Principles of Australian contract law : cases and materials [Fourth edition.] 9780409345469, 0409345466

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PRINCIPLES OF AUSTRALIAN CONTRACT LAW Cases and Materials Fourth Edition

PRINCIPLES OF AUSTRALIAN CONTRACT LAW Cases and Materials Fourth Edition

PETER RADAN BA, LLB, PhD (Syd), Dip Ed (SCAE) Professor of Law, Macquarie Law School, Macquarie University

JOHN GOOLEY BA, LLB (Syd), LLM (Hons) (Syd), Dip Ed (SCAE) Barrister, 153 Phillip, Barristers, Sydney

ILIJA VICKOVICH BA (Hons), LLB (Syd), LLM (Macq) Roll of Legal Practitioners, New South Wales Lecturer, Macquarie Law School, Macquarie University

LexisNexis Butterworths Australia 2018

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Author: Title: Edition: ISBN: Notes: Subjects: Other Authors/Contributors:

Radan, Peter. Principles of Australian contract law cases and materials. 4th edition. 9780409345452 (pbk). 9780409345469 (ebk). Includes index. Contracts — Australia. Contracts — Australia — Cases. Gooley, J. V. (John V.). Vickovich, Ilija.

© 2018 Reed International Books Australia Pty Limited trading as LexisNexis. First edition 2007. Second edition 2009 (reprinted 2012 (twice), 2013 and 2014). Third edition 2015 (reprinted 2017) 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 Minion Pro and Myriad Pro. Printed in China. Visit LexisNexis Butterworths at www.lexisnexis.com.au

PREFACE TO FOURTH EDITION In the years since the publication of the previous edition of this casebook there have been a number of important cases in the field of contract law that have been included in this edition. These include Pavlovic v Universal Music Australia Pty Ltd (2015) 90 NSWLR 605, Commonwealth Bank of Australia v Barker (2014) 253 CLR 169, Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640, Gnych v Polish Club Ltd (2015) 255 CLR 414, Richmond v Moore Stephens Adelaide Pty Ltd [2015] SASCFC 147, Paciocco v Australia and New Zealand Banking Group Ltd (2016) 333 ALR 569, Cavendish Square Holding BV v Makdessi; ParkingEye Ltd v Beavis [2016] AC 1172, CA & CA Ballan Pty Ltd v Oliver Hume (Australia) Pty Ltd [2017] VSCA 11, Zurich Insurance Co plc v Hayward [2017] AC 152, and Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd (2014) 253 CLR 560. As with the previous editions of this casebook, in this edition we have used a standard template in which, for each case, we have sought to clearly set out: (i) a summary of the relevant facts; (ii) the issue(s) before the court; (iii) the decision of the court; and (iv) the matter(s) addressed in the extracts. At the end of each extracted case we have referred readers to the relevant secondary materials dealing with the case as well as the relevant parts of Radan, Gooley, and Vickovich, Principles of Australian Contract Law, 4th ed, LexisNexis Butterworths, Sydney, 2017. In setting out the facts of a case and in the judgment extracts, we have generally referred to the parties by name rather than by their procedural appellations, such as plaintiff and defendant, appellant and respondent, and so on. This, we believe, makes it easier to read and understand the extracts. For the same reason we have, as far as possible, edited the extracts so that the names and citations of cases referred to by the judges have been footnoted, even though in the case reports they often appear in the body of the judgment. Furthermore, we have exercised our discretion to delete some of the citations and footnotes from the extracted judgments.

As with the previous editions of this casebook, the completion of this edition could not have been achieved without the support and encouragement of our families, friends, and colleagues. In particular, we acknowledge the love, support, encouragement, and most of all understanding of our families: Sybil, Rade, Andrija, and Aleksandra Radan; Sylvia, Andrew, Nathan, and Mitchell Gooley (John would also like to acknowledge the valuable research work and proofing undertaken for him for this edition by Mitchell Gooley); and Aleks, Daniel, and Damien Vickovich. At LexisNexis Butterworths we wish, in particular, to thank our Commissioning Editor, Jocelyn Holmes, and Book Editor, Jeanette Maree, for the skill, care, and efficiency with which they turned our manuscript into a book. Peter Radan John Gooley Ilija Vickovich 9 August 2017

TABLE OF CASES References are to Introductions to Chapters, Extracts, and Comments to Extracts; bold references indicate where cases are extracted

A A v Hayden (1984) 156 CLR 532 …. 27.1, 27.4C, 27.4.2 A Roberts & Co Ltd v Leicestershire County Council [1961] Ch 555 …. 34.4C A Schroeder Music Publishing Co Ltd v Macaulay [1974] 3 All ER 616 …. 32.3C Aaron’s Reefs Ltd v Twiss [1896] AC 273 …. 14.2C Abbott v Lance (1860) Legge 1283 …. 4.8C Aberfoyle Plantations Ltd v Cheng [1960] AC 115 …. 23.3C Abrahams v Herbert Reiach Ltd (1922) 1 KB 477 …. 29.6C Abram Steamship Co Ltd v Westville Shipping Co Ltd [1923] AC 773 …. 35.2C, 35.5C ACN 002 804 702 (formerly Brooks Building) v McDonald [2009] NSWSC 610 …. 22.4C ACN 074 971 109 (as trustee for Argot Unit Trust) v National Mutual Life Association of Australasia Ltd [2006] VSC 507 …. 36.4C — v — (2008) 21 VR 351 …. 36.1, 36.4C Adam v Newbigging (1888) 13 App Cas 308 …. 35.2C Adams v Lindsell (1818) 106 ER 250 …. 4.6C Adamson v New South Wales Rugby League Ltd (1991) 103 ALR 319 …. 32.3C Adelaide City Corp v Jennings Industries Ltd (1985) 156 CLR 274 …. 11.3C Agip (Africa) Ltd v Jackson [1990] Ch 265 …. 34.4C Agip SpA v Navigazione Alta Italia SpA [1984] 1 Lloyd’s Rep 353 …. 34.4C Agricultural and Rural Finance Ltd v Gardiner (2008) 238 CLR 570 …. 12.1 Ahmed Angullia Bin Hadjee Mohamed Salleh Angullia v Estate and Trust Agencies (1927) Ltd [1938] AC 624 …. 5.4C

Aiken v Short (1856) 156 ER 1180 …. 38.5C Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd [1983] 1 All ER 101 …. 13.2C Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 …. 34.2C Ajayi v R T Briscoe (Nigeria) Ltd [1964] 3 All ER 556 …. 36.2C, 36.3C Akron Securities Ltd v Iliffe (1997) 41 NSWLR 353 …. 15.4C Alam v Preston (1938) 38 SR (NSW) 475 …. 31.7C Alati v Kruger (1955) 94 CLR 216 …. 35.1, 35.2C, 35.4C Albacruz v Albazero [1977] AC 774 …. 39.3C Albert D Goan & Co v Interprofessionelle des Oleagineux Alimentaires [1960] 2 QB 318 …. 25.3C Albert House Ltd (in voluntary liquidation) v Brisbane City Council (1968) 42 ALJR 158 …. 36.3C Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349 …. 5.4C, 11.6C Alderslade v Hendon Laundry Ltd [1945] KB 189 …. 13.1, 13.3C, 13.4C Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310 …. 29.9C — v Rayson [1936] 1 KB 169 …. 28.4C Alfred McAlpine Capital Projects Ltd v Tilebox Ltd [2005] EWHC 281 …. 30.2.3 Alghussein Establishment v Eton College [1988] 1 WLR 587; [1991] 1 All ER 267 …. 26.6C Allan’s Trustees v Lord Advocate [1971] SC (HL) 45 …. 39.3C Allcard v Skinner (1887) 36 Ch D 145 …. 18.2C Allen v Flood [1898] AC 1 …. 37.6C Alley v Deschamps (1806) 33 ER 278 …. 39.2C, 39.3C Allingham, Re; Allingham v Allingham [1932] VLR 469 …. 17.4C Amalgamated Investment & Property Co Ltd v Texas Commerce International Bank Ltd [1982] QB 84 …. 36.2C Amev-Udc Finance Ltd v Austin (1986) 162 CLR 170 …. 30.4C Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288 …. 27.1, 27.7C, 27.7.2

AMP (UK) plc v Barker [2001] PLR 77 …. 34.3C Anderson Ltd v Daniel [1924] 1 KB 138 …. 26.1, 26.4C, 26.5C Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205 …. 30.1, 30.2.2, 30.3C, 30.4C Anglia Television Ltd v Reed [1972] 1 QB 60 …. 29.6C Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 …. 24.4C Annand & Thompson Pty Ltd v Trade Practices Commission (1979) 25 ALR 91 …. 15.3C Antonovic v Volker (1986) 7 NSWLR 151 …. 20.2C Archbolds (Freightage) Ltd v S Spanglett Ltd [1961] 1 QB 374 …. 26.3C, 27.2E, 28.2C, 28.3C Arcos Ltd v EA Ronaasen & Sons [1933] AC 470 …. 22.2.2 Argy v Blunts & Lane Cove Real Estate Pty Ltd (1990) 26 FCR 112 …. 15.5C, 15.6C ARPL Palaniappa Chettiar v PLAR Arunaalam Chettiar [1962] AC 294 …. 28.6C Ashbury Rly Carriage and Iron Co (Ltd) v Riche (1875) LR 7 HL 653 …. 9.5C Ashton v Pratt (2015) 88 NSWLR 281 …. 7.1, 7.6C ‘Asia Star’, The [2010] 2 Lloyd’s Rep 121 …. 29.1, 29.11C Askey v Golden Wine Co Ltd [1948] 2 All ER 5 …. 27.2E Associated Newspapers Ltd v Bancks (1951) 83 CLR 322 …. 24.1, 24.2C, 24.4C, 32.3C Astley v Reynolds (1731) 93 ER 939 …. 17.5C ASX Operations Pty Ltd v Pont Data Australia Pty Ltd (No 2) (1991) 27 FCR 492 …. 15.4C Atlantic Coast Line Railroad Co v Florida 295 US 301 (1935) …. 38.6C Attorney General of Belize v Belize Telecom Ltd [2009] 2 All ER 1127 …. 11.4C Attorney-General v Codner [1973] 1 NZLR 545 …. 36.2C Attorney-General (Hong Kong) v Humphreys Estate Ltd [1987] AC 114 …. 36.2C Attwood v Lamont (1920) 3 KB 571 …. 27.6C

— v Small (1835–1840) 7 ER 684 …. 14.5C Austotel Pty Ltd v Franklins Selfserve Pty Ltd (1989) 16 NSWLR 582 …. 36.2.2 Australia & New Zealand Banking Group Ltd v Karam (2005) 64 NSWLR 149 …. 17.4.2 — v Westpac Banking Corporation (1988) 164 CLR 662 …. 38.5C, 38.6C, 39.3C — v Widin (1990) 26 FCR 21 …. 8.3C Australian Blue Metal Ltd v Hughes [1963] AC 74 …. 23.2C Australian Broadcasting Commission v Australasian Performing Rights Association Ltd (1973) 129 CLR 99 …. 12.1 Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199 …. 38.6C — v Redmore Pty Ltd (1989) 166 CLR 454 …. 26.6C — v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 …. 7.5C, 34.2C Australian Competition and Consumer Commission v Baxter Healthcare Pty Ltd (2007) 232 CLR 1 …. 26.6C — v C G Berbatis Holdings Pty Ltd (2003) 214 CLR 51 …. 19.1, 19.5C — v — (No 2) (2000) 96 FCR 491 …. 19.5C — v Samton Holdings Pty Ltd (2002) 117 FCR 301 …. 19.5C, 19.5.2 Australian Estates Pty Ltd v Cairns City Council (2005) QCA 328 …. 16.5.2 Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd (2014) 253 CLR 560 …. 38.1, 38.6C Australian Hardboards Ltd v Hudson Investment Group Ltd (2007) 70 NSWLR 201 …. 33.3C Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424 …. 4.2.2, 6.1, 6.2C, 7.5C Automatic Fire Sprinklers Pty Ltd v Watson (1946) 72 CLR 435 …. 27.8C Awwad v Geraghty [2001] QB 570 …. 27.2E B B and B Viennese Fashions v Losane [1952] 1 All ER 909 …. 26.4C Baden v Société Générale pour Favoriser le Développement du Commerce et de l’Industrie en France SA [1993] 1 WLR 509 …. 34.4C

Bagot v Stevens Scanlan & Co Ltd [1966] 1 QB 197 …. 37.4C Bahr v Nicolay (No 2) (1988) 164 CLR 604 …. 24.8C, 31.7.2 Bailey v De Crespigny (1869) LR 4 QB 180 …. 25.5C Baird v BCE Holdings Pty Ltd (1996) 40 NSWLR 374 …. 24.8C Baker v Campbell (1983) 153 CLR 52 …. 27.4C — v Paine (1750) 27 ER 1140 …. 34.2C Balfour v Balfour [1919] 2 KB 571 …. 7.1, 7.2C, 7.2.2, 7.3C Balfour & Clark v Hollandia Ravensthorpe NL (1978) 18 SASR 240 …. 14.1, 14.2C Ball v Storie (1823) 57 ER 84 …. 34.2C Balog v Crestani (1975) 132 CLR 289 …. 24.5C Baltic Shipping Co v Dillon (1993) 176 CLR 344 …. 20.2.2, 29.1, 29.5C — v Dillon ‘Mikhail Lermontov’ (1991) 22 NSWLR 1 …. 20.1, 20.2C Banco de Portugal v Waterlow and Sons Ltd [1932] AC 452 …. 29.11C Bando v Goldberg (1944) 62 WN (NSW) 87 …. 31.7C Bank of New South Wales v Rogers (1941) 65 CLR 42 …. 18.2C, 18.6C Bank of Victoria Ltd v Mueller [1925] VLR 642 …. 18.6C, 19.3C, 35.4C Bank of Western Australia Ltd v Primanzon [2010] NSWSC 862 …. 20.1 Bannerman v White (1861) 142 ER 685 …. 24.2C Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1997] AC 191 …. 15.5C, 29.10C Banque Worms v BankAmerica International 77 NY 2d 362 (1991) …. 38.6C Barbagallo v J & F Catelan Pty Ltd [1986] 1 Qd R 245 …. 33.1 Barclays Bank v W J Simms Son & Cooke (Southern) Ltd [1980] QB 677 …. 38.5C Barclays Bank plc v O’Brien [1994] 1 AC 180 …. 18.6C Barry v Davies [2001] 1 All ER 944 …. 4.1, 4.4C Barton v Armstrong [1973] 2 NSWLR 598 …. 17.4C — v — [1975] 2 All ER 465 …. 37.3C — v — [1976] AC 104 …. 17.1, 17.2C, 17.3C, 17.4C

Bassin v Standen (1945) 46 SR (NSW) 16 …. 26.6C Batterham v QSR Ltd (2006) 225 CLR 237 …. 21.3C Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622 …. 5.5C, 5.6C Behan v Obelon Pty Ltd (1985) 157 CLR 326 …. 18.6C Bell v Lever Brothers Ltd [1932] AC 161 …. 16.1, 16.2C, 16.3C, 16.4C, 16.5C, 16.7C, 25.2C Bellgrove v Eldridge (1954) 90 CLR 613 …. 29.7C, 29.7.3 Bennett v L & W Whitehead Ltd [1926] 2 KB 380 …. 24.6C Bentsen v Taylor, Sons & Co (No 2) (1893) 2 QB 274 …. 24.2C Beresford v Royal Insurance Co Ltd [1937] 2 KB 197 …. 26.4C — v — [1938] AC 586 …. 26.4C, 27.2E Bergl (Australia) Ltd v Moxon Lighterage Co Ltd (1920) 28 CLR 194 …. 12.3C Berkeley v Poullett [1977] 1 EGLR 86 …. 24.8C Bernard v Williams (1928) 139 LT 22 …. 24.5C Bester v Perpetual Trustee Co Ltd [1970] 3 NSWR 30 …. 18.1, 18.4C Beswick v Beswick [1966] Ch 538; [1966] 3 All ER 1 …. 31.2C, 39.2C — v — [1968] AC 58 …. 31.1, 31.2C, 39.3C Betjemann v Betjemann [1895] 2 Ch 474 …. 37.3C Bettini v Gye (1876) 1 QBD 183 …. 24.2C Betts v Receiver for the Metropolitan Police District [1932] 2 KB 595 …. 28.6C Biggin and Co Ltd v Permanite Ltd (1951) 1 KB 422 …. 29.6C Bilbie v Lumley (1802) 102 ER 448 …. 38.5C Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130 …. 7.6C Birkett v Acorn Business Machines Ltd [1999] 2 All ER (Comm) 429 …. 27.2E Birmingham and District Land Company v London and North Western Railway Co (1889) 40 Ch D 268 …. 36.3C Bishopsgate Motor Finance Corporation Ltd v Transport Brakes Ltd [1949] 1 KB 322 …. 28.5 Blackburn v Smith (1848) 154 ER 707 …. 35.2C Blackpool & Fylde Aero Club v Blackpool Borough Council [1990] 3 All ER 25

…. 4.1, 4.5C Blakeley v Muller & Co [1903] 2 KB 760 …. 25.5C, 25.6C Blomley v Ryan (1956) 99 CLR 362 …. 19.1, 19.2C, 19.3C, 19.5C Blumer & Co v Scott & Sons (1874) 1R 379 …. 39.3C Bofinger v Kingsway Group Ltd (2009) 239 CLR 269 …. 38.6C Boland (T) and Co Ltd v Dundas’s Trustees [1975] SLT 80 …. 23.3C Bond v Barrow Haematite Steel Co (1902) 1 Ch 353 …. 40.3C Bonnard v Dott [1906] 1 Ch 740 …. 26.5C Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600 …. 5.1, 5.2C, 5.4C Boone v Eyre (1779) 1 H Bl 273 …. 27.8C Boucaut Pay Co Ltd v Commonwealth (1927) 40 CLR 98 …. 30.1 Bourne v Mason (1669) 86 ER 5 …. 39.2C, 39.3C Bowes v Chaleyer (1923) 32 CLR 159 …. 24.2C, 24.7C — v Shand (1877) 2 App Cas 455 …. 24.2C Bowmakers Ltd v Barnet Instruments Ltd [1945] KB 65 …. 28.1, 28.2C, 28.4C, 28.5C, 28.6C, 34.3C BP Exploration Co (Libya) Ltd v Hunt (No 2) [1979] 1 WLR 783 …. 38.1 BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 …. 11.1, 11.2C, 11.3C, 11.4C Bradshaw v Gilbert’s (Australasian) Agency (Vic) Pty Ltd (1952) 86 CLR 209 …. 26.6C Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153 …. 4.6.2, 34.2C Breen v Williams (1996) 186 CLR 71 …. 11.4C Bressan v Squires [1974] 2 NSWLR 460 …. 4.1, 4.12C Brice v Bannister (1878) 3 QBD 569 …. 40.3C Bridge v Campbell Discount Co Ltd [1962] AC 600 …. 30.3C Bridge Stockbrokers Ltd v Bridges (1985) 57 ALR 401 …. 15.2C Bridgewater v Leahy (1998) 194 CLR 457 …. 19.5C Briess v Woolley [1954] 1 All ER 909 …. 37.3C

Brinkibon Ltd v Stahag Stahl und Stahlwarenhandelsgesellschaft mbH [1983] 2 AC 34 …. 4.1, 4.11C Brisbane v Dacres (1813) 128 ER 641 …. 38.5C Brisbane City Council v Group Products Pty Ltd (1979) 145 CLR 143 …. 25.2C, 25.3C British Columbia Saw Mill Co Ltd v Nettleship (1868) LR 3 CP 499 …. 29.10C British Industrial Plastics Ltd v Ferguson [1940] 1 All ER 479 …. 37.6C British Road Services Ltd v Arthur V Crutchley & Co Ltd [1968] 1 All ER 811 …. 4.13C British Russian Gazette &c Ltd and Talbot v Associated Newspapers Ltd [1933] 2 KB 616 …. 23.4C Brogden v Directors of Metropolitan Ry Co (1877) 2 App Cas 666 …. 4.10C, 4.13C Brooks v Burns Philp Trustee Co Ltd (1969) 121 CLR 432 …. 26.6C Brown v Heffer (1967) 116 CLR 344 …. 5.2C, 24.8C — v Rezitis (1971) 127 CLR 157 …. 21.1, 21.3C, 21.4C — v Smitt (1924) 34 CLR 160 …. 35.1, 35.2C, 35.3C — v — [1924] VLR 333 …. 35.5C Browne v Cornely (1533), King’s Bench 27/1086, m 28 …. 2.5E Brownlie v Campbell (1880) 5 App Cas 925 …. 37.2C Bryne & Co v Leon Van Tienhoven & Co (1880) 5 CPD 344 …. 4.6C Buckley v Tutty (1971) 125 CLR 353 …. 32.3C Building Workers’ Industrial Union of Australia v Odco Pty Ltd (1991) 29 FCR 104 …. 37.7C Bull v Attorney-General (NSW) (1913) 17 CLR 370 …. 15.4C Burazin v Blacktown City Guardian Pty Ltd (1996) 142 ALR 144 …. 11.4C Burger King Corporation v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558; [2001] NSWCA 187 …. 5.4C, 11.1, 11.6C Burrowes v Lock (1805) 32 ER 927 …. 37.2C Busshewell v Rye (1546) King’s Bench 17/1138, m 67d …. 2.5E Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592 …. 15.1, 15.6C

— v Stapely (1685) 23 ER 524 …. 8.3C Butler v Fairclough (1917) 23 CLR 78 …. 29.2C Butler Machine Tool Co v Ex-Cell-O Corp (England) Ltd [1979] 1 All ER 965 …. 4.1, 4.13C Butlin’s Settlement Trusts, Re [1976] Ch 251 …. 34.3C Butt v McDonald (1896) 7 QLJ 68 …. 5.4C Butterworth v Kingsway Motors Ltd (1954) 2 All ER 694 …. 29.5C Butts v O’Dwyer (1952) 87 CLR 267 …. 5.2C Byrne v Australian Airlines Ltd (1995) 185 CLR 410 …. 11.1, 11.3C, 11.4C, 26.6C — v Cope Street Pty Ltd [2009] NSWSC 947 …. 20.1 Byrne & Frew v Australian Airlines Ltd (1994) 120 ALR 274 …. 11.3C Byrnes v Kendle (2011) 243 CLR 253 …. 12.1 Byron v Clay (1989) 867 F 2d 1049 …. 28.2C C C H Giles & Co Ltd v Morris [1972] 1 All ER 960 …. 31.1, 31.4C, 31.5C CA & CA Ballan Pty Ltd v Oliver Hume (Australia) Pty Ltd [2017] VSCA 11 …. 34.1, 34.3C Cadbury-Schweppes Pty Ltd v Pub Squash Co Pty Ltd (1980) 32 ALR 387 …. 15.3C Camden Nominees Ltd v Forcey [1940] Ch 352 …. 37.7C Cameron v UBS AG (2000) 2 VR 108 …. 24.8C Campbell v Jones (1796) 6 TR 570 …. 27.8C — v Kitchen & Sons Ltd and Brisbane Soap Co Ltd (1910) 12 CLR 515 …. 38.6C Canada Steamship Lines Ltd v The King [1952] AC 192 …. 13.3.2 Canning v Temby (1905) 3 CLR 419 …. 24.5C Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 …. 4.1, 4.2C, 4.5C, 6.2C, 7.4C, 39.4C Carmichael v Carmichael’s Executrix [1920] SC (HL) 195 …. 39.3C Carr v J A Berriman Pty Ltd (1953) 89 CLR 327 …. 24.5C, 24.7C

Casey’s Patents, Re; Stewart v Casey [1892] 1 Ch 104 …. 6.4C Casquash Pty Ltd v NSW Squash Ltd (No 2) [2012] NSWSC 522 …. 16.6.3 Cassidy v Ministry of Health [1951] 2 KB 343 …. 37.4C Castle Constructions Pty Limited v Fekala Pty Ltd [2006] NSWCA 133 …. 29.9C Caterpillar of Australia Pty Ltd v Industrial Court of NSW (2009) 78 NSWLR 43 …. 21.3C Cathels v Commissioner of Stamp Duties [1962] SR (NSW) 455 …. 39.2C Cavendish Square Holding BV v Makdessi; ParkingEye Ltd v Beavis [2016] AC 1172; [2016] 2 All ER 519; [2015] 3 WLR 1373 …. 30.1, 30.3C, 30.4C Cawenfeld v Elder (1546) King’s Bench 27/1137, m 113d …. 2.5E CBS Songs Ltd v Amstrad Consumer Electronics plc [1988] AC 1013 …. 37.6C CCC Films Ltd v Impact Quadrant Films Ltd [1985] QB 16 …. 29.6C Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130 …. 36.2C, 36.3C Chadwick v Manning [1896] AC 231 …. 36.3C Chandler v Webster [1904] 1 KB 493 …. 25.6C Chang v Registrar Titles (1976) 137 CLR 177 …. 24.8C Chapelton v Barry Urban District Council [1940] 1 KB 532 …. 10.5C Chaplin v Hicks [1911] 2 KB 786 …. 5.4C, 29.4C, 29.6C — v Leslie Frewin (Publishers) Ltd [1966] Ch 71 …. 9.4C Charrington & Co Ltd v Wooder [1914] AC 71 …. 12.2C Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101 …. 12.1, 12.4C Cheall v Association of Professional Executive Clerical and Computer Staff [1983] 2 AC 180 …. 26.6C Cheese v Thomas [1994] 1 WLR 129 …. 35.4C Chemists’ Federation Agreement (No 2), Re [1958] 1 WLR 1192 …. 37.7C Chief Commissioner of Stamp Duties (NSW) v Paliflex Pty Ltd (1999) 47 NSWLR 382 …. 24.8C Chinnock v Marchioness of Ely (1865) 46 ER 1066 …. 5.5C Ciavarella v Balmer (1983) 153 CLR 438 …. 24.8C Clark v Kirby-Smith [1964] Ch 506 …. 37.4C

— v Malpas (1862) 54 ER 1067; 45 ER 1238 …. 19.2C — v Urquhart [1930] AC 28 …. 15.5C Clarke v Dickson (1858) 120 ER 463 …. 35.2C — v — (1859) 6 CBNS 453 …. 14.3C — v Shee (1774) 98 ER 1041 …. 38.6C Classic International v Lagos (2002) 60 NSWLR 241 …. 16.5.2 Cleaver v Mutual Reserve Fund Life Association [1892] 1 QB 147 …. 39.2C Clements v London and North Western Railway Co [1884] 2 QB 482 …. 9.2C, 9.3C Clifton v Coffey (1924) 34 CLR 434 …. 24.2C Clough v London and North Western Railway Co (1871) LR 7 Exch 26 …. 35.5C Club Cape Schanck Resort Co Ltd v Cape Country Club Pty Ltd (2001) 3 VR 526 …. 34.2C, 34.3C Clydebank Engineering and Shipbuilding Co v Don Jose Ramos Yzquierdo y Castaneda [1905] AC 6 …. 30.2C, 30.3C Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 …. 5.4C Coastal Estates Pty Ltd v Melevende [1965] VR 433 …. 35.1, 35.5C Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 …. 7.5C, 10.8C, 11.1, 11.2C, 11.3C, 11.4C, 12.1, 12.2C, 12.3C, 25.1, 25.2C, 25.3C, 34.2C Coggs v Bernard (1703) 92 ER 107 …. 25.4C Combe v Combe [1951] 2 KB 215 …. 36.2C Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 …. 18.6C, 19.1, 19.3C, 19.4C, 19.5C, 35.4C Commercial Banking Co of Sydney Ltd v R H Brown & Co (1972) 126 CLR 337 …. 15.2C Commercial Life Assurance Co v Drever [1948] 2 DLR 241 …. 26.3C Commerzbank AG v Price-Jones [2003] EWCA Civ 1663 …. 38.6C Commission for the New Towns v Cooper (Great Britain) Ltd [1995] Ch 259 …. 34.4C Commissioner of Inland Revenue v Morris [1958] NZLR 1126 …. 36.3C

Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd (1995) 41 NSWLR 329 …. 34.2C, 34.3C Commissioner of Stamp Duties (Qld) v Jolliffe (1920) 28 CLR 178 …. 39.3C Commissioner of State Taxation v Cyril Henschke Pty Ltd …. 23.5C Commonwealth v Scituate Savings Bank (1884) 137 Mass 301 …. 36.2C — v Verwayen (1990) 170 CLR 394 …. 36.4C, 38.6C Commonwealth Bank of Australia v Barker (2014) 253 CLR 169; 312 ALR 356 …. 11.1, 11.4C, 26.6C Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64 …. 15.4C, 29.1, 29.6C, 38.6C — v Sanofi [2017] FCA 382 …. 27.4.2 Compania Colombiana de Seguros v Pacific Steam Navigation Co [1965] 1 QB 101 …. 40.4C Concut Pty Ltd v Worrell (2000) 75 ALJR 312 …. 11.4C Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Pty Ltd (1986) 160 CLR 226 …. 11.1, 11.4C, 11.5C Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd (1985) 155 CLR 541 …. 39.3C Cooke v Clayworth (1811) 34 ER 222 …. 19.2C — v Oxley (1790) 100 ER 785 …. 4.6C Cooney v Burns (1922) 30 CLR 216 …. 8.3C Cooper v Phibbs (1867) LR 2 HL 149 …. 16.3C Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1996] Ch 286 …. 31.5.3 — v — [1998] AC 1 …. 31.1, 31.5C Cope v Rowlands (1836) 150 ER 707 …. 26.3C, 26.5C, 27.2E Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184 …. 22.1, 22.3.2, 22.4C Cornwall v Hawkins (1872) 41 LJ Ch 436 …. 9.3C Cort v Ambergate, etc Railway Co (1851) 117 ER 1229 …. 24.7C Cory v Cory (1747) 27 ER 864 …. 19.2C

Cotman v Brougham [1918] AC 514 …. 9.5C Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460 …. 5.4C, 6.1, 6.3C, 31.2.2, 39.1, 39.2C, 39.3C Council of the City of Sydney v West (1965) 114 CLR 481 …. 13.1, 13.2C, 13.5C Courage Ltd v Crehan [2001] ECR 1-6314 …. 27.2E Courtaulds Northern Textiles Ltd v Andrew [1979] IRLR 84 …. 11.4C Courtney & Fairbairn Ltd v Tolaini Brothers (Hotels) Ltd [1975] 1 WLR 297 …. 5.4C Couturier v Hastie (1852) 155 ER 1250 …. 16.2C — v — (1856) 10 ER 1065 …. 16.2C Crabb v Arun District Council [1976] Ch 179 …. 36.2C, 38.6C Crago v McIntyre [1976] 1 NSWLR 729 …. 16.8C Crane v Hegeman-Harris Co Inc [1971] 1 WLR 1390 …. 34.2C Crawford Fitting Co v Sydney Valve & Fitting Pty Ltd (1988) 14 NSWLR 438 …. 23.1, 23.2C Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40 …. 17.1, 17.2.3, 17.4C Cresswell v Potter [1978] 1 WLR 255 …. 19.3C Cricklewood Property and Investment Trust Ltd v Leighton’s Investment Trust Ltd [1945] AC 221 …. 25.3C Crosse v Gardner (1688) 90 ER 656 …. 10.3C Crowe Horwath (Aust) Pty Ltd v Loone [2017] VSC 163 …. 27.8.2 Crown Melbourne Ltd v Cosmopolitan Hotel (Vic) Pty Ltd (2016) 33 ALR 384 …. 10.10.2, 36.2.3 Cummings v London Bullion Co Ltd [1952] 1 KB 327 …. 29.3C Cundy v Lindsay (1878) 3 App Cas 459 …. 16.6C Curro v Beyond Productions Pty Ltd (1993) 30 NSWLR 337 …. 32.1, 32.3C Curtis v Chemical Cleaning & Dyeing Co [1951] 1 KB 805 …. 10.1, 10.5C — v Perry (1802) 31 ERR 1285 …. 27.2E Cutter v Powell (1795) 101 ER 573 …. 22.1, 22.2C, 38.4C Cutts v Holland [1965] TAS SR 69 …. 23.5C

Cypjayne Pty Ltd v Babcock & Brown International Pty Ltd (2011) 282 ALR 152 …. 12.3C D D & C Builders Ltd v Rees [1966] 2 QB 617 …. 17.5C Dagenham (Thames) Dock Co, Re; Ex parte Hulse (1873) LR 8 Ch App 1022 …. 24.8C Dahl v Nelson (1881) 6 App Cas 38 …. 25.2C Daily Mirror Newspapers Ltd v Gardner [1968] 2 QB 762 …. 37.6C Dale v Sollet (1767) 98 ER 112 …. 38.6C Dalgety and New Zealand Loan Ltd v V C Imeson Pty Ltd [1963] SR (NSW) 998 …. 26.3C Dalgety Wine Estates Pty Ltd v Rizzon (1979) 141 CLR 552 …. 32.3C Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 …. 10.4C, 13.1, 13.2C, 13.3.3, 13.3C Daventry District Council v Daventry & District Housing Ltd [2012] 1 WLR 1333 …. 34.2.2 David Payne & Co Ltd, Re; Young v David Payne & Co Ltd [1904] 2 Ch 608 …. 9.5C David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353 …. 38.1, 38.5C, 38.6C Davies v Presbyterian Church of Wales [1986] 1 WLR 323 …. 7.5.2 Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 …. 25.2C, 25.3C Day v Newman (1788) 2 Cox 77 …. 31.3C DC Thomson & Co Ltd v Deakin [1952] Ch 646 …. 37.6C De Francisco v Barnum (1890) 43 Ch D 165 …. 9.3C — v — [1894] 2 QB 430 …. 9.2C, 9.4C De Lassalle v Guildford [1901] 2 KB 215 …. 10.10C De Medina v Norman (1842) 152 ER 347 …. 24.7C Decro-Wall International SA v Practitioners in Marketing Ltd [1971] 2 All ER 216 …. 23.2C, 24.4C

Delaforce v Simpson-Cook (2010) 78 NSWLR 483 …. 38.6C Delooze v Healey [2007] WASCA 157 …. 11.4C Demagogue Pty Ltd v Ramensky (1992) 110 ALR 608 …. 15.4C Denmark Productions Ltd v Boscobel Productions Ltd [1969] 1 QB 699; [1968] 3 All ER 513 …. 9.4C Denny, Mott & Dickson Ltd v James B Fraser & Co Ltd [1944] AC 265 …. 25.2C Denton v Great Northern Railway Company (1856) 119 ER 701 …. 4.4C Derry v Peek (1889) 14 App Cas 337 …. 37.1, 37.2C Devenish v Jewel Food Stores Pty Ltd (1991) 172 CLR 32 …. 15.4C Dey v Victorian Railways Commissioners (1949) 78 CLR 62 …. 34.3C, 35.5C Diagnostic X-Ray Services Pty Ltd v Jewel Food Stores Pty Ltd (2001) 4 VR 632 …. 31.5.3 Dick Bentley Products Ltd v Harold Smith (Motors) Ltd [1965] 1 WLR 623 …. 10.2C Dickinson v Dodds (1876) 2 Ch D 463 …. 4.1, 4.7C Dietrich v R (1992) 177 CLR 292 …. 11.4C Dillon v Baltic Shipping Co, The ‘Mikhail Lermontov’ (1989) 21 NSWLR 614 …. 29.5C — v Dean 551 NYS 2d 547 (1990) …. 28.2C — v Nash Properties Pty Ltd [1950] VLR 293 …. 33.1 Dillwyn v Llewelyn (1862) 45 ER 1285 …. 36.2C, 36.4C Diocese of Southwark v Coker [1998] ICR 140 …. 7.5C, 7.5.2 Diplock, Re [1948] 1 Ch 465 …. 19.3C Director of Public Prosecutions for Northern Ireland v Lynch [1975] AC 653 …. 17.4C Doherty v Allman (1878) 3 App Cas 709 …. 32.2C Donoghue v Stevenson [1932] AC 562 …. 13.4C Douglas v Hello Ltd [2008] 1 AC 1 …. 37.6C Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158 …. 15.5C, 37.4C — v White City Stadium Ltd [1935] 1 KB 110 …. 9.4C Drimmie v Davies [1899] 1 IR 176 …. 39.2C, 39.3C

DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423; [1978] HCA 12 …. 12.2C, 23.5C, 24.4C, 24.7C Duffel v Wilson (1808) 170 ER 999 …. 14.2C Duggan v Barnes [1923] VLR 27 …. 5.3C Dunlop v Higgins (1848) 9 ER 805 …. 4.6C Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 …. 30.1, 30.2C, 30.3C — v Selfridge & Co Ltd [1915] AC 847 …. 39.2C, 39.3C Dunnage v White (1818) 36 ER 329 …. 19.2C Durham Fancy Goods Ltd v Michael Jackson (Fancy Goods) Ltd [1968] 2 QB 839 …. 36.2C E Earl v Hector Whaling Ltd [1961] 1 Lloyd’s Rep 459 …. 34.2C Earl of Chesterfield v Janssen (1751) 28 ER 82 …. 19.3C, 19.4C East v Pantiles (Plant Hire) Ltd (1981) 263 EG 61 …. 12.4C Eccles v Bryan and Pollock [1948] Ch 93 …. 5.5C Edgington v Fitzmaurice (1885) 29 Ch D 459; [1881–5] All ER Rep 856 …. 14.1, 14.3C, 37.3C Edward Street Properties Pty Ltd v Collins [1977] Qd R 399 …. 33.1 Edwinton Commercial Corporation v Tsavliris Russ (Worldwide Salvage & TowageLtd (The ‘Sea Angel’) [2007] 2 Lloyd’s Rep 517 …. 25.3C Egerton v Brownlow (1853) 10 ER 359 …. 27.3C Elder’s Trustee & Executor Co Ltd v Commonwealth Homes & Investment Co Ltd (1941) 65 CLR 603 …. 24.6C — v E G Reeves Pty Ltd (1987) 78 ALR 193 …. 34.2C Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 …. 5.6C, 12.1, 12.3C Elkofairi v Permanent Trustee Co Ltd [2002] NSWCA 413; (2002) 11 BPR 20,841 …. 20.3C Ellis v Rogers (1884) 29 Ch D 661 …. 31.7C — v Torrington [1920] 1 KB 399 …. 40.4C

Ellul & Ellul v Oakes (1972) 3 SASR 377 …. 10.1, 10.2C Elna Australia Pty Ltd v International Computers (Aust) Pty Ltd (No 2) (1987) 16 FCR 410 …. 15.5C Else (1982) Ltd v Parkland Holdings Ltd [1994] 1 BCLC 130 …. 30.4C Emerald Construction Co Ltd v Lowthian [1966] 1 WLR 691 …. 37.6C English v Dedham Vale Properties Ltd [1978] 1 All ER 382 …. 33.1 Entores Ltd v Miles Far East Corporation [1955] 2 QB 327 …. 4.11C Environment Agency v Empress Car Co (Abertillery) Ltd [1999] AC 22 …. 15.4C Equititrust Ltd (formerly Equitiloan Ltd) v Franks (2009) 259 ALR 388 …. 36.1 Equuscorp Pty Ltd v Haxton (2012) 246 CLR 498 …. 26.6C, 34.3C, 38.1, 38.6C, 38.7C Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 …. 31.6C, 35.2C, 35.3C, 35.4C Ermogenous v Greek Orthodox Community of South Australia Inc (1997) 64 SAIR 622 …. 7.5C — v — (2002) 209 CLR 95 …. 7.1, 7.5C, 7.5.3, 7.5.4, 7.6C Erskine v Adeane (1873) LR 8 Ch App 756 …. 10.2C Esanda Finance Corporation Ltd v Tong (1997) 41 NSWLR 482 …. 20.3C Esso Australia Resources Ltd v Federal Commissioner of Taxation (1999) 201 CLR 49 …. 10.4C — v Plowman (1995) 128 ALR 391 …. 11.3C Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269 …. 27.7C — v Mardon [1976] QB 801 …. 37.1, 37.4C Esso Petroleum Ltd v Commissioners of Customs and Excise [1976] 1 All ER 117 …. 7.1, 7.4C Euro-Diam Ltd v Bathurst [1990] 1 QB 1 …. 27.2E European Bank Ltd v Evans (2010) 240 CLR 432 …. 29.1 Evans v Benson and Co [1961] WALR 13 …. 35.5C — v Secretary, Department of Families, Housing, Community Services and Indigenous Affairs (2012) 289 ALR 237 …. 7.5.4, 7.6C

Evans Marshall & Co Ltd v Bertola SA [1973] 1 WLR 349 …. 32.3C Evanturel v Evanturel (1874) LR 6 PC 1 …. 27.3C Everet v Williams (1893) 9 LQR 197 …. 27.2E Everitt v Everitt (1870) LR 10 Eq Cas 405 …. 18.4C F F A Tamplin Steamship Co Ltd v Anglo-Mexican Petroleum Products Co Ltd [1916] 2AC 397 …. 25.2C Fagan v Green & Edwards Ltd [1926] 1 KB 102 …. 13.3C Fairbanks v Snow 13 NE 596 (1887) …. 17.3C Falcke v Gray (1859) 62 ER 250 …. 31.1, 31.3C — v Scottish Imperial Insurance Company (1886) 34 Ch D 234 …. 38.3C Falconer v Wilson [1973] 2 NSWLR 131 …. 24.5C Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 …. 38.6C Farmer v Arundel (1772) 96 ER 485 …. 38.5C — v Honan (1919) 26 CLR 183 …. 5.5C Farrow Mortgage Services Pty Ltd (in liq) v Edgar (1993) 114 ALR 1 …. 28.2C — v Slade and Nelson (1996) 38 NSWLR 636 …. 34.2C Fast Fix Loans Pty Ltd v Samardzic [2011] NSWCA 260; (2011) 15 BPR 29,445 …. 20.3C Fawcett v Star Car Sales Ltd [1960] NZLR 406 …. 16.6C Fazio v Fazio [2012] WASCA 72 …. 23.1, 23.5C Fercometal SARL v Mediterranean Shipping Co SA [1989] 1 AC 788 …. 24.7C Ferguson v Wilson (1866) LR 2 Ch 77 …. 33.2C Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 …. 25.1, 25.6C, 29.5C, 38.6C Fidler v Sun Life Assurance Co of Canada (2006) 271 DLR (4th) 1 …. 29.5.3 Filby v Hounsell [1896] 2 Ch 737 …. 5.5C Fink v Fink (1946) 74 CLR 127 …. 29.6C Fish v Solution 6 Holdings Ltd (2006) 225 CLR 180 …. 21.1, 21.3C Fitzgerald v FJ Leonhardt Pty Ltd (1997) 189 CLR 215 …. 28.1, 28.3C

— v Masters (1956) 95 CLR 420; [1956] HCA 53 …. 23.5C, 31.6C Flight v Booth (1834) 131 ER 1160 …. 24.2C Flockton v Hall (1849) 14 QB 380; 117 ER 150 …. 23.4C — v — (1851) 16 QB 1039; 117 ER 1179 …. 23.4C Foakes v Beer (1884) 9 App Cas 605 …. 6.1, 6.6C, 36.3C Foran v Wight (1989) 168 CLR 385 …. 24.1, 24.7C Forbes v Australian Yachting Federation Inc (1996) 131 FLR 241 …. 4.8.2 Ford v Beech (1848) 116 ER 693 …. 23.4C — v Perpetual Trustees Victoria Ltd (2009) 75 NSWLR 42 …. 16.1, 16.8C Ford-Hunt v Raghbir Singh [1973] 2 All ER 700 …. 33.1, 33.3C Foreman v Great Western Railway Company (1878) 38 LT 851 …. 10.4C Fowler v Fowler (1859) 45 ER 97 …. 34.2C Francis v F Berndes Ltd [2012] 1 All ER 735 …. 34.3C Franklin v Manufacturers Mutual Insurance Ltd (1935) 35 SR (NSW) 76 …. 24.6C Frederick E Rose (London) Ltd v William H Pim Junior & Co Ltd [1953] 2 QB 450 …. 34.2C, 34.3C Free v Jetstar Airways Pty Ltd, Civil Claims [2007] VCAT 1405 …. 21.2E Friend v Brooker (2009) 239 CLR 129 …. 38.6C Fry v Lane (1888) 40 Ch D 312 …. 19.2C, 19.3C Fullers’ Theatres Ltd v Musgrove (1923) 31 CLR 524 …. 24.2C, 31.7C Fyneux v Clyfford (1517) King’s Bench 27/1026, m 76 …. 2.5E G Gandy v Gandy (1885) 30 Ch D 57 …. 39.3C Gange v Sullivan (1966) 116 CLR 418 …. 23.3C Garcia v National Australia Bank Ltd (1998) 194 CLR 395 …. 18.1, 18.6C, 19.4C Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 …. 15.4C GE Capital Finance Australasia Pty Ltd v Federal Commissioner of Taxation (2011) 219 FCR 420 …. 34.3C

GEC Marconi Systems v BHP Information Technology Pty Ltd (2003) 128 FCR 1; [2003] FCA 50 …. 22.1, 22.4C General Billposting Company Limited v Atkinson [1909] AC 118 …. 27.8C General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 …. 34.3C George Mitchell Ltd v Finney Lock Seeds Ltd [1983] 2 AC 803 …. 13.2C George Wimpey UK Ltd v VI Construction Ltd [2005] EWCA Civ 77 …. 34.1, 34.4C Geraets-Smits v Stichting Ziekenfonds VGZ [2001] All ER (D) 152 …. 16.4C Geraghty v Minter (1979) 142 CLR 177; [1979] HCA 42 …. 23.5C, 27.8C Gibbons v Wright (1954) 91 CLR 423 …. 16.8C Gibson v Patterson (1737) 26 ER 8 …. 31.6C Gillett v Holt [2001] Ch 210 …. 38.6C Giorgianni v R (1985) 156 CLR 473 …. 28.3C Gipps v Gipps [1978] 1 NSWLR 454 …. 37.3C Giumelli v Giumelli (1999) 196 CLR 101 …. 36.4C, 38.6C Glasier v Rolls (1889) 59 LJCh 63 …. 33.2C, 33.3C Glegg v Bromley [1912] 3 KB 474 …. 40.1, 40.4C Gnych v Polish Club Ltd (2015) 255 CLR 414 …. 26.1, 26.6C Golden Key Ltd, Re [2009] EWCA Civ 636 …. 12.3C Gollin & Co Ltd v Karenlee Nominees Pty Ltd (1983) 153 CLR 455 …. 12.3C Goodwin v National Bank of Australasia Ltd (1968) 117 CLR 173 …. 19.3C Goss v Lord Nugent (1833) 110 ER 713 …. 12.2C Gould v Vaggelas (1984) 157 CLR 215 …. 15.2C, 15.5C Governor etc of the Poor of Kingston-upon-Hull v Petch (1854) 156 ER 583 …. 5.5C GR Securities v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631 …. 5.6C Grand Lodge, AOUW of Minnesota v Towne 161 NW 403 (1917) …. 38.6C Grant v Dawkins [1973] 3 All ER 897 …. 33.2C — v Downs (1976) 135 CLR 674 …. 27.4C

Graves v Legg (1854) 9 Ex 709 …. 24.2C Gray v Motor Accident Commission (1998) 196 CLR 1 …. 29.2C Great Northern Railway Co v Witham (1873) LR 9 CP 16 …. 39.4C Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2003] QB 679 …. 16.1, 16.4C Great Western Railway and Midland Railway v Bristol Corporation [1918] LJ Ch 414 …. 12.2C Great-West Life & Annuity Insurance Co v Knudson 534 US 204 (2002) …. 38.6C Greek Orthodox Community of SA Inc v Ermogenous (2000) 77 SASR 523 …. 7.5C Green v AMP Life (2005) 13 ANZ Insurance Cases 90–124 …. 34.2C — v Sevin (1879) 13 Ch D 589 …. 24.5C Greenwood Shopping Plaza Ltd v Beattie (1980) 111 DLR (3d) 257 …. 39.3C Greig v Insole, World Series Cricket Pty Ltd v Insole [1978] 3 All ER 449 …. 9.4C Grey v Botte (1544), King’s Bench 27/1133, m 105 …. 2.5E Griffin v Mercantile Bank (1890) 11 LR (NSW) Eq 231 …. 33.1 Griffiths v Robins (1818) 56 ER 480 …. 18.3C Groom v Crocker [1939] 1 KB 194 …. 37.4C Groves v Groves (1829) 148 ER 1136 …. 28.2C Grundt v Great Boulder Pty Gold Mines Ltd (1937) 59 CLR 641 …. 36.2C, 36.3C, 38.6C H H Dakin & Co Ltd v Lee [1916] 1 KB 566 …. 22.3C Hadley v Baxendale (1854) 156 ER 145 …. 29.1, 29.5C, 29.5.3, 29.6C, 29.8C, 29.9C, 29.10C, 37.5C Hall v Brooklands Auto-Racing Club [1933] 1 KB 205 …. 13.4C — v Hebert [1993] 2 SCR 159 …. 27.2E Halt Garage (1964) Ltd, Re [1982] 3 All ER 1016 …. 9.5C Hamilton v Lethbridge (1912) 14 CLR 236 …. 9.1, 9.3C

— v Watson (1845) 8 ER 1339 …. 18.6C Hamlin v Great Northern Railway Company (1856) 156 ER 1261 …. 29.5C Hammersley v De Biel (1845) 8 ER 1312 …. 36.2C Hampton v Glamorgan County Council [1917] AC 13 …. 38.3C Haque v Haque [No 2] (1965) 114 CLR 98 …. 24.8C Harmer v Armstrong [1934] Ch 65 …. 39.3C Harris v Great Western Railway Co (1976) 1 QBD 515 …. 10.6C — v Nickerson (1873) LR 8 QB 286 …. 4.4C, 4.5C — v Wall (1847) 154 ER 51 …. 9.3C Harrison v National Bank of Australasia Ltd (1928) 23 Tas LR 1 …. 19.3C Hartog v Colin & Shields [1939] 3 All ER 566 …. 16.6C Harvy v Stone (1539) King’s Bench 27/1112, m 65 …. 2.5E Hastie v Couturier (1853) 156 ER 43 …. 16.2C Hawkins v Clayton (1988) 164 CLR 539 …. 11.3C Hayes v Dodd (1990) 2 All ER 815 …. 29.5C Head v Tattersall (1871) LR 7 Exch 7 …. 35.2C Hector’s Case (1988) 58 P&CR 156 …. 16.6C Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 …. 37.4C Heilbut, Symons & Co v Buckleton [1913] AC 30 …. 10.2C, 10.3C Henderson v Stevenson (1875) LR 2 Sc & Div 470 …. 10.6C Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 79 ALR 83 …. 15.1, 15.2C Henthorn v Fraser [1892] 2 Ch 27 …. 4.10.2, 4.11C, 4.12C Henville v Walker (2001) 206 CLR 459 …. 15.1, 15.5C Herbert Clayton and Jack Waller Ltd v Oliver [1930] AC 209 …. 24.2C, 29.6C Herbert Morris Ltd v Saxelby [1916] 1 AC 688 …. 27.6C, 27.7C Hewell v Court (1983) 149 CLR 639 …. 24.8C Hewton v Forster (1536) KB 27/1099, m 76 …. 2.5E Hickman v Haynes (1875) LR 10 CP 598 …. 33.2C Hill v C A Parsons & Co Ltd [1972] Ch 305 …. 32.3C

— v Van Erp (1997) 188 CLR 159 …. 15.4C Hirji Mulji v Cheong Yue Steamship Co Ltd [1926] AC 497 …. 25.2C Hispanica de Petroleos SA v Vencedora Oceanica (The Kapetan Markos NL (No 2)) [1987] 2 Lloyd’s Rep 321 …. 4.5C Hoare v Rennie (1859) 157 ER 1083 …. 24.2C Hobbs v London and South Western Railway Co (1875) LR 10 QB 111 …. 37.5C Hoenig v Isaacs [1952] 2 All ER 176 …. 22.1, 22.3C, 22.3.2, 22.4C Holland v Wilsthire (1954) 90 CLR 409 …. 24.5C, 27.8C Holman v Johnson (1775) 98 ER 1120 …. 27.2E, 28.2C, 28.3C, 28.4C, 34.3C Holmes v Harryson (1549) King’s Bench 27/1149, m 32 …. 2.5E Holt v Markham [1923] 1 KB 504 …. 36.3C — v United Security Life Ins & Trust Co (1909) 72 Atlantic Reporter 301 …. 29.6C Holwell Securities Ltd v Hughes [1974] 1 All ER 161 …. 4.12C Homburg Houtimport BV v Agrosin Private Ltd [2004] 1 AC 715 …. 12.3C Homer v Ashford (1825) 130 ER 537 …. 27.5C Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 …. 24.1, 24.3C, 24.4C Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216 …. 15.2C, 15.3C Horsler v Zorro [1975] Ch 302 …. 33.2C Horsley & Weight Ltd, Re [1982] Ch 442 …. 9.5C Horwood v Millar’s Timber and Trading Co Ltd [1917] 1 KB 305 …. 40.3C Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 …. 11.3C, 12.3C Hospitality Group Pty Limited v Australian Rugby Union LTD (2001) 110 FCR 157 …. 29.2C Household Fire and Carriage Accident Insurance Company (Ltd) v Grant (1879) LR 4 Ex D 216 …. 4.1, 4.10C, 4.11C Howard v Shirlstar Container Transport Ltd [1990] 1 WLR 1292 …. 27.2E Howe v Teefy (1927) 27 SR (NSW) 301 …. 29.1, 29.4C

Hoyt’s Pty Ltd v Spencer (1919) 27 CLR 133 …. 10.1, 10.9C, 10.11C, 10.11.1, 36.2C Hughes v Metropolitan Railway Co (1877) 2 App Cas 439 …. 36.2C, 36.3C Hughes Bros Pty Ltd v Trustees of the Roman Catholic Church for the Archdiocese of Sydney (1993) 31 NSWLR 91 …. 5.4C Huguenin v Baseley (1807) 33 ER 526 …. 18.3C Hungerfords v Walker (1989) 171 CLR 125 …. 30.3C Hunt v Wilson [1978] 2 NZLR 261 …. 23.3C Hvalfangerselskapet Polaris Aktieselskap v Unilever Ltd [1933] 39 Com Cas 1 …. 12.2C Hydarnes Steamship Co v Indemnity Mutual Marine Assurance Co [1895] 1 QB 500 …. 12.3C Hyde v Wrench (1840) 49 ER 132 …. 4.6C, 4.13C Hydro Electric Commission of Nepean v Ontario Hydro [1982] 1 SCR 347 …. 38.5C Hyundai Heavy Industries Co Ltd v Papadopoulos [1980] 2 All ER 29 …. 29.5C Hyundai Shipbuilding and Heavy Industries Co Ltd v Pournaras (1978) 2 Lloyd’s Rep 502 …. 29.5C I IAC Leasing Ltd v Humphrey (1972) 126 CLR 131 …. 30.4C ICI Australia Operations Pty Ltd v Trade Practices Commission (1992) 38 FCR 248 …. 15.4C Imperial Group Pension Trust Ltd v Imperial Tobacco Ltd [1991] 2 All ER 597 …. 11.4C Imperial Land Co of Marseilles, Re (1872) LR 7 Ch App 587 …. 4.11C Inche Noriah v Shaik Allie Bin Omar [1929] AC 127 …. 18.2C, 18.3C Independent Oil Industries Ltd v The Shell Co of Australia Ltd (1937) 37 SR (NSW) 394 …. 37.7C Ingram v Little [1960] 3 All ER 332 …. 16.6C International Air Transport Association v Ansett Australia Holdings Ltd (2008) 234 CLR 151 …. 12.3C

Introductions Ltd, Re [1970] Ch 199 …. 9.5C Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 All ER 98; [1998] 1 WLR 896 …. 12.1, 12.2.2, 12.4C Irnham v Child (1781) 28 ER 1006 …. 34.2C Irving v Kleinman [2005] NSWCA 116 …. 11.4C J J J Savage & Sons Pty Ltd v Blakney (1970) 119 CLR 435 …. 10.1, 10.10C J Lauritzen AS v Wijsmuller BV (The Super Servant Two) [1990] 1 Lloyd’s Rep 1 …. 25.3C J Spurling Ltd v Bradshaw (1956) 1 WLR 461 …. 13.5C Jackson v Horizon Holidays Ltd [1975] 3 All ER 92 …. 29.5C, 39.3C — v Royal Bank of Scotland plc [2005] 2 All ER 71 …. 29.10C — v Union Marine Insurance Co (1873) LR 8 CP 572 …. 25.5C James v The Commonwealth (1939) 62 CLR 339 …. 37.7C Jamshed Khodaram Irani v Burjorji Dhunjibha (1915) 32 TLR 156 …. 24.5C Janson v Driefontein Consolidated Mines Ltd [1902] AC 484 …. 27.3C Jaques v Millar (1877) 6 Ch D 153 …. 33.3C Jarvis v Swans Tours Ltd [1973] QB 233 …. 29.5C JC Williamson Ltd v Lukey & Mulholland (1931) 45 CLR 282 …. 8.3C, 31.5C Je Maintiendrai Pty Ltd v Quaglia (1980) 26 SASR 101 …. 36.1, 36.3C Jennings’ Trustee v King [1952] 1 Ch 899 …. 31.7C Jeune v Queens Cross Properties Ltd [1974] Ch 97 …. 31.5C Jia Min Building Construction Pte Ltd v Ann Lee Pte Ltd [2004] 3 SLR(R) 288 …. 29.11C Johnson v Agnew [1980] AC 367 …. 29.1, 29.3C, 33.1, 33.2C — v Buttress (1936) 56 CLR 113 …. 18.1, 18.2C, 18.3C — v Medlicott (1731) 24 ER …. 19.2C — v Perez (1988) 166 CLR 351 …. 29.1, 29.3C Johnsons Tyne Foundry Pty Ltd v Maffra Corporation (1948) 77 CLR 544 …. 38.2C

Jones v Barkley (1781) 99 ER 434 …. 24.7C — v Canavan [1972] 2 NSWLR 236 …. 11.5C — v Gardiner [1902] 1 Ch 191 …. 33.3C — v Padavatton [1969] 2 All ER 616 …. 7.1, 7.3C Jordan v Jordan (1595) 78 ER 616 …. 39.2C Jorden v Money (1854) 10 ER 868 …. 36.2C, 36.3C Jorgensen v Boyce (1896) 22 VLR 408 …. 23.5C Joscelyne v Nissen [1970] 2 QB 86 …. 16.7C, 34.2C K Kadner v Brune Holdings Pty Ltd [1973] 1 NSWLR 498 …. 15.2C Kakavas v Crown Melbourne Ltd (2013) 298 ALR 35 …. 19.1, 19.4C, 38.6C Kali Bakhsh Singh v Ram Gopal Singh (1913) 30 TLR 138 …. 18.4C Kammins Ballrooms Co Ltd v Zenith Investments (Torquay) Ltd [1971] AC 850 …. 24.6C Kaufmann v McGillicuddy (1914) 19 CLR 1 …. 27.8C Kelly v Solari (1841) 152 ER 24 …. 38.5C Kennedy v Vercoe (1960) 105 CLR 521 …. 5.2C Kenny & Good Pty Ltd v MGICA (1992) Ltd (1999) 199 CLR 413 …. 15.5C Kern Corporation Ltd v Walter Reid Trading Pty Ltd (1987) 163 CLR 164 …. 24.8C Khoury v Khouri (2006) 66 NSWLR 241 …. 8.1, 8.3C Killarney Investments Pty Ltd v Macedonian Community of WA (Inc) [2007] WASCA 180 …. 30.1 King v Poggioli (1923) 32 CLR 222 …. 31.7C King Construction Company v Smith Electric Co 350 SW 2d 940 (1961) …. 17.5C Kiriri Cotton Co Ltd v Dewani [1960] AC 192 …. 38.5C Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281 …. 15.4C KLDE Pty Ltd v Commissioner of Stamp Duties (Q) (1984) 155 CLR 288 …. 24.8C

Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349 …. 38.6C Kocotis v D’Angelo (1957) 13 DLR (2d) 69 …. 26.3C Koehler v Cerebos (Australia) Ltd (2005) 222 CLR 44 …. 11.4C Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115 …. 24.1, 24.4C Koufos v C Czarnikow Ltd [1969] 1 AC 350 …. 29.5C, 29.6C, 29.8.2, 29.9C, 29.10C, 37.1, 37.5C Kowalczuk v Accom Finance Pty Ltd [2008] NSWCA 343; (2008) 77 NSWLR 205 …. 20.3C Krell v Henry [1903] 2 KB 740 …. 16.3C, 25.1, 25.2C, 25.5C, 25.6C L L Albert and Son v Armstrong Rubber Co 178 F 2d 182 (1949) …. 29.6C L G Thorne & Co Pty Ltd v Thomas Borthwick & Sons (A/asia) Ltd (1956) 56 SR (NSW) 81; 73 WN (NSW) 9 …. 10.9C L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 …. 12.2C La Rosa v Nudrill Pty Ltd [2013] WASCA 18 …. 10.1, 10.8C Laird v Pim (1841) 151 ER 852 …. 24.7C, 30.5C Lampet’s Case (1612) 77 ER 994 …. 40.3C Lampleigh v Brathwait (1615) 80 ER 255 …. 6.4C Lamshed v Lamshed (1963) 109 CLR 440 …. 31.1, 31.6C Lancashire Loans Ltd v Black [1934] 1 KB 380 …. 18.3C Langton v Hughes (1813) 105 ER 222 …. 26.2C Larrinaga and Co Ltd v Societe Franco-Americaine des Phosphates de Medulla, Paris (1922) 29 Com Cas 1 …. 25.2C Last v Rosenfeld [1972] 2 NSWLR 923 …. 8.3C Latec Investments Ltd v Hotel Terrigal Pty Ltd (in liq) (1965) 113 CLR 265 …. 24.8C Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623 …. 24.7C Lavarack v Woods of Colchester Ltd [1967] 1 QB 278 …. 29.6C Lawrence v Fox 20 NY 268 (1859) …. 39.3C

Leach Nominees Pty Ltd v Walter Wright Pty Ltd [1986] WAR 244 …. 4.11.2 Leaf v International Galleries [1950] 1 All ER 693 …. 10.3C Lee v Jones (1864) 144 ER 194 …. 18.6C Leeds Industrial Co-operative Society Ltd v Slack [1924] AC 851 …. 33.2C Leeman v Stock [1951] Ch 941 …. 8.2C Legione v Hateley (1983) 152 CLR 406 …. 18.6C, 24.8C, 30.3C, 36.2C, 38.6C Les Affréteurs Réunis Société Anonyme v Leopold Walford (London) Ltd [1919] AC 801 …. 39.3C L’Estrange v F Graucob Ltd [1934] 2 KB 394 …. 10.4C, 10.5C Lewery v Salvation Army in Canada (1993) 104 DLR (4th) 449 …. 7.5C Lewis v Averay [1971] 3 All ER 907 …. 16.6C — v — [1972] 1 QB 198 …. 16.6C Life Insurance Co of Australia Ltd v Phillips (1925) 36 CLR 60 …. 5.3C Lindner v Murdock’s Garage (1950) 83 CLR 628 …. 27.1, 27.6C, 27.7C Lindsay Petroleum Co v Hurd (1874) LR 5 PC 221 …. 31.6C Lipkin Gorman (a firm) v Karpnale Ltd [1991] 2 AC 548 …. 38.6C Lister v Romford Ice and Cold Storage Co Ltd [1957] AC 555 …. 37.4C Llanelly Railway and Dock Co v London and North Western Railway Co (1875) LR 7 HL 550 …. 23.2C Lloyd v Collett (1793) 29 ER 992 …. 31.6C Lloyd’s v Harper (1880) 16 Ch D 290 …. 39.2C, 39.3C Lloyds Bank v Bundy [1975] 1 QB 326 …. 19.3C Lloyds Bank Ltd, Re; Bomze and Lederman v Bomze (1931) 1 Ch 289 …. 18.5C London and River Plate Bank v Bank of Liverpool [1896] 1 QB 7 …. 38.6C London General Omnibus Co Ltd v Holloway [1912] 2 KB 72 …. 18.6C Longlands Farm, Re [1968] 3 All ER 552 …. 23.3C Lord Elphinstone v Monkland Iron and Coal Co (1886) 11 App Cas 332 …. 30.2C, 30.3C Lord Gerard’s Case (1581) Lincoln’s Inn MS Misc 361, fol 2IV …. 2.5E Louinder v Leis (1982) 149 CLR 509 …. 23.3C, 24.1, 24.5C

Louth v Diprose (1992) 175 CLR 621 …. 19.1, 19.4C, 19.5C Love v Amalgamated Society of Lithographic Printers (1912) 2 SLT 50 …. 39.3C Low v Bouverie [1891] 3 Ch 82 …. 10.5C Lowry v Bourdieu (1780) 99 ER 299 …. 38.5C Lukin v Lovrinov (unreported, SASC, Perry J, 9 April 1998) …. 23.5C Lumbers v W Cook Builders Pty Ltd (in liq) (2008) 232 CLR 635 …. 38.1, 38.3C, 38.6C Lumley v Gye (1853) 118 ER 749 …. 32.2.3, 37.6C — v — (1854) 23 LT 66 …. 32.2.3 — v Wagner (1852) 42 ER 687 …. 32.1, 32.2C, 32.3C, 32.4C Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286 …. 24.2C, 24.4C Lunn v Thornton (1845) 135 ER 587 …. 40.3C Luxor (Eastbourne) Ltd v Cooper [1941] AC 108 …. 23.2C Lysaght v Edwards (1876) 2 Ch D 499 …. 24.8C M Macbryde v Weekes (1856) 52 ER 1214 …. 24.5C Macdonald v Longbottom (1859) 120 ER 1177 …. 12.2C Mackay v Dick (1881) 6 App Cas 251 …. 11.4C, 26.6C Mackreth v Marlar (1786) 29 ER 1156 …. 24.8C Maddison v Alderson (1883) 8 App Cas 467 …. 8.3C, 36.2C Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 …. 12.3C Mahmoud and Ispahani, Re [1921] 2 KB 716 …. 26.1, 26.2C Mahoney v Lindsay (1980) 33 ALR 601 …. 24.7C Mainprice v Westley (1865) 122 ER 1250 …. 4.4C Mainstream Properties v Young [2008] 1 AC 1 …. 37.6C Malhotra v Choudhury [1980] Ch 52 …. 33.2C Malik v Bank of Credit and Commerce International SA (in compulsory liquidation) [1998] AC 20 …. 11.4C Mamidoil-Jetoil Greek Petroleum Co SA v Okta Crude Oil Refinery AD [2001] 2

Lloyd’s Rep 76 …. 5.3C Manchester Trust v Furness [1895] 2 QB 539 …. 19.4C Mander Pty Ltd v Clements (2005) 30 WAR 46 …. 34.2C Marek v Australasian Conference Association Pty Ltd [1994] 2 Qd R 521 …. 5.5C Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] AC 524 …. 25.2C, 25.3C Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494 …. 15.1, 15.4C, 15.5C Marler v Wilmer (1539) King’s Bench 27/1111, m 64 …. 2.5E Marles v Philip Trant & Sons [1964] 1 QB 29 …. 26.4C Marminta Pty Ltd v French [2003] QCA 541 …. 23.5C Marquis of Townshend v Stangroom (1801) 31 ER 1076 …. 34.2C Martin-Baker Aircraft Co Ltd v Canadian Flight Equipment Ltd [1955] 2 QB 556 …. 23.2C Maskell v Horner [1915] 3 KB 106 …. 17.2C Maslen v Perpetual Executor Trustees …. 23.5C Mason v Provident Clothing & Supply Co Ltd [1913] AC 724 …. 27.6C Master Education Services Pty Ltd v Ketchell (2008) 236 CLR 101 …. 26.6C Masters v Cameron (1954) 91 CLR 353 …. 5.1, 5.5C, 5.6C, 7.5C Matthews v Kuwait Bechtel Corporation [1959] 2 QB 57 …. 37.4C Maybury v Atlantic Union Oil Co Ltd (1953) 89 CLR 507 …. 36.2C Maynard v Goode (1926) 37 CLR 529 …. 23.3C Mayo v W & K Holdings (NSW) Pty Ltd (in liq) [2015] NSWCA 119 …. 34.3C McArdle (dec’d), Re [1951] 1 Ch 669 …. 40.3C McArthur v Stern (1986) 5 NSWLR 538 …. 24.8C McBride v Sandland (1918) 25 CLR 69 …. 8.3C McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579 …. 12.3C McCathie v McCathie [1971] NZLR 58 …. 36.3C McCutcheon v David MacBrayne Ltd [1964] 1 WLR 125 …. 10.8C McDermott v Black (1940) 63 CLR 161; [1940] HCA 4 …. 23.1, 23.4C, 23.5C

McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 …. 27.8C, 30.1, 30.5C — v McMullen (1908) 25 WN (NSW) 142 …. 31.7C McEllistrim v Ballymacelligott Co-operative Agricultural and Dairy Society Ltd [1919] AC 548 …. 27.7C McFarlane v Daniell (1938) 38 SR (NSW) 337 …. 28.6C McIntyre v Nemesis DBK Ltd [2009] NZCA 329 …. 17.2.2 McNally v Waitzer [1981] 1 NSWLR 294 …. 24.5C McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 …. 16.1, 16.2C, 16.7C, 29.6C McWilliam’s Wines Pty Ltd v McDonald’s System of Australia Pty Ltd (1980) 33 ALR 394 …. 15.3C Measures v Measures Brothers Ltd [1910] 2 Ch 248 …. 27.8C Mehmet v Benson (1965) 113 CLR 295 …. 31.1, 31.7C, 31.7.2 Michael Realty Pty Ltd v Carr [1977] 1 NSWLR 553 …. 24.7C Mihalis Angelos, The [1971] 1 QB 164 …. 29.6C Mildmay v Standysh [1584] 1 Rep 175; (1584) 76 ER 379 …. 2.5E Miller v Miller (2011) 242 CLR 446 …. 26.6C Mister Figgins Pty Ltd v Centrepoint Freeholds Pty Ltd (1981) 36 ALR 23 …. 15.2C Mitchel v Reynolds (1711) 24 ER 347 …. 27.5C Mizzi v Reliance Financial Services Pty Ltd [2007] NSWSC 37 …. 39.3.3 Mobil Oil Australia Ltd v Lyndel Nominees Pty Ltd (1998) 153 ALR 198 …. 4.1, 4.8C Monarch Steamship Co Ltd v Karlshamns Oljefabriker (A/B) [1949] AC 196 …. 29.10C Mondel v Steel (1841) 151 ER 1288 …. 22.3C Moore v Blake (1808) 1 Ball & B 62 …. 31.6C — v — (1816) 3 ER 1147 …. 31.6C, 31.7C — v Morgan (1900) 21 LR (NSW) Eq 158 …. 23.5C Moorgate Mercantile Co Ltd v Twitchings [1976] QB 225 …. 24.7C Moorgate Tobacco Co Ltd v Philip Morris Ltd (No 2) (1984) 156 CLR 414 ….

11.3C Morgan v Beeby [1968] 2 NSWR 609 …. 24.5C Morrison v Coast Finance Ltd (1965) 55 DLR (2d) 710 …. 19.3C Moses v Macferlan (1760) 97 ER 676 …. 38.6C Moss v Elphick [1910] 1 KB 846 …. 23.5C Muckleston v Brown (1801) 31 ER 934 …. 28.5C Mulvenna v Royal Bank of Scotland plc [2003] EWCA Civ 1112 …. 29.10C Mumford v Gething (1859) 141 ER 834 …. 27.6C Munchies Management Pty Ltd v Belperio (1988) 58 FCR 274 …. 15.4C Munro v Finlinson (1903) 116 LT Journal 109 …. 33.2C Muschinski v Dodds (1985) 160 CLR 583 …. 38.2C Mushroom Composters Pty Ltd v IS & DE Robertson Pty Ltd [2015] NSWCA 1 …. 5.6C Muskham Finance Ltd v Howard [1963] 1 QB 904 …. 16.8C Mutual Pools & Staff Pty Ltd v Commonwealth …. 38.6C N National Australia Bank Ltd v Garcia (1996) 39 NSWLR 577 …. 18.6C National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675 …. 25.2C National Commercial Banking Corporation of Australia Ltd v Batty (1986) 160 CLR 251 …. 38.6C National Mutual Property Services (Australia) Pty Ltd v Citibank Savings Ltd (1995) 132 ALR 514 …. 38.7.2, 40.4.2 National Phonograph Co Ltd v Edison-Bell Consolidated Phonograph Co Ltd [1908] 1 Ch 335 …. 37.6C Neeta (Epping) Pty Ltd v Phillips (1974) 131 CLR 286 …. 24.5C Neill v Heavens (1953) 89 CLR 1 …. 8.2C Nelson v Dahl (1879) 12 Ch D 568 …. 11.5C — v Nelson (1995) 184 CLR 538 …. 28.1, 28.2C, 28.3C, 34.3C New South Wales Medical Defence Union Ltd v Transport Industries Insurance Co Ltd (1986) 6 NSWLR 740 …. 34.2C

New Zealand Shipping Co v Société des Ateliers et Chantiers de France [1919] AC 1 …. 26.6C New Zealand Shipping Co Ltd v AM Satterthwaite & Co Ltd [1975] AC 154 …. 4.13C, 39.1, 39.4C Newbigging v Adam (1886) 34 Ch D 582 …. 35.2C Newman v Gybbe (1549) King’s Bench 27/1152, m 135 …. 2.5E Neylon v Dickens [1987] 1 NZLR 402 …. 33.1, 33.3C Nicholas v Thompson [1924] VLR 554 …. 14.1, 14.6C Nickoll v Ashton [1901] 2 KB 126 …. 25.5C Nielsen v Hempston Holdings Pty Ltd (1986) 65 ALR 302 …. 15.2C Niesmann v Collingridge (1921) 29 CLR 177 …. 5.5C Nocton v Lord Ashburton [1914] AC 932 …. 37.4C Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] AC 535 …. 27.1, 27.3C, 27.5C, 27.6C, 27.7C Norman v Federal Commissioner of Taxation (1963) 109 CLR 9 …. 38.6C, 40.1, 40.3C — v Moore (1549) King’s Bench 27/1149, m 117 …. 2.5E North Ocean Shipping Company Ltd v Hyundai Construction Company Ltd [1979] 1 QB 705 …. 6.5C, 17.1, 17.5C Norwich Winterthur Insurance v Con-Stan Industries of Australia [1983] 1 NSWLR 461 …. 11.5C Notcutt v Universal Equipment Ltd Co (London) [1986] 1 WLR 641 …. 25.3C Nullagine Investments Pty Ltd v Western Australian Club Inc (1993) 177 CLR 635 …. 11.3C O Obacelo Pty Ltd v Taveraft Pty Ltd (1986) ATPR 40-703 …. 15.2C OBG Ltd v Allan [2008] 1 AC 1 …. 37.1, 37.6C Occidental Worldwide Investment Corp v Skibs A/S Avanti (The ‘Siboen’ and The ‘Sibotre’) [1976] 1 Lloyd’s Rep 293 …. 17.5C Ocean Tramp Tankers Corporation v V/O Sovfracht (The Eugenia) [1964] 2 QB 226 …. 25.3C

Oceanic Sun Line Special Shipping Company Inc v Fay (1988) 165 CLR 197 …. 10.4C O’Connor v SP Bray Ltd (1936) 36 SR (NSW) 248 …. 35.5C O’Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359 …. 30.1, 30.4C Office of Fair Trading v Abbey National plc [2008] EWHC 875 (Comm) …. 30.4C — v — [2010] 1 AC 696 …. 30.4C Ogle v Comboyuro Investments Pty Ltd (1976) 136 CLR 444 …. 27.8C — v Earl Vane (1867) LR 2 QB 275; LR 3 QB 272 …. 33.2C Old UGC Inc v Industrial Relations Commission of NSW (2006) 225 CLR 274 …. 21.3C Oliver Hume (Australia) Pty Ltd v Land Source Australia Pty Ltd [2015] VSC 77 …. 34.3C Olley v Marlborough Court [1949] 1 KB 532 …. 10.5C, 10.7C Olsson v Dyson (1969) 120 CLR 365 …. 39.3C oOh! Media Roadside Pty Ltd v Diamond Wheels Pty Ltd (2011) 32 VR 255 …. 25.1, 25.3C O’Rorke v Bolingbroke (1877) 2 App Cas 814 …. 19.3C Orr v Ford (1989) 167 CLR 316 …. 26.6C Osborn v McDermott [1998] 3 VR 1 …. 23.5C Oscar Chess Ltd v Williams [1957] 1 All ER 325; [1957] 1 WLR 370 …. 10.1, 10.2C, 10.3C O’Sullivan v Management Agency Ltd [1985] QB 428 …. 35.4C Oun v Ahmad [2007] EWCA Civ 412 …. 34.3C Overseas Tankship (UK) Ltd v Morts Dock & Engineering Co Ltd (The Wagon Mound) (No 1) [1961] AC 388 …. 15.5C Owen and Gutch v Homan (1853) 4 HL Cas 997; 10 ER 752 …. 19.3C, 19.4C Owtrede v Whyte (1546) King’s Bench 27/1138, m 24d …. 2.5E P P J Berry Estates Pty Ltd v Mangalore Homestead Pty Ltd (1984) 6 ATPR 40-459

…. 15.2C Pacaya Rubber & Produce Co Ltd, Re [1914] 1 Ch 542 …. 14.2C Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 …. 34.2C Pacific Sport & Leisure Pty Ltd v Underworks Pty Ltd (2006) 149 FCR 395 …. 40.1 Paciocco v Australia and New Zealand Banking Group Ltd (2016) 333 ALR 569 …. 30.1, 30.3C Pacol Ltd v Trade Lines Ltd [1982] 1 Lloyd’s Rep 456 …. 36.2C Page One Records Ltd v Britton [1967] 3 All ER 822 …. 32.1, 32.4C Palmer v Lark [1945] Ch 182 …. 24.7C — v Moore [1900] AC 293 …. 23.5C — v Temple (1839) 112 ER 1304 …. 30.5C Public Works Commissioner v Hills [1906] AC 368 …. 30.2C Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1994] 3 All ER 581 …. 37.3C Pan Ocean Shipping Co Ltd v Creditcorp Ltd [1994] 1 All ER 470 …. 38.3C Pao On v Lau Yiu Long [1980] AC 614 …. 6.1, 6.4C, 6.5C, 17.2C, 17.4C Paper Reclaim Ltd v Aotearoa International Ltd [2006] 3 NZLR 188 …. 29.1, 29.2C Parana, The (1877) 2 PD 118 …. 37.5C Parker v Clark [1960] 1 All ER 93 …. 7.3C — v South Eastern Railway Co (1877) 2 CPD 416 …. 10.1, 10.4C, 10.6C Parkin v Thorold (1852) 51 ER 698 …. 24.5C Parkinson v College of Ambulance Ltd and Harrison [1925] 2 KB 1 …. 27.2E Pascoe v Turner [1979] 2 All ER 945 …. 36.2C Pasley v Freeman (1798) 100 ER 450 …. 37.2C Patel v Mirza [2016] 3 WLR 399 …. 34.3C Pattinson v Luckley (1875) LR 10 Ex 330 …. 38.4C Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 …. 38.1, 38.2C, 38.3C, 38.5C, 39.3C Pavlovic v Universal Music Australia Pty Ltd (2015) 90 NSWLR 605 …. 5.1,

5.6C Payne v Cave [1775–1802] All ER Rep 492 …. 4.4C Paynter v James (1867) LR 2 CP 348 …. 27.8C Pearce v Brooks (1866) LR 1 Ex 213 …. 28.4C — v Watts (1875) LR 20 Eq 492 …. 5.3C Peek v Derry (1887) 37 Ch D 541 …. 15.5C Pepper v Hart [1993] AC 593 …. 12.4C Percy v Board of National Mission of the Church of Scotland [2006] 2 AC 28 …. 7.5.2, 7.5.3 Performing Right Society Ltd v London Theatre of Varieties Ltd [1924] AC 1 …. 40.3C Perkins v Grace Worldwide (Aust) Pty Ltd (1997) 72 IR 186 …. 11.4C Perpetual Trustee Co Ltd v Khoshaba [2006] NSWCA 41; (2006) 14 BPR 26,639 …. 20.3C Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 …. 23.1, 23.3C Perri v Coolangatta Investments Pty Ltd (Supreme Court of NSW (Court of Appeal), unreported; 5 August 1981) …. 24.5C Petelin v Cullen (1975) 132 CLR 355 …. 10.4C, 16.8C Peter Turnbull & Co Pty Ltd v Mundus Trading Co (Australasia) Pty Ltd (1954) 90 CLR 235 …. 24.7C Petera Pty Ltd v EAJ Pty Ltd (1985) ATPR 40-605 …. 15.2C Peters American Delicacy Co Ltd v Patricia’s Chocolates and Candies Pty Ltd (1947) 77 CLR 574 …. 27.7C Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1952] 2 QB 795 …. 4.3C — v — [1953] 1 QB 401 …. 4.1, 4.3C Philips v Ward [1956] 1 All ER 874 …. 29.3C Phillips v Brooks Ltd [1919] 2 KB 243 …. 16.6C Phoenix Commercial Enterprises Pty Ltd v City of Canada Bay Council [2010] NSWCA 64 …. 12.1 Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 …. 10.4C, 13.2C, 27.8C

Phyllyp v Heeth (1540) KB 27/1116, m 23d …. 2.5E Pilkington ACI (Operations) Pty Ltd, Ex parte (1978) 142 CLR 113 …. 15.2C Pinnel’s Case (1602) 77 ER 237 …. 6.1, 6.6C Pirie v Saunders (1961) 104 CLR 149 …. 8.1, 8.2C Placer Development Ltd v The Commonwealth (1969) 121 CLR 353 …. 7.5C Polish Club Ltd v Gnych (2014) 86 NSWLR 650 …. 26.6C Pordage v Cole (1669) 85 ER 449 …. 27.8C Port Jackson Stevedoring Pty Ltd v Salmond & Spraggon (Aust) Pty Ltd (1978) 139 CLR 231 …. 39.3C — v — (1980) 144 CLR 300 …. 39.3C Potts v Miller (1940) 64 CLR 282; 40 SR (NSW) 351 …. 15.5C Prenn v Simmonds [1971] 1 WLR 1381 …. 12.2C, 12.4C, 34.2C President of the Methodist Conference v Parfitt [1984] QB 368 …. 7.5.2 Preston v President of the Methodist Conference [2013] 2 AC 163; [2013] 4 All ER 477 …. 7.5.4 Price v Price (1852) 42 ER 571 …. 18.3C Proform Sports Management Ltd v Proactive Sports Management Ltd [2007] 1 All ER 542 …. 9.1, 9.4C Project 28 Pty Ltd (formerly Narui Gold Coast Pty Ltd) v Barr [2005] NSWCA 240 …. 38.7.2, 40.4.2 Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 …. 26.6C Property and Bloodstock Ltd v Emerton [1968] 1 Ch 94 …. 23.3C Provident Capital Ltd v Papa [2013] NSWCA 36 …. 20.1, 20.3C Pukallus v Cameron (1982) 180 CLR 447 …. 34.2C Putsman v Taylor (1927) 1 KB 637 …. 28.6C Puxu Pty Ltd v Parkdale Custom Built Furniture Pty Ltd (1980) 31 ALR 73 …. 15.3C Pynnok v Clopton (1547) King’s Bench 27/1141, m 79 …. 2.5E Pyrry v Appowell (1545) King’s Bench 27/1134, m 67d …. 2.5E

Q Quinn v Overland [2010] FCA 799 …. 31.4.2 — v Leathem [1901] AC 495 …. 37.6C R R v Clarke (1927) 40 CLR 227 …. 4.1, 4.9C — v Croydon Justices; Ex parte Dean [1993] 3 All ER 129 …. 1.2E — v Federal Court of Australia; Ex parte Pilkington ACI (Operations) Pty Ltd (1978) 142 CLR 113 …. 15.3C R & H Hall Ltd v WH Pim (Junior) & Co Ltd (1927) 32 Com Cas 144 …. 37.5C — v — [1928] All ER 763 …. 29.9C Radaich v Smith (1959) 101 CLR 209 …. 26.6C Radford v De Froberville [1978] 1 All ER 33 …. 29.3C, 29.7C, 33.2C Raineri v Miles [1981] AC 1050 …. 24.5C Ramsden v Dyson (1866) LR 1 HL 129 …. 36.2C Rannie v Irvine (1894) 135 ER 393 …. 27.5C Rawson v Hobbs (1961) 107 CLR 466 …. 24.7C Reardon Smith Line Ltd v Hansen-Tangen [1976] 3 All ER 570; [1976] 1 WLR 989 …. 12.2C, 34.2C Redgrave v Hurd (1881) 20 Ch D 1 …. 14.1, 14.4C, 14.5C, 15.2C Reese River Silver Mining Company v Smith (1869) LR 4 HL 64 …. 14.5C, 35.2C Regent v Millett (1976) 133 CLR 679 …. 8.3C Reid v Moreland Timber Co Pty Ltd (1946) 73 CLR 1 …. 23.3C Rely-a-Bell Burglar & Fire Alarm Co Ltd v Eisler [1926] Ch 609 …. 32.2C Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 …. 5.4C, 11.6C Rent v Danyell (1549) King’s Bench 27/1150, m 104 …. 2.5E Reynolds v Fury [1921] VLR 14 …. 30.5C Rhodes v Bate (1866) 1 Ch App 252 …. 18.2C Rhone-Poulenc Agrochimie SA v UIM Chemical Services Pty Ltd (1986) 68 ALR 77 …. 15.2C

Richards v Bartlet (1584) 74 ER 17 …. 2.5E Richardson, Spence & Co v Rowntree [1894] AC 217 …. 10.4C Riches v Hogben [1985] 2 Qd R 292 …. 38.6C Richmond v Moore Stephens Adelaide Pty Ltd [2015] SASCFC 147 …. 27.1, 27.8C Ricochet Pty Ltd v Equity Trustees Executors and Agency Co Ltd (1993) 41 FCR 229 …. 15.5C Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656 …. 30.3C, 30.4C River Wear Commissioners v Adamson (1877) 2 App Cas 743 …. 12.2C, 34.2C Riverlate Properties Ltd v Paul [1975] Ch 133 …. 16.7C, 34.4C Robert A Munro & Co v Meyer [1930] 2 KB 312 …. 16.7C Roberts v Gray [1913] 1 KB 520 …. 9.1, 9.2C, 9.4C Robertson v Wait (1853) 155 ER 1360 …. 39.3C Robinson v Harman (1848) 154 ER 363 …. 29.1, 29.6C, 29.7C, 29.10C Robophone Facilities Ltd v Blank [1966] 3 All ER 128 …. 29.9C Rock Refrigeration Ltd v Jones & Anor [1997] 1 All ER 1 …. 27.8C Rogers v Booth [1937] 2 All ER 751 …. 7.5C Rolled Steel Products (Holdings) Ltd v British Steel Corporation [1982] Ch 478 …. 9.5C — v — [1986] Ch 246 …. 9.1, 9.5C Rose v Pim [1953] 2 QB 450 …. 34.2C — v Watson (1864) 33 LJ Ch (NS) 385 …. 24.8C Ross T Smyth & Co Ltd v T D Bailey, Son & Co [1940] 3 All ER 60 …. 24.6C Rossiter v Miller (1878) 3 App Cas 1124 …. 5.5C Routledge v Grant (1828) 130 ER 920 …. 4.6C — v McKay [1954] 1 All ER 855 …. 10.3C Rover International Ltd v Cannon Film Ltd [1989] 3 All ER 423 …. 38.5C Rowland v Divall (1923) 2 KB 500 …. 29.5C, 38.5C Roxborough v Rothmans of Pall Mall Australia Ltd (2001) 208 CLR 516 …. 38.6C Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002)

186 ALR 289 …. 7.5C Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 …. 5.4C Royal Exchange Assurance v Hope [1928] Ch 179 …. 39.3C Ruddenklau v Charlesworth [1925] NZLR 161 …. 30.5C Rugg v Minett (1814) 103 ER 985 …. 25.6C Rural Municipality of Storthoaks v Mobil Oil Canada Ltd [1976] 2 SCR 147 …. 38.6C Rutter v Palmer [1922] 2 KB 87 …. 13.3C Ruxley Electronics and Constructions Ltd v Forsyth [1996] AC 344 …. 29.1, 29.7C Ryder v Frohlich [2004] NSWCA 472 …. 23.5C Ryledar Pty Ltd v Euphoric Pty Ltd (2007) 69 NSWLR 603; [2007] NSWCA 65 …. 34.1, 34.2C, 34.3C S Sadler v Evans (1766) 98 ER 34 …. 38.6C Sandwell Park Colliery Co, Re; Field v The Company [1929] 1 Ch 277 …. 24.5C Sankey v Whitlam (1978) 142 CLR 1 …. 27.4C Sanpine Pty Ltd v Koompahtoo Local Aboriginal Land Council [2006] NSWCA 291 …. 24.4C Sargent v ASL Developments Ltd (1974) 131 CLR 634 …. 15.2C, 24.1, 24.6C Satef-Huttenes Albertus SpA v Paloma Tercera Shipping Co SA [1981] 1 Lloyd’s Rep 175 …. 29.6C, 29.10C Saunders v Anglia Building Society (Gallie v Lee) [1971] AC 1004 …. 16.8C — v Edwards [1987] 1 WLR 1116 …. 27.2E Sawyer & Vincent v Window Brace Ltd [1943] KB 32 …. 38.5C Scaffidi v Perpetual Trustees Victoria Ltd [2011] WASCA 159 …. 23.5C Scanlan’s New Neon Ltd v Tooheys Ltd (1943) 67 CLR 169 …. 25.2C Scarf v Jardine (1882) 7 App Cas 345 …. 35.5C Scarfe v Morgan (1838) 150 ER 1430 …. 28.4C, 28.5C Schebsman, Re [1944] Ch 83 …. 39.3C

Scott v Brown, Doering, McNab & Co [1892] 2 QB 724 …. 28.4C, 28.4C — v English [1947] VicLawRp 67; [1947] VLR 445 …. 23.5C — v Rania [1966] NZLR 527 …. 23.3C Scottish Equitable plc v Derby [2001] 3 All ER 818 …. 38.6C Scowby, Re; Scowby v Scowby [1897] 1 Ch 741 …. 33.3C Scruttons Ltd v Midland Silicones Ltd [1962] AC 446 …. 39.4C Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 …. 5.4C, 11.3C, 11.4C, 26.6C Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 …. 5.4C, 15.5C, 38.6C Sent v Jet Corp of Australia Pty Ltd (1986) 160 CLR 540 …. 15.4C Seton v Slade (1802) 32 ER 108 …. 24.5C, 24.8C Shadwell v Shadwell (1860) 142 ER 62 …. 7.3C Sharland v Sharland [2016] 1 All ER 671 …. 37.3C Shaw v New South Wales (2012) 219 IR 87 …. 11.4C Shears v Mendeloff (1914) 30 TLR 342 …. 9.4C Shevill v Builders Licensing Board (1982) 149 CLR 620 …. 24.4C Shiloh Spinners Ltd v Harding [1973] AC 691 …. 24.8C, 31.5C Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206 …. 11.2C Shogun Finance Ltd v Hudson [2004] 1 AC 919 …. 16.1, 16.6C Simpson v Vaughan (1739) 26 ER 415 …. 34.2C Sinclair v Brougham [1914] AC 398 …. 25.6C Sinclair Scott & Co Ltd v Naughton (1929) 43 CLR 310 …. 5.5C Singh v Ali [1960] AC 167 …. 28.1, 28.5C Sion v NSW Trustee & Guardian [2013] NSWCA 337 …. 7.6C Skeate v Beale (1840) 113 ER 688 …. 17.5C Slade’s Case (1602) 76 ER 1072 …. 2.1, 2.2E, 2.4C Smeaton Hanscomb & Co Ltd v Sassoon I Setty, Son & Co (1953) 1 WLR 1468 …. 13.5C Smith v Chadwick (1884) 9 AC 187 …. 14.3C — v Hamilton [1951] Ch 174 …. 24.5C

— v Hughes (1871) LR 6 QB 597 …. 16.5C, 16.6C, 16.7C — v Kay (1859) 7 HL Cas 750; 11 ER 299 …. 14.6C, 37.3C — v Land and House Property Corporation (1885) 28 Ch D 7 …. 14.1, 14.4C — v Mawhood (1845) 153 ER 552 …. 26.3C — v William Charlick Ltd (1924) 34 CLR 38 …. 17.5C Smith and Snipes Hall Farm Ltd v River Douglas Catchment Board [1949] 2 KB 500 …. 39.3C Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] AC 254 …. 15.5C Snoid v Handley (1981) 38 ALR 383 …. 15.3C Sobell v Boston (1975) 1 WLR 1587 …. 23.5C Solle v Butcher [1949] 2 All ER 1107 …. 10.3C, 16.5C — v — [1950] 1 KB 671 …. 16.1, 16.2C, 16.4C, 16.7C South Australia v McDonald (2009) 104 SASR 344 …. 11.4C — v The Commonwealth (1962) 108 CLR 130 …. 7.5C South Australian Cold Stores Ltd v Electricity Trust of South Australia (1957) 98 CLR 65 …. 38.5C South Caribbean Trading Ltd v Trafigura Beheer BV [2005] 1 Lloyd’s Rep 128 …. 6.5C South Wales Miners’ Federation v Glamorgan Coal Co Ltd [1905] AC 239 …. 37.6C, 37.7C Southwark, Diocese of v Coker [1998] ICR 140 …. 7.5C, 7.5.2 Spenborough Urban District Council’s Agreement, Re [1968] Ch 139 …. 23.2C Spence v Crawford [1939] 3 All ER 271 …. 35.2C Spencer v Harding (1870) LR5CP 561 …. 4.5C St John Shipping Corporation v Joseph Rank Ltd [1957] 1 QB 267 …. 26.1, 26.3C, 26.4C, 28.2C Standard Chartered Bank v Pakistan National Shipping Corp (No 2) [2003] 1 All ER 173 …. 37.3C Stanford v Roberts [1901] 1 Ch 440 …. 37.7C Starsin Homburg Houtimport BV v Agrosin Private Ltd [2004] 1 AC 715 ….

12.4C State Bank of New South Wales v Commonwealth Savings Bank of Australia (1985) 60 ALR 73 …. 23.2C State Rail Authority of New South Wales v Heath Outdoor Pty Ltd (1986) 7 NSWLR 170 …. 10.1, 10.9C, 36.2C Steadman v Steadman [1976] AC 536 …. 8.3C Steel Wing Co Ltd, Re [1921] 1 Ch 349 …. 40.3C Steele v Tardiani (1946) 72 CLR 386 …. 38.3C Stephens v Board of Education of the City of Brooklyn 79 NY 183 (1879) …. 38.6C Sterling v Trade Practices Commission (1981) 35 ALR 59 …. 15.3C Stern v McArthur (1988) 165 CLR 489 …. 24.8C Stevenson, Jaques & Co v McLean (1880) 5 QBD 346 …. 4.1, 4.6C Stickney v Keeble [1915] AC 386 …. 24.5C, 24.7C Stilk v Myrick (1809) 170 ER 1168 …. 6.5C Stone v Chappel [2017] SASCFC 72 …. 29.7.3 — v Withepoole (1588) Owen 94; 74 ER 924 …. 2.5E Stuart Alexander & Co (Interstate) Pty Ltd v Blenders Pty Ltd (1981) 37 ALR 161 …. 15.3C Stuart Pty Ltd v Condor Commercial Pty Ltd [2006] NSWCA 334 …. 29.1, 29.9C Sudbrook Trading Ltd v Eggleton (1983) 1 AC 444 …. 5.2C Suisse Atlantique Societe d’Armement Maritime SA v NV Rotterdamsche Kolen Centrale [1967] 1 AC 361 …. 13.2C Summergreene v Parker (1950) 80 CLR 304 …. 5.5C Summers v Commonwealth (1918) 25 CLR 144; [1918] HCA 33 …. 23.5C, 24.7C Sumpter v Hedges [1898] 1 QB 673 …. 38.1, 38.3C, 38.4C Suttor v Gundowda Pty Ltd (1950) 81 CLR 418 …. 23.3C Svanosio v McNamara (1956) 96 CLR 186 …. 16.7C Swain v Law Society [1983] 1 AC 598 …. 39.1, 39.3C

T Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272 …. 29.1, 29.7C Taco Company of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177 …. 15.1, 15.3C Tailby v Official Receiver (1888) 13 App Cas 523 …. 40.3C Tait v Bonnice [1975] VR 102 …. 23.3C Tan Hung Nguyen v Luxury Design Homes Pty Ltd [2004] NSWCA 178 …. 22.4C Tanwar Enterprises Pty Ltd v Cauchi (2003) 217 CLR 315 …. 19.4C, 24.1, 24.8C Tappenden v Randall (1801) 126 ER 1388 …. 27.2E Tatham v Huxtable (1950) 81 CLR 639 …. 39.3C Tayloe v Merchants’ Fire Insurance Co 50 US (9 How) 390 (1850) …. 4.6C Taylor v Bhail [1996] CLC 377 …. 27.2E — v Caldwell (1863) 122 ER 309 …. 16.2C, 25.1, 25.4C, 25.5C, 25.6C — v Crowland Gas and Coke Co (1854) 156 ER 455 …. 26.3C — v Foster (1599) 78 ER 1034 …. 2.1, 2.3C — v Johnson (1983) 151 CLR 422 …. 5.6C, 16.1, 16.7C Taylors Fashions Ltd v Liverpool Victoria Trustees Co Ltd [1982] QB 133 …. 36.2C TC Industrial Plant Pty Ltd v Robert’s Queensland Pty Ltd (1963) 37 ALJR 289 …. 29.6C TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130 …. 29.6C Tefbao Pty Ltd v Stannic Securities Pty Ltd (1993) 118 ALR 565 …. 15.5C Terrell v Mabie Todd & Co Ltd (1952) 69 RPC 234 …. 12.3C Thackwell v Barclays Bank plc [1986] 1 All ER 676 …. 27.2E Theodore v Mistford Pty Ltd (2005) 221 CLR 612 …. 8.3C Thirkell v Cambi [1919] 2 KB 590 …. 8.2C Thomas v Monaghan [1975] 1 NZLR 1 …. 24.5C Thomas Bates Ltd v Wyndham’s (Lingerie) Ltd [1981] 1 WLR 505 …. 34.4C

Thomas Brown and Sons Ltd v Fazal Deen (1962) 108 CLR 391 …. 28.1, 28.6C Thompson v De Lissa (unreported, NSWSC, Powell J, 16 February 1990) …. 23.5C — v Palmer (1933) 49 CLR 507 …. 24.7C, 36.2C Thorne v Motor Trade Association [1937] AC 797 …. 17.2C Thornett v Haines (1846) 153 ER 892 …. 4.4C Thornley v Tilley (1925) 36 CLR 1 …. 11.5C Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163 …. 10.1, 10.7C Tilley v Thomas (1867) LR 3 Ch App 61 …. 24.5C Tinsley v Milligan [1992] Ch 310 …. 27.2E, 28.3C — v — [1994] 1 AC 340 …. 27.2E, 28.2C, 34.3C Tito v Waddell (No 2) [1977] Ch 106 …. 31.5C Todorovic v Waller (1981) 150 CLR 402 …. 29.3C Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 …. 10.1, 10.4C, 34.2C Tolnay v Criterion Film Production Ltd [1936] 2 All ER 1625 …. 24.2C Tomlinson (A) (Hauliers) Ltd v Hepburn [1966] AC 451 …. 39.3C Tonkin v Cooma-Monaro Shire Council (2006) 145 LGERA 48 …. 26.6C Tonto Home Loans Australia Pty Ltd v Tavares [2011] NSWCA 389; (2011) 15 BPR 29,699 …. 20.3C Tool Metal Manufacturing Co Ltd v Tungsten Electric Co Ltd [1955] 1 WLR 761; [1955] 2 All ER 657 …. 36.3C Torkington v Magee [1902] 2 KB 427 …. 40.1, 40.2C Torquay Hotel Co Ltd v Cousins [1969] 2 Ch 106 …. 37.6C Torrance v Bolton (1872) 8 Ch App 118 …. 16.5C, 16.7C Townsend v Persistence Holdings Ltd [2008] UKPC 15 …. 27.2E Tozer Kemsley & Millbourn (A/asia) Pty Ltd v Collier’s Interstate Transport Service Ltd (1956) 94 CLR 384 …. 13.5C Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632 …. 24.2C, 24.4C Transfield Pty Ltd v Arlo International Ltd (1980) 144 CLR 83 …. 12.3C

Transfield Shipping Inc of Panama v Mercator Shipping Inc of Monrovia [2007] 2 Lloyd’s Rep 555 …. 29.10C Transfield Shipping Inc v Mercator Shipping Inc [2007] 1 Lloyd’s Rep 19 …. 29.10C — v — [2009] 1 AC 61 …. 29.1, 29.10C Transworld Oil Ltd v North Bay Shipping Corporation (The Rio Claro) [1987] Lloyd’s Rep 173 …. 29.10 Trawl Industries of Australia Pty Ltd v Effem Foods Pty Ltd (1992) 27 NSWLR 326 …. 5.4C Trendtex Trading Corporation v Credit Suisse [1980] QB 629 …. 40.4C — v — [1982] AC 679 …. 40.1, 40.4C Tribe v Tribe [1996] Ch 107 …. 27.2E TriContinental Corporation Ltd v HDFI Ltd (1990) 21 NSWLR 689 …. 22.4C Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1987) 8 NSWLR 270 …. 39.3C — v — (1988) 165 CLR 107 …. 39.1, 39.3C Trollope & Colls Ltd v Atomic Power Constructions Ltd [1962] 3 All ER 1035 …. 4.13C Tropical Traders v Groonan (1964) 37 ALJR 497 …. 35.5C Truong v Lam [2009] WASCA 217 …. 23.5C Turfote v Pytcher (1543) King’s Bench 27/1130, m 104 …. 2.5E Turner v The Civil Service Supply Association [1926] 1 KB 50 …. 13.3C Turvey v Dentons (1923) Ltd [1953] 1 QB 218 …. 38.5C Tweddle v Atkinson (1861) 121 ER 762 …. 39.3C Twinsectra Ltd v Yardley [2002] 2 AC 164 …. 5.4C Tyll v Brockhouse (1548) King’s Bench 27/1147, m 103d …. 2.5E U Unilever plc v Chefaro Proprietaries Ltd [1994] FSR 135 …. 37.6C Union Bank of Australia Ltd v Puddy [1949] VLR 242 …. 18.6C — v Whitelaw [1906] VLR 711 …. 19.3C

Union Eagle Ltd v Golden Achievement Ltd [1997] AC 514 …. 24.8C Union Fidelity Trustee Co of Australia Ltd v Gibson [1971] VR 573 …. 18.1, 18.2C United Group Rail Services Ltd v Rail Corporation New South Wales (2009) 74 NSWLR 618 …. 5.1, 5.4C United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904 …. 24.5C United States Surgical Corporation v Hospital Products International Pty Ltd [1982] 2 NSWLR 766 …. 5.4C Universal Cargo Carriers Corp v Citati [1957] 2 QB 401 …. 24.3C, 24.7C Universe Tankships Inc of Monrovia v International Transport Workers Federation [1981] ICR 129 …. 17.2C — v — [1983] 1 AC 366 …. 17.1, 17.2C, 17.4C Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 …. 5.4C Utopia Financial Services Pty Ltd v Financial Ombudsman Service Ltd [2012] WASC 279 …. 31.2.3 V Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102 …. 35.1, 35.4C Vandepitte v Preferred Accident Insurance Corporation of New York [1933] AC 70 …. 39.2C, 39.3C Veivers v Cordingley [1989] 2 Qd R 278 …. 4.8C Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 …. 29.1, 29.8C, 29.10C Victorian Daylesford Syndicate Ltd v Dott [1905] 2 Ch 624 …. 26.3C, 26.5C Viles v Viles [1939] SASR 164 …. 39.2C, 39.3C Vita Food Products Inc v Unus Shipping Co Ltd [1939] AC 277 …. 26.3C, 26.4C, 28.2C Von Hatzfeldt-Wildenburg v Alexander [1912] 1 Ch 284 …. 5.5C Vroon BV v Foster’s Brewing Group Ltd [1994] VR 32 …. 7.6C W

W J Alan Ltd v El Nasr Export and Import Co [1972] 2 QB 189 …. 36.3C W K Witt (WA) Pty Ltd v Metters Ltd [1967] WAR 10 …. 23.2C W Scott Fell & Co Ltd v Lloyd (1906) 4 CLR 572 …. 15.2C Wakefield v Newbon (1844) 115 ER 107 …. 17.5C Walford v Miles [1992] 2 AC 128 …. 3.5E, 5.4C Walker v Bradford Old Bank Ltd (1884) 12 QBD 511 …. 40.3C — v Melham [2007] NSWSC 264 …. 23.5C Wallera Pty Ltd v CGM Investments Pty Ltd [2003] FCAFC 279 …. 23.5C Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 …. 8.3C, 24.7C, 36.1, 36.2C, 36.2.4, 36.4C, 39.3C Ward v Byham [1956] 2 All ER 318 …. 6.5C Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 …. 15.4C Warlow v Harrison [1843–60] All ER Rep 620 …. 4.4C Warner Brothers Pictures Inc v Nelson [1937] 1 KB 209 …. 32.1, 32.2C Waterways Authority of New South Wales v Coal & Allied (Operations) Pty Ltd [2007] NSWCA 276 …. 33.1 Watkins v Combes (1922) 30 CLR 180 …. 19.3C Watson v Burton [1956] 3 All ER 929 …. 35.5C Webb Distributors (Aust) Pty Ltd v Victoria (1993) 179 CLR 15 …. 15.4C Webb’s Case (1577) 74 ER 763 …. 2.5E Webster v Bosanquet [1912] AC 394 …. 30.2C Wedgwood Coal and Iron Co, Re; Anderson’s Case (1877) 7 Ch D 75 …. 10.11C Weily v Williams (1895) 16 LR (NSW) Eq 190 …. 33.1 Weitmann v Katies Ltd (1977) 29 FLR 336 …. 15.2C, 15.3C Weld-Blundell v Stephens (1919) 1 KB 520 …. 27.4C Werrin v The Commonwealth (1938) 59 CLR 150 …. 38.5C, 38.7C West v AGC (Advances) Ltd (1986) 5 NSWLR 610 …. 20.2C — v Houghton (1879) 4 CPD 197 …. 39.2C, 39.3C — v Sydney City Council (1964) 82 WN (Pt 1) (NSW) 139 …. 13.5C Western Export Services Inc v Jireh International Pty Ltd (2011) 282 ALR 604

…. 12.2.2 Westland Savings Bank v Hancock [1987] 2 NZLR 21 …. 34.2C Westralian Farmers Cooperative Ltd v Southern Meat Packers Ltd [1981] WAR 241 …. 39.3C Westralian Farmers Ltd v Commonwealth Agricultural Service Engineers Ltd (in liq) (1936) 54 CLR 361 …. 27.8C Wetherell v Jones (1832) 110 ER 82 …. 26.3C, 26.4C Whelpdale’s Case (1604) 77 ER 239 …. 10.4C White v Australia & New Zealand Theatres Ltd (1943) 67 CLR 266 …. 24.2C, 29.6C, 32.3C — v Damon (1800) 7 Ves 30 …. 31.3C — v John Warwick & Co Ltd [1953] 2 All ER 1021; [1953] 1 WLR 1285 …. 13.1, 13.4C, 39.3C White & Carter (Councils) Ltd v McGregor [1962] AC 413 …. 4.5C, 30.1, 30.6C Whiten v Pilot Insurance Co (2002) 209 DLR (4th) 257 …. 29.2C Whitlock v Brew (1968) 118 CLR 445 …. 5.1, 5.3C Whitwood Chemical Co v Hardman [1891] 2 Ch 416 …. 32.2C Wichals v Johns (1599) 78 ER 938 …. 2.2E Wilkinson v ASB Bank Ltd [1998] 1 NZLR 674 …. 18.6C — v Osborne (1915) 21 CLR 89 …. 27.1, 27.3C — v Verity (1871) LR 6 CP 206 …. 28.6C Willes v Glovers (1804) 127 ER 362 …. 14.2C Williams v Atlantic Assurance Co [1933] 1 KB 81 …. 40.3C — v Baltic Insurance Association of London Ltd [1924] 2 KB 282 …. 39.3C — v Lloyd (1628) 82 ER 95 …. 25.4C — v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1 …. 6.1, 6.5C, 6.6C — v Williams [1957] 1 All ER 305 …. 6.5C Wills v Gibbs [2007] EWHC 3361 …. 34.3C Wilson v Darling Island Stevedoring & Lighterage Co Ltd (1956) 95 CLR 43 …. 39.3C, 39.4C — v Northampton and Banbury Junction Railway Co (1874) 9 Ch App 279 ….

39.2C Wilton v Farnworth (1948) 76 CLR 646 …. 10.4C Wiltshire v Marshall (1866) 14 LT 396 …. 19.2C Winchcombe Carson Trustee Co Ltd v Ball-Rand Pty Ltd [1974] 1 NSWLR 477 …. 24.5C Winter Garden Theatre (London) Ltd v Millenium Productions Ltd [1948] AC 173 …. 23.2C Winterton Constructions Pty Ltd v Hambros Australia Ltd (1991) 101 ALR 363 …. 39.3.2 Withers v General Theatre Corporation (1933) 2 KB 536 …. 29.6C Wolverhampton Corporation v Emmons [1901] 1 KB 515 …. 31.5C Woodar Investment Development Ltd v Wimpey Construction UK Ltd [1980] 1 All ER 571 …. 39.3C Woodhouse Ltd v Nigerian Produce Ltd [1972] AC 741 …. 36.3C Woods v WM Car Services (Peterborough) Ltd [1981] ICR 666 …. 11.4C World Series Cricket Pty Ltd v Parish (1977) 16 ALR 181 …. 15.2C, 15.3C Worrall v British Railways Board (unreported, 29 April 1999) …. 27.2E Wroth v Tyler [1974] Ch 30 …. 33.2C Y Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410 …. 26.1, 26.3C, 26.6C, 28.2C, 28.3C Yerkey v Jones (1939) 63 CLR 649 …. 18.1, 18.2C, 18.5C, 18.6C York Air Conditioning (A/asia) Pty Ltd v The Commonwealth (1949) 80 CLR 11 …. 38.5C Yorke v Lucas (1985) 158 CLR 661 …. 28.3C Yoshimoto v Canterbury Golf International Ltd [2001] 1 NZLR 523 …. 12.4C Young v Queensland Trustees (1954) 99 CLR 560 …. 30.1 Z Zhu v Treasurer of the State of New South Wales (2004) 218 CLR 530 …. 12.3C, 37.1, 37.7C

Zieme v Gregory [1963] VR 214 …. 23.3C Zurich Insurance Co plc v Hayward [2017] AC 142 …. 37.1, 37.3C

TABLE OF STATUTES References are to Introductions to Chapters, Extracts, and Comments to Extracts

COMMONWEALTH Australian Consumer Law …. 15.1, 21.1, 21.2.1 Ch 5 …. 15.1 s 18 …. 15.1 s 20 …. 19.1, 19.5C, 19.5.3 ss 21–22 …. 19.1 Australian Securities and Investments Commission Act 2001 …. 30.3C s 12DA …. 15.1 Banking Act 1959 Pt III, Div 2 …. 26.3C s 8 …. 26.3C s 9 …. 26.3C Competition and Consumer Act 2010 …. 21.1 Ch 2, Pt 2-3 …. 21.1 Pt IV …. 27.1 ss 23–28 …. 21.1 Sch 2 …. 15.1, 21.1 Corporations Act 2001 s 124 …. 9.5.2 s 125 …. 9.5.2 s 1041H …. 15.1 Defence Service Homes Act 1918 …. 28.2C s 29 …. 28.2C

s 30(1)(a) …. 28.2C s 30(1)(b) …. 28.2C Income Assessment Act 1936 s 261 …. 38.5C Insurance Contracts Act 1984 …. 39.3C s 48 …. 39.3C Judiciary Amendment Act 1984 …. 27.4C National Security (Exchange Control) Regulations …. 28.6C Proceeds of Crime Act 2002 …. 27.2E Sydney 2000 Games (Indicia and Images) Protection Act 1996 s 12 …. 37.7C s 43 …. 37.7C s 44 …. 37.7C s 45 …. 37.7C s 46 …. 37.7C Trade Practices Act 1974 …. 15.2C, 15.3C, 15.4C, 15.5C, 19.5C, 21.1, 21.2E Pt IIIA …. 21.2E Pt IV …. 15.4C, 15.5C Pt IVA …. 15.4C, 21.2E Pt IVB …. 15.5C Pt V …. 15.4C, 15.5C Pt V, Div 1 …. 21.2E Pt VI …. 15.4C s 2 …. 15.4C s 4K …. 15.4C s 51AA …. 15.4C, 19.1, 19.5C, 19.5.2, 19.5.3, 21.2E s 51AA(1) …. 19.5C s 51AB …. 19.5C, 21.2E s 51AC …. 15.5C, 19.5C s 52 …. 15.1, 15.2C, 15.3C, 15.4C, 15.5C, 15.6C, 21.2E

s 52(1) …. 15.3C, 15.4C s 53 …. 15.4C, 21.2E s 53(g) …. 15.4C s 76 …. 19.5C s 80 …. 15.4C s 82 …. 15.4C, 15.5C, 15.6C, 19.5C s 82(1) …. 15.4C, 15.5C s 84(2) …. 15.6C s 87 …. 15.2C, 15.4C, 15.6C s 87(1) …. 15.4C s 87(1A) …. 15.4C s 87(1C) …. 15.4C s 87(2) …. 15.4C s 87(2)(b) …. 15.4C s 87(2)(c) …. 15.4C Trade Practices Regulations 1974 …. 21.1 AUSTRALIAN CAPITAL TERRITORY Civil Law (Property) Act 2006 s 205 …. 40.1 Sale of Goods Act 1954 s 35(2) …. 24.4C NEW SOUTH WALES Builders Licensing Act 1971 s 45 …. 38.2C City and Suburban Electric Railways Act 1915 s 11 …. 25.2C Closer Settlement (Amendment) Act 1907 …. 27.3C Contracts Review Act 1980 …. 17.1, 20.1, 20.2C, 20.3C, 21.1, 21.2E

s 4 …. 20.3C s 6(1) …. 20.2C s 6(2) …. 20.1, 20.2C s 7 …. 20.1, 20.3C s 7(1) …. 20.2C s 9 …. 20.2C, 20.3C s 9(2) …. 20.2C s 9(2)(e) …. 20.2C s 9(2)(f) …. 20.2C s 9(2)(h) …. 20.2C s 9(4) …. 20.2C Conveyancing Act 1919 …. 24.4C s 12 …. 40.1 s 13 …. 24.4C, 24.5C s 54A …. 8.1, 8.2C, 8.3C s 54A(1) …. 8.1 s 54A(2) …. 8.1 Environmental Planning and Assessment Act 1979 s 149 …. 15.6C Frustrated Contracts Act 1978 …. 25.1 Industrial Arbitration Act 1940 s 88F …. 20.2C, 21.3C, 21.4C, 21.4.2 s 88F(1) …. 21.4C s 88F(2) …. 21.4C Industrial Relations Act 1996 …. 21.1, 21.3C s 7 …. 21.3C s 105 …. 21.1, 21.3C s 106 …. 21.1, 21.3C, 21.4.2 s 106(1) …. 21.3C s 106(5) …. 21.4.2

Liquor Act 2007 …. 26.6C s 92(1) …. 26.6C s 92(1)(c) …. 26.6C s 92(1)(d) …. 26.6C Local Government Act 1919 Pt XIIA …. 24.6C s 342AS …. 24.6C Real Property Act 1900 …. 24.6C Restraints of Trade Act 1976 …. 27.1 Sale of Goods Act 1923 s 34(2) …. 24.4C NORTHERN TERRITORY Law of Property Act 2000 s 182 …. 40.1 Sale of Goods Act s 34(2) …. 24.4C Water Act 1992 …. 28.3C s 14 …. 28.3C s 56 …. 28.3C s 56(1) …. 28.3C s 57 …. 28.3C s 57(1) …. 28.3C QUEENSLAND Equity Act 1867 s 62 …. 33.1 Property Law Act 1974 s 55 …. 39.3C s 55(1) …. 39.3C

s 55(2) …. 39.3C s 55(3)(d) …. 39.3C s 55(6)(c)(ii) …. 39.3C s 199 …. 40.1 Sale of Goods Act 1896 s 33(2) …. 24.4C SOUTH AUSTRALIA Law of Property Act 1936 s 15 …. 40.1 Sale of Goods Act 1895 s 31(2) …. 24.4C TASMANIA Conveyancing and Law of Property Act 1884 s 86 …. 40.1 Sale of Goods Act 1896 s 36(2) …. 24.4C VICTORIA Criminal Proceedings Act 1984 …. 27.4C Estate Agents Act 1980 …. 34.3C s 49A …. 34.3C s 49A(1) …. 34.3C s 50 …. 34.3C s 50(1) …. 34.3C s 97 …. 34.3C Fair Trading Act 1999 …. 30.3C Goods Act 1958 s 38(2) …. 24.4C Property Law Act 1958

s 134 …. 40.1 WESTERN AUSTRALIA Fair Trading Act 1987 …. 15.5C Partnership Act 1895 s 26 …. 23.5C s 32 …. 23.5C s 36 …. 23.5C s 37 …. 23.5C s 37(1) …. 23.5C s 37(2) …. 23.5C s 43 …. 23.5C s 43(a) …. 23.5C s 43(b) …. 23.5C s 44 …. 23.5C s 45 …. 23.5C s 46 …. 23.5C Property Law Act 1969 s 11 …. 39.3C s 11(2) …. 39.3C s 11(3) …. 39.3C s 20 …. 40.1 Sale of Goods Act 1895 s 31(2) …. 24.4C GERMANY German Civil Code s 343 …. 30.3C s 1121 …. 39.3C INTERNATIONAL

European Community Treaty art 81 …. 27.2E art 85 …. 27.2E Hague Rules …. 39.4C art III(6) …. 39.4C UNIDROIT Principles of International Commercial Contracts 2004 …. 24.4C United Nations Convention on Contracts for the International Sale of Goods 1980 …. 24.4C NEW ZEALAND Contracts (Privity) Act 1982 …. 39.3C UNITED KINGDOM Chancery Amendment Act 1858 …. 33.1 Companies Act 1948 …. 9.5C s 199 …. 9.5C Consumer Credit Act 1974 …. 16.6C Consumer Credit (Agreements) Regulations 1983 …. 16.6C Sch 1 …. 16.6C Fertilisers and Feeding Stuffs Act 1906 s 1(1) …. 26.5C s 6(1) …. 26.5C Hire-Purchase Act 1964 s 27 …. 16.6C s 29(4) …. 16.6C Increase of Rent and Mortgage Interest (Restrictions) Act 1920 s 2(3) …. 16.5C Lord Cairns’ Act 1858 …. 33.1, 33.2C s 2 …. 33.2C Merchant Shipping (Safety and Load Line Conventions) Act 1932 …. 26.4C s 44 …. 26.4C

s 57 …. 26.4C Misrepresentation Act 1967 …. 37.4C Moneylenders Act 1900 …. 26.5C National Assistance Act 1948 s 42 …. 6.5C Occupiers Liability Act 1957 …. 10.7C Pharmacy and Poisons Act 1933 …. 4.3C s 18 …. 4.3C Road and Rail Traffic Act 1933 …. 27.2E Sale of Goods Act 1893 …. 24.3C s 51 …. 33.2C Sex Discrimination Act 1975 …. 7.5C Statute of Frauds 1677 …. 1.2E, 8.1, 8.3C s 4 …. 38.3C s 9 …. 40.3C Statute of Uses 1535 …. 2.2E Supreme Court of Judicature Act 1873 …. 40.3C s 25(6) …. 40.2C, 40.3C Trade Union and Labour Relations Act 1974 s 13(1) …. 17.2C Unfair Contract Terms Act 1977 …. 13.2C, 30.4C Unfair Terms in Consumer Contracts Regulations 1994 …. 30.4C Unfair Terms in Consumer Contracts Regulations 1999 …. 30.4C reg 3 …. 30.4C reg 5 …. 30.4C UNITED STATES OF AMERICA Restatement (Second) of Contracts 1981 s 90 …. 36.2C Uniform Commercial Code, 14th edition …. 24.4C

s 2-403 …. 16.6C

CONTENTS Preface to Fourth Edition Table of Cases Table of Statutes 1

Introduction to Contract Law

PART I: HISTORY AND THEORY 2 3

History of Contract Law Contract Theory

PART II: FORMATION OF A CONTRACT 4 5 6 7 8 9

The Fact of Agreement The Requirements of Certainty and Completeness Consideration Intention to Create Legal Relations The Requirement of Writing Capacity

PART III: TERMS OF A CONTRACT 10 11 12 13

Express Terms Implied Terms Construction of Contractual Terms Construction of Exclusion Clauses

PART IV: VITIATING FACTORS 14 Misrepresentation 15 Misleading or Deceptive Conduct 16 Mistake 17 Duress 18 Undue Influence 19 Unconscionable Transactions 20 Contracts Review Act 1980 (NSW) 21 Unfair Contracts

PART V: DISCHARGE 22 23 24 25

Discharge by Performance Discharge by Agreement Discharge by Breach Discharge by Frustration

PART VI: ILLEGALITY 26 Statutory Illegality 27 Common Law Illegality 28 Effect of Illegality

PART VII: REMEDIES BASED ON CONTRACT 29 30 31 32 33 34 35

Damages for Breach of Contract Actions for a Fixed Sum and Debt Specific Performance Injunctions Equitable Damages Rectification Rescission

PART VIII: OTHER BASES OF RELIEF 36 Equitable Estoppel 37 Liability in the Law of Torts 38 Restitution

PART IX: THIRD PARTY RIGHTS 39 Privity of Contract 40 Assignment of Contractual Rights and Liabilities Index

DETAILED CONTENTS Preface to Fourth Edition Table of Cases Table of Statutes 1

Introduction to Contract Law Introduction The meaning of the word ‘contract’ The purpose of contract law

PART I: HISTORY AND THEORY 2

3

History of Contract Law Introduction An overview of the history of contract law Instalment debts — legal remedies available The use of assumpsit as a contractual action Origins of the doctrine of consideration Contract Theory Introduction The normative and analytic questions for contract law Promise as the theoretical basis of contract law Transfer of property by consent as the theoretical basis of contract law A feminist critique of contract law

PART II: FORMATION OF A CONTRACT

4

The Fact of Agreement Introduction Offers or invitations to treat — promotional materials Offers or invitations to treat — self-service stores Offers or invitations to treat — auctions Offers or invitations to treat — tenders

5

6

7

Counter-offer or request for further information and acceptance of offer Withdrawal of offers Withdrawal of offer where performance has commenced Acceptance of offers and reliance The postal acceptance rule The extent of the postal acceptance rule Exclusion of the postal acceptance rule Alternatives to offer and acceptance analysis The Requirements of Certainty and Completeness Introduction Agreements must be sufficiently complete Agreements must be sufficiently certain Agreements to negotiate in good faith and the requirement of certainty The enforcement of informal agreements Consideration Introduction Consideration must be bargained for Consideration must move from the promisee ‘Past consideration’ is not consideration The existing contractual duty rule The rule in pinnel’s case Intention to Create Legal Relations Introduction The presumption in family, social, or domestic agreements

Rebuttal of the presumption in family, social, or domestic agreements

8

9

The presumption in commercial agreements The ermogenous approach to intention The Requirement of Writing Introduction The requirement of a written memorandum or note The payment of money and the doctrine of part performance Capacity Introduction The contractual capacity of an infant The capacity of a company at common law

PART III: TERMS OF A CONTRACT 10 Express Terms Introduction Terms and mere representations The effect of signing a contract Misrepresentation and the signature rule Incorporation of terms by reasonable notice Incorporation of terms on the basis of prior dealings The parol evidence rule Collateral contracts Collateral contracts and the requirement of consistency 11 Implied Terms Introduction Terms implied on the facts of the case Terms implied by law Terms implied by custom Implied terms of good faith 12 Construction of Contractual Terms

Introduction General principles of construction of terms The rule against evidence of pre-contractual negotiations 13 Construction of Exclusion Clauses Introduction General principles of construction of exclusion clauses Exclusion clauses and liability in negligence The four corners rule

PART IV: VITIATING FACTORS 14 Misrepresentation Introduction Statement of fact Inducement The relevance of the materiality of the statement of fact 15 Misleading or Deceptive Conduct Introduction The meaning of misleading or deceptive conduct Statutory remedies for misleading or deceptive conduct The ‘conduit’ argument 16 Mistake Introduction Common mistake at common law No common mistake in equity Unilateral mistake as to identity Unilateral mistake as to the terms of a contract The doctrine of non est factum 17 Duress Introduction The meaning of duress

Duress to the person Economic duress 18 Undue Influence Introduction The principles of undue influence Rebutting the presumption of undue influence The wife’s guarantee of her husband’s loan 19 Unconscionable Transactions Introduction Unconscionability and intoxication and mental and physical weakness Unconscionability and business inexperience Unconscionability and problem gambling Unconscionability and business regulation — the Australian Consumer Law 20 Contracts Review Act 1980 (NSW) Introduction What is unjust? 21 Unfair Contracts Introduction Unfair contracts Unfair contractual terms in employment contracts

PART V: DISCHARGE 22 Discharge by Performance Introduction The requirement for exact performance Substantial performance and discharge of contractual obligations 23 Discharge by Agreement Introduction Discharge of a contract pursuant to an express or implied term of the

original contract Discharge of a contract where the contract expressly provides that a nominated event must occur, but that event does not occur Discharge of a contract by release Discharge of a contract by abandonment 24 Discharge by Breach Introduction Conditions and warranties Intermediate terms Time stipulations and notices to complete Termination pursuant to a contractual right to terminate Anticipatory breach Relief against forfeiture 25 Discharge by Frustration Introduction Court orders leading to frustration Destruction of the subject matter of the contract leading to frustration Failure of a condition of the contract leading to frustration The effect of frustration at common law

PART VI: ILLEGALITY 26 Statutory Illegality Introduction Express statutory illegality Implied statutory illegality 27 Common Law Illegality Introduction The illegality defence Contracts contrary to public policy Contracts prejudicial to the administration of justice

Contracts in restraint of trade generally Restraints of trade in employment contracts Restraints of trade in exclusive dealing contracts Enforcement of a post-employment restraint of trade following repudiation by the employer 28 Effect of Illegality Introduction The enforceability of contracts that are unlawful or have an unlawful purpose Illegality and claims based in tort law Illegality and the doctrine of severance

PART VII: REMEDIES BASED ON CONTRACT 29 Damages for Breach of Contract Introduction Exemplary damages and breach of contract The date for assessment of damages Damages for loss of a chance The recovery of damages for non-economic loss Damages for reliance loss Damages for indemnity loss The rules of remoteness The obligation to mitigate 30 Actions for a Fixed Sum and Debt Introduction The principles relating to penalties Actions for the recovery of a debt and instalment contract payments Actions in debt and the duty to mitigate 31 Specific Performance Introduction

The inadequacy of damages at common law Contracts for the sale of personalty Contracts for personal services Constant court supervision of an order for specific performance Laches The requirement that the plaintiff be ready, willing, and able 32 Injunctions Introduction Restraints of trade in personal services contracts 33 Equitable Damages Introduction Equitable damages in lieu of specific performance Equitable damages in addition to specific performance 34 Rectification Introduction Rectification for common mistake Rectification for illegality Rectification for unilateral mistake 35 Rescission Introduction The meaning of restitutio in integrum Partial rescission Loss of the right to rescind by affirmation

PART VIII: OTHER BASES OF RELIEF 36 Equitable Estoppel Introduction The nature of equitable estoppel Detriment and equitable estoppel Relief based upon equitable estoppel

37 Liability in the Law of Torts Introduction Fraudulent misrepresentation Carelessly made pre-contractual statements Concurrent liability and the measure of damages Torts for economic loss caused by intentional acts Justification and inducement to breach a contract 38 Restitution Introduction Principles regulating the recovery of the value of work done or other non-monetary benefits supplied Entire contracts and restitution Restitution and recovery of money paid by mistake Recovery of money paid where consideration has totally failed

PART IX: THIRD PARTY RIGHTS 39 Privity of Contract Introduction The privity of contract principle The trident case ‘Himalaya clauses’ and privity of contract 40 Assignment of Contractual Rights and Liabilities Introduction Contractual rights as choses in action Assignments in equity Assignment of the right to litigate for breach of contract Index

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1 INTRODUCTION TO CONTRACT LAW

INTRODUCTION 1.1 This chapter explores two matters in relation to contract law, as an introduction to the examination of the substantive content of contract law in the remaining chapters of this book. The first of the matters addressed is the definition of ‘contract’. The renowned 19th-century scholar Frederick Pollock began his treatise on the principles of contract law by saying: ‘The law of Contract may be described as an endeavor of the State … to establish a positive sanction for the expectation of good faith which has grown up in the mutual dealings of men of average right-mindedness’. Immediately following this sentence Pollock gives what he claims to be ‘the most popular’ and ‘most exact’ definition of a contract.1 Pollock’s short definition is one based on the concept of enforceable promises. However, there are different short definitions based on the concept of enforceable agreements. The strengths and weaknesses of these definitions of contract are discussed in P S Atiyah, ‘Definition of Contract’ (see 1.2E). The second matter concerns the importance of contract law. Contract law is a reality in the daily lives of everyone. It thus plays an important role in the shaping and functioning of society. The role that contract law plays in facilitating trade and commerce and, as Pollock would say, establishing ‘a positive sanction for the expectation of good faith … in the mutual dealings of men [and women]’, is discussed in Roger Brownsword, ‘The Function of Contract Law’ (see 1.3E).

THE MEANING OF THE WORD ‘CONTRACT’ 1.2E

Atiyah, ‘Definition of Contract’

Source: P S Atiyah, An Introduction to the Law of Contract, 5th ed, Oxford University Press, Oxford, 1995, pp 37–41. Extract: The extract from Atiyah’s book discusses definitions of contract based upon promise and agreement. He notes that, although they both give a reasonable sense of what a contract is, each has its own limitations.

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Definition of contract Definitions of contract are usually cast in terms either of agreements or of promises. So English lawyers generally define a contract as ‘an agreement which is legally enforceable or legally recognized as creating a duty’, and there are many similar definitions cast in terms of promises. One widely used definition is that in the American Restatement of Contracts: A contract is a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognises as a duty. Some other definitions are in similar terms, but sacrifice some accuracy as the price for succinctness. Pollock, for instance, defined a contract as ‘a promise or a set of promises which the law will enforce’. But there are problems with definitions of this kind. First, they assume that the law ‘enforces’ contracts. There is nothing seriously objectionable about this, and in fact lawyers constantly talk about contracts being ‘enforced’ but, strictly speaking, this is incorrect, and in some ways it is also misleading. Courts hardly ever ‘enforce’ contracts themselves, and they rarely even order the parties to perform their promises. Generally speaking, the law

does not actually compel the performance of a contract; it merely gives a remedy, normally damages, for the breach. In practice this means that what a breaching party is ordered to do by a court is rarely what he actually promised or agreed to do, and that may be a point of some importance for understanding the theoretical foundations of the law. Until very recently it was always necessary, in attempting to define a contract, to take account of some anomalous cases which were at one time of considerable importance. Under the Statute of Frauds of 1677 and [its] later replacements, … it was necessary for certain contracts to be evidenced in writing if they were to be fully ‘enforceable’, even in the sense which that term usually bears in contract law. The final clause of the definition from the Restatement was inserted to take account of this problem. Where the statutory requirement of writing was not complied with the contract could not be enforced by direct legal action, but it was none the less recognized to exist and to create a duty of performance which could be indirectly relevant in other ways. In England, recent reforms have almost completely eliminated this rare type of case, and it can now be said that, if a contract exists in the legal sense, it will be legally enforceable in the same way as all contracts are legally enforceable. At the same time, it needs to be recognized that agreements and promises can be made and given some legal recognition in different contexts without always being thought of as legal contracts. An agreement by two persons to engage in sexual conduct, for instance, would not be treated by lawyers as a contract, but it undoubtedly has important legal implications — it means, for instance, that the male cannot be guilty of rape. So also, an agreement between the solicitors of two parties engaged in litigation (for example, that no objection would be made by one party to an application for an adjournment by the other) would not be regarded as a contract, but would certainly be recognized as having legal significance.2 [page 3] Another, and perhaps more fundamental, problem is that definitions in terms of agreements or promises assume that agreements and promises are ‘things’ which exist outside the law and can easily be recognized as such.

But agreements and promises are not physical objects which can be perceived by the senses. They are themselves abstract concepts, just as much as the concept of contract itself. Of course ‘agreement’ and ‘promise’ are ordinary English words, and do have well-understood meanings in ordinary speech, so it may be possible to recognize them when one sees them, as it were, without any legal training. No doubt this is true of some agreements and promises, but it is not true of all. There are many difficult questions involved in actually identifying an agreement or a promise. … [F]or instance, … [there is] the problem of the person who signs a document without reading it. Does his signature show that he ‘agrees’ to the contents of the document, whatever they may be; that he ‘promises’ to do whatever the document says, even though he has not read it? In many cases of this nature it is not possible to say whether there is an agreement or a promise until we have first of all analysed the issue in legal terms. In other words it is the law itself which provides the only precise definitions we have of the concepts of agreement and promise, so definitions of contract which use these concepts are either incomplete or circular. Another possible weakness of the definition of the American Restatement is that it ignores the bargain element in contracts. No indication is given in the definition that the typical contract is a two-sided affair, something being promised or done on one side in return for something being promised or done on the other side. Thus, to say, as this definition does, that a contract can simply be ‘a promise’ is to overlook the fact that there is generally some act or promise given in return for the other promise before that promise becomes a contract. Even to say that a contract may consist of ‘a set of promises’ gives no indication that some of these promises are usually given in return for some others. On the other hand, it would be wrong to think that all contracts are genuine bargains in which something is offered on one side for something else of equivalent value on the other. In fact, as we shall see, there are cases in which promises are treated as contractual though there is no real bargain. A promise which is simply relied upon by the promisee even though he gives nothing in return is not a bargain, though it often creates legal obligations. For instance, … there are well established English cases holding that an advertisement offering a reward for specified conduct can lead to a contract if the conduct is performed. Yet such cases do not seem to involve anything

that could be called a bargain or an ‘agreement’ in ordinary speech. The person who performs the conduct does not agree to do anything, and the person offering the reward promises, rather than agrees, to pay the reward. Then there are also many cases involving other doctrines which are very close to contract (such as ‘estoppel’) in which a promise is enforceable because it has been relied upon by the promisee, yet there is nothing which can really be called an agreement. American lawyers, relying on the definition and approach of the Restatement would often treat such cases as contractual, which is probably why American lawyers tend to define contracts in terms of promises rather than of agreements. A more fundamental weakness of all definitions in terms of promises or agreements is that they presuppose that people only enter into contractual relations after they have made some [page 4] agreement or promise. The assumption of the law is thus that contract is always a planned affair — agreement first, performance later. But this is not always the case. People sometimes simply enter into transactions or relations which are not really based on prior agreements or promises. One obvious example is that of the simultaneous exchange or sale. A person who buys goods in a supermarket and pays cash for them is exchanging his money for the goods that he buys. There is no doubt at all that this is a legal contract, but it is artificial to regard it as a contract created by agreement or promises. To insist that there must be a prior agreement or a set of promises in such a case is to imply that there is a moment of time — before the handing over of the goods and the money — in which the parties are legally bound to perform their agreement or promises. But it seems very doubtful whether that is the case. In practice, it is surely inconceivable that either party would object if the other changed his mind at the last minute, in a case of this nature. For all practical purposes this is a case where the parties make an exchange or a sale without any prior agreement to do so. And there are many other similar cases recognized by the law as, for instance, where a person simply boards a bus, paying as he enters, or drives into a car park, putting his money into a slot machine, or taking a

ticket which obliges him to pay on exit. In many cases of this nature the transaction does not in practice become legally binding until one party has actually done something, so it is artificial to regard the obligations as arising purely from agreement or promises. Still, it must be recognized that the strength of the classical tradition in contract law is great: a traditionalminded lawyer might very well argue that ‘in contemplation of law’ there is an implied agreement before the actual exchange of goods for money. There is a still broader source of difficulty about all attempts to define a contract. A definition of a contract presupposes that the law recognizes a single concept of contract. In fact it is doubtful if this is really the case. Certainly there is one very central and powerful concept in the middle of contract law — and that is the concept, roughly speaking, of classical contract law. But contractual obligations arise in such a very wide variety of circumstances, and are based on such a wide variety of grounds, that there is little relationship between cases on the outer extremities of contract law. It is true that central and straightforward cases, like a simple sale of goods, are usually treated as paradigms of contract, but there are many other types of contract which can claim to be equally paradigmatic, and yet which differ greatly from a simple exchange like a sale of goods. A contract of employment, for instance, is a relationship which may subsist over a long period of time, and cannot be easily seen as a mere agreement or set of promises. Again, contract law is often used for different purposes such as regulating institutions. Bodies like the Jockey Club, for example, which are not technically speaking companies or corporate bodies, are treated in law as a group of members bound together by contract. But institutions like this have a real existence and can hardly be said merely to consist of agreements or promises. Then also, contract law often serves purposes other than merely giving effect to agreements and promises. Promises and agreements undoubtedly lie close to the centre of the concept of contract; but there are at least two other ideas which also lie very close to that centre. One is [page 5] the idea that a person who induces another to rely upon him and change his

position, ought not to let that person down; and the other is the idea that a person who receives a benefit from another ought generally to pay for that benefit, whether he has promised or not. Contractual obligations are often imposed for one or other of these reasons on persons who have not really promised or agreed to bear them. In cases of this nature it would often be absurd to try to identify ‘a contract’ as though there were a thing corresponding, say, to a formal written contract in cases closer to the typical or paradigm contract of classical theory. There simply is no such ‘thing’ to be found. What is to be found is some behaviour by the parties as a result of which the law treats them as coming under certain obligations which may be called contractual. In order to reconcile this result with traditional definitions of contract, two devices are often employed. One is to rely on the concept of an ‘implied agreement’ or an ‘implied promise’; the other is to argue that the liability being imposed is not ‘truly’ contractual but is in fact a legal liability of a different kind — for instance a liability in tort, or a liability arising from ‘estoppel’. In the last analysis many of these issues are verbal ones. Since the law does not contain an authoritative and conclusive definition of contract, there is no way of saying what is ‘truly’ a contractual liability. And the fact that different legal systems may treat liabilities as contractual which English lawyers would treat as non-contractual suggests that the search for a liability which is ‘truly’ contractual is pretty artificial. But the fact that there is often no thing which can sensibly be identified as the contract which the parties have made means that we need to be careful about some of the questions posed by classical law, and about some of the ways in which lawyers talk. For instance, classical law often asks such questions as, how is a contract made, or when (or where) was a contract made? This kind of question is clearly inappropriate in those cases where the law creates a liability out of the behaviour of the parties, but this is not always recognized by lawyers. And more generally, the fact that lawyers (and law books) talk of the law of contracts tends to reify contracts, so strictly speaking it would perhaps be more accurate to talk of the law of contractual obligations than of the law of contracts.

Comments

1.2.1

See Radan, Gooley, and Vickovich at 1.1–1.10.

1.2.2

Two leading Australian texts on contract law offer differing definitions of contract. Carter defines contract as ‘a legally binding promise or agreement’: J W Carter, Contract Law in Australia, 6th ed, LexisNexis Butterworths, Sydney, 2013, p 3. Seddon, Bigwood, and Ellinghaus refer to contracts as being ‘about legally enforceable consensual obligations’: N Seddon, R Bigwood and M Ellinghaus, Cheshire & Fifoot, Law of Contract, 10th Australian ed, LexisNexis Butterworths, Sydney, 2013, p 61.

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THE PURPOSE OF CONTRACT LAW 1.3E

Brownsword, ‘The Function of Contract Law’

Source: Roger Brownsword, Contract Law, Themes for the Twenty-First Century, 2nd ed, Oxford University Press, Oxford, 2006, pp 37–41. Extract: The extract examines the various functions of contract law. These include the facilitation of trade and commerce, the protection of the public, and providing a means for the resolution of disputes.

The function of contract law [There exists] the sceptical view that the law of contract in general, and the English law of contract in particular, performs no useful function. However, there is a difference between alleging that the law of contract lacks a guiding purpose and complaining that it fails to deliver on its intended purpose (fails to function as intended). An adequate response to the former charge will not necessarily also adequately respond to the latter complaint. There are, it seems, a number of angles from which we might inquire as to

the function of contract law. We might ask, for example, what function contract law is intended to have, or what function it actually does have, or what function it ideally ought to have. In principle, different accounts of the function of contract law might follow from the differing ways in which the question is posed. For instance, we might say that the intended function of the law of contract is to establish the ground rules for trading between free and equal individuals; that, in practice, where the parties are free and equal, they make little use of contract law and, where the parties are not free and equal, contract law functions as a licence for one party to exploit the vulnerability of the other; and that, ideally, contract law ought to function as a platform for developing relationships built on trust and solidarity rather than legitimating short-term advantage-taking — in other words, contract law ought to reinforce and reflect a cooperative rather than an individualist ethic. If our angle of inquiry is the intended function of contract law, we must allow for the possibility of some deviation in practice (ie, in relation to the actual function of contract law) and we must not assume that the specified intended function will correspond with everyone’s idea of the ideal function. However, we can avoid begging too many questions by saying that the core purpose of contract law is to set out a regulatory framework within which exchange can take place. Furthermore, if this regulatory framework is to be at all adequate, we can take it that it must prescribe what counts as a contract, that it must determine when contractual obligation arises and how contracts are to be interpreted, and (crucially) that it must provide for a remedial regime of some kind. As Wolfgang Friedmann put it, it is ‘the sanctions of contract [that] enable the hirer of services, the manufacturer of goods, the speculator in land or the purchaser of shares, to engage in calculated economic risks.’3 Yet, insurance against calculated economic risks (or security against non-performance or defective performance) [page 7] is only one of four elements that Friedmann associates with the social function of contract in the formative period of modern industrial and

capitalist society, the other three elements being freedom of movement, freedom of will, and equality between parties.4 According to Friedmann, contract functions as a legal instrument for the free circulation of goods and labour, thereby signalling the movement away from societies characterized by status and immobility. Again, we can accept this as a statement of the intended function of contract without begging too many questions. However, when we move on to the elements of freedom of will and equality between the parties, Friedmann warns that we are dealing with expressions of particular political and social ideologies. In the case of freedom of will, we are taking on board the ideology of freedom of contract; and, as Friedmann explains, the ideology of equality is its partner in crime: To some extent, the concepts of freedom and equality in contract are interchangeable. Lack of freedom to make or unmake a contract, or to bargain on its terms, also implies lack of equality. As long as we restrict both concepts to the limited meaning which the orthodox theory of contract gives them, one usually implies the other. In so far as a person is free from physical restraint or other direct compulsion to make and unmake a contract, he is also assumed to be in a position of equality. Because the law will impartially award damages or an injunction according to the same principles of corrective justice to the employer and to the employee, it is not generally concerned with the inequality resulting from the fact that one may be a corporation controlling the entire oil or chemical industry of the country, and the other a worker on weekly wage and notice.5 As Friedmann himself observes, the practice of contracting and, concomitantly, the law of contract itself has been transformed by such factors as the standardization of contracts, collective bargaining, programmes of welfare and consumer protection, and the realignment of the relationship between the public and private spheres. … [W]e can highlight three broad objectives that might serve to guide our thinking about the intended, actual, and ideal functions of the modern law of contract.6 First, it is widely accepted that contract law aims to facilitate exchange. Indeed, as Lord Irvine has put it, the commercial law of contract serves as

an engine for trade.7 Exchange is not normally compulsory; but, for those who wish to exchange, contract law attempts to put in place a secured framework that facilitates dealing with a degree of confidence and trust. Contract law lays down the transactional ground rules; contractors know where they stand; whether parties deal with friends or strangers, at home or away, they trade in the shadow of the sanctioning apparatus of the law. To this extent, contract law channels parties towards performance. [page 8] Secondly, it is recognized that contract law has a protective function. At one level, this function is relatively uncontroversial, the idea being that contract law must be compatible with the public interest in general. Thus, parties must not be encouraged or permitted to draw on the sanctioning apparatus of contract law where their agreement is illegal or, in some other sense, is antithetical to the public interest. More controversially, however, it is arguable that the intent underlying much of the modern law is to protect parties who are relatively vulnerable. Certainly, it is widely agreed that one of the distinctive functions of the modern law of contract is to put in place a protective regime for routine consumer dealing. Thirdly, where contracts give rise to disputes, it is accepted that one of the objectives of contract law is to put in place machinery for the resolution of such disputes.8 Indeed, some commentators would argue that the distinctive feature of the modern law is that the courts have increasingly taken their function to be that of private dispute-settlement rather than that of general channelling or rule-setting — and one might see as one of the corollaries of this thesis a tendency for the body of contract doctrine to reflect this change by becoming more flexible, open-textured, and discretionary.9 Whether or not contract law actually succeeds in practice in delivering on its facilitative, protective, and dispute-resolving objectives, is a matter for … empirical inquiry … (including inquiry into the accessibility of the institutions through which the law is administered).10 Whether or not contract law ought to adopt such functions, and in what sense and how it ought to adopt such functions, are matters that need further analysis. On the face of it, the function of facilitating exchange is unproblematic.

However, once we begin to debate the more detailed features of the regulatory regime, we run into the question of what kind of exchange relationship the law of contract should aim to facilitate. Should it be selfinterested exchange, based on the ethic of individualism; or should it be exchange that is guided by cooperative thinking? Moreover, there is another major question concealed by the bland statement that contract law aims to facilitate exchange. In principle, contract law could be seen as a freestanding framework for exchange or as one that is deeply connected with existing trading practices. On the former view, contract law is, so to speak, imposed ab extra; whereas, on the latter view, contract law largely tracks existing practice and simply formalises transactional norms that are already recognised by traders. To put the point more sharply, did Lord Goff speak for the ideal function of contract law generally when he said of the work of the Commercial Court: ‘We are there to help businessmen, not to hinder them: we are there [page 9] to give effect to their transactions, not to frustrate them: we are there to oil the wheels of commerce, not to put a spanner in the works, or even grit in the oil’?11 … The second function of the modern law of contract is, as we have noted already, a matter of some controversy. Whilst, at one extreme, free marketeers might argue that it is quite wrong for the law to assume any kind of protective function, at the opposite extreme, it will be argued that the law should offer comprehensive protection to those who are damaged by the deals that they make, and various shades of opinion will be expressed in the middle. There will also be debates about whether, if protection is to be offered, the law of contract is the best instrument for achieving this purpose (as against, say, the use of criminal law, administrative regulation, or redistributive taxation). And, there will be debates about whether protectivism can be distinguished from paternalism and consumerism; and, if so, whether a defensible protectivism can be prosecuted in practice without also adopting elements of paternalism and consumerism. … Finally, if the commentators are right in detecting more flexibility and

discretion in the law, then there is likely to be less calculability in the law, and a familiar puzzle arises. Namely, should contract law prioritize its commitment to facilitation of exchange (to certainty, predictability, and bright line rules) or should it prioritize its commitment to fairness in dispute resolution? Frequently, this is the issue that divides the courts; and the accommodation of these competing functions is often reflected in the particulars of doctrine — for example, by structuring and confining what might otherwise be open-ended discretions. Indeed, whether one thinks that the function of contract law is primarily about constituting a market in accordance with sharply defined rules, or whether one thinks that it is primarily about achieving fair and reasonable settlements of disputes arising from transactions, this is one of the major ideological questions for contract lawyers.

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Comment 1.3.1 See Radan, Gooley, and Vickovich at 1.11–1.14.

1.

F Pollock, Principles of Contract: A Treatise On the General Principles Concerning the Validity of Agreements in the Law of England, 5th ed, Stevens & Sons Ltd, London, 1889, p 1.

2. 3.

For an example of a case giving legal effect to a promise in a non-contractual context, see R v Croydon Justices, ex parte Dean [1993] 3 All ER 129. W Friedmann, Law in a Changing Society, 2nd ed, Columbia University Press, New York, 1972.

4. 5.

W Friedmann, Law in a Changing Society, note 3 above, pp 119–29. W Friedmann, Law in a Changing Society, note 3 above, p 124.

6.

See generally K N Llewellyn, ‘The Normative, the Legal, and the Law-Jobs: The Problem of Juristic Method’ (1940) 49 Yale Law Journal 1355. Lord Irvine of Lairg, ‘The Law: An Engine for Trade’ (2001) 64 Modern Law Review 333.

7. 8.

9.

Or, to respect the machinery put in place by the contracting parties. In line with this objective, the modern law of arbitration has moved ever closer to accepting the principle that, in general, where the parties have agreed to provide their own machinery for settling disputes, court intervention should be minimised. … See P S Atiyah, From Principles to Pragmatism, Oxford University Press, Oxford, 1978; G H Treitel,

Doctrine and Discretion in the Law of Contract, Clarendon Press, Oxford, 1981; and L M Friedman, Contract Law in America: A Social and Economic Case Study, University of Wisconsin Press, Madison WI, 1965. 10.

11.

See H Collins, ‘The Sanctimony of Contract’ in Richard Rawlings (ed), Law, Society and Economy, Centenary Essays for the London School of Economics and Political Science, 1895–1995, Oxford University Press, Oxford, 1997, pp 63–89. Lord Goff, ‘Commercial Contracts and the Commercial Court’ (1984) Lloyd’s Maritime and Commercial Law Quarterly 382 at 391.

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Part I: History and Theory

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2 HISTORY OF CONTRACT LAW

INTRODUCTION 2.1 This chapter provides an overview of the history of contractual obligations. As part of this overview, reference is made to the most common actions that were available in the medieval period (namely, debt and covenant) as well as to the development of assumpsit and the doctrine of consideration. In order to illustrate how contract law has evolved, reference has been made to the development of debt, covenant, assumpsit, indebitatus assumpsit, and to consideration. In this respect, extracts are provided from Anson, ‘History of Contractual Obligations in English Law’ (see 2.2E), where the history of contractual obligations in English Law from medieval times through to the 19th century is summarised. In addition, case examples are used to show how the early actions were applied in practice. In Taylor v Foster (1599) 78 ER 1034 (see 2.3C), a decision at the end of the 16th century, an issue arose as to whether damages were recoverable in an instalment contract when the date for the second and final payments had not crystallised. Later courts began to allow the use of assumpsit as a contractual action, rather than limit recovery to those suing in debt. The most notable early illustration of this development occurred in Slade’s Case (1602) 76 ER 1072 (see 2.4C). An important development arose in the mid-16th century with the development of an early form of what is regarded as the doctrine of

consideration. This development is explored in the extract from J H Baker, ‘Origins of the “Doctrine” of Consideration, 1535–1585’ (see 2.5E), where emphasis is given to the origin of consideration, to attempts to delimit it, and to an examination of the question of whether the doctrine is in fact old law or new.

AN OVERVIEW OF THE HISTORY OF CONTRACT LAW 2.2E

Anson, ‘History of Contractual Obligations in English Law’

Source: A G Guest, Anson’s Law of Contract, 25th ed, Clarendon Press, Oxford, 1979, pp 8–18. Extract: The extract from Guest’s edition of Anson’s Law of Contract contains a succinct overview of the history of contractual obligations in English law. In the extract Guest emphasises that the purpose of his overview is not so much to recount historical events, [page 14] but rather to assist in understanding how the current law came to be developed and in appreciating how changes occurred. The outline begins with the more common medieval actions of debt and covenant and then explores the remedy of assumpsit and its subsequent development into indebitatus assumpsit. It also traces the origins of the doctrine of consideration, a doctrine more fully explored in Chapter 6.

The history of contractual obligations in English laws Our modern law of contract contains much which can properly be understood only in the light of its history. Without some acquaintance with this history, the Law Reports, especially those earlier in date than the procedural simplifications of the nineteenth century, will hardly be

intelligible to the student. Hence, even in a book which aims only at stating the principles of the modern law, it is desirable to give some account of how that law came to take the form which has just been indicated in outline. We shall see that it has not been by any process of analysis and elucidation of the essential nature of a contract that the law has been moulded. Indeed, the very idea of enforcing promises or agreements as such, which seems most natural to us, is not an early one in the history of any legal system. We have therefore to go back to a time before any such purpose was consciously present to the minds of English lawyers, and we shall find the key to the story by examining the conditions which the Courts have attached at different stages to the actions which they were willing to admit for the enforcement of the kind of rights which we now regard as contractual. The story can here be given only in the barest outline, and it should be understood that there are some points in it which are still obscure or controversial.

The medieval actions In the period which immediately followed the Norman Conquest, the royal judges were more concerned with the dual task of keeping the peace and working out the detailed system of land tenure to take much account of private agreements. Nevertheless, by the end of the thirteenth century two forms of action for enforcing rights which included some of those which we should now call contractual had taken fairly definite shape. These were the action of Debt, and the action of Covenant. (a) Debt It is difficult to describe the action of Debt without reading back into medieval times legal ideas which would not have occurred to lawyers of those days. But if we are to fit it into our modern categories, we shall have to say that, at first, it had more the character of a recuperatory than of a contractual remedy. In fact, originally Debt was but a part of the composite writ of Debt-Detinue, in which the plaintiff alleged that the defendant was ‘unjustly detaining’ something which was of value to him and to which he was entitled. By the beginning of the fourteenth century it came to be recognized that, in general, Detinue was the proper action for the recovery of specific chattels, and Debt for the recovery of money.

[page 15] So in Debt the gist of the action was that the defendant was detaining a sum of money which was really the plaintiff’s money. The action was used to enforce a variety of claims for the repayment of a loan, for the price of goods sold, and for the rent reserved in a lease. Or there might have been no ‘contract’ and the sum might have become owing in some other way — for example, as customary dues, or by the judgment of a Court. These claims were grouped by later medieval lawyers into three classes: Debt on the Record (for the payment of a sum of money ordered to be paid by a Court and entered upon its record), Debt on an Obligation (where the plaintiff produced a sealed instrument), and Debt on a Contract. Thus in 1410 it was said, ‘Each writ of Debt is general and in one form, but the count is special and makes mention of the contract, the obligation or the record, as the case requires.’ The description ‘Debt on a Contract’ is, however, rather misleading from a modern standpoint, for a contract would result in a ‘debt’ being owed to the plaintiff only after he had performed his own part under it. For instance, if the plaintiff had agreed to sell goods, there would be no ‘debt’ owing to him until he had delivered them.1 Or to put the same point from the side of the defendant, he would only be liable to an action of Debt if he had received some benefit or performance, a Quid pro Quo, in return for his promise to pay the money. Mutual promises were thus insufficient to sustain an action of Debt unless the plaintiff had himself performed his side of the bargain. It is possible that the Courts might, in time, have modified the conditions of this action and developed out of it a remedy for the enforcement of contracts which were completely executory, but, as we shall see, they invented another, and more convenient, remedy to meet that case. One reason why Debt did not develop in this way was probably because there were certain inconvenient incidents attaching to it which made it unpopular. One of these was that in Debt, the defendant might normally ‘wage his law’,2 and the action would then be determined, not upon its merits, but by an archaic process known as ‘compurgation’, in which the defendant came into Court and declared upon oath that he did not owe the debt, and twelve respectable neighbours, his ‘compurgators’ or ‘oath helpers’ declared, also upon oath, that they believed that his oath was good.

A second was that Debt could only be brought to recover a certain sum of money; and the plaintiff had to recover the precise sum claimed, or fail completely. Finally, the recuperatory nature of the action, and the requirement of a Quid pro Quo, stifled its development as a remedy based on agreement, so that it could be very little adapted to meet changing commercial conditions. (b) Covenant The writ of Covenant had emerged by the beginning of the thirteenth century, and by the reign of Henry III3 it was a frequently used form of action. It covered consensual agreements [page 16] of various kinds, and in particular agreements to do something, such as to build a house, other than to pay a definite sum of money. But by the middle of the fourteenth century it was clearly established that Covenant required the production of a sealed instrument. The agreement was enforced not because the parties had exchanged mutual promises, but because it had been made in a particular form to which the law attached a peculiar force. This requirement of a seal confined the action within formal limits. Moreover, if the plaintiff’s claim was for a fixed and certain sum of money, the proper action was that of Debt. Covenant could therefore scarcely be expected to produce a general contractual remedy. There was yet a third action of a ‘contractual’ nature. This was the action of Account which could be used against those whose duty it was to account for moneys received by them on behalf of another. Its importance, however, lies mainly in the field of quasi-contract. …

Assumpsit The remedy which was eventually found for the enforcement of informal promises is a curious instance of the shifts and turns by which practical convenience evades technical rules. Such a remedy was developed out of two actions, the action of Trespass and the action of Deceit, and at first

sight it requires more than a little ingenuity to see any logical connection between these actions and contractual agreements. But briefly the process was as follows. Trespass lay for a direct physical injury to the person or to property, but by some process, the details of which are contentiously obscure, there had developed out of it a modified form of action which would lie for injuries which were not direct or physical, and this came to be known as Trespass on the Case, or simply as Case.4 Case is the parent of many of our modern torts as, for instance, nuisance and negligence, but with that side of its prolific development we are not here concerned. Deceit, too, was at first a very narrow and technical form of action, but out of it seems to have developed an action of Deceit on the Case which had a wider compass. The boundaries between these two types of the action on the Case are difficult to trace, but both appear to have been instrumental in the future development of Case in relation to the enforcement of mutual promises. Now if we are to apply our modern categories to Case, it is evident that we should classify it as an action in tort, and not in contract. It lay originally for damage caused by one man to another by the commission of an unlawful act, a misfeasance, but one not amounting to an actual trespass. But one common occasion of one man injuring another by a misfeasance is where he has promised to do something for that other, and has fulfilled his promise so negligently or otherwise improperly that the other has been damnified by his conduct. So, for example, where a ferryman undertook to carry a mare in his boat across a river, but so overloaded the boat that it sank and the mare was drowned, and where a man promised to cure a horse and yet did it so negligently that the horse died, an action was given to the owner in respect of the damage suffered. [page 17] At this stage in the story we begin to see a special form of Case breaking off from the parent stock, applicable to the case where damage has been caused by the misperformance of that which a man has ‘assumed’ or promised to do. This is the action of Assumpsit, which was destined in course of time to supplant the older actions of Debt and Covenant, and to mould the

conditions on which mere informal promises were to become actionable in our law. But at this stage the action is still delictual: the promise which the defendant has given has provided the occasion for the wrongful act by which he has injured the plaintiff, but it is for the harmful consequences of that act, and not for the broken promise as such, that the action is allowed. There still had to be a positive act; and a mere nonfeasance, or failure to carry out a promise, would not suffice. In such a case the judges held that the action, if any, would have to be in Covenant, and the plaintiff would have to produce a sealed instrument. It was, perhaps, this limitation which led litigants to explore the possibility of Deceit as an alternative remedy. In Doige’s Case in 1442, an action of Deceit was brought against Doige in the King’s Bench. The complaint was that the plaintiff had bought from Doige a plot of land for £100, that he had paid this sum to Doige, and that Doige had promised to enfeoff him within fourteen days. In fact, Doige had enfeoffed another, and so deceived him. It was contended for Doige that the proper cause of action was in Covenant, but the Court of Exchequer Chamber gave a verdict in favour of the plaintiff. The case was clearly one of nonfeasance, and it is thus probable that both Deceit and Trespass contributed to the evolution of that branch of Case known as Assumpsit. Nevertheless, as late as 1503, a law reporter could note: where a carpenter makes a bargain to make me a house and does nothing, no action on the case lies, for it sounds in covenant. But if he makes the house improperly, the action on the case well lies. By this time, however, the obvious inconvenience of there being no remedy for the breach of an executory contract, unless it had been made under seal, was beginning to influence the Courts, and there was besides a special reason why the common law Courts could not rest content with the law as it then was. The Chancellor was showing signs of being willing to enlarge a jurisdiction which he already exercised over contracts, and the Courts began to fear that he might annex a subject which they regarded as their own. So we find that, at the beginning of the sixteenth century, they began to allow Assumpsit to be brought for the nonfeasance of a mere promise. At first, it seems that Assumpsit was only allowed in these cases of nonfeasance where the plaintiff had paid money under the agreement, but before long it

was enough if he had suffered some detriment under it other than payment of money. The way was now clear for the formulation of a general contractual remedy based on agreement and with no requirement of form.

Indebitatus assumpsit The next development came some thirty years later in the sixteenth century, when the Court of King’s Bench began to allow Assumpsit to be brought in cases where, in fact, Debt was the proper remedy. It was a cardinal principle of English law at this time not to allow two alternative remedies on the same set of facts. But King’s Bench showed itself prepared to [page 18] disregard this ‘rule against double remedies’ and to allow a plaintiff to choose between Debt and Assumpsit. This step was bitterly resented by the Court of Common Pleas which had a virtual monopoly of the older actions. Owing to the superior efficacy of the action of Assumpsit, business (and, with it, revenue) began to flow out of Common Pleas into King’s Bench, to the satisfaction of the latter and the chagrin of the former. For a time, there was an unfortunate conflict between the two Courts — a conflict which eventually culminated in a victory for King’s Bench. The case which brought about this victory was Slade’s Case in 1602,5 which, so Coke tells us, was twice argued before all the justices of England and the Barons of Exchequer assembled in the full Court of Exchequer Chamber: Slade complained that, at the special instance and request of the defendant, Morley, he had bargained and sold to Morley a crop of wheat and corn; that the defendant had assumed and promised to pay him the sum of £16; that the defendant had not paid the said sum, whereby he suffered damage. The jury found, in a special verdict, that there was no other promise or assumption except the actual bargain itself. It was argued on behalf of the defendant that the proper form of action was Debt and not the action on the case for Assumpsit, and that to hold

otherwise would be to deprive the defendant of the opportunity of waging his law. The Court, however, held that, although the action of Debt lay upon the contract, yet the plaintiff might have an action on the case or an action of Debt at his option. And it was further resolved that ‘every contract executory imports in itself an Assumpsit, for when one agrees to pay money or to deliver any thing, thereby he assumes or promises to pay or deliver it’. It may be said that this is the most important case in the whole history of contractual obligations in English law, for the action of Assumpsit was now able to emerge as a general contractual action, freed from the inhibiting forms and limitations of the medieval writs. This generalization is the distinctive mark of the English law of contract. In Roman law, for example, the jurists thought in terms of particular obligations — of sale, loan, hire, and deposit, and made but trifling generalizations from these. In the common law, however, particular contracts were, for the most part, discarded, and the common lawyers thought more in terms of a single type of obligation with a variable content than of the pigeon-hole actions of a formulary system. This process was aided and accentuated by the fact that, not long after Slade’s Case, the Courts began to allow Assumpsit to be brought when services had been rendered or goods supplied in circumstances which made it clear that they were to be paid for, even though the amount of the payment had not been expressly fixed. The plaintiff was allowed an action for quantum meruit, for the amount which his services deserved, or for quantum valebant, for the amount which the goods were worth, or, as we should say today, he was allowed to claim a reasonable remuneration or a reasonable price. Later still the Courts went even further and were ready to imply a contract not only from the conduct of the parties, but also where there was no agreement at all. … [page 19] In 1852 it became no longer necessary to mention in the writ by which an action was begun the particular form in which it was being brought, and in 1875 the Judicature Act abolished the forms of action altogether. Thus English law was left with a generalized law of contract — a situation which

contrasts favourably with the lack of generality in the companion subject of torts.

Consideration In English law, a mere promise (unless made under seal) does not of itself create a contractual obligation. There must be present some ‘consideration’ moving from the promisee, that is to say, the promisee must give, or promise to give, something of value in return for the promise. The requirement that consideration must be given for a binding promise introduces an element of reciprocity that is peculiar to the English law of contract and to the common law systems derived therefrom. We have therefore to ask how it was that consideration became the test of the actionability of informal promises, and this question is a difficult one to answer. In the sixteenth century, the courts were called upon to decide, case by case, whether good or sufficient reason existed to render an informal promise actionable, but the exact origin of the modern doctrine of consideration is by no means clear. Some have found the answer in the Quid pro Quo of Debt. This seems unlikely, since the essence of a Quid pro Quo was the benefit conferred upon the debtor, which cast upon him the duty to pay, whereas the essence of consideration is normally the detriment incurred by the promisee. Others have found it in the ‘bargain’ nature of the English law of contract, but this is to neglect the formative influence of consideration in this respect. A further possible explanation is that it is the result of the original tortious nature of the action of Assumpsit, the detriment being the damage resulting from the breach of the obligation. Of course, it is true to say that there is no logical connection between detriment in tort and detriment in contract, as the latter is the thing which ‘buys’ the counter promise or undertaking before any breach has occurred. But it may be that the clue lies in that delicate stage in the history of Assumpsit when it was sought to bring the action for a mere nonfeasance. If A promised B to build him a house and did nothing, wherein lay B’s hurt? Nowhere, unless he had already paid across the money for the building. So a plaintiff would have to show either resultant damage in an action for misfeasance, or the payment of a consideration in an action for nonfeasance. Cause and effect are not distinguished.

Yet another explanation is that consideration originates from the introduction into the common law of the concept of cause or ‘good consideration’ from the Court of Chancery, where it had been known since the very beginning of the sixteenth century. This must have become familiar to the common law judges when the passing of the Statute of Uses in 1535 brought much former ‘equitable’ business into their Courts. Whatever may have been its origin, the sufficiency of mutual promises came quickly to be recognized, each party’s promise being a detriment as it was a ‘charge’ upon him. Thus in Wichals v Johns in 1599,6 Popham CJ was able to say: ‘there is a mutual promise, the one to [page 20] the other: so that, if the plaintiff does not [perform his promise], the defendant may have his action against him: and so also the defendant shall be charged as to him; and a promise against a promise is a good consideration’. In this way mutual promises were fitted into the new pattern of English law, and the doctrine of consideration firmly established.

Subsequent developments The development of the law of contract during the eighteenth and nineteenth centuries in no way interfered with the basic notions thus laid down. But, during this period, the judges formulated the principles which now appear as those of the modern law. This process was a gradual one, but it gained momentum with the advent of the industrial revolution and the consequent need for more sophisticated rules to deal adequately with the expansion of trade and commerce. In this period, too, the treatise writers began to expound the judgments of the Courts in a systematic fashion and to impose on the English law of contract a conceptual structure.7 The nineteenth century, in particular, was a period of great innovation in and expansion of contract law. Nevertheless, this branch of the law is today by no means stagnant, and the principles enunciated by the Victorian judges are constantly being modified and adapted to meet the changes in economic and social conditions of the twentieth century

[page 21]

Comment 2.2.1 See Radan, Gooley, and Vickovich at 2.1–2.32.

INSTALMENT DEBTS — LEGAL REMEDIES AVAILABLE 2.3C

Taylor v Foster (1599) 78 ER 1034

Court: King’s Bench Division Facts: Taylor owed money to another person identified as ‘JS’. Taylor agreed with Foster that he would marry Foster’s daughter if Foster would pay JS the money that Taylor owed. The arrangement was that Foster would pay JS part of the money on a specified day and then pay the balance at the end of the particular year. Foster did not pay the first instalment and Taylor, within a short period of time, brought an action for damages. It should be noted that Taylor brought the action prior to the date for the payment of the balance of the money. It was argued that the action did not lie until the last day that full payment was due. Issue: The issue before the King’s Bench Division was whether damages were recoverable prior to the date that the second and final payment was due. Decision: The court found in favour of Taylor. Taylor did not have to wait until the last instalment was due before he could bring an action in damages and this was so notwithstanding the fact that the money that was promised to be paid was to be paid to a stranger — JS.

The Court [B]ecause the first £50 was not paid, he [Taylor], brought the

action. And after verdict, upon non assumpsit, it was moved, that the action lay not until the last day, as it is in debt upon an obligation payable at two days. … [F]or true it is, that so it is in debt upon an obligation, where the entire debt is to be recovered; but not in this action, or in covenant, where damages only are to be recovered. It was also held, that the action well lies for the plaintiff, although the £100 had been to be paid to a stranger, and not to himself; because the promise is unto him. Wherefore it was adjudged for the plaintiff.

Comment 2.3.1 See Radan, Gooley, and Vickovich at 2.12.

[page 22]

THE USE OF ASSUMPSIT AS A CONTRACTUAL ACTION 2.4C

Slade’s Case (1602) 76 ER 1072

Court: King’s Bench Division Facts: John Slade brought an action against Humphrey Morley, in which he asserted that he had sold a quantity of wheat and rye to Morley, who had promised to pay £16 for that produce. Morley failed to pay the agreed sum. In his defence, Morley pleaded non assumpsit and that Slade might have an ordinary remedy by action of debt, but not an action on the case. In the Full Court of the Exchequer Chamber it was held that Slade could elect to maintain either an action in debt or an action in assumpsit. Issue: The issue before the court was whether Slade’s action should be in debt or assumpsit. Decision: The court ruled that Slade was entitled to maintain the action and to recover damages and costs against Morley. This

decision was important, as it was found that assumpsit could emerge as a contractual action

The Court [T]he said Humphrey Morley did take upon him in manner and form, as in the declaration within written, within specified, or no, the said jurors are altogether ignorant, and thereof they ask the advice and consideration of the Court here, and if upon the whole matter aforesaid by the said jurors in form aforesaid found, it shall see in to the justices of the Court here, that these said Humphrey Morley did take upon him in manner and form, in the declaration within specified, then the said jurors say upon their oath aforesaid, that the aforesaid Humphrey Morley did take upon him in manner and form as the aforesaid John Slade within against him complaineth; and then they do asses the damages of the said John Slade, by occasion of not performance of his promise, and taking upon him within written, besides his charges and costs in the suit aforesaid by him expended to £16. … That although an action of debt lies upon the contract, yet the bargainor may have an action on the case, or an action of debt at his election. … [E]very contract executory imports in itself an assumpsit, for when one agrees to pay money, or to deliver anything, thereby he assumes or promises to pay, or deliver it, and therefore when one sells any goods to another, and agrees to deliver them at a day to come, and the other in consideration of thereof agrees to pay so much money as such a day, in that case both parties may have an action of debt, or an action on the case on assumpsit, for the mutual executory agreement of both parties imports in itself reciprocal actions upon the case, as well as actions of debt. … It was resolved, that [Slade] in this action on the case on assumpsit should not recover only damages for the special loss (if any be) which he had, but also for the whole debt, so that a recovery or bar in this action would be a good bar in an action of debt brought upon the same contract

[page 23]

Comment 2.4.1 See Radan, Gooley, and Vickovich at 2.16–2.17.

ORIGINS OF THE DOCTRINE OF CONSIDERATION 2.5E

Baker, ‘Origins of the “Doctrine” of Consideration, 1535– 1585’

Source: J H Baker, ‘Origins of the “Doctrine” of Consideration, 1535– 1585’, in M S Arnold, T A Green, S A Scully and S D White (eds), On the Laws and Customs of England, University of North Carolina Press, 1981, pp 336–58. Extract: The extract from Baker’s article explores the origins of the concept known as consideration. An analysis is provided of whether the doctrine is the product of an unbroken development of a single idea or whether it was a combination of different ideas. Baker also deals with whether the doctrine of consideration has been influenced by canon or civil law and how it was used in the 16th century. No other doctrine in English law can compete with ‘consideration’ for the greatest diversity and complexity of historical explanations. Most of these explanations can be seen as attempts to answer two groups of questions. Was ‘consideration’ an unbroken development of a single idea from medieval times; or was there a break with medieval thought, and perhaps a combination of different ideas? Second, was it a wholly indigenous development; and, if so, was it an incidental consequence of the exigencies of the forms of action or a direct result of juristic speculation about contractual liability? Alternatively, was it something reflected or borrowed from the canon law or the civil law? And, if so, was the influence brought to bear on the common law directly through Renaissance humanism, or indirectly by way of the canonist chancellors or ecclesiastical

judges? It has been customary to seek some single answer to all these questions; but that approach in itself begs another question, for there is no reason to suppose that sixteenth-century lawyers were unanimous as to the nature, let alone the intellectual sources, of the doctrine of consideration. Indeed, the one safe assumption to begin with is that if the matter had been plain then, it would be more readily clarifiable now. Anyone who attempts to augment, even by a few pages, all that has already been written on this vexed subject must at the outset acknowledge his own foolhardiness; for, in the apt language of our old books, serra rette son foly demesne. Nevertheless, there is one large evidential stone still unturned. We have never known quite when or how ‘consideration’ appeared in the assumpsit declaration, nor what legal discussion (if any) accompanied the process of its becoming a material allegation. It would be idle to expect the discovery of this missing information to end all doubt and speculation concerning the origins of the idea of consideration, if only for the very good reason that the idea seems to have been present in English law long before it acquired the name. But whether we are endeavoring to trace the idea backward or forward from its first appearance in modem guise, our most convenient [page 24] focus must be the point at which the innominate idea lurking in older jurisprudence became a nominate ‘doctrine’ capable of shaping arguments and controlling decisions. Of course, the focus will not be very sharp. The common law was not in the habit of changing overnight, and its exponents were adept at concealing any overt evidence that it had changed at all. With reasonable confidence, however, we can reduce our concentration to the half century from 1535 to 1585. By the 1580s the reports are full of discussions about consideration; usually the matter arose on a motion in arrest of judgment, but it could also be raised by a demurrer, or writ of error, or special verdict, or argument upon the evidence. Objecting to the declaration ‘for want of sufficient consideration’ had become the lawyer’s first resort in attacking any assumpsit action that seemed to raise some arguable point, and the procedure was already raising a wide range of

questions both substantive and technical. Consideration had achieved the status of a doctrine, and could be defined as a profit to the defendant or a labor or charge to the plaintiff.8 A mere fifty years earlier there was no trace of ‘consideration’ in assumpsit declarations or in the few reported discussions relating to such actions. This fifty years, then, is the period on which attention must be fixed; and it is no accident that it is precisely the period that most previous speculation as to the history of consideration has studiously or unwittingly avoided.

Origin of the ‘consideration’ clause The first appearance of the in consideratione clause in the assumpsit declaration may be dated with reasonable precision to 1539. No contemporary, we may be sure, regarded it as a significant event; actions on the case were still in the fluid, experimental stage, and it would be another thirty years or more before the new phrase ousted its predecessors. The most we can hope to discover from the circumstances of its introduction is some sense of what ‘consideration’ originally meant and of the extent to which it represented new thinking about contractual liability. In order to draw the contrast, we must first step back a little before our chosen period. In the fifteenth century, assumpsit actions rarely proceeded beyond the optulit se stage, and therefore the precedents in the rolls are mostly of uncontested writs. Hundreds of these precedents recur in the most elementary form: ‘whereas, in return for [pro] a sum agreed or paid beforehand by Y, X had undertaken to build a house for Y, X failed to build the house’. The pro clause here bears more than a superficial resemblance to the later consideration clause, and a discussion in 1425 suggests that it did indeed reflect a notion of reciprocity: it was because the carpenter had been paid, or could bring debt for the agreed sum, that he himself should be liable in return. By the end of the century, however, the usual formula had become more sophisticated, with the pro clause demoted to a recital: ‘whereas, for a sum agreed or paid, A had agreed to build a house for B, and A had undertaken to build the house within a certain time, A had failed to build within the time as undertaken’. The undertaking had been gently separated from the principal bargain, to become in effect a promise to carry out the bargain on time or (in negligence cases) in a careful manner. This

verbal divorce was no doubt designed to avert technical objections to overlapping remedies, yet in so doing it [page 25] introduced a new problem. The undertaking now seemed imperfectly explained; it was no longer expressed to have been made in return for the sum of money, and it was linked to the bargain only by the implication inherent in the word ‘and’. Now, it may seem an absurd subtlety to hold that ‘and’ did not adequately fuse the bargain and the undertaking into one single transaction, but the dilemma arose inevitably from the object of the expanded formula: either the action was founded on the bargain or covenant itself, in which case it would probably fail on formal or evidential grounds, or it was founded on the collateral undertaking, in which case it had to be shown why that undertaking should be independently actionable. By the time of Henry VIII at the latest, pleaders seem to have been aware of this problem and increasingly they took care to avoid all mention of a precedent bargain or contract — by reciting a delivery rather than a sale of goods, or a discussion (colloquium) instead of a bargain — or else to give the undertaking an explanation of its own. The formulas they devised for the latter purpose are so varied as to defy classification, and include some phrases in which consideration is clearly foreshadowed;9 but the commonest device was to say that the undertaking had been given in return for (pro) a small sum of money, usually twelvepence. This last device was probably in many cases a fiction and is therefore hardly a true precursor of consideration, but the need for such a fiction shows the reality of the pleader’s dilemma, and his uneasiness about leaving the undertaking unexplained on the face of the record. The need for a connecting link between the recited bargain and the undertaking to perform it was the subject of an unreported King’s Bench decision in Marler v Wilmer (1539).10 The plaintiff complained in the mayor’s court at Coventry that he had sold goods to the defendant’s testator for a sum to be paid on request, and that after the testator’s death the defendant executor super se assumpsit et fideliter promisit to pay the sum but had not done so. The local court gave judgment for the plaintiff, upon

demurrer, and the defendant brought a writ of error in the King’s Bench. One of the points assigned for error was ‘that it does not appear in the declaration for what cause [quam ob causam] he made the aforesaid undertaking, either for money paid beforehand, or receipt of part of the aforesaid goods, and so ex nudo pacto non oritur actio’. He also objected that the action should have been debt, not ‘deceit on the case’, and that the plaintiff should have produced a deed. Unfortunately, the King’s Bench proceedings end with the scire facias to summon the defendant in error; but it is significant that already by 1539 it could be argued that no action would lie on an undertaking without ‘causa’ because it is nudum pactum. The declaration had to explain the under--taking, and it was not enough merely to recite a precedent bargain. The consideration required for an executor’s promise would continue to give difficulty throughout the century, but the relatively simple objection in 1539 would have applied with equal force to the common declaration in assumpsit for the price of goods. Some linking phrase was needed between the recital and the assumpsit clause to explain the undertaking, and it can hardly be a mere coincidence that within a year or two of Marler v Wilmer several new formulas had been invented for the purpose. The most common of the new devices can best be described as [page 26] a quid pro quo clause. It was used mainly in actions to recover the price of goods, which had become the principal function of assumpsit by 1540. The plaintiff alleged a sale of goods for a certain sum, or a delivery of goods worth a certain sum, ‘for which goods [pro quibusquidem bonis]’ the defendant undertook to pay. Thus the goods were treated as the quid ‘pro quo’ the undertaking was given. The buyer could use the same formula, alleging that the promise to deliver was made pro the money paid.11 For over twenty years the quid pro quo clause dominated assumpsit declarations, and bid fair to jostle consideration out of use. The consideration clause that appeared in 1539 performed exactly the same linking function as the quid pro quo clause. At first it was simply an alternative, chosen whenever it seemed more apt or elegant than pro. The

first recorded case illustrates this very well. The plaintiff complained that, whereas the defendant’s wife had before marriage been indebted to the plaintiff for board, lodging, and a loan, the defendant in full knowledge afterwards, in consideration of his impending marriage and for twelvepence paid to him, undertook to pay off the debt, but had not done so.12 The plaintiff’s counsel had seen fit to make use of the fictional shilling in addition to the true cause, and so the in consideratione clause was used to avoid the repetition of pro, a word much more appropriate to introduce a payment than a marriage.13 In the next instance on the King’s Bench rolls, the undertaking to pay was in consideration of wrongs done and pro twelvepence paid; again in consideratione is a companion to pro, and it is more apt to describe a motive founded on something past.14 In a third early case, the two phrases occur together as past and present moving causes, where a woman had asked a man to ride on a journey with her, and for (pro) his company and in consideration that he had lent her money, she promised to give him a ring.15 In the decade after 1540 there are at least thirty-two instances of consideration clauses in the King’s Bench rolls, but there is little uniformity in their form or function. In one back-to-front case the assumpsit was the consideration for the plaintiff’s promise to perform.16 In nearly all the cases, however, the consideration was used to explain a promise to pay money. It might be a past act (often the delivery of goods), or a present bargain, or a future act. Sometimes it was combined with the word pro, as in the phrase pro et in consideratione17 [page 27] or the general, meaningless pro diversis considerationibus.18 As a mere alternative to pro it could mean ‘in return for’, and this sense of reciprocity is underlined in such phrases as in consideratione et recompensatione.19 But it had more subtle connotations of its own: there was the sense of causa, itself ambiguously hovering between the two shades of meaning ‘because of’ and (more subjectively) ‘having taken into consideration’ or ‘being moved by’. The latter sense is clearly manifest in the general form pro diversis aliis causis et considerationibus ipsum E. adtunc et ibidem moventibus.20 It is

therefore impossible to assert that the nascent phrase represented precisely the notion of quid pro quo or causa. There is a very strong case, on the other hand, for saying that it actually combined both notions, and that its triumph over the various pro clauses was eventually secured by its convenient ambivalence.

Attempts to delimit consideration On turning to the reports, we meet with an apparent lack of concern with general principles of liability. Not only are there no discussions of the nature of ‘consideration’ before 1560, but when the discussions do begin the profession seems already to be engulfed in a torrent of complex learning gushing out in every direction from no apparent source. Ironically, the commonest types of assumpsit — actions for the price of goods or services — received the least attention. Although consideration had begun in such actions, it was by now thought unnecessary for them and if alleged could not be traversed; under such liberal conditions even a conditional gift of money could be enforced. We have seen that consid--eration in these common cases served to link circumstances that had always given rise to liability with the undertaking that enabled assumpsit to be brought instead; whatever problems that caused with respect to overlapping remedies, they were not problems relating to the nature of consideration. The doubts were not as to the existence of liability, but as to the form of the remedy and the mode of proof; in the seventeenth century common counts consideration was to become virtually meaningless, certainly unimportant. It was outside the context of sale that consideration came to be of fundamental importance, because there was no preexisting substantive law of contractual liability and so consideration not only explained the undertaking, but thereby determined whether an action would lie for its breach. This was the context in which discussion began as to what constituted a ‘good’ consideration. Would a merely subjective motive (such as affection), or a ‘continuing’ motive (such as kinship), give binding force to an undertaking; or must the plaintiff have done or promised something in return? If the plaintiff had done something in return, must it have been done in return for the promise; or would it be sufficient if it had been done at the defendant’s request, or simply for the defendant’s benefit? If the plaintiff had not done, but promised, something in return, was it necessary that he should

subsequently have performed his promise; or would it be enough that the promise would have been performed if the defendant had not broken his promise? [page 28]

Adequacy and contemporaneity The courts do not seem ever to have been troubled about economic disparity between consideration and promise; it was a common maxim that for a penny consideration a man could bind himself for a hundred pounds. In the earlier cases past consideration is not unusual,21 and there are also several examples of the vague general clause pro aliis considerationibus tacked on to a small prepayment.22 By the 1580s, however, it was common learning that consideration had to be something of value; and it was a standard objection to the consideration that it was ‘insufficient’ or ‘past’. That position may well have been reached in a haphazard way, as defense lawyers persuaded courts to reject particularly dubious kinds of moving cause; but its attainment is significant as marking the emergence of a ‘doctrine’ of consideration. The choice of direction open to the courts was provided by the ambiguity of the word ‘consideration’. In the causa sense it might more easily encompass motives, and things past or continuing, whereas in the quid pro quo sense it called for some reciprocal act done or promised. Common lawyers were not wont to distinguish these senses, and in the law of uses it was already the practice to speak of ‘insufficient cause’ to denote the absence of quid pro quo. …

Mutual promises It has been generally assumed that the question whether a promise could be consideration for a promise was the last important question to be asked, and that its answer in the affirmative finally transformed consideration into a doctrine based on a consensual view of contract. The hurdle, as historians have seen it, was a logical one: a promise was only of value if binding, and to say that it was binding because it was given in consideration of another promise would trap one in a vicious circle from which the only escape would be to suppose that the reciprocal promises somehow breathed life

into each other at the same instant, so that they could support each other. Unfortunately for this view, no contemporary discussion has been found in which the problem is treated in those terms. One recent writer has concluded from this that the problem never entered anyone’s head, and that ‘all talk about the recognition of “wholly execu--tory” “bilateral”, or “consensual” contracts in [the sixteenth] century is wholly misconceived’.23 The only contemporary problem, on this view, was whether the plaintiff had to aver the performance of his own promise; and the answer lay in the ‘sharp distinction’ between a promise and a future act. If A promised B ten pounds if B would build a house, then B had to show that he had built the house before he could sue for the ten pounds; but if A promised B ten pounds in consideration that B then and there promised to build a house, then B’s promise was a sufficient consideration to bind A. This was not so [page 29] much a consideration problem as that of determining whether promises were dependent or independent: a problem eventually to be solved by a mass of abstruse learning centered upon Serjeant Williams’s notes to Pordage v Cole and then lost (in England) in the confused law about conditions, warranties, and discharge by breach.24 Neither approach seems entirely satisfactory. It is true that mutual promises are found at an early date,25 and that the discussions are not in terms that anyone affected toward the traditional story would wish. But it is equally true that the reported cases do reveal a consideration problem; indeed, the three most extensive early discussions of consideration arose from mutual promises. …

Was consideration old law or new? By 1600 there were so many decisions touching the doctrine of consideration that recourse to earlier ideas was seldom necessary. To that extent the doctrine of consideration was plainly novel, so novel in fact that none of the cases after 1568 was in print until the seventeenth century. In the earliest discussions, however, lawyers saw no incongruity in citing Year Book cases for propositions about consideration: in the middle of

the sixteenth century, Brooke and Plowden explained the non-feasance cases of 1409 and 1425 as showing that assumpsit would not lie without consideration; Wyndham, J, in 1581 adapted a definition of consideration from a remark of Serjeant Jenney in 1476;26 and, in 1588, Coke professed to have based his ‘charge or benefit’ definition on the marriage-money case of 1477.27 Should we conclude that consideration was but an amalgam of old ideas in a new guise, or were lawyers trying to disguise, or at least authenticate, completely new ideas? Of one thing we may be sure: the law of consideration was English. Of course, we know that St German had some slight acquaintance with the canonist learning about causa, and that Plowden was able to quote a brief civilian definition of nudum pactum.28 But these superficial flirtations with Romanism had no noticeable effect on the history of consideration, except perhaps on Plowden’s notion of ‘deliberation’ or intention to be bound; but that notion bore little fruit until Lord Mansfield tried unsuccessfully to revive it two centuries later, and it is now treated by English lawyers as a requirement distinct from consideration. …

Conclusion We began with a warning against an undue desire for historical neatness. When the legal historian sees confusion or inconsistency, unless it is of his own making, he is probably looking at law being made. If a legal historian of the twenty-fourth century purported to reveal the perfect clarity of, say, the English doctrine of fundamental breach in the 1960s and [page 30] 1970s, he would be a bad historian; we of the 1960s and 1970s know how many plausible ways there are of looking at the same problem, but we cannot know (as our successor will) which view will ultimately prevail, and so the state of uncertainty is itself the historical truth. It rather looks as though ‘consideration’ was in the same plight in the period we have examined. Most lawyers could identify the questions without difficulty, but the search for a clear answer was complicated and delayed in practice by divergent views about the forms of action, by the infinite variety of special

declarations, and by the tireless ingenuity of opposing counsel. The survival of older ways of settling disputes had rendered a detailed law of contractual liability unnecessary, or at least unattainable, before the establishment of assumpsit for nonfeasance. The comfortable certainty of that old world ended when the special declarations in case, with their myriad permutations of facts, began to throw up endless questions of law that had never been posed before. These new questions required new, more precise formulations of shadowy medieval notions, and the nascent learning suddenly converged in the 1560s upon a simple phrase which was calculated merely to avoid or deflect a number of disparate problems raised by the development of assumpsit declarations. Contemporary sources suggest that the only novelty lay in the refinement of earlier ideas; for the spiritual sources of the law of consideration were the two simple, timeless, and ubiquitous moral principles that bargains should bind both parties and that men should be held to promises on which others have actively relied. The technical ‘doctrine of consideration’ in which these principles came to be enshrined in the time of Elizabeth I was occasioned by nothing more arcane than the fertile ambiguity resulting from a little shift of wording by the pleader. It is true enough that the life of the law has not been scholastic logic: it has been the conversion of loose words into jargon.

Comment 2.5.1 See Radan, Gooley, and Vickovich at 2.20–2.32.

1.

By the middle of the fifteenth century, however, the Courts had allowed an exception in the case of an executory contract for the sale of goods. The ‘property’ in the goods was deemed to pass upon sale, even though no delivery had been made; and this was of sufficient benefit to the purchaser to enable him to be sued by the vendor for the price.

2. 3.

Unless the plaintiff produced a sealed instrument. 1216–1272.

4. 5.

For a different view of the origin of Case, see S F C Milsom, ‘Not Doing is No Trespass: A View of the Boundaries of Case’ [1954] Cambridge Law Journal 105. (1602) 76 ER 1072.

6. 7.

(1599) 78 ER 938. See A W B Simpson, ‘Innovation in Nineteenth Century Contract Law’ (1975) 91 Law Quarterly

Review 247. 8. 9.

Webb’s Case (1577) 74 ER 763; Richards v Bartlet (1584) 74 ER 17. Eg, Browne v Cornely (1533), King’s Bench 27/1086, m 28.

10. 11.

King’s Bench 27/1111, m 64. Eg, Grey v Botte (1544), King’s Bench 27/1133, m 105 (judgment for the plaintiff).

12. 13.

Harvy v Stone (1539) King’s Bench 27/1112, m 65. Marriage had often been treated as a ‘consideration’ to raise a use, and it was more accurate to describe it so than as quid pro quo because there were doubtless other reasons for the marriage than the payment of the debt.

14.

15.

Phyllyp v Heeth (1540) KB 27/1116, m 23d. For the association of consideration with causes past or ‘precedent’, see C St German, Doctor and Student, ed T F T Plucknett and J L Barton, Selden Society, vol 91 (London, 1975), p 229. St German distinguishes between an ‘accord’ (for past wrongs) and a contract. The first mention of consideration in an assumpsit action occurs not in a declaration, but in a plea of accord: Hewton v Forster (1536) KB 27/1099, m 76. Turfote v Pytcher (1543) King’s Bench 27/1130, m 104.

16. 17.

Owtrede v Whyte (1546) King’s Bench 27/1138, m 24d (judgment for the plaintiff). Eg, Rent v Danyell (1549) King’s Bench 27/1150, m 104.

18.

Usually added to a money payment: eg, Cawenfeld v Elder (1546) King’s Bench 27/1137, m 113d; Pynnok v Clopton (1547) King’s Bench 27/1141, m 79; Holmes v Harryson (1549) King’s Bench 27/1149, m 32; Norman v Moore (1549) King’s Bench 27/1149, m 117. Pyrry v Appowell (1545) King’s Bench 27/1134, m 67d.

19. 20. 21.

Newman v Gybbe (1549) King’s Bench 27/1152, m 135. Eg, Phyllyp v Heeth (1540) King’s Bench 27/1116, m 23d (injuries done); Busshewell v Rye (1546) King’s Bench 17/1138, m 67d (money previously received); Tyll v Brockhouse (1548) King’s Bench 27/1147, m 103d (goods previously taken).

22.

In 1584 it was held that such general consideration could not raise a use, because it did not appear whether it was sufficient (which Coke interpreted as requiring quid pro quo) (Mildmay v Standysh [1584] 1 Rep 175, 76 ER 379). A W B Simpson, A History of the Common Law of Contract (Oxford, 1975), pp 461, 467.

23. 24. 25.

There is a valuable account in S J Stoljar, A History of Contract at Common Law, Canberra, 1975, pp 147–63. Perhaps the earliest is Fyneux v Clyfford (1517) King’s Bench 27/1026, m 76.

26. 27.

Lord Gerard’s Case (1581) Lincoln’s Inn MS Misc 361, fol 2IV. Stone v Withepoole (1588) Owen 94, 74 ER 924.

28.

St Germain, Doctor and Student, ed T F T Plucknett and J L Barton, Selden Society, vol 91 (London, 1975), pp 228–9.

[page 31]

3 CONTRACT THEORY

INTRODUCTION 3.1 This chapter examines theoretical approaches to, and critiques of, contract law. Contract theory seeks to explain the nature of contractual obligations and to examine the justifications for particular doctrines or even for a discrete body of law about contracts. Critical positions on contract law are generally motivated by ideological perspectives on social, economic, or political issues. The Canadian legal theorist, Stephen A Smith, in ‘Two Questions for Contract Theory’ (see 3.2E) poses two fundamental questions concerning the law on contracts. The first is the ‘analytic’ question, the answers to which indicate what kinds of events give rise to contractual obligations and what could be considered to be the proper content of such obligations. The second is the ‘normative’ question, the answers to which reveal why contracts should be recognised and enforced and why there needs to be a separate body of law about contracts at all. One of the most prominent schools of thought concerned with the ‘analytic’ question is grounded in the ‘promissory’ nature of contractual obligations. Charles Fried, in ‘The Moral Obligation of Promise’ (see 3.3E) argues that promises are a sound basis for contracts since they are based on individual free will, autonomy, and trust. According to the ‘promissory’ theories, promises are binding because the parties are morally bound to perform and to expect performance from the other party. In contrast, ‘reliance’ theorists contend that the basis of contract law is the concept of

reliance. They argue that a promise is binding because it induces a reasonable reliance by the party to whom the promise is made, and that a party that reasonably relies on a promise should be compensated if they suffer a loss. On the other hand, according to the ‘transfer’ theorists, a contract can essentially be seen as a transfer of rights. Prominent transfer theorist Randy E Barnett argues, in ‘A Consent Theory of Contract’ (see 3.4E) that contractual liability arises when a promisor consents to the transfer of his or her existing rights to another person, thereby providing the basis for the enforcement of the promise by courts. The ‘normative’ question, concerned with why contracts are recognised by the law, has attracted a number of theoretical perspectives over time. They include traditional utilitarian theories and more contemporary rights-based approaches. In this vein also are the theories that emerged from the Critical Legal Studies movement of the early 20th century and the feminist school. An example of the feminist worldview is provided by Linda Mulcahy in ‘Feminist Perspectives on Contract Law’ (see 3.5E). [page 32]

THE NORMATIVE AND ANALYTIC QUESTIONS FOR CONTRACT LAW 3.2E

Smith, ‘Two Questions for Contract Theory’

Source: S A Smith, Contract Theory, Oxford University Press, Oxford, 2004, pp 42–9. Extract: The extract from Smith’s book discusses the analytic and normative questions that any contract theory should address. The analytic question deals with the essential characteristics of contractual obligations. The normative question deals with why legal force should be given to contractual obligations. As Smith observes, theorists give various answers to both questions and a particular contract theory will ideally contain a combination of answers to each of the questions.

Two questions for contract theory It would be convenient if contract theories could be classified on the basis of a single criterion. Something like: does the theory regard contracts as self-imposed obligations or as obligations that are imposed by law? It would then be possible to neatly line up all theories according to how they answered this question. Unfortunately, contract theories are more complex than that. … [C]ontract theories, at least insofar as they are complete theories, address two quite different sorts of questions, and so must be categorized according to two criteria. Failing to distinguish between these questions is probably the most common source of confusion in contemporary discussions of contract theory. The first question that a complete theory of contract must answer is an analytic question about the nature of contractual obligations. The second question is a normative question about the justification, if any, for contractual obligations. …

The analytic question The analytic question is a ‘what’ question. It asks: what are the essential characteristics of a contractual obligation? Specifically, how is a contractual obligation like or unlike the obligations given legal force by tort law, unjust enrichment law, the law of trusts, and so on? Another way of describing the analytic question is that its answer tells us what sorts of events give rise to a contractual obligation and what the content of the obligation thus created is. Most contract theories can be placed into one of three broad categories (or a mixture of these categories) according to how they answer the analytic question. According to the first category, promissory theories, contractual obligations are promissory obligations or another closely related kind of voluntary obligation, such as an agreement-based obligation. This understanding views contractual obligations as essentially self-imposed: the obligation is created by communicating an intention to undertake that same obligation. The obligation thus created is regarded as a duty to do what was undertaken — in other words, as an obligation to perform a

promise. Promissory theories provide the traditional, and probably still the orthodox, answer to the analytic question about contract law. [page 33] Reliance theories make up the second category of responses to the analytic question. As the name suggests, these theories regard contractual obligations as amounting to reliance-based obligations. More specifically, a contractual obligation is regarded as an obligation to ensure that those who rely upon us are not made worse off as a result. In contrast to the will-based understanding supplied by promissory theories, reliance theories therefore regard contractual obligations as imposed-by-law. In this understanding, a contractual obligation may arise when one person induces another to rely, even if the former did not intend to undertake an obligation. It follows that reliance theories regard contract law as closely related to, if not actually a part of, tort law. In each, obligations are imposed on persons because of what they do (eg, driving a car, making a reliance-inducing statement) and not because of what they have intended. The third, and at present least well-known, answer to the analytic question about contract law is provided by transfer theories. These theories suppose that the beneficiary of a contract has a right to the performance of a future act, which right has arisen and is owing because the other party handed over or gave that right (transferred it) to the beneficiary (similar to what happens when a contractual right is ‘assigned’ to another party). As such, transfer theories (unlike promissory ones) do not understand the right in question to have been created by the contract. Rather, the right arises because it has been transferred to the beneficiary in the same way that a tangible piece of property — let’s say a watch — might be transferred. Unlike a watch, though, the transferred right is intangible. Moreover, the duty that is created after the transfer is not a negative one such as, ‘don’t interfere with the watch’. Instead, it is a positive one that commands performance of an action. Loosely stated, the imperative might be: ‘you transferred that right to performance to me, and it’s mine now — so give it to me’. As such, the transferor has an obligation not to interfere with the right of the transferee to receive her performance. Therefore, just as occurs

with reliance theories, the ‘contractual’ obligation collapses here into the tort obligation that requires one to respect another’s rights. The promissory, reliance, and transfer theories of contract are essentially different views about how to categorize contract law. Determining what sorts of events give rise to contractual obligations and what is the content of a contractual obligation determines where contract law fits within private law. Each group of theories thus gives a different answer to the question of what makes contract law contract law. If contractual obligations are promissory, then contract law is an autonomous category of legal liability. On the other hand, if contractual obligations are reliance-based, then it is more likely that they are closely related to (if not actually a part of) tort law or another non-promissory basis of liability. In this view, contract law as a distinct category disappears. … Finally, if it is transfers that give rise to contractual obligations, it is the legal categories of property and tort that should apply. Property rules would logically inform the transfer of the right (as occurs with the regulating of gifts, testamentary dispositions, etc), and would oversee the formation of the contract. As for the rules of contract liability, we would look to the law of tort. Describing the analytic question as giving rise to what are essentially classificatory issues might be thought to diminish its importance. Nothing could be further from the truth. Just as our knowledge of the natural world is explained primarily through classificatory schemes [page 34] (eg, mammals/canines/bull dogs), so too our knowledge of the law is explained through classificatory schemes. It is, of course, appropriate to argue about what labels are adopted, about what goes where, and even about the entire basis of a classificatory schema (eg, ‘legal’ schemes as opposed to, say; schemes based on economic or sociological criteria). But to argue against legal classification per se is like arguing against legal knowledge. It should also be kept in mind that classification is practically significant in law. Most obviously; if courts fail to relate like to like, and to distinguish unlike from unlike, they may fail to achieve the most elementary requirement of justice: treating like cases alike. Moreover, even scholars

who purport to be solely interested in normative issues cannot avoid taking a position on analytic questions. To state, for example, that contract law is, or should be, informed by a certain normative principle assumes that we know what qualifies as contract law — which is an analytic question. Finally, classification is critical in ensuring the efficient dispensation of justice: if a judge knows that a particular case is a contract case rather than a tort case, the judge will also know, without further thought, that a large number of consequences follow more or less automatically. Without categories, judges must decide every case from first principles. The same applies to the lawyer or citizen trying to learn the law. In short, categories matter very much for both the understanding and the practice of law.

The normative question In addition to answering the analytic ‘what’ question, a complete theory of contract must also answer a justificatory or normative ‘why’ question. The normative question, simply stated, is this: why give legal force to contractual obligations? Stated in broader terms, the question is: why have a law of contract? What is the justification, if there is one, for maintaining this institution? Answering the analytic question does not answer this normative question, at least not in any straightforward way. A conclusion that contractual obligations are, for instance, promissory obligations does not tell us why promises should be legally enforced, or if they should be enforced at all. Perhaps promises should be regarded as creating at most only moral obligations, akin to obligations to give to charity. … [M]any contract theorists reach exactly this conclusion. Most contract theories can be placed into one of two broad categories according to the answers they give to the normative question: utilitarian theories or rights-based theories. Utilitarian theories justify contract law on the ground that it promotes utility, broadly defined. Theories that justify contract law in terms of its beneficial effects on welfare, wealth, autonomy, close relationships, or any other (alleged) aspect of human well-being are utilitarian theories in the broad sense in which the term is used here. The essence of a utilitarian theory of contract law, so understood, lies not in a particular understanding of utility — of the ‘good’ — but in the theory’s view that contract law is essentially a vehicle for promoting the good, however defined.

The best known and most developed utilitarian theories of law are ‘efficiency’ theories. Efficiency theories regard contract law as an instrument for promoting the overall welfare, subjectively understood, of society’s members. In this view, the justification for contract law is that it makes people better off in terms of how they themselves understand the notion of [page 35] ‘better off’. Efficiency theories of contract are therefore closely linked to the traditional version of utilitarianism, which evaluates actions according to how much happiness, or preference-satisfaction, they produce. Other utilitarian theories … regard contract law as promoting closer social relationships, a particular distribution of wealth, or conditions favourable to the achievement of individual autonomy. The second category of answers to the normative question is found in rights-based theories. These theories justify contract law on the basis of individual rights. In this view, contractual obligations are grounded in respect for individual rights, and contract law gives legal force to such rights by enforcing them directly or by attaching legal consequences to their infringement. Insofar as the latter approach is taken, contract law is seen as giving force to contractual rights through a scheme of corrective justice — understood here in the broad sense of a duty to repair harms that one has caused. An order of damages, in particular, is justified on the ground that this defendant, having infringed this plaintiff’s right to the performance of a contract, has a duty in justice to compensate the plaintiff. The conclusion that a damages order would increase social welfare (perhaps by establishing incentives for future contracting parties to act in welfare maximizing ways) is therefore irrelevant in this approach. In principle, rights-based theories of contract can be further distinguished according to how they understand the rights that contract law upholds. In practice, though, nearly all rights theories regard contractual rights as classically individualist or ‘negative-liberty’ rights. In other words, contract rights are rights to non-interference with person, property or liberty. As for the content of contractual rights — whether it is a right to

performance, or compensation, or whatever — the answer provided by rights-based theories depends on which answer is given to the analytic question discussed earlier. But the most common and … the most plausible rights-based view regards contractual rights as rights to the performance of a promise. Rights-based theories of contract law remain the traditional and, at least among legal actors, the orthodox way of answering the normative question about contract law.

The link between analytic and normative questions The main reason for distinguishing analytic from normative questions is that the answer to one does not determine, at least in a straightforward way, the answer to the other. Thus, two theorists might agree that contracts are promises, but then disagree as to whether the justification for enforcing promises is utilitarian or rights-based. Similarly, two theorists might agree that contractual obligations are justified on rights-based grounds, but then disagree as to whether those obligations arise from promises, reliance, or transfers. In short, any combination of answers to the respective questions is possible in principle. … A further advantage of separating analytic from normative questions … [is that the] theoretical issue raised by a particular doctrine is often exclusively, or at least primarily, either analytic or normative. The primary issue raised by the rules on specific performance, for example, is the significance of these rules for why contracts are enforced — a normative question. [page 36] With respect to the rules on estoppel, on the other hand, the primary issue is the significance of these rules for understanding the events that give rise to contractual obligations — an analytic question. Separating analytic and normative questions at this stage makes issues of this kind easier to understand. All this said, it must be kept in mind throughout that there are obvious and important connections between analytic and normative questions. To

provide a justification for contractual obligations, it is necessary to know what sort of a thing a contractual obligation is. A justification justifies something: the substance of the ‘something’ is the focus of the analytic question. Just as the analytic question informs the normative one, the reverse is also true — at least if one accepts the argument … that a good theory of contract must account for the law’s claims to be morally justified. Assuming this argument is persuasive, the list of possible answers to the analytic question must be limited to the kinds of obligations that might plausibly be considered moral obligations — ones that a law-maker might sincerely think the state is justified in enforcing. The link between analytic and normative questions is arguably even stronger than this. Although the best known answers to the analytic question are prima facie open to both utilitarian and rights-based justifications, in practice scholars who defend particular answers to the analytic question also hold that, in the end, there is only one good justification (the justification they defend) for the obligation they have identified. For example, Charles Fried, whose answer to the analytic question is that contracts are promises, argues that although both utilitarian and rights-based justifications for promissory obligations exist, ultimately only a rights-based justification works1. In principle, such an approach must be correct: the best theory of contract will answer both the analytic and normative questions and it will tie its answers together in such a way that they cannot be separated. For these reasons, it is impossible to maintain a rigid distinction between analytic and normative questions. … But the distinction is a useful one for explanatory purposes. …

Comment 3.2.1 See Radan, Gooley, and Vickovich at 3.2–3.4.

PROMISE AS THE THEORETICAL BASIS OF CONTRACT LAW

3.3E

Fried, ‘The Moral Obligation of Promise’

Source: C Fried, Contract as Promise, A Theory of Contractual Obligation, Harvard University Press, Cambridge MA, 1981, pp 14–17. Extract: The extract from Fried’s book is an example of an answer to Smith’s analytic question regarding contract as based upon freely agreed promises.

[page 37] The moral obligation of promise1 Once I have invoked the institution of promising, why exactly is it wrong for me then to break my promise? My argument so far does not answer that question. The institution of promising is a way for me to bind myself to another so that the other may expect a future performance, and binding myself in this way is something that I may want to be able to do. But this by itself does not show that I am morally obligated to perform my promise at a later time if to do so proves inconvenient or costly. That there should be a system of currency also increases my options and is useful to me, but this does not show why I should not use counterfeit money if I can get away with it. In just the same way the usefulness of promising in general does not show why I should not take advantage of it in a particular case and yet fail to keep my promise. That the convention would cease to function in the long run, would cease to provide benefits if everyone felt free to violate it, is hardly an answer to the question of why I should keep a particular promise on a particular occasion. David Lewis has shown2 that a convention that it would be in each person’s interest to observe if everyone else observed it will be established and maintained without any special mechanisms of commitment or enforcement. Starting with simple conventions (for example that if a telephone conversation is disconnected, the person who initiated the call is

the one who calls back) Lewis extends his argument to the case of language. Now promising is different, since (unlike language, where it is overwhelmingly in the interest of all that everyone comply with linguistic conventions, even when language is used to deceive) it will often be in the interest of the promisor not to conform to the convention when it comes time to render his performance. Therefore individual self-interest is not enough to sustain the convention, and some additional ground is needed to keep it from unraveling. There are two principal candidates: external sanctions and moral obligation. David Hume sought to combine these two by proposing that the external sanction of public opprobrium, of loss of reputation for honesty, which society attaches to promise-breaking, is internalized, becomes instinctual, and accounts for the sense of the moral obligation of promise.3 Though Hume offers a possible anthropological or psychological account of how people feel about promises, his is not a satisfactory moral argument. Assume that I can get away with breaking my promise (the promisee is dead), and I am now asking why I should keep it anyway in the face of some personal inconvenience. Hume’s account of obligation is more like an argument against my keeping the promise, for it tells me how any feelings of obligation that I may harbor have come to lodge in my psyche and thus is the first step toward ridding me of such inconvenient prejudices. [page 38] Considerations of self-interest cannot supply the moral basis of my obligation to keep a promise. By an analogous argument neither can considerations of utility. For however sincerely and impartially I may apply the utilitarian injunction to consider at each step how I might increase the sum of happiness or utility in the world, it will allow me to break my promise whenever the balance of advantage (including, of course, my own advantage) tips in that direction. The possible damage to the institution of promising is only one factor in the calculation. Other factors are the alternative good I might do by breaking my promise, whether and by how many people the breach might be discovered, what the actual effect on confidence of such a breach would be. There is no a priori reason for

believing that an individual’s calculations will come out in favor of keeping the promise always, sometimes, or most of the time. Rule-utilitarianism seeks to offer a way out of this conundrum. The individual’s moral obligation is determined not by what the best action at a particular moment would be, but by the rule it would be best for him to follow. It has, I believe, been demonstrated that this position is incoherent: Either rule-utilitarianism requires that rules be followed in a particular case even where the result would not be best all things considered, and so the utilitarian aspect of rule-utilitarianism is abandoned; or the obligation to follow the rule is so qualified as to collapse into act-utilitarianism after all. There is, however, a version of rule-utilitarianism that makes a great deal of sense. In this version the utilitarian does not instruct us what our individual moral obligations are but rather instructs legislators what the best rules are. If legislation is our focus, then the contradictions of rule-utilitarianism do not arise, since we are instructing those whose decisions can only take the form of issuing rules. From that perspective there is obvious utility to rules establishing and enforcing promissory obligations. Since I am concerned now with the question of individual obligation, that is, moral obligation, this legislative perspective on the argument is not available to me. The obligation to keep a promise is grounded not in arguments of utility but in respect for individual autonomy and in trust. Autonomy and trust are grounds for the institution of promising as well, but the argument for individual obligation is not the same. Individual obligation is only a step away, but that step must be taken. An individual is morally bound to keep his promises because he has intentionally invoked a convention whose function it is to give grounds — moral grounds — for another to expect the promised performance. To renege is to abuse a confidence he was free to invite or not, and which he intentionally did invite. To abuse that confidence now is like (but only like) lying: the abuse of a shared social institution that is intended to invoke the bonds of trust. A liar and a promise-breaker each use another person. In both speech and promising there is an invitation to the other to trust, to make himself vulnerable; the liar and the promise-breaker then abuse that trust. The obligation to keep a promise is thus similar to but more constraining than the obligation to tell the truth. To avoid lying you need only believe in the truth of what you say when you say it, but a promise binds into the future, well past the

moment when the promise is made. There will, of course, be great social utility to a general regime of trust and confidence in promises and truthfulness. But this just shows that a regime of mutual respect allows men and women to accomplish what in a jungle of unrestrained self-interest could not be accomplished. If this [page 39] advantage is to be firmly established, there must exist a ground for mutual confidence deeper than and independent of the social utility it permits. The utilitarian counting the advantages affirms the general importance of enforcing contracts. The moralist of duty, however, sees promising as a device that free, moral individuals have fashioned on the premise of mutual trust, and which gathers its moral force from that premise. The moralist of duty thus posits a general obligation to keep promises, of which the obligation of contract will be only a special case — that special case in which certain promises have attained legal as well as moral force. But since a contract is first of all a promise, the contract must be kept because a promise must be kept. To summarize: There exists a convention that defines the practice of promising and its entailments. This convention provides a way that a person may create expectations in others. By virtue of the basic Kantian principles of trust and respect, it is wrong to invoke that convention in order to make a promise, and then to break it.

Comment 3.3.1 See Radan, Gooley, and Vickovich at 3.6–3.11.

TRANSFER OF PROPERTY BY CONSENT AS THE THEORETICAL BASIS OF CONTRACT LAW

3.4E

Barnett, ‘A Consent Theory of Contract’

Source: R E Barnett, ‘A Consent Theory of Contract’ (1986) 86 Columbia Law Review 269 at 270–1, 297–300, 303–5, and 319–20. Extract: The extracts from Barnett’s article provide an example of an answer to Smith’s analytic question that regards contract as the transfer of rights based upon the consent of the transferor.

A consent theory of contract A consent theory posits that contractual obligation cannot be completely understood unless it is viewed as part of a broader system of legal entitlements. Such a system, based in morality, specifies the substance of the rights individuals may acquire and transfer, and the means by which they may do so. Properly understood, contract law is that part of a system of entitlements that identifies those circumstances in which entitlements are validly transferred from person to person by their consent. Consent is the moral component that distinguishes valid from invalid transfers of alienable rights. A consent theory of contract explains why we generally take an ‘objective’ approach to contractual intent and why we deviate from this approach in some situations. In addition, a [page 40] consent theory validates the enforcement of certain commitments where no bargained-for exchange exists — such as those supported by ‘nominal considera--tion’ — and thereby rescues these useful legal arrangements from their present uncertain status in contract law. By providing a clear, common-sense test of enforceability that avoids the need for courts to distinguish ‘reasonable’ from ‘unreasonable’ reliance in determining whether a contract was formed, a consent theory enables parties to calculate better who bears the risk of reliance and, hence, facilitates reliance on interpersonal commitments. Finally, a consent

theory’s account of contractual obligation explains and justifies the historically recognized defenses to contractual obligation. … [C]ontract law concerns enforceable obligations arising from the valid transfer of entitlements that are already vested in someone, and this difference is what makes consent a moral prerequisite to contractual obligation. The rules governing alienation of property rights by transfer perform the same function as rules governing their acquisition and those specifying their proper content: facilitating freedom of human action and interaction. Freedom of action and interaction would be seriously impeded, and possibly destroyed, if legitimate rights holders who have not acted in a tortious manner could be deprived of their rights by force of law without their consent. Moreover, the moral requirement of consent mandates that others take the interests of the rights holder into account when seeking to obtain the rights she possesses. … Consequently, the consent of the rights holder to be legally obligated is the moral component that distinguishes valid from invalid transfers of alienable rights in a system of entitlements. It is not altogether novel to suggest that consent is at the heart of contract law. … In a modern society the chain between initial acquisition of resources and their ultimate consumption can be quite long and complicated. While controversies may exist, even among those who acknowledge the legitimacy of property rights in principle, about the proper mode of resource acquisition and the proper manner of resource use, a valid transfer of rights must be conditioned on some act of the rights holder. The … way rights are transferred is by consent. … [L]egal enforcement is morally justified because the promisor voluntarily performed acts that conveyed her intention to create a legally enforceable obligation by transferring alienable rights. … [C]ontractual obligation, as distinct from other types of legal obligation, is based on that consent. … Requiring the consent of the rights holder as a condition of a valid transfer of rights is absolutely vital. … [W]hether one has consented to a transfer of rights … generally depends not on one’s subjective opinion about the meaning of one’s freely chosen words or conduct, but on the ordinary meaning that is attached to them. … [O]bjectively manifested conduct, which usually reflects subjective

intent, provides a far sounder basis for contractual obligation than do subjectively held intentions. Evidence of subjective intent that is extrinsic to the transaction and was unavailable to the other party is relevant, if at all, only insofar as it helps a court to ascertain the ‘objective’ meaning of certain terms. [page 41] What exact meaning must a court conclude was conveyed by a promisor to a promisee to find that a contractual commitment was incurred? If consent is properly thought of as ‘objective’ or ‘manifested’ assent, what is it that must be assented to for a contractual obligation to arise? It is not enough that one manifests a commitment or promises to perform or refrain from doing some act. Such a manifestation would be nothing more than a promise. Contract theory searches for the ‘extra’ factor that, if present, justifies the legal enforcement of a commitment or promise. … Consent to a transfer of rights is this factor. The consent that is required is a manifestation of an intention to alienate rights. In a system of entitlements where manifested rights transfers are what justify the legal enforcement of agreements, any such manifestation necessarily implies that one intends to be ‘legally bound,’ to adhere to one’s commitment. Therefore, the phrase ‘a manifestation of an intention to be legally bound’ neatly captures what a court should seek to find before holding that a contractual obligation has been created. Charles Fried maintains that a promisor incurs a moral obligation because she intentionally invokes a social convention whose purpose is to cause others to expect the promised performance. By contrast, a consent theory specifies that a promisor incurs a contractual obligation the legal enforcement of which is morally justifiable by manifesting assent to legal enforcement and thereby invoking the institution of contract. In the circumstances described by Fried, a promisor may have a moral obligation to do what she promised. Without more she would not have a legal obligation and a promisee would not have a legal right to performance. She incurs a contractual obligation to perform only when she manifests to a

promisee her intention to be legally bound. The basis of contractual obligation is not promising per se. The basis of contract is consent. … This approach accurately captures what is at stake when individuals seek to exchange or bestow entitlements that they have acquired or will acquire. … A consent theory facilitates efficient resource distribution by legally protecting consensual exchanges. Such consensual exchanges produce vital and otherwise unavailable information about value and thereby enable resources to gravitate to their highest value user. However, a consent theory refuses to approve nonconsensual transfers regardless of the alleged ‘efficiency’ of such transfers. A consent theory also avoids the extreme indeterminacy of a substantive fairness approach, while protecting that concept of fairness that is not a phantom — procedural fairness — by its reliance on generally formulated principles of contract formation and avoidance. … A consent theory of contract is an entitlements theory and therefore it bases legal obligation upon the rights of the parties. In contrast to one-sided party-based theories, a consent theory stresses the interrelational function of contract law. The criterion of enforceability — a manifested intention to be legally bound — respects the interests of both parties. A corollary of the manifestation requirement is that the meaning of a promisor’s conduct is interpreted from the perspective of (reasonable) promisees. Requiring that it is an intention to be legally bound that must be manifested protects the autonomy of promisors. [page 42] Further, a consent theory acknowledges that substantive concerns arising at the level of entitlements — for example, a distinction between alienable and inalienable rights — can affect the enforceability of certain commitments. Yet a consent approach eschews the sorts of substantive inquiries into and interference with ordinary contractual arrangements that substance-based theories demand. Finally, a consent theory supports the traditional recognition that certain processes — such as bargaining or using a seal —

give rise to a heavy presumption of enforceability. Unlike a process-based theory, a consent theory clearly specifies its dependence on underlying notions of entitlements that enable a legal system to choose which processes to recognize and to know when procedural requirements should be overridden.

Comment 3.4.1 See Radan, Gooley, and Vickovich at 3.21–3.24.

A FEMINIST CRITIQUE OF CONTRACT LAW 3.5E

Mulcahy, ‘Feminist Perspectives on Contract Law’

Source: L Mulcahy, ‘The Limitations of Love and Altruism — Feminist Perspectives on Contract Law’, in L Mulcahy and S Wheeler (eds), Feminist Perspectives on Contract Law, Glasshouse Press, London, 2005, pp 1–5. Extract: The extracts from Mulcahy’s chapter outline a critique, rather than a theoretical explanation, of contract law from a feminist perspective.

Feminist perspectives on contract law The law of contract is an area which is ripe for feminist analysis. Of the ‘core’ common law subjects, it is the one most obviously imbued with values associated with the marginalisation of women and the feminine. The emphasis placed on self-regarding, autonomous and competitive contractors by classical and neo-classical scholars has led to calls that the law of contract is phallocentric and centrally located in a suppression of the feminist voice and feminist values. Indeed, the identification of a correlation between the characteristics of masculinity and the ethos and philosophy of classical legal doctrine has been central to feminist

engagements with the law. Nothing better embodies masculine abstracted relations with each other than the model of the discrete contractual transaction with which the majority of scholarship in the field remains concerned. … [A] feminist analysis of contract law allows us to identify what dominant discourse has left unsaid about the nature of contractual relationships, and to question the credibility of dominant paradigms. … [page 43] Feminists have engaged with contract scholarship at several levels. At a general level, feminist work on law has encouraged sensitivity towards the many ways in which legal language and concepts are gendered. It has been argued, for instance, that masculine ways of thinking about relationships determine judicial approaches to problem solving. In particular, it has been claimed that masculine subjects prefer to work with predetermined and logical rules which, although inflexible, produce certainty. This tendency is reflected in classical and formalistic approaches to contracts, which concentrate on certainty, specific events and particular moments in time. Moreover, the emphasis placed by the judiciary on abstract principles and linear reasoning reflects the tendency of the common law to seek universal and guiding principles to frame all decisions. Such generalisations assume universal truths and a neutral or objective way of seeing things, which tend to suppress alternative visions of relationships and the needs of contracting parties. The emphasis of the law of contract on the objectified subject, or reasonable man, is particularly worthy of note in this context. Feminist critiques of law have argued that such rational and objective ordering of apparently gender-neutral persons serves subconsciously to address the essential male only. For many feminists, the root problem with law lies in its pretended impartiality, objectivity and rationality. This has meant that if women are to be reasonable within the legal meaning of the term then they must adopt the male standard of reasonableness. At a more specific level, a considerable amount of work has focused on contract as an alternative to marriage and the use of contract in intimate relationships more generally. It has been argued, for instance, that contract has the potential to foster a non-exploitative conception of ‘private’

relationships, although feminists have also argued that using contracts in this sphere could merely entrench existing bargaining inequalities. Recently, there has been some limited discussion of the value of relational contract theory to debate amongst feminists and increasing sympathy towards the view that contractual relationships need to be reconceptualised. This does not so much reflect a movement away from recognition of the oppressive effects of contracts so much as a rediscovery of their potential to privilege notions of connection rather than competition. …

An ethic of care in contracts? The gendered way in which contracts are understood has traditionally expressed itself in two main ways in the law of obligations. First, contractual relationships have been understood as being motivated and fuelled by separation, possessive individualism, certainty, security of transaction and standardisation. The classical and neo-classical models of contract, which continue to dominate the formulation of modern law, are associated with these masculine ideals of the discrete arms-length transaction between strangers. Indeed, it is arguable that there is no branch of the law in which the hostile egoism of possessive individualism is more clearly reflected than in the classical model, which takes people away from their pre-existing web of communities and networks. According to this vision, doctrinal analysis of contractual exchange is viewed as a mere expression of economic relationships: a callous cash nexus divorced from intimacy, in which exchanges are the only way in which individuals come to recognise the needs of others. [page 44] Numerous examples of this understanding of relationships can be drawn from the field of contract. One of the most obvious is the decision in Walford v Miles,4 in which Lord Ackner famously argued that 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 pre-contractual negotiations. In the alternative, he encouraged each party to pursue their own interests so long as they avoided making misrepresentations. The point

is also well illustrated by the way in which doctrines such as intention to create legal relations,5 and debate around the enforceability of cohabitation contracts exclude certain agreements from the contractual sphere because of their supposed reliance on alternative values. … [C]onsideration of the status of prenuptial agreements has been largely relegated to the sphere of family law, despite the fact that the majority of such contracts involve those concerned to protect proprietorial interests in acquired capital, as well as non-commercial expectations. The issues raised in debate about such agreements suggest that contract lawyers continue to struggle to know how to regulate complex relationships based on a mixture of trust, intimacy and selfishness. Drawing on some of these themes, Auchmuty argues, somewhat ironically, that the law’s fear of managing intimacy and abuse of bargaining power in undue influence cases stems from the fact that a defining feature of heterosexuality is a gendered power dynamic which is in turn reinforced by the legal system.6 One of the most important debates to emerge from modern feminism focuses on alternative understandings of what motivates people to form relationships and fulfil their promises to each other. Central to this debate is the idea that feminine subjects have a fundamentally different way of conceiving of, and understanding, relationships than the masculine architects of the classical and neo-classical canon. The argument that a discrete set of ideologies and values exist, which can be labelled feminine, has been the subject of much discussion and has resonance with contemporary discussions about the state of the law of contract. The distinction that … [has been] made between an ethic of justice and an ethic of care accentuates the differences between moral philosophy concerned with the rights of the autonomous, separate, objective self with an orientation towards procedural justice and the responsibilities of the connected, interdependent self with an orientation towards substantive outcomes. Men and women have been shown to adopt both orientations in response to particular needs but it is the former — an ethic of justice — that has been associated with masculinity and the latter ‘ethics of care’ that has been shown to most dominate the moral reasoning of women. … [page 45]

The ethic of care represents a distinctive approach to the understanding of relationships and has its own moral vocabulary, moral epistemology and explanatory force. It offers a direct contrast to the classical model in that it stresses the importance of intimacy, community and relational actors embedded in particular contexts. Feminist scholars have argued that the worlds of feminine subjects are worlds in which connection and network rather than bargain give rise to a recognition of responsibility for one another. Applying this reasoning to contracts, the late Mary Jo Frug characterised as feminine a position that was grounded in a pluralistic, context-sensitive model of contract relationships, which offered a multiplicity of objectives and perspectives.7 Her work gives us a taste of how feminine theories of contract might impact on contractual doctrines, such as frustration, and provide support for the development of a more sophisticated understanding of such concepts as good faith or unconscionability.

[page 46]

Comment 3.5.1 See Radan, Gooley, and Vickovich at 3.45–3.48.

1.

C Fried, Contract as Promise, A Theory of Contractual Obligation, Harvard University Press, Cambridge MA, 1981.

2. 3.

D Lewis, Convention: A Philosophical Study, Harvard University Press, Cambridge MA, 1969. D Hume, A Treatise of Human Nature, Selby-Bigge, Oxford, 1888, pp 516–25.

4. 5.

[1992] 2 AC 128. The overt aim of the doctrine was to ensure that only those who intended to enter into a commercial agreement would be bound by it; but indirectly the doctrine served the purposes of rendering unenforceable agreements made in the ‘domestic’ sphere between married couples or close relatives. As it is women, rather than men, who have tended to dominate the domestic sphere, such prohibitions have served to leave unheard women’s stories of unfulfilled obligations.

6.

R Auchmuty, ‘The Rhetoric of Equality and the Problem of Heterosexuality’ in L Mulcahy and S Wheeler (eds), Feminist Perspectives on Contract Law, Glasshouse Press, London, 2005, pp 51–74. Mary Jo Frug, Postmodern Legal Feminism, Routledge, London, 1992.

7.

[page 47]

Part II: Formation of a Contract

[page 49]

4 THE FACT OF AGREEMENT

INTRODUCTION 4.1 This chapter is concerned with one of the principal formative elements of contract, namely, agreement. Generally, where disputes as to the existence of an agreement arise, the law applies ‘offer and acceptance analysis’, by which courts are able to analyse the words and conduct of parties in order to determine whether a contract has been formed. What is required is the location of an offer by one party (the offeror) and, if it exists, the presence of an acceptance of that offer by the other party (the offeree). This, in principle, provides evidence that the parties have reached agreement. An offer is a statement upon which the maker is objectively seen as prepared and willing to be bound. In deciding whether an offer exists, courts distinguish between offers and invitations to treat, which are simply invitations for an offer. Although advertisements and other promotional materials are generally seen as invitations to treat, their wording may amount to an offer. The decision in Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 (see 4.2C) shows that a unilateral promise to the world at large to pay an amount of money on the performance of an act specified in the offer will amount to a valid offer capable of acceptance. Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953] 1 QB 401 (see 4.3C) illustrates that goods on display in a store are generally understood to be invitations to treat, and that interested customers make the offers required to buy them. Generally, auctions and calls for tender are examples of invitations to treat. However, they may amount to offers if the words used indicate a

willingness to be bound. This is discussed respectively in Barry v Davies [2001] 1 All ER 944 (see 4.4C) and Blackpool & Fylde Aero Club v Blackpool Borough Council [1990] 3 All ER 25 (see 4.5C). An acceptance is a statement indicating that the maker is willing to enter into the agreement on the offeror’s terms. Apart from being accepted, offers may lapse or be extinguished by a rejection or counter-offer. The decision in Stevenson, Jaques & Co v McLean (1880) 5 QBD 346 (see 4.6C) deals with the issue of whether a particular response to an offer is a counter-offer or merely a request for further information, thereby leaving the offer open for acceptance by the offeree. An offer may also be revoked, so long as it has not been accepted. However, to be valid the revocation must be communicated. The requirements of communication in this context are dealt with in Dickinson v Dodds (1876) 2 Ch D 463 (see 4.7C). Whether an offer may be revoked once the offeree has commenced performance of its terms will depend on whether the performance has provided a benefit to the offeree: Mobil Oil Australia Ltd v Lyndel Nominees Pty Ltd (1998) 153 ALR 198 (see 4.8C). [page 50] For an acceptance to be valid, certain requirements need to be met. One is that a valid acceptance must be in reliance on, and in response to, the offer: R v Clarke (1927) 40 CLR 227 (see 4.9C). Another is that acceptance must be communicated to the offeror, and that acceptance generally takes place when communication is received. However, where it is reasonable in the circumstances that acceptance may be effected by post, the decision in Household Fire and Carriage Accident Insurance Company (Ltd) v Grant (1879) LR 4 Ex D 216 (see 4.10C) makes plain that acceptance takes place when it is sent. This ‘postal acceptance’ rule places the commercial risk on the offeror, who may dictate the terms of acceptance in his or her offer. The different kinds of communication that fall within the ambit of the postal acceptance rule are discussed in Brinkibon Ltd v Stahag Stahl und Stahlwarenhandelsgesellschaft mbH [1983] 2 AC 34 (see 4.11C). However, it should also be noted that the operation of the postal acceptance rule may be excluded by the parties, as illustrated in Bressan v Squires [1974] 2 NSWLR 460 (see 4.12C).

Finally, Butler Machine Tool Co v Ex-Cell-O Corp (England) Ltd [1979] 1 All ER 965 (see 4.13C) shows that a strict application of offer and acceptance analysis to locate agreement between apparently contracting parties may not be appropriate, especially in cases involving a ‘battle of forms’.

OFFERS OR INVITATIONS TO TREAT — PROMOTIONAL MATERIALS 4.2C

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

Court: Court of Appeal in England Facts: The Carbolic Smoke Ball Co produced the Carbolic Smoke Ball, which was a medical preparation. It placed an advertisement in newspapers offering a reward of £100 to any person who, having used the medication as prescribed for two weeks, nevertheless contracted influenza. The advertisement further stated that the company had deposited £1000 in a special bank account as evidence of its sincerity in this matter. Mrs Carlill purchased the medication and used it as prescribed for eight weeks before contracting influenza. On the basis that the offer of a reward and her conduct in response to the offer constituted a contract, Carlill sued to recover the £100 reward. Carbolic argued that there was no contract between itself and Carlill. Issues: This case involved a number of issues in relation to whether the reward offer was an offer in law and whether it had been accepted by Carlill’s conduct. It also raised the question of whether Carlill had provided consideration (see Chapter 6) for the promise of the reward. Decision: The Court of Appeal (Lindley, Bowen, and A L Smith LJJ) unanimously ruled in favour of Carlill and ordered that Carbolic pay the reward. Extract: The extracts below from the judgment of Bowen LJ discuss

and apply to the facts of this case the relevant principles relating to offer and acceptance and consideration.

[page 51]

Bowen LJ Was it intended that the £100 should, if the conditions were fulfilled, be paid? The advertisement says that £1,000 is lodged at the bank for the purpose. Therefore, it cannot be said that the statement that £100 would be paid was intended to be a mere puff. I think it was intended to be understood by the public as an offer which was to be acted upon. But it was said there was no check on the part of the persons who issued the advertisement, and that it would be an insensate thing to promise £100 to a person who used the smoke ball unless you could check or superintend his manner of using it. The answer to that argument seems to me to be that if a person chooses to make extravagant promises of this kind he probably does so because it pays him to make them, and, if he has made them, the extravagance of the promises is no reason in law why he should not be bound by them. It was also said that the contract is made with all the world — that is, with everybody; and that you cannot contract with everybody. It is not a contract made with all the world. There is the fallacy of the argument. It is an offer made to all the world; and why should not an offer be made to all the world which is to ripen into a contract with anybody who comes forward and performs the condition? It is an offer to become liable to anyone who, before it is retracted, performs the condition, and, although the offer is made to the world, the contract is made with that limited portion of the public who come forward and perform the condition on the faith of the advertisement. It is not like cases in which you offer to negotiate, or you issue advertisements that you have got a stock of books to sell, or houses to let, in which case there is no offer to be bound by any contract. Such advertisements are offers to negotiate — offers to receive offers — offers to chaffer, as, I think, some learned judge in one of the cases has said. If this is

an offer to be bound, then it is a contract the moment the person fulfils the condition. … Then it was said that there was no notification of the acceptance of the contract. One cannot doubt that, as an ordinary rule of law, an acceptance of an offer made ought to be notified to the person who makes the offer, in order that the two minds may come together. Unless this is done the two minds may be apart, and there is not that consensus which is necessary according to the English law — I say nothing about the laws of other countries — to make a contract. 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 I suppose there can be no doubt that where a person in an offer made by him to another person, expressly or impliedly intimates a particular mode of acceptance as sufficient to make the bargain binding, it is only necessary for the other person to whom such offer is made to follow the indicated method of acceptance; 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. … Now, if that is the law, how are we to find out whether the person who makes the offer does intimate that notification of acceptance will not be necessary in order to constitute a [page 52] binding bargain? In many cases you look to the offer itself. In many cases you extract from the character of the transaction that notification is not required, and in the advertisement cases it seems to me to follow as an inference to be drawn from the transaction itself that a person is not to notify his acceptance of the offer before he performs the condition, but that if he performs the condition notification is dispensed with. It seems to me that from the point of view of common sense 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? Why, of course, they at once look after the dog, and as soon as they find the dog they have performed the condition. The essence of the transaction is that the dog should be found, and it is not necessary under such circumstances, as it seems to me, that in order to make the contract binding there should be any notification of acceptance. It follows from the nature of the thing that the performance of the condition is sufficient acceptance without the notification of it, and a person who makes an offer in an advertisement of that kind makes an offer which must be read by the light of that common sense reflection. He does, therefore, in his offer impliedly indicate that he does not require notification of the acceptance of the offer. A further argument for the defendants was that this was a nudum pactum — that there was no consideration for the promise — that taking the influenza was only a condition, and that the using the smoke ball was only a condition, and that there was no consideration at all; in fact, that there was no request, express or implied, to use the smoke ball. … The short answer, to abstain from academical discussion, is, it seems to me, that there is here a request to use involved in the offer. Then as to the alleged want of consideration. The definition of ‘consideration’ given in Selwyn’s Nisi Prius1 … is this: ‘Any act of the plaintiff from which the defendant derives a benefit or advantage, or any labour, detriment, or inconvenience sustained by the plaintiff, provided such act is performed or such inconvenience suffered by the plaintiff, with the consent, either express or implied, of the defendant’. Can it be said here that if the person who reads this advertisement applies thrice daily, for such time as may seem to him tolerable, the carbolic smoke ball to his nostrils for a whole fortnight, he is doing nothing at all — that it is a mere act which is not to count towards consideration to support a promise (for the law does not require us to measure the adequacy of the consideration). Inconvenience sustained by one party at the request of the other is enough to create a consideration. I think, therefore, that it is consideration enough that [Mrs Carlill] took the trouble of using the smoke ball. But I think also that [Carbolic] received a benefit from this user, for the use of the smoke ball was contemplated by

[Carbolic] as being indirectly a benefit to them, because the use of the smoke balls would promote their sale.

[page 53]

Comments 4.2.1 4.2.2

4.2.3

See Radan, Gooley, and Vickovich at 4.12, 4.22, 4.47, 4.66, and 4.99–4.100. On the consideration aspect of this case and how this case contrasts with the decision in Australian Woollen Mills Pty Ltd v The Commonwealth (1954) 92 CLR 424, see Radan, Gooley, and Vickovich at 6.21–6.23. Australian Woollen Mills is extracted at 6.2C. For a fascinating account of this case, including its background, see A W Brian Simpson, Leading Cases in the Common Law, Clarendon Press, United Kingdom, 1995, pp 257–91.

OFFERS OR INVITATIONS TO TREAT — SELF-SERVICE STORES 4.3C

Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953] 1 QB 401

Court: Court of Appeal in England Facts: Section 18 of the Pharmacy and Poisons Act 1933 (UK) stipulated that certain drugs could only be sold to members of the public if the sale was ‘effected by, or under the supervision of, a registered pharmacist’. Boots Cash Chemists operated a self-service pharmacy. When one of its customers selected to purchase drugs covered by the legislation, they proceeded to a checkout desk where

a registered pharmacist handled the transaction. The registered pharmacist was also authorised by the pharmacy to prevent any person from removing any drugs from the premises. The Pharmaceutical Society brought an action against Boots Cash Chemists, claiming that this method of selling the drugs breached s 18. Issue: In determining whether the legislation was breached, the critical issue before the Court of Appeal was whether the display of drugs was an offer or an invitation to treat. Decision: The Court of Appeal (Somervell, Birkett, and Romer LJJ) unanimously ruled that the legislation had not been breached because the display was not an offer. The court held that the offer was made by the customer, which, in the case of drugs covered by the legislation, was accepted by a registered pharmacist. Thus, there was no violation of s 18 because the sale of drugs was effected under the control or supervision of a registered pharmacist. Extract: The extracts from the judgments of Somervell LJ and Birkett LJ discuss the reasons why a display of goods is generally not viewed as an offer.

Somervell LJ The point taken by the [Society] is this: it is said that the purchase is complete if and when a customer going round the shelves takes an article and puts it in the receptacle which he or she is carrying, and that therefore, if that is right, when the customer comes to the pay [page 54] desk, having completed the tour of the premises, the registered pharmacist, if so minded, has no power to say: ‘This drug ought not to be sold to this customer.’ Whether and in what circumstances he would have that power we need not inquire, but one can, of course, see that there is a difference if

supervision can only be exercised at a time when the contract is completed. … Whether the view contended for by the [Society] is a right view depends on what are the legal implications of this layout — the invitation to the customer. Is a contract to be regarded as being completed when the article is put into the receptacle, or is this to be regarded as a more organized way of doing what is done already 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 got the ones which they wish to buy, to come up to the assistant saying ‘I want this’? The assistant in 999 times out of 1,000 says ‘That is all right,’ and the money passes and the transaction is completed. I agree … that in the case of an 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 having indicated the articles which he needs, the shopkeeper, or someone on his behalf, accepts that offer. Then the contract is completed. I can see no reason at all, that being clearly the normal position, for drawing any different implication as a result of this layout. … [O]ne of the most formidable difficulties in the way of the [Society’s] contention [is] that, if the [Society is] right, once an article has been placed in the receptacle the customer himself is bound and would have no right, without paying for the first article, to substitute an article which he saw later of a similar kind and which he perhaps preferred. I can see no reason for implying from this self-service arrangement any implication other than that … it is a convenient method of enabling customers to see what there is and choose, and possibly put back and substitute, articles which they wish to have, and then to go up to the cashier and offer to buy what they have so far chosen. On that conclusion the case fails, because it is admitted that there was supervision in the sense required by the Act and at the appropriate moment of time.

Birkett LJ This action has been brought by the Pharmaceutical Society in pursuance of that duty which is laid upon them by statute, and the short point of the case is, at what point of time did the sale in this particular

shop at Edgware take place? … The two women customers in this case each took a particular package containing poison from the particular shelf, put it into her basket, came to the exit and there paid. It is said, on the one hand, that when the customer takes the package from the poison section and puts it into her basket the sale there and then takes place. On the other hand, it is said the sale does not take place until that customer, who has placed that package in the basket, comes to the exit. The Lord Chief Justice [who heard this case at first instance] dealt with the matter in this way, and I would like to adopt his words: It seems to me, therefore, that the transaction is in no way different from the normal transaction in a shop in which there is no selfservice scheme. I am quite satisfied it would [page 55] be wrong to say that the shopkeeper is making an offer to sell every article in the shop to any person who might come in and that that person can insist on buying any article by saying ‘I accept your offer’.2 Then he went on to deal with the illustration of the bookshop, and continued: Therefore, in my opinion, the mere fact that a customer picks up a bottle of medicine from the shelves in this case does not amount to an acceptance of an offer to sell. It is an offer by the customer to buy and there is no sale effected until the buyer’s offer to buy is accepted by the acceptance of the price. The offer, the acceptance of the price, and therefore the sale take place under the supervision of the pharmacist. That is sufficient to satisfy the requirements of the section, for by using the words ‘the sale is effected by, or under the supervision of, a registered pharmacist’ the Act envisages that the sale may be effected by someone not a pharmacist. I think, too, that the sale is effected under his supervision if he is in a position to say ‘You must not have that: that contains poison’, so that in any case,

even if I were wrong in the view that I have taken on the question as to when the sale was completed, and it was completed when the customer took the article from the shelf, it would still be effected under the supervision of the pharmacist within the meaning of section 18.3 I agree with that.

[page 56]

Comment 4.3.1 See Radan, Gooley, and Vickovich at 4.23–4.27.

OFFERS OR INVITATIONS TO TREAT — AUCTIONS 4.4C

Barry v Davies [2001] 1 All ER 944

Court: Court of Appeal in England Facts: Davies, trading as an auctioneer, conducted an auction of a couple of machines, each worth over £14,000. The auction was conducted without a reserve price on the machines. The auctioneer, after unsuccessfully seeking bids ranging from £3000 to £5000, then asked what bids there were for the machines. The only bids were those made by Barry, who offered £200 for each machine. The auctioneer refused to accept the bids. The machines were subsequently sold for £700 each. Barry successfully sued the auctioneer for damages for breach of contract on the basis that, as the highest bidder, he was entitled to purchase the two machines for £400. The auctioneer appealed the trial judge’s decision. Issue: The issue before the Court of Appeal was whether an

auctioneer who, at a without-reserve-price auction refuses to accept the highest bid, is in breach of contract with that bidder. Decision: The Court of Appeal (Pill LJ and Sir Murray Stuart-Smith) unanimously held that the auctioneer was liable to Barry for damages for breach of contract. Extract: The extract from the judgment of Sir Murray Stuart-Smith discusses the basis for the auctioneer’s liability in contract to the highest bidder in a without-reserve-price auction, if the auctioneer does not accept the highest bid.

Sir Murray Stuart-Smith The [trial] judge held that it would be the general and reasonable expectation of persons attending at an auction sale without reserve that the highest bidder would and should be entitled to the lot for which he bids. Such an outcome was in his view fair and logical. As a matter of law he held that there was a collateral contract between the auctioneer and the highest bidder constituted by an offer by the auctioneer to sell to the highest bidder which was accepted when the bid was made. In so doing he followed the views of the majority of the Court of Exchequer Chamber in Warlow v Harrison.4 … Mr Moran on behalf of [Davies] criticises this conclusion on a number of grounds. First he submits that the holding of an auction without reserve does not amount to a promise on the part of the auctioneer to sell the lots to the highest bidder. There are no express words [page 57] to the effect, merely a statement of fact that the vendor has not placed a reserve on the lot. Such an intention, he submits, is inconsistent with two principles of law, namely that the auctioneer’s request for bids is not an offer which can be accepted by the highest bidder5 and that there is no completed contract of sale until the auctioneer’s hammer falls and the bidder may withdraw his bid up until that time. … There should be no need

to imply such a promise into a statement that the sale is without reserve, because there may be other valid reasons why the auctioneer should be entitled to withdraw the lot, for example if he suspected an illegal ring or that the vendor had no title to sell. Secondly Mr Moran submits that there is no consideration for the auctioneer’s promise. He submits that the bid itself cannot amount to consideration because the bidder has not promised to do anything, he can withdraw the bid until it is accepted and the sale completed by the fall of the hammer. At most the bid represents a discretionary promise, which amounts to illusory consideration, for example promising to do something ‘if I feel like if’. The bid only had real benefit to the auctioneer at the moment the sale is completed by the fall of the hammer. Furthermore the suggestion that consideration is provided because the auctioneer has the opportunity to accept the bid or to obtain a higher bid as the bidding is driven up depends upon the bid not being withdrawn. Finally Mr Moran submits that where an agent is acting for a disclosed principal he is not liable on the contract.6 If therefore there is any collateral contract it is with the principal and not the agent. These submissions were forcefully and attractively argued by Mr Moran. The authorities, such as they were, do not speak with one voice. … [In] sales by auction without reserve, the auctioneer is the agent of the vendor and unless [the auctioneer has notified bidders that the vendor reserves the right to make a bid] it is not lawful for him to make a bid [on behalf of the vendor]. Yet withdrawing the lot from the sale because it has not reached the level which the auctioneer considers appropriate is tantamount to bidding on behalf of the seller. The highest bid cannot be rejected simply because it is not high enough. The judge based his decision on the reasoning of the majority of the Court of Exchequer Chamber in Warlow v Harrison. The sale was of ‘the three following horses, the property of a gentleman, without reserve’. The plaintiff bid 60 guineas for one of the horses; another person, who was in fact the owner, immediately bid 61 guineas. The plaintiff, having been informed that the bid was from the owner declined to bid higher, and claimed he was entitled to the horse. He sued the auctioneer; he based his claim on a plea that the auctioneer was his agent to complete the contract

on his behalf. On that plea the plaintiff succeeded at first instance; but the verdict was set aside in the Court of Queen’s Bench. The plaintiff appealed. Although the Court of Exchequer Chamber upheld the decision on the case as pleaded, all five members of the court held that if the pleadings were appropriately amended, [page 58] the plaintiff would be entitled to succeed on a retrial. Martin B gave the judgment of the majority. … He said: Upon the facts of the case, it seems to us that the plaintiff is entitled to recover. In a sale by auction there are three parties, viz. the owner of the property to be sold, the auctioneer, and the portion of the public who attend to bid, which of course includes the highest bidder. In this, as in most cases of sales by auction, the owner’s name was not disclosed: he was a concealed principal. The name of the auctioneers, of whom the defendant was one, alone was published; and the sale was announced by them to be ‘without reserve’. This, according to all the cases both at law and equity, means that neither the vendor nor any person in his behalf shall bid at the auction, and that the property shall be sold to the highest bidder, whether the sum bid be equivalent to the real value or not.7 We cannot distinguish the case of an auctioneer putting up property for sale upon such a condition from the case of the loser of property offering a reward, or that of a railway company publishing a time table stating the times when, and the places to which, the trains run. It has been decided that the person giving the information advertised for, or a passenger taking a ticket, may sue as upon a contract with him.8 Upon the same principle, it seems to us that the highest bona fide bidder at an auction may sue the auctioneer as upon a contract that the sale shall be without reserve. We think the auctioneer who puts the property up for sale upon such a condition pledges himself that the sale shall be without reserve; or, in other words, contracts that it shall be so; and that this contract is made

with the highest bona fide bidder; and, in case of a breach of it, that he has a right of action against the auctioneer.9 And he said: We entertain no doubt that the owner may, at any time before the contract is legally complete, interfere and revoke the auctioneer’s authority: but he does so at his peril; and, if the auctioneer has contracted any liability in consequence of his employment and the subsequent revocation or conduct of the owner, he is entitled to be indemnified.10 … In Harris v Nickerson the defendant, an auctioneer, advertised a sale by auction of certain lots including office furniture on a certain day and the two following days. But the sale of furniture on the third day was withdrawn. The plaintiff attended the sale and claimed against the defendant for breach of contract in not holding the sale, seeking to recover his expenses in attending. The claim was rejected by the Court of Queen’s Bench. In the course of his judgment Blackburn J said: [I]n the case of Warlow v Harrison, the opinion of the majority of the judges in the Exchequer Chamber appears to have been that an action would lie for not knocking down the lot to the highest bona fide bidder when the sale was advertised as without reserve; in such a case it may be that there is a contract to sell to the highest bidder. …11 [page 59] As to consideration, in my judgment there is consideration both in the form of detriment to the bidder, since his bid can be accepted unless and until it is withdrawn, and benefit to the auctioneer as the bidding is driven up. Moreover attendance at the sale is likely to be increased if it is known that there is no reserve. As to the agency point, there is no doubt that when the sale is concluded, the contract is between the purchaser and vendor and not the auctioneer. Even if the identity of the vendor is not disclosed, it is clear that the

auctioneer is selling as agent. It is true that there was no such contract between vendor and purchaser. But that does not prevent a collateral agreement existing between the auctioneer and bidder. A common example of this is an action for breach of warranty of authority, which arises on a collateral contract. For these reasons I would uphold the [trial] judge’s decision. …

Comments 4.4.1 See Radan, Gooley, and Vickovich at 4.30–4.33. 4.4.2 For a discussion of this case, see J W Carter, ‘Auction “Without Reserve” – Barry v Davies’ (2001) 17 Journal of Contract Law 69.

OFFERS OR INVITATIONS TO TREAT — TENDERS 4.5C

Blackpool & Fylde Aero Club v Blackpool Borough Council [1990] 3 All ER 25

Court: Court of Appeal in England Facts: The Council, which owned an airport, called for tenders to operate pleasure flights from the airport. Blackpool & Fylde Aero Club was the existing operator whose contract was coming to an end. It was also one of the closed group of seven persons invited to tender for a new contract. The invitation to tender was detailed and specific in the procedure for, and form of, the submission of tenders. The reason for this was that the Council wanted to ensure that the committee considering the tenders was not in a position to know which tender had been submitted by which tenderer. One of the clauses in the call for tenders stated that ‘[n]o tender which is received after the last date and time specified shall be admitted for consideration’. The Club submitted its tender on time and in accordance with the required procedure and form. However, due to

an administrative error by the Council, the tender was not considered. This meant that the Club lost any chance of being the successful tenderer. The Club sued the Council for damages for breach of contract. Issue: The issue before the Court of Appeal was whether a call for tenders could, in any circumstances, contain an offer. [page 60] Decision: The Court of Appeal (Stocker, Bingham, and Farquharson LJJ) unanimously held that the clause in the call for tenders constituted an offer to consider all duly submitted tenders, and that the Club had accepted the offer by submitting a tender that met all of the Council’s requirements as to procedure and form. Thus, the Council was liable to the Club for damages for breach of contract. Extract: The extracts from the judgments of Bingham LJ and Stocker LJ discuss the circumstances in which a call for tenders may contain an offer.

Bingham LJ In defending the [trial] judge’s decision counsel for the club accepted that an invitation to tender was normally no more than an offer to receive tenders. But it could, he submitted, in certain circumstances give rise to binding contractual obligations on the part of the invitor, either from the express words of the tender or from the circumstances surrounding the sending out of the invitation to tender or (as here) from both. The circumstances relied on here were that the council approached the club and the other invitees, all of them connected with the airport, that the club had held the concession for eight years, having successfully tendered on three previous occasions, that the council as a local authority was obliged to comply with its standing orders and owed a fiduciary duty to ratepayers to act with reasonable prudence in managing its financial affairs and that there was a clear intention on the part of both parties that all timely tenders

would be considered. If in these circumstances one asked of this invitation to tender the question posed by Bowen LJ in Carlill v Carbolic Smoke Ball,12 ‘How would an ordinary person reading this document construe it?’, the answer in the submission of counsel for the club was clear: the council might or might not accept any particular tender; it might accept no tender; it might decide not to award the concession at all; it would not consider any tender received after the advertised deadline; but if it did consider any tender received before the deadline and conforming with the advertised conditions it would consider all such tenders. … A tendering procedure of this kind is, in many respects, heavily weighted in favour of the invitor. He can invite tenders from as many or as few parties as he chooses. He need not tell any of them who else, or how many others, he has invited. The invitee may often, although not here, be put to considerable labour and expense in preparing a tender, ordinarily without recompense if he is unsuccessful. The invitation to tender may itself, in a complex case, although again not here, involve time and expense to prepare, but the invitor does not commit himself to proceed with the project, whatever it is; he need not accept the highest tender; he need not accept any tender; he need not give reasons to justify his acceptance or rejection of any tender received. The risk to which the tenderer is exposed does not end with the risk that his tender may not be the highest (or, as the case may be, lowest). But where, as here, tenders are solicited from selected parties all of them known to the invitor, and where a local authority’s invitation prescribes a clear, orderly and familiar procedure (draft contract conditions available for inspection and plainly not open [page 61] to negotiation, a prescribed common form of tender, the supply of envelopes designed to preserve the absolute anonymity of tenderers and clearly to identify the tender in question and an absolute deadline) the invitee is in my judgment protected at least to this extent: if he submits a conforming tender before the deadline he is entitled, not as a matter of mere expectation but of contractual right, to be sure that his tender will after the deadline be opened and considered in conjunction with all other

conforming tenders or at least that his tender will be considered if others are. Had the club, before tendering, inquired of the council whether it could rely on any timely and conforming tender being considered along with others, I feel quite sure that the answer would have been ‘of course’. The law would, I think, be defective if it did not give effect to that. It is of course true that the invitation to tender does not explicitly state that the council will consider timely and conforming tenders. That is why one is concerned with implication. But the council does not either say that it does not bind itself to do so, and in the context a reasonable invitee would understand the invitation to be saying, quite clearly, that if he submitted a timely and conforming tender it would be considered, at least if any other such tender were considered. I readily accept that contracts are not to be lightly implied. Having examined what the parties said and did, the court must be able to conclude with confidence both that the parties intended to create contractual relations and that the agreement was to the effect contended for. It must also, in most cases, be able to answer the question posed by Mustill LJ in Hispanica de Petroleos SA v Vencedora Oceanica Navegacion SA, The Kapetan Markos NL (No 2): ‘What was the mechanism for offer and acceptance?’13 In all the circumstances of this case (and I say nothing about any other) I have no doubt that the parties did intend to create contractual relations to the limited extent contended for. Since it has never been the law that a person is only entitled to enforce his contractual rights in a reasonable way,14 counsel for the club was in my view right to contend for no more than a contractual duty to consider. I think it plain that the council’s invitation to tender was, to this limited extent, an offer, and the club’s submission of a timely and conforming tender an acceptance.

Stocker LJ I agree. … The format of the invitation to tender document itself suggests, in my view, that a legal obligation to consider to tender submitted before any award of a concession was made to any other operator was to be implied in the case of any operator of aircraft to whom the invitation was directed who complied with its terms and conditions. The fact that the invitation to tender was limited to a very small class of operators is itself of significance. The circumstances surrounding the issue of the invitation to

tender and the formal requirements imposed by it support the conclusion. Of particular significance, in my view, was the requirement that tenders be submitted in the official envelope supplied and indorsed … by the council. The purpose of this requirement must surely have been to preserve the [page 62] anonymity of the tenderer and, in conjunction with the council’s standing orders, to prevent any premature leak of the nature and amount of such tender to other interested or potentially interested parties. Such a requirement, as a condition of the validity of the tender submitted, seems pointless unless all tenders submitted in time and in accordance with the requirements are to be considered before any award of the concession is made. There can be no doubt that this was the intention of both parties, as exemplified by the council’s actions when its error with regard to the time of receipt of the club’s tender was appreciated. Such a common intention can, of course, exist without giving rise to any contractual obligations, but the circumstances of this case indicate to me that this is one of the fairly rare exceptions to the general rule expounded in the leading cases of Spencer v Harding and Harris v Nickerson. I therefore agree that in all the circumstances of this case there was an intention to create binding legal obligations if and when a tender was submitted in accordance with the terms of the invitation to tender, and that a binding contractual obligation arose that the club’s tender would be before the officer or committee by whom the decision was to be taken for consideration before a decision was made or any tender accepted. This would not preclude or inhibit the council from deciding not to accept any tender or to award the concession, provided the decision was bona fide and honest, to any tenderer. The obligation was that the club’s tender would be before the deciding body for consideration before any award was made. Accordingly, in my view, the conclusion of the judge and his reasons were correct.

Comments 4.5.1 See Radan, Gooley, and Vickovich at 4.38–4.40.

4.5.2

For a discussion of this case, see A Phang, ‘Tenders and Uncertainty’ (1991) 4 Journal of Contract Law 46.

COUNTER-OFFER OR REQUEST FOR FURTHER INFORMATION AND ACCEPTANCE OF OFFER 4.6C

Stevenson, Jaques & Co v McLean (1880) 5 QBD 346

Court: Queen’s Bench Division Facts: McLean offered to sell a quantity of iron to Stevenson at a set price for cash on delivery. Stevenson responded by seeking credit terms. McLean treated this as a rejection of the offer and sold the iron to somebody else. However, Stevenson subsequently accepted the offer before it was formally withdrawn and claimed that there was a contract. Stevenson sued McLean for damages for non-delivery of the goods. Issues: The first question to be determined by the court was whether Stevenson’s response to McLean’s offer was a rejection of it. If it was not, then the second issue was whether Stevenson had accepted the offer before McLean withdrew it. [page 63] Decision: Lush J answered both questions in favour of Stevenson, with the result that, there being a contract between the parties, McLean was liable to pay damages to Stevenson for non-delivery of the iron. Extract: The extract from the decision of Lush J discusses and applies the principles relevant to the two questions raised by this case.

Lush J

Two objections were relied on by [McLean], it was contended that the telegram sent by [Stevenson] on the Monday morning was a rejection of [McLean’s] offer and a new proposal on [Stevenson’s] part, and that [McLean] had therefore a right to regard it as putting an end to the original negotiation. Looking at the form of the telegram, the time when it was sent, and the state of the iron market, I cannot think this is its fair meaning. The plaintiff Stevenson said he meant it only as an inquiry, expecting an answer for his guidance, and this, I think, is the sense in which the defendant ought to have regarded it. It is apparent throughout the correspondence, that [Stevenson] did not contemplate buying the iron on speculation, but that their acceptance of [McLean’s] offer depended on their finding someone to take the [iron] off their hands. All parties knew that the market was in an unsettled state, and that no one could predict at the early hour when the telegram was sent how the prices would range during the day. It was reasonable that, under these circumstances, they should desire to know before business began whether they were to be at liberty in case of need to make any and what concession as to the time or times of delivery, which would be the time or times of payment, or whether [McLean] was determined to adhere to the terms of his letter; and it was highly unreasonable that [Stevenson] should have intended to close the negotiation while it was uncertain whether they could find a buyer or not, having the whole of the business hours of the day to look for one. Then, again, the form of the telegram is one of inquiry. It is not ‘I offer forty for delivery over two months,’ which would have likened the case to Hyde v Wrench,15 where one party offered his estate for £1,000, and the other answered by offering £950. Lord Langdale, in that case, held that after the £950 had been refused, the party offering it could not, by then agreeing to the original proposal, claim the estate, for the negotiation was at an end by the refusal of his counter proposal. Here there is no counter proposal. The words are, ‘Please wire whether you would accept forty for delivery over two months, or, if not, the longest limit you would give’. There is nothing specific by way of offer or rejection, but a mere inquiry, which should have been answered and not treated as a rejection of the offer. This ground of objection therefore fails. The remaining objection was one founded on a well-known passage in

Pothier, which has been supposed to have been sanctioned by the Court of Queen’s Bench in Cooke v Oxley,16 that in order to constitute a contract there must be the assent or concurrence of the [page 64] two minds at the moment when the offer is accepted; and that if, when an offer is made, and time is given to the other party to determine whether he will accept or reject it, the proposer changes his mind before the time arrives, although no notice of the withdrawal has been given to the other party, the option of accepting it is gone. The case of Cooke v Oxley does not appear to me to warrant the inference which has been drawn from it, or the supposition that the judges ever intended to lay down such a doctrine. … All that the judgment [in Cooke v Oxley] affirms is, that a party who gives time to another to accept or reject a proposal is not bound to wait till the time expires. And this is perfectly consistent with legal principles and with subsequent authorities, which have been supposed to conflict with Cooke v Oxley. It is clear that a unilateral promise is not binding, and that if the person who makes an offer revokes it before it has been accepted, which he is at liberty to do, the negotiation is at an end.17 But in the absence of an intermediate revocation, a party who makes a proposal by letter to another is considered as repeating the offer every instant of time till the letter has reached its destination and the correspondent has had a reasonable time to answer it.18 ‘Common sense tells us’, said Lord Cottenham, in Dunlop v Higgins, ‘that transactions cannot go on without such a rule’.19 It cannot make any difference whether the negotiation is carried on by post, or by telegraph, or by oral message. If the offer is not retracted, it is in force as a continuing offer till the time for accepting or rejecting it has arrived. But if it is retracted, there is an end of the proposal. Cooke v Oxley, if decided the other way, would have negatived the right of the proposing party to revoke his offer. Taking this to be the effect of the decision in Cooke v Oxley, the doctrine of Pothier before adverted to, which is undoubtedly contrary to the spirit of English law, has never been affirmed in our Courts. Singularly enough, the very reasonable proposition that a revocation is nothing till it has been

communicated to the other party, has not, until recently, been laid down, no case having apparently arisen to call for a decision upon the point. In America it was decided some years ago that ‘an offer cannot be withdrawn unless the withdrawal reaches the party to whom it is addressed before his letter of reply announcing the acceptance has been transmitted’;20 and in Bryne & Co v Leon Van Tienhoven & Co21 my Brother Lindley, in an elaborate judgment, adopted this view, and held that an uncommunicated revocation is, for all practical purposes and in point of law, no revocation at all. It follows, that as no notice of withdrawal of his offer to sell at 40s, nett cash, was given by [McLean], … [Stevenson] … had a right to regard it as a continuing offer, and their acceptance of it made the contract, which was initiated by the proposal, complete and binding on both parties. My judgment must, therefore, be for [Stevenson].

[page 65]

Comments 4.6.1 See Radan, Gooley, and Vickovich at 4.53 and 4.116. 4.6.2 In Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153 at 179, Heydon JA, in discussing cases where offer and acceptance analysis is not appropriate to determine whether parties have entered into an agreement, said that: … the general principle that a rejection of an offer brings it to an end cannot be universal. 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.

WITHDRAWAL OF OFFERS 4.7C

Dickinson v Dodds (1876) 2 Ch D 463

Court: Court of Appeal in England Facts: Dodds made an offer to sell land to Dickinson, but before Dickinson accepted the offer, Dodds sold the property to Allan. Dodds did not advise Dickinson of the sale, but Dickinson was made aware of the sale to Allan by Berry, who was Dickinson’s agent. Dickinson subsequently purported to accept Dodds’s offer. As the property had already been sold to Allen, Dickinson sued Dodds for damages for breach of contract. Issue: The issue before the Court of Appeal was whether Dodds’s offer had been validly revoked before it was accepted by Dickinson. Decision: The Court of Appeal (James and Mellish LJJ, Baggallay JA) unanimously ruled in favour of Dodds. It held that the communication by Berry to Dickinson that the property had been sold to Allan terminated Dodds’s offer, with the consequence that there was no longer any offer for Dickinson to accept. Extract: The extracts from the judgments of James LJ and Mellish LJ discuss the requirement of communication for the revocation of an offer.

James LJ It appears to me that there is neither principle nor authority for the proposition that there must be an express and actual withdrawal of the offer, or what is called a retractation. It must, to constitute a contract, appear that the two minds were at one, at the same moment of time, that is, that there was an offer continuing up to the time of the acceptance. If there was not such a continuing offer, then the acceptance comes to nothing. Of course it may well be that the one man is bound in some way or other to let the other man know that his mind with regard to the offer has been

changed; but in this case, beyond all question, [Dickinson] knew that Dodds was no longer minded to sell the property to him as plainly [page 66] and clearly as if Dodds had told him in so many words, ‘I withdraw the offer.’ This is evident from [Dickinson’s] own statements in the bill. …

Mellish LJ If an offer has been made for the sale of property, and before that offer is accepted, the person who has made the offer enters into a binding agreement to sell the property to somebody else, and the person to whom the offer was first made receives notice in some way that the property has been sold to another person, can he after that make a binding contract by the acceptance of the offer? I am of opinion that he cannot. The law may be right or wrong in saying that a person who has given to another a certain time within which to accept an offer is not bound by his promise to give that time; but, if he is not bound by that promise, and may still sell the property to someone else, and if it be the law that, in order to make a contract, the two minds must be in agreement at some one time, that is, at the time of the acceptance, how is it possible that when the person to whom the offer has been made knows that the person who has made the offer has sold the property to someone else, and that, in fact, he has not remained in the same mind to sell it to him, he can be at liberty to accept the offer and thereby make a binding contract? It seems to me that would be simply absurd. If a man makes an offer to sell a particular horse in his stable, and says, ‘I will give you until the day after to-morrow to accept the offer,’ and the next day goes and sells the horse to somebody else, and receives the purchase-money from him, can the person to whom the offer was originally made then come and say, ‘I accept,’ so as to make a binding contract, and so as to be entitled to recover damages for the non-delivery of the horse? If the rule of law is that a mere offer to sell property, which can be withdrawn at any time, and which is made dependent on the acceptance of the person to whom it is made, is a mere nudum pactum, how is it possible that the person to whom the offer has been made can by

acceptance make a binding contract after he knows that the person who has made the offer has sold the property to someone else? It is admitted law that, if a man who makes an offer dies, the offer cannot be accepted after he is dead, and parting with the property has very much the same effect as the death of the owner, for it makes the performance of the offer impossible. I am clearly of opinion that, just as when a man who has made an offer dies before it is accepted it is impossible that it can then be accepted, so when once the person to whom the offer was made knows that the property has been sold to someone else, it is too late for him to accept the offer, and on that ground I am clearly of opinion that there was no binding contract for the sale of this property by Dodds to Dickinson, and even if there had been, it seems to me that the sale of the property to Allan was first in point of time. However, it is not necessary to consider, if there had been two binding contracts, which of them would be entitled to priority in equity, because there is no binding contract between Dodds and Dickinson.

Comment 4.7.1 See Radan, Gooley, and Vickovich at 4.60–4.61.

[page 67]

WITHDRAWAL OF OFFER WHERE PERFORMANCE HAS COMMENCED 4.8C Mobil Oil Australia Ltd v Lyndel Nominees Pty Ltd (1998) 153

ALR 198 Court: Full Court of the Federal Court of Australia Facts: Franchisees of Mobil Oil alleged that it had made them an offer of various benefits if they reached certain levels of sales over a certain period of time. Before that time period had elapsed the

alleged offer was withdrawn. The franchisees brought claims against Mobil on a number of grounds, including damages for breach of contract. In relation to the contract claim, the franchisees claimed that Mobil had made an offer that could not be revoked once the terms of the offer had been partly performed. They claimed that Mobil’s revocation of the offer in such circumstances rendered it liable for damages for breach of contract. Issues: The issues before the Full Court were whether Mobil had made an offer and, if it had, whether its revocation of the offer rendered it liable for damages for breach of contract. Decision: The Full Court (Lockhart, Lindgren, and Tamberlin JJ) in a unanimous joint judgment ruled that Mobil made no such offer. The court nevertheless dealt with withdrawal of offers in such circumstances. Such a withdrawal would have been valid because the increased level of sales achieved by the franchisees in performing the terms of the offer was of benefit to them and, therefore, it would not have been unjust for Mobil to revoke the offer. Furthermore, the court said that if there was an implied condition in the offer not to revoke it, the offeror could still nevertheless revoke the offer. However, in such a case the offeree would have an action for damages for breach of the implied contract. Extract: The extract from the court’s joint judgment discusses the principles that apply to the revocation of an offer where the offeree has partly performed the terms of the offer at the time of the purported revocation.

The Full Court His Honour [the judge at first instance] 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 considered that the weight of authority was in favour of the proposition that, … a person who makes an offer susceptible of acceptance by

performance of an act, may not revoke that offer after the offeree has embarked upon performance of the act. … We would make several observations at the outset. It has been suggested to be unjust that an offeror should be at liberty to revoke the offer once performance of the act, which is at once the act of acceptance and the executed consideration, has commenced. This proposition is usually stated as if its truth were self evident and universal. We do not think that it is either. [page 68] (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 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. … (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

[page 69] 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. We turn next to the [Australian] authorities which are said to support the general proposition. In Abbott v Lance, Lance stated to Abbott that he was willing to sell two stations and stock for a certain price on certain terms. Abbott was unwilling to purchase without inspecting. Inspection, which would involve travel to the properties, would take two months. The parties agreed that if Abbott should make, within that period, a bona fide offer to purchase at the price and on the terms agreed, but Lance should have sold to another party in the meanwhile, Lance would pay £100 to Abbott. Pursuant to the agreement, Abbott set out to inspect the stations which were about 500 miles away. When about half way there, he received a letter from Lance informing him that they had been sold. Abbott discontinued his journey and did not make an offer. The question for decision was whether Abbott was entitled to the sum of £100. The court … held that he was. On any view, the case is an awkward one. It is reported in a mere three pages and the report contains internal inconsistencies. The court itself said: The agreement is certainly somewhat obscure and we have had some difficulty in coming to a conclusion as to the rights of the parties.22 The Court described the contract as being in substance ‘an agreement by the defendant to keep the offer open two months, if the plaintiff will go and inspect the stations’, yet as being also an agreement to sell to the plaintiff at an agreed price ‘unless previously sold’. Similarly, their Honours referred to the defendant’s promise to pay £100 as being dependent on his having previously sold to another, yet as being also dependent on the plaintiff’s having made a bona fide offer to purchase. The decision itself can be supported if the contract is conceived of as a promise to pay £100 as compensation for the plaintiff’s having embarked upon his inspection trip and been deprived of the opportunity of making a

bona fide offer within two months by the defendant’s having previously sold to another. This view ignores the reference to a bona fide offer, but apparently this is exactly what their Honours did: they accepted that once the defendant had sold, he had made it impossible for the plaintiff to make a bona fide offer. It should be noted that the contract expressly reserved to the defendant the liberty to sell to another party subject to his paying £100 to the plaintiff. In substance, the contract in Abbott v Lance was simply a promise to pay £100 as compensation for the plaintiff’s time, trouble and expense in undertaking the inspection trip if the defendant should cause them to be wasted by selling to someone else, upon a condition that they would only be taken to have been wasted if the sale by the defendant occurred within two months and could be seen to have prevented the plaintiff from making, within that period, a bona fide offer to purchase. The view of the case which we have advanced is consistent with the final, if characteristically tantalising, paragraph of the report: [page 70] The present case does not affect the general proposition that an offer may be retracted before acceptance, because we consider that the part performance of the journey constituted a sufficient consideration to give the plaintiff a right in the events that have happened.23 Their Honours appear to be indicating here that they were treating the act of acceptance (and the executed consideration) as the undertaking of the trip, and, one presumes, non-abandonment of it down to the time of notification of the defendant’s sale to another. … In Veivers v Cordingley, McPherson J appears to have applied the general proposition on the basis that Abbott v Lance was authority for it. The following is the relevant passage from his Honour’s judgment: There can be no doubt that, ordinarily an offer can be withdrawn before acceptance. It may well be a different matter if, in the case of

what is commonly called a ‘unilateral contract’, the promisee has already entered upon the act which, when completed, will constitute acceptance of the promise. … The only decision directly in point is that of the Supreme Court of New South Wales in Abbott v Lance. … It seems to me that the decision in Abbott v Lance is authority for propositions that, although as a general rule an offer may be retracted before acceptance, yet, if it takes the form of an offer in exchange for the doing of an act or acts, then: (1) acceptance takes place when the offeree ‘elects’ to do the relevant act or acts; and (2) the offer becomes irrevocable once the act or acts, which will constitute consideration for the offer, have been partly performed.24 … For the reasons indicated earlier, we do not accept that there is a universal proposition that an offeror is not at liberty to revoke the offer once the offeree ‘commences’ or ‘embarks upon’ performance of the sought act of acceptance (being also the sought executed consideration for the offered promise). If and to the extent that any of the authorities to which we have referred say otherwise, we would respectfully disagree. In any event, even if it be assumed that an offeror has impliedly promised not to revoke in consideration of a commencement of performance of the act of acceptance, it would not follow that a purported revocation would be ineffective. On the contrary, in the absence of specific relief in respect of that promise, the offeror’s revocation would be effective, although leaving the offeror liable in damages. It should not be thought that the absence of a universal rule is unjust. In the circumstances of a particular case, it may be appropriate to find that the offeror has entered into an implied ancillary contract not to revoke, or that the offeror is estopped from falsifying an assumption, engendered by it, that the offeree will not be deprived of the chance of completing the act of acceptance.

[page 71]

Comments 4.8.1 4.8.2

See Radan, Gooley, and Vickovich at 4.67–4.68. In Forbes v Australian Yachting Federation Inc (1996) 131 FLR 241 at 283–4, Santow J observed that in circumstances where an offeree has commenced performance of the terms of the offer, there may well be an implied promise by the offeror not to revoke the offer, but it may also be that the offeree could bring an action against the offeror pursuant to the more flexible principles of equitable estoppel (see Chapter 36) if the offeror sought to revoke the offer before the offeree had a reasonable opportunity to perform the terms of the offer.

ACCEPTANCE OF OFFERS AND RELIANCE 4.9C

R v Clarke (1927) 40 CLR 227

Court: High Court of Australia Facts: The Western Australian government offered a reward of £1000 for information leading to the arrest and conviction of the murderers of two police officers. Clarke, who knew of the reward offer, gave information at the trial of those charged with the murders that led to their convictions, thereby satisfying the conditions of the reward. At the time, Clarke made the following statements: ‘When I gave evidence in the Criminal Court I had no intention of claiming the reward. I first decided to claim the reward a few days after the appeal had been dealt with. Inspector Condon told me to make application. I had not intended to apply for the reward up to that date. I did not know exactly the position I was in. Up to that time I had not considered the position. … I had not given the matter consideration at all. My motive was to clear myself of the charge of murder. I gave no consideration and formed no intention with regard to the reward.’ Clarke then claimed the reward. Issue: The issue before the High Court was whether Clarke’s actions

in satisfying the terms of the reward amounted to an acceptance of the offer of the reward. Decision: The High Court (Isaacs ACJ, Higgins and Starke JJ) found in favour of the Crown on the basis that at the time he gave the information, Clarke did not have it in his mind to claim the reward. His decision to do so was made subsequently. Thus, Clarke’s providing of the information required by the reward proclamation was not a valid acceptance of the offer of the reward and he was not entitled to claim it. Extract: The extracts from the three judgments in the High Court focus on the principle that an effective acceptance of an offer is one made in reliance upon the offer.

Isaacs ACJ The information for which Clarke claims the reward was given by him when he was under arrest … on a charge of murder, and was given by him in circumstances which show [page 72] 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 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. … 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. … The controlling principle … is that to establish the consensus without which no true contract can exist, acceptance is as essential as offer, even in a case of the present class where the same act is at once sufficient for both acceptance and performance. But acceptance and performance of condition … … involve that the person accepting and performing must act on the offer. … 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. …

Higgins J Clarke cannot succeed in this action unless he can establish a contract between the Crown and himself. I think that there was no contract. … [The] statements of Clarke [set out above] show clearly that he did not intend to accept the offer of the Crown, did not give the information on the faith of, or relying on, the proclamation. He did not mentally assent to

the Crown’s offer; there was no moment of time at which there was, till after the information was given, as between Clarke and the Crown, a consensus of mind. … [page 73] Clarke had seen the offer, indeed; but it was not present to his mind — he had forgotten it, and gave no consideration to it, in his intense excitement as to his own danger. There cannot be assent without knowledge of the offer; and ignorance of the offer is the same thing whether it is due to never hearing of it or to forgetting it after hearing. But for this candid confession of Clarke’s it might fairly be presumed that Clarke, having once seen the offer, acted on the faith of it, in reliance on it; but he has himself rebutted that presumption.

Starke J In my opinion the true principle applicable to this type of case is that unless a person performs the conditions of the offer, acting upon its faith or in reliance upon it, he does not accept the offer and the offeror is not bound to him. As a matter of proof any person knowing of the offer who performs its conditions establishes prima facie an acceptance of that offer. … And probably … the performance of some of the conditions required by the offer also establishes prima facie an acceptance of that offer, but does not of course establish the right of the person so performing some of the conditions of the offer to the reward until he has completely performed them all according to the proper construction of the offer. From such facts an acceptance is probable but it is not, as was urged, ‘an absolute proposition of law’ that one, who, having the offer before him, acts as one would naturally be induced to act, is deemed to have acted on the faith of or in reliance upon that offer. It is an inference of fact and may be excluded by evidence. … The statements or conduct of the party himself uncommunicated to the other party, or the circumstances of the case, may supply that evidence. Ordinarily, it is true, the law judges of the intention of a person in making a contract by outward expression only by words or acts communicated between them. … But when the offeror, as in the anomalous

case under consideration, has dispensed with any previous communication to himself of the acceptance of the offer the law is deprived of one of the means by which it judges of the intention of the parties, and the performance of the conditions of the offer is not in all cases conclusive for they may have been performed by one who never hears of the offer or who never intended to accept it. Hence the statements or conduct of the party himself uncommunicated to the other party are admissible to show the circumstances under which an act, seemingly within the terms of the offer, was done and the inducement which led to the act. In the present case the statements of [Clarke] himself satisfied the Chief Justice that he did not act on the faith of or in reliance upon the offer and we are unable to disturb that finding. I should have had more hesitation than the learned Judge in displacing the inference open on the facts that [Clarke] knew of the offer and did in fact supply the Crown with most valuable information. Nowhere in the evidence is it said that he did not act upon the faith of or in reliance upon the offer, and it is unfortunate that no direct question was put to him upon the matter. [Clarke’s] statements are, I think, consistent with the position that he acted upon the offer but had not addressed his mind to the question whether he would or would not claim the reward. However, the proper inference of fact is essentially one for the learned Judge who saw and heard the petitioner.

[page 74]

Comments 4.9.1 See Radan, Gooley, and Vickovich at 4.77–4.79. 4.9.2 For a discussion of this case and an argument that acceptance should be effective even if the offeree does not act in reliance of the offer, see P Mitchell and J Phillips, ‘The Contractual Nexus: Is Reliance Essential?’ (2002) 22 Oxford Journal of Legal Studies 115.

THE POSTAL ACCEPTANCE RULE 4.10C

Household Fire and Carriage Accident Insurance Company (Ltd) v Grant (1879) LR 4 Ex D 216

Court: Court of Appeal in England Facts: Grant applied for shares in the Household Fire and Carriage Accident Insurance Company. The Company allotted the shares to Grant, and addressed to him and posted a letter containing the notice of allotment, but the letter was never received by him. Three years later the Company was liquidated. The liquidator sought from Grant amounts yet unpaid on the shares issued to him. Grant claimed he was not liable for the amount on the ground that his offer to buy shares was never accepted because the letter of acceptance never reached him, and that as a consequence he was never the owner of the shares and thus liable to the liquidator as claimed. Issue: The issue before the Court of Appeal was whether posting of the allotment of shares by the Company was a valid acceptance of Grant’s offer. If it was, Grant was liable to the liquidator as claimed. Decision: The majority of the Court of Appeal (Thesiger and Baggally LJJ; Bramwell LJ dissenting) found in favour of the liquidator on the basis that the postal acceptance rule meant that acceptance was complete when the letter of allotment was posted. Whether it was ever received by Grant was irrelevant. Extract: The extracts from the majority judgment of Thesiger LJ and the dissenting judgment of Bramwell LJ present conflicting arguments about the postal acceptance rule.

Thesiger LJ An acceptance, which only remains in the breast of the acceptor without being actually and by legal implication communicated to the offerer, is no binding acceptance. How then are these elements of law to be harmonised in the case of contracts formed by correspondence through the

post? I see no better mode than that of treating the post office as the agent of both parties. … [If] the post office be such common agent, then it seems to me to follow that, as soon as the letter of acceptance is delivered to the post office, the contract is made as complete and final and absolutely binding as if the acceptor had put his letter into the [page 75] hands of a messenger sent by the offerer himself as his agent to deliver the offer and receive the acceptance. What other principle can be adopted short of holding that the contract is not complete by acceptance until and except from the time that the letter containing the acceptance is delivered to the offerer, a principle which has been distinctly negatived? … The acceptor, in posting the letter, has, to use the language of Lord Blackburn, in Brogden v Directors of Metropolitan Ry Co, ‘put it out of his control, and done an extraneous act which clenches the matter, and shews beyond all doubt that each side is bound’.25 How then can a casualty in the post, whether resulting in delay, which in commercial transactions is often as bad as no delivery, or in non-delivery, unbind the parties or unmake the contract? To me it appears that in practice a contract complete upon the acceptance of an offer being posted, but liable to be put an end to by an accident in the post, would be more mischievous than a contract only binding upon the parties to it upon the acceptance actually reaching the offerer, and I can see no principle of law from which such an anomalous contract can be deduced. There is no doubt that the implication of a complete, final, and absolutely binding contract being formed, as soon as the acceptance of an offer is posted, may in some cases lead to inconvenience and hardship. But such there must be at times in every view of the law. It is impossible in transactions which pass between parties at a distance, and have to be carried on through the medium of correspondence, to adjust conflicting rights between innocent parties, so as to make the consequences of mistake on the part of a mutual agent fall equally upon the shoulders of both. At the same time I am not prepared to admit that the implication in question will lead to any great or general inconvenience or hardship. An offerer, if he chooses,

may always make the formation of the contract which he proposes dependent upon the actual communication to himself of the acceptance. If he trusts to the post he trusts to a means of communication which, as a rule, does not fail, and if no answer to his offer is received by him, and the matter is of importance to him, he can make inquiries of the person to whom his offer was addressed. On the other hand, if the contract is not finally concluded, except in the event of the acceptance actually reaching the offerer, the door would be opened to the perpetration of much fraud, and, putting aside this consideration, considerable delay in commercial transactions, in which despatch is, as a rule, of the greatest consequence, would be occasioned; for the acceptor would never be entirely safe in acting upon his acceptance until he had received notice that his letter of acceptance had reached its destination.

Bramwell LJ (dissenting) That because a man, who may send a communication by post or otherwise, sends it by post, he should bind the person addressed, though the communication never reaches him, while he would not so bind him if he had sent it by hand, is impossible. There is no reason in it; it is simply arbitrary. … It is said that a contrary rule would be hard on the would-be acceptor, who may have made his arrangements on the footing that the bargain was concluded. But to hold as contended would be equally hard on the offerer, who may have made his arrangements on the footing [page 76] that his offer was not accepted; his non-receipt of any communication may be attributable to the person to whom it was made being absent. What is he to do but to act on the negative, that no communication has been made to him? Further, the use of the post office is no more authorised by the offerer than the sending an answer by hand, and all these hardships would befall the person posting the letter if he sent it by hand. Doubtless in that case he would be the person to suffer if the letter did not reach its destination. Why should his sending it by post relieve him of the loss and cast it on the other

party. It was said, if he sends it by hand it is revocable, but not if he sends it by post, which makes the difference. But it is revocable when sent by post, not that the letter can be got back, but its arrival might be anticipated by a letter by hand or telegram, and there is no case to shew that such anticipation would not prevent the letter from binding. It would be a most alarming thing to say that it would. That a letter honestly but mistakenly written and posted must bind the writer if hours before its arrival he informed the person addressed that it was coming, but was wrong and recalled.

Comments 4.10.1 See Gooley, Radan, and Vickovich at 4.74 and 4.115. 4.10.2 Thesiger LJ’s suggestion that the postal acceptance rule applies because the post office is the common agent for both the offeror and offeree, was rejected in Henthorn v Fraser [1892] 2 Ch 27 at 35– 6. 4.10.3 For a discussion of the case within a broader analysis of the postal acceptance rule, see S Gardner, ‘Trashing with Trollope: A Deconstruction of the Postal Rules in Contract’ (1992) 12 Oxford Journal of Legal Studies 170; D McLauchlan, ‘The Uncertain Basis of the Postal Acceptance Rule?’ (2013) 30 Journal of Contract Law 33; and D M Evans, ‘The Anglo-American Mailing Rule: Some Problems of Offer and Acceptance in Contracts by Correspondence’ (1966) 15 International & Comparative Law Quarterly 553. 4.10.4 For an argument in favour of the offeree being able to validly revoke a posted letter of acceptance by a speedier means of communication before it reaches the offeror, see A Hudson, ‘Retraction of Letters of Acceptance’ (1966) 82 Law Quarterly Review 169.

THE EXTENT OF THE POSTAL ACCEPTANCE RULE 4.11C

Brinkibon Ltd v Stahag Stahl und

Stahlwarenhandelsgesellschaft mbH [1983] 2 AC 34 Court: House of Lords Facts: Brinkibon, an English company, was negotiating the purchase of steel from Stahag Stahl, an Austrian company. Communications between them were by telex. Although the House of Lords did not determine whether a contract was entered into [page 77] between the parties, it assumed that an offer had been made by Stahag Stahl by telex on 3 May 1979, which was accepted by Brinkibon by telex the following day. Issue: The issue before the House of Lords was when and where a contract would have arisen in these circumstances. This was important because the resolution of this issue would also determine when the contract was entered into and whether it was entered into in England or Austria. Brinkibon argued that the contract was entered into in England, with the consequence that disputes under the contract would be determined by English courts. Decision: The House of Lords (Lords Wilberforce, Fraser of Tullybelton, Russell of Killowen, Bridge of Harwich, and Brandon of Oakbrook) unanimously held such a contract would not be entered into in England on the basis that the postal acceptance rule did not generally apply to telex communications. Thus, the contract would have been entered into in Austria, the place where the offeror (Stahag Stahl) received communication of the acceptance. Extract: The extracts from the speeches by Lord Wilberforce and Lord Fraser of Tullybelton discuss the postal acceptance rule and the extent to which it applies to acceptances other than by letters and telegrams.

Lord Wilberforce In the present case it seems that if there was a contract (a question which can only be decided at the trial), 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. … [This case] 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 … decides in favour of the latter category, ie a telex is to be assimilated to other methods of instantaneous communication.26 [Brinkibon] ask[s] that this [authority], 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 [page 78] the same place and at the same time, if communication is instantaneous, for example by telephone or radio communication, the same result should follow. Then there is the case — very common — of communication at a distance, to meet which the so called ‘postal rule’ has developed. … The rationale for

[the rule] … has … been well explained. Mellish LJ in In re Imperial Land Co of Marseilles27 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.28 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 noninstantaneous communication at a distance, how should communications by telex be categorised? In Entores Ltd v Miles Far East Corporation29 the Court of Appeal classified them with instantaneous communications. Their ruling … 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.30 The present case is … 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.

Lord Fraser of Tullybelton The question is whether acceptance by telex falls within the general rule that it requires to be notified to the offeror in order to be binding, or within the exception of the postal rule whereby it becomes binding when (and where) it is handed over to the post office. The [page 79] posting rule is based on considerations of practical convenience, arising from the delay that is inevitable in delivering a letter. But it has been extended to apply to telegrams sent through the post office, and in strict logic there is much to be said for applying it also to telex messages sent by one business firm directly to another. There is very little, if any, difference in the mechanics of transmission between a private telex from one business office to another, and a telegram sent through the post office — especially one sent from one large city to another. Even the element of delay will not be greatly different in the typical case where the operator of the recipient’s telex is a clerk with no authority to conclude contracts, who has to hand it to his principal. In such a case a telex message is not in fact received instantaneously by the responsible principal. I assume that the present case is a case of that sort. Nevertheless I have reached the opinion that, on balance, an acceptance sent by telex directly from the acceptor’s office to the offeror’s office should be treated as if it were an instantaneous communication between principals, like a telephone conversation. One reason is that the decision to that effect in Entores v Miles Far East Corporation seems to have worked without leading to serious difficulty or complaint from the business community. Secondly, once the message has been received on the offeror’s telex machine, it is not unreasonable to treat it as delivered to the principal offeror, because it is his responsibility to arrange for prompt handling of messages within his own office. Thirdly, a party (the acceptor) who tries to send a message by telex can generally tell if his message has not been received on the other party’s (the offeror’s) machine, whereas the offeror, of course, will not know if an unsuccessful attempt has been made to send an acceptance to him. It is therefore convenient that the acceptor, being in the

better position, should have the responsibility of ensuring that his message is received. For these reasons I think it is right that in the ordinary simple case, such as I take this to be, the general rule and not the postal rule should apply. But … … the general rule will not cover all the many variations that may occur with telex messages.

Comments 4.11.1 See Radan, Gooley, and Vickovich at 4.63, 4.108, 4.114, and 4.121. 4.11.2 For an example of a case where the postal acceptance rule did apply to an acceptance by telex, see Leach Nominees Pty Ltd v Walter Wright Pty Ltd [1986] WAR 244, discussed in Radan, Gooley, and Vickovich at 4.108.

EXCLUSION OF THE POSTAL ACCEPTANCE RULE 4.12C

Bressan v Squires [1974] 2 NSWLR 460

Court: Supreme Court of New South Wales, Equity Division Facts: Squires granted Bressan an option to purchase her property, known as ‘Sunnyside’. Clause 1 of the option agreement stipulated that Bressan could exercise the option ‘by [page 80] notice in writing addressed to [Squires] at any time on or before 20th December, 1972’. Bressan’s written exercise of the option was posted on 18 December 1972 and received by Squires on 21 December 1972. It was established that for a letter posted on 18 December 1972, delivery in the ordinary course of the postal system would have taken place on 21 December 1972. Bressan claimed that the exercise of the option was effective on the date of posting and that he

therefore had a valid contract for the purchase of ‘Sunnyside’. He brought an action against Squires for specific performance of the alleged contract. Squires argued that there was no contract between herself and Bressan for the sale of ‘Sunnyside’ on the basis that the option was not validly exercised because the notice was received after the date stipulated in clause 1 of the option agreement. Issue: The issue before the Supreme Court was whether the postal acceptance rule applied or was excluded in relation to the exercise of the option. If the rule applied, the option was validly exercised and a contract arose between the parties. If the rule was excluded, the option was not validly exercised and no contract arose between the parties. Decision: Bowen CJ in Eq ruled that the postal acceptance rule was excluded, with the consequence that the option was not validly exercised because the notice of exercise was received after the date stipulated in the option agreement. Thus, no contract for the sale of ‘Sunnyside’ arose. Bressan’s application for specific performance was refused. Extract: The extract below discusses the circumstances in which the postal acceptance rule may be excluded and applies these principles to the facts of the case.

Bowen CJ in Eq The main question argued was whether the material date was the date of posting or the date of receipt. The former being within time would result in a contract; the latter being outside would not. The answer to this question turns, I think, upon the interpretation to be placed on cl 1. However, before dealing with that matter, I should mention an argument put forward for [Bressan] that under the general rules applicable to offer and acceptance, acceptance of the irrevocable unilateral offer constituted by the option agreement was complete and effective when the notice of exercise was posted. The general rule is, of course, that a contract is not concluded until

acceptance of an offer is actually communicated to the offeror. To this rule there is an exception in the case of acceptance by post. There have been various formulations of the exception and various reasons assigned for its existence. Many of these reasons have later been said to be unsound. The exception, it seems, is really based upon notions of expediency and convenience, as these are envisaged by the courts from time to time. It is an important exception, since it may determine not only whether or when a contract has been made but also where it has been made. A formulation of the exception, which is often quoted, is that of Lord Herschell in Henthorn v Fraser. His Lordship said: ‘Where the circumstances are such that it must have been within [page 81] 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, the acceptance is complete as soon as it is posted’.31 According to this formulation, all that needs to be in contemplation of the parties is the post as a mode, indeed as a possible or permitted mode, for the law to impose the consequence that the contract is concluded by the action of posting. It is not required that it should be within the contemplation of the parties that the action of posting should have the consequence of concluding the contract; this, of course, would apply in relatively fewer cases, and would narrow the application of the exception. … In the present case the parties must, in my view, have contemplated that the option might be exercised by means of a notice sent through the post. Accordingly the exception applies and there is here a concluded contract, unless there is some other ground for holding this result does not follow. Two grounds are suggested. The first is that the exception, being based upon notions of expediency and convenience does not apply where its application would produce manifest inconvenience, and absurdity; that this is particularly so with options for the purchase of land, where, if the exception applies, the offeror may, where

the letter is delayed or goes astray, become a trustee of the land without becoming aware of it, or without becoming aware of it until a substantial period of time has elapsed. … Some supports for this ground may be found in the reasons for judgment of Lawton LJ in Holwell Securities Ltd v Hughes.32 However, I am not prepared to decide the present case on this basis. The second ground brings me finally to the question of the proper interpretation of the option agreement in this case. It is submitted on behalf of [Squires that] the provision that the option may be exercised by ‘notice’ to her imports the notion of actual communication to her, and requires the application of the general rule that acceptance must be communicated and not the application of the exception. It is true the word ‘notice’ generally imports the notion of communication of information. Support for [Squires’] submission is to be found in Holwell Securities Ltd v Hughes.33 However, on behalf of [Bressan] it is submitted the parties have in cl 1 actually stipulated that the option may be exercised by notice posted on or before 20th December, 1972. Though they have not used the word ‘posted’, they have used the words ‘addressed to me at any time on or before 20th December, 1972’, and this means the same thing. This, it can be said, distinguishes the case from Howell Securities Ltd v Hughes. In my opinion, had the parties in cl 1 said: ‘This option may be exercised by you by notice in writing posted to me on or before 20th December, 1972’,z the argument put for [Bressan] would clearly be correct. Indeed, if that is what the parties intended, it is difficult to see why they did not say so, in plain terms. To say: ‘This option may be exercised by you by notice in writing addressed to me on or before 20th December, 1972’ left the matter ambiguous. The words ‘addressed to me’ [page 82] may be a mere characterization of the notice, indicating what kind of notice it should be, how it should be directed. Or, the word ‘addressed’ may carry what is one of its dictionary meanings, even though one less frequently used, and refer to the action of sending the notice.

The matter is largely one of impression. The impression I gain from reading the option is that the parties were, in cl 1, simply describing the notice, and were not stipulating that it should be exercised by being addressed in the sense of sent or posted on or before 20th December, 1972. For this reason I think that what was required for due exercise was actual notice to [Squires] on or before 20th December, 1972. Since actual notice was not received by [Squires] until 21st December, 1972, [Bressan] must fail.

Comment 4.12.1 See Radan, Gooley, and Vickovich at 4.115.

ALTERNATIVES TO OFFER AND ACCEPTANCE ANALYSIS 4.13C Butler Machine Tool Co v Ex-Cell-O Corp (England) Ltd [1979]

1 All ER 965 Court: Court of Appeal in England Facts: Butler offered to supply Ex-Cell-O a specified machine for a particular price. The standard form of offer used by Butler contained a price escalation clause that allowed for the price to be increased in certain circumstances. Ex-Cell-O placed an order for the machine at the set price, the order stating that it was subject to Ex-Cell-O’s standard terms which did not contain any price escalation clause. ExCell-O also requested that Butler confirm the order by signing and returning a tear-off slip attached to the order. Butler did so, but noted that the acknowledgment was in accordance with the original offer that had been sent to Ex-Cell-O. The machine was built and Butler claimed a price that had been increased in accordance with the price escalation clause. Ex-Cell-O claimed that the contract did not contain any price escalation clause.

Issue: The issue before the Court of Appeal was whether or not the contract included Butler’s price escalation clause. Decision: The Court of Appeal (Lord Denning MR, Lawton and Bridge LJJ), by applying traditional rules of offer, counter-offer, and acceptance, unanimously held that the contract did not include the price escalation clause. The court held that, in response to Butler’s offer to supply the machine, Ex-Cello-O’s order, which did not include the price escalation clause, was a counter-offer, which was accepted by Butler’s return of the tear-off slip. The notation on the tear-off slip was interpreted as being simply a reference to the price and identity of the machine, and did not amount to a reaffirmation of the terms and conditions in its original offer. [page 83] Extract: The extract from the judgment of Lord Denning MR sets out the reasoning of the court. However, it also comments upon the difficulty in applying traditional offer and acceptance analysis in these ‘battle of the forms’ cases and suggests alternative approaches that may be taken.

Lord Denning MR If those documents are analysed in our traditional method, the result would seem to me to be this: the quotation of 23 May 1969 was an offer by [Butler] to [Ex-Cello-O] containing the terms and conditions on the back. The order of 27 May 1969 purported to be an acceptance of that offer in that it was for the same machine at the same price, but it contained such additions as to cost of installation, date of delivery and so forth, that it was in law a rejection of the offer and constituted a counter-offer. That is clear from Hyde v Wrench.34 As Megaw J said in Trollope & Colls Ltd v Atomic Power Constructions Ltd: ‘… the counter-offer kills the original offer’.35 The letter of the sellers of 5 June 1969 was an acceptance of that counter-offer, as is shown by the acknowledgment which [Butler] signed

and returned to [Ex-Cello-O]. The reference to the quotation of 23 May 1969 referred only to the price and identity of the machine. … In many of these cases our traditional analysis of offer, counter-offer, rejection, acceptance and so forth is out-of-date. This was observed by Lord Wilberforce in New Zealand Shipping Co Ltd v A M Satterthwaite.36 The better way is to look at all the documents passing between the parties and glean from them, or from the conduct of the parties, whether they have reached agreement on all material points, even though there may be differences between the forms and conditions printed on the back of them. As Lord Cairns LC said in Brogden v Metropolitan Railway Co: … there may be a consensus between the parties far short of a complete mode of expressing it, and that consensus may be discovered from letters or from other documents of an imperfect and incomplete description.37 Applying this guide, 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. … 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 term and conditions: and, if they are not objected to by the other party, he may be taken to have agreed to them.38 … In some cases, however, 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 [page 84] 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.

Comments 4.13.1 See Radan, Gooley, and Vickovich at 4.122–4.126. 4.13.2 For a discussion of this case, see R Rawlings, ‘The Battle of the Forms’ (1979) 42 Modern Law Review 715.

1.

8th ed, p 47.

2. 3.

Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1952] 2 QB 795 at 802. Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1952] 2 QB 795 at 802– 3.

4. 5.

[1843–60] All ER Rep 620. Payne v Cave [1775–1802] All ER Rep 492.

6. 7.

Bowstead and Reynolds on Agency (16th edn, 1995) para 9-001 and Mainprice v Westley (1865) 122 ER 1250. Thornett v Haines (1846) 153 ER 892.

8. 9.

Denton v Great Northern Railway Company (1856) 119 ER 701. Warlow v Harrison [1843–60] All ER Rep 620 at 622.

10. 11.

Warlow v Harrison [1843–60] All ER Rep 620 at 623. Harris v Nickerson (1873) LR 8 QB 286 at 288.

12. 13.

[1893] 1 QB 256 at 266. Hispanica de Petroleos SA v Vencedora Oceanica Navegacion SA, The Kapetan Markos NL (No 2) [1987] 2 Lloyd’s Rep 321 at 331.

14. 15.

White & Carter (Councils) Ltd v McGregor [1962] AC 413 at 430. (1840) 49 ER 132.

16. 17.

(1790) 100 ER 785. Routledge v Grant (1828) 130 ER 920.

18. 19.

Adams v Lindsell (1818) 106 ER 250. Dunlop v Higgins (1848) 9 ER 805.

20. 21.

Tayloe v Merchants’ Fire Insurance Co 50 US (9 How) 390 (1850). (1880) 5 CPD 344.

22.

Abbott v Lance (1860) Legge 1283 at 1284.

23.

Abbott v Lance (1860) Legge 1283 at 1285.

24. 25.

Veivers v Cordingley [1989] 2 Qd R 278 at 297–8. Brogden v Directors of Metropolitan Ry Co (1877) 2 App Cas 666 at 691.

26. 27.

Entores Ltd v Miles Far East Corporation [1955] 2 QB 327. (1872) LR 7 Ch App 587 at 594.

28. 29.

(1879) 4 Ex D 216 at 223. [1955] 2 QB 327.

30. 31.

See Household Fire and Carriage Accident Insurance Co Ltd v Grant (1879) 4 Ex D 216 at 227 and Henthorn v Fraser [1892] 2 Ch 27. Henthorn v Fraser [1892] 2 Ch 27 at 33.

32. 33.

[1974] 1 All ER 161 at 166, 167. [1974] 1 All ER 161 at 164.

34. 35.

(1840) 49 ER 132. Trollope & Colls Ltd v Atomic Power Constructions Ltd [1962] 3 All ER 1035 at 1038.

36. 37.

[1975] AC 154 at 167. Brogden v Metropolitan Railway Co (1877) 2 App Cas 666 at 672.

38.

British Road Services Ltd v Arthur V Crutchley & Co Ltd [1968] 1 All ER 811 at 816–17.

[page 85]

5 THE REQUIREMENTS OF CERTAINTY AND COMPLETENESS

INTRODUCTION 5.1 In addition to the formative elements of offer, acceptance, and consideration, a contract must be sufficiently certain and complete to be valid. This means that a court must be sufficiently certain what the parties have agreed, and that their contract must set out those essential terms without which the contract cannot be enforced. Generally, courts will look to uphold agreements, especially in commercial dealings, rather than declare them void for uncertainty or lack of completeness. However, if a contractual term, or even an agreement as a whole, is incomplete or uncertain, it is void. Moreover, where it is clear that parties consider themselves bound to an agreement, courts will seek to give it effect even if the parties are yet to agree on some of its terms. In particular, a contract is likely to be considered sufficiently complete where it provides for a mechanism by which the essential terms may be determined, as illustrated by Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600 (see 5.2C). Where a contract fails to provide such a mechanism and simply leaves a term to be agreed upon later in a vague or unclear way, it is likely that the term, and even where necessary the contract itself, will be declared void for uncertainty. This was the outcome in Whitlock v Brew (1968) 118 CLR 445 (see 5.3C). Courts will generally not enforce arrangements whereby the parties ‘agree to agree’ at some later stage. Such arrangements are void for uncertainty.

However, courts may in appropriate circumstances hold that an agreement to negotiate in good faith towards a more comprehensive agreement is not void for uncertainty. This may be the case, such as in United Group Rail Services Ltd v Rail Corporation New South Wales (2009) 74 NSWLR 618 (see 5.4C), where the parties are not engaged in open-ended bargaining about a range of issues, but are trying to resolve a defined dispute within a framework fixed by their contract. An often contentious aspect of certainty involves agreements that are ‘subject to contract’. These are cases where the parties have reached an informal agreement about essential terms, but also envisage a more formal contract being prepared and executed later. The issue that arises is whether the earlier informal agreement is enforceable if the contemplated formal contract is not entered into. This often arises in the context of commercial parties who negotiate and draw up ‘heads of agreement’ or verbally arrive at a ‘preliminary agreement’. Typically, one party seeks to enforce the earlier agreement and the other party expects contractual obligations to arise only at the later time. The High Court in Masters v Cameron (1954) 91 CLR 353 (see 5.5C) [page 86] provided a useful means by which the possible obligations may be categorised and then applied to the facts of any given situation. The Court of Appeal decision in New South Wales in Pavlovic v Universal Music Australia Pty Ltd (2015) 90 NSWLR 605 (see 5.6C) illustrates the working of these principle in establishing the intention of the parties as to whether the earlier informal agreement is enforceable.

AGREEMENTS MUST BE SUFFICIENTLY COMPLETE 5.2C

Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600

Court: High Court of Australia

Facts: Wilson leased premises from Booker for a period of three years. Clause 4.01 of the lease granted Wilson an option for a further lease for a term of three years. The option clause stipulated that the terms of the new lease would be the same as in the original lease, with the exception of the rent. In relation to the rent, cl 4.01 stipulated that it would be ‘the rental as may be mutually agreed between the Lessor and the Lessee and failing agreement then such rental as may be fixed by an arbitrator nominated in accordance with the provisions of cl 3.05(b) but in any event the rental shall not be less than the rental payable in the last year of the first term’. Clause 3.05(b) provided for the appointment of a single arbitrator to be nominated by the President for the time being of the Queensland Law Society. Wilson sought to exercise his rights pursuant to the option clause. Booker rejected Wilson’s claim, arguing that the option clause was void for incompleteness as to an essential term, namely, the rent. Wilson brought an action for specific performance in relation to the option clause. Issue: The issue before the High Court was whether the option clause was sufficiently complete to be enforceable by a decree of specific performance. Decision: The High Court (Gibbs CJ, Murphy, Wilson, and Brennan JJ) unanimously held in favour of Wilson and ordered specific performance of the option. Extract: The extract from the joint judgment of Gibbs CJ, Murphy and Wilson JJ discusses the issue of completeness and the conditional nature of the decree of specific performance that was granted in the circumstances of the case.

Gibbs CJ, Murphy and Wilson JJ The only issue of substance which now arises for decision is whether the renewal agreement contained in the lease is a concluded agreement. … 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, [page 87] it is also well established that the parties to a contract may leave terms — even essential terms — to be determined by a third person. … In the present case, the lease itself provides the entire mechanism for determining the rental for the renewed term. There is no further agreement required of the parties. It is true that if they do agree upon that rental, then there is no occasion to resort to the independent mechanism that the lease provides. But, there being no such agreement, all that is required is that the President name a person to fix a figure being not less than the minimum rental operative during the original term. No formality is required to effect the necessary appointment. Either party may request the President to facilitate the fulfilment of the agreement. It may be assumed that if he declines to do so, or if the person nominated declines to carry out the task assigned to him, then the renewal cannot be effected, and that Wilson’s exercise of the option will have been fruitless. Nevertheless, in the circumstances as they stand at present, there is a valid agreement for the renewal of the lease subject to the fixation of a rental for the new term. The fixation of that rental is a condition precedent to the performance of the agreement. It follows that at this stage an order could not be made for the specific performance of the agreement to grant a further lease.1 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.2 … 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. … 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.

[page 88]

Comment 5.2.1 See Radan, Gooley, and Vickovich at 5.9–5.12.

AGREEMENTS MUST BE SUFFICIENTLY CERTAIN 5.3C

Whitlock v Brew (1968) 118 CLR 445

Court: High Court of Australia Facts: Whitlock agreed to sell land to Brew. Special Condition 5 of the sale agreement stipulated that Brew would grant a lease of the petrol station on the land to the Shell Company of Australia for the sale of its products ‘on such reasonable terms as commonly govern such a lease’. Whitlock purported to rescind the agreement and forfeited the deposit. Brew sought recovery of the deposit. He argued that Special Condition 5 was uncertain and could not be severed from the rest of the agreement, with the consequence that the whole

agreement was void for uncertainty. If this argument was correct, Brew was entitled to restitution of the deposit. Issue: The issue before the High Court was whether Special Condition 5 was uncertain, thereby rendering the whole of the agreement void for uncertainty. Decision: In a majority decision, the High Court (Kitto, Taylor, Menzies, and Owen JJ; McTiernan J dissenting) held in favour of Brew. The entire agreement was void because of the uncertainty of Special Condition 5, there being no clear evidence of commonly used lease terms that could establish the specific key terms, such as the rent and term of the lease, in the agreement entered into by the parties. Extract: The extract from the joint judgment of Taylor, Menzies, and Owen JJ applies the principles of uncertainty to the facts of the case.

Taylor, Menzies, and Owen JJ The first question to be considered is whether the contention that special condition 5 is uncertain should be upheld. [Whitlock] 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 [page 89]

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 … in Life Insurance Co of Australia Ltd v Phillips … Knox CJ [said]: 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.3 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. … Of course, cases may arise where a vague, uncertain or meaningless clause in a contract may simply be ignored. … 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 [Brew] 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. The case is, perhaps, not as clear as

the case where a contract for the sale of land is entered into with a reservation to the vendor of an unspecified part.4 … The case more closely resembles Duggan v Barnes,5 where A agreed to sell land to B for a stated price and B undertook to grant a lease to any person who should purchase A’s business. There the court had no difficulty in holding that B’s undertaking was a material and inseverable part of the consideration for A’s promises. In our view the same conclusion must be reached in this case and the fact that here it is the purchaser, and not the vendor, who is asserting the invalidity of the contract is of no consequence. In our opinion [Whitlock’s] appeal should be dismissed.

[page 90]

Comments 5.3.1 See Radan, Gooley, and Vickovich at 5.18–5.19. 5.3.2 In Mamidoil-Jetoil Greek Petroleum Co SA v Okta Crude Oil Refinery AD [2001] 2 Lloyd’s Rep 76 at 89, Rix LJ listed the following as a non-exhaustive list of principles to apply in dealing with cases of possible uncertainty: Each case must be decided on its own facts and on the construction of its own agreement. Subject to that: Where no contract exists, the use of an expression such as ‘to be agreed’ in relation to an essential term is likely to prevent any contract coming into existence, on the ground of uncertainty. This may be summed up by the principle that ‘you cannot agree to agree’. Similarly, where no contract exists, the absence of agreement on essential terms of the agreement may prevent any contract coming into existence again on the ground of uncertainty. However, particularly in commercial dealings between parties who are familiar with the trade in question, and

particularly where the parties have acted in the belief that they had a binding contract, the Courts are willing to imply terms, where that is possible, to enable the contract to be carried out. Where a contract has once come into existence, even the expression ‘to be agreed’ in relation to future executory obligations is not necessarily fatal to its continued existence. Particularly in a case of contracts for future performance over a period, where the parties may desire or need to leave matters to be adjusted in the working out of their contract, the Courts will assist the parties to do so, so as to preserve rather than destroy bargains, on the basis that what can be made certain is itself certain. … This is especially the case where one party has either already had the advantage of some performance which reflects the parties’ agreement on a long term relationship, or has had to make an investment premised on that agreement. For these purposes, an express stipulation for a reasonable or fair measure or price will be a sufficient criterion for the courts to act on. But even in the absence of express language, the Courts are prepared to imply an obligation in terms of what is reasonable.

[page 91]

AGREEMENTS TO NEGOTIATE IN GOOD FAITH AND THE REQUIREMENT OF CERTAINTY 5.4C United Group Rail Services Ltd v Rail Corporation New South

Wales (2009) 74 NSWLR 618

Court: Court of Appeal in New South Wales Facts: United Group Rail Services, in two contracts undertook to design and build new rolling stock for Rail Corporation. Both contracts contained an identical cl 35.11, which stipulated that any difference or dispute that arose between the two parties to the contract would be referred to senior representatives of each party. These representatives were then obliged to ‘meet and undertake genuine and good faith negotiations with a view to resolving the dispute or difference’. Issue: The issue before the Court of Appeal was whether cl 35.11 was enforceable or void for uncertainty. Decision: The Court of Appeal (Allsop P, Ipp and Macfarlan JJA) unanimously upheld the validity of cl 35.11 on the basis that such clauses could, in appropriate circumstances, be valid and enforceable. Extract: The extract from the judgment of Allsop P, who gave the only judgment in this case, explains the reason why, in appropriate circumstances, an agreement to negotiate in good faith is not void for uncertainty and may be enforced.

Allsop P [In Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1, Kirby P] cautiously, but decidedly, [put] the view that an agreement to negotiate in good faith might be enforceable, depending on its terms and context. … His Honour was not stating an all encompassing generalised test or formula. … In Trawl [Industries of Australia Pty Ltd v Effem Foods Pty Ltd (1992) 27 NSWLR 326], Samuels JA made the valuable point … that uncertainty and incompleteness were different concepts. I agree. … [G]iven the juristic debate that has taken place about agreements to negotiate in good faith, it is helpful to begin with some essential propositions founded on accepted authority and principle. First, an

agreement to agree is incomplete, lacking essential terms.6 (That is not a question of uncertainty or vagueness, but the absence of essential terms.) Secondly, the task of the Court is to give effect to business contracts where there is a meaning capable of being ascribed to a word or phrase or term or contract, ambiguity not being vagueness.7 … [page 92] Thirdly, good 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.8 … There are other decisions of Australian courts and discussions by scholars recognising the obligation of good faith in a non-fiduciary context. It is fair to say that caution (in some cases a lack of enthusiasm) has been expressed by some. … Whilst … the law in Australia is not settled as to the place of good faith in the law of contracts, this Court should work from the position that it has said on at least three occasions (not including Renard) that good faith, in some degree or to some extent, is part of the law of performance of contracts. … [I]n my view, Kirby P’s reasons [in Coal Cliff Collieries v Sijehama] are more persuasive than the competing authority. … I turn to the major contrary appellate decisions. In … Courtney,9 … Lord Denning MR equated an agreement to negotiate with an agreement to agree. The latter is, of course, not enforceable.10 … It does not follow, however, that an agreement to undertake negotiations in good faith fails for the same reason. An agreement to agree to another agreement may be incomplete if it lacks essential terms of the future bargain. An agreement to negotiate, if viewed as an agreement to behave in a particular way, may be uncertain, but is not incomplete. The objection that no court could

estimate the damages because no one could tell whether the negotiations ‘would be’ successful ignores the availability of damages for the loss of a bargained for valuable commercial opportunity.11 The relevant question is whether the clause has certain content. Nor, with respect, do I find the views of Lord Ackner in Walford v Miles12 persuasive. 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.13 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 [page 93] 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. … Of course, it must be that the certainty and content of any contract will depend on its specific terms and context. Sweeping generalised rules, however, are difficult to sustain and not of great assistance. … What the phrase ‘good faith’ signifies in any particular context and contract will depend on that context and that contract. A number of things, however, can be said as to the place of good faith in the operation of the common law in Australia. The phrase does not, by its terms, necessarily import, or presumptively introduce, notions of fiduciary obligation familiar

in equity or the law of trusts. Nor does it necessarily import any notion or requirement to act in the interests of the other party to the contract. The content and context here is a clearly worded dispute resolution clause of an engineering contract. It is to be anticipated at the time of entry into the contract that disputes and differences that may arise will be anchored to a finite body of rights and obligations capable of ascertainment and resolution by the chosen arbitral process (or, indeed, if the parties chose, by the Court). The negotiations (being the course of treaty or discussion) with a view to resolving the dispute will be anticipated not to be open-ended about a myriad of commercial interests to be bargained for from a selfinterested perspective. … Rather, they will be anticipated to involve or comprise a discussion of rights, entitlements and obligations said by the parties to arise from a finite and fixed legal framework about acts or omissions that will be said to have happened or not happened. The aim of the negotiations will be anticipated to be to resolve a dispute about an existing bargain and its performance. Honest and genuine differences of opinion may attend the parties’ views of their rights and obligations. Such things as difficulties of proof and uncertainty as to fact or law may perfectly legitimately strike the parties differently. That accepted, honest business people who approach a dispute about an existing contract will often be able to settle it. This requires an honest and genuine attempt to resolve differences by discussion and, if thought to be reasonable and appropriate, by compromise, in the context of showing a faithfulness and fidelity to the existing bargain. The phrase ‘genuine and good faith’ in cl 35.11 is, as I have said, a composite phrase. It is a phrase concerning an obligation to behave in a particular way in the conduct of an essentially self-interested commercial activity: the negotiation of a resolution of a commercial dispute. Given that context, the content of the phrase involves the notions of honesty and genuineness. Whilst the activity is of a self-interested character, the parties have not left its conduct unconstrained. They have promised to undertake negotiations in a genuine and good faith manner for a limited period (14 days). As a matter of language, the phrase ‘genuine and good faith’ in this context needs little explication: it connotes an honest and genuine approach to

[page 94] the task. This task, rooted as it is in the existing bargain, carries with it an honest and genuine commitment to the bargain (fidelity to the bargain) and to the process of negotiation for the designated purpose. The notion of fidelity to the bargain can be seen as founded, at least in part, on the requirement of a party to do all things necessary to enable the other party to have the benefit of the contract14 and upon the recognition that contractual obligations do not set up a choice or election to perform or pay damages.15 Contractual promises (supported by consideration) comprise legal rights to performance.16 The encompassing of fidelity to the bargain within the concept of good faith, at least in the context at hand — the genuine and good faith negotiation of an existing dispute by reference to an existing contract — does no violence to the language used here by the parties. That the phrase ‘good faith’ contains the notion of fidelity (or faithfulness) to the bargain conforms with what other jurisdictions have seen as the core of the concept and with historical uses of the phrase.17 Most importantly, its strength lies in its closeness to the contractual jurisprudence of the common law and the appreciation that the parties have expressly bound themselves to a good faith standard in seeking to resolve a dispute arising from an existing bargain about the resolution of which dispute they anticipate having different views. The parties have mutually agreed to bring an approach of genuineness and good faith to that process of seeking resolution of any such disagreement. That agreement carried with it, in ordinary language, a requirement to bring an honestly held and genuine belief about their mutual rights and obligations and about the controversy to the negotiations, and to negotiate by reference to such beliefs. These are not empty obligations; nor do they represent empty rhetoric. An honest and genuine approach to settling a contractual dispute, giving fidelity to the existing bargain, does constrain a party. The constraint arises from the bargain the parties have willingly entered into. It requires the honest and genuine assessment of rights and obligations and it requires that a party negotiate by reference to such. A party, for instance, may well not be entitled to threaten a future breach of contract in order to bargain for a lower settlement sum than it genuinely recognises as due. That would not,

in all likelihood, reflect a fidelity to the bargain. A party would not be entitled to pretend to negotiate, having decided not to settle what is recognised to be a good claim, in order to drive the other party into an expensive arbitration that it believes the other party cannot afford. If a party recognises, without qualification, that a claim or some material part of it is due, fidelity to the bargain may well require its payment. That, however, is only to say that a party should perform what it knows, without qualification, to be its obligations under a contract. Nothing in cl 35.11 prevents a party, not [page 95] under such a clear appreciation of its position, from vindicating its position by self-interested discussion as long as it is proceeding by reference to an honest and genuine assessment of its rights and obligations. It is not appropriate to multiply examples. It is sufficient to say that the standard required by the notion of genuineness and good faith within a process of otherwise tactical and self-interested behaviour (negotiation) is rooted in the honest and genuine views of the parties about their existing bargain and the controversy that has arisen in connection with it within the limits of a clause such as cl 35.1. With respect to those who assert to the contrary, a promise to negotiate (that is to treat and discuss) genuinely and in good faith with a view to resolving claims to entitlement by reference to a known body of rights and obligations, in a manner that respects the respective contractual rights of the parties, giving due allowance for honest and genuinely held views about those pre-existing rights is not vague, illusory or uncertain. It may be comprised of wide notions difficult to falsify. However, a business person, an arbitrator or a judge may well be able to identify some conduct (if it exists) which departs from the contractual norm that the parties have agreed, even if doubt may attend other conduct. If business people are prepared in the exercise of their commercial judgement to constrain themselves by reference to express words that are broad and general, but which have sensible and ascribable meaning, the task of the Court is to give effect to, and not to impede, such solemn express contractual provisions. It

may well be that it will be difficult, in any given case, to conclude that a party has not undertaken an honest and genuine attempt to settle a dispute exhibiting a fidelity to the existing bargain. In other cases, however, such a conclusion might be blindingly obvious. Uncertainty of proof, however, does not mean that this is not a real obligation with real content.

Comment 5.4.1 See Radan, Gooley, and Vickovich at 5.22–5.30.

THE ENFORCEMENT OF INFORMAL AGREEMENTS 5.5C

Masters v Cameron (1954) 91 CLR 353

Court: High Court of Australia Facts: On 6 December 1951 the parties signed a written memorandum for the sale of Cameron’s farm to Masters. The memorandum stated that ‘this agreement is made subject to the preparation of a formal contract of sale which shall be acceptable to [Cameron’s] solicitors on the above terms and conditions’. On the same day Masters paid a deposit of £1750 to Cameron’s real estate agent. Later Masters refused to complete the transaction and claimed he was entitled to a refund of the deposit paid to the agent. Cameron claimed that the memorandum created a binding and enforceable contract, even though [page 96] no formal written contract was ever entered into between the parties as envisaged by the 6 December agreement. Issue: The issue before the High Court was whether the

memorandum of 6 December created a binding and enforceable contract. Decision: In a unanimous decision, the High Court (Dixon CJ, McTiernan and Kitto JJ) held in favour of Masters, holding that the memorandum did not create a binding and enforceable contract. Extract: The extract from the joint judgment of the court discusses the principles that apply in determining whether an informal agreement stipulating that a later formal agreement is to be entered into is enforceable if the later formal agreement is never entered into by the parties.

Dixon CJ, McTiernan and Kitto JJ The first question in the appeal is whether … this document on its true construction constitutes a binding contract between [Cameron] and [Masters], or only a record of terms upon which the signatories were agreed as a basis for the negotiation of a contract. … 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 classes. 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. 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 (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 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 [page 97] is completed’.18 A case of the second class came before this court in Niesmann v Collingridge 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 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 … 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’.19 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.20 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 Parker21 or simply because they wish to reserve to themselves a right to withdraw at any time until the formal document is signed. …

So, as Parker J said in Von Hatzfeldt-Wildenburg v Alexander22 in such a case there is no enforceable contract, either because the condition is unfulfilled or because the law does not recognise a contract to enter into a contract. 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.23 Nor is any formula, such as ‘subject to contract’, so intractable as always and necessarily to produce that result.24 But the natural sense of such words was shown by the language of Lord Westbury when he said in Chinnock v Marchioness of Ely: ‘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’.25 … 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 recognised 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 Greens MR remarked during the argument in Eccles v Bryan and Pollock26 that when the expression ‘subject to contract’ was used he had never [page 98] 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. … 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 … no binding contract for the sale and purchase of the property mentioned in the

document dated 6 December 1951 was made between [Cameron] and [Masters].

Comments 5.5.1 See Radan, Gooley, and Vickovich at 5.31–5.37. 5.5.2 To the three categories noted in Masters v Cameron, a fourth has been added in Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622 at 628: see Radan, Gooley, and Vickovich at 5.38–5.42. The need to recognise the fourth category is challenged in E Peden, J W Carter and G Tolhurst, ‘When Three Just Isn’t Enough: The Fourth Category of the “Subject to Contract” Cases’ (2004) 20 Journal of Contract Law 156. It has been argued that the four categories should be abandoned and replaced by two categories — the first being agreements intended to be legally binding that are sufficiently complete to be enforceable, and the second being agreements that are not intended to be legally binding or that are not sufficiently complete: D W McLauchlan, ‘In Defence of the Fourth Category of Preliminary Agreements: Or Are There Only Two?’ (2005) 21 Journal of Contract Law 286. On the other hand, it has been suggested that all the categories should be dispensed with, and that the question to be determined in any given case is ‘whether the objective intention of the putative parties … shows an intention to be bound’: B Walker, ‘The Fourth Category of Masters v Cameron’ (2009) 25 Journal of Contract Law 108 at 116–17. 5.5.3 In relation to entering into formal contracts for the sale of land, in Marek v Australasian Conference Association Pty Ltd [1994] 2 Qd R 521 at 527–8, McPherson SPJ said: The usual expectation of parties in negotiations of the sale of land is that they will not be taken to have made a concluded bargain unless and until a formal contract is executed. In this State real estate is ordinarily agreed to be sold by the execution by vendor and purchaser of a form of contract adopted by the Real Estate Institute of Queensland

and approved by the Queensland Law Society. … This notorious fact largely explains why these days in land sales the ‘expectation is strong that the parties did not intend to be bound until a formal contract is executed’. … Exceptionally, the conduct of the parties may reveal [page 99] an intention to make a binding agreement concerning land before a formal contract is signed. … However such cases are rare. Where solicitors are to assist in the preparation of a contract for the sale of real estate, that factor tends to make it less likely that the parties desire to be finally committed before the contract’s execution.

5.6C Pavlovic v Universal Music Australia Pty Ltd (2015) 90 NSWLR

605 Court: Court of Appeal of the Supreme Court of New South Wales Facts: Pavlovic and Universal Music Australia Pty Ltd formed a joint venture to operate a music recording label business, Modular Recordings Pty Ltd. After operating successfully for some years, the relationship between the parties broke down and they both decided to terminate the joint venture. In December 2009 Universal’s solicitors drew up a deed of release and settlement. Among other things, the deed provided for Pavlovic’s resignation from Modular, a restraint on him using the name Modular in the future, the assignment of certain trade marks, the transfer of shares in Modular to him for $100, and mutual releases by the parties. A draft was sent to Pavlovic’s solicitor in ‘final form for execution’ on 23 December 2009. On the following day the solicitor replied by email, stating that Pavlovic ‘will sign’ the proposed deed. A further email stated that he would sign, scan, and send it on the following day. Universal’s

solicitors finally replied with an email that allowed Pavlovic ‘a further 48 hours’ to sign the deed and return it. The respective solicitors then closed their offices for the Christmas break. Pavlovic at some point then asserted to Universal he had signed the deed and appeared to take steps that ‘reasonably indicated’ he was performing some of his obligations under the deed. The deed was never signed by the parties and the $100 consideration for the share transfer was never paid. Pavlovic then changed his mind and contended that the agreement was not binding. Universal argued that an agreement was reached and commenced proceedings. The trial judge found in favour of Universal on the basis of an exchange of offer and acceptance between the solicitors on 23 and 24 December. Pavlovic appealed. Issues: The court had to determine whether the parties, acting through their solicitors, had entered into a binding agreement on the terms of the proposed deed and whether the solicitors had actual or ostensible authority to enter into the agreement on behalf of the parties. Decision: The Court of Appeal (Bathurst CJ, and Beazley P and Meagher JA) unanimously allowed the appeal. The court held that the objectively determined intention of the parties was that they were to be bound only upon the execution of the deed and that solicitors do not have, other than in the context of litigation, ostensible authority to bind their clients to a contract. Extract: The extracts below from the judgment of Beazley P (with whom Bathurst CJ and Meagher JA agreed) indicate the appeal court’s reasoning in respect of the main issues on appeal.

[page 100]

Beazley P Legal principles

Where parties have reached agreement as to all the terms of a contract, but have also agreed that a further, formal agreement is to be executed the question for determination is whether the parties intend to be immediately bound. That is to be determined objectively from the ‘outward manifestations’ of the parties’ intentions.27 The question, therefore, is ‘what each party by words and conduct would have led a reasonable person in the position of the other party to believe’. … An agreement that is incomplete will not give rise to an enforceable contract. It is apparent that by 24 December 2014 the parties had finalised their negotiations. The question in issue is whether they intended to be immediately bound once each party had given assent to the terms of the Proposed Deed or whether their intention, objectively ascertained, was that they would not be bound until all aspects of a formal agreement and, in particular, execution of the relevant documentation, had been finalised. The starting point of [the trial judge’s] consideration of this issue was Masters v Cameron,28 where Dixon CJ, McTiernan and Kitto JJ identified … three categories within which cases, where the parties’ agreement was to be or was to be recorded in writing, may fall as follows: 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 classes. 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.29

In Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd McLelland J identified a fourth category: … 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.30 [page 101] However, as his Honour’s review of the case law demonstrated, the Masters v Cameron classifications are no longer, if ever they were, applied as strict categories into which such cases must fall. … Rather, as McHugh JA stated in GR Securities v Baulkham Hills Private Hospital Pty Ltd: … the 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.31 Consistent with the authorities, none of the parties submitted that the case was to be determined solely by reference to one or other of the Masters v Cameron categories. Mr Pavlovic submitted that in its email of 4:13 pm on 24 December 2014, Universal was ‘reserving its right to withdraw from proceeding further with the proposed settlement if the Proposed Deed was not executed and exchanged by the Pavlovic Parties within 48 hours’. Although this submission reflected the language of the third category of Masters v Cameron, Mr Pavlovic reformulated the submission in his reply and in oral argument, submitting that the real question was whether Universal had established that there was an agreement on 24 December 2014 on the terms of the Proposed Deed, binding on the parties, without the deed having been signed or exchanged. Universal contended that the appellants had not established that the 24 December 2014 agreement fell within the third category of Masters v Cameron but recognised that the ultimate question was ‘one of characterisation of the facts as found and recorded’ by the primary judge. Both parties accepted that in determining whether a binding agreement had

come into existence it was relevant to consider the commercial context and surrounding circumstances of the parties’ dealings. … Accordingly, each relied upon the history of the parties’ relationship, the terms of the Proposed Deed, the terms of the emails of 23 and 24 December and the subsequent conduct of the parties. Each argued that those considerations pointed to the conclusion for which they respectively contended. … In my opinion, the formal context in which the parties had always dealt with one another, and the fact that up until 23 December 2014, as Universal accepted, the termination of the relationship was to be concluded in the same formal manner, namely, by execution of the Proposed Deed, do not support Universal’s contentions. This context also does not support [the trial judge’s] finding that the parties intended to be and were bound by the email exchange that occurred on 23 and 24 December 2014. The negotiations were complex. They dealt not only with the conditions upon which Mr Pavlovic’s employment with Universal was to be terminated and the assignment of his shares to Universal, but also the assignment of significant intellectual property rights between the parties, the domain name was to be transferred and his resignation as Managing Director was required. [page 102] All of these matters were the subject of drafts of the Proposed Deed that passed back and forth between the solicitors during the course of the negotiations. There was no indication in the communications between the parties during that process that once the parties’ assent to the various terms and conditions was obtained, they would be bound. The reverse was the case. The negotiations centred on amending the draft documents and neither party had indicated an intention to depart from the formal arrangements envisaged by them throughout the negotiations. … I also do not put any store on Universal’s hypothesis, that although in the past the parties had signed and executed variations to the Shareholders’ Agreement: … there is no basis for concluding that the parties did not regard

themselves as bound by the previous written amendments before the documents had been executed and exchanged. There was no evidence to support this submission and the manner in which the parties conducted their negotiations on this occasion indicates, if anything, that in the past they had bound themselves by execution of the formal documentation. Nor could it reasonably be suggested, given the extensive range of matters that had to be dealt with in order to terminate the relationship between the parties, that termination would involve less formality than all previous dealings between them. The emails of 23 and 24 December 2014 are to be considered in light of the commercial and formal relationship between the parties, the complex dispute they were facing, and the lengthy negotiations that had culminated in the Proposed Deed. These factors indicate an intention to maintain the formalities which had characterised the relationship between the parties as until 24 December 2014. … I do not agree with [the trial judge’s] reasoning … that the consistent references to “Execution Date” or other formal time requirements related only to performance of the terms agreed between the parties. It is unnecessary to analyse all the clauses where the execution date is pivotal to a particular aspect of the parties’ obligations. It is sufficient to refer to cls 2.1, 2.4(a) and cls 3.2, 3.4 and 3.5, to demonstrate why the execution date was more than merely a provision that governed the time of performance. Clause 4 is also relevant, being a central provision in the Proposed Deed. Finally, cl 7.3, which was an “entire agreement clause”, and cl 7.4 which provided that variations were to be in writing and signed by both parties, are relevant. Clause 2.1 provided: (a) This deed is executed by the parties on a ‘without admissions’ basis. (b) Each of [the parties] agree to the following terms of settlement. Clause 2.1 is consistent with the parties being bound by the agreement by entering into the Proposed Deed. Were it otherwise and the parties were already bound, the clause would be surplusage. In particular, cl 2.1(b) would be surplusage, as on Universal’s argument, the parties had already agreed to the terms of the Proposed Deed.

[page 103] Clause 2.4(a) provided that Mr Pavlovic “agrees to assign the Trade Marks … by returning executed copies of the Deed of Assignment of Trade Marks to Universal by the Execution Date”. Clause 2.4(c) related to the transfer of the domain name, which was required on or before the Execution Date. Clause 2.4(c) additionally required Mr Pavlovic to provide evidence that this had occurred “within 1 Business Day of the Execution Date”. Pursuant to cl 3.2, Modular released Mr Pavlovic and the Pavlovic interest from all actions, claims and the like arising out of, relevantly, the registration of the trade marks and the domain name. The transfer of the trade marks and domain name was an important requirement of the agreement. It would make no commercial sense for the parties to bind themselves to this agreement and for Mr Pavlovic not to be required, as a matter of performance of the contract, to transfer essential assets of the business until a time, unspecified by the agreement, when the documents had been fully executed. Likewise, the releases provided in cls 3.4 and 3.5 only came into effect on and from the Execution Date. Again, as a matter of commercial reality, a party would expect to be released from the claims by the opposing party as and from the time the agreement was agreed to be binding. Clause 4 provided for Mr Pavlovic to cause his 50 per cent shareholding to be transferred to Universal for $100 (receipt of which was acknowledged), by the Execution Date. Leaving aside the non-payment of the $100, it would likewise be expected that the transfer of the shares was such an essential aspect of the agreement that its occurrence would not be left to some undefined time, particularly in circumstances where the shares were held in trust by another person. Although the payment of the $100 for the transfer of the shares was essentially nominal, [Universal’s solicitors’] email of 23 December 2014, in which they stated they would forward the executed documents and the $100, indicates that Universal treated the obligation to pay as an important, if not an essential, obligation. His Honour’s finding … that the entire agreement provision in cl 7.3 of the Proposed Deed and the stipulation as to variation in cl 7.4 ‘do not prevent a binding agreement from having been reached’ is correct so far as it goes.

However, alongside the obligations conditioned upon the ‘Execution Date’, these provisions indicate the parties’ intention that the formal steps of execution and exchange be taken before they were bound by the terms of the Proposed Deed. In summary therefore, Universal’s contention that there was a binding agreement by the exchange of emails is contrary to the terms of the Proposed Deed, which provide that the agreement was to take effect upon execution. … In effect, therefore, both parties submitted that the silence in the emails as to whether they were to be immediately bound and the flexibility as to when the Proposed Deed would be signed supported their respective positions. Although the authorities state that it is not necessary to identify a precise offer or acceptance in order to find the existence of a binding contract, I am of the opinion that the language used in the emails was not the language of an immediately binding contract. … In the email of 23 December 2014, [Universal’s solicitors] attached two copies of the Proposed Deed, one in marked up form and the other in ‘final form for execution’. The email [page 104] then confirmed the arrangements it had previously advised as to Universal’s execution and delivery of the deed and stated that they ‘would appreciate if’ [Pavlovic’s solicitor] would do the same. This was not an offer by Universal that it would consider itself immediately bound when it was advised that Mr Pavlovic would sign. As a matter of ordinary language, this was advice as to the proposed arrangements for execution and exchange. As a matter of commercial reality, that information made business sense. [Pavlovic’s solicitor’s] response at 2.36 pm on 24 December 2014 again, as a matter of ordinary language, said nothing about Mr Pavlovic being immediately bound by the terms of the Proposed Deed. It was a response relating to the arrangements for execution and exchange.

For the reasons I have discussed, there was nothing in the surrounding circumstances that cast a different light on the emails. [The trial judge’s] finding that the parties were bound by the email communications does not accord with the past dealings between the parties, nor with the terms of the Proposed Deed. In my opinion, something more than mere silence would have been required to evince the intention to diverge from the parties’ past practice and the terms of the Proposed Deed. …

Comment 5.6.1 See Radan, Gooley, and Vickovich at 5.49–5.50.

1.

Brown v Heffer (1967) 116 CLR 344.

2. 3.

See Butts v O’Dwyer (1952) 87 CLR 267; Kennedy v Vercoe (1960) 105 CLR 521; Sudbrook Trading Ltd v Eggleton (1983) 1 AC 444. Life Insurance Co of Australia Ltd v Phillips (1925) 36 CLR 60 at 72.

4. 5.

Pearce v Watts (1875) LR 20 Eq 492. [1923] VLR 27.

6. 7.

Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd [1982] 149 CLR 600 at 604. Upper Hunter County District Council v Australian Chilling and Freezing Co Limited (1968) 118 CLR 429 at 436–7.

8.

9.

Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 at 263–70; Hughes Bros Pty Ltd v Trustees of the Roman Catholic Church for the Archdiocese of Sydney (1993) 31 NSWLR 91; Burger King Corporation v Hungry Jacks Pty Ltd (2001) 69 NSWLR 558 at 565–74; Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349 at 363–9. Courtney & Fairbairn Ltd v Tolaini Brothers (Hotels) Ltd [1975] 1 WLR 297.

10. 11.

Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd [1982] 149 CLR 600 at 604. Chaplin v Hicks [1911] 2 KB 786; Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 at 349ff.

12. 13.

[1992] 2 AC 128 at 138. Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378; Twinsectra Ltd v Yardley [2002] 2 AC 164.

14.

Butt v McDonald (1896) 7 QLJ 68 at 70–1, approved in Secured Income Real Estate (Australia) Limited v St Martins Investments Pty Limited (1979) 144 CLR 596 at 607. United States Surgical Corporation v Hospital Products International Pty Limited [1982] 2 NSWLR 766 at 800.

15. 16. 17.

Ahmed Angullia Bin Hadjee Mohamed Salleh Angullia v Estate and Trust Agencies (1927) Ltd [1938] AC 624 at 634–5; Coulls v Bagot’s Executor and Trustee Company Limited (1967) 119 CLR 460 at 504. H Lücke, ‘Good Faith and Contractual Performance’ in P Finn (ed), Essays on Contract, Law Book

Company, Sydney, 1987, p 161 ff. 18. 19.

Rossiter v Miller (1878) 3 App Cas 1124 at 1151; see also Sinclair Scott & Co Ltd v Naughton (1929) 43 CLR 310 at 317. Niesmann v Collingridge (1921) 29 CLR 177 at 185.

20. 21.

Governor etc of the Poor of Kingston-upon-Hull v Petch (1854) 156 ER 583. (1950) 80 CLR 304.

22. 23.

[1912] 1 Ch 284 at 289. Farmer v Honan (1919) 26 CLR 183.

24. 25.

Filby v Hounsell [1896] 2 Ch 737. Chinnock v Marchioness of Ely (1865) 46 ER 1066 at 1069.

26. 27.

[1948] Ch 93 at 94. Electricity Generation Corporation v Woodside Energy Ltd 251 CLR 640 at [35]; Mushroom Composters Pty Ltd v IS & DE Robertson Pty Ltd [2015] NSWCA 1 at [59]–[61]; Taylor v Johnson (1983) 151 CLR 422 at 428.

28. 29.

(1954) 91 CLR 353. Masters v Cameron (1954) 91 CLR 353 at 360–2.

30. 31.

(1986) 40 NSWLR 622 at 628. (1986) 40 NSWLR 631 at 634–5.

[page 105]

6 CONSIDERATION

INTRODUCTION 6.1 This chapter deals with one of the essential elements of a contract, namely, the requirement of consideration. For a contract to be created, it is not enough that the parties arrive at an agreement, their agreement must also be supported by consideration. This means that their agreement reflects an exchange of something of value between them, which is often referred to as a ‘bargain’. Without providing something of value in exchange for a promise, the promise remains gratuitous and unenforceable. Where parties do provide consideration, they are simultaneously promisor and promisee for each other. This could be by way of a bilateral contract, which comes into being with the exchange of promises, or it could be by way of the exchange of an act for a promise — a unilateral contract — in which event the contract comes into existence only upon the performance of the act. The principle that consideration must be bargained for may be seen in Australian Woollen Mills Pty Ltd v The Commonwealth (1954) 92 CLR 424 (see 6.2C). Where it is claimed that consideration has been provided, thereby making the promisor’s promise enforceable, it will also be necessary to ensure that it is good or valid consideration. One of the requirements is that the consideration must have moved from the promisee, being the party to whom the promise was made, unless the promise is given to more than one promisee. In such event, the promise is enforceable by any of the promisees, even if consideration is provided by only one of them. This rule, and its joint promisee exception, may be seen in Coulls v Bagot’s Executor and Trustee Co Ltd (1967)

119 CLR 460 (see 6.3C). Another condition of valid consideration is that it must not be ‘past consideration’. This rule requires that the act or promise upon which the promisee relies must not precede the promisor’s promise. An illustration of the rule may be seen in Pao On v Lau Yiu Long [1980] AC 614 (see 6.4C). A further important rule of consideration is that it must be ‘sufficient’ in the sense that it has a discernible value in the eyes of the law. Courts will not be concerned with whether the consideration is adequate in a commercial sense, which is why they will generally not inquire as to whether the promisee has promised to pay less than market value or simply nominal consideration. Unless a valid exception applies, courts have not accepted the performance of a public duty or an existing contractual duty as sufficient consideration because they do not represent the promise of a new price to be paid by the promisee. However, as the case of Williams v Roffey Bros & Nicholls (Contractors) Ltd [1990] 1 QB 1 (see 6.5C) shows, this may amount to valid consideration if the promisor gains a ‘practical benefit’ as a result. Furthermore, unless one of several available exceptions applies, the partpayment of a debt by the promisee [page 106] is generally not sufficient consideration for the promisor’s promise to discharge the whole debt. This shows that a promise to do less than what one is contractually bound to do for the promisor is not sufficient consideration (the rule in Pinnel’s Case (1602) 77 ER 237) and is illustrated in Foakes v Beer (1884) 9 App Cas 605 (see 6.6C). Finally, valid consideration may also be provided by way of a forbearance to sue, meaning that a promisee who genuinely gives up a reasonable legal claim against the promisor may enforce the promisor’s promise. Furthermore, consideration is generally not a requirement where the parties choose to execute a deed, which is a formal contract that displaces the need for consideration.

CONSIDERATION MUST BE BARGAINED FOR

6.2C Australian Woollen Mills Pty Ltd v The Commonwealth (1954)

92 CLR 424 Court: High Court of Australia Facts: The Australian Government implemented a scheme to facilitate the supply of wool products to the public at a reasonable price, given that wool was scarce and relatively expensive at the time. The scheme involved the payment of subsidies to Australian wool manufacturers in relation to wool purchased for the production of garments for the Australian market. Australian Woollen Mills purchased considerable quantities of wool. The government did not pay the subsidies on all the wool purchased and Australian Woollen Mills sued the Commonwealth government for the unpaid subsidies, claiming that its purchase of wool was consideration for the promise by the government to pay subsidies to those local wool manufacturers, such as Australian Woollen Mills, who purchased wool. Issue: The issue before the High Court was whether Australian Woollen Mills’ purchase of wool was consideration for a promise by the government to pay the subsidies. Decision: In a joint judgment, the High Court (Dixon CJ, Williams, Webb, Fullagar, and Kitto JJ) rejected Australian Woollen Mills’ claim. The court effectively considered the government’s subsidy scheme as a conditional promise of a gift, which could not be legally enforced. Extract: The extract from the court’s judgment illustrates the need for a connection between the alleged consideration and the promise which it is claimed to support, and the difficulties this requirement can give rise to in cases where the alleged consideration is the performance of an act, rather than the making of a promise in exchange for the promisor’s promise.

The Court

The contract put forward by [Australian Woollen Mills] is … of that type which is commonly said to be constituted by an offer of a promise for an act, the offer being accepted [page 107] by the doing of the act. … 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 Smoke Ball Co.1 … 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. One simple example will suffice to illustrate this. A, in Sydney, says to B in Melbourne: ‘I will pay you £ 1,000 on your arrival in Sydney’. The next day B goes to Sydney. If these facts alone are proved, it is perfectly clear that no contract binding A to pay £ 1,000 to B is established. For all that appears there may be no relation whatever between A’s statement and B’s act. It is quite consistent with the facts proved that B intended to go to Sydney anyhow, and that A is merely announcing that, if and when B arrives in Sydney, he will make a gift to him. The necessary relation is not shown to exist between the announcement and the act. Proof of further facts, however, might suffice to establish a contract. For example, it might be proved that A, on the day before the £ 1,000 was mentioned, had told B that it was a matter of vital importance to him (A) that B should come to Sydney forthwith, and that B objected that to go to Sydney at the moment might involve him in financial loss. These further facts throw a different light on

the statement on which B relies as an offer accepted by his going to Sydney. They are not necessarily conclusive but it is now possible to infer (a) that the statement that £ 1,000 would be paid to B on arrival in Sydney was intended as an offer of a promise, (b) that the promise was offered as the consideration for the doing of an act by B, and (c) that the doing of the act was at once the acceptance of an offer and the providing of an executed consideration for a promise. The necessary connection or relation between the announcement and the act is provided if the inference is drawn that A has requested B to go to Sydney. 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. … A test which has not seldom been applied in such cases in order to determine whether a contract has been made or not is to ask whether there has been a request by the alleged promisor that the promisee shall do the act on which the latter relies. Such a request may, of course, be expressed or implied. … Coming to the present case, it is impossible, in our opinion, to hold that any contract was constituted at any stage binding the Commonwealth to pay a subsidy to [Australian Woollen Mils], or to any manufacturer, in consideration of a purchase of wool for local manufacture. … [page 108] The question at issue depends on an examination of documents, and not — except as a last resort — on probabilities. But the documents did not come into existence in a vacuum, and it is a relevant consideration that the announcements on which [Australian Woollen Mills] relies did not emanate from someone who had something to sell or from a rich and generous uncle. When one comes to the documents, it is not, in our opinion, possible to construe them as containing a standing offer, a standing offer capable of acceptance by the purchase of wool. It is impossible to find anywhere anything in the nature of a request or invitation to purchase wool, or anything which suggests that the payment of subsidy was put forward in

order to induce any manufacturer to purchase wool, or which suggests that the payment of subsidy and the purchase of wool were regarded as related in such a way that the one was a consideration for the other. Whichever of the possibly legitimate tests is applied, the answer is the same. If we ask (what we think is the real and ultimate question) whether there is a promise offered in consideration of the doing of an act, as a price which is to be paid for the doing of an act, we cannot find such a promise. No relation of quid pro quo between a promise and an act can be inferred. If we ask whether there is an implied request or invitation to purchase wool, we cannot say that there is. If we ask whether the announcement that a subsidy would be paid was made in order to induce purchases of wool, no such intention can be inferred.

Comments 6.2.1

See Radan, Gooley, and Vickovich at 6.21–6.23.

6.2.2

The decision in this case can be contrasted with that in Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256, which is extracted at 4.2C.

CONSIDERATION MUST MOVE FROM THE PROMISEE 6.3C Coulls v Bagot’s Executor and Trustee Co Ltd (1967) 119 CLR

460 Court: High Court of Australia Facts: Mr Coulls owned land and entered into an agreement by which O’Neil Construction Pty Ltd was given a right to quarry stone from his land. The agreement stipulated that royalties would be paid to Mr and Mrs Coulls as joint tenants — according to the principle of survivorship, where property is held by two or more persons as joint tenants, the property automatically passes to the surviving joint tenant on the death of the other joint tenant. After Mr Coulls’ death the issue was whether the royalties were to be paid to Mrs Coulls or

to the executor of Mr Coulls’ estate. The agreement setting out the arrangement for the payment of royalties was ambiguous as to whether it was between O’Neil Construction on the one part and Mr and Mrs Coulls jointly on the other part, or between O’Neil Construction on the one part and Mr Coulls only on the other part. [page 109] Issue: The issue before the High Court was whether Mrs Coulls could enforce the agreement. The executor of Mr Coulls’ estate argued that because she had not provided any consideration for the royalties payable by O’Neil Construction, she was not entitled to enforce the agreement. Decision: The majority of the High Court (McTiernan, Taylor, and Owen JJ) held that the agreement was one between O’Neil Construction and Mr Coulls only, and that accordingly Mrs Coulls had no right to enforce it. The minority (Barwick CJ and Windeyer J) held that the agreement was one between O’Neill Construction and Mr and Mrs Coulls jointly, and that although she herself had not provided consideration, Mrs Coulls was entitled to enforce it. This was on the basis of the principle that, provided one of a number of joint promisees provides consideration, any other of the joint promisees can enforce the agreement irrespective of whether he or she has provided consideration. Taylor and Owen JJ agreed that the principle applied by the minority judges was correct, but said it was inapplicable to the facts of the case, given their finding that Mrs Coulls was not a joint promisee. Extract: The extract from the judgment of Barwick CJ discusses the principle relating to joint promisees and consideration.

Barwick CJ But as I construe this writing, we have here not a promise by A with B for consideration supplied by B to pay C. It was, in my opinion, a promise

by A made to B and C for consideration to pay B and C. In such a case it cannot lie in the mouth of A, in my opinion, to question whether the consideration which he received for his promise moved from both B and C or, as between themselves, only from one of them. His promise is not a gratuitous promise as between himself and the promisees as on the view I take of the agreement it was a promise in respect of which there was privity between A on the one hand and B and C on the other. Such a promise, in my opinion, is clearly enforceable in the joint lifetime of B and C: But it is only enforceable if both B and C are parties to the action to enforce it. B, though he only supplied the consideration, could not sue alone. If C were unwilling to join in the action as plaintiff, B no doubt, after suitable tender of costs, could join C as a defendant. And A’s promise could be enforced. But the judgment would be for payment to B and C. If B would not join in an action to enforce A’s promise, I see no reason why C should not sue joining B as a defendant. Again, in my opinion, A’s promise would be enforced and a judgment in favour of B and C would result. In neither of these cases could A successfully deny either privity or consideration. … 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 [page 110] 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.

Comments

6.3.1

See Radan, Gooley, and Vickovich at 6.31–6.32.

6.3.2

For criticism of the principle in this case, see B Coote, ‘Consideration and the Joint Promisee’ (1978) 37 Cambridge Law Journal 301, where the author argues that the joint promisee principle violates both the rule that consideration must move from the promisee and the doctrine of privity of contract.

‘PAST CONSIDERATION’ IS NOT CONSIDERATION 6.4C

Pao On v Lau Yiu Long [1980] AC 614

Court: Judicial Committee of the Privy Council Facts: The Paos owned shares in a private company, Shing On. The Laus were the majority shareholders in a public investment company, Fu Chip. In February 1973 the Paos contracted to sell their shares in Shing On to Fu Chip in exchange for an allotment of 4.2 million shares in Fu Chip, which had a deemed value of $2.50 a share. The Paos also agreed not to sell 2.5 million of these shares prior to the end of April 1974. By a subsidiary agreement of the same day, the Laus agreed to buy back 2.5 million shares in Fu Chip from the Paos on or before 30 April 1974 at $2.50 per share. The Paos then realised that, when they sold the shares to the Laus pursuant to this agreement, they would not obtain the benefit of any increase in the value of the shares in the meantime. The Paos therefore refused to proceed with the sale of their shares in Shing On to Fu Chip, unless the Laus replaced the subsidiary agreement with an agreement by which the Laus would guarantee the price of the 2.5 million shares at $2.50 a share. On 4 May 1973 the Laus entered into the replacement guarantee agreement. Prior to 30 April 1974, the price of Fu Chip shares had fallen to 36 cents a share. The Paos sought to enforce the guarantee. Issues: The issues before the Privy Council were whether the Paos had provided consideration for the guarantee by the Laus or whether

this was an instance of ‘past consideration’, and whether the Laus’ agreement to the contract of guarantee was obtained as a result of duress exerted by the Paos. Decision: The Privy Council (Viscount Dilhorne, and Lords Wilberforce, Simon of Glaisdale, Salmon, and Scarman) found in favour of the Paos on both issues. (In relation to the issue of duress, see Radan, Gooley, and Vickovich at 17.21.) Extract: The following extract from the decision of the Privy Council, delivered by Lord Scarman, addresses the principles relating to socalled ‘past consideration’ and why the facts in this case did not amount to consideration that was in the past.

[page 111]

Lord Scarman The first question is whether upon its true construction the written guarantee of May 4, 1973, states a consideration sufficient in law to support the [Laus’] promise of indemnity against a fall in value of the Fu Chip shares…. [C]ounsel for the [Paos] before their Lordships’ Board but not below, contends that the consideration stated in the agreement is not in reality a past one. It is to be noted that the consideration was not on May 4, 1973, a matter of history only. The instrument by its reference to the main agreement with Fu Chip incorporates as part of the stated consideration the [Paos’] three promises to Fu Chip: to complete the sale of Shing On, to accept shares as the price for the sale, and not to sell 60 per cent of the shares so accepted before April 30, 1974. Thus, on May 4, 1973, the performance of the main agreement still lay in the future. Performance of these promises was of great importance to the [Laus], and it is undeniable that, as the instrument declares, the promises were made to Fu Chip at the request of the [Laus]. It is equally clear that the instrument also includes a promise by the [Paos] to the [Laus] to fulfil their earlier promises given to Fu Chip. The Board agrees with [counsel for the Paos’] submission that the

consideration expressly stated in the written guarantee is sufficient in law to support the [Laus’] promise of indemnity. An act done before the giving of a promise to make a payment or to confer some other benefit can sometimes be consideration for the promise. The act must have been done at the promisors’ request: the parties must have understood that the act was to be remunerated either by a payment or the conferment of some other benefit: and payment, or the conferment of a benefit, must have been legally enforceable had it been promised in advance. All three features are present in this case. The promise given to Fu Chip under the main agreement not to sell the shares for a year was at the [Laus’] request. The parties understood at the time of the main agreement that the restriction on selling must be compensated for by the benefit of a guarantee against a drop in price: and such a guarantee would be legally enforceable. The agreed cancellation of the subsidiary agreement left, as the parties knew, the [Paos] unprotected in a respect in which at the time of the main agreement all were agreed they should be protected. [Counsel for the Paos’] submission is based on Lampleigh v Brathwait. In that case the judges said: First … a meer voluntary courtesie will not have a consideration to uphold an assumpsit. But if that courtesie were moved by a suit or request of the party that gives the assumpsit, it will bind, for the promise, though it follows, yet it is not naked, but couples itself with the suit before, and the merits of the party procured by that suit, which is the difference.2 The modern statement of the law is in the judgment of Bowen LJ in In re Casey’s Patents; Bowen LJ said: Even if it were true, as some scientific students of law believe, that a past service cannot support a future promise, you must look at the document and see if the promise cannot [page 112] receive a proper effect in some other way. 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. So that here for past services there is ample justification for the promise to give the third share.3 [Counsel] for the [Laus], does not dispute the existence of the rule but challenges its application to the facts of this case. He submits that it is not a necessary inference or implication from the terms of the written guarantee that any benefit or protection was to be given to the plaintiffs for their acceptance of the restriction on selling their shares. Their Lordships agree that the mere existence or recital of a prior request is not sufficient in itself to convert what is prima facie past consideration into sufficient consideration in law to support a promise as they have indicated, it is only the first of three necessary preconditions. As for the second of those preconditions, whether the act done at the request of the promisor raises an implication of promised remuneration or other return is simply one of the construction of the words of the contract in the circumstances of its making. Once it is recognised, as the Board considers it inevitably must be, that the expressed consideration includes a reference to the [Paos’] promise not to sell the shares before April 30, 1974 — a promise to be performed in the future, though given in the past — it is not possible to treat the [Laus’] promise of indemnity as independent of the [Paos’] antecedent pro-mise, given at the [Laus’] request, not to sell. The promise of indemnity was given because at the time of the main agreement the parties intended that the [Laus] should confer upon the [Paos] the benefit of his protection against a fall in price. When the subsidiary agreement was cancelled, all were well aware that the [Paos] were still to have the benefit of his protection as consideration for the restriction on selling…. Their Lordships, therefore, accept the submission that the contract itself states a valid consideration for the promise of indemnity.

[page 113]

Comment 6.4.1 See Radan, Gooley, and Vickovich at 6.33–6.37.

THE EXISTING CONTRACTUAL DUTY RULE 6.5C

Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1

Court: Court of Appeal in England Facts: Roffey Bros, after entering into a contract (the head contract) to renovate a block of 27 flats, subcontracted the carpentry work to Williams for a price of £ 20,000. Williams experienced financial difficulties and informed Roffey Bros that he could not complete the job. Under the head contract Roffey Bros was liable to pay agreed damages to the owner of the block of flats if they completed the work late. In these circumstances Roffey Bros offered to vary the original contract with Williams by increasing the amount to be paid to him by £ 10,300. Williams accepted the proposal, did some more work, but did not fully complete the job. Roffey Bros then engaged other carpenters to continue the job. The renovations were, however, not completed on time and Roffey Bros had to pay agreed damages to the owner for the delay. When Roffey Bros refused to pay Williams for the work he had done after the promise to pay the additional money, he sued to recover the outstanding amount. Roffey Bros argued that Williams had undertaken to do no more in return for the additional money than he already had to do under the subcontract and that, therefore, Roffey Bros’ promise to pay the extra money was not supported by consideration from Williams. Issues: The two issues before the Court of Appeal were whether the incomplete performance of the carpentry work by Williams amounted to substantial performance of his obligation, and whether

Williams provided consideration for Roffey Bros’ promise of the additional payment to complete the carpentry work. Decision: The Court of Appeal (Purchas, Glidewell, and Russell LJJ) unanimously found in favour of Williams in relation to both issues. (On the principles relating to substantial performance, see Radan, Gooley, and Vickovich at 22.45–22.49.) Extract: The extract from the judgment of Glidewell LJ sets out the basis for finding that Williams’ promise to perform his existing contractual duty already owed to Roffey Bros was sufficient consideration for the promise of the additional payment to complete the carpentry work.

Glidewell LJ In his address to us, [counsel for Roffey Bros] Mr Evans outlined the benefits to his clients … which arose from their agreement to pay the additional £ 10,300 as: (i) seeking to ensure that the plaintiff continued work and did not stop in breach of the subcontract; [page 114] (ii) avoiding the penalty for delay; and (iii) avoiding the trouble and expense of engaging other people to complete the carpentry work. However, Mr Evans submits that, though his clients may have derived, or hoped to derive, practical benefits from their agreement to pay the ‘bonus,’ they derived no benefit in law, since [Williams] was promising to do no more than he was already bound to do by his subcontract, ie, continue with the carpentry work and complete it on time. Thus there was no consideration for the agreement. Mr Evans relies on the principle of law which, traditionally, is based on the decision in Stilk v Myrick. 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. Counsel for the defendant argued that such an agreement was contrary to public policy, but Lord Ellenborough CJ’s judgment was based on lack of consideration. It reads: … Here, I say, the agreement is void for want of consideration. There was no consideration for the ulterior pay promised to the mariners who remained with the ship. Before they sailed from London they had undertaken to do all they could under all the emergencies of the voyage. They had sold all their services till the voyage should be completed. If they had been at liberty to quit the vessel at Cronstadt, the case would have been quite different; or if the captain had capriciously discharged the two men who were wanting, the others might not have been compellable to take the whole duty upon themselves, and their agreeing to do so might have been a sufficient consideration for the promise of an advance of wages. But the desertion of a part of the crew is to be considered an emergency of the voyage as much as their death; and those who remain are bound by the terms of their original contract to exert themselves to the utmost to bring the ship in safety to her destined port. Therefore, without looking to the policy of this agreement, I think it is void for want of consideration, and that the plaintiff can only recover at the rate of £ 5 a month.4 In North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd,5 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 sought to escape from the confines of the rule, but was not accompanied in his attempt by the other members of the court. In Ward v Byham [a mother] and [a father] lived together unmarried for five years, during which time the [mother] bore their child. After the parties ended their relationship, the [father] promised to pay the [mother] £ 1 per week to maintain the child, provided that she was well looked after and happy. The [father] paid this sum for some months, but ceased to pay when the [mother] 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 [mother] to maintain her child, since she was obliged by law to do [page 115] so: see section 42 of the National Assistance Act 1948. The county court judge upheld the … mother’s claim, and this court dismissed the [father’s] appeal. Denning LJ said: 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. I regard the father’s promise in this case as what is sometimes called a unilateral contract, a promise in return for an act, a promise by the father to pay £ 1 a week in return for the mother’s looking after the child. Once the mother embarked on the task of looking after the child, there was a binding contract. So long as she looked after the child, she would be entitled to £ 1 a week. … I would dismiss the appeal.6 … Morris LJ … and Parker LJ held that, though in maintaining the child the [mother] 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, 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 reiterated his view that: 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.7 However, the other members of the court (Hodson and Morris LJJ) declined to agree with this expression of view, though agreeing with Denning LJ in finding that there was consideration because the wife’s desertion might not have been permanent, and thus there was a benefit to the husband. … There is … another legal concept of relatively recent development which is relevant, namely, that of economic duress. Clearly if a subcontractor 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 [page 116] 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…. 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. 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 eg where B secures no benefit by his promise. It is not in my view surprising that a principle enunciated in relation to the rigours of seafaring life during the Napoleonic wars should be subjected during the succeeding 180 years to a process of refinement and limitation in its application in the present day. It is therefore my opinion that on [the] findings of fact in the present case … [Roffey Bros’] 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’. … My understanding of the meaning of the requirement that ‘consideration must move from the promisee’ is that such consideration must be provided by the promisee, or arise out of his contractual relationship with the promisor. It is consideration provided by somebody else, not a party to the contract, which does not ‘move from the promisee’. … Here the benefits to [Roffey Bros] arose out of their agreement of 9 April 1986 with [Williams], the promisee. In this respect I would adopt the following passage from Chitty on Contracts, 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 eg where he parts with money or goods, or renders services, in exchange for the promise. But the requirement may equally well be satisfied where the promisee confers a benefit on the promisor without in fact suffering any detriment.8

That is the situation in this case. I repeat, therefore, my opinion that the judge was, as a matter of law, entitled to hold that there was valid consideration to support the agreement under which [Roffey Bros] promised to pay an additional £ 10,300 at the rate of £ 575 per flat.

[page 117]

Comments 6.5.1 See Radan, Gooley, and Vickovich at 6.62–6.68. 6.5.2 For discussion and analysis of this case, see B Coote, ‘Consideration and Benefit in Fact and in Law’ (1990) 3 Journal of Contract Law 23; J W Carter, A Phang and J Poole, ‘Reactions to Williams v Roffey’ (1995) 8 Journal of Contract Law 248; M Chen-Wishart, ‘Consideration: Practical Benefit and the Emperor’s New Clothes’, in J Beatson and D Friedmann (eds), Good Faith and Fault in Contract Law, Oxford University Press, Oxford, 1995, p 123; B Coote, ‘Variations Sans Consideration’ (2011) 27 Journal of Contract Law 185; P W Lee, ‘Contract Modifications — Reflections on Two Commonwealth Cases’ (2012) 12 Oxford University Commonwealth Law Journal 189; M Giancaspro, ‘Practical Benefit: An English Anomoly or a Growing Force in Contract Law?’ (2013) 30 Journal of Contract Law 12; M Giancaspro, ‘Should the Practical Benefit Principle Extend to Contract Formation?’ (2104) 42 Australian Business Law Review 389. 6.5.3 Judicial criticism of the decision in this case has been made by Colman J in South Caribbean Trading Ltd v Trafigura Beheer BV [2005] 1 Lloyd’s Rep 128 at 149–50, where his Honour said: But for the fact that Williams v Roffey Bros Ltd was a decision of the Court of Appeal, I would not have followed it. That decision is inconsistent with the long-standing rule that consideration, being the price of the promise sued upon, must move from the promisee. The judgment of Lord

Justice Glidewell was substantially based on Pao On v Lau Yin Long [1980] AC 614 in which the Judicial Committee of the Privy Council had held a promise by A to B to perform a contractual obligation owed by A to X could be sufficient consideration as against B…. Lord Justice Glidewell regarded Lord Scarman’s reasoning in relation to such tripartite relationship as applicable in principle to a bipartite relationship. But in the former case by the additional promise to B, consideration has moved from A because he has made himself liable to an additional party, whereas in the latter case he has not undertaken anything that he was not already obliged to do for the benefit of the same party. Lord Justice Glidewell substituted for the established rule as to consideration moving from the promisee a completely different principle — that the promisor must by his promise have conferred a benefit on the other party.

THE RULE IN PINNEL’S CASE 6.6C

Foakes v Beer (1884) 9 App Cas 605

Court: House of Lords Facts: In August 1875 Julia Beer obtained judgment against Dr Foakes in the sum of £ 2090 19s. Foakes was liable for interest on the judgment debt that accrued from the [page 118] date of judgment. In December 1876 Beer agreed that if Foakes paid £ 500 immediately and £ 150 twice annually until the entire judgment debt was paid she ‘would not take any proceedings

whatever on the said judgment’. Interest was not included in the sum to be paid pursuant to this agreement. Foakes made payments pursuant to the agreement totalling £ 2090 19s. Beer then brought an action claiming interest on the debt. Issues: The issue before the House of Lords was whether the December 1876 agreement was enforceable. This raised questions of whether, on its proper construction, it meant that Foakes agreed to repay only £ 2090 19s, or £ 2090 19s plus accrued interest on that amount to the date of full repayment. If interest was not included in the agreement, the issue arose as to whether Foakes gave consideration for Beer’s promise ‘not [to] take any proceedings whatever on the said judgment’. Decision: The House of Lords (Earl of Selborne LC, and Lords Blackburn, Watson, and Fitzgerald) unanimously found in favour of Beer. The Earl of Selborne and Lord Fitzgerald held that the December 1876 agreement included accrued interest and that Beer was entitled to sue Foakes to recover it. However, they also held that if they were wrong and the December 1876 agreement did not include the accrued interest, Beer’s promise not to sue Foakes was unenforceable because, following the rule in Pinnel’s Case (1602) 77 ER 237, Foakes had not given consideration for the promise. Lords Watson and Blackburn held that the December 1876 agreement did not include accrued interest. Although both of their Lordships held that Beer’s promise not to sue Foakes was unenforceable because Foakes had not given consideration for the promise, Lord Blackburn expressed major reservations as to whether the principles set out in Pinnel’s Case were correct. Extract: The extracts from the speeches of the Earl of Selborne and Lord Blackburn set out their respective views on the rule in Pinnel’s Case.

Earl of Selborne LC The question … raised by this [case is] whether your Lordships are now prepared, not only to overrule, as contrary to law, the doctrine stated

by Sir Edward Coke to have been laid down by all the judges of the Common Pleas in Pinnel’s Case, … but to treat a prospective agreement, not under seal, for satisfaction of a debt, by a series of payments on account to a total amount less than the whole debt, as binding in law, provided those payments are regularly made; the case not being one of a composition with a common debtor, agreed to, inter se, by several creditors. … The doctrine itself, as laid down by Sir Edward Coke, may have been criticised, as questionable in principle, by some persons whose opinions are entitled to respect, but it has never been judicially overruled; on the contrary I think it has always, since the sixteenth century, been accepted as law. If so, I cannot think that your Lordships would do right, if you were now to reverse, as erroneous, a judgment of the Court of Appeal, proceeding upon a doctrine which has been accepted as part of the law of England for 280 years. … The distinction between the effect of a deed under seal, and that of an agreement by parol, or by writing not under seal, may seem arbitrary, but it is established in our law; [page 119] nor is it really unreasonable or practically inconvenient that the law should require particular solemnities to give to a gratuitous contract the force of a binding obligation. If the question be (as, in the actual state of the law, I think it is), whether consideration is, or is not, given in a case of this kind, by the debtor who pays down part of the debt presently due from him, for a promise by the creditor to relinquish, after certain further payments on account, the residue of the debt, I cannot say that I think consideration is given, in the sense in which I have always understood that word as used in our law. It might be (and indeed I think it would be) an improvement in our law, if a release or acquittance of the whole debt, on payment of any sum which the creditor might be content to receive by way of accord and satisfaction (though less than the whole), were held to be, generally, binding, though not under seal; nor should I be unwilling to see equal force given to a prospective agreement, like the present, in writing though not under seal; but I think it impossible, without refinements which practically

alter the sense of the word, to treat such a release or acquittance as supported by any new consideration proceeding from the debtor. … What is called ‘any benefit, or even any legal possibility of benefit’ … is not (as I conceive) that sort of benefit which a creditor may derive from getting payment of part of the money due to him from a debtor who might otherwise keep him at arm’s length, or possibly become insolvent, but is some independent benefit, actual or contingent, of a kind which might be good and valuable consideration for any other sort of agreement not under seal. …

Lord Blackburn There are two things here resolved. First, that where a matter paid and accepted in satisfaction of a debt might by any possibility be more beneficial to the creditor than his debt, the Court will not inquire into the adequacy of the consideration. If the creditor, without any fraud, accepted it in satisfaction when it was not a sufficient satisfaction it was his own fault. And that payment before the day might be more beneficial, and consequently that the plea was in substance good, and this must have been decided in the case. There is a second point stated to have been resolved, viz: ‘That payment of a lesser sum on the day cannot be any satisfaction of the whole, because it appears to the judges that by no possibility a lesser sum can be a satisfaction to the plaintiff for a greater sum’. This was certainly not necessary for the decision of the case; but though the resolution of the Court of Common Pleas was only a dictum, it seems to me clear that Lord Coke deliberately adopted the dictum, and the great weight of his authority makes it necessary to be cautious before saying that what he deliberately adopted as law was a mistake, and though I cannot find that in any subsequent case this dictum has been made the ground of the decision … yet there certainly are cases in which great judges have treated the dictum in Pinnel’s Case as good law. I doubt much whether any judge sitting in a Court of the first instance would be justified in treating the question as open. But as this has very seldom, if at all, been the ground of the decision even in a Court of the first instance, and certainly never been the ground of a decision in the Court of

Exchequer Chamber, still less in this House, I did think it open in your Lordships’ House to reconsider this question. And, notwithstanding the very high authority of Lord Coke, I think it is not the fact that to accept prompt payment of a part only [page 120] of a liquidated demand, can never be more beneficial than to insist on payment of the whole. And if it be not the fact, it cannot be apparent to the judges. … What principally weighs with me in thinking that Lord Coke made a mistake of fact is my conviction that all men of business, whether merchants or tradesmen, do every day recognise and act on the ground that prompt payment of a part of their demand may be more beneficial to them than it would be to insist on their rights and enforce payment of the whole. Even where the debtor is perfectly solvent, and sure to pay at last, this often is so. Where the credit of the debtor is doubtful it must be more so. I had persuaded myself that there was no such long-continued action on this dictum as to render it improper in this House to reconsider the question. I had written my reasons for so thinking; but as they were not satisfactory to the other noble and learned Lords who heard the case, I do not now repeat them nor persist in them.

Comments 6.6.1 See Radan, Gooley, and Vickovich at 6.85–6.88. 6.6.2 J O’Sullivan, in ‘In Defence of Foakes v Beer’ (1996) 55 Cambridge Law Journal 219, argues that the law should treat differently promises to pay more, on the one hand, and promises to accept less, on the other. However, if the law treats the two in the same way, she suggests that the approach in Foakes v Beer should be preferred to that of Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1. For a further discussion of the background to Foakes v Beer and its authority in the light of Williams v Roffey Bros

6.6.3

& Nicholls (Contractors) Ltd and the principles of equitable estoppel, see M Lobban, ‘Foakes v Beer (1884)’, in C Mitchell and P Mitchell (eds), Landmark Cases in the Law of Contract, Hart Publishing, Oxford, 2008, pp 223–67. On the question of whether the consequences of the rule in Pinnel’s Case can be overcome by an application of the consideration principles set out in Williams v Roffey Bros & Nicholls (Contractors) Ltd, see Radan, Gooley, and Vickovich at 6.90–6.93; D Thampapillai, ‘Practical Benefits and Promises to Pay Lesser Sums: Reconsidering the Relationship Between the Rule in Foakes v Beer and the rule in Williams v Roffey’ (2015) 34 University of Queensland Law Journal 301; M Arden, ‘Should Consideration be Required for the Consensual Discharge of an Agreement by Part Payment?’, in A Dyson, J Goudkamp and F Wilmot-Smith (eds), Defences in Contract, Hart Publishing, Oxford, 2017, p 111.

1.

(1893) 1 QB 256.

2. 3.

Lampleigh v Brathwait (1615) 80 ER 255 at 255. In re Casey’s Patents; Stewart v Casey [1892] 1 Ch 104 at 115–16.

4. 5.

Stilk v Myrick (1809) 170 ER 1168 at 1169. [1979] QB 705.

6. 7.

Ward v Byham [1956] 2 All ER 318 at 319. Williams v Williams [1957] 1 All ER 305 at 307.

8.

Chitty on Contracts, 26th ed (1989), at 126, para 183.

[page 121]

7 INTENTION TO CREATE LEGAL RELATIONS

INTRODUCTION 7.1 This chapter deals with one of the essential elements of a contract, namely, the existence of an intention to create legal relations. In addition to agreement and consideration, courts require that the parties have manifested an intention to be legally bound to each other in the sense that they understand their agreement to be legally enforceable. This will be determined objectively, substituting the view of the reasonable person for that of the parties’ subjectively-held intention. To determine whether intention has been made manifest, courts have traditionally used two presumptions. Of course, in appropriate cases both presumptions may be rebutted. First, it is presumed that the requisite intention is absent in agreements made between members of a family or close friends. This is illustrated in Balfour v Balfour [1919] 2 KB 571 (see 7.2C), one of the earliest cases in which courts demanded evidence of intention as a matter of public policy. The family, social, and domestic presumption may be rebutted if there is clear evidence that the nature of the transaction is essentially commercial, notwithstanding the family or social relationship, and that one of the parties will suffer loss if the existence of the contract is denied. Issues associated with rebuttal of the family, social, and domestic presumption may be seen in Jones v Padavatton [1969] 2 All ER 616 (see 7.3C). Second, in agreements that are commercial in nature it is presumed that

the requisite intention is present. The operation of the presumption in the context of commercial and business agreements is illustrated by Esso Petroleum Ltd v Commissioners of Customs and Excise [1976] 1 All ER 117 (see 7.4C), which involved the offer of a ‘free gift’ to petrol consumers. The element of intention is rarely a contentious issue because it can usually be determined that most contracting parties intend to be legally bound due to the commercial nature of their agreements. However, it has often been contested in less obviously commercial settings. For example, where a letter of comfort is provided by a corporation on behalf of one of its subsidiary entities to a lending institution that contracts with the subsidiary, it has been held that any contractual liability of the corporation to the lender will depend on locating intention on a proper construction of the letter itself. Similarly, whether a government instrumentality has the requisite intention to be legally bound when it contracts with an entity, is likely to depend on whether the government body is carrying out a public policy program or acting in the administration of its own interests. In disputes between members of the clergy and their religious organisations, intention has played a pivotal role in determining whether contractual obligations have arisen. These cases led the High Court in Ermogenous v Greek Orthodox Community of South Australia Inc (2002) 209 CLR 95 (see 7.5C) to question the continuing [page 122] utility of the traditional presumptions, an issue that has not yet been clearly resolved. In Ashton v Pratt (2015) 88 NSWLR 281 (see 7.6C) the Court of Appeal in New South Wales applied the approach of the High Court in the context of a case that would otherwise have attracted the application of the presumption in relation to family, social, and domestic arrangements.

THE PRESUMPTION IN FAMILY, SOCIAL, OR DOMESTIC AGREEMENTS 7.2C

Balfour v Balfour [1919] 2 KB 571

Court: Court of Appeal in England Facts: The Balfours, a married couple, had lived in Ceylon (now Sri Lanka) for some years, where the husband was an engineer employed by the Ceylonese Government. They travelled to England in 1915 during the husband’s period of leave. On medical advice, the wife decided to delay her return to Ceylon when her husband’s leave was finished. Just before his departure the couple came to a verbal agreement that the husband would send his wife £30 per month as maintenance while she remained in England. After some time the husband stopped payments and suggested they continue living apart. Although the couple later divorced, it was generally agreed that they were not separated when the husband agreed to pay a monthly maintenance to the wife while he was overseas. Mrs Balfour brought an action to recover the money allegedly owed by her husband. Issue: The issue before the Court of Appeal was whether the Balfours had entered into an enforceable contract in relation to the monthly payments that Mr Balfour had agreed to make to his wife. Decision: The Court of Appeal (Warrington, Duke, and Atkin LJJ) held unanimously on differing grounds that the alleged agreement did not amount to a legal contract. According to Duke LJ the wife in this case had not provided consideration to make her husband’s promise enforceable. Warrington LJ relied on the absence of express or implied terms to back the wife’s claim. Atkin LJ held that although agreement and consideration could arguably have been found, this was an ordinary domestic arrangement between husband and wife. Mutual promises of this kind were not made by the parties with the necessary intention to be legally bound. Extract: The extract from the speech of Atkin LJ sets out the reasons why he decided agreements between married couples were outside the law of contract for lack of intention.

Atkin LJ The defence to this action on the alleged contract is that the

defendant, the husband, entered into no contract with his wife, and for the determination of that it is necessary to remember that there are agreements between parties which do not result in contracts within the meaning of that term in our law. The ordinary example is where [page 123] two parties agree to take a walk together, or where there is an offer and an acceptance of hospitality. Nobody would suggest in ordinary circumstances that those agreements result in what we know as a contract, and one of the most usual forms of agreement which does not constitute a contract appears to me to be the arrangements which are made between husband and wife. 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 — agreements such as are in dispute in this action — agreements for allowances, by which the husband agrees that he will pay to his wife a certain sum of money, per week, or per month, or per year, to cover either her own expenses or the necessary expenses of the household and of the children of the marriage, and in which the wife promises either expressly or impliedly to apply the allowance for the purpose for which it is given. To my mind 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. … [T]hey are not contracts because the parties did not intend that they should be attended by legal consequences. To my mind it would be of the worst possible example to hold that agreements such as this resulted in legal obligations which could be enforced in the Courts. It would mean this, that when the husband makes his wife a promise to give her an allowance of 30s or £2 a week, whatever he can afford to give her, for the maintenance of the household and children, and she promises so to apply it, not only could she sue him for his failure in any week to supply the allowance, but he could sue her for non-performance of the obligation, express or implied, which she had undertaken upon her part. All I can say is that the small Courts of this country would have to be multiplied one hundredfold if these arrangements

were held to result in legal obligations. They are not sued upon, not because the parties are reluctant to enforce their legal rights when the agreement is broken, but because the parties, in the inception of the arrangement, never intended that they should be sued upon. Agreements such as these are outside the realm of contracts altogether. The common law does not regulate the form of agreements between spouses. Their promises are not sealed with seals and sealing wax. The consideration that really obtains for them is that natural love and affection which counts for so little in these cold Courts. The terms may be repudiated, varied or renewed as performance proceeds or as disagreements develop, and the principles of the common law … are such as find no place in the domestic code. … [I]t appears to me to be plainly established that the promise here was not intended by either party to be attended by legal consequences. I think the onus was upon [the wife], and [the wife] has not established any contract.

Comments 7.2.1 See Radan, Gooley, and Vickovich at 7.8–794, 7.12–7.13, and 7.17–7.18. 7.2.2 For a discussion of the continued relevance of Balfour v Balfour in the context of marriage, see M Freeman, ‘Contracting in the Haven: Balfour v Balfour Revisited’, [page 124] in R Halson (ed), Exploring the Boundaries of Contract, Dartmouth, Aldershot, 1996, pp 68–82. For a broader criticism of the principle in Balfour v Balfour, see S Hedley, ‘Keeping Contract in its Place — Balfour v Balfour and the Enforceability of Informal Agreements’ (1985) 5 Oxford Journal of Legal Studies 391.

REBUTTAL OF THE PRESUMPTION IN FAMILY, SOCIAL,

OR DOMESTIC AGREEMENTS 7.3C

Jones v Padavatton [1969] 2 All ER 616

Court: Court of Appeal in England Facts: Padavatton was a divorced woman employed at the Indian Embassy in Washington DC, where she lived with her son. In 1962 she agreed with Jones, her mother, that she should relocate to London and study law on the basis that Jones would pay her tuition fees and an allowance of £42 per month. There was a misunderstanding about the amount of the allowance, although the daughter accepted the smaller monthly amounts paid by her mother. Also, there was no clearly identifiable arrangement about the period of time for which the allowance was to be paid. During her stay in London, the daughter raised the issue of her accommodation. In response to this issue the mother and daughter agreed to vary their arrangement. Pursuant to this variation the mother purchased a large home, some of the rooms in which were then let out to tenants. The daughter inhabited the rest of the house rent-free. After the daughter remarried and had a falling out with her mother, the mother sought possession of the house. Her daughter counter-claimed for an amount of money she had spent on the house. Issues: The issues before the Court of Appeal were whether the presumption against contractual intention could be applied to the arrangements entered into between the mother and daughter, and whether a contract had on the facts been entered into between them. Decision: The Court of Appeal (Danckwerts, Salmon, and Fenton Atkinson LJJ) unanimously held in the mother’s favour. Danckwerts and Fenton Atkinson held that the arrangements were unenforceable because of the absence of contractual intention, objectively determined, on the part of the mother and daughter. Although Salmon LJ took a contrary view as to the presence of contractual intention, he held in favour of the mother on the ground that the dispute between the women related to the varied

arrangement about the occupation of the house. He held this arrangement to be too vague and uncertain to be enforceable. Extract: The extracts from the judgments of Danckwerts LJ and Salmon LJ show the differing views of the court on the issue of whether the 1962 arrangement between the mother and daughter was intended to create a legally enforceable contract.

[page 125]

Danckwerts LJ The precise terms of the arrangement between the mother and the daughter were difficult to discover completely. There is no doubt that the daughter gave consideration for a promise by her mother to provide maintenance at the rate of £42 per month so long as she was reading for the Bar in England by giving up her job and her other advantages in Washington, and by reading for the Bar. But various incidental matters appear never to have been thought out at all. There were no terms recorded in writing, no sort of businesslike statement of the parties’ respective obligations, not even of how long the mother was to go on paying if the studies were prolonged or unsuccessful. … The question therefore arises whether any binding legal contract was intended, or whether this was simply a family arrangement in which one member of the family relies on a promise given by another person and trusts that person to carry out the promise. But such an arrangement is not intended to create actionable legal rights. … Were the arrangements (such as they were) intended to produce legally binding agreements, or were they simply family arrangements depending for their fulfilment on good faith and trust, and not legally enforceable by legal proceedings? … Counsel for the daughter argued strenuously for the view that the parties intended to create legally binding contracts. He relied on the old case of Shadwell v Shadwell1 and Parker v Clark.2 Counsel for the mother argued

for the contrary view that there were no binding obligations, and that if there were they were too uncertain for the court to enforce. His standby was Balfour v Balfour.3 … Of course, there is no difficulty, if they so intend, in members of families entering into legally binding contracts in regard to family affairs. A competent equity draftsman would, if properly instructed, have no difficulty in drafting such a contract. But there is possibly in family affairs a presumption against such an intention (which, of course, can be rebutted). I would refer to Atkin LJ’s magnificent exposition in regard to such arrangements in Balfour v Balfour. There is no doubt that this case is a most difficult one, but I have reached a conclusion that the present case is one of those family arrangements which depend on the good faith of the promises which are made and are not intended to be rigid, binding agreements. Balfour v Balfour was a case of husband and wife, but there is no doubt that the same principles apply to dealings between other relations, such as father and son and daughter and mother. This, indeed, seems to me a compelling case. The mother and the daughter seem to have been on very good terms before 1967. The mother was arranging for a career for the daughter which she hoped would lead to success. This involved a visit to England in conditions which could not be wholly foreseen. What was required was an arrangement which was to be financed by the mother and was such as would be adaptable to circumstances, as it in fact was. The operation about the house was, in my view, not a completely fresh arrangement, [page 126] but an adaptation of the mother’s financial assistance to the daughter due to the situation which was found to exist in England. It was not a stiff contractual operation any more than the original arrangement.

Salmon LJ There is no dispute that the parties entered into some sort of arrangement. … Did the parties intend the arrangement to be legally binding? This question

has to be solved by applying what is sometimes (although perhaps unfortunately) called an objective test. The court has to consider what the parties said and wrote in the light of all the surrounding circumstances, and then decide whether the true inference is that the ordinary man and woman, speaking or writing thus in such circumstances, would have intended to create a legally binding agreement. Counsel for the mother has said, quite rightly, that as a rule when arrangements are made between close relations, for example, between husband and wife, parent and child or uncle and nephew in relation to an allowance, there is a presumption against an intention of creating any legal relationship. This is not a presumption of law, but of fact. It derives from experience of life and human nature which shows that in such circumstances men and women usually do not intend to create legal rights and obligations, but intend to rely solely on family ties of mutual trust and affection. … There may, however, be circumstances in which this presumption, like all other presumptions of fact, can be rebutted. … In the present case the learned county court judge … came to the conclusion that on these very special facts the true inference must be that the arrangement between the parties prior to the daughter’s leaving Washington were intended by both to have contractual force. On the facts as found by the learned county court judge this was entirely different from the ordinary case of a mother promising her daughter an allowance whilst the daughter read for the Bar, or a father promising his son an allowance at university if the son passed the necessary examinations to gain admission. The daughter here was 34 years of age in 1962. She had left Trinidad and settled in Washington as long ago as 1949. In Washington she had a comfortable flat and was employed as an assistant accountant in the Indian embassy at a salary of $500 a month (over £2,000 a year). This employment carried a pension. She had a son of seven years of age who was an American citizen, and had, of course, already begun his education. There were obviously solid reasons for her staying where she was. For some years prior to 1962, however, the mother, who lived in Trinidad, had been trying hard to persuade her to throw up all that she had achieved in Washington and go to London to read for the Bar. The mother would have been very proud to have a barrister for a daughter. She also thought that her plan was in the interest of the grandson, to whom she was much attached. She envisaged

that, after the daughter had been called to the Bar, she would practise in Trinidad and thereafter presumably she (the mother) would be able to see much more of the daughter than formerly. The daughter was naturally loath to leave Washington, and did not regard the mother’s suggestion as feasible. The mother, however, eventually persuaded the daughter to do as she wished by promising her that, if she threw up her excellent position in Washington and came to study for the Bar in England, she would pay her daughter an [page 127] allowance of $200 a month until she had completed her studies. The mother’s attorney in Trinidad wrote to the daughter to confirm this. I cannot think that either intended that if, after the daughter had been in London, say, for six months, the mother dishonoured her promise and left her daughter destitute, the daughter would have no legal redress. In the very special circumstances of this case, I consider that the true inference must be that neither the mother nor the daughter could have intended that the daughter should have no legal right to receive, and the mother no legal obligation to pay, the allowance of $200 a month. The point was made by counsel for the mother that the parties cannot have had a contractual intention since it would be unthinkable for the daughter to be able to sue the mother if the mother fell on hard times. I am afraid that I am not impressed by this point. The evidence which the learned county court judge accepted showed that the mother was a woman of some substance, and prior to the agreement had assured the daughter that there would be no difficulty in finding the money. The fact that, if contrary to everyone’s expectation the mother had lost her money, the daughter would have been unlikely to sue her throws no light on whether the parties had an intention to contract. The fact that a contracting party is in some circumstances unlikely to extract his pound of flesh does not mean that he has no right to it. … The next point made by counsel for the mother was that the arrangements between the mother and the daughter in 1962 were too uncertain to

constitute a binding contract. It is true that the mother said $200 a month without stipulating whether she meant West Indian or United States dollars. Obviously she meant West Indian dollars. The daughter says that she thought her mother meant United States dollars. This point does not, however, appear to have given rise to any difficulty. For two years from November 1962 until December 1964 the mother regularly paid her daughter £42, the equivalent of $(West Indian) 200, a month, and the daughter accepted this sum without demur. Then it is said on the mother’s behalf that the daughter’s obligations are not sufficiently stated. I think that they are plain, to leave Washington, with all that entailed, come to London and genuinely study for the Bar there. If the daughter threw up her studies for the Bar, maybe the mother could not have recovered damages, but she would have been relieved of any obligation to continue the allowance. Then again it is said that the duration of the agreement was not specified. No doubt, but I see no difficulty in implying the usual term that it was to last for a reasonable time. The parties cannot have contemplated that the daughter should go on studying for the Bar and draw the allowance until she was seventy, nor on the other hand that the mother could have discontinued the allowance if the daughter did not pass her examinations within, say, 18 months. The promise was to pay the allowance until the daughter’s studies were completed, and to my mind there was a clear implication that they were to be completed within a reasonable time. Studies are completed either by the student being called to the Bar or giving up the unequal struggle against the examiners. It may not be easy to decide, especially when there is such a paucity of evidence, what is a reasonable time. The daughter, however, was a well-educated intelligent woman capable of earning the equivalent of over [page 128] £2,000 a year in Washington. It is true that she had a young son to look after, and may well (as the learned judge thought) have been hampered to some extent by the worry of this litigation. But, making all allowance for these factors and any other distraction, I cannot think that a

reasonable time could possibly exceed five years from November 1962, the date when she began her studies.

Comment 7.3.1 See Radan, Gooley, and Vickovich at 7.15–7.16.

THE PRESUMPTION IN COMMERCIAL AGREEMENTS 7.4C

Esso Petroleum Ltd v Commissioners of Customs and Excise [1976] 1 All ER 117

Court: House of Lords Facts: As part of a successful promotion, Esso offered a ‘free gift’ of a coin to every customer who purchased four gallons of petrol. The coins were of negligible value in themselves, but were popular because they featured the images of members of the English World Cup football squad. The Commissioners argued that Esso was in effect ‘selling’ the coins to its customers, despite using the term ‘free gift’. They claimed the transaction satisfied the statutory definition of a contract for sale of goods, being a contract by which goods are transferred in return for money consideration, and that Esso needed to pay a purchase tax under the relevant tax legislation because the coins had been ‘produced in quantity for general sale’. Issue: The issue before the House of Lords was whether there was a contract for sale of goods such as to attract a purchase tax. However, in deciding that question, their Lordships needed to address the issue of whether Esso and individual customers intended to enter into legal relations. Decision: The majority of the House of Lords (Lords Wilberforce, Simon of Glaisdale, and Russell of Killowen, and Viscount Dilhorne; Lord Fraser of Tullybelton dissenting) held the offer of a coin did not

amount to a contract for sale of goods. The consideration for the coins was not payment of money, but rather a collateral contract to buy petrol. On the question of whether the coins were given as gifts or under a contract, three of the majority Law Lords (Lords Wilberforce, Simon of Glaisdale, and Fraser of Tullybelton) decided there was an intention to create legal relations. Lord Russell and Viscount Dilhorne held the parties did not intend to be legally bound. Extract: The extracts below deal only with the issue of intention, not the tax matter. The speech of Viscount Dilhorne illustrates the argument that no intention could be found [page 129] on the facts, while the speeches of Lord Simon of Glaisdale and Lord Fraser of Tullybelton indicate the basis of the majority view on intention.

Viscount Dilhorne Was there any intention on the part of the garage proprietor and also on the part of the customer who bought four gallons, or multiples of that quantity, of petrol to enter into a legally binding contract in relation to a coin or coins? … True it is that Esso are engaged in business. True it is that they hope to promote the sale of their petrol, but it does not seem to me necessarily to follow or to be inferred that there was any intention on their part that their dealers should enter into legally binding contracts with regard to the coins; or any intention on the part of the dealers to enter into any such contract or any intention on the part of the purchaser of four gallons of petrol to do so. If on the facts of this case the conclusion is reached that there was any such intention on the part of the customer, of the dealer and of Esso, it would seem to exclude the possibility of any dealer ever making a free gift to any of his customers, however negligible its value, to promote his sales.

If what was described as being a gift which would be given if something was purchased was something of value to the purchaser, then it could readily be inferred that there was a common intention to enter into legal relations. But here, whatever the cost of production, it is clear that the coins were of little intrinsic value. I do not consider that the offer of a gift of a free coin is properly to be regarded as a business matter. … Nor do I see any reason to impute to every motorist who went to a garage where the posters were displayed to buy four gallons of petrol any intention to enter into a legally binding contract for the supply to him of a coin. On the acceptance of his offer to purchase four gallons there was no doubt a legally binding contract for the supply to him of that quantity of petrol, but I see again no reason to conclude that because such an offer was made by him, it must be held that, as the posters were displayed, his offer included an offer to take a coin. The gift of a coin might lead to a motorist returning to the garage to obtain another one, but I think the facts in this case negative any contractual intention on his part and on the part of the dealer as to the coin and suffice to rebut any presumption there may be to the contrary. If, however, there was any contract relating to the coin or coins, the consideration for the entry into that contract was not the payment of any money but the entry into a contract to purchase four gallons or multiples of that quantity of petrol, in which case the contract relating to the coin or coins cannot be regarded as a contract of sale.

Lord Simon of Glaisdale 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 [page 130] 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.4 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.

Lord Fraser of Tullybelton The matter that is in my view of decisive importance is the wording on the posters which were displayed in the forecourts of Esso petrol retailers during the promotion scheme. The originals of these posters were large, 60 by 40 inches, and each poster was headed in large letters ‘Free World Cup Coins’. Below that was a picture either of one of the coins or of a group of the coins and below the picture on one poster were the words: ‘Collect the complete set. One coin given with every four gallons of petrol’, and on the other poster: ‘Collect the full set of thirty coins. One coin given when you buy four gallons of petrol.’ The feature of that wording, which is of special significance, is the correlation of one coin to every four gallons; a definite scale of issue, or ration, was thus promised, and the plain inference is that any motorist who bought four gallons of petrol would have a right also to receive a coin. It is as if a baker had a poster in his shop window promising that any person who bought a dozen buns would be given one extra bun free of charge to make up a ‘bakers’ dozen’. Standing that promise by the retailer, it is in my opinion impossible to avoid the inference that when a motorist ordered some petrol he was offering to enter into a contract on the terms advertised by the retailer, and therefore that when his offer was accepted he had a contractual right to one coin with every four gallons of petrol. … Various reasons have been suggested for taking the contrary view, and the one that appears to me to be the strongest is also the simplest, namely that the poster and advertisements repeatedly use the words ‘gift’, ‘given’ and ‘free’. It is said that the use of these words, together with the small value of the coins and the fact that the price of petrol was not increased during the

promotion period shows that the coins were truly given away. But the purpose of the promotion scheme was to attract motorists, and perhaps their children, and to persuade them to buy Esso rather than some other brand of petrol, and it cannot be right that a motorist who had been persuaded to buy four gallons of Esso should be liable to be met at the end of the transaction with a refusal to give him a coin.

[page 131]

Comment 7.4.1 See Radan, Gooley, and Vickovich at 7.37.

THE ERMOGENOUS APPROACH TO INTENTION 7.5C

Ermogenous v Greek Orthodox Community of South Australia Inc (2002) 209 CLR 95

Court: High Court of Australia Facts: The Greek Orthodox Community of South Australia Inc (the Community) was a lay organisation that ran a number of cultural, social, sporting, and religious activities in South Australia. It had engaged priests in the past to conduct religious services and cater to the Community’s spiritual needs. At one point, wishing to assert its independence from the Archbishop in Sydney, it arranged for Ermogenous to come from the United States to take up the role of Archbishop in a future autonomous Greek Orthodox church in Australia. The parties discussed basic terms and conditions, including accommodation, remuneration, and the nature of the role. It was agreed that Ermogenous was not to interfere in matters of real estate and finances, and the Community was not to interfere in matters of spiritual administration. The autonomous church was registered, but

never received nationwide support as intended. Ermogenous remained in his role as Archbishop, ministering to the needs of the Community’s members for over two decades. On occasions the Community interfered in matters of spiritual administration, such as intervening to curb Ermogenous’s disciplining of two bishops and vetoing an intended synod meeting. The Community continued to pay Ermogenous, even when on leave, and deduct PAYE tax. When he retired after some years of often strained relations with the Community’s management, Ermogenous requested payment of accrued employee entitlements. The Community argued he could not be treated as an employee because he was the holder of an ecclesiastical office. Issues: The issues before the High Court included whether ministers of religion could be employed by their religious bodies and, if so, whether Ermogenous and the Community had in fact demonstrated the requisite intention to enter into a contract of employment. If a contract of employment existed, Ermogenous was entitled to be paid the accrued employee entitlements. Decision: The High Court (Gaudron, McHugh, Hayne, Callinan, and Kirby JJ) unanimously held that there was a contract of employment and that Ermogenous was entitled to his accrued employee entitlements. Extract: The extract from the joint judgment of the majority (Kirby J delivered a separate but concurring judgment) reflects the High Court’s view on the role of the presumptions in determining the existence of contractual intention.

[page 132]

Gaudron, McHugh, Hayne, and Callinan JJ ‘It is of the essence of contract, regarded as a class of obligations, that there is a voluntary assumption of a legally enforceable duty’.5 To be a legally enforceable duty there must, of course, be identifiable parties to the

arrangement, the terms of the arrangement must be certain, and, unless recorded as a deed, there must generally be real consideration for the agreement. Yet ‘[t]he circumstances may show that [the parties] did not intend, or cannot be regarded as having intended, to subject their agreement to the adjudication of the courts’.6 Because the inquiry about this last aspect may take account of the subjectmatter of the agreement, the status of the parties to it, their relationship to one another, and other surrounding circumstances,7 not only is there obvious difficulty in formulating rules intended to prescribe the kinds of cases in which an intention to create contractual relations should, or should not, be found to exist, it would be wrong to do so. Because the search for the ‘intention to create contractual relations’ requires an objective assessment of the state of affairs between the parties8 (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.9 It is not a search for the uncommunicated subjective motives or intentions of the parties. In this context of intention to create legal relations there is frequent reference to ‘presumptions’. It is said that it may be presumed that there are some ‘family arrangements’ which are not intended to give rise to legal obligations and it was said in this case that it should not be presumed that there was an intention to create legal relations because it was a matter concerning the engagement of a minister of religion. For our part, we doubt the utility of using the language of presumptions in this context. At best, the use of that language does no more than invite attention to identifying the party who bears the onus of proof. In this case, where issue was joined about the existence of a legally binding contract between the parties, there could be no doubt that it was for the appellant to demonstrate that there was such a contract. Reference to presumptions may serve only to distract attention from that more basic and important proposition.

[page 133] More importantly, the use of the language of presumptions may lead, as it did in this case, to treating one proposition (that an intention to create legal relations is not to be presumed) as equivalent to another, different proposition (that generally, or usually, or it is to be presumed that, an arrangement about remuneration of a minister of religion will not give rise to legally enforceable obligations). References to ‘the usual non-contractual status of a priest or minister’ and factors which ‘generally militate against’ a finding of intention to create legal relations10 illustrate the point. The latter proposition may then be understood as suggesting, in some way, that proof to the contrary is to be seen as particularly difficult and yet offer no guidance at all about how it may be done. Especially is that so when the chief factor said to justify the proposition that an intention to create legal relations must be proved (the essentially spiritual role of a minister of religion) is then put forward as the principal reason not to find that intention in a particular case, and any other matters suggesting that there may be an intention to create legal relations are treated as dealing only with ‘collateral’ or ‘peripheral’ aspects of the relationship between the parties.11 In practice, the latter proposition may rapidly ossify into a rule of law, that there cannot be a contract of employment of a minister of religion, distorting the proper application of basic principles of the law of contract. … [R]eference must also be made to the statements, found in several cases, that the relationship between a minister of religion and a church is pre-eminently or even entirely spiritual, not contractual.12 … That the relationship between a minister of religion and the relevant religious body or group in which, and to which, he or she ministers is, at its root, concerned with matters spiritual is self-evidently true. That the minister’s conduct as minister will at least be informed, if not wholly governed, by consideration of matters spiritual is likewise self-evident. It by no means follows, however, that it is impossible that the relationship between the minister and the body or group which seeks or receives that ministry will be governed by a contract, and the respondent in this appeal did not seek to advance any such absolute proposition. Rather, the respondent advanced the more limited proposition, adopted by [the

majority in the Supreme Court] that an intention to enter contractual relations is not to be presumed where the arrangement concerns the engagement of a minister of religion but must affirmatively be proved.13 Nevertheless, it is as well to identify some aspects of the more absolute proposition earlier identified — that the relationship between minister and church is pre-eminently or even entirely spiritual because, in the end, the conclusion at which the majority of the Full Court arrived, was that the only arrangement or relationship which the appellant had was with a church not the respondent, and was a spiritual, not a contractual relationship. First, although the proposition that the relationship between minister and church is pre-eminently or even entirely spiritual is couched in apparently absolute terms, it has been [page 134] recognised that there are aspects of that relationship which may give rise to legally enforceable rights and duties. … Secondly, the ‘essentially spiritual’ character of the relationship may take on a different character when one of the parties to the arrangement (the putative employer) is not itself a spiritual body but is, as Staughton LJ said in Coker,14 ‘a school, or a duke, or an airport authority’ or, we would add, an incorporated body having the characteristics of the present respondent. To say that a minister of religion serves God and those to whom he or she ministers may be right, but that is a description of the minister’s spiritual duties. It leaves open the possibility that the minister has been engaged to do this under a contract of employment. … We do not accept that the Industrial Magistrate failed to consider the question of intention to create legal relations. The Industrial Magistrate described the issue as being ‘Can a minister of religion be in law an employee?’ and he dealt at length with the principal cases upon which the respondent relied both in this Court and in the Full Court of the Supreme Court. It seems that, at trial, the respondent advanced an argument framed in absolute terms. The Industrial Magistrate recorded it as being that ‘a minister of religion — any religion — cannot in law be considered an

employee of any other person or legal entity’. This proposition was rejected. But, read as a whole, the reasons of the Industrial Magistrate reveal that whether the arrangement which he had found to have been made between the appellant and the respondent was intended by them to be subject to the adjudication of the courts was a question at the centre of his consideration. No less importantly, the Industrial Magistrate expressly recognised that, in each of the several cases to which the respondent had referred in support of its submissions, there had been: a close consideration of the particular facts of the matter, including the charters, statutes and documents of fundamental belief of each creed considered, the documented position of the clergy in respect of each of the churches mentioned, and the special provisions of statute which govern the actual situation in the law of that particular church.15 He undertook a similarly close examination of the evidence that had been called at the trial of this matter about those subjects. That is, he examined, with care, all of the objective circumstances which bore on whether the parties intended to make a contract, as distinct from an arrangement binding only in honour. The Industrial Magistrate did not make the error which the majority in the Full Court of the Supreme Court attributed to him. Even if the Industrial Magistrate did make that error, the inference which the Full Court drew about the absence of an intention to create legal relations was an inference that was not open on the facts that had been found at trial.

[page 135]

Comments 7.5.1 See Radan, Gooley, and Vickovich at 7.11 and 7.38–7.59. 7.5.2 In Percy v Board of National Mission of the Church of Scotland [2006] 2 AC 28, Percy, an ordained female minister of the Church of

Scotland, alleged that she had been discriminated against in violation of the Sex Discrimination Act 1975 (UK). In order to bring the complaint, Percy had to establish that her engagement as a minister was pursuant to a contract of employment. In relation to the issue of intention to create legal relations, Lord Nicholls of Birkenhead, at 40–1, said: There are indeed many arrangements or happenings in church matters where, viewed objectively on ordinary principles, the parties cannot be taken to have intended to enter into a legally-binding contract. The matters relied upon by Mr Parfitt in President of the Methodist Conference v Parfitt [1984] QB 368 are a good example of this. The nature of the lifelong relationship between the Methodist Church and a minister, the fact that he could not unilaterally resign from the ministry, the nature of his stipend, and so forth, all these matters made it impossible to suppose that any legally-binding contract came into being between a newlyordained minister and the Methodist Church when he was received into full connection. Similarly with the church’s book of rules relied on by the Reverend Colin Davies in Davies v Presbyterian Church of Wales [1986] 1 WLR 323. Then the rebuttable presumption enunciated by the Lord President in the present case, following Mummery LJ’s statements of principle in Diocese of Southwark v Coker [1998] ICR 140, 147, may have a place. Without more, the nature of the mutual obligations, their breadth and looseness, and the circumstances in which they were undertaken, point away from a legally-binding relationship. But this principle should not be carried too far. It cannot be carried into arrangements which on their face are to be expected to give rise to legally-binding obligations. The offer and acceptance of a church post for a specific period, with specific provision for the appointee’s duties and remuneration and travelling expenses and holidays and accommodation, seems to me to fall firmly within this latter category.

Further, in this regard there seems to be no cogent reason today to draw a distinction between a post whose duties are primarily religious and a post within the church where this is not so. In President of the Methodist Conference v Parfitt [at 376], Dillon LJ noted that a binding contract of service can be made between a minister and his church. This was echoed by Lord Templeman … in Davies v Presbyterian Church of Wales [at 329]. Lord Templeman said it is possible for a man to be employed as a servant or as an independent contractor to carry out duties which are exclusively spiritual. The context in which these issues normally arise today is statutory protection for employees. Given this context, in my view it is time to recognise that employment arrangements between a church and its ministers should not [page 136] lightly be taken as intended to have no legal effect and, in consequence, its ministers denied this protection. 7.5.3

7.5.4

For a discussion of Percy v Board of National Mission of the Church of Scotland and Ermogenous v Greek Orthodox Community of South Australia Inc in the context of the status of clergy and whether they perform their functions pursuant to a contract of employment, see G Blake SC, ‘Serving God and the Church: Clergy, Employment and Discrimination’ (2006) 80 Australian Law Journal 571. For a discussion of the element of intention in the context of decisions involving clergy, see I Vickovich, ‘The Modern Animus Contrahendi; Focusing on Intention Through a “Contemporary Lens”’ (2011) 13 Flinders Law Journal 95. The reasoning of the High Court in Ermogenous v Greek Orthodox Community of South Australia Inc has influenced superior court decisions in cases outside the context of faith work. For example, in Evans v Secretary, Department of Families, Housing, Community Services and Indigenous Affairs (2012) 289 ALR 37, the Full Court of

the Federal Court stated, at 241, that: Ermogenous rejected the use of presumptions as a basis for ascertaining whether parties intended to enter into contractual relations … the question in every case [is] whether an objective assessment of the state of affairs between the parties, in the context in which they [are] dealing evince[s] an intention to create contractual relations. Similarly, the United Kingdom Supreme Court, in Preston v President of the Methodist Conference [2013] 2 AC 163 at 173; [2013] 4 All ER 477 at 483, held that in the faith worker cases the ‘primary considerations’ for locating intention, rather than the presumptions, are: … the manner in which the minister was engaged, and the character of the rules or terms governing his or her service. … [T]hese documents and any other admissible evidence on the parties’ intentions fall to be construed against their factual background.

7.6C

Ashton v Pratt (2015) 88 NSWLR 281

Court: Court of Appeal of the Supreme Court of New South Wales Facts: Pratt was one of Australia’s wealthiest business people and Ashton was an escort with whom he had a relationship. Conversations between them, alleged by Ashton to have taken place in November 2003, were to the effect that in consideration for her not returning to the escort industry but providing him with services as his mistress, Pratt promised to settle $2.5 million on trust for each of her children, pay her an annual allowance of $500,000, an amount of $36,000 for rental accommodation, and $30,000 per annum for business expenses. After Pratt died Ashton signed a settlement with his estate for an amount of money, but she later commenced proceedings against his

[page 137] estate, seeking to set aside the settlement and claim the moneys under an alleged contract with Pratt. The primary judge accepted Ashton’s uncorroborated testimony about the conversations, but also held that Pratt and Ashton did not intend to create legal relations. Even if a contract had been formed, the trial judge found it would have been void as against public policy. It was also held that estoppel did not apply to preclude Pratt’s estate from denying that the conversations were legally binding. Finally, the trial judge held that any binding obligations were subsequently released by the settlement. Issue: The issue before the appeal court was, inter alia, whether the November 2003 conversations gave rise to a binding contract between Ashton and Pratt. Decision: The Court of Appeal (Bathurst CJ, McColl and Meagher JJA) unanimously dismissed Ashton’s appeal. It was held that the parties did not intend to create legal relations and, even if they did, any contract was void for uncertainty. It was also held that a social or family arrangement, rather than raising any presumption regarding the parties’ intention to enter into a contract, simply forms part of the circumstances from which the existence of a contract could be determined. Extracts: The extracts from the judgment of Bathurst CJ are directed to the matters of fact that were taken into account as indicators of the absence of intention to create legal relations.

Bathurst CJ In Ermogenous,16 the High Court held … that whether the parties intended to create legal relations required an objective assessment of the state of affairs between them. In that case, the High Court doubted … 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 Affairs17 concluded … that the High Court had rejected the use of presumptions as a basis of determining whether parties had entered into contractual relations. By contrast, in Sion v NSW Trustee & Guardian18 (Sion), Emmett JA, with whom Basten and Barrett JJA agreed, stated … 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. 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 [page 138] satisfied that the parties did not intend to make a contract. For the reasons which follow, he was correct in reaching that conclusion. 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. 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. 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. 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. 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’. 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. 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. Undoubtedly it is correct that formal language of offer and acceptance is not necessary to constitute a contract.19 However, it is relevant that with the exception of that portion of the conversation to which I have referred … the language was not cast in the language of obligation. 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 [page 139] no reference to Ms Ashton becoming Mr Pratt’s mistress as distinct from requesting her to concentrate on his needs and wants.

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 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. 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 [answers that were equivocal]. … [This] highlights the difficulties of ascertaining what the obligations to be undertaken by Ms Ashton were. 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. 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.20 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 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. 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. 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 [page 140] 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. 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 [a Pratt associate]. 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 [sic] 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. 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. … 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, 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. It follows that no binding agreement of the nature of that pleaded was entered into.

Comment 7.6.1 See Radan, Gooley, and Vickovich at 7.50.

1.

(1860) 142 ER 62.

2. 3.

[1960] 1 All ER 93. [1919] 2 KB 571.

4. 5.

cf Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256. Australian Woollen Mills Pty Ltd v The Commonwealth (1954) 92 CLR 424.

6. 7.

South Australia v The Commonwealth (1962) 108 CLR 130 at 154. South Australia v The Commonwealth (1962) 108 CLR 130 at 154; Placer Development Ltd v The Commonwealth (1969) 121 CLR 353 at 367.

8.

Masters v Cameron (1954) 91 CLR 353 at 362; ABC v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 at 548–9. Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 348–53; Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 186 ALR 289.

9. 10. 11.

cf Greek Orthodox Community of SA Inc v Ermogenous (2000) 77 SASR 523 at 576. Greek Orthodox Community of SA Inc v Ermogenous (2000) 77 SASR 523 at 576.

12.

Rogers v Booth [1937] 2 All ER 751 at 754; Lewery v Salvation Army in Canada (1993) 104 DLR (4th) 449 at 453.

13.

Greek Orthodox Community of SA Inc v Ermogenous (2000) 77 SASR 523 at 524, 576, 584.

14. 15.

Diocese of Southwark v Coker [1998] ICR 140 at 150. Ermogenous v Greek Orthodox Community of SA Inc (1997) 64 SAIR 622 at 734.

16. 17.

Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95. (2012) 289 ALR 237.

18. 19.

[2013] NSWCA 337. See the discussion by Ormiston J in Vroon BV v Foster’s Brewing Group Ltd [1994] VR 32 at 79.

20.

See Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130 at 137 and 156.

[page 141]

8 THE REQUIREMENT OF WRITING

INTRODUCTION 8.1 This chapter deals with the statutory requirement that contracts dealing with the sale of land or an interest in land have to be evidenced in writing. Although there has never been a general requirement at common law or under statute that contracts need to be written, there are two generally accepted exceptions. One is that formal contracts (such as deeds) must comply with specified writing requirements mandated by statute. The other is that ever since the seminal Statute of Frauds (UK) in 1677, contracts for the sale or disposition of land or an interest in land must be evidenced in writing — that is, these agreements will not be enforceable unless they are fully in writing or there is sufficient written evidence of information and terms that are prescribed by statute. In New South Wales the relevant statutory provision is s 54A of the Conveyancing Act 1919 (NSW).1 This provision is replicated in other Australian jurisdictions. The primary requirement that the contract must be evidenced by a ‘memorandum or note’ is discussed in Pirie v Saunders (1961) 104 CLR 149 (see 8.2C). In broad terms, the legislation says that agreements of this kind will not be enforced unless they are evidenced by a note or memorandum that is signed by the ‘party to be charged’, being the party against whom the contract is to be enforced, or their agent. This means that any oral agreements for sale of land or interest in land must be backed up by sufficient written evidence to be enforceable. Courts have interpreted this provision to include the essential terms of the agreement, meaning that the note or memorandum must as a

minimum contain a sufficiently clear indication of the parties, the property, and the price. Generally, non-compliance with the legislation renders the contract unenforceable. However, courts exercising equitable jurisdiction have in some circumstances ordered oral agreements for sale of land to be enforced where the statutory requirements have not been met. The equitable jurisdiction of the courts in this regard is recognised in s 54A(2) of the Conveyancing Act 1919 (NSW). For an alleged oral agreement of this kind to be enforceable, evidence of ‘part performance’ of the oral agreement is required. Equity will recognise acts in part performance of the oral agreement, instead of the writing requirements, as sufficient evidence of an enforceable contract. However, the acts must be performed by the party seeking [page 142] to enforce the contract, they must be ‘authorised’ by the oral agreement, and they must be unequivocally referable to a contract of the general nature of that agreement. The question of whether the payment of money, in the absence of acts in relation to the land, is a sufficient act of part performance is discussed in Khoury v Khouri (2006) 66 NSWLR 241 (see 8.3C).

THE REQUIREMENT OF A WRITTEN MEMORANDUM OR NOTE 8.2C

Pirie v Saunders (1961) 104 CLR 149

Court: High Court of Australia Facts: Saunders brought an action for damages for breach of a lease of commercial premises in Sylvania Heights against Pirie and Cripps. Saunders claimed that handwritten notes prepared by Hargraves (the solicitor for Pirie and Cripps) setting out instructions to prepare such a lease constituted a sufficient note or memorandum that satisfied the statutory requirement of writing in relation to the sale of land or

interests in land — in this case, s 54A of the Conveyancing Act 1919 (NSW). The notes described the property as ‘Lot B Princes Highway, Sylvania Heights’ and set out the term of the lease and rent to be paid. However, the notes did not indicate when the lease was to commence. The notes also contemplated that further terms would be formulated. Pirie and Cripps rejected Saunders’ claim. Issue: The issue before the High Court was whether the solicitor’s notes constituted a written note or memorandum of an agreement in relation to a lease that was sufficient to satisfy the requirement of s 54A. Decision: The High Court (Dixon CJ, Fullagar, Kitto, Taylor, and Menzies JJ) overruled the Full Court in New South Wales and unanimously held that the solicitor’s notes did not satisfy the requirements of s 54A and that there was no enforceable lease between the parties to the litigation. Extract: The extract from the court’s joint judgment discusses the requirement of a written note or memorandum in the context of s 54A.

The Court In these circumstances the Full Court, by majority, took the view that the solicitor’s notes of his instructions were capable of being regarded as a sufficient note or memorandum of an earlier concluded agreement. This view was based upon the so-called ‘authenticated signature fiction’ by which the majority meant ‘that if the name of the party to be charged (not being a signature in the ordinary sense of the word) is placed on the document said to constitute the written memorandum of the contract, it is to be treated as a signature for the purposes of the statute if such party expressly or impliedly indicates that he recognizes the writing as being an authenticated expression of the contract’. But since they considered that the jury should have been asked to determine as a question of fact whether what took place when Cripps gave instructions to Hargraves ‘amounted to an authentication’ of the appellants’ ‘signatures’ they directed that there

should be a new trial. Possibly their Honours intended to limit the new trial to this issue but the formal order is in general terms. [page 143] With respect to those members of the Full Court who thought otherwise we are of the opinion that their Honours’ decision pushes too far the principle applied in Leeman v Stock2 and the earlier cases referred to in Neill v Heavens.3 The principle applied in those cases can, we think, have no application to any document which is not in some way or other recognizable as a note or memorandum of a concluded agreement. We do not mean by this that it is necessary that the written note must always appear to have been made after the making of the contract for it is clear that a written proposal or offer may by its subsequent acceptance become by the conduct of the parties recognizable as a sufficient note or memorandum of the resulting contract. But this is not such a case. Here there is an allegation of a prior concluded contract and the solicitor’s notes are said to constitute a note or memorandum of this contract. But they purport to be and are nothing more or less than a brief notation of his instructions for the preparation of a draft lease for submission to [Saunders’] solicitor. Neither the existence of the document nor its contents are indicative of the existence of any binding contract. Perhaps, in other words, it may be said that the enumerated particulars do not appear as a note or memorandum of a subsisting contract as distinct from bare instructions for the preparation of a formal lease. Both the document and its contents are quite consistent with the hypothesis that the parties had not made any prior binding contract and that their rights and obligations were not to be effected until the execution of a memorandum of lease in the form which, after discussion, it should finally take. That being so it in no way recognizes the existence of any binding contract and cannot therefore be regarded as a note or memorandum of any such contract.4 In these circumstances it is not of much consequence to enter upon a discussion concerning the view expressed by the majority of the Full Court that … Cripps ‘stood by’ whilst Hargraves noted his instructions and that these circumstances ‘afforded evidence that he was impliedly recognizing

the writing as an authentic record of the prior oral bargain with [Saunders]’. But since there is nothing in the evidence to suggest that Cripps had any knowledge of what was written down, it seems clear that no inference adverse to [Pirie and Cripps] can be based on the so-called ‘standing by’. Moreover even if Cripps can be said to have ‘stood by’ there is no room for the inference that he impliedly recognized the writing as an authentic record of any prior oral bargain. Indeed, both the character and contents of the document and the circumstances in which it was composed tell conclusively against any such inference. We should add also that the nature of the document was such as to render any inquiry concerning the solicitor’s authority to make it quite inappropriate. Finally, even if these objections are not properly founded, it will be seen upon examination that there are several reasons why the document could not be regarded as a sufficient note or memorandum. In the first place it does not specify the property which is to be leased beyond describing it as ‘part of Lot B, Princes Highway, Sylvania Heights’. This alone is, we should think, a fatal objection. Secondly, it is clear that the document does not contain all the terms of the proposed lease for it contemplates the formulation of special conditions after ascertainment of the requirements of the Board of Health. Again, the agreement for [page 144] breach of which [Saunders] sought damages was an agreement in the terms alleged in the declaration and the lease the subject of the alleged agreement was to contain, in addition to the matters specified in the declaration, ‘all the usual and proper covenants’. But it is reasonably clear from the immediately following allegation in the declaration that ‘the said lease was prepared by [Pirie’s and Cripps’] solicitor and all covenants were agreed to by [Saunders] and [Pirie and Cripps]’, and from succeeding allegations, that the substance of the [Saunders’] case was that there had been a breach of an agreement to grant a lease in the form which the final engrossment took. That being so it is clear that, even if the solicitor’s notes can be regarded as a note or memorandum of an agreement between the parties, it is quite insufficient to support the agreement sued upon.

Comment 8.2.1 See Radan, Gooley, and Vickovich at 8.13–8.18.

THE PAYMENT OF MONEY AND THE DOCTRINE OF PART PERFORMANCE 8.3C

Khoury v Khouri (2006) 66 NSWLR 241

Court: Court of Appeal in New South Wales Facts: In 1988 the siblings Marina and Peter Khoury purchased a house in Bass Hill with a loan that was secured by a mortgage over the property in favour of the Commonwealth Bank. In 1992 Peter orally agreed to hold his share in the house on trust for his brother, Bechara Khouri, and to transfer that share to Bechara when called upon to do so. In return Bechara agreed to pay Peter $30,000 and to meet Peter’s share of the loan repayments to the Commonwealth Bank. Bechara paid the $30,000 as agreed. About the same time, Marina agreed to transfer her share of the house to a senior clergyman, Bishop Gibran, who was a family friend. In return Bishop Gibran paid Marina $70,000 and agreed to take over responsibility for her share of the loan repayments to the Commonwealth Bank. Shortly after this agreement Bechara agreed with Bishop Gibran to pay $70,000 to the bishop, and in return the bishop agreed to make repayments of the loan to the Commonwealth Bank that Bechara had agreed to make pursuant to his earlier oral agreement with Peter. Bechara made the payment to the bishop, who then made payments over the ensuing years in reduction of the loan to the Commonwealth Bank. In 1996 Marina and her husband borrowed money from the Arab Bank. Part of the loan was used to pay the amount then outstanding on the loan to the Commonwealth Bank. The other part of the loan was used to re-purchase the share of the house she had earlier sold to Bishop Gibran. The loan from the Arab

Bank was secured by a mortgage over the Bass Hill property, with Peter acting as a guarantor on the loan. In 2002 Bechara demanded that his share of the house be transferred to him by Peter. [page 145] Issue: The issue before the Court of Appeal was whether Bechara’s payments of $30,000 to Peter and $70,000 to Bishop Gibran were sufficient acts of part performance upon which it could ground an order for specific performance in favour of Bechara. Decision: The Court of Appeal (Handley, Hodgson, and Bryson JJA) unanimously held that the payments of money by Bechara were not sufficient acts of part performance. Extract: The extract from the judgment of Bryson JA, who gave the main judgment in this case, discusses the requirements of the doctrine of part performance and, in particular, the extent to which payments of money can qualify as acts of part performance.

Bryson JA Case law … shows that part performance was treated as a ground for specific performance in 1686, 10 years after the enactment of Statute of Frauds,5 and was relied on in several cases early in the 18th Century. … The judicial approach to the meaning and effect of the Statute of Frauds may well have been influenced by the recital with which it opens: ‘For prevention of many fraudulent practices, which are commonly endeavoured to be upheld by perjury and subornation of perjury; (2) be it enacted. …’ This recital establishes the purpose of the Statute clearly, and could support the view that if evidence shows that the transaction is genuine in some other way than by writing, the Statute was not intended to apply to it. If this was part of the reasoning of seventeenth-century Chancery judges, they are not known to have articulated it. In Last v Rosenfeld Hope J gave this account, which has the evident approval of the High Court in Theodore v Mistford Pty Ltd:6

No sooner had the Statute of Frauds been enacted in 1677 than the courts set about relieving persons of its effect in cases where it was thought that the legislation could not have been intended to apply. In general terms, it was said that the courts would not allow the Statute of Frauds to be made an instrument of fraud, and that it did not prevent the proof of the fraud. No doubt, as was said by Selborne LC in Maddison v Alderson7 in relation to one of the principles that was developed in this way, namely, the doctrine of part performance, 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 relevant doctrine. The general approach indicated by this summary statement did, however, spread into a number of fields where a statute requires writing. …8 [page 146] The modern foundation of the doctrine is the decision of the House of Lords in Maddison v Alderson. The speech of Lord Selborne LC has become a starting point for later consideration. His Lordship’s speech includes these observations: … 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.9 While extensively reviewing case law Lord Selborne said: 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

[page 147] the subject-matter of the contract. … [I]t 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.10 Lord Selborne reviewed many of the very numerous cases on part performance. They show that judicial opinion has not been completely uniform but from the earliest times there was unreadiness to give the Statute of Frauds its full literal effect. The readiness of the Court to give effect to equities arising upon conduct in performance of the contract does not provide a full or satisfactory exposition of unreadiness to treat part payment of the purchase money as an act of part performance; but as recognised by Lord Selborne that attitude to part payment was as well established by judicial authority as the doctrine of part performance itself. … Consideration of part performance in the High Court of Australia has not produced any relaxation or departure from Maddison v Alderson. In McBride v Sandland Isaacs and Rich JJ … said: (4) It must have been in fact done by the party relying on it on the

faith of the agreement, and further the other party must have permitted it to be done on that footing.11 This is a very stringent requirement. Their Honours also said that it remained to be shown: (7) That the act was done under the terms of that agreement by force of that agreement.12 Their Honours did not refer to the standing of part payment as an act of part performance, as their consideration was limited to the facts of that case. The High Court again considered part performance in Cooney v Burns, where there was not in fact a payment. Knox CJ said ‘It is settled that payment of part of the purchase-money is not of itself and apart from other circumstances — eg, delivery of possession — a sufficient act of part performance to take a case out of the statute. …’13 In JC Williamson Ltd v Lukey & Mulholland, which related to an oral agreement for a five-year lease, the decision did not turn solely on part performance, but also involved suitability [page 148] of the agreement for specific performance. Dixon J said ‘Equitable relief is obtainable, notwithstanding the Statute of Frauds, by a party who in pursuance of his contract has done acts of performance consistent only with some such contract subsisting …’14 and this appears to allude to Lord Selborne in Maddison v Alderson. Dixon J also said ‘The acts of part performance must be such as to be consistent only with the existence of a contract between the parties, and to have been done in actual performance of that which in fact existed.’15 … Regent v Millett was a case in which the vendor in an oral contract for sale permitted the purchaser to take possession, and this was treated as an act of part performance, although there was no contractual obligation to take

possession. Justice Gibbs, in an ex tempore judgment with which other members of the Court agreed, said: … it was submitted that a narrower test should be adopted and that it was necessary to establish ‘such a performance as must necessarily imply the existence of the contract’ — to use the words of Lord O’Hagan in Maddison v Alderson. However, the test suggested by the Earl of Selborne LC in that case, that the acts relied upon as part performance ‘must be unequivocally, and in their own nature, referable to some such agreement as that alleged’, 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).16 Justice Gibbs also adopted an expression in Dr Williams’ text17 ‘The change of possession of land has been described as “the act of part performance par excellence”.’ In Waltons Stores (Interstate) Ltd v Maher Brennan J said: In order that acts may be relied on as part performance of an unwritten contract, they must be done under the terms and by force of that contract and they must be unequivocally and in their nature referable to some contract of the general nature of that alleged: Regent v Millett. The acts which were held to amount to part performance were done by the Mahers to develop their own property, and the development was clearly for a commercial purpose. But, in my respectful opinion, those acts are not unequivocally and in their nature referable to an agreement for the lease of the Mahers’ land.18 This passage is a restatement in classic terms of a formulation which has been repeatedly approved in the High Court, and has not received any disapprobation. In Steadman v Steadman the House of Lords, in a case about a complicated agreement for settlement of maintenance and property disputes between husband and wife, treated a payment of £ 100 arrears of maintenance,

which was required by a term of the agreement, as an act of part performance so as to enable specific enforcement of another term under [page 149] which the wife was to surrender her interest in the matrimonial home for another payment of money which had not been made. Law Lords in the majority expressed dissatisfaction with the general rule that payment of money cannot constitute an act of part performance of a parol contract for disposition of an interest in land. Lord Reid said: Normally the consideration for the purchase of land is a sum of money and there are statements that a sum of money can never be treated as part performance. Such statements would be reasonable if the person pleading the statute tendered repayment of any part of the price which he had received and was able thus to make restitutio in integrum. That would remove any ‘fraud’ or any equity on which the purchaser could properly rely. But to make a general rule that payment of money can never be part performance would seem to me to defeat the whole purpose of the doctrine and I do not think that we are compelled by authority to do that.19 Lord Simon of Glaisdale said that the reasons for the rule did not justify it ‘as framed so absolutely.’20 Lord Salmon was of the view that payments may be ‘acts from which the nature of the contract can be deduced’, while saying ‘It is no doubt true that often it is impossible to deduce even the existence of any contract from payment. … Nevertheless the circumstances surrounding a payment may be such that the payment becomes evidence not only of the existence of the contract under which it was made but also of the nature of that contract. What the payment proves in the light of its [surrounding] circumstances is not a matter of law but a matter of fact.’21 Viscount Dilhorne said that his Lordship found it difficult to say on what principle the conclusion excluding payments of money from part performance had been reached.22 Lord Morris of Borth-Y-Gest dissented. Later legislative changes in the United Kingdom seem to make it unlikely that the House of Lords will again consider such a question.

In Australian and New Zealand Banking Group Ltd v Widin the Full Court of the Federal Court of Australia applying the Conveyancing Act treated part performance as authoritatively expounded in Maddison v Alderson and was of the view that there were acts of part performance in that case without resort to treating payment as an act of part performance. Justice Hill made an extremely comprehensive review and concluded: ‘It may be possible to reconcile what is said in Steadman with the orthodox approach taken by the High Court to date and while there is much to be said for the adoption in Australia of Steadman, these are matters for the High Court rather than an intermediate Court of Appeal.’23 I take the same view. In the present case there are no acts of ownership such as taking possession, paying rates or paying for the upkeep or improvement of the property, or receipt of rent or profits, or any other act at all. Acts of part performance have been almost universally closely related to possession and use or tenure of the land itself, such as where a purchaser is [page 150] put into possession by the vendor, or allowed to take possession by the vendor, or where the purchaser carries out improvements. They have not necessarily been acts which the contract requires to be done. Acts on the land can much more readily be seen as unequivocally referable to the contract than payments of money. The anomaly of not recognising payment as an act of part performance is clear. … The whole law of part performance is established by judicial authority, and discerning underlying principle is an obscure process. … Unless authoritatively directed to do otherwise, my view is that the Court of Appeal should apply the doctrine of part performance as it has received it, according to the terms in which it has been recognised in decisions of the High Court of Australia. The unavailability of payments as acts of part performance is part of what has been so received. Payment may be relevant for other reasons yet not be treated as an act of part performance for the operation of s 54A. It is always necessary to prove

the terms of the oral agreement, and the acts done in relation to the contract and its performance, including all payments made, can be put in evidence to show that there was an oral agreement as well as to show that there has been part performance. Payments are also relevant as part of the material upon which the Court is to act in deciding to award specific performance, which has a discretionary element, and is done in a way which resolves the whole controversy and sees to performance of outstanding obligations of each party. Observations in Steadman v Steadman disapproving of excluding payments as acts of part performance are not altogether uniform. If the observations of Lord Salmon are applied, it cannot, in my opinion, be said that the series of payments to the Bishop are evidence either of the existence of the contract between Bechara and Peter, or of the nature of that contract. On no view was the arrangement between Bechara and the Bishop and the series of payments referable, let alone unequivocally referable, to the agreement between Bechara and Peter. That agreement required Bechara to do something quite different, to pay the instalments to the Commonwealth Bank, not to rely on a different arrangement which he made with the Bishop and to act on that other arrangement; and no less so if the fact is, as the Trial Judge inferred, that the Bishop did things which brought about the same result as performance of the contract would have done. Whether or not payments could qualify as acts of part performance, these payments to the Bishop, and the arrangement with the Bishop for the Bishop to pay the instalments, have no claim at all for consideration as acts unequivocally referable to the contract as found or to a transaction of that kind. However that leaves the payment of the $30,000 for consideration; if there were no rule excluding payments, this payment would seem to fulfil every requirement for an act of part performance. As the law is, neither can be regarded, and s 54A stands in the way of Bechara’s obtaining any relief in judicial proceedings, whether the declaratory order which he obtained, or any other relief.

Comment 8.3.1 See Radan, Gooley, and Vickovich at 8.29–8.44.

1.

Section 54A(1) of the Conveyancing Act 1919 (NSW) states as follows: ‘No action or proceedings may be brought upon any contract for the sale or other disposition of land or any interest in land, unless the agreement upon which such action or proceedings is brought, or some memorandum or note thereof, is in writing, and signed by the party to be charged or by some other person thereunto lawfully authorised by the party to be charged.’

2. 3.

[1951] Ch 941. (1953) 89 CLR 1.

4. 5.

Thirkell v Cambi [1919] 2 KB 590. Setting instruction. Butcher v Stapely (1685) 23 ER 524.

6. 7.

(2005) 221 CLR 612 at 623–4. (1883) 8 App Cas 467 at 474.

8. 9.

Last v Rosenfeld [1972] 2 NSWLR 923 at 927. Maddison v Alderson (1883) 8 App Cas 467 at 474–6.

10. 11.

Maddison v Alderson (1883) 8 App Cas 467 at 478. McBride v Sandland (1918) 25 CLR 69 at 79.

12. 13.

McBride v Sandland (1918) 25 CLR 69 at 79. Cooney v Burns (1922) 30 CLR 216 at 222–3.

14. 15.

JC Williamson Ltd v Lukey & Mulholland (1931) 45 CLR 282 at 297. JC Williamson Ltd v Lukey & Mulholland (1931) 45 CLR 282 at 300.

16. 17.

Regent v Millett (1976) 133 CLR 679 at 682–3. James Williams, The Statute of Frauds Section Four in the Light of its Judicial Interpretation, Cambridge, 1932, Chapter 7.

18. 19.

Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 at 432. Steadman v Steadman [1976] AC 536 at 541.

20. 21.

Steadman v Steadman [1976] AC 536 at 565. Steadman v Steadman [1976] AC 536 at 570.

22. 23.

Steadman v Steadman [1976] AC 536 at 555. Australian and New Zealand Banking Group Ltd v Widin (1990) 26 FCR 21 at 37.

[page 151]

9 CAPACITY

INTRODUCTION 9.1 This chapter deals with the issue of contractual capacity, principally from a common law perspective. In order to enter into a contract and to enforce it, the parties to it must have contractual capacity. However, not all persons or entities have full contractual capacity and some, in fact, lack any contractual capacity. This lack of capacity impacts not just upon the individual who lacks capacity, but also upon the party that they have dealt with who may be under the impression that they have entered into legally-binding contractual obligations. Lack of capacity impacts upon enforceability of those obligations. A number of the authorities extracted in this chapter focus upon illustrations of individuals who are minors entering into contractual relations with other parties. These authorities illustrate common law principles that have been developed in this regard. In the cases extracted, questions have arisen as to whether the particular contracts were binding and whether the contract could be repudiated. In Roberts v Gray [1913] 1 KB 520 (see 9.2C) it was held that the particular contract with a minor was enforceable because it satisfied the common law requirement that it was one for necessities. The criteria for necessities were examined in this case. In Hamilton v Lethbridge (1912) 14 CLR 236 (see 9.3C) the essential question was whether a contract with a minor was capable of being affirmed by the minor when he came of adult age. The court held that the contract was capable of affirmation and in reaching that decision, examined the options

available to a minor who had entered into a contract, but who now had reached their majority before the contract had been discharged. In relation to contracts with minors it is sometimes the case that a third party influences the minor to avoid a contract that the minor had made in circumstances where the minor could have elected to affirm that contract upon obtaining their majority. This issue was raised in Proform Sports Management Ltd v Proactive Sports Management Ltd [2007] 1 All ER 542 (see 9.4C), which concerned an English football player who had entered into a representative agreement and who was induced by a third party to avoid that agreement. It was held in the particular case that there was no liability for inducing a breach of a voidable contract by the minor. Not all cases involving lack of capacity involve minors. In company law (and, indeed, in the law relating to associations that have constitutions) an issue may arise as to whether the particular entity, such as a company, has the capacity to enforce a contract that may have been made notwithstanding that the company did not have the power in its constitution to enter into the contract in the first place. At common law such contracts were void ab initio. Although modern [page 152] legislative developments dealing with the law relating to corporations and/or incorporated associations have altered the common law position — primarily because those legislative developments have included provisions that give entities the powers of natural persons — nevertheless it was relatively common for parties to seek to avoid contracts on the basis that one of the contracting parties did not have the contractual capacity to make the particular contract. These issues were discussed in Rolled Steel Products (Holdings) Ltd v British Steel Corp [1986] Ch 246 (see 9.5C).

THE CONTRACTUAL CAPACITY OF AN INFANT 9.2C

Roberts v Gray [1913] 1 KB 520

Court: Court of Appeal in England Facts: Gray (an infant) entered into a contract with Roberts (a professional billiard player) pursuant to which Roberts agreed to accompany Gray on a world billiard tour and whereby both would play billiard tournaments together. After entering into the contract Roberts spent money and effort in making tour arrangements. However, due to a dispute between Gray and Roberts, the tour was cancelled. Roberts sued Gray for breach of contract. Issues: The issues before the Court of Appeal were whether an infant could be sued for breach of contract, whether the contract was binding between the parties, and whether the contract could be repudiated. Decision: The Court of Appeal (Cozens-Hardy MR, Farewell and Hamilton LJJ) unanimously held that the contract between Gray and Roberts was binding, as it was regarded as one for necessities. It was noted that Gray had received some form of instruction under Roberts and that the contract did not involve unreasonable terms. In the circumstances it was held that Gray could not repudiate the agreement. Extract: The extracts from the judgments of Cozens-Hardy MR and Farewell LJ discuss the concepts of necessaries and a contract for an infant’s benefit.

Cozens-Hardy MR [A]s early as Lord Coke … it has been held that an infant’s contract for necessaries is binding, and it was laid down by him that the doctrine also applied not merely to bread and cheese and clothes, but to education and instruction. … It applies to education and instruction in the social state in which the infant is, and in which he may expect to find himself when he becomes an adult. … Now, what is the effect of a contract which is entered into by an infant with reference to necessaries, including instruction and education? We have heard an argument forcibly put before us that such a contract may be good

so far as the consideration has been executed, but that it cannot be enforced so far as it is executory. For that proposition I think there is no authority, and I certainly think that it is not open to this Court to say that there is any such rule. [page 153] We are bound by Clements v London and North Western Railway Co.1 There the contract was a contract of service by the infant. A term of the service was that he should become a member of the Society for the employees of the London and North Western Railway Co, and, in consideration of certain benefits, he was not to bring any action against the company in case of accidents whether due to the company’s negligence or not. The Court considered the contract as a whole. It is quite idle to say ‘look at the contract and see if there is one clause which is adverse to the infant’. The Court cannot consider whether that is for the infant’s benefit and, if it is not, say that the whole contract is therefore void; it must look at the contract as a whole and see whether, looking at it as a whole, it is a contract for the infant’s benefit, not merely a contract for necessaries, but if it is a contract which is on the whole for the infant’s benefit. If so, what is the result? Lord Esher says if upon consideration of the whole of the contract there is a manifest advantage to the infant he cannot avoid it.2 Then Kay LJ says: ‘I agree with the Divisional Court that, on examination of the whole contract, it is to the benefit of the infant, although it contains terms that, standing alone, would not be for his advantage. There is, therefore no right on the part of the infant to repudiate the contract’.3 A L Smith LJ quoting with approval the passage in the judgment of Fry LJ sitting, not in the Court of Appeal, but as a judge of the Chancery Division, in De Francisco v Barnum says: ‘there is another exception which is based on the desirableness of infants employing themselves in labour, therefore, when you get a contract for labour, and you have a remuneration of wages, that contract, I think, must be taken to be prima facie binding upon the infant. I take this to be good law. Prima facie, therefore, this contract is binding on the infant’.4 If, therefore this is a contract falling within a class to which the doctrine of necessary supplies, and if, taken as a whole, it is to the infant’s benefit, I see no foundation whatever for the

argument that the infant is not liable for damages in the event of his repudiating or declining to perform the contract entered into. …

Farewell LJ This is clearly a contract for necessaries within the meaning which that phrase has had attached to it in the course of many centuries since Lord Coke wrote. It is in effect for board, lodging, travelling and employment all found at the plaintiff’s expense for the infant and involved in the employment, and the education which a billiard player of receptive capacity could not fail to obtain from playing continually month after month with a great billiard player like John Roberts. Every item which goes to make up necessaries in the sense of a labour and education contract, except the express term to give the education, which would be necessary if it were an apprenticeship deed, it is in this particular contract as much so as though, instead of funding the board and lodging on board ship and in various hotels, Roberts had found it in a house of his own where he gave exhibitions. I cannot doubt that this is a contract for necessaries. [page 154] Then the next thing is, is it for the benefit of the infant, because, although a contract for necessaries is prima facie binding, it may be shewn to contain terms so harsh as not to be binding on the infant. In my opinion, it is clearly for the benefit of the infant, and I see nothing to suggest that it is in the least harsh upon him.

Comment 9.2.1 See Radan, Gooley, and Vickovich at 9.13 and 9.18. 9.3C

Hamilton v Lethbridge (1912) 14 CLR 236

Court: High Court of Australia

Facts: The father of a minor named Lethbridge entered into an employment contract on behalf of his son with Hamilton, a solicitor. The contract contained a provision that bound Lethbridge to serve Hamilton for five years as an articled clerk. The contract also contained a provision that prevented Lethbridge, when he later qualified, from practising as a solicitor within 50 miles of Toowoomba, the town in which Hamilton practised as a solicitor, unless Hamilton consented. The contract stated that Lethbridge’s father would be liable to pay Hamilton the sum of £ 2000 if Lethbridge were guilty of a breach of that obligation. Lethbridge’s father also agreed that his son, on obtaining 21 years of age, would enter into a similar covenant. The son continued service under the articles for a period of two years after he attained 21 years of age, but he did not enter into the additional covenant. Within a short time of Lethbridge graduating as a solicitor he commenced practice within the restricted area. Hamilton then applied for an injunction seeking to restrain. Issue: The issue before the High Court was whether the restraint of trade in the contract was unreasonable as such to protect the minor from the covenant. Decision: The High Court (Griffith CJ, Barton and Isaacs JJ) unanimously held that Hamilton was entitled to an injunction against Lethbridge. The court held that the contract of employment was binding upon Lethbridge notwithstanding the presence of a restraint of trade clause within the agreement. As part of the decision it was held that Lethbridge had ratified and adopted the articles of clerkship and that the restraint preventing him from practice was binding on him. In those circumstances the onus was on Lethbridge to establish that the restriction as to time and place was excessive. Extract: The extract from the judgment of Griffiths CJ sets out and applies the principles concerned with whether a contract is for the minor’s benefit, and with ratification of the contract after the minor comes of age.

[page 155]

Griffith CJ Some contracts made by an infant are said to be absolutely void, but that rule does not in general apply, as I understand it, to executory contracts still open to be performed on the attainment of majority. Other contracts by an infant are in general voidable only. It cannot be suggested that articles of apprenticeship or articles of clerkship are absolutely void, although there is high authority for saying that a covenant, although contained in articles of apprenticeship, is void and cannot be enforced against an infant after attaining 21 as was pointed out by Chitty J in the case of De Francesco v Barnum.5 A contract made by an infant cannot be enforced against him during infancy unless it is held to be for his benefit. For the purpose of determining that question the whole of the contract must be looked into, and not a particular portion only. Clements v London and N W Railway Co6 is sufficient authority for that proposition. When an infant comes of age he is free to affirm or disaffirm the contract as to anything remaining to be done under it. If he affirms it the question of it being for his benefit no longer arises. If he disaffirms it there is an end of the matter. He must do one thing or the other. The principal objections taken to this contract now in question, as showing that it was not for the benefit of the infant, were based on the covenant restricting the right of practice, and the provisions as to assignment of the articles. The first of these objections is based upon public policy. So far as regards public policy the point is just the same whether the covenantor is an infant or an adult. If the restriction is not against public policy and is not too wide for the protection of the master, the question would be whether on the whole it was for the benefit of the infant to enter into a contract in which such a stipulation regarded per se was reasonable. The question of minority is quite irrelevant. One point taken was that the restriction was unusual in Queensland. In my opinion, in the present circumstances of Queensland, in which the conditions are constantly changing with the growth and distribution of population, it is impossible to say that any stipulation in articles is usual or unusual. All that can be said is that in the still comparatively small number of cases that have occurred some stipulations have been used oftener than others, or rather that one has been more

frequently adopted than others. It appears, indeed, that in fact a stipulation in the terms of this covenant has been by no means infrequent in Queensland. … The contract now in question as a whole is clearly not void, but at most voidable. When an infant by whom a voidable contract has been made comes of age he must, as I have already stated, elect whether he will affirm or disaffirm it. If he elect to disaffirm it, which in this case he did not do, he must do so within a reasonable time. … In this case after [Lethbridge] came of age he continued to serve under the articles for more than two years after the assignment. That, of itself amounts to ratification and adoption by the infant. I will read what was laid down in the case of Harris v Wall: — ‘Any act or declaration which recognises the existence of the promise as binding is a ratification of it, as, in the case of agency, anything which recognises as binding an act done by an agent, or by a party who has acted as agent, is an adoption of it. Any written instrument signed by the party, [page 156] which in the case of adults would have amounted to the adoption of the act of a party acting as agent, will in the case of an infant who has attained his majority amount to a ratification’.7 As I said, [Lethbridge] continued in [Hamilton’s] service for more than two years after the assignment, and I should be disposed to hold, if it were necessary, on the authority of Cornwall v Hawkins8 that that in itself would be sufficient. But that is not all. In the deed of assignment, executed more than two years after [Lethbridge] came of age, it is recited that ‘by articles of clerkship dated the twenty-eighth day of April one thousand nine hundred and five the said Christopher Baron Lethbridge (of his own free will and with the assent of his father William Baron Lethbridge of Mitchell in the State of Queensland Clerk since deceased) did bind himself Clerk to the said Charles William Hamilton to serve him from the day of the date thereof for the term of five years thence next ensuing and subject to the covenants and conditions therein contained’. By the same deed it

was agreed that, notwithstanding the assignment, the father’s covenant in the original articles that he should not practise in Toowoomba or within 50 miles thereof and that if he did he should be liable to pay £ 2,000 as liquidated damages, and further the covenant by the father that the son should enter into a covenant to that effect immediately on attaining 21, should remain in full force and effect as if the assignment had not been executed. I do not know how a more clear and distinct ratification and adoption of the obligations contained in the original articles could be expressed. Alternatively it may be regarded, if necessary, as a new contract by [Lethbridge] himself. It is, indeed, both a new contract and a ratification of the old one. Further, [Lethbridge] applied to the Supreme Court for admission as a solicitor on the faith of these articles, and of his service under them, and put them forward as the basis and foundation of his right to admission. For these reasons I think the fact that he was a minor when the articles were originally executed is quite irrelevant, and that he is bound by the ratification of the original contract, from whatever point of view you look at it.

[page 157]

Comment 9.3.1 See Radan, Gooley, and Vickovich at 9.20 and 9.26. 9.4C

Proform Sports Management Ltd v Proactive Sports Management Ltd [2007] 1 All ER 542

Court: Chancery Division Facts: Wayne Rooney, a well-known football player in England, entered into a representative agreement with Proform Sports Management Limited in December 2000, at a time when he was 15

years old. Rooney’s father also signed the agreement. The term of the agreement was for two years. On 27 June 2002 Rooney and his parents wrote to Proform and advised them that they would not be renewing the agreement after its expiry in December 2002. On 14 December 2002, three days after the expiry of the agreement with Proform, Rooney entered into a representative agreement with Proactive Sports Management Limited. Subsequently, Proform brought proceedings for unlawful interference with and/or the procuring of a breach of the representative agreement dated December 2000. Issue: The issue before the Chancery Division was whether there could be any liability for inducing or facilitating a breach of a voidable contract with a minor. Decision: Judge Hodge QC held there could be no liability for inducing or facilitating a breach of a voidable contract with a minor. Extract: The extract from the judgment of Hodge J sets out and applies the principles concerned whether there could be any liability for a voidable contract with a minor.

Judge Hodge QC The first ground of [Proactive’s] application is that they cannot be liable for inducing the breach of a voidable contract. The principles are said to be expressed at para 25-23 of Clerk and Lindsell on Torts.9 I quote: Where the contract is determinable, the defendant incurs no liability merely by inducing the contracting party to determine the contract lawfully, for there is then no breach. It must follow therefore that it is no tort to procure the breach of a voidable contract, at least where the person induced is the party who enjoys the right to rescind. I was taken to a number of authorities in support of these propositions. It is said by Mr Joffe for [Proactive] that the proposition that it is no tort to procure the breach of a voidable contract must follow logically from the proposition that the defendant incurs no liability merely by inducing the contracting party to determine the contract lawfully. He submits

[page 158] that Slade J was prepared to assume that such was the law in Greig v Insole, World Series Cricket Pty Ltd v Insole.10 Slade J recorded that a question that had been the subject of some argument before him was whether it could be a tort to induce the breach of a merely voidable agreement. His conclusion was as follows: For the purpose of this judgment, therefore, so far as it is relevant at all, I propose to assume in favour of the defendants, without deciding, that it does not constitute a tort for a third party to induce a person to exercise a lawful right to rescind a contract. Mr King [for Proform] relies upon the limited terms of Slade J’s assumption that it does not constitute a tort for a third party ‘to induce a person to exercise a lawful right to rescind a contract’. Mr King says that that statement does not extend beyond inducing a person to exercise a lawful right to rescind a contract. It does not in terms apply to inducing a person to act in breach of a contract which is voidable, but which he has not then previously sought to avoid. Mr Joffe says that two earlier authorities neither considered by, nor even cited to, Slade J show clearly that there can be no liability for procuring the breach of a voidable contract with a minor. He submits that those decisions go further than the assumption that Slade J was prepared to make. Those cases are both decisions at first instance. The first is De Francesco v Barnum11 a decision of Fry LJ sitting as an additional judge of the Chancery Division. The other decision is Shears v Mendeloff,12 a decision of Avory J sitting with a common jury. Mr King points out that in Shears v Mendeloff, the second paragraph of the recital of the facts records that the contract was one that the minor was not only entitled to repudiate, but one ‘that he did repudiate in the Autumn of 1913’. Thus Mr King says that Shears v Mendeloff was not a case in which the matter fell to be decided. So far as the other authority, De Francesco v Barnum, is concerned, he submits that there is no indication in Fry LJ’s judgment that he considered this actual point at all. Mr King makes the point that neither authority is cited in Chitty on Contracts13 in connection

with the proposition for which Greig v Insole is cited as authority. He submits that in De Francesco v Barnum the issue simply did not raise its head at all. He submits that, until avoided, the contract is binding. He questions the principle that no one can be liable for inducing the breach of a voidable contract, on the footing that, unless and until a voidable contract has been avoided, it remains valid. Mr Joffe submits that the Proform agreement was at all times a voidable contract which was avoided in June, or if not in June, in September, 2002, and therefore there can be no liability in tort, even if, which he denies, [Proactive] procured a breach of that contract. Mr King submits that the 27 June letter, rather than seeking to avoid the contract, in terms acknowledged that the claimant’s agreement would continue until December 2002, and therefore cannot be relied upon as an avoidance of the contract. … [page 159] On the issue of law as to whether there can be any liability for procuring the breach of a voidable contract with a minor, I find in favour of Mr Joffe’s argument. I acknowledge that Slade J merely assumed that it was not a tort for a third party to induce a person to exercise a lawful right to rescind a contract. In my judgment, although he was merely prepared to assume that, he was right to do so. I agree with Mr Joffe that it follows logically from the proposition that where a contract is determinable, the defendant incurs no liability merely by inducing the contracting party to determine the contract lawfully, for there is then no breach, that it is no tort to procure the breach of a voidable contract, at least where the person induced is the party who enjoys the right to rescind. I accept Mr King’s submission that the point was not decided in Shears v Mendeloff because on the facts it was unnecessary to do so, the contract having already been repudiated. I am also prepared to accept that the point may not have been directly thrown up for decision in De Francesco v Barnum; but it does seem to me that if a contract is voidable, then there should be no liability for procuring the breach of it. It does not matter whether the contract has already been avoided, or whether the alleged tortfeasor merely induces the minor to breach the contract. If

the contract is one which the minor is entitled to avoid, then it does not seem to me that liability for the tort of wrongfully interfering with, or of inducing the breach of, the contract should arise. I can see no justification for holding a defendant liable for the tort in such circumstances, notwithstanding the fact that the contract remains valid until avoided. The fact that it can be avoided should be, in my judgment, in principle a defence to any claim for the tort of wrongful interference with, or wrongfully procuring a breach of, the contract. It then becomes necessary to consider the next stage in Mr Joffe’s argument. He submits that the law as to minors’ contracts is correctly stated in Chitty.14 Paragraph 8-004 identifies the only contracts which are binding on the minor as contracts for necessaries. However, a diversity of meanings has been given to the word ‘necessaries’. In one sense the term is confined to necessary goods and services supplied to the minor, but in another it extends to contracts for the minor’s benefit and in particular to contracts of apprenticeship, education and service. Paragraph 8-005 provides that apart from contracts for necessaries and contracts of apprenticeship, education and service, the general rule at common law is that a minor’s contract is voidable at his option; ie not binding on the minor, but binding on the other party. As to other beneficial contracts, Mr Joffe relies on para 8-028. I quote: The principle that contracts beneficial to a minor are binding on him is not confined to contracts for necessaries and contracts of employment, apprenticeship or education in a strict sense. It extends also to other contracts which in a broad sense may be treated as analogous to contracts of service, apprenticeship or education. So, for instance, a contract by a minor (who was a professional boxer) with the British Boxing Board of Control whereby he agreed to adhere to the rules of the Board was held binding on him because he could not have earned his living as a boxer without entering into the agreement. [page 160]

The authority cited is Doyle v White City Stadium Ltd.15 Similarly, it has been held that an agreement between a minor and a publisher for the publication of the minor’s biography which was to be written by a ‘ghost writer’, was binding on the minor. The authority cited is Chaplin v Leslie Frewin (Publishers) Ltd.16 So also, a contract between a group of under-age musicians (known as ‘The Kinks’) whereby they appointed a company as their manager and agent was held binding as analogous to a contract of employment. … The authority cited is the first instance decision in Denmark Productions Ltd v Boscobel Productions Ltd.17 The footnote goes on to contrast from that case the case of Shears v Mendeloff, where the contract contained oppressive terms and was void. The text goes on: On the other hand there is no general principle to the effect that any contract beneficial to a minor is binding on him. So a minor’s trading contracts are not binding on him, even if beneficial. Thus, two questions arise. First, whether the contract between Wayne Rooney and Proform falls within the class of contracts analogous to contracts for necessaries and contracts of employment, apprenticeship or education. If so, secondly, and only if the first question is answered in a positive sense, whether this particular contract was one which was beneficial to Wayne Rooney. Mr Joffe submits that a contract analogous to one of apprenticeship, education or employment is only enforceable against a minor if it is of benefit to him at the time when he enters into it. Where the contract contains terms, some of which are beneficial to him and others not, the question is whether, taken as a whole, the contract is to his advantage. The burden of showing benefit is always on the party seeking to uphold the contract. At para 31 of his written skeleton argument, Mr Joffe poses the question whether the Proform agreement fell within the class of minors’ contracts which were analogous to those of apprenticeship, education and service. At sub-para 6 he proposes a negative answer to that question. He says that Proform cannot show that the contract is so analogous. At the time when it was signed, Mr Rooney was already with a

club, Everton, that was providing him with training. He had no need for any training from Proform. He submits that the Proform agreement makes no provision for training, education or instruction in any way. The absence of such provision was, he submits, the basis of the decision in Shears v Mendeloff that the contract could not be construed as one for necessaries. Shears v Mendeloff was of course the case before Avory J, where a minor who was a professional boxer had appointed the plaintiff his sole manager on commission and agreed not to take any engagements under any other management without the plaintiff’s consent for three years. Such a contract was held [page 161] unenforceable against the infant, on the grounds that it was a trading contract, and also as one which could not be construed as being beneficial to him. Mr Joffe contrasts such a case with the decision in Roberts v Gray,18 where the infant had entered into a contract to go on a tour as a professional billiard player. That contract was held to be one for necessaries and for his benefit. The Court of Appeal held the contract to be binding on him as a whole. Mr Joffe submits that the basis of the decision in that case was clearly that the contract could be construed as one for necessaries, because it was for teaching, instruction and employment. By contrast, he submits that the Proform agreement contains nothing which can be said to be analogous to instruction, education or training. Nor did the Proform agreement permit Mr Rooney to make a start as a footballer or enable him to earn a living. It is on that basis that he distinguishes the cases of Chaplin v Leslie Frewin (Publishers) Ltd19 and Doyle v White City Stadium Ltd,20 which are authorities relied upon by Mr King. Mr Joffe submits that in those two cases the minor was enabled to earn a living by reason of a contract he entered into. That is not the position here. There was no payment being made to him. He was already contracted to Everton. That was all that he needed. He had no need of a contract to represent him as a professional footballer. He would on turning 17 be in a position to earn his living via a contract with Everton Football Club or any other club, and he had no need of an agreement with an agent to enable him to do so.

Certainly he did not need to be bound to such an agent for two years. After all, he could not under the Football Association Rules sign a professional contract at the earliest until he was 17, assuming he was not then in full-time education; and he had no need of representation in his work as a professional footballer, as cl 1 of the Proform agreement stated. Mr King submits that the terms of the Proform contract speak for themselves. He relies upon the terms of Mr McIntosh’s witness statement, which record that Proform was providing all the functions in respect of personal representation and management, advice and negotiation for the benefit of Wayne Rooney. That was intended to encompass all aspects of the services undertaken by the claimant for a player aged 17 years or under. He submits that the case falls squarely within the principle stated at para 8028 of Chitty, that contracts beneficial to a minor, and which can thus be upheld, are not confined to contracts for necessaries and contracts of employment, apprenticeship or education in a strict sense. They extend also to other contracts which in a broad sense may be treated as analogous to contracts of service, apprenticeship or education. In any event, he submits that the defendants cannot establish — and the burden is upon them — that the claimant has no real prospect at trial of bringing the agreement within these principles. Whether the agreement is within the same must, he submits, be a mixed question of construction and fact. I am conscious that on this issue I have, as Mr King submits, to be satisfied that the claimant has no real prospect of succeeding in establishing that the Proform agreement falls within the class of contracts analogous to those described as contracts for necessaries, contracts of employment, apprenticeship or education. Clearly Wayne Rooney’s agreement with Everton Football Club would fall squarely within the class of contracts identified at para 8-028 of Chitty. However, [page 162] it does seem to me that the same cannot be said of the Proform agreement. On the evidence, Mr Rooney was already engaged with Everton. Under the terms of the Football Association rules, he could not enter into any contract of employment until he was 17, if then not in full-time education. Even if he

entered into a contract with Everton when he was 17, that contract, if not for his benefit, would of course be voidable at his election. It does not seem to me that a contract in the terms of the Proform agreement, whereby Proform was to act as his executive agent and to carry out all the functions in respect of personal representation on behalf of his work as a professional football player, falls to be considered as analogous to the class of contracts considered at para 8-028 of Chitty. As I say, Mr Rooney was already with Everton on Mr McIntosh’s own evidence. … At this time, and indeed in 2002, Wayne Rooney only wanted to play for Everton; he did not wish to play for any other club. He was already doing so. It does seem to me that the Proform agreement is much more analogous to the contract considered by Avory J in Shears v Mendeloff than it is to the class of contract considered in cases such as Doyle v White City Stadium Ltd and Chaplin v Leslie Frewin (Publishers) Ltd and Denmark Productions Ltd v Boscobel Productions Ltd. As Mr Joffe submitted, music group managers are very different from player’s representatives. Music group managers organise matters that are essential to the very business of the musical artiste. Players’ representatives do not undertake matters that are essential to the player’s training or his livelihood. They do not enable the minor to earn a living or to advance his skills as a professional footballer. In my judgment, cases such as Chaplin v Leslie Frewin (Publishers) Ltd and Doyle v White City Stadium Ltd make it clear that the basis of the class of analogous contracts is that the minor is entitled to earn his living or to start to do so. It does not seem to me that the Proform agreement is analogous to such a contract. I say that particularly bearing in mind the fact that, under the Football Association rules, no contract can be entered into by a player as young as Wayne Rooney then was. No contract could properly be entered into by him until a time less than two months before this representation agreement was due to expire; and even if entered into by Wayne Rooney at that time, it would have been voidable at his instance if not genuinely for his benefit. That would have continued to be so throughout the remaining short duration of the management and agency agreement. It seems to me that the Proform agreement is at one remove from the class of contract that has been treated in the authorities as being subject to the exception to the general voidability of minors’ contracts, applicable where such a contract is for the minor’s benefit. As para 8-028 of Chitty makes clear, ‘A minor’s trading contracts are not binding on him, even if beneficial’. It seems to me

that this case falls within the general principle that merely because a contract is beneficial to a minor, if such is the case, it is not binding on him unless it falls within a particular category. So for those reasons, it seems to me that Mr Joffe is correct in saying that the Proform agreement does not fall within the class of minors’ contracts which are analogous to contracts of apprenticeship, education and service.

[page 163]

Comments 9.4.1 See Radan, Gooley, and Vickovich at 9.16 and 9.21–9.24. 9.4.2 For analysis of the principles relating to inducing a breach of contract, see Radan, Gooley, and Vickovich at 37.38–37.66.

THE CAPACITY OF A COMPANY AT COMMON LAW 9.5C Rolled Steel Products (Holdings) Ltd v British Steel Corp [1986]

Ch 246 Court: Court of Appeal in England Facts: Rolled Steel Products (Holdings) Ltd (RSP) was a company formed under the Companies Act 1948 (UK). Prior to its liquidation, RSP carried on the business of importing and selling steel in the United Kingdom. RSP’s main customers were motor manufacturers. Shenkman owned 51 per cent of the issued share capital in RSP and the remaining 49 per cent was held by trustees for Shenkman’s children. RSP’s directors were Shenkman and his father. Clause 3 of the memorandum of association of RSP listed a number of objects, including the following:

(A) To carry on business as exporters and importers of, and manufacturers of, and dealers in, and buying and selling agents for, iron, steel, copper, bronze, aluminium, lead, tin, zinc, antimony and other metal goods of all descriptions and home and foreign and dominion and colonial goods, merchandise and produce of all descriptions. … (K) To lend and advance money or give credit to such persons, firms, or companies and on such terms as may seem expedient, and in particular to customers of and others having dealings with the Company, and to give guarantees or become security for any such persons, firms, or companies. (L) To borrow or raise money in such manner as the Company shall think fit, and in particular by the issue of Debentures or Debenture Stock (perpetual or otherwise), and to secure the repayment of any money borrowed, raised, or owing, by mortgage, charge, or lien upon the whole or any part of the Company’s property or assets (whether present or future), including its uncalled Capital, and also by a similar mortgage, charge, or lien to secure and guarantee the performance by the Company of any obligation or liability it may undertake. The objects clause ended with the following words: It is hereby expressly declared that each Sub-Clause of this Clause shall be construed independently of the other SubClauses hereof, and that none of the objects mentioned in any Sub-Clause shall be deemed to be merely subsidiary to the objects mentioned in any other Sub-Clause. [page 164] RSP’s articles of association included the following provisions: 17 Provided that a Director declares his interest in a contract or arrangement or proposed contract or arrangement with the Company in manner provided by Section 199 of the Act

he shall be counted in the quorum at any meeting of Directors at which the same is considered and shall be entitled to vote as a Director in respect thereof. 18 (a) The quorum necessary for the transaction of the business of the Directors may be fixed by the Directors, and unless so fixed, shall, be two. … At Shenkman’s request, RSP borrowed money from Scottish Steel Sheet Ltd (SSS), another company controlled by him, to establish a steel service centre which was operated by SSS. SSS became indebted to Colvilles Ltd, a subsidiary of British Steel Corporation (BSC). Shenkman gave a personal guarantee of the SSS debt, but later agreed to an arrangement whereby Colvilles lent sufficient money to RSP to enable it to repay its debt to SSS, in return for RSP agreeing to guarantee repayment of SSS’s debt to Colvilles and to repay the loan from the proceeds of a prompt sale of the steel service centre. When the sale was not effected by the agreed date, RSP gave Colvilles a debenture over its property as security for the loan. Shenkman, in breach of the articles of RSP, did not declare his interest in the transaction when voting on these matters. Colvilles recovered its loan by exercising its rights under the debenture to put RSP into receivership. Sale of the assets did not realise sufficient funds to pay all the unsecured creditors. At the conclusion of the receivership RSP, relying on Shenkman’s nondisclosure being a sufficient breach of duty to render the security ultra vires and void, sued BSC and the receiver for the recovery of all moneys paid by the receiver to BSC. The trial judge held that BSC was entitled to assume that company documents were executed in the proper form, but upheld RSP’s claim on the basis that BSC knew that the guarantee and debenture had been given by RSP for an improper purpose. BSC appealed against that finding. RSP cross-appealed. Issues: The main issues before the Court of Appeal were the questions of principle regarding the capacity and powers of the particular company and the powers and authority of their directors. Decision: The Court of Appeal (Slade, Lawton, and Browne-Wilkinson LJJ) dismissed the appeal and allowed the cross-appeal.

Extract: The following extracts from the three judgments of the court concern the doctrine of ultra vires.

Slade LJ The ultra vires point For many years, the phrase ‘ultra vires’ has from time to time been used by company lawyers in two senses. Primarily it is used to describe acts which are beyond the capacity of a company. … [T]he phrase is also sometimes used to describe acts which are not beyond the [page 165] capacity of the company but simply beyond the authority of either the board of directors or a majority of the shareholders. In many instances, the sense in which the phrase is being used is far from clear. However, I think it plain that … the statement of claim in this case, in alleging that each of the guarantee and the debenture were ‘ultra vires and void’, were intended to allege that their execution was beyond the corporate capacity of [RSP], on the grounds that they were executed not for the purposes or benefit of [RSP] but for the purposes or benefit of Mr Shenkman. … The legal personality of a company incorporated under the Companies Acts exists only for the purpose of its incorporation, as defined in the objects clause, which have to be set out in its memorandum of association. … It does not, however, follow that any act is beyond its capacity unless expressly authorised by its objects clause. Any such company is treated as having implied powers to do any act which is reasonably incidental to the attainment or pursuit of any of its express objects, unless such act is expressly prohibited by the memorandum.21 Strictly, therefore, it is not essential for the memorandum to insert any reference at all to mere powers, as distinct from objects. … The statutory requirement that the objects of a company shall be specified in the memorandum marks one important difference between objects and

powers. In my judgment, however, whether a particular transaction, carried out in purported exercise of an express or implied power contained in a company’s memorandum of association, is within the capacity of the company must still depend on the true construction of that memorandum. … [In this case] [a]ttention … has to be directed to the particular wording of cl 3(K). The authority to give guarantees and become security conferred by the second limb of the sub-clause is not an unrestricted authority. It is merely an authority to give guarantees or become security for ‘any such persons, firms or companies’. The six words just quoted echo the words of the first limb of the sub-clause, which authorise the company to — lend and advance money or give credit to such persons, firms or companies and on such terms as may seem expedient, and in particular to customers of and others having dealings with the Company.[J10] The phrase ‘as may seem expedient’ necessarily implies that there is some criterion by which expediency is to be tested. The only possible criterion, in my opinion, can only mean ‘as may seem expedient for the furtherance of the objects of the company’. The references in cl 3(K) to the giving of credit and to customers of and persons having dealings with the company, make it additionally clear that the sub-clause in its context was intended to comprise merely a series of ancillary powers. It follows that, in my opinion, the power to give guarantees and become security, which are the relevant powers in the present case, are not to be construed as independent objects of [RSP] and the judge was right in so holding. Correspondingly, I think he was right to reject the … argument that the relevant transactions were intra vires [RSP], [page 166] in so far as that argument was based on the hypothesis that the powers conferred by cl 3(K) were independent objects of [RSP]. What, then, is the position if (as I have concluded) the power to give

guarantees and to become security are to be regarded as mere powers ancillary to the objects of [RSP]? Even on this footing, [RSP], in executing the guarantee and the debenture, was performing acts of a nature which, at least seemingly, it was expressly authorised by cll 3(K) and (L) of its memorandum to perform. The particular exercises of these powers were, on the face of them, well capable of falling within the objects of [RSP]. The judge, as I have read his judgment, accepted that these transactions were capable of falling within the scope of the wording of the powers conferred on [RSP] by its memorandum. Nevertheless, he considered that there is a general principle of company law that a transaction, which ostensibly falls within the scope of the wording of a company’s memorandum but is in fact entered into for some purpose not authorised by that memorandum, will be ultra vires the company in what he called the ‘wider sense’, and will confer rights on another party only if he can show that he dealt with the company in good faith and did not have notice that the transaction was entered into for an unauthorised purpose.22 It was primarily on the basis of this principle that the judge ultimately held the [BSC] liable to restore the moneys which they had received. As Lord Selborne said in Ashbury Rly Carriage and Iron Co (Ltd) v Riche: a statutory corporation created by Act of Parliament for a particular purpose, is limited, as to all its powers, by the purposes of its incorporation as defined in that Act.23 Strict logic might therefore appear to require that any act purported to be done by a company in purported exercise of powers ancillary to its objects conferred on it by its memorandum of association, whether express or implied, (eg a power to borrow) would necessarily, and in every case, be beyond its capacity and therefore wholly void if such act was in fact performed for purposes other than those of its incorporation. However, the practical difficulties resulting from such a conclusion for persons dealing with a company carrying on a business authorised by its memorandum, would be intolerable. As Buckley J put it, in regard to a power to borrow, in Re David Payne & Co Ltd, Young v David Payne & Co Ltd: A corporation, every time it wants to borrow, cannot be called upon by the lender to expose all its affairs, so that the lender can say,

‘Before I lend you anything I must investigate how you carry on your business, and I must know why you want the money, and how you apply it, and when you do have it I must see you apply it in the right way’. It is perfectly impossible to work out such a principle.24 The David Payne decision, in my opinion, indicates the proper alternative approach. In that case, the company concerned had express power under its memorandum of association ‘to [page 167] borrow and raise money for the purposes of the company’s business’. It borrowed money and issued a debenture to secure the loan. Its liquidator claimed that the debenture was ultra vires and void because there was evidence that the borrowing had not in fact been made for the purposes of the company’s business. … The most relevant passages in the judgments of the Court of Appeal in the David Payne case are cited in Vinelott J’s judgment and I will not repeat them. Vaughan Williams and Cozens-Hardy LJJ expressly approved the manner in which Buckley J had approached the problem. Vaughan Williams LJ expressly, and the other members of the court implicitly rejected the borrower’s first argument that, since the debenture was not issued to raise money for the purposes of the company, it was ultra vires altogether ‘in such a sense that nothing could make it right’. All three members of the court considered that the plaintiff company could succeed if, but only if, it showed that, at the time of the loan, the lending company knew that the money was going to be applied by the borrowers for an improper purpose and that this had not been proved. The one crucially important point to which Buckley J and the Court of Appeal in Re David Payne & Co Ltd did not expressly advert is the basis on which the lenders would have lost their security if they had known of the improper purpose for which the moneys lent were going to be applied. The basis is, in my opinion, this. The directors of the borrowing company in fact had no authority from the company to take the loan and grant the debenture because these transactions were not effected for the purposes of

the company. Nevertheless, as a general rule, a company incorporated under the Companies Acts holds out its directors as having ostensible authority to do on its behalf anything which its memorandum of association, expressly or by implication, gives the company the capacity to do. … The various passages in the judgments in both courts in the David Payne case which refer to the extent of the lender’s obligation (if any) to inquire as to the purposes for which the loan is to be used, in my opinion, are not directed at all to the corporate capacity of the borrowing company: they are directed to the right of the lender to rely on the ostensible authority of the borrower’s directors. In Re Introductions Ltd the Court of Appeal again had to consider the validity of debentures granted by a company as security for a loan. The company under a sub-cl (N) of its memorandum of association had a general ancillary power to borrow money and to issue debentures to secure its repayment. But this power was not an independent object of the company. As Harman LJ put it: ‘borrowing is not an end in itself and must be for some purpose of the company’.25 The power was not expressed in terms to be exercisable only ‘for the purposes of the company’ but, following the reasoning of Buckley J in Re David Payne & Co Ltd26 the court held that the words necessarily had to be implied. The company had borrowed money from a bank and granted debentures to secure the loan. But the only business carried on by it was that of pig-breeding, which was a purpose not authorised by its memorandum of association. On the liquidation of the company, a question arose as to the [page 168] validity of the debentures. Harman LJ, who gave the leading judgment, after deciding that the power to borrow conferred by the memorandum was a mere ancillary power not an independent object, proceeded to cite27 the following passage from the speech of Lord Parker in Cotman v Brougham: A person who deals with a company is entitled to assume that a company can do everything which it is expressly authorized to do by

its memorandum of association, and need not investigate the equities between the company and its shareholders.28 This passage, it will be seen, closely echoes some of the language used by Buckley J in his judgment in the David Payne case. … Harman LJ went on to say: I would agree that if the defendant bank did not know what the purpose of the borrowing was it need not enquire, but it did know, and I can find nothing in Cotman v Brougham to protect it notwithstanding that knowledge. (My emphasis.)29 The words ‘it need not enquire’, in my opinion, make it clear that Harman LJ did not regard the borrowing as having been beyond the capacity of the company. However, he then went on to point out that the David Payne decision shows that the protection afforded by the principle stated by Lord Parker affords no protection to a lender who knows that the money is intended to be misapplied. The absence of any express provision in the company’s memorandum of association requiring the loan to be applied for the purposes of the company, in his judgment, did not improve the bank’s position, since such a provision would fall to be implied anyway. He concluded: This borrowing was not for a legitimate purpose of the company; the bank knew it and therefore cannot rely on its debenture. (My emphasis.)30 As I read his judgment, therefore, Harman LJ reached his decision that the bank could not rely on the debentures following the ratio of the David Payne decision, that is to say, not because they had been granted by the company in excess of its corporate capacity, but because the bank knew that the directors of the company, in purporting to grant them, had exceeded the authority conferred on them by the company by entering into the transaction for purposes other than the company’s corporate purpose. Russell LJ, in a very short judgment, reached the same conclusion but by rather a different route from that of Harman LJ. As I read his judgment, his view was that the borrowing and execution of the debentures were ultra vires the company as a matter of corporate capacity because it was an

implicit condition attached to the power to borrow contained in the company’s memorandum that moneys should not be borrowed for use in an undertaking ultra vires the company. Since the sole undertaking of that company was the pig-breeding business, which was beyond the company’s corporate capacity, the loans taken for [page 169] use in that business were likewise inevitably beyond its corporate capacity. I read Russell LJ’s decision as being limited to the facts of that particular case and not in any way conflicting with my interpretation of the David Payne decision. It follows that, in my opinion, the decisions of this court in Re David Payne & Co Ltd and Re Introductions Ltd, on their true analysis, lend no support to [RSP’s] submission that the relevant transactions in the present case were beyond the corporate capacity of [RSP] simply because they were effected for improper purposes not authorised by its memorandum of association. … I also respectfully agree with the following observations made by Oliver J, after an extensive review of the authorities, in Re Halt Garage (1964) Ltd: I cannot help thinking, if I may respectfully say so, that there has been a certain confusion between the requirements for a valid exercise of the fiduciary powers of directors (which have nothing to do with the capacity of the company but everything to do with the propriety of acts done within that capacity), the extent to which powers can be implied or limits be placed, as a matter of construction, on express powers, and the matters which the court will take into consideration at the suit of a minority shareholder in determining the extent to which his interests can be overridden by a majority vote. These three matters, as it seems to me, raise questions which are logically quite distinct but which have sometimes been treated as if they demanded a single, universal answer leading to the conclusion that, because a power must not be abused, therefore, beyond the limit of propriety it does not exist.31

My conclusions from these authorities on these questions of principle may be summarised as follows. (1) The basic rule is that a company incorporated under the Companies Acts only has the capacity to do those acts which fall within its objects as set out in its memorandum of association or are reasonably incidental to the attainment or pursuit of those objects. Ultimately, therefore, the question whether a particular transaction is within or outside its capacity must depend on the true construction of the memorandum. (2) Nevertheless, if a particular act … is of a category which, on the true construction of the company’s memorandum, is capable of being performed as reasonably incidental to the attainment or pursuit of its objects, it will not be rendered ultra vires the company merely because in a particular instance its directors, in performing the act in its name, are in truth doing so for purposes other than those set out in its memorandum. Subject to any express restrictions on the relevant power which may be contained in the memorandum, the state of mind or knowledge of the persons managing the company’s affairs or of the persons dealing with it is irrelevant in considering questions of corporate capacity. (3) While due regard must be paid to any express conditions attached to or limitations on powers contained in a company’s memorandum (eg a power to borrow only up to a specified amount), the court will not ordinarily construe a statement in a memorandum that a particular power is exercisable ‘for the purposes of the company’ as a condition limiting the company’s corporate capacity to exercise the power: it will regard it as simply imposing a limit on the authority of the directors. … [page 170] (4) At least in default of the unanimous consent of all the shareholders … the directors of a company will not have actual authority from the company to exercise any express or implied power other than for the purposes of the company as set out in its memorandum of association. (5) A company holds out its directors as having ostensible authority to bind the company to any transaction which falls within the powers expressly or

impliedly conferred on it by its memorandum of association. Unless he is put on notice to the contrary, a person dealing in good faith with a company which is carrying on an intra vires business is entitled to assume that its directors are properly exercising such powers for the purposes of the company as set out in its memorandum. Correspondingly, such a person in such circumstances can hold the company to any transaction of this nature. (6) If, however, a person dealing with a company is on notice that the directors are exercising the relevant power for purposes other than the purposes of the company, he cannot rely on the ostensible authority of the directors and, on ordinary principles of agency, cannot hold the company to the transaction. … To sum up, my conclusions on the ultra vires point are these. The relevant transactions of 22 January 1969 were not beyond the corporate capacity of [RSP] and thus were not ultra vires in the proper sense of that phrase. However, the entering into the guarantee and, to the extent of the sum guaranteed, the debenture was beyond the authority of the directors, because they were entered into in furtherance of purposes not authorised by [RSP’s] memorandum. Despite this lack of authority, they might have been capable of conferring rights on Colvilles if Colvilles had not known of this lack of authority. Colvilles, however, did have such knowledge and so acquired no rights under these transactions. Even if the no due authorisation point discussed earlier in this judgment were not open to [RSP], because Mr Shenkman had duly declared his interest at the relevant board meeting, [RSP] could disclaim these transactions, which its directors had carried out on its behalf, as being unauthorised, inasmuch as they were carried out for improper purposes. The practical relevance of the no due authorisation point discussed in an earlier section of this judgment is that it enables [RSP] also to disclaim the borrowing of the £ 401,448 and the whole (as opposed to part only) of the security given by the debenture (as having been in each case entered into by the directors without its authority) and also to attack the validity of the receiver’s appointment. …

Browne-Wilkinson LJ In my judgment, much of the confusion that has crept into the law flows from the use of the phrase ‘ultra vires’ in different senses in different contexts. The reconciliation of the authorities can only be achieved if one

first defines the sense in which one is using the words ‘ultra vires’. Because the literal translation of the words is ‘beyond the powers’, there are many cases in which the words have been applied to transactions which, although within the capacity of the company, are carried out otherwise than through the correct exercise of the powers of the company by its officers; indeed, that is the sense in which the judge seems to have used the words in this case. … [I]n my judgment, the use of the phrase [page 171] ‘ultra vires’ should be restricted to those cases where the transaction is beyond the capacity of the company and therefore wholly void. A company, being an artificial person, has no capacity to do anything outside the objects specified in its memorandum of association. If the transaction is outside the objects, in law it is wholly void. But the objects of a company and the powers conferred on a company to carry out those objects are two different things.32 … In my judgment, for this purpose the position of a company is analogous to that of a human being who has fiduciary powers. … The critical distinction is, therefore, between acts done in excess of the capacity of the company on the one hand and acts done in excess or abuse of the powers of the company on the other. If the transaction is beyond the capacity of the company it is in any event a nullity and wholly void; whether or not the third party had notice of the invalidity, property transferred or money paid under such a transaction will be recoverable from the third party. If, on the other hand, the transaction (although in excess or abuse of powers) is within the capacity of the company, the position of the third party depends on whether or not he had notice that the transaction was in excess or abuse of the powers of the company. As between the shareholders and the directors, for most purposes it makes no practical difference whether the transaction is beyond the capacity of the company or merely in excess or abuse of its power: in either event the shareholders will be able to restrain the carrying out of the transaction or hold liable those who have carried it out. Only if the question of ratification

by all the shareholders arises will it be material to consider whether the transaction is beyond the capacity of the company since it is established that, although all the shareholders can ratify a transaction within the company’s capacity, they cannot ratify a transaction falling outside its objects. In this judgment I therefore use the words ‘ultra vires’ as covering only those transactions which the company has no capacity to carry out, ie those things the company cannot do at all as opposed to those things it cannot properly do. The two badges of a transaction which is ultra vires in that sense are (1) that the transaction is wholly void and (consequentially) (2) that it is irrelevant whether or not the third party had notice. … I summarise my conclusions as follows. (1) To be ultra vires, a transaction has to be outside the capacity of the company, not merely in excess or abuse of the powers of the company. (2) The question whether a transaction is outside the capacity of the company depends solely on whether, on the true construction of its memorandum of association, the transaction is capable of falling within the objects of the company as opposed to being a proper exercise of the powers of the company. (3) Notwithstanding the fact that the provision authorising the company to enter into the particular transaction is found in the objects clause and there is a provision requiring each paragraph to be construed as a separate object, such provision may be merely a power (and not an object) if either it is incapable of existing as a [page 172] separate object or it can only be construed as a power ancillary to the other objects in the strict sense. (4) If a transaction falls within the objects (and therefore the capacity) of the company, it is not ultra vires the company and accordingly it is not absolutely void. (5) If a company enters into a transaction which is intra vires (as being within its capacity) but in excess or abuse of its powers, such transaction will be set aside at the instance of the shareholders. (6) A third party, who has notice — actual or constructive

— that a transaction, although intra vires the company, was entered into in excess or abuse of the powers of the company, cannot enforce such transaction against the company and will be accountable as constructive trustee for any money or property of the company received by the third party. (7) The fact that a power is expressly or impliedly limited so as to be exercisable only ‘for the purposes of the company’s business’ (or other words to that effect), does not put a third party on inquiry whether the power is being so exercised, ie such provision does not give him constructive notice of excess or abuse of such power. Applying those principles to the present case, in my judgment, no question of ultra vires arises.

Comments 9.5.1 See Radan, Gooley, and Vickovich at 9.61–9.63. 9.5.2 It should be noted that this area of the law is now almost completely regulated by statutory provisions such as ss 124 and 125 of the Corporations Act 2001 (Cth). These statutory provisions provide that a company has the legal capacity and powers of an individual and that an act of the company that is beyond a stated object in its constitution will not be invalid.

1.

[1884] 2 QB 482.

2. 3.

Clements v London and North Western Railway Co [1894] 2 QB 482 at 490. Clements v London and North Western Railway Co [1894] 2 QB 482 at 492.

4. 5.

De Francisco v Barnum [1894] 2 QB 430 at 495. (1890) 43 Ch D 165.

6. 7.

[1894] 2 QB 482. Harris v Wall (1847) 154 ER 51 at 55.

8. 9.

(1872) 41 LJ Ch 436. 19th edn, 2006, pp 1512–13.

10. 11.

[1978] 3 All ER 449 at 486. (1890) 45 Ch D 430.

12.

(1914) 30 TLR 342.

13.

29th edn, 2004.

14. 15.

Vol 1, p 581 (paras 8-004, 8-005). [1935] 1 KB 110.

16. 17.

[1966] Ch 71. Reported only at (1967) 111 Sol Jo 715 and reversed on other grounds by the Court of Appeal [1968] 3 All ER 513, [1969] 1 QB 699.

18. 19.

[1913] 1 KB 520. [1966] Ch 71.

20. 21.

[1935] 1 KB 110. Re Horsley & Weight Ltd [1982] Ch 442 at 448.

22. 23.

Rolled Steel Products (Holdings) Ltd v British Steel Corporation [1982] Ch 478 at 499. Ashbury Rly Carriage and Iron Co (Ltd) v Riche (1875) LR 7 HL 653 at 693.

24. 25.

Re David Payne & Co Ltd, Young v David Payne & Co Ltd [1904] 2 Ch 608 at 613. Re Introductions Ltd [1970] Ch 199 at 210.

26. 27.

[1904] 2 Ch 608 at 612. Re Introductions Ltd [1970] Ch 199 at 210.

28. 29.

Cotman v Brougham [1918] AC 514 at 521. Re Introductions Ltd [1970] Ch 199 at 210.

30. 31.

Re Introductions Ltd [1970] Ch 199 at 211. Re Halt Garage (1964) Ltd [1982] 3 All ER 1016 at 1029–30.

32.

Cotman v Brougham [1918] AC 514 at 520, 522.

[page 173]

Part III: Terms of a Contract

[page 175]

10 EXPRESS TERMS

INTRODUCTION 10.1 This chapter deals with the terms of a contract that are expressly included by the contracting parties. Many contractual disputes before the courts require a decision about what the parties have actually agreed — in other words, what terms have been expressly incorporated into the contract. In such cases courts wish to determine the express terms because they represent the true intentions of the parties. There are several ways in which terms may be incorporated into a contract and the test is an objective one. Where the contract is entered into orally, it will often be necessary to consider whether statements made by the parties in negotiations leading to the formation of the contract are express terms or mere representations. Express terms are statements that are promissory in nature and give rise to contractual obligations because they indicate what the parties need to do under the contract. Mere representations are statements that are nonpromissory in nature and do not create contractual obligations because they are generally only ‘representational’ or descriptive of the subject matter of the contract. The issue of whether a statement made in the course of negotiations is a term or a mere representation is illustrated in Ellul & Ellul v Oakes (1972) 3 SASR 377 (see 10.2C) and Oscar Chess Ltd v Williams [1957] 1 All ER 325 (see 10.3C). The most common way in which terms are expressly incorporated into a written contract is by signature. It is generally understood that a party signing a contractual document is indicating that they have read and understood the

document and consented to its terms. This fundamental rule, which universally gives certainty to contractual dealings, is known as the ‘signature’ rule and is illustrated in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 (see 10.4C). However, the rule may be displaced in cases where the signature is procured through fraud, misrepresentation, or some other vitiating factor. This may be seen in Curtis v Chemical Cleaning & Dyeing Co [1951] 1 KB 805 (see 10.5C). Terms may also be incorporated into a contract by notice. This manner of incorporation is especially important in cases involving unsigned documents or signs, which affect many transactions involving travel or entry to premises. It is often the case that one party will seek to rely on an exclusion or limitation clause that purports to limit or exclude their liability if the contract is breached in some way. In order to hold that the clause is incorporated as an express term, courts will require evidence that notice of the term has been given by the party seeking to rely on it before the contract was formed. They will also require that the notice be given in a way that may be considered reasonable. Of course, if the other party has actual knowledge of the term, notice will be deemed to have been given. However, where actual knowledge is [page 176] not evident, the reasonableness or otherwise of the notice will depend on the nature of the document or sign in which the clause appears. If the document or sign appears objectively to be contractual in nature, mere delivery of the document containing the clause will be considered sufficiently reasonable. This is illustrated in Parker v South Eastern Railway Co (1877) 2 CPD 416 (see 10.6C), a case involving a bill of lading. However, if it is non-contractual in nature, notice will have to be given in some expressly overt and deliberate way. The case of Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163 (see 10.7C) focused on the reasonable notice requirement where the term appeared on an unsigned ticket at the entry to premises. Where contracting parties have an ongoing commercial relationship typically involving a series of similar transactions, it is often the case that they use their own documents and forms that provide some confirmation and evidence of their agreement. In such cases one party may often not be aware

that the other party’s documents have changed over time to include new or amended terms. If the terms are contested, one party may argue that they have been incorporated as express terms by prior dealings — in other words, courts will need to decide whether the party affected by the term, very often an exclusion clause, may be deemed to have been aware of the term and consented to its incorporation by virtue of the parties’ prior dealings. The factors to be considered by a court in coming to such a decision may be seen in La Rosa v Nudrill Pty Ltd [2013] WASCA 18 (see 10.8C). Any question of incorporation of terms in written documents must take account of the parol evidence rule. This fundamental rule provides certainty to written contracts because it states that, where a contract is in writing and is intended to be fully in writing, extrinsic evidence cannot be introduced that will have the effect of adding to, subtracting from, or varying the language of the written contract. The operation of the rule is illustrated by State Rail Authority of NSW v Heath Outdoor Ltd (1986) 7 NSWLR 170 (see 10.9C). However, courts have recognised important exceptions to the rule, one of which is evidence of a prior collateral contract. An oral promise made before or in conjunction with the execution of a written contract may be enforceable if the signing of the contract provides consideration for the promise. The issue of whether a pre-contractual statement constitutes a collateral contract is addressed in J J Savage & Sons Pty Ltd v Blakney (1970) 119 CLR 435 (see 10.10C). For a collateral contract to be enforceable, it must be promissory in nature and must not be inconsistent with any express term of the written contract, as explained in Hoyt’s Pty Ltd v Spencer (1919) 27 CLR 133 (see 10.11C).

TERMS AND MERE REPRESENTATIONS 10.2C

Ellul & Ellul v Oakes (1972) 3 SASR 377

Court: Full Court of the Supreme Court of South Australia Facts: Oakes listed his house for sale with a real estate agent. The agent gave him a Multiple Listing form that recorded certain particulars about the property. In answer to a question about whether the property was sewered, Oakes crossed out the word

‘septic’ in the words ‘septic/sewer’ and inscribed a ditto sign adjacent to the word ‘sewer’. He signed the form. His agent then added the word ‘yes’ in the belief that the house was connected to the sewer. The house was in fact served by a septic tank, even though sewer connection was available in the area. After inspecting the property [page 177] the Elluls agreed to buy it for £11,300 and signed a ‘sale note’ that was expressed to be ‘subject to the vendor’s approval’. The sale note was never signed by Oakes, but the conveyance was completed nevertheless and the Elluls became registered proprietors. After some months the new owners realised the property was not connected to the sewer. Claiming they would not have bought the property for the contract price if they had known about the septic tank, they sued Oakes for damages for breach of warranty and for negligent misrepresentation. The Local Court held that the purchasers had relied on the statement about the sewer connection on the form. However, damages were not awarded because there had been no agreement in relation to the sewer. The Elluls appealed to the Full Court. Issue: The issue before the Full Court was whether the vendor’s statement on the form to the effect that the house was sewered, amounted to a mere representation or to a term of the contract that could ground an action for breach of warranty. Decision: The Full Court (Bray CJ, Zelling and Wells JJ) held unanimously that the Elluls’ appeal should be allowed because the statement on the form amounted to a warranty forming part of the contract. Breach of the warranty resulted in an award of damages representing the cost of connecting the house to the sewer. However, the claim for negligent misrepresentation failed because the Elluls had failed to establish the requisite damage — namely, that the house was worth less than they had paid. Extract: The extracts from the judgment of Zelling J are indicative of

the Full Court’s reasoning on the issue of breach of warranty.

Zelling J The learned [trial] Judge thought that [the Elluls] by their contention were attempting to do what the House of Lords in Heilbut, Symons & Co v Buckleton1 forbad, namely the turning of an innocent misrepresentation into a warranty so as to provide a remedy. In my opinion this approach was misconceived. The position, as is set out by the decisions of the Court of Appeal in Oscar Chess Ltd v Williams2 and Dick Bentley Products Ltd v Harold Smith (Motors) Ltd3 is this, namely, that as Lord Denning said …: If a representation is made in the course of dealings from a contract for the very purpose of inducing the other party to act upon it, and actually inducing him to act upon it, by entering into the contract, that is prima facie ground for inferring that it was intended as a warranty. It is not necessary to speak of it as being collateral. Suffice it that it was intended to be acted upon and was in fact acted upon.4 [page 178] That in my opinion is the position here. [Oakes] made the representation through the Multiple Listing Bureau to induce a purchaser, and in this case [the Elluls], to buy his property and succeeded thereby in doing so, and this provided a prima facie case which [Oakes] had to meet. The only real answer could be if the inspection which took place afterwards displaced the effect of that warranty. The various questions which have to be considered are well set out … as follows: In endeavouring to reach a conclusion on this point, the Courts can be said to take into account a number of factors. First, they may have regard to the time which elapsed between the time of making the statement and the final manifestation of agreement; if the interval is a long one, this points to a representation. Secondly, they

may consider the importance of the statement in the minds of the parties; a statement which is important is likely to be classed as a term of the contract. Thirdly, if the statement was followed by the execution of a formal contract in writing, it will probably be regarded as a representation should it not be incorporated in the written document. Finally, where the maker of the statement is, visa-vis the other party, in a better position to ascertain the accuracy of the statement, the Courts will tend to regard it as a contractual term.5 But all of these factors are at best only secondary guides, and they are subsidiary to the main test of contractual intention, that is, whether there is evidence of an intention by one or both parties that there should be contractual liability in respect of the accuracy of the statement. The question therefore is: On the totality of evidence, must the person making the statement be taken to have warranted its accuracy, ie promised to make it good? This overriding principle was laid down in Heilbut, Symons & Co v Buckleton. The question here, therefore, should have been: whether on the totality of the evidence should [Oakes], the person making the statement, be taken to have warranted its accuracy, in other words did he promise to make it good. In my opinion he did and it is not a question of what he intended or of any consensus of minds but of what effect that statement would have on the mind of a reasonable person so as to make him think that such a representation was contractual in its nature, in other words that this would form part of the basis of the contract hereafter to be entered into. In Erskine v Adeane Mellish LJ said: No doubt, as a rule of law, if parties enter into negotiations affecting the terms of a bargain, and afterwards reduce it into writing, verbal evidence will not be admitted to introduce additional terms into the agreement; but, nevertheless, what is called a collateral agreement, where the parties have entered into an agreement for a lease or for any other deed under seal, may be made in consideration of one of the parties executing that deed, unless, of course, the stipulation contradicts the terms of the deed itself.6 In following the Oscar Chess and Dick Bentley cases I do not want to be

taken as assenting to the remainder of the observations of the Master of the Rolls in the Dick Bentley Case that the maker of the representation can rebut the prima facie inference by showing that [page 179] the misrepresentation was innocent, that he was innocent of fault in making it and it would not be reasonable in the circumstances for him to be bound by it. I find myself in respectful agreement with the [following] comment on this case … : It is not the function of the law of contract to absolve a defendant if he has behaved as a reasonable man would have done, but to hold him to his promises and make him answerable in damages if he has not. The issue whether an assertion is to be construed as a legally binding promise cannot depend upon whether the man who made it was well-meaning or irresponsible, saint or sinner.7 No doubt the considerations referred to by the Master of the Rolls are some of the considerations which, in some cases at least, one would take into account in deciding whether or not at the end of the day the plaintiff had made out his case in warranty but they are not answers to the claim of a plaintiff in these circumstances as a matter of law. They are simply circumstances of fact which one might, if one encountered them in a particular case, weigh along with others in deciding whether or not the plaintiff had ultimately discharged the onus which lay upon him. The only aspect of this matter which troubles me is the length of time which took place between [the Elluls] reading [the form] and the time at which they entered into the contract, albeit an oral one, to purchase the property. Nevertheless time is only one aspect of this matter and the real question is whether any subsequent conduct or actions displaced the representation contained in [the form] in the minds of [the Elluls] or gave them an opportunity, which they neglected, of checking the true facts. I do not think either of these is the position here.

[page 180]

Comment 10.2.1 See Radan, Gooley, and Vickovich at 10.9–10.12 and 10.20. 10.3C

Oscar Chess Ltd v Williams [1957] 1 All ER 325

Court: Court of Appeal in England Facts: In 1955 Williams traded in his Morris car, which he honestly thought to be a 1948 model, for a new Hillman Minx from car dealers Oscar Chess Ltd. The Morris had been bought for £300 by Williams’s mother in 1954, with the registration papers showing the car had first been registered in 1948. The transaction was carried out between Williams and an employee of Oscar Chess Ltd who was familiar with Williams’s car. The employee also believed it to be a 1948 model and, after checking the registration papers and a professional guide book, arranged for Williams to be credited the amount of £290 on the trade-in. A few months after the trade-in Oscar Chess Ltd checked the chassis and engine numbers with the manufacturer and was advised it was in fact a 1939 model. The car dealers took legal action against Williams on the basis that they would not have paid more than £175 had they been informed of the true age of the car. They claimed the sum of £115 as damages for breach of warranty, claiming it was a condition of the contract that the car was a 1948 model or, alternatively, that there had been a collateral warranty to that effect. They were successful, but Williams appealed. Issues: The issues before the Court of Appeal were whether Williams’s assertion that the car was a 1948 model amounted to an express term of the contract and, if so, whether that term had been breached. Decision: In a majority decision the Court of Appeal (Denning and

Hodson LJJ; Morris LJ dissenting) ruled the statement about the car’s age was not a contractual term, but an innocent misrepresentation. Extract: The extracts from the judgment of Denning LJ show how the Court of Appeal majority decided that from an objective viewpoint, Williams could not have intended the statement to be a term of the contract. He had innocently relied on the registration papers, while the car dealers had the expertise and the opportunity to verify the statement for themselves.

Denning LJ I entirely agree with the [trial] judge that both parties assumed that the Morris car was a 1948 model and that this assumption was fundamental to the contract. This does not prove, however, that the representation was a term of the contract. The assumption was based by both of them on the date given in the registration book as the date of first registration. They both believed that the car was a 1948 model, whereas it was only a 1939 one. They were both mistaken and their mistake was of fundamental importance. [page 181] The effect of such a mistake is this: It does not make the contract a nullity from the beginning, but it does in some circumstances enable the contract to be set aside in equity. If the buyer had come promptly, he might have succeeded in getting the whole transaction set aside in equity on the ground of this mistake,8 but he did not do so and it is now too late for him to do it.9 His only remedy is in damages, and to recover these he must prove a warranty. In saying that he must prove a warranty, I use the word ‘warranty’ in its ordinary English meaning to denote a binding promise. Everyone knows what a man means when he says, ‘I guarantee it’, or ‘I warrant it’, or ‘I give you my word on it’. He means that he binds himself to it. That is the meaning which it has borne in English law for three hundred years. …

During the last hundred years, however, the lawyers have come to use the word ‘warranty’ in another sense. They use it to denote a subsidiary term in a contract as distinct from a vital term which they call a ‘condition’. In so doing they depart from the ordinary meaning, not only of the word ‘warranty’, but also of the word ‘condition’. There is no harm in their doing this, so long as they confine this technical use to its proper sphere, namely, to distinguish between a vital term, the breach of which gives the right to treat the contract as at an end, and a subsidiary term which does not. The trouble comes, however, when one person uses the word ‘warranty’ in its ordinary meaning and another uses it in its technical meaning. … These different uses of the word seem to have been the source of confusion in the present case. The judge did not ask himself, ‘Was the representation (that the car was a 1948 Morris car) intended to be a warranty?’ He asked himself, ‘Was it fundamental to the contract?’ He answered it by saying that it was fundamental, and, therefore, it was a condition and not a warranty. By concentrating on whether it was fundamental, he seems to me to have missed the crucial point in the case which is whether it was a term of the contract at all. The crucial question is: Was it a binding promise or only an innocent misrepresentation? The technical distinction between a ‘condition’ and a ‘warranty’ is quite immaterial in this case, because it is far too late for the buyer to reject the car. He can, at best, only claim damages. The material distinction here is between a statement which is a term of the contract and a statement which is only an innocent misrepresentation. This distinction is best expressed by the ruling of Holt CJ,10 ‘Was it intended as a warranty or not?’, using the word ‘warranty’ there in its ordinary English meaning: because it gives the exact shade of meaning that is required. It is something to which a man must be taken to bind himself. In applying this test, however, some misunderstanding has arisen by the use of the word ‘intended’. It is sometimes supposed that the tribunal must look into the minds of the parties to see what they themselves intended. That is a mistake. Lord Moulton made it quite clear in Heilbut Symons & Co v Buckleton that ‘[T]he intention of the parties can only be deduced from the totality of the evidence …’.11 The question whether a warranty was intended depends on the conduct of the parties, on their words and behaviour, rather than on their thoughts.

[page 182] If an intelligent bystander would reasonably infer that a warranty was intended, that will suffice. And this, when the facts are not in dispute, is a question of law. … When the seller states a fact which is or should be within his own knowledge and of which the buyer is ignorant, intending that the buyer should act on it and he does so, it is easy to infer a warranty. … So also if the seller makes a promise about something which is or should be within his own control. … If, however, the seller, when he states a fact, makes it clear that he has no knowledge of his own but has got his information elsewhere, and is merely passing it on, it is not so easy to imply a warranty. Such a case [is] Routledge v McKay,12 where the seller stated that a motor cycle combination was a 1942 model, and pointed to the corroboration of that statement to be found in the registration book, and it was held that there was no warranty. Turning now to the present case, much depends on the precise words that were used. If the seller says: ‘I believe the car is a 1948 Morris. Here is the registration book to prove it’, there is clearly no warranty. It is a statement of belief, not a contractual promise. If, however, the seller says: ‘I guarantee that it is a 1948 Morris. This is borne out by the registration book, but you need not rely solely on that. I give you my own guarantee that it is’, there is clearly a warranty. The seller is making himself contractually responsible, even though the registration book is wrong. … What is the proper inference from the known facts? It must have been obvious to both [parties] that [Williams] had himself no personal knowledge of the year when the car was made. He only became owner after a great number of changes. He must have been relying on the registration book. It is unlikely that such a person would warrant the year of manufacture. The most that he would do would be to state his belief, and then produce the registration book in verification of it. In these circumstances the intelligent bystander would, I suggest, say that [Williams] did not intend to bind himself so as to warrant that the car was a 1948 model. If [Williams] was asked to pledge himself to it, he would at

once have said ‘I cannot do that. I have only the log-book to go by, the same as you’. The [trial] judge seems to have thought that there was a difference between written contracts and oral contracts. … I agree that … [if] an oral representation is afterwards recorded in writing, it is good evidence that it was intended as a warranty. If it is not put into writing, it is evidence against a warranty being intended; but it is by no means decisive. There have been many cases … where the courts have found an oral warranty collateral to a written contract. When, however, the purchase is not recorded in writing at all, it must not be supposed that every representation made in the course of the dealing is to be treated as a warranty. The question then is still: Was it intended as a warranty?

[page 183]

Comment 10.3.1 See Radan, Gooley, and Vickovich at 10.15–10.16.

THE EFFECT OF SIGNING A CONTRACT 10.4C Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 Court: High Court of Australia Facts: Alphapharm Pty Ltd purchased a flu vaccine from Ebos Group Ltd. The vaccine was to be stored after its importation from the United Kingdom and then transported to Alphapharm’s customers by Finemores, later known as Toll (FGCT) Pty Ltd. The carriage contract was entered into between Finemores and Richard Thomson Pty Ltd, as agent for Alphapharm. On the front of the relevant contractual document, which was headed ‘Application for Credit’,

just above the place where it was signed there appeared the words: ‘Please read “Conditions of Contract” (Overleaf) prior to signing’. Richard Thomson did not read the relevant conditions, nor were they mentioned in any conversation between the parties. One of the conditions was clause 6, an exclusion clause protecting Finemores from liability in the event of damage to the vaccine during its transportation to Alphapharm’s customers. The vaccine was destroyed in transit because it was stored at too low a temperature. Issue: The issue before the High Court was whether clause 6 formed part of the carriage contract, thereby excluding Finemores from liability for the destruction of the vaccine. Decision: The High Court of Australia (Gleeson CJ, Gummow, Hayne, Callinan, and Heydon JJ) unanimously held that clause 6 formed part of the contract. Extract: The extract from the court’s joint judgment sets out the relevant principles on the effect of signing a contractual document.

Gleeson CJ, Gummow, Hayne, Callinan, and Heydon JJ Consistent with [the] 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: 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 [page 184]

there must be evidence independently of the agreement itself to prove that the defendant has assented to it.13 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.14 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.15 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. The statements in the above authorities accord with the well-known principle stated by Scrutton LJ in L’Estrange v F Graucob Ltd 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’.16 Scrutton LJ, in turn, was repeating the substance of what had been said by Mellish LJ in Parker v South Eastern Railway Company.17 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 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 [page 185] reading it’.18 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.19 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 HLA Hart once asked, whether the signature is merely conclusive evidence of agreement, or whether it is itself a criterion of agreement.20 These themes appeared in the judgment of this Court in Petelin v Cullen.21 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.22

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.23 [page 186] The importance which, for a very long time,24 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 knowing that it is a legal document relating to an interest in property, he is in general bound by the act of signature.25 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. In most common law jurisdictions, and throughout Australia, legislation has been enacted in recent years to confer on courts a capacity to ameliorate in individual cases hardship caused by the strict application of

legal principle to contractual relations. As a result, there is no reason to depart from principle, and every reason to adhere to it, in cases where such legislation does not apply, or is not invoked.26 To speak of the operation of the law of contract with respect to the signature of the document containing cl 6 requires attention both to the significance attached by the law to the presence of the signature and also to the absence of any grounds, such as a plea of non est factum, which at common law would render the contract void and of any grounds, such as misrepresentation, which might attract equitable relief, or which might elicit curial dispensation under a statutory regime. … An application of settled principle in the present case leads to the conclusion that the terms and conditions on the reverse of the Application for Credit formed part of the contract governing the storage and transportation of the goods. The reasoning of the primary judge, accepted by the Court of Appeal, was based upon the proposition that, in order for those terms and conditions to be made part of the contract, it was necessary for Finemores to establish that it had done what was reasonably sufficient to give Richard Thomson notice of the terms and conditions (the major premise), and the further proposition that Finemores had not done what was reasonably sufficient to give Richard Thomson such notice (the minor premise). It would be possible to dispose of the appeal by disagreeing with the minor premise. What more Finemores could have done to give Richard Thomson notice of the terms and conditions than requiring their representative to sign a document, and to place his signature immediately below a request that he read the conditions on the reverse side of the document before signing, is difficult to imagine. [page 187] Of wider importance, however, is the major premise. If correct, it involves a serious qualification to the general principle concerning the effect of signing a contract without reading it. The proposition appears to be that a person who signs a contractual document without reading it is

bound by its terms only if the other party has done what is reasonably sufficient to give notice of those terms. If the proposition is limited to some terms and not others, it is not easy to see what the discrimen might be. It appears from the reasoning of the primary judge and the Court of Appeal that the proposition was given a narrower focus, and was limited to exclusion clauses, or, perhaps, exclusion clauses which are regarded by a court as unusual and onerous. The present happens to be a case about exclusion clauses, but there is no apparent reason why the principle, if it exists, should apply only to them. Nor is the criterion by which a court might declare a contractual provision to be unusual or onerous always easy to identify. The origin of the proposition, clearly enough, is in the principles that apply to cases, such as ticket cases, in which one party has endeavoured to incorporate in a contract terms and conditions appearing in a notice or an unsigned document. When an attempt is made to introduce the concept of sufficient notice into the field of signed contracts, there is a danger of subverting fundamental principle based on sound legal policy. There are circumstances in which it is material to ask whether a person who has signed a document was given reasonable notice of what was in it. Cases where misrepresentation is alleged, or where mistake is claimed, provide examples. No one suggests that the fact that a document has been signed is for all purposes conclusive as to its legal effect. At the same time, where a person has signed a document, which is intended to affect legal relations, and there is no question of misrepresentation, duress, mistake, or any other vitiating element, the fact that the person has signed the document without reading it does not put the other party in the position of having to show that due notice was given of its terms. Furthermore, it may be asked, where would this leave a third party into whose hands the document might come? In L’Estrange v Graucob, Scrutton LJ said that the problem in that case was different from what he described as ‘the railway passenger and cloak-room ticket cases, such as Richardson, Spence & Co v Rowntree’,27 where ‘there is no signature to the contractual document, the document being simply handed by the one party to the other’. His Lordship said: 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.28 In the same case Maugham LJ,29 who agreed with Scrutton LJ, referred to three possible circumstances in which the party who signed the document might not have been bound by its terms. The first was if the document signed was not a contract but merely a [page 188] memorandum of a previous contract which did not include the relevant term. The second was a case of non est factum. The third was a case of misrepresentation. If there is a claim of misrepresentation, or non est factum, or if there is an issue as to whether a document was intended to affect legal relations or whether, on the other hand, it was tendered as a mere memorandum of a pre-existing contract, or a receipt, or if there is a claim for equitable or statutory relief, then even in the case of a signed document it may be material to know whether a person who has signed it was given sufficient notice of its contents. 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 that 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. L’Estrange v Graucob explicitly rejected an attempt to import the principles relating to ticket cases into the area of signed contracts. It was not argued, either in this Court or in the Court of Appeal, that L’Estrange v Graucob should not be followed. … In this case the printed conditions on the Application for Credit formed part of the contract of storage and transportation.

Comments 10.4.1 See Radan, Gooley, and Vickovich at 10.26–10.31.

10.4.2 For a discussion of this case, see E Peden and J W Carter, ‘Incorporation of Terms by Signature: L’Estrange Rules!’ (2005) 21 Journal of Contract Law 96.

MISREPRESENTATION AND THE SIGNATURE RULE 10.5C

Curtis v Chemical Cleaning & Dyeing Co [1951] 1 KB 805

Court: Court of Appeal in England Facts: Curtis took a white satin wedding dress to the Chemical Cleaning & Dyeing Co for cleaning. She was asked to sign a piece of paper titled ‘Receipt’ by the company’s shop employee. When she inquired why her signature was required, Curtis alleged she was told it was because the company did not accept any liability for certain risks, one of which was damage to the sequins and beads on the dress. She signed the document, but later discovered it contained the following words: ‘This or these articles is accepted on condition that the company is not liable for any damage howsoever arising, or delay.’ When she picked up the dress after cleaning there was a stain on it that the company’s employees could not explain. The company denied negligence and relied on the clause appearing on the ‘Receipt’ document to exclude any liability for the damage to Curtis’s wedding dress. She sued for damages. [page 189] Issue: The issue before the Court of Appeal was whether a clause purporting to exclude liability in a signed contract could be enforced in view of misrepresentation as to the meaning of the clause. Decision: The Court of Appeal (Somervell, Singleton, and Denning LJJ) unanimously rejected the company’s appeal and upheld the damages verdict in favour of Curtis.

Extract: The extracts from the judgment of Denning LJ are significant in regard to the exception to the signature rule on the grounds of misrepresentation or fraud.

Denning LJ 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.30 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.31 But what is a sufficient misrepresentation for this purpose? … 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. … 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. [Curtis] 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,32 but nevertheless it was a sufficient misrepresentation to disentitle [Chemical Cleaning & Dyeing Co] from relying on the exemption, except in regard to beads and sequins. [page 190] In the present case [Curtis] 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.33 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 [Curtis], 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.

[page 191]

Comment 10.5.1 See Radan, Gooley, and Vickovich at 10.35–10.38.

INCORPORATION OF TERMS BY REASONABLE NOTICE 10.6C

Parker v South Eastern Railway Co (1877) 2 CPD 416

Court: Court of Appeal in England Facts: Parker and Gabell left their bags in the cloak rooms of the South Eastern Railway Co’s station. Parker paid his money and received a ticket that contained a date and number on one side and some writing on the other. He was aware of the existence of the writing, but did not read what it contained. One of the printed matters was a clause stating that the South Eastern Railway Co would not be responsible for any ‘package’ exceeding the value of £10. When the men returned to collect their bags, they could not be found. The company relied on the exemption clause to avoid liability. At trial both men were awarded damages for the loss of the bags and their contents, which in each case amounted to well over £10. In Parker’s case a jury found he was not aware of the special condition and was under no obligation to make himself aware of it. Judgment was entered in his favour by direction. The South Eastern Railway Co applied for a new trial on the ground of misdirection. When the motion for a new trial was refused, the South Eastern Railway Co appealed to the Court of Appeal. Issue: The issue before the Court of Appeal in deciding whether to order a new trial, was whether a person could be bound by the terms of an exemption clause if he or she had not read the clause, but had been aware of writing of which the clause formed a part. Decision: The majority of the Court of Appeal (Mellish and Baggallay LJJ) approved of the holding of a new trial by a majority decision. Bramwell LJ decided judgment should be entered for the South Eastern Railway Co. Extract: The extract from the judgment of Mellish LJ is often regarded as one of the most authoritative statements of reasonableness of notice for the incorporation of terms in a contract.

Mellish LJ The question … is whether [Parker] was bound by the conditions contained in the ticket. 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 [page 192] 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. Now if in the course of making a contract one party delivers to another a paper containing writing, and the party receiving the paper knows that the paper contains conditions which the party delivering it intends to constitute the contract, I have no doubt that the party receiving the paper does, by receiving and keeping it, assent to the conditions contained in it, although he does not read them, and does not know what they are. I hold therefore that the case of Harris v Great Western Railway Co34 was rightly decided, because in that case the plaintiff admitted, on cross-examination, that he believed there were some conditions on the ticket. On the other hand, the case of Henderson v Stevenson35 is a conclusive authority that if the person receiving the ticket does not know that there is any writing upon the back of the ticket, he is not bound by a condition printed on the back. The facts in the cases before us differ from those in both Henderson v Stevenson and Harris v Great Western Railway Co, because in both the cases which have been argued before us, though [Parker and Gabell] admitted that they knew there was writing on the back of the ticket, they swore not only that they did not read it, but that they did not know or believe that the writing contained conditions, and we are to consider whether, under those circumstances, we

can lay down as a matter of law either that [Parker] is bound or that he is not bound by the conditions contained in the ticket, or whether his being bound depends on some question of fact to be determined by the jury, and if so, whether, in the present case, the right question was left to the jury. [I] am of opinion that we cannot lay down, as a matter of law, either that [Parker] was bound or that he was not bound by the conditions printed on the ticket, from the mere fact that he knew there was writing on the ticket, but did not know that the writing contained conditions. I think there may be cases in which a paper containing writing is delivered by one party to another in the course of a business transaction, where it would be quite reasonable that the party receiving it should assume that the writing contained in it no condition, and should put it in his pocket unread. For instance, if a person driving through a turnpike-gate received a ticket upon paying the toll, he might reasonably assume that the object of the ticket was that by producing it he might be free from paying toll at some other turnpike-gate, and might put it in his pocket unread. On the other hand, if a person who ships goods to be carried on a voyage by sea receives a bill of lading signed by the master, he would plainly be bound by it, although afterwards in an action against the shipowner for the loss of the goods, he might swear that he had never read the bill of lading, and that he did not know that it contained the terms of the contract of carriage, and that the shipowner was protected by the exceptions contained in it. Now the reason why the person receiving the bill of lading would be bound seems to me to be that in the great majority of cases persons shipping goods do know that the bill of lading contains the terms of the contract of carriage; and the shipowner, or the master delivering the bill of lading, is entitled to assume that the person shipping goods has that knowledge. [page 193] It is, however, quite possible to suppose that a person who is neither a man of business nor a lawyer might on some particular occasion ship goods without the least knowledge of what a bill of lading was, but in my opinion such a person must bear the consequences of his own exceptional

ignorance, it being plainly impossible that business could be carried on if every person who delivers a bill of lading had to stop to explain what a bill of lading was. Now the question we have to consider is whether the railway company were entitled to assume that a person depositing lug--gage, and receiving a ticket in such a way that he could see that some writing was printed on it, would understand that the writing contained the conditions of contract, and this seems to me to depend upon whether people in general would in fact, and naturally, draw that inference. The railway company, as it seems to me, must be entitled to make some assumptions respecting the person who deposits luggage with them: I think they are entitled to assume that he can read, and that he understands the English language, and that he pays such attention to what he is about as may be reasonably expected from a person in such a transaction as that of depositing luggage in a cloak-room. The railway company must, however, take mankind as they find them, and if what they do is sufficient to inform people in general that the ticket contains conditions, I think that a particular plaintiff ought not to be in a better position than other persons on account of his exceptional ignorance or stupidity or carelessness. But if what the railway company do is not sufficient to convey to the minds of people in general that the ticket contains conditions, then they have received goods on deposit without obtaining the consent of the persons depositing them to the conditions limiting their liability. I am of opinion, therefore, that the proper direction to leave to the jury in these cases is, that if the person receiving the ticket did not see or know that there was any writing on the ticket, he is not bound by the conditions; that if he knew there was writing, and knew or believed that the writing contained conditions, then he is bound by the conditions; that if he knew there was writing on the ticket, but did not know or believe that the writing contained conditions, nevertheless he would be bound, if the delivering of the ticket to him in such a manner that he could see there was writing upon it, was, in the opinion of the jury, reasonable notice that the writing contained conditions. I have lastly to consider whether the direction of the learned judge was correct, namely, ‘Was [Parker], under the circumstances, under any obligation, in the exercise of reasonable and proper caution, to read or to make himself aware of the condition?’ I think that this direction was not

strictly accurate, and was calculated to mislead the jury. [Parker] was certainly under no obligation to read the ticket, but was entitled to leave it unread if he pleased, and the question does not appear to me to direct the attention of the jury to the real question, namely, whether the railway company did what was reasonably sufficient to give the plaintiff notice of the condition. On the whole, I am of opinion that there ought to be a new trial.

Comment 10.6.1 See Radan, Gooley, and Vickovich at 10.44–10.45.

[page 194] 10.7C

Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163

Court: Court of Appeal in England Facts: Thornton parked his car in a multiple storey car park to which he had not been before. At the front of the car park was a large sign with certain information, including the name of the car park, prices, and the words ‘All cars parked at owner’s risk’. When Thornton approached the entrance, a red light changed to green and a ticket was dispensed from a machine. The ticket, which he did not read, contained information about the time of issue, payment details, and the following words in small print: ‘This ticket is issued subject to the conditions of issue as displayed on the premises.’ Inside the premises there was a pillar opposite the ticket machine on which certain conditions of entry were displayed. The conditions, amongst other things, purported to exempt the car park from liability for any physical injury to patrons. After Thornton returned to collect his car, he was seriously injured in the grounds of the car park. He sued to

recover damages for his injuries on the basis of the car park’s negligence. Issue: The issue before the Court of Appeal was whether the reference on the ticket given to Thornton to conditions of entry displayed inside the car park constituted sufficient notice for the exemption clause to be incorporated in the contract as one of its terms. Decision: The Court of Appeal (Lord Denning MR, Megaw LJ, and Sir Gordon Willmer) unanimously held that Thornton was entitled to damages for his injuries on the basis that the exemption clause was not incorporated into the contract. Extract: The extracts from the judgments of Lord Denning MR and Megaw LJ are directed to the necessity for reasonable notice of the inclusion of express terms, such as exemption clauses in a contract.

Lord Denning MR We have been referred to the ticket cases of former times … [which] 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. 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

[page 195] 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.36 The ticket is no more than a voucher or receipt for the money that has been paid … 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’, ie 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. … 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. … [T]he customer is bound by the exempting 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. [Counsel] admitted here that [Shoe Lane] 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. … 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, [Counsel] said that … Mr Thornton ‘knew or believed that the writing contained conditions’. There was no finding to that effect. The burden was on [Shoe Lane] 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. … [Here] 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 [Shoe Lane] did not do what was reasonably sufficient to give him notice of it. I do not think [Shoe Lane] can escape liability by reason of the exemption condition. I would, therefore, dismiss the appeal.

Megaw LJ In the present case what has to be sought … is whether [Shoe Lane] did what was reasonable fairly to bring to the notice of [Thornton], at or before the time when the contract was made, the existence of [the condition] … by which, in the midst of provisions as to [page 196] damage to property, [Shoe Lane] sought to exempt themselves from liability for any personal injury suffered by [Thornton] 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 [Thornton] by statute, the Occupiers Liability Act 1957. True, it is open under that statute 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 upon 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. … In my view the [trial] judge was wholly right on the evidence in the conclusion which he reached that [Shoe Lane] have not taken proper or adequate steps fairly to bring to the notice of [Thornton] at or before the time when the contract was made that any special conditions were sought to be imposed. I think it is a highly relevant factor in considering whether proper steps were taken fairly to bring that matter to the notice of [Thornton] that the first attempt to bring to his notice the intended inclusion of those conditions was at a time when as a matter of hard reality it would have been practically impossible for him to withdraw from his intended entry upon the premises for the purpose of leaving his car there. It does not take much imagination to picture the indignation of [Shoe Lane] if their potential customers, having taken their tickets and observed the reference therein to contractual conditions which, they said, could be seen in notices on the premises, were one after the other to get out of their cars, leaving the cars blocking the entrances to the garage, in order to search for, find and peruse the notices! Yet unless [Shoe Lane] genuinely intended that potential customers should do just that, it would be fiction, if not farce, to treat those customers as persons who have been given a fair opportunity, before the contracts are made, of discovering the conditions by which they are to be bound. I agree that this appeal should be dismissed.

Comment 10.7.1 See Radan, Gooley, and Vickovich at 10.43 and 10.50.

[page 197]

INCORPORATION OF TERMS ON THE BASIS OF PRIOR DEALINGS

10.8C

La Rosa v Nudrill Pty Ltd [2013] WASCA 18

Court: Court of Appeal of the Supreme Court of Western Australia Facts: La Rosa was an independent transport contractor who had carried out cartage work for Nudrill Pty Ltd on a number of occasions. Nudrill Pty Ltd usually engaged him for specific jobs by way of short telephone conversations. After each job La Rosa provided an invoice showing the amount owing, details of the equipment that was transported, and the pickup and delivery locations. The invoices stated that the work was done subject to terms and conditions printed on the reverse side. One of the terms purported to exclude La Rosa’s liability ‘for any loss or damage of property and/or goods of the Client’. On one occasion La Rosa drove his semi-trailer around a roundabout too fast and a drill rig he was carrying fell off the vehicle and was damaged. When he was sued for the damage, La Rosa argued that the exclusion clause protected him from liability, as it had become part of the contract through a consistent course of prior dealings between the parties over some time. At first instance it was held that the exclusion clause was not incorporated into his contract with Nudrill Pty Ltd. La Rosa appealed to the Court of Appeal. Issue: The issue before the Court of Appeal was whether the exclusion clause on the back of La Rosa’s invoice was incorporated as an express term of the contract through prior dealings. Decision: The Court of Appeal (McLure P, Buss and Murphy JJA) unanimously dismissed La Rosa’s appeal. Extract: The extracts from the judgments of McLure P (with whom Murphy JA concurred) and Buss JA outline the relevant principles relating to the incorporation of express terms on the basis of prior dealings between the parties.

McLure P [43] A review of all the cases reveals that there is no single test for the incorporation of a term into a contract based on prior dealings. However, it

is clear that we are not here talking about implied terms in fact (which must satisfy the test in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales)37 or a term implied as a matter of trade custom or usage. The question is whether an express term is incorporated into a contract as a result of an inference arising from the prior conduct of the parties as a whole. Moreover, it is not essential in a prior dealing case that the term in issue must have been incorporated in a previous contract between the parties, whether by a contractual document or otherwise. … [page 198] [44] The test applied in the ‘ticket cases’ is frequently used in prior dealing cases. That test is whether the party seeking to rely on the term did what was reasonably sufficient to give to the other contracting party notice of the term; that is a question of fact having regard to the circumstances of each case and the situations of the contractual parties. … [45] In the ticket cases, notice of the terms is given on or around the time of entry into the relevant contract and constructive knowledge of the content of the term(s) is sufficient. … Moreover, in the ticket cases the expression ‘contractual document’ is used to refer to the sort of document in which a reasonable person would expect to find contractual terms. However, in the prior dealing cases it has a wider meaning to include documents which the parties have by their conduct accepted or treated as a contractual document. … [47] [T]he facts in this case do not support an inference that the exclusion clause was incorporated in the cartage contract as a result of the prior dealings between the parties. … The invoices were not a ‘contractual document’ within either the narrow or wider meaning of the expression. In each case the invoice was provided to [Nudrill Pty Ltd] for services already supplied pursuant to a prior contract. The purpose of the invoices was to secure payment for those services. The receipt of the invoices by [Nudrill Pty Ltd] in all the circumstances is not sufficient to justify an inference of an acceptance by [Nudrill Pty Ltd] of, and readiness to be bound by, the terms on the reverse of the invoices. Nor is it sufficient notice to [Nudrill

Pty Ltd] of the terms on which [La Rosa] would do business in the future. …

Buss JA [62] [W]here, in the case of a contract of carriage, an exemption clause is contained in a ticket or other unsigned document intended by the carrier to contain the terms of carriage, and the other party was not in fact aware, when the contract was formed, that the intended terms included an exemption clause, the carrier cannot rely on the exemption clause unless, when the contract was formed, the carrier had done everything that was reasonably necessary to notify the other party of the clause. … [63] The parties to a contract may, by their conduct, incorporate terms into the contract. For example, terms may be incorporated by a previous course of dealings between the parties. A course of dealings, for this purpose, refers in general to the existence of a prior consistent history of comparable transactions between the parties when the relevant transaction is undertaken. … [68] It will be a question of fact and degree whether, in a particular case, the parties, by their conduct, have incorporated a term into their contract by a previous course of dealings. Each case turns on its own facts and circumstances. Factors of relevance in determining whether the alleged term was incorporated include the number of prior dealings, how recent they were, and the consistency in the prior dealings and the dealing in question (for example, the similarity between the subject matter of the dealings and the manner in which the dealings were entered into or concluded). This is not, of course, an exhaustive statement of relevant factors. [69] The factors which I have identified are relevant to what each party was reasonably entitled to conclude from the actions or conduct of the other. The requisite frequency will [page 199] vary depending on the facts and circumstances of the particular case. …

Consistency is required in that … when the conduct is not consistent ‘there is no reason why it should produce an invariable contractual result’.38 [70] A term may be incorporated by a previous course of dealings without it being essential for the party seeking to rely on the term to establish that the other party had actual knowledge of it. … [71] It is not an essential pre-condition to the incorporation of a term by a previous course of dealings that: a) any document containing the relevant term have been sent or given to the party sought to be bound at or prior to the formation of each of the contracts (or one or more of them) constituting the previous course of dealings; or b) the relevant term have been incorporated in at least one of the contracts constituting the previous course of dealings. [72] However, the time when any document containing the alleged term was in fact given or sent to the party sought to be bound, and that party’s degree of knowledge (if any) of the document or the alleged term, will be relevant in determining whether it was given reasonable notice of the alleged term and, if so, what the party seeking to rely on the alleged term was reasonably entitled to conclude from the actions or conduct of the other party. … [84] [La Rosa] was not reasonably entitled to conclude from the actions or conduct of [Nudrill Pty Ltd] that it had accepted and agreed to be bound by the printed conditions on the reverse of the invoices (in particular, the exemption clause) and, as a result, those conditions were not, by a previous course of dealings, incorporated into the contract for the carriage of the drill rig. I have arrived at this opinion on the basis of the following matters, which I have evaluated and weighed in combination. [85] First, in the context of the absence of any transactions between September 1991 and July 1997, the transactions during January 1989–May 1989 and in January 1990 and September 1991 were not sufficiently proximate to the formation of the contract for the carriage of the drill rig (or the contracts entered into during the period July 1997–June 2001) to constitute a course of dealings relevant to the contract in question. [86] Secondly, the transactions during the period July 1997–June 2001 were

not sufficiently numerous or frequent to constitute a proper foundation for inferring that [Nudrill Pty Ltd], by failing to query or object to the conditions, would have led a reasonable person, in [La Rosa’s] position, to believe that [Nudrill Pty Ltd] had assented to the incorporation of the conditions into the contract for the carriage of the drill rig. [87] Thirdly, the trial judge did not find that any representative of [Nudrill Pty Ltd] had actual knowledge of the existence of the conditions or had actually read them, and [La Rosa] does not challenge the absence of such a finding. … [A]lthough it is not essential, before a term may be incorporated by a previous course of dealings, that the party sought to be bound [page 200] had actual knowledge of the term, any knowledge possessed in fact by that party is a relevant factor in determining whether the term was incorporated. [88] Fourthly, each invoice was sent to [Nudrill Pty Ltd] after the contract had been performed, and in the circumstances a reasonable person, in [Nudrill Pty Ltd’s] position, would have been entitled to regard the invoice as merely a request or demand for payment of the contract price, and would not have expected to find contractual terms in relation to the completed work in the invoice. [89] Fifthly, the relevant course of conduct between [La Rosa] and [Nudrill Pty Ltd] was to contract orally without the incorporation of written terms, and the parties never departed from this course of conduct.

Comment 10.8.1 See Radan, Gooley, and Vickovich at 10.56–10.65.

THE PAROL EVIDENCE RULE 10.9C

State Rail Authority of NSW v Heath Outdoor Ltd

(1986) 7 NSWLR 170 Court: Court of Appeal in New South Wales Facts: Heath entered into several contracts with the State Rail Authority (SRA) to construct hoardings on SRA property at Duck Creek for the display of advertising material. Two five-year contracts, signed in 1981 and 1982, contained a clause to the effect that the SRA could ‘terminate the contract at any time’ upon the giving of one month’s notice. Before one of the agreements was signed an SRA representative informed the managing director of Heath that the contract was a standard form document that the SRA never altered. When questioned about the likelihood of the SRA invoking the clause, the managing director alleged he was told that the ‘the only time … the clause is ever invoked is for non-payment of rent or if somebody wants to advertise objectionable advertising content’. A separate representation was allegedly made to the effect that the termination provision applied only to hoardings and poster panels that belonged to the SRA, and not to hoardings erected on ground space that was simply rented from the SRA. When the SRA terminated the agreement because of a ministerial policy to phase out cigarette advertising, Heath claimed the pre-contractual assurances gave rise to an estoppel or amounted to a collateral contract on the basis of which the agreements had been executed. Issues: The issues before the Court of Appeal were whether the two contracts originally gave the SRA an unconditional right of termination on written notice and, if so, whether [page 201] later conversations and correspondence varied the 1982 contract or gave rise to an estoppel so as to preclude the exercise of that right. If so, the appeal court also had to consider whether oral assurances given by the SRA before or at the time of making each contract constituted a collateral contract or gave rise to an equitable estoppel.

Decision: The Court of Appeal (Kirby P and Glass JA; McHugh JA dissenting) decided the appeal by the SRA should be allowed on the basis that the agreements gave the SRA a right of early termination and that the representations by the SRA were not sufficient to amount to either a collateral contract or a promissory estoppel in Heath’s favour. Extract: The dissenting judgment of McHugh JA extracted below contains a succinct statement of the application of the parol evidence rule.

McHugh JA It is now convenient to mention the circumstances of the signing of the 1981 contract. Discussions between [Heath] and Mr Wierzbicki and Mr Newton, two officers of [the SRA], concerning the making of that contract had taken place over a considerable time. The 1981 contract was concerned with a sign which [Heath] was to erect at Duck Creek. It was for five years. Mr Low [of Heath] said that, when Mr Giles [of the SRA] handed him a letter and a form of contract on 12 October 1981, he said to him ‘that cl 6 on the back of the agreement was not in accordance with the agreement with Mr Wierzbicki and Mr Newton in our original undertaking’. Mr Giles replied that the document was a standard authority document which could not be changed. Mr Giles said that there was no need for Mr Low to be concerned because he had ‘five years on the contract and it is very difficult for me to have that clause or any other clause altered’. Mr Giles also said that ‘the only time that that clause is ever invoked is for non-payment of rent or if somebody wants to advertise objectionable advertising content’. Mr Low said ‘as long as I have your assurance that that is the case we can proceed’. Mr Giles replied ‘you need not be concerned as the terms of that agreement apply only to hoardings and poster panels that belong to us and where you would be placing your advertising. These don’t affect you because you are building the plant and all we are doing is renting you the ground space’. In cross-examination Mr Low said that Mr Giles told him that he could not change the standard terms and conditions in [the SRA’s] printed advertising contract. Mr Low said that the reason he did not ask Mr Giles to cross out condition 6 was because ‘it became very evident to me

that he was going to have difficulty having the clauses changed if he had to take them away’. Mr Low said that immediately following the statements by Mr Giles he signed the contract. The first submission of [Heath] was that the letter dated 12 October 1981, which accompanied the advertising contract, must be regarded as part of the contract. That letter stated, inter alia: As agreed at our meeting on 25 September 1981, the contract has been drawn for a five (5) year period (1/12/81 to 30/11/86) and rental of $4,128 per annum for years one and two and $9,000 per annum for years three, four and five. … The construction of the sign must be carried out in accordance with the structural drawings submitted by you on [page 202] 17 March 1981, and to the satisfaction of [the SRA]. … The attached indemnity forms and advertising contract will need to be completed and held in this office before approval will be given for this work to commence. [Heath] says that the matters stated in the letter are part of the contractual terms and that, in the event of doubt as to the meaning of the whole contract, greater weight must be given to the specially selected terms over the printed terms. [Heath] contends that, if condition 6 is construed literally, it defeats the object and intent of the parties expressed in the special terms which are found in the letter and on the front page of the advertising contract. … The [SRA] replies that the advertising contract stated in terms that it should commence from 1 December 1981 ‘and shall, unless sooner determined as provided in the said conditions of contract, continue until 30 November 1986’. Even if one accepts [Heath’s] argument that the letter of 12 October 1981 is to be regarded as part of the contract, it does not assist [its] case. There is no inconsistency between the letter and the conditions of the contract. The letter and the advertising contract when read together indicate that the parties entered upon a contract for a period of five years ‘until sooner

determined’. However, condition 6 gave [the SRA] the right to terminate the contract at any time on one month’s notice in writing. The exercise of its right under condition 6 enabled [the SRA] to determine the contract before the five year period expired. The next submission of [Heath] was that the 1981 contract was partly oral and partly written. [It] submitted that it is always open to a party to show that a written document is not the binding record of their contract. … It is then said that the statements by Mr Giles about condition 6 were part of the contractual terms between the parties. A preliminary question which arises is whether the so called parol evidence rule prevents reliance on the oral assurances of Mr Giles. Under that rule parol evidence is not admissible to contradict or vary the terms of a written agreement. But it is a rule whose scope and rationale is often misunderstood. It has no operation until it is first determined that the terms of the agreement are wholly contained in writing. The tendering of oral evidence to prove a contractual term, therefore, cannot be excluded until it is determined that any terms in writing record the whole of the parties’ agreement. … When a person alleges that an agreement was partly oral and partly written, it is not always easy to determine whether the writing is the exclusive repository of the bargain. Williston claims that, when a document appears on its face to be a complete record of the parties’ contract, it is conclusively presumed to be the contract.39 However, Corbin takes a different view and says that the issue is whether the parties assented to a particular writing as the complete and accurate ‘integration’ of the contract.40 Support for Williston’s approach is to be found in the judgment of Street CJ in L G Thorne & Co Pty Ltd v Thomas Borthwick & Sons (A/asia) Ltd.41 But in my opinion the correct rule is that the existence of writing which [page 203] appears to represent a written contract between the parties is no more than an evidentiary foundation for a conclusion that their agreement is wholly in

writing. … In my opinion the English Law Commission correctly stated the law when it said: … the mere production of a contractual document, however complete it may look, cannot as a matter of law exclude evidence of oral terms if the other party asserts that such terms were agreed. If that assertion is proved, evidence of the oral terms cannot be excluded because the court will, by definition, have found that the contractual terms are partly to be found in what was agreed orally as well as the document in question. No parol evidence rule could apply. On the other hand, if that assertion is not proved, there can be no place for a parol evidence rule because the court will have found that all the terms of the contract were set out in the document in question and, by implication, will thereby have excluded evidence of terms being found elsewhere.42 While I think that [Heath] was entitled to rely on the oral assurances of Mr Giles in support of its claim that the advertising contract and/or letter of 12 October 1981 did not contain the whole terms of the parties’ agreement, I am of opinion that on the evidence the submission that the contract was partly oral should be rejected. The proper conclusion to be drawn from the discussion between the parties is that, as a matter of contract, condition 6 was one of the contractual terms and that its literal effect was to give [the SRA] an unfettered right to terminate the contract. Mr Giles made it plain that he had no authority to change any condition of the contract. Mr Low accepted this. He said that it became apparent to him that Mr Giles was going to have difficulty getting the clauses changed if he had to take them away. Mr Giles also informed Mr Low that the document was a standard authority document which could not be changed. Whatever effect the discussion between Mr Low and Mr Giles had, it did not add to the terms of the contract. Moreover, it is not possible to conclude that the assurances amounted to a collateral contract, since the terms of the assurances contradict the terms of condition 6.43 The main contract can be the consideration for a collateral contract only when the terms of the collateral contract do not reduce or alter the rights created by the main contract.44

[page 204]

Comment 10.9.1 See Radan, Gooley, and Vickovich at 10.70–10.72.

COLLATERAL CONTRACTS 10.10C

J J Savage & Sons Pty Ltd v Blakney (1970) 119 CLR 435

Court: High Court of Australia Facts: During negotiations with the Savage company about the construction of a motor boat, Blakney sought advice on the type of engine that could be installed. In correspondence between them the company manager expressed his opinion about various engines and recommended one that had an ‘estimated speed’ of 15 miles per hour. When Blakney placed his order, which included the recommended engine, he signed a written agreement which did not refer to the boat’s speed. After construction and purchase, the boat reached a speed of only 12 miles per hour. Blakney sued, claiming that the reference in correspondence to the boat’s speed capacity was a condition or warranty of the contract or, alternatively, that it amounted to a collateral warranty. He argued that the statement constituted a promise, the consideration for which was his execution of the written agreement. Issue: The issue before the High Court was whether the precontractual statement in correspondence about the boat’s estimated speed could amount to a collateral contract. Decision: The High Court (Barwick CJ, Kitto, Menzies, Owen, and Walsh JJ) unanimously held that the pre-contractual statement did not give rise to a collateral contract. Extract: The extracts from the joint judgment of the High Court

outline the basis on which it ruled that a statement has to have a ‘promissory and not merely representational’ character to be judged a collateral contract.

Barwick CJ, Kitto, Menzies, Owen, and Walsh JJ The facts, as found by the learned trial judge, to which the Full Court referred were, that [Savage] had persuaded [Blakney] to abandon the idea of Twin Clae diesels for one GM diesel; that [Savage] had stated that from computations made it was assumed that the boat powered with the 4/53 GM diesel would have an estimated speed of fifteen mph; that [Blakney] was induced to order the boat with the single diesel engine on the faith of what [Savage] had informed him both orally and by letter; that the attainable speed of the boat was an important matter both in the boat building and selling industry and to [Blakney]. The Court thought that by this material [Blakney] had established a collateral warranty as to the attainable speed of the boat. [page 205] The trial judge was of opinion that the statement in [Savage’s] letter was an estimate only, expressed as an expectancy, and not an unequivocal promise of a future speed. The Full Court, after referring to a dictionary meaning of the word ‘estimate’, thought the expression ‘estimated speed 15 mph’ in [Savage’s] letter should be construed as ‘approximate speed 15 mph’. In our opinion, this was an unwarranted substitution which stripped the words of the letter of their most significant meaning. The actual words used by [Savage] in the letter should be considered. So far from being a promissory expression, ‘estimated speed 15 mph’ indicates, in our opinion, an expression of opinion as the result ‘of approximate calculation based on probability’ to use the dictionary equivalent of ‘estimate’ referred to by the Full Court. There is no need to resort to cases decided upon different facts and circumstances in order to determine the significance in this case of the actual words used by [Savage]. The words in themselves tend, in our

opinion, against the inference of a promise that the boat would in fact achieve the nominated speed. The Full Court seems to have thought it sufficient in order to establish a collateral warranty that without the statement as to the estimated speed the contract of purchase would never have been made. But that circumstance is, in our opinion, in itself insufficient to support the conclusion that a warranty was given. So much can be said of an innocent representation inducing a contract. The question is whether there was a promise by [Savage] that the boat would in fact attain the stated speed if powered by the stipulated engine, the entry into the contract to purchase the boat providing the consideration to make the promise effective. The expression in De Lassalle v Guildford45 that without the statement the contract in that case would not have been made does not, in our opinion, provide an alternative and independent ground on which a collateral warranty can be established. Such a fact is but a step in some circumstances towards the only conclusion which will support a collateral warranty, namely, that the statement so relied on was promissory and not merely representational. When the letter which we have quoted was written, the negotiations for the construction and delivery of the boat were incomplete. On receipt of the letter there were three courses open to [Blakney]. He could have required the attainment of the speed to be inserted in the specification as a condition of the contract; or he could have sought from [Savage] a promise — however expressed, whether as an assurance, guarantee, promise or otherwise — that the boat would attain the speed as a prerequisite to his ordering the boat; or he could be content to form his own judgment as to the suitable power unit for the boat relying upon the opinion of [Savage] of whose reputation and experience in the relevant field he had, as the trial judge found, a high regard. Only the second course would give rise to a collateral warranty. In our opinion, there is nothing in the evidence before the trial judge to support the view that [Blakney] took either the first or second of these courses: the only conclusion open upon that evidence was that [Blakney] took the third course; he accepted [Savage’s] estimate of what the boat would do under the power of the 4/53 GM diesel as sufficient to found his (Blakney’s) own judgment as to the powering of the vessel. As he said ‘I

prefer upon your advice the GM 4/53’. That the statement actually made by [Savage] was intended to have [page 206] some commercial significance upon a matter of importance to [Blakney] can be conceded; that [Blakney] was intended to act upon it, and that he did act upon it, is clearly made out. But those facts do not warrant the conclusion that the statement was itself promissory. In our opinion, so far from it being shown that the trial judge was wrong in refusing to draw the conclusion that [Savage] made a promissory statement as to the attainable speed of the cruiser (which he did by deciding that there was no condition of the contract in the stated terms) we are satisfied that he took the only course permitted by the material before him. In our opinion, the appeal should be allowed.

Comments 10.10.1 See Radan, Gooley, and Vickovich at 10.85–10.87. 10.10.2 The principle in J J Savage & Sons Pty Ltd v Blakney was affirmed by the High Court in Crown Melbourne Ltd v Cosmopolitan Hotel (Vic) Pty Ltd (2016) 333 ALR 384 at 440, where Gordon J said: A statement will be promissory if it was ‘reasonably considered’ by the person to whom it was made as ‘intended’ to be a contractual promise. It must also be shown that the person to whom the statement was made ‘intended’ to accept the statement as a contractual promise. The relevant ‘intention’ of the parties is to be judged objectively, that is, ‘deduced from the totality of the evidence’, by reference to what a reasonable person in the position of the parties would have understood. And as with any contractual promise, the statement must be sufficiently certain.

COLLATERAL CONTRACTS AND THE REQUIREMENT OF CONSISTENCY 10.11C

Hoyt’s Pty Ltd v Spencer (1919) 27 CLR 133

Court: High Court of Australia Facts: Spencer sub-leased premises to Hoyt’s for a period of four years. It was a term of the sub-lease that Spencer had the right to terminate the lease at any time during its term by giving at least four weeks’ notice in writing. At the time the sub-lease was executed Spencer assured Hoyt’s that he would not terminate the sub-lease unless he was required to do so by the lessor under the head lease. However, at one point during the term Spencer did give notice in writing for Hoyt’s to vacate the premises even though no direction had been given to him by the lessor. After Hoyt’s left, they sued on the grounds that a collateral contract had been made and breached by Spencer when he promised he [page 207] would not terminate the sub-lease unless required to do so under the head lease. They argued the consideration for the collateral contract was their entry into the sub-lease. Spencer contended that any assurance given by him was unenforceable, and that no collateral agreement had arisen because it was inconsistent with the rights given to him by the sub-lease agreement that had been executed by both parties. Issue: The issue before the High Court was whether a promise could sustain a collateral contract if it contradicted an express term of the main contract. Decision: The High Court (Knox CJ, Isaacs and Rich JJ) unanimously

ruled in favour of Spencer. Extract: The extract from the judgment of Isaacs J illustrates the proposition that a collateral contract cannot be inconsistent with a right given under the main contract, entry to which purportedly serves as consideration for the collateral agreement.

Isaacs J In this case … the consideration is stated to be that [Hoyt’s] would take a lease and become lessee for the term mentioned ‘upon certain terms’. That, in view of the plea and demurrer, is the same as if those terms were set out in the declaration. The declaration avers that [Hoyt’s] took a lease ‘upon the said terms’, and says ‘yet’ [Spencer] broke his promise. In other words, it avers that [Spencer], being entitled to the consideration agreed upon, received that consideration, and yet broke his promise. There is no denial — in fact it is conceded as the very groundwork of the action, as indeed it must be — that [Spencer] is entitled to have to the full every part of the consideration mentioned, which by the admission on demurrer includes the terms of the proviso, undiminished, unaltered, and unqualified, by anything which took place up to the time of the making of the lease. Putting the argument in the best form for [Hoyt’s], it amounts to this: the respondent Spencer was to have the unqualified right as a matter of property to resume possession whenever he chose to exercise his power in terms of the proviso, but he was under a personal contractual obligation, by virtue of the collateral promise, not to exercise his property right except in accordance with the collateral promise. The answer to that, however, is that the argument rests on a fallacy. A lease is a contract. … When two parties are entering into contractual relations with respect to a given subject matter, they may (apart from special technical requirements) elect to conclude their bargain without writing, or they may elect to record it in writing, and, if in writing, they may further decide to have it under seal. But in whatever form they determine to leave their bargain, they may further agree to have one contract only, or to have separate and distinct contracts. All that is for the parties themselves to

resolve upon. If they determine to make one contract only, then the terms they decide to include are the only terms that affect them contractually. It connotes that all else is abandoned. And that is the case whatever the form of the contract. If the matter is not committed to writing, though the principle is clear, the evidence is manifestly open to great dispute. But if the parties agree to commit their agreement [page 208] to writing, then what is written is the conclusive record of the terms of their agreement, and, unless it can be shown that the document was not intended as the complete record of their bargain, no oral evidence can be admitted to alter or qualify it. … This principle applies even to the case where the agreement is partly written and partly verbal. To the extent to which the parties have deliberately agreed to record any part of their contract, that record stands unimpeachable by oral testimony. It may be that the parties have, in their discretion, chosen to record a single bargain in several documents contemporaneously, or so close in point of time that they are treated as being contemporaneously executed. In that case, as Jessel MR says in In re Wedgwood Coal and Iron Co; Anderson’s Case,46 ambiguities and even inconsistencies have to be resolved and reconciled as best the Court can. … In such case, if there be an action on the whole agreement as one entire indivisible agreement, the whole of the documents are read together, and the words of one may have to be modified by the words of another. And if in this case [Hoyt’s] were suing on one entire indivisible contract into the composition of which both the proviso in the lease and the promise alleged in the declaration entered, [Hoyt’s’] position would be that the agreement would have to be treated very much as postulated by Sir George Jessel in Anderson’s Case. But [Hoyt’s] is not suing upon such an entire indivisible contract. The contract contained in the lease … has the force of a deed. It could not be contended that the promise sued on (assuming, as perhaps by the rules of pleading we may be bound to assume, it was in writing though not under seal and not registered) was intended to be part of the one contract along with the proviso. If such were [Hoyt’s’] contention the

remedy would have been a suit for rectification or injunction at the proper time. At all events this is not the claim in the declaration. The claim is on the basis that there was no mistake in framing the main contract of lease, that that contract is complete in itself and correctly recorded, and that its only function now is as the sole consideration for the independent collateral agreement sued on. [Ferguson J, the dissenting judge in the Full Court] truly says that no question arises here as to admissibility of evidence, such as parol evidence to affect a written document, or evidence of any kind to affect a deed, or evidence proper to found a claim for rectification of the lease, or in any other way. All the observations in the authorities as to parol evidence are beside the question, because it is to be assumed that the ‘agreement’ as pleaded is established in fact. The only question on this demurrer is as to its legal effect; and up to this point I entirely agree with the view taken by Ferguson J. At one point I diverge; and that is, what is the legal force and effect to be given to the promise pleaded, having regard to the consideration on which it is alleged to be based, namely, the making of the lease with all the terms it contains? The contract contained in the lease is, as observed, complete in itself. It contains the mutual covenants and considerations of the parties, and it stands entirely on its own footing. A transferee would take it upon the very terms of the document and upon no others. And in that document the plaintiff says: ‘I Hoyt’s Proprietary Limited the within named lessee do hereby accept this lease as tenant subject to the conditions restrictions and covenants above set forth’. But, though complete in itself as a contract, it might well play another part as consideration for another promise. … [page 209] The main contract here, when utilized to form the consideration for the collateral contract, must be taken exactly as it is. Its provisions do not change according as it is considered as an independent contractor as a consideration for the collateral contract. A principle that must govern the bargain of a contractual promise made in consideration of entering into the main contract is that the parties shall have and be subject to all (not some only) of the respective benefits and burdens of the main contract. When the collateral promise is truly consistent with the main

contract, that principle has full play. The main contract is not then interfered with. The collateral contract alters, as every contract must, the contractual relations of the parties; but it does not alter, and from the simple statement of the bargain is not intended to alter, the contractual relations which are established by the main contract. When both are worked out, it may be that in the final outcome the parties are in the same position as if those contractual relations had been varied. But the practical result cannot affect the independence and legal effect of each contract; and that is what we are here concerned with. … The truth is that a collateral contract, which may be either antecedent or contemporaneous, being supplementary only to the main contract, cannot impinge on it, or alter its provisions or the rights created by it; consequently, where the main contract is relied on as the consideration in whole or part for the promise contained in the collateral contract, it is a wholly inconsistent and impossible contention that the other party is not to have the full benefit of the main contract as made; and [Hoyt’s’] first contention is therefore unsound. If in any case the Court finds two enforceable agreements executed in such circumstances that one is intended to affect the other, no doubt such effect will be given to them as the superimposing operation of the governing contract requires; but in that case it is not collateral, but dominant. … It only remains to consider whether the alleged promise does leave the contractual rights of [Spencer] under the main contract unimpaired. Ex concessis, it does not. The very argument on which the claim is founded is that but for the additional promise [Spencer] had the power by virtue of the proviso to do what he did. And [Hoyt’s’] case is that that power was cut down by the further promise. There is at once a conflict between the two, with the result that [Hoyt’s], though in one breath conceding the full extent of the proviso as a consideration, yet, in the next, cuts it down almost to the point of rendering it nugatory. In my opinion the judgment should be affirmed and this appeal dismissed.

Comments 10.11.1 See Radan, Gooley, and Vickovich at 10.88–10.98.

10.11.2 For a critique of the rule in Hoyt’s Pty Ltd v Spencer, see N C Seddon, ‘A Plea for the Reform of the Rule in Hoyt’s Pty Ltd v Spencer’ (1978) 52 Australian Law Journal 372. 10.11.3 The rule relating to the consistency of an alleged collateral contract with the main contract can be circumvented if the principles of equitable estoppel are satisfied: see J C Phillips and J W Carter, ‘The Demise of Hoyt’s Pty Ltd v Spencer’ (1989) 2 Journal of Contract Law 181.

1.

[1913] 1 AC 30.

2. 3.

[1957] 1 WLR 370. [1965] 1 WLR 623.

4. 5.

Dick Bentley Products Ltd v Harold Smith (Motors) Ltd [1965] 1 WLR 623 at 627. Anson’s Law of Contract, 23rd ed (1969), at 117–18.

6. 7.

Erskine v Adeane (1873) LR 8 Ch App 756 at 766. L S Sealy, ‘Representations, Warranties and the Reasonable Man’ [1965] Cambridge Law Journal 178 at 181.

8. 9.

See Solle v Butcher [1949] 2 All ER 1107. See Leaf v International Galleries [1950] 1 All ER 693.

10. 11.

Crosse v Gardner (1688) 90 ER 656. Heilbut Symons & Co v Buckleton [1913] AC 30 at 51.

12. 13.

[1954] 1 All ER 855. Parker v South Eastern Railway Company (1877) 2 CPD 416 at 421.

14. 15.

Wilton v Farnworth (1948) 76 CLR 646 at 649. Oceanic Sun Line Special Shipping Company Inc v Fay (1988) 165 CLR 197 at 228.

16. 17.

L’Estrange v F Graucob Ltd [1934] 2 KB 394 at 403. Parker v South Eastern Railway Company (1877) 2 CPD 416 at 421.

18. 19.

Foreman v Great Western Railway Company (1878) 38 LT 851 at 853. MacCormick and Birks (eds), The Legal Mind: Essays for Tony Honoré, (1986), Ch 2, 19 at 34.

20.

MacCormick and Birks (eds), The Legal Mind: Essays for Tony Honoré, (1986), Ch 2, 19 at 35. See Hart, ‘The Ascription of Responsibility and Rights’ (1949) 49 Proceedings of the Aristotelian Society 171. (1975) 132 CLR 355.

21. 22. 23.

Bullen and Leake, Precedents of Pleadings in Personal Actions in the Superior Courts of Common Law, 3rd ed (1868) at 467–8. Petelin v Cullen (1975) 132 CLR 355 at 359.

24.

See Whelpdale’s Case (1604) 77 ER 239; Holdsworth, A History of English Law, 2nd ed (1937), vol 8 at

25. 26.

50–1. Wilton v Farnworth (1948) 76 CLR 646 at 649. Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 at 843 (Lord Wilberforce) and 851 (Lord Diplock); Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 at 507–8; Esso Australia Resources Ltd v Federal Commissioner of Taxation (1999) 201 CLR 49 at 62.

27. 28.

[1894] AC 217. L’Estrange v Graucob [1934] 2 KB 394 at 402–3.

29. 30.

L’Estrange v Graucob [1934] 2 KB 394 at 406–7. Olley v Marlborough Court [1949] 1 KB 532.

31. 32.

L’Estrange v Graucob [1934] 2 KB 394. Low v Bouverie [1891] 3 Ch 82.

33. 34.

See Chapelton v Barry Urban District Council [1949] 1 KB 532. (1976) 1 QBD 515.

35. 36.

(1875) LR 2 Sc & Div 470. See Olley v Marlborough Court Ltd [1949] 1 KB 532.

37. 38.

(1982) 149 CLR 337 at 347. McCutcheon v David MacBrayne Ltd [1964] 1 WLR 125 at 138.

39. 40.

Williston on Contracts, 3rd ed (1961), s 633. Corbin on Contracts (1960) vol 3 at 358–9.

41. 42.

(1956) 56 SR (NSW) 81 at 88; 73 WN (NSW) 9 at 14. The Law Commission, Law of Contract, The Parol Evidence Rule (January 1986) Cmnd 9700, par 2.12 at 11.

43. 44.

Hoyt’s Pty Ltd v Spencer (1919) 27 CLR 133. Hoyt’s Pty Ltd v Spencer (1919) 27 CLR 133 at 139.

45. 46.

[1901] 2 KB 215 at 222. (1877) 7 Ch D 75 at 99.

[page 210]

11 IMPLIED TERMS

INTRODUCTION 11.1 This chapter deals with the circumstances in which terms may be implied into contracts. Although most contractual terms are express, it may be necessary to incorporate terms by implication where the contract does not expressly provide for what happens when some extraneous event occurs. Some terms are implied into a contract to give effect to the presumed intentions of the parties. These are terms that are implied on the facts of the case and those that are implied by custom and usage. In such cases the onus of proof rests on the party alleging the term should be implied. In other cases terms are implied simply because they are presumed to be part of the contract. These terms are usually implied by operation of law. In cases where the presumed intentions of the parties are sought to be implied, courts are generally reluctant to imply terms if the contract is in writing and has been the subject of negotiation. Where it is argued that a term should be implied because of the specific facts and circumstances of the case, courts have tended to distinguish between contracts that are entered into informally or orally, and contracts that are entered into by formal written means. In the latter category the aim is to discover what the contract objectively means to the reasonable person, rather than to somehow make it fairer or more reasonable. According to the key Privy Council decision in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266, which was confirmed by the High Court in many cases, a term may be implied on the facts of the case only where the term is

‘reasonable and equitable’, necessary to give ‘business efficacy’ to the contract, so obvious that ‘it goes without saying’, capable of clear expression, and not inconsistent with any express term. In Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 (see 11.2C) the High Court considered and applied the BP Refinery approach to the implication of terms on the facts of the case. In Byrne v Australian Airlines Ltd (1995) 185 CLR 410 (see 11.3C), involving a contract that was less formal and partly oral, the High Court cautioned against an ‘automatic or rigid application of the cumulative criteria’ identified in the BP Refinery case. Terms may also be implied into contracts by statute or common law. Here, policy considerations take precedence over any presumed intentions of the parties. First, there are often statutory provisions that mandate the implication of terms in some contracts, such as consumer contracts and contracts for sale of goods. Typical examples are terms that guarantee merchantable or acceptable quality of goods, or the rendering of services with due care and skill. Second, the common law has over time sanctioned the implication, where necessary, of terms that are considered inherent to certain types or classes of contract. Typical examples [page 211] are terms in employment contracts to the effect that employees are to take reasonable care in carrying out their work, and employers are to provide employees with a safe workplace. In these cases courts will need to be satisfied that implication of the term is necessary in order to avoid the rights conferred by the contract to be rendered nugatory or worthless. This is illustrated in Commonwealth Bank of Australia v Barker (2014) 253 CLR 169 (see 11.4C). It is also clear that some terms have been implied by common law courts to all contracts, regardless of the class to which they belong. An important example here is the implied term of cooperation, which binds each party to do what is necessary to enable the other party to have the benefit of the contract. A term may also be implied into a contract to incorporate a relevant custom in a particular market, trade, or locality. The party alleging the custom, usage, or way things are done in a particular context or situation bears the onus of

proving the existence of the custom as a clear matter of fact that is ‘well known and acquiesced in’, so long as it does not contradict an express term of the contract. The requirements for establishing custom and usage as a matter of fact that would justify the implication of a contractual term may be seen in the important High Court decision of Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Pty Ltd (1986) 160 CLR 226 (see 11.5C). A controversial area in relation to the implication of contractual terms is the issue of the extent to which there exist implied terms of good faith in commercial contracts. Although the precise nature of good faith terms in contract law is not clear, they have been described as precluding the exercise of a contractual power ‘capriciously for an extraneous purpose’. There have been widely varying and opposing views expressed from judicial and academic sources about a range of matters in this respect — the recognition of terms of good faith, their essential nature, and the contracts to which they could apply; the circumstances of their implication; and the possibility of their express exclusion. The law in Australia on this topic has not been definitively stated by the High Court. However, there seems to be agreement that a duty of good faith will not routinely be implied into commercial contracts. On the other hand, it also seems clear that good faith terms may be implied into standard form contracts, especially where they contain a general power of termination, and relational contracts that involve an ongoing relationship between business parties based on expectations of loyalty and interdependence. An important example of a case in which a term of good faith was implied in a commercial contract is Burger King Corporation v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558 (see 11.6C).

TERMS IMPLIED ON THE FACTS OF THE CASE 11.2C

Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337

Court: High Court of Australia Facts: The State Rail Authority (SRA) accepted Codelfa’s tender in relation to excavation work required for the construction of the

Eastern Suburbs Railway. Construction of the railway was authorised by statute, which included a provision granting the SRA immunity from prosecution for nuisance. The parties agreed that Codelfa was to complete its work within 130 weeks from commencement. It was expressly agreed that Codelfa would [page 212] bear all necessary costs for the work at an agreed price regardless of the difficulties it might encounter. In order to complete on time, Codelfa calculated it would need to work three eight-hour shifts per day for six days per week, with certain work on Sundays as well. However, local residents obtained an injunction against Codelfa, which mistakenly assumed it was protected by the SRA’s statutory immunity. This meant that work could not proceed between 10 pm and 6 am on the six days or at all on Sundays. The SRA refused Codelfa’s claim for additional costs. Issue: One of the issues before the High Court was whether there were grounds upon which to imply a term into the contract granting Codelfa further time to complete and requiring the SRA to indemnify Codelfa against additional costs incurred. Decision: On the issue of implied terms, the High Court (Stephen, Mason, Aickin, Wilson, and Brennan JJ) held unanimously that there was no basis upon which to imply any terms arising from the grant of the injunction. Extract: The extracts from the judgment of Mason J are indicative of the High Court’s reasoning on the issue of implied terms.

Mason J In this ocean of litigious controversy there is one large island of agreement between the parties. It is common ground that their contract consists of the agreement dated 21 March 1972 and the various documents which it incorporates. [Codelfa] does not suggest that dehors the agreement

and the incorporated documents there is to be found a term actually agreed upon by the parties which together with the contract documents stands as the true contract or which stands in its own right as a collateral contract. Nor does [Codelfa] suggest that there is a case for rectification arising from the existence of such a term on the footing that it was inadvertently omitted from the contract documents. [Codelfa’s] case is that a term has to be implied in the contract to give it business efficacy, to make it workable. Consequently, there is no contest as to what constitutes the contract; rather the contest is as to its meaning and effect. When we say that the implication of a term raises an issue as to the meaning and effect of the contract we do not intend by that statement to convey that the court is embarking upon an orthodox exercise in the interpretation of the language of a contract, that is, assigning a meaning to a particular provision. Nonetheless, the implication of a term is an exercise in interpretation, though not an orthodox instance. … The implication of a term is to be compared, and at the same time contrasted, with rectification of the contract. In each case the problem is caused by a deficiency in the expression of the consensual agreement. A term which should have been included has been omitted. The difference is that with rectification the term which has been omitted and should have been included was actually agreed upon; with implication the term is one which it is presumed that the parties would have agreed upon had they turned their minds to it — it is not a term that they have actually agreed upon. Thus, in the case of the implied term [page 213] the deficiency in the expression of the consensual agreement is caused by the failure of the parties to direct their minds to a particular eventuality and to make explicit provision for it. Rectification ensures that the contract gives effect to the parties’ actual intention; the implication of a term is designed to give effect to the parties’ presumed intention. 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. … The basis on which the courts act in implying a term was expressed by MacKinnon LJ in Shirlaw v Southern Foundries (1926) Ltd 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. …1 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: ‘(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.’2 … The importance of [the] evolution of the law as it affects the construction of contracts is that it centres upon the presumed, rather than the actual, intention of the parties. Once it is accepted that in the construction of the contract account is taken of the presumed intention of the parties it naturally follows that account should also be taken of their presumed intention when the court is called upon to decide whether a term is to be implied. The existence of the remedy of rectification and the purpose which it serves make it obvious that the actual intention of the parties cannot constitute the basis of an implied term. … The implication of the term found by the Court of Appeal rests on findings made by the arbitrator based on circumstances surrounding the making of

the contract, including evidence of the discussions between the parties which preceded entry into the contract. Thus the arbitrator found that there was a common understanding (described as a ‘belief’ by the Court of Appeal) that the works would be carried out on a three shift continuous basis six days per week and without restriction as to Sundays. He also found that the Authority [page 214] had represented to Codelfa, and that it had accepted, that no injunction would be granted in relation to noise or other nuisance. He further found that the works could not be carried out in accordance with methods and programmes agreed between the parties unless Codelfa worked three shifts a day for six days a week. The first question is whether, in the light of the principles as I have explained them, it was legitimate to look to this material on the issue of implication of a term. I think it was. The discussions which generated these findings were not negotiations about the terms of the contract. The terms of the contract documents had been determined in advance by the Authority. By lodging its tender Codelfa accepted the Authority’s contract documents. The relevant discussions were therefore directed to the question of price. Their object was to enable Codelfa to inform itself of what was involved in the work and to cost it so as to arrive at a price for inclusion in its tender. The consequence is that the discussions did not have the character of negotiations in the course of which the parties gradually evolved the terms of a bargain ultimately embodied in written form. Had the discussions been of that kind then, as we have seen, recourse to them would have been prohibited for the purpose of interpreting the contract by reference to the parties’ actual intentions as expressed before entry into the contract. As it was, the relevant discussions reflect neither the preliminary consensus that merged into the written contract, nor statements made during the course of negotiations indicative of the unilateral intentions of each party. Instead the evidence revealed a matter which was in the common contemplation of the parties yet was not a contractual provision actually agreed upon for the simple reason that it was a matter of common assumption.

To say that the maintenance of three eight hour shifts a day for six days a week was a matter of common contemplation between the parties is not enough in itself to justify the implication of a term. … It must appear that the matter of common contemplation was necessary to give the contract business efficacy and that the term sought to be implied is so obvious that it goes without saying. In this case the problem, as I see it, lies not so much in saying that the implication of a term is necessary to give business efficacy to the contract, as in concluding that the particular term to be implied is so obvious that ‘it goes without saying’. … [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 [the Supreme Court]. 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. [page 215] 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.

Comments 11.2.1 See Radan, Gooley, and Vickovich at 11.8–11.9 and 11.19–11.21. 11.2.2 This case is also relevant to the topic of frustration, as extracted at 25.2C. 11.3C

Byrne v Australian Airlines Ltd (1995) 185 CLR 410

Court: High Court of Australia Facts: Byrne and Frew, baggage handlers employed by Australian Airlines, were dismissed from their positions for aiding a work colleague to search through customers’ luggage for the purpose of stealing goods. They brought actions in the Federal Court, claiming that the terminations were ‘harsh, unjust or unreasonable’ and therefore in breach of cl 11(a) of the Transport Workers (Airlines) Award 1988, which governed the terms of their employment. Byrne and Frew argued that cl 11(a) of the award was an implied term of their employment contract in order to attract the remedy of damages. If they had limited their case to the legislation dealing with awards, the courts would only have been able to impose a monetary penalty against Australian Airlines. Alternatively, they claimed the terminations were illegal and void because they breached cl 11(a) of the award, meaning that Australian Airlines had in effect repudiated their employment contracts, giving rise to the remedy of damages. Issue: The issue before the Court was whether the award provision had become a term of the contract. In that process, the judgments addressed the distinction between terms implied by law and terms implied by fact, as well as the application of the principles for the implication of contractual terms. Decision: The High Court (Brennan CJ, Dawson, Toohey, McHugh, and Gummow JJ) unanimously rejected the arguments of the baggage handlers on the issue of the implied term. Brennan CJ, Dawson and Toohey JJ held that there was no need to imply the award provision in the employment contract because it dealt

specifically with harsh dismissal, which was not necessary to give the contract efficacy. McHugh and Gummow JJ agreed that implication of the award provision was not necessary to give business efficacy to the actual agreement between the parties to the dispute (on the basis of their presumed intention) or to all employment contracts as a class of contract (on the basis of factors [page 216] independent of intention). Importantly, the High Court took the view that the principles for implying terms could be applied less rigorously with agreements that were oral or not fully expressed, such as many employment contracts. Extract: Extracts below from the separate joint judgments of Brennan CJ, Dawson and Toohey JJ, and McHugh and Gummow JJ incorporate the main reasons for the High Court’s decision.

Brennan CJ, Dawson and Toohey JJ The implication which [Byrne and Frew] seek to make is based upon the presumed or imputed intention of the parties. In that context, the remarks of the majority in the Privy Council in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council are frequently called in aid: … (1) [the implication] 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.3 In laying down those criteria, it was recognised that there was a degree of overlap. Further … the cases in which the criteria in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council have been applied in this court are cases in which there was a formal contract, complete on its face.

… [A] rigid approach should be avoided in cases, such as the present, where there is no formal contract. In those cases the actual terms of the contract must first be inferred before any question of implication arises. That is to say, it is necessary to arrive at some conclusion as to the actual intention of the parties before considering any presumed or imputed intention. And the test to be then applied was … formulated by Deane J in these terms: The most that can be said consistently with the need for some degree of flexibility is that, in a case where it is apparent that the parties have not attempted to spell out the full terms of their contract, a court should imply a term by reference to the imputed intention of the parties if, but only if, it can be seen that the implication of the particular term is necessary for the reasonable or effective operation of a contract of that nature in the circumstances of the case. That general statement of principle is subject to the qualification that a term may be implied in a contract by established mercantile usage or professional practice or by a past course of dealing between the parties.4 That is, we think, the appropriate test to apply in this case and the answer must be that it is not necessary to imply a term in the form of cl 11(a) for the reasonable or effective operation of the contract of employment in all the circumstances. In the absence of any provision in the award and of any express provision in the contract of employment the law would regard it as a legal incident of the contract that it should be terminable upon reasonable notice or summarily [page 217] for serious breach. Clause 11(a) may alter that position, but there is no reason to presume that any alteration was intended by the parties to form a term of their contract, nor any reason to impute such an intention to them. Plainly, the fact that the inclusion of such a term would, if it were breached, support an action for damages by the employee is no ground for saying that the term is necessary for the reasonable or effective operation of the contract. The contract is capable of operating reasonably and effectively in

the absence of such a term and in the presence of an award provision offering limited remedies in the event of breach. The argument that cl 11(a) constituted an implied term of the contract of employment should be rejected.

McHugh and Gummow JJ Business efficacy We turn … to consider the submission that cl 11(a) was implied as a term from the particular circumstances of the case and to give effect to some apparent underlying intention of the parties about providing business efficacy. Reliance here was placed upon the well-known statement of the Privy Council in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council.5 This has been approved and applied in numerous decisions in this court.6 … The Privy Council specified five conditions which, whilst they might overlap, must be satisfied before a court may imply a term in a contract which the parties had not thought fit to express. First, the term must be ‘reasonable and equitable’; secondly, 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; thirdly, the term must be so obvious that ‘it goes without saying’; fourthly, it must be ‘capable of clear expression’; and, finally, it must not contradict any express term. In [the BP Refinery case] itself and in other cases … the question was whether a term should be implied in a formal written contract which was complete upon its face. That is not the present case. We have referred to the exiguous nature of the evidence as to the form taken by, and the express terms of, the contract of employment between [Australian Airlines] and [Byrne and Frew]. There are two consequences. First, this species of implication is concerned with the circumstances of the particular case. The primary judge and Black CJ and Gray J in the Full Court referred to the need to prove facts leading to the implication of a term of this nature. Gray J said: [T]his Full Court does not know what all of the express terms of the

contracts were. It does not know whether they were adequate to make the contracts of employment efficacious or whether any of them would contradict the proposed implied term. An examination of the [page 218] facts surrounding the creation of each contract of employment might lead to a different result for one appellant from the other.7 Secondly, where the contract is not in writing and is oral or partly oral or it appears that the parties themselves did not reduce their agreement to a complete written form, caution is required against an automatic or rigid application of the cumulative criteria identified in [the BP Refinery case]. We should proceed on the footing that the present case is to be approached in this way. In such situations, the first task is to consider the evidence and find the relevant express terms. Some terms may be inferred from the evidence of a course of dealing between the parties. It may be apparent that the parties have not spelled out all the terms of their contract, but have left some or most of them to be inferred or implied. Some terms may be implied by established custom or usage, as described above. Other terms may satisfy the criterion of being so obvious that they go without saying, in the sense that if the subject had been raised the parties to the contract would have replied ‘of course’.8 If the contract has not been reduced to complete written form, the question is whether the implication of the particular term is necessary for the reasonable or effective operation of the contract in the circumstances of the case; only where this can be seen to be true will the term be implied.9 The contractual term propounded by [Byrne and Frew] would operate in a partisan fashion. It would favour the interests of the employee at the expense of those of the employer. Further, in the operation sought to be given the term by [Byrne and Frew], so as to require procedural regularity or fairness, the term also would qualify what otherwise has been understood to be the general law of the employment contract. …

It is true that, in this country, what one might call the overall relationship between employer and employee includes the effect which by statute must be given to a relevant award made under the federal or a State system. … There is no reason why an employee might not be engaged upon terms and conditions including some or all of the terms of an award under the legislation. … But these considerations do not, as a matter of imputed intention of the parties to a particular employment contract, render it any more likely that the importation into the contract of a provision such as cl 11(a) of the award was so obvious that it went without saying, or that it was necessary for the reasonable or effective operation of the contract. … In contracts of this nature, apparently lacking written formality and detailed specificity, it still is necessary to show that the term in question would have been accepted by the contracting parties as a matter so obvious that it would go without saying. That cannot be postulated here. [page 219] Nor could it be said that the implication into the contract of employment of a term to the effect of cl 11(a) of the award would be necessary for their reasonable or effective operation. In the absence of such a contractual provision, there would remain unaffected the entitlement of the employer at general law to terminate at will on giving reasonable notice and to dismiss summarily for misconduct. … Accordingly, we accept the submissions for [Australian Airlines] that the term for which [Byrne and Frew] contend, is not to be implied as a matter of business efficacy in its [contracts of employment with Byrne and Frew].

Implications independent of intention What, then, is involved in the proposition that a contractual term is implied as a matter of law rather than as the assumed intention of the parties? There is at least one basic distinction. It is that, as indicated above, terms

implied by the application of what one might call the business efficacy test are terms unique to the particular contract in question, depending upon the form of the contract, the express terms and the surrounding circumstances. By contrast, terms implied by law are, in general, implied in all contracts of a particular class or which answer a given description.10 … There is force in the suggestion that what now would be classified as terms implied by law in particular classes of case had their origin as implications based on the intention of the parties, but thereafter became so much a part of the common understanding as to be imported into all transactions of the particular description. … 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.11 Hence, the reference in the decisions to ‘necessity’. For example, it is established that the mere relationship of landlord and tenant implies a covenant for quiet enjoyment. The reason for this appears to be that, originally, the common law courts would not recognise the tenant as having any estate in the demised land and would not reinstate the tenant if ejected by the landlord. … In the present appeal, [Byrne and Frew] relied upon this concept of necessity. Their submission was that employment contracts were a wellrecognised ‘class’ of contract. That was conceded by [Australian Airlines]. So also was the proposition that the law imported various incidents into the relationship of employment, one of them being the entitlement of the employer to terminate the employment at will on giving reasonable notice and to dismiss summarily for misconduct. It was then submitted that the existence of the award, and in particular cl 11(a), ‘required’ reformulation of that incident of the relationship by importing, in terms, the provisions of cl 11(a). [page 220] However, there is no ‘necessity’ for such a step. … The contract of

employment is not, from the viewpoint of the employee, rendered nugatory if the existing provisions thereof remain, as a matter of contract, to operate concurrently with the regime established by the award and deriving its authority from statute. There is nothing to suggest that the contracts of employment were not workable and effective before the introduction into awards of provisions such as cl 11(a). This is not a case where a provision such as cl 11(a) is necessary lest the contract be deprived of its substance, seriously undermined or drastically devalued in an important respect.

Comment 11.3.1 See Radan, Gooley, and Vickovich at 11.13, 11.28–11.29, and 11.33.

TERMS IMPLIED BY LAW 11.4C

Commonwealth Bank of Australia v Barker (2014) 253 CLR 169

Court: High Court of Australia Facts: Barker was a long-term employee of the Commonwealth Bank and held an executive director position in Adelaide. On 2 March 2009 he was advised that his position would be made redundant after four weeks unless he was redeployed within the Bank before then. He lost access to his Bank email and voicemail almost immediately and was not able to access Bank information about deployment and other opportunities. He was therefore not informed about an alternative position within the Bank until 26 March 2009, and the recruitment consultant responsible for that position did not inform him of its existence. Barker was also not advised by anyone in the Bank about the possibility of retraining him for that role. He commenced proceedings against the Bank, alleging that it had breached a term of

mutual trust and confidence, which was implied by operation of law, by effectively denying him redeployment within the Bank. Barker succeeded at first instance and again on appeal. A majority in the Full Court of the Federal Court held that a term of mutual trust and confidence was implied in his contract of employment, and that the Bank had breached it by failing to provide him with the opportunity of redeployment. The Bank appealed to the High Court. Issue: The issue before the court was whether employment contracts contain by law a term that neither party will, without reasonable cause, conduct itself in a manner likely to destroy or seriously damage the relationship of trust and confidence between them. Decision: The High Court (French CJ, Kiefel, Bell, Gageler, and Keane JJ) unanimously overturned the Full Court decision and held that a term of mutual trust and confidence should not be implied by law in employment contracts. [page 221] Extracts: The extracts from the joint judgment of French CJ, Bell and Keane JJ highlight the High Court’s reasoning in rejecting the implication of an implied term of mutual trust and confidence by operation of law in employment contracts.

French CJ, Bell and Keane JJ The employment relationship, in Australia, operates within a legal framework defined by statute and by common law principles, informing the construction and content of the contract of employment. This appeal raises the question whether, under the common law of Australia, there is a term of mutual trust and confidence to be implied by law in all employment contracts. For the reasons that follow, that implication is a step beyond the legitimate law-making function of the courts. It should not be taken. This appeal, against a decision of the Full Court of the Federal Court of Australia, which made the implication, should be allowed. …

The implication of terms 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 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’.12 As Brennan J said in Dietrich v The Queen:13 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. 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. Courts have implied terms in contracts in a number of ways: in fact or ad hoc to give business efficacy to a contract;14 by custom in particular classes of contract;15 [page 222] 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.

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’.16 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 Ltd17 as an exercise in construction. Lord Hoffmann, delivering the judgment of the Privy Council, said: [I]t 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.18 The distinction thus drawn is appropriate even though the scope of the constructional approach adopted by Lord Hoffmann has been debated. 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. That distinction attracted authoritative support in ConStan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd.19 … 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,20 so characterised the principle enunciated by Lord Blackburn in Mackay v Dick: [W]here 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.21 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’.22 [page 223] 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 Malik23 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. 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 no relevant contractual benefit with which the implied term could engage. Clause 8 [of Barker’s contract] 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. An implication in law may have evolved from repeated implications in fact. As Gaudron and McHugh JJ observed in Breen v Williams,24 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.’ 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 [page 224] 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 implication in Australia The conclusion reached by the House of Lords in Malik [in which the House of Lords held the implied term was established as a standard term implied by law as an incident of all contracts of employment] must be

understood in the context of the existing body of decisions made by the courts and tribunals of the United Kingdom, reflecting a consensus as to the implication which predated Malik.25 The history of the development of the term in the United Kingdom is not applicable to Australia. There is a background of approving references to the implied term in decisions of Australian State and federal courts.26 The strength of those approving references, however, depends upon the analysis underpinning them. In South Australia v McDonald, decided in 2009, the Full Court of the Supreme Court of South Australia observed that, with the exception of two first instance decisions, none of the Australian authorities to that date had ‘addressed in any detail the basis for the implication of the implied term.’27 In that case, the Full Court concluded that the extensive statutory and regulatory context in which the contract in question operated rendered the implied term unnecessary. In an obiter statement, their Honours acknowledged that it had long been recognised in Australia that contracts of employment involve ‘elements of mutual confidence.’ They related the development of the implied term to a contemporary view of the employment relationship as one of common interests and partnership. There have been passing references to the duty in two decisions of this Court, neither of which constituted a determination that the duty should be implied.28 In the end, while taking appropriate note of the decisions of State and federal courts, this Court must determine the existence of the implied duty by reference to the principles governing implications of terms in law in a class of contract. That requires this Court to determine whether the proposed implication is ‘necessary’ in the sense that would justify the exercise of the judicial [page 225] power in a way that may have a significant impact upon employment relationships and the law of the contract of employment in this country. The broad concept of ‘necessity’ discussed earlier in these reasons may be defined by reference to what ‘the nature of the contract itself implicitly requires’. It may be demonstrated by the futility of the transaction absent

the implication. It is not satisfied by demonstrating the reasonableness of the implied term. The duty to cooperate satisfies the criterion of necessity explained in Byrne. The implied term of mutual trust and confidence, however, imposes mutual obligations wider than those which are ‘necessary’, even allowing for the broad considerations which may inform implications in law. It goes to the maintenance of a relationship. It appears, at least in part, to be informed by a view of the employment contract as ‘relational’, a characteristic of uncertain application in this context and not one which was advanced on behalf of Mr Barker. The implied term cannot be treated as a particular application to employment contracts of the duty to cooperate, which applies to contracts generally. That duty is directly related to contractual performance, which explains to some degree why it can arguably be characterised as a rule of construction. The duty of mutual trust and confidence is proposed in this appeal as an implication apposite to the disposition of a particular dispute in which an employee complains of an employer’s conduct. Yet it is an implication which would impose obligations not only on employers but also on employees, whose voices about that consequence of the implication are not heard in this appeal. Neither party had a direct interest in putting submissions to the Court about the burden the implication might place on employees. While the mutuality of an obligation and its effect upon a range of interests is not a bar to its implication, it locates the propounded implication close to the boundary between judicial law-making and that which is within the province of the legislature. … The complex policy considerations encompassed by those views of the implication mark it, in the Australian context, as a matter more appropriate for the legislature than for the courts to determine. It may, of course, be open to legislatures to enshrine the implied term in statutory form and leave it to the courts, according to the processes of the common law, to construe and apply it. It is a different thing for the courts to assume that responsibility for themselves. The mutual aspect of the obligation cannot be put to one side by characterising its operation with respect to employees as merely a restatement of the existing duty of fidelity. It is more broadly worded than that obligation. As Jessup J observed in his dissenting judgment in the Full Court, the proposed implied duty of mutual trust and

confidence might apply to conduct by employees which was neither intentional nor negligent and did not breach their implied duty of fidelity, but objectively caused serious disruption to the conduct of their employer’s business. Importantly, the implied duty of trust and confidence as propounded in Malik is directed, in broad terms, to the relationship between employer and employee rather than to performance of the contract. It depends upon a view of social conditions and desirable social policy that informs a transformative approach to the contract of employment in law. It should not be accepted as applicable, by the judicial branch of government, to employment contracts in Australia. [page 226] 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. Those questions were not before the Court in this appeal. Mr Barker also sought to support the decision of the Full Court by way of a notice of contention and the submission that the term of mutual trust and confidence should be implied as a matter of fact in the Agreement. For the reasons already given, the term did not answer the criterion of necessity required to support its implication in law in employment contracts generally. Mr Barker’s counsel was unable to point to any particular feature of the Agreement that would support its implication in fact, albeit he referred to Mr Barker’s seniority, his long and distinguished career with the Bank, and the silence of the contract on matters of trust and confidence. The submission in support of an implication in fact must be rejected.

Comment 11.4.1 See Radan, Gooley, and Vickovich at 11.34–11.40.

TERMS IMPLIED BY CUSTOM 11.5C Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur

Insurance (Australia) Pty Ltd (1986) 160 CLR 226 Court: High Court of Australia Facts: Con-Stan engaged an insurance broker to arrange for certain business insurances, which were effected through the services of Norwich. Premium payments for three policies were made by ConStan directly to the broker, but these were never remitted to the insurance company. Subsequently the broker was wound up and Norwich, being one of its creditors, sued Con-Stan directly to recover the premiums. Norwich failed because the Supreme Court accepted in the circumstances of the case that a term could be implied in the contracts of insurance. This was on the ground of custom and usage, with the court accepting that payment by an insured to the broker constitutes a discharge of the obligation to pay the insurer. However, the Court of Appeal reversed the decision. Con-Stan appealed to the High Court. Issue: The issue before the High Court was whether the criteria for implying terms into a contract on the grounds of custom and usage had been satisfied. Con-Stan’s position was that it was customary in the insurance industry for insurers to look to the broker for payment or, alternatively, that its payment to the broker of the premiums discharged any obligations it may have had to Norwich. [page 227] Decision: In a joint judgment the High Court (Gibbs CJ, Mason, Wilson, Brennan, and Dawson JJ) unanimously rejected Con-Stan’s reliance on terms implied by custom to avoid liability to Norwich. It decided Con-Stan had failed to establish that the custom relied on

was so well known that such a term could reasonably be implied into every insurance contract. Extract: The extracts from the High Court’s joint judgment explain its reasoning and outline the common law criteria for implication of terms through trade, custom, and usage.

Gibbs CJ, Mason, Wilson, Brennan, and Dawson JJ In the present case, if [the broker] had been an agent of Norwich with authority to receive money on the latter’s behalf, the payment by ConStan of its premiums to [the broker] would have constituted payment to the principal [Norwich]. Norwich’s sole recourse would then have been against [the broker] for failure to account for moneys received in its capacity as agent. However, under the general principles of the law of agency, a broker is the agent of the assured, not the insurer. … This avenue foreclosed, Con-Stan nevertheless seeks to avoid having to pay the premiums a second time on a number of distinct grounds. It was submitted that: (1) there is an implied term in the contract of insurance, arising by virtue of custom or usage in the industry, that a broker alone is liable to an insurer for payment of the premium, or alternatively there is an implied term that payment of the premium to a broker discharges the assured’s obligation to the insurer; (2) alternatively, similar terms should be implied to give business efficacy to the contract. …

Custom The principal submission advanced on behalf of [Con-Stan], and the one which assumed the greatest importance both in argument before this court and at the trial, is that there is an implied term in the contract of insurance between Con-Stan and Norwich, arising by virtue of custom in the industry, that an insurer is entitled to look only to the broker for payment of the premium. An alternative submission, which was the one accepted by [the trial judge], is that the implied term arising by custom is that payment by an assured to his broker is a good discharge of his obligation to the insurer. The two submissions clearly differ because in the former the existence of an obligation in the assured to pay the premiums to the

insurer is denied, whereas in the latter it is accepted but regarded as discharged by payment to the broker. Thus an assured who made no payment of premiums to his broker would not be liable to the insurer under the primary submission, but would be if the alternative submission were accepted. 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: [page 228] (1) The existence of a custom or usage that will justify the implication of a term into a contract is a question of fact.29 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 [Con-Stan] urged us to do) to the practices of the London marine market in the last century, notwithstanding that those practices formed the basis for the implication, in contracts of marine insurance, of a term similar to the first of the terms alternatively contended for in this case. … (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. … In the words of Jessel MR: [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.30 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. …

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. … A more fundamental explanation is that the presumed intention of the parties, on which the importation of the custom rests, … 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. … But these statements are directed to situations in which the courts have been asked to imply terms amounting to rules of law applicable to all contracts of a particular class. 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 [page 229] of it.31 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. [Norwich’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. … In the Court of Appeal, Hutley JA did not regard [evidence before the trial judge of the number of cases in which an insurer sought to recover a second payment from an assured following a broker’s default] as destroying the custom alleged. He said: The fact that there are occasional departures from a uniform course of business does not prove the non-existence of a custom — otherwise no custom would ever be proved because those denying its existence in the instant case could, by their own eccentric conduct, destroy it as a legal custom. The fact that one soldier is out of step does not show that it is not customary for troops to march in step on parade.32

The existence of a custom sufficiently settled in its observance to found the implication of a term into a contract is very much a matter of fact and degree, but, with respect to his Honour [the trial judge], we do not share his view of the effect of the evidence just cited. This evidence supports the inference that, at least since 1973, it was a not uncommon view of those involved in the industry that insurers were entitled to look past the broker for payment of the premium. … In our opinion, in the light of this evidence, it is not possible to say that the custom alleged has been proved to the high standard which the law requires. It has not been shown 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.

[page 230]

Comment 11.5.1 See Radan, Gooley, and Vickovich at 11.44–11.47.

IMPLIED TERMS OF GOOD FAITH 10.6C

Burger King Corporation v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558

Court: Court of Appeal of the Supreme Court of New South Wales Facts: Burger King franchised its fast food business in Australia to Hungry Jack’s, while continuing to operate outlets under its own name. After a series of disputes and varied agreements over some years, the parties entered into four new agreements in 1990. One of the agreements related to the development by Hungry Jack’s of a specified number of new restaurants across Australia every year,

either by itself or through third-party franchisees. It was required to obtain operational, financial, and legal approval for each restaurant from Burger King, which had ‘sole discretion’ in that regard. At the same time Burger King was actively looking to consolidate its position in the Australian fast food market and attempted unsuccessfully to buy the Hungry Jack’s brand. Burger King then imposed several restrictive measures on Hungry Jack’s, including payment of nonrefundable deposits on each new outlet, a freeze on the appointment of third-party franchisees, and the withdrawal of financial and operational support. Under such pressure Hungry Jack’s fell behind in its contractual obligation to develop new outlets on time. Burger King purported to terminate the development agreement for this breach. Hungry Jack’s then challenged the validity of the termination and alleged Burger King had also breached the agreement through its restrictive actions. Hungry Jack’s was awarded damages and equitable compensation by the Supreme Court, which also ordered the formation of new franchise agreements with a number of new franchisee restaurants. Burger King appealed. Issues: The issues before the Court of Appeal were, inter alia, whether there were implied terms of good faith and reasonableness in the development agreement and, if there were, whether there was breach of those terms when Burger King imposed the freeze on new franchise appointments and withdrew its financial and operational support. Decision: The Court of Appeal (Sheller, Beazley, and Stein JJA) held that the development agreement was subject to implied terms of cooperation, good faith, and reasonableness, and that Burger King had breached those terms by imposing the third-party freeze and withdrawing financial and operational approvals. Extract: The extracts from the joint judgment of the bench indicate the basis upon which the appeal court arrived at its decision regarding the implication of a duty of good faith and its breach on the facts of the case. (Note that the extracts are based on the medium neutral citation [2001] NSWCA 187, as the judgment is only partially reported in the New South Wales Law Reports.)

[page 231]

Sheller, Beazley, and Stein JJA [146] Until Renard, there had only been tentative acceptance in Australian jurisprudence of an implied term of good faith. However, in Renard Priestley JA said … :33 … that people generally, including judges and other lawyers, from all strands of the community, have grown used to the courts applying standards of fairness to contract which are wholly consistent with the existence in all contracts of a duty upon the parties of good faith and fair dealing in its performance. In my view this is in these days the expected standard, and anything less is contrary to prevailing community expectations. … [150] His Honour also observed that the American experience indicated that judges used the notion of good faith flexibly as an ‘excluder’. In other words, the concept ‘serve[d] to exclude many heterogeneous forms of bad faith’ so as ‘to do justice according to law.’ … [151] In seeking to find a place for the established American jurisprudence in Australian law, Priestley JA drew upon a wide source of material. We wish to refer only to two of those sources. First, there is the well documented Australian experience of controlling the operation of general rescission clauses by preventing their use ‘for improper and extraneous purposes’. … Secondly, there are the many statutory provisions, which require contracting parties in a variety of circumstances to act reasonably and fairly. … [155] In Alcatel,34 Sheller JA (Powell and Beazley JJA agreeing) accepted that there could be an obligation of good faith implied into commercial contracts. … [159] 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. … [163] [T]he case law post Alcatel indicates that obligations of good faith and

reasonableness will be more readily implied in standard form contracts, particularly if such contracts contain a general power of termination. Clearly, however, the cases where these terms are to be implied are not limited to standard form agreements. Alcatel itself, which involved a 50 year lease agreement of commercial premises, provides an example of a one off contract where such terms were implied. … [164] There also appears to be increasing acceptance … that if terms of good faith and reasonableness are to be implied, they are to be implied as a matter of law. We consider that to be correct. … [165] Traditionally, specific terms have been implied as a matter of law into contracts of a certain class. Examples include contracts between employer/employee (implied term not to disclose secret processes), for the sale of goods (implied terms of reasonable fitness and merchantable quality and that payment and delivery of goods are concurrent obligations), for the provision of work and materials, between landlord and tenant (implied term that [page 232] premises will be reasonably fit for habitation) and in contracts of carriage by sea (an implied warranty of seaworthiness). … [169] [T]he Australian cases make no distinction of substance between the implied term of reasonableness and that of good faith. As Priestley JA said in Renard … : ‘The kind of reasonableness I have been discussing seems to me to have much in common with the notions of good faith’.35 [170] Priestley JA commented further 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.36 [171] Rolfe J observed that in Alcatel, Sheller JA … appeared to equate the notions of ‘reasonableness’ and ‘good faith’. … In addition to his references to Renard, Sheller JA referred to the statement of Sir Anthony Mason in his

1993 Cambridge Lecture, that it was probable that the concept of good faith ‘embraced no less than three related notions’: (1) an obligation on the parties to co-operate in achieving the contractual objects (loyalty to the promise itself); (2) compliance with honest standards of conduct; and (3) compliance with standards of contract which are reasonable having regard to the interests of the parties. … [183] In our opinion, [Hungry Jack’s] submission must be correct. There is such an extraordinary range of detailed considerations, particularly in relation to whether operational requirements have been satisfied, contained within cl 4.1(a), that unless there was an implied requirement of reasonableness and good faith, [Burger King] could, for the slightest of breaches, bring to an end the very valuable rights which [Hungry Jack’s] had under the Development Agreement. Further, contrary to [Burger King’s] submissions, cl 4 does not contain only objective criteria against which the discretion is to be exercised. There are many subjective, evaluative notions involved. The reflection of ‘an acceptable Burger King image’ is one example. … [184] The meaning of cl 4.1(b) provides further support for the implication of these terms. That clause requires that for the purposes of financial approval, [Hungry Jack’s] stores must all be performing their obligations under their individual franchise agreements and [Hungry Jack’s] must not be in default of any of its financial obligations to [Burger King]. These two criteria qualify as objective benchmarks against which to grant, or not to grant, financial approval. However, [Burger King] contended that [Hungry Jack’s] obligations under cl 4.1(b) went further and that the provision that [Hungry Jack’s] ‘acknowledges and agrees that it is vital to [Burger King’s] interest that a franchisee be financially sound to avoid a business failure affecting the reputation and good name of the Burger King marks’ imposed [page 233] a contractual requirement to that effect on [Hungry Jack’s]. The other possible construction of this part of cl 4.1(b), and that favoured by [Hungry

Jack’s], is that it was no more than an acknowledgment of a particular circumstance and did not impose a contractual obligation. [185] For present purposes, and without deciding the matter, we propose to assume that [Burger King’s] submission on this is correct and that this part of cl 4(1)(b) has contractual content. Once that assumption is made, it can be immediately seen that the provision is also wide and can have both an objective and subjective content. That being so, it reinforces our view that [Burger King’s] contractual powers under cl 4.1 are to be exercised in good faith and reasonably. That does not mean that [Burger King] is not entitled to have regard only to its own legitimate interests in exercising its discretion. However, it must not do so for a purpose extraneous to the contract — for example, by withholding financial or operational approval where there is no basis to do so, so as to thwart [Hungry Jack’s] rights under the contract. [186] In conclusion, therefore, we are of the opinion that the Development Agreement is subject to implied terms of reasonableness and good faith and [the trial judge] was correct to so find. … [223] In summary, the position in relation to the third party freeze was as follows. Except to the extent that [Hungry Jack’s Franchise Recruitment and Development Manager] agreed to a temporary and short term suspension of third party franchisee recruitment, we are satisfied that [Hungry Jack’s] did not consent to the imposition of the freeze. [Burger King] did not seek to support the freeze on any contractual basis. The freeze was imposed at a time when [Burger King] had made a policy decision to, in some way, take back the Australian market. It was clear that what was meant by this was that it was actively seeking ways to at least reduce [Hungry Jack’s] dominant role if it could not remove it from the market altogether. One of the means available to [Hungry Jack’s] to both satisfy the development schedule and to develop generally was through third party franchisee arrangements. [Hungry Jack’s] was precluded from doing so from mid May 1995 at a time when there was evidence that there was active interest by prospective franchisee applicants. Although in May 1995 there may have been a reasonable basis to suspend the processing of applications for a short time, there was no basis for [Burger King] to do so from at least early June 1995 onwards.

[224] We consider, therefore, that the continued imposition of the freeze was in breach of the implied terms of reasonableness and good faith. … [306] First, [Burger King] asserted a right to conduct an annual financial review when it had no right to do so. [307] Secondly, [Burger King’s] conduct at this time could not properly be characterised as an annual financial review of [Hungry Jack’s]. At least by late October/early November 1995, the analysis had shifted to an investigation of the Competitive Foods Group, as evidenced by the fact that, commencing from [Burger King’s Senior Vice President’s] letter of 8 November 1995, no further requests were made in relation to [Hungry Jack’s] accounts. All enquiries and requests related to the Competitive Foods Group. However, even if [Burger King] was conducting an annual financial review and such review was permitted by the Development [page 234] Agreement, the Development Agreement did not authorise withdrawal of financial approval pending completion of the review. [308] Next, [Burger King’s] failure to grant financial approval after the time it had assessed [Hungry Jack’s] as having complied with its ratios, was a breach of the implied term of good faith. … [310] In our opinion, the evidence clearly establishes that [Burger King’s] conduct is properly characterised as being directed not to furthering its legitimate rights under the Development Agreement but to preventing [Hungry Jack’s] from performing its obligations under the Development Agreement. … [368] In our opinion, all these matters: namely, the failure to deliver a list of restaurants in the ‘Needs Improvement’ category; the failure to forward the Franchise Action Plan to [Hungry Jack’s] until October 1995; the failure to comply with its side of the process specified in detail in the Expansion Policy of at least ten visits per year, was unreasonable and lacking in good faith in the sense in which we have explained those concepts. … [370] Accordingly, we agree with [the trial judge’s] conclusion that [Burger

King] had not established that it was entitled in its sole discretion to operationally disapprove [Hungry Jack’s]. … [429] In the result, we have found that [the trial judge’s] findings that there were implied terms of good faith and reasonableness and that those terms … were breached were correct.

Comment 11.6.1 See Radan, Gooley, and Vickovich at 11.50, 11.60, 11.68, 11.75, 11.76, and 11.79.

1.

Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206 at 227.

2. 3.

BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 at 283. BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 at 283.

4. 5.

Hawkins v Clayton (1988) 164 CLR 539 at 573. (1977) 180 CLR 266 at 283.

6.

7.

These include Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 at 605–6; Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 351–2; Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 at 65–6, 95, 117–18, 121; Moorgate Tobacco Co Ltd v Philip Morris Ltd (No 2) (1984) 156 CLR 414 at 435; Adelaide City Corp v Jennings Industries Ltd (1985) 156 CLR 274 at 281–2; Hawkins v Clayton (1988) 164 CLR 539 at 571–3. (1994) 120 ALR 274 at 332.

8. 9.

Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 at 121. Hawkins v Clayton (1988) 164 CLR 539 at 573.

10. 11.

Esso Australia Resources Ltd v Plowman (1995) 128 ALR 391 at 401–2. Nullagine Investments Pty Ltd v Western Australian Club Inc (1993) 177 CLR 635 at 647–8, 659.

12. 13.

Hon Michael McHugh, ‘The Judicial Method’, (1999) 73 Australian Law Journal 37 at 48. [1992] 177 CLR 292 at 320.

14. 15.

Such implications are made when the conditions set out in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 283 are satisfied. The custom or usage must be notorious, certain, legal and reasonable. See Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226 at 236–7; Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 423–4.

16. 17.

(1982) 149 CLR 337 at 345. [2009] 2 All ER 1127.

18. 19.

[2009] 2 All ER 1127 at 1134. (1986) 160 CLR 226 at 237.

20.

(1979) 144 CLR 596 at 607.

21. 22.

(1881) 6 App Cas 251 at 263. Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 at 607.

23.

Malik v Bank of Credit and Commerce International SA (In Compulsory Liquidation) [1998] AC 20 at 45. (1996) 186 CLR 71.

24. 25.

26.

See eg Courtaulds Northern Textiles Ltd v Andrew [1979] IRLR 84; Woods v WM Car Services (Peterborough) Ltd [1981] ICR 666; Imperial Group Pension Trust Ltd v Imperial Tobacco Ltd [1991] 2 All ER 597. See generally Lindsay, ‘The Implied Term of Trust and Confidence’, (2001) 30 Industrial Law Journal 1. See eg Burazin v Blacktown City Guardian Pty Ltd (1996) 142 ALR 144; Perkins v Grace Worldwide (Aust) Pty Ltd (1997) 72 IR 186; Irving v Kleinman [2005] NSWCA 116; Delooze v Healey [2007] WASCA 157; Shaw v New South Wales (2012) 219 IR 87.

27. 28.

(2009) 104 SASR 344 at 388. Concut Pty Ltd v Worrell (2000) 75 ALJR 312 at 322; Koehler v Cerebos (Australia) Ltd (2005) 222 CLR 44 at 55.

29. 30.

Nelson v Dahl (1879) 12 Ch D 568 at 575. Nelson v Dahl (1879) 12 Ch D 568 at 575; approved by Knox CJ in Thornley v Tilley (1925) 36 CLR 1 at 8.

31. 32.

See Halsbury’s Laws of England 4th ed, vol 12, paras 467–8; Jones v Canavan [1972] 2 NSWLR 236 at 243. [1983] 1 NSWLR 461 at 466.

33. 34.

Renard Constructions (ME) Pty Limited v Minister for Public Works (1992) 26 NSWLR 234 at 268. Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349.

35. 36.

Renard Constructions (ME) Pty Limited v Minister for Public Works (1992) 26 NSWLR 234 at 263. Renard Constructions (ME) Pty Limited v Minister for Public Works (1992) 26 NSWLR 234 at 265.

[page 235]

12 CONSTRUCTION OF CONTRACTUAL TERMS

INTRODUCTION 12.1 This chapter deals with the general principles of the construction or interpretation of contractual terms. In ascertaining the meaning of the terms of a contract, the court is primarily concerned with objectively determining the intention of the parties: Australian Broadcasting Commission v Australasian Performing Rights Association Ltd (1973) 129 CLR 99 at 109. In achieving this objective a court will seek to give the words used their natural and ordinary meaning, although where technical words or phrases are incorporated into a contract, there is a rebuttable presumption that they are used with that technical meaning in mind: Phoenix Commercial Enterprises Pty Ltd v City of Canada Bay Council [2010] NSWCA 64 at [167]–[170]. In determining the objective meaning of contractual terms, there has been considerable debate as to the extent to which the court can use evidence of surrounding circumstances. In Australia the High Court in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 (see 12.2C) states that such circumstances can only be used in cases where the language used is ambiguous or susceptible to more than one meaning. Reaffirmation of that approach is illustrated in Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 (see 12.3C). This is in contrast to the approach in the United Kingdom, where the use of surrounding circumstances does not require ambiguity in the language used

by the contracting parties: Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 All ER 98. An important rule in contractual construction is the parol evidence rule. This rule of evidence precludes the use of the contractual parties’ precontractual negotiations as an aid in ascertaining the meaning of the contract: Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1011 (see 12.4C). The rule also precludes the use of the parties’ post-contract conduct as an aid in ascertaining the meaning of the language used. Both parts of the parol evidence rule have been the subject of considerable controversy. However, the prior negotiations rule was recently confirmed by the High Court of Australia in Byrnes v Kendle (2011) 243 CLR 253 at 284–5, as was the postcontract conduct rule in Agricultural and Rural Finance Ltd v Gardiner (2008) 238 CLR 570 at 582. [page 236]

GENERAL PRINCIPLES OF CONSTRUCTION OF TERMS 12.2C

Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337

Court: High Court of Australia Facts: The State Rail Authority (SRA) accepted Codelfa’s tender in relation to excavation work required for the construction of the Eastern Suburbs Railway in Sydney. Construction of the railway was authorised by statute, which included a provision granting the SRA immunity from prosecution for nuisance. The parties agreed that Codelfa was to complete its work within 130 weeks from commencement. It was expressly agreed that Codelfa would bear all necessary costs for the work at an agreed price regardless of the difficulties it might encounter. In order to complete on time, Codelfa calculated it would need to work three eight-hour shifts per day for six days per week, as well as certain work on Sundays. However, local residents obtained an injunction against Codelfa, which mistakenly

assumed it was protected by SRA’s statutory immunity. This meant that work could not proceed between 10 pm and 6 am on the six days or at all on Sundays. The SRA refused Codelfa’s claim for additional costs and the dispute proceeded to arbitration. Issue: An issue before the High Court was whether the injunctions issued by the Supreme Court frustrated the contract between Codelfa and the SRA. The court also had to consider Codelfa’s claim that there was an implied term that the SRA would grant a reasonable extension of time and indemnify Codelfa against additional costs occasioned by the grant of the injunctions. Decision: In a majority decision the High Court (Stephen, Mason, Aickin, and Wilson JJ; Brennan J dissenting) held that the injunctions fundamentally or radically changed the circumstances of the contract, such that the contract was frustrated. The court unanimously held that there was no implied term as claimed by Codelfa. Extract: The extract from the judgment of Mason J discusses the rule that contracts are to be construed objectively and the extent to which surrounding circumstances can be used in the process of construction.

Mason J [T]here is a question whether … [the] authorities support the … view that it is legitimate to take into account the common beliefs of the parties as developed and manifested during their antecedent negotiations. 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 from, add to, vary or contradict the language of a written instrument.1 Although the traditional expositions of the rule did [page 237]

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 contract 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 ineffectively to modify what has been so established. On the other hand, it has frequently been acknowledged that there is more to the construction of the words of written instruments than merely assigning to them their plain and ordinary meaning. … This has led to a recognition that evidence of surrounding circumstances is admissible in aid of the construction of a contract. So Lord Wilberforce in L Schuler AG v Wickman Machine Tool Sales Ltd was able to state the broad thrust of the rule in this way: The general rule is that extrinsic evidence is not admissible for the construction of a written contract; the parties’ intentions must be ascertained, on legal principles of construction, from the words they have used. It is one and the same principle which excludes evidence of statements, or actions, during negotiations, at the time of the contract, or subsequent to the contract, any of which to the lay mind might at first sight seem to be proper to receive.2 His Lordship noted that evidence of surrounding circumstances is an exception to the rule, but he had no occasion to discuss its scope for there it was not, as it is here, a critical question. However, as Lord Wilberforce had earlier pointed out in his speech in Prenn [v Simmonds] … the English rule forbidding recourse to extrinsic evidence is not as strict as some have thought. … [In that case] Lord Wilberforce said: 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. There is no need to appeal here to any modern, antiliteral, tendencies, for Lord

Blackburn’s well-known judgment in River Wear Commissioners v Adamson3 provides ample warrant for a liberal approach. We must, as he said, 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. Moreover, at any rate since 1859 (Macdonald v Longbottom)4 it has been clear enough that evidence of mutually known facts may be admitted to identify the meaning of a descriptive term.5 … [I]n Great Western Railway and Midland Railway v Bristol Corporation, Lord Atkinson6 and Lord Shaw7 stated that evidence of surrounding circumstances was inadmissible except [page 238] to resolve an ambiguity, that is, where the words are susceptible of more than one meaning. … Their Lordships took the view that evidence of surrounding circumstances was not admissible to raise an ambiguity for in their opinion that would be to contradict or vary the words of the written document, the assumption being that in the overwhelming majority of cases the written words will have a fixed meaning. Lord Wrenbury8 thought otherwise, stating that in every case of construction extrinsic evidence is receivable to raise and resolve an ambiguity. Lord Wilberforce in Prenn did not discuss these competing views, perhaps because the difference between them is more apparent than real. However, I doubt whether English and United States use of extrinsic evidence for the purpose of interpretation is quite as uniform as his Lordship appeared to think. Lord Wilberforce returned to the same theme in Reardon Smith [Line v Hansen-Tangen]. In a speech concurred in by a majority of the members of the House of Lords he acknowledged that it is legitimate ‘to have regard to … “the surrounding circumstances”’.9 He went on to say: 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.10 After discussing [several other cases], his Lordship continued: It is often said that, in order to be admissible in aid of construction, these extrinsic facts must be within the knowledge of both parties to the contract, but this requirement should not be stated in too narrow a sense. When one speaks of the intention of the parties to the contract, one is speaking objectively — the parties cannot themselves give direct evidence of what their intention was — and what must be ascertained is what is to be taken as the intention which reasonable people would have had if placed in the situation of the parties. Similarly when one is speaking of aim, or object, or commercial purpose, one is speaking objectively of what reasonable persons would have in mind in the situation of the parties.11 His Lordship thought that this approach was supported by the speeches in Hvalfangerselskapet Polaris Aktieselskap v Unilever Ltd12 and Charrington & Co Ltd v Wooder.13 He expressed the conclusion to be drawn from them in this way: … what the court must do must be to place itself in thought in the same factual matrix as that in which the parties were. All of these opinions seem to me implicitly to recognise that, in the search for the relevant background, there may be facts which form part of the circumstances in which the parties contract in which one, or both, may take no particular [page 239] interest, their minds being addressed to or concentrated on other facts so that if asked they would assert that they did not have these facts in the forefront of their mind, but that will not prevent those

facts from forming part of an objective setting in which the contract is to be construed. In DTR Nominees Pty Ltd v Mona Homes Pty Ltd, Stephen and Jacobs JJ and I, following Prenn, in a joint judgment said: A court may admit evidence of surrounding circumstances in the form of ‘mutually known facts’ ‘to identify the meaning of a descriptive term’ and it may admit evidence of the ‘genesis’ and objectively the ‘aim’ of a transaction to show that the attribution of a strict legal meaning would ‘make the transaction futile’.14 … 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. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed. It is here that a difficulty arises with respect to the evidence of prior negotiations. Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency they are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself. The object of the parol evidence rule is to exclude them, the prior oral agreement of the parties being inadmissible in aid of construction, though admissible in an action for rectification. Consequently when the issue is which of two or more possible meanings is to be given to a contractual provision we look, not to the actual intentions, aspirations or expectations of the parties before or at the time of the contract, except in so far as they are expressed in the contract, but to the objective framework of facts within which the contract came into existence,

and to the parties’ presumed intention in this setting. 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.

[page 240]

Comments 12.2.1 See Radan, Gooley, and Vickovich at 12.16–12.19, 12.32, 12.38, 12.66, and 12.74. 12.2.2 A significant issue in recent years has been whether the approach set out by Mason J differs from the approach set out by Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1988] 1 All ER 98 at 114, where his Lordship stated that the existence of an ambiguity was not necessary before surrounding circumstances could be used in construing a contract. In 2011, in the wake of considerable judicial and academic discussion on this question, the High Court in Western Export Services Inc v Jireh International Pty Ltd (2011) 282 ALR 604 at 605 reaffirmed the approach adopted by Mason J. 12.3C

Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640

Court: High Court of Australia Facts: Electricity Generation Corporation, trading as Verve Energy, entered into an agreement to purchase natural gas from Woodside Energy Ltd for use in Verve’s power stations. In addition to the gas that Woodside was required to supply daily, cl 3.3(a) of the agreement provided that it was obliged to use ‘reasonable

endeavours’ to make available to Verve a supplemental maximum daily quantity (SMDQ) of gas. To determine whether Woodside was able to supply the SMDQ, cl 3.3(b) of the agreement permitted it take into account ‘all relevant commercial, economic and operational matters’. An explosion at a gas plant in June 2008 led to a temporary shortage of supply to the Western Australian market. Woodside advised Verve that it was not able to supply SMDQ for a period of several months. However, it did offer to supply Verve with a quantity of gas equivalent to SMDQ for that period at the higher prevailing market price. Verve paid the higher price under protest and then began proceedings on the basis that Woodside had breached its contractual obligation to use ‘reasonable endeavours’ to supply SMDQ. Issue: The issue before the High Court was whether, on a proper construction of the contract, Woodside had failed to use ‘reasonable endeavours’ by supplying SMDQ at the higher market price, rather than the contract price. Decision: The High Court by majority (French CJ, Hayne, Crennan, and Kiefel JJ; Gageler J dissenting) held that Woodside had not breached the contract. A proper construction of cl 3.3 did not require Woodside to forego or sacrifice its business interests in favour of Verve’s interest in obtaining SMDQ at the lower contract price when using reasonable endeavours to make SMDQ available to Verve. Extract: The extracts below from the joint majority judgment shed light on the interpretation of the contractual obligation to use ‘reasonable endeavours’.

[page 241]

French CJ, Hayne, Crennan, and Kiefel JJ The crucial issue of construction is the relationship between [Woodside’s] obligation in cl 3.3(a) to ‘use reasonable endeavours’ to make SMDQ available for delivery to Verve, and [its] entitlement under cl 3.3(b),

in determining whether they ‘are able to supply SMDQ’ on any particular day, to take into account all relevant commercial, economic and operational matters. Relevantly, cl 4.2 obliges Verve, in each contract year, to pay [Woodside] for an Annual Minimum Quantity of gas (AMQ), whether or not Verve has taken that quantity. Further, cl 4.3 contains calculations for a minimum quantity which is subject to offsets. The prices for all gas delivered under the [gas supply agreement] (GSA) are set out in cl 6. Subject to price reviews, cl 6 contains price tranches referable to quantities, tranche 3 being the price applicable to gas delivered … in excess of MDQ [maximum daily quantity (of gas)], thus the price for SMDQ. Other features of the GSA which bear on the construction issue must also be mentioned. As to supply, Verve is not obliged to nominate any SMDQ for supply from [Woodside], and [Woodside] are not obliged to reserve daily capacity in their plants to supply SMDQ to Verve, nor to refrain from agreeing to sell gas to third parties. As to payment, Verve’s take or pay obligation applies to MDQ. That obligation does not apply to SMDQ which Verve nominates, but which [Woodside] are unable to supply, to the extent that Verve acquires that gas from another supplier. It was not part of Verve’s case that the practical effect of the take or pay obligation is that Verve would be obliged to pay for SMDQ not taken. Clause 12 provides for restricted capacity and sets out priorities to be followed when capacity is constrained. In relation to defaults under the GSA, cl 22.6 limits the liability of Verve in respect of gas not taken to its liability in accordance with cl 4.2, which imposes the take or pay obligation in respect of AMQ. Clause 22.7 relevantly limits [Woodside’s] liability in respect of a failure to use reasonable endeavours to meet Verve’s nominations of SMDQ. Pursuant to cl 22.7(c), [Woodside’s] liability is limited to a proportionate share of the amount by which Verve’s actual costs incurred in obtaining alternative gas exceed the amount equivalent to the price applicable to SMDQ in the GSA. …

The construction issue

Both Verve and [Woodside] 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.15 That approach is not unfamiliar.16 As reaffirmed, it will require consideration of the language used by the parties, [page 242] 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.17 As Arden LJ observed in Re Golden Key Ltd,18 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.19 …

Reasonable endeavours Contractual obligations framed in terms of reasonable endeavours or best endeavours (or efforts) are familiar. Argument proceeded on the basis that substantially similar obligations are imposed by either expression. Such obligations are not uncommon in distribution agreements, intellectual property licences, mining and resources agreements and planning and construction contracts. Such clauses are ordinarily inserted into commercial contracts between parties at arm’s length who have their own independent business interests. Three general observations can be made about obligations to use reasonable endeavours to achieve a contractual object. First, an obligation expressed thus is not an absolute or unconditional obligation.20 Second, the nature and extent of an obligation imposed in such terms is necessarily conditioned by what is reasonable in the circumstances, which can include

circumstances that may affect an obligor’s business.21 This was explained by Mason J in Hospital Products Ltd v United States Surgical Corporation,22 which concerned a sole distributor’s obligation to use best efforts to promote the sale of a manufacturer’s products. His Honour said: The qualification [of reasonableness] itself is aimed at situations in which there would be a conflict between the obligation to use best efforts and the independent business interests of the distributor and has the object of resolving those conflicts by the standard of reasonableness. … It therefore involves a recognition that the interests of [the manufacturer] could not be paramount in every case and that in some cases the interests of the distributor would prevail.23 [page 243] As Sellers J observed of a corporate obligor in Terrell v Mabie Todd & Co Ltd,24 an obligation to use reasonable endeavours would not oblige the achievement of a contractual object to the certain ruin of the Company or to the utter disregard of the interests of the shareholders. An obligor’s freedom to act in its own business interests, in matters to which the agreement relates, is not necessarily foreclosed, or to be sacrificed, by an obligation to use reasonable endeavours to achieve a contractual object. Thirdly, some contracts containing an obligation to use or make reasonable endeavours to achieve a contractual object contain their own internal standard of what is reasonable, by some express reference relevant to the business interests of an obligor.

Clause 3.3 The GSA, pre-eminently a commercial contract between parties at arm’s length with their own independent business interests, should be given a businesslike interpretation in accordance with the authorities and the approach described above. Broadly described, the chief commercial purpose and objects of the GSA are twofold. First, Verve obtains a secure supply of gas which [Woodside] are

obliged to make available for delivery up to the specified MDQ, and secondly, [Woodside] have an assured price in respect of the specified AMQ, which Verve is obliged to take and pay for, or pay for if not taken. The business interests of the parties coincide in each contract year, but also over the long term, in respect of the quantities of gas which must be delivered by [Woodside] and which must be paid for by Verve, whether taken or not. Those provisions have the effect of insulating the parties from respective risks of fluctuations in demand and price in the context of a large domestic and commercial electricity market, at least to the extent of those quantities and the unconditional obligations imposed in respect of them. A supplementary commercial purpose or object of the GSA is the supply of SMDQ at the tranche 3 price, bearing in mind that, subject to the take or pay obligations for AMQ, Verve is not contractually bound to buy SMDQ from [Woodside] and [Woodside] are not contractually bound to reserve capacity in their plants for SMDQ. The obligation to use reasonable endeavours to supply SMDQ, provided for in cl 3.3, can be readily contrasted with the unconditional obligation to supply MDQ specified in cl 3.2. By way of contrast, the language of cl 3.3(a) is recognisably the language of qualified obligation, and cl 3.3(b) provides an internal standard of reasonableness by which the obligation to use reasonable endeavours to supply SMDQ can be measured. Taken as a whole, cl 3.3 provides for a balancing of interests if the business interests of the parties in respect of the supply of SMDQ do not entirely coincide, or if they conflict. What is a reasonable standard of endeavours obliged by cl 3.3(a) is conditioned both by [Woodside’s] responsibilities to Verve in respect of SMDQ and by [Woodside’s] express entitlement to take into account relevant commercial, economic and operational matters when determining whether they are able to supply SMDQ. Compendiously, the expression commercial, [page 244] economic and operational matters refers to matters affecting [Woodside’s] business interests. The relevant ability to supply is thus qualified, in part, by reference to the constraints imposed by commercial and economic

considerations. The non-exhaustive examples of circumstances in which [Woodside] will not breach the obligation to use reasonable endeavours to supply SMDQ, found in cl 3.3(b)(i), (ii) and (iii), are not confined to capacity (or capacity constraints). The effect of cl 3.3(b) is that [Woodside] are not obliged to forgo or sacrifice their business interests when using reasonable endeavours to make SMDQ available for delivery. Verve’s submission that able should be construed narrowly, so as to refer only to [Woodside’s] capacity to supply, fails to give full effect to the entire text of cl 3.3(b) and must be rejected. The word able in cl 3.3(b) relates to [Woodside’s] ability, having regard to their capacity and their business interests, to supply SMDQ. This is the interpretation which should be given to cl 3.3. The construction which has been accepted is consistent with surrounding circumstances known to both parties at the time of entering the GSA, which include the circumstances that [Woodside] sell and supply gas to customers and buyers in the market other than Verve, some essential services depend on gas supply, and the prevailing market price of gas at any particular time may be greater (or less) than the tranche 3 price in the GSA. Understood as explained above, cl 3.3 did not oblige [Woodside] to supply SMDQ to Verve notwithstanding conflict with their own business interests. Applied to the facts, cl 3.3 did not oblige [Woodside] to supply SMDQ to Verve when the [plant explosion] incident occasioned business conditions leading to conflict between [Woodside’s] business interests and Verve’s interest in obtaining nominated SMDQ at the tranche 3 price. These conclusions render it unnecessary to consider other issues raised by the appeals, including the construction issue in respect of cl 22.7, which imposes a cap on [Woodside’s] liability for default in respect of the supply of SMDQ.

Comment 12.3.1 See Radan, Gooley, and Vickovich at 12.13, 12.26–12.29, and 12.51–12.52.

THE RULE AGAINST EVIDENCE OF PRE-CONTRACTUAL NEGOTIATIONS 12.4C

Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101

Court: House of Lords Facts: Persimmon Homes purchased a development site in Wandsworth from Chartbrook. The contract included a term that required Persimmon Homes to make an additional payment to Chartbrook if Persimmon Homes gained a higher price than anticipated for the residential units to be built on the site. This ‘Additional Residential Payment’ (ARP) was [page 245] defined as ‘23.4% of the price achieved for each Residential Unit in excess of the Minimum Guaranteed Residential Unit Value less the Costs and Incentives’. A dispute arose as to the precise meaning of this term. Chartbrook argued that a literal interpretation of the clause meant that it should receive a total ARP of £4,482,862 — almost doubling the original price paid by Persimmon Homes for the land. Persimmon Homes argued that, taking the commercial purpose of the clause into account, the ARP should come to £897,051. As an alternative argument, Persimmon Homes claimed that evidence relating to the pre-contractual negotiations should be admitted because this evidence also supported its interpretation of the term. Issue: The issue before the House of Lords was the resolution of the contested approaches to the interpretation of the term relating to the ARP. Decision: The House of Lords (Lords Hope of Craighead, Hoffmann, Rodger of Earlsferry, and Walker of Gestingthorpe, and Baroness Hale of Richmond) unanimously held in favour of Persimmon Homes on the basis that an interpretation of ‘additional residential payment’ in

accordance with the ordinary rules of syntax made no commercial sense. It was clear that something had gone wrong with the language used by the parties, in which case it was for the court to correct the error as a matter of construction. In so doing it was clear that the commercial purpose of the clause meant that Persimmon Homes’ argument as to the amount to be paid was correct. Although this ruling determined the outcome of the case in favour of Persimmon Homes and an examination of the parties’ precontractual negotiations was unnecessary, the House of Lords noted that such evidence would not have been admissible in this case in accordance with traditional authority that excludes evidence of precontractual negotiations in the process of the interpretation of contractual terms. Extract: The extract from the speech of Lord Hoffmann, which was endorsed by all the other members of the House of Lords, discusses the general approach to interpretation of contracts, as well as the continued application of the rule that excludes evidence of precontractual negotiations in interpreting contracts.

Lord Hoffmann There is no dispute that the principles on which a contract (or any other instrument or utterance) should be interpreted are those summarised by the House of Lords in Investors Compensation Scheme Ltd v West Bromwich Building Society.25 They are well known and need not be repeated. It is agreed that the question is what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean. The House emphasised that ‘we do not easily accept that people have made linguistic mistakes, particularly in formal documents’ … but said that in some cases the context and background drove a court to the conclusion that ‘something must have gone wrong with the language’. In such a case, the law [page 246]

did not require a court to attribute to the parties an intention which a reasonable person would not have understood them to have had. It clearly requires a strong case to persuade the court that something must have gone wrong with the language and the judge and the majority of the Court of Appeal did not think that such a case had been made out. On the other hand, Lawrence Collins LJ thought it had. It is, I am afraid, not unusual that an interpretation which does not strike one person as sufficiently irrational to justify a conclusion that there has been a linguistic mistake will seem commercially absurd to another. … The subtleties of language are such that no judicial guidelines or statements of principle can prevent it from sometimes happening. It is fortunately rare because most draftsmen of formal documents think about what they are saying and use language with care. But this appears to be an exceptional case in which the drafting was careless and no one noticed. I agree with the dissenting opinion of Lawrence Collins LJ because I think that to interpret the definition of ARP in accordance with ordinary rules of syntax makes no commercial sense. … When the language used in an instrument gives rise to difficulties of construction, the process of interpretation does not require one to formulate some alternative form of words which approximates as closely as possible to that of the parties. It is to decide what a reasonable person would have understood the parties to have meant by using the language which they did. The fact that the court might have to express that meaning in language quite different from that used by the parties … is no reason for not giving effect to what they appear to have meant. In East v Pantiles (Plant Hire) Ltd Brightman J stated the conditions for what he called ‘correction of mistakes by construction’: Two conditions must be satisfied: first, there must be a clear mistake on the face of the instrument; secondly, it must be clear what correction ought to be made in order to cure the mistake. If those conditions are satisfied, then the correction is made as a matter of construction.26 Subject to two qualifications … I would accept this statement, which is in my opinion no more than an expression of the common sense view that we

do not readily accept that people have made mistakes in formal documents. The first qualification is that ‘correction of mistakes by construction’ is not a separate branch of the law, a summary version of an action for rectification. … The second qualification concerns the words ‘on the face of the instrument’. … [I]n deciding whether there is a clear mistake, the court is not confined to reading the document without regard to its background or context. As the exercise is part of the single task of interpretation, the background and context must always be taken into consideration. [page 247] [It] is clear … that there is not, so to speak, a limit to the amount of red ink or verbal rearrangement or correction which the court is allowed. All that is required is that it should be clear that something has gone wrong with the language and that it should be clear what a reasonable person would have understood the parties to have meant. In my opinion, both of these requirements are satisfied [in this case]. … There is no need to say anything more. But Persimmon advanced … [an argument] of very considerable general importance and I think it is appropriate that your Lordships deal with [it. The argument is] that (contrary to the unanimous opinion of the judge and the Court of Appeal) the House should take into account the pre-contractual negotiations … [in support of its case as to the interpretation of the contract]. The rule that pre-contractual negotiations are inadmissible was clearly reaffirmed by this House in Prenn v Simmonds, where Lord Wilberforce said that earlier authorities ‘contain little to encourage, and much to discourage, evidence of negotiation or of the parties’ subjective intentions’.27 It is clear that the rule of inadmissibility has been established for a very long time. … To allow evidence of pre-contractual negotiations to be used in aid of construction would therefore require the House to depart from a long and consistent line of authority, the binding force of which has frequently been acknowledged. The House is nevertheless invited to do so, on the

ground that the rule is illogical and prevents a court from … putting itself in the position of the parties and ascertaining their true intent. In Prenn v Simmonds Lord Wilberforce said by way of justification of the rule [that excludes evidence of pre-contractual negotiations]: The reason for not admitting evidence of these exchanges is not a technical one or even mainly one of convenience, (though the attempt to admit it did greatly prolong the case and add to its expense). It is simply that such evidence is unhelpful. By the nature of things, where negotiations are difficult, the parties’ positions, with each passing letter, are changing and until the final agreement, though converging, still divergent. It is only the final document which records a consensus. If the previous documents use different expressions, how does construction of those expressions, itself a doubtful process, help on the construction of the contractual words? If the same expressions are used, nothing is gained by looking back: indeed, something may be lost since the relevant surrounding circumstances may be different. And at this stage there is no consensus of the parties to appeal to. It may be said that previous documents may be looked at to explain the aims of the parties. In a limited sense this is true: the commercial, or business object, of the transaction, objectively ascertained, may be a surrounding fact. … And if it can be shown that one interpretation completely frustrates that object, to the extent of rendering the contract futile, that may be a strong argument for an alternative interpretation, if that can reasonably be found. But beyond that it may be difficult to go: it may be a matter of degree, or of judgment, how far one interpretation, or another, gives effect to a common intention: the parties, indeed, may be pursuing that intention with differing emphasis, and hoping [page 248] to achieve it to an extent which may differ, and in different ways. The words used may, and often do, represent a formula which means different things to each side, yet may be accepted because

that is the only way to get ‘agreement’ and in the hope that disputes will not arise. The only course then can be to try to ascertain the ‘natural’ meaning. Far more, and indeed totally, dangerous is it to admit evidence of one party’s objective — even if this is known to the other party. However strongly pursued this may be, the other party may only be willing to give it partial recognition, and in a world of give and take, men often have to be satisfied with less than they want. So, again, it would be a matter of speculation how far the common intention was that the particular objective should be realised.28 Critics of the rule … point out that although all this may usually be true, in some cases it will not. Among the dirt of aspirations, proposals and counter-proposals there may gleam the gold of a genuine consensus on some aspect of the transaction expressed in terms which would influence an objective observer in construing the language used by the parties in their final agreement. Why should court deny itself the assistance of this material in deciding what the parties must be taken to have meant? … [H]owever … it would not be inconsistent with the English objective theory of contractual interpretation to admit evidence of previous communications between the parties as part of the background which may throw light upon what they meant by the language they used. The general rule … is that there are no conceptual limits to what can properly be regarded as background. Prima facie, therefore, the negotiations are potentially relevant background. They may be inadmissible simply because they are irrelevant to the question which the court has to decide, namely, what the parties would reasonably be taken to have meant by the language which they finally adopted to express their agreement. For the reasons given by Lord Wilberforce, that will usually be the case. But not always. In exceptional cases … a rule that prior negotiations are always inadmissible will prevent the court from giving effect to what a reasonable man in the position of the parties would have taken them to have meant. Of course judges may disagree over whether in a particular case such evidence is helpful or not. In Yoshimoto v Canterbury Golf International Ltd,29 Thomas J thought he had found gold in the negotiations but the Privy Council said it was only dirt. As I have said, there is nothing unusual or surprising about

such differences of opinion. In principle, however, I would accept that previous negotiations may be relevant. It therefore follows that while it is true that, as Lord Wilberforce said, inadmissibility is normally based in irrelevance, there will be cases in which it can be justified only on pragmatic grounds. I must consider these grounds, which have been explored in detail in the literature and on the whole rejected by academic writers but supported by some practitioners. The first is that the admission of pre-contractual negotiations would create greater uncertainty of outcome in disputes over interpretation and add to the cost of advice, litigation or arbitration. Everyone engaged in the exercise would have to read the correspondence and statements would have to be taken from those who took part in oral negotiations. Not only [page 249] would this be time-consuming and expensive but the scope for disagreement over whether the material affected the construction of the agreement … would be considerably increased. As against this, it is said that when a dispute over construction is litigated, evidence of the precontractual negotiations is almost invariably tendered in support of an alternative claim for rectification … or an argument based on estoppel by convention or some alleged exception to the exclusionary rule. Even if such an alternative claim does not succeed, the judge will have read and possibly been influenced by the evidence. The rule therefore achieves little in saving costs and its abolition would restore some intellectual honesty to the judicial approach to interpretation. There is certainly a view in the profession that the less one has to resort to any form of background in aid of interpretation, the better. The document should so far as possible speak for itself. … I do not think that these opinions can be dismissed as merely based upon the fallacy that words have inherent or ‘available’ meanings, rather than being used by people to express meanings, although some of the arguments advanced in support might suggest this. It reflects what may be a sound practical intuition that the law of contract is an institution designed to

enforce promises with a high degree of predictability and that the more one allows conventional meanings or syntax to be displaced by inferences drawn from background, the less predictable the outcome is likely to be. In this respect, it is interesting to consider the reaction to the statement of principle in Investors Compensation Scheme Ltd v West Bromwich Building Society,30 which was viewed with alarm by some distinguished commercial lawyers as having greatly increased the quantity of background material which courts or arbitrators would be invited to conside. … [However,] there was little in that statement of principle which could not be found in earlier authorities. The only points it decided that might have been thought in the least controversial were, first, that it was not necessary to find an ‘ambiguity’ before one could have any regard to background and, secondly, that the meaning which the parties would reasonably be taken to have intended could be given effect despite the fact that it was not, according to conventional usage, an ‘available’ meaning of the words or syntax which they had actually used. … I rather doubt whether the ICS case produced a dramatic increase in the amount of material produced by way of background for the purposes of contractual interpretation. But pre-contractual negotiations seem to me capable of raising practical questions different from those created by other forms of background. Whereas the surrounding circumstances are, by definition, objective facts, which will usually be uncontroversial, statements in the course of pre-contractual negotiations will be drenched in subjectivity and may, if oral, be very much in dispute. It is often not easy to distinguish between those statements which (if they were made at all) merely reflect the aspirations of one or other of the parties and those which embody at least a provisional consensus which may throw light on the meaning of the contract which was eventually concluded. But the imprecision of the line between negotiation and provisional agreement is the very reason why in every case of dispute over interpretation, one or other [page 250] of the parties is likely to require a court or arbitrator to take the course of

negotiations into account. Your Lordships’ experience in the analogous case of resort to statements in Hansard under the rule in Pepper v Hart31 suggests that such evidence will be produced in any case in which there is the remotest chance that it may be accepted and that even these cases will be only the tip of a mountain of discarded but expensive investigation. Pepper v Hart has also encouraged ministers and others to make statements in the hope of influencing the construction which the courts will give to a statute and it is possible that negotiating parties will be encouraged to improve the bundle of correspondence with similar statements. … In his judgment in the present case, Briggs J thought that the most powerful argument against admitting evidence of pre-contractual negotiations was that it would be unfair to a third party who took an assignment of the contract or advanced money on its security. Such a person would not have been privy to the negotiations and may have taken the terms of the contract at face value. There is clearly strength in this argument, but it is fair to say that the same point can be made … in respect of the admissibility of any form of background. The law sometimes deals with the problem by restricting the admissible background to that which would be available not merely to the contracting parties but also to others to whom the document is treated as having been addressed. Thus … The Starsin Homburg Houtimport BV v Agrosin Private Ltd32 the House of Lords construed words which identified the carrier on the front of a bill of lading without reference to what it said on the back, on the ground that the bankers to whom the bill would be tendered could not be expected to read the small print. Ordinarily, however, a contract is treated as addressed to the parties alone and an assignee must either inquire as to any relevant background or take his chance on how that might affect the meaning a court will give to the document. The law has sometimes to compromise between protecting the interests of the contracting parties and those of third parties. But an extension of the admissible background will, at any rate in theory, increase the risk that a third party will find that the contract does not mean what he thought. How often this is likely to be a practical problem is hard to say. … The conclusion I would reach is that there is no clearly established case for departing from the exclusionary rule. The rule may well mean … that parties are sometimes held bound by a contract in terms which, upon a full

investigation of the course of negotiations, a reasonable observer would not have taken them to have intended. But a system which sometimes allows this to happen may be justified in the more general interest of economy and predictability in obtaining advice and adjudicating disputes. It is, after all, usually possible to avoid surprises by carefully reading the documents before signing them and there are the safety nets of rectification and estoppel by convention. Your Lordships do not have the material on which to form a view. It is possible that empirical study (for example, by the Law Commission) may show that the alleged disadvantages of admissibility are not in practice very significant or that they are outweighed by the advantages of doing more precise justice in exceptional cases or falling into line with international conventions. But the determination of where the balance of advantage lies is not in my opinion suitable for judicial decision. … [page 251] The rule excludes evidence of what was said or done during the course of negotiating the agreement for the purpose of drawing inferences about what the contract meant. It does not exclude the use of such evidence for other purposes: for example, to establish that a fact which may be relevant as background was known to the parties, or to support a claim for rectification or estoppel. These are not exceptions to the rule. They operate outside it.

Comments 12.4.1 See Radan, Gooley, and Vickovich at 12.5, 12.15, 12.41, and 12.64–12.69. 12.4.2 For discussions of whether the rule against admitting evidence of pre-contractual negotiations should be abolished or maintained, see Lord Nicholls of Birkenhead, ‘My Kingdom for a Horse: The Meaning of Words’ (2005) 121 Law Quarterly Review 577; J J Spigelman, ‘From Text to Context: Contemporary Contractual Interpretation’ (2007) 81 Australian Law Journal 322; D McLauchlan,

‘Contract Interpretation: What Is It About?’ (2009) 31 Sydney Law Review 1; C Mitchell, ‘Contract Interpretation: Pragmatism and the Prior Negotiations Rule’ (2010) 26 Journal of Contract Law 134; and J E Bailey, ‘Prior Negotiations and Subsequent Conduct in Contract Interpretation: Principles and Practical Concerns’ (2011) 28 Journal of Contract Law 179. 12.4.3 In R Catterwell, ‘The “Indirect” Use of Evidence of Prior Negotiations and the Parties’ Intentions in Contract Construction: Part of the Surrounding Circumstances’ (2012) 29 Journal of Contract Law 183, the author discusses the extent to which evidence of pre-contractual negotiations colours the background against which contracts are interpreted in Australia.

1.

Goss v Lord Nugent (1833) 110 ER 713 at 716.

2. 3.

L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 at 261. [1877] 2 App Cas 743 at 763.

4. 5.

(1859) 120 ER 1177. Prenn v Simmonds [1971] 1 WLR 1381 at 1383–4.

6. 7.

Great Western Railway and Midland Railway v Bristol Corporation [1918] LJ Ch 414 at 418–19. Great Western Railway and Midland Railway v Bristol Corporation [1918] LJ Ch 414 at 424–5.

8. 9.

Great Western Railway and Midland Railway v Bristol Corporation [1918] LJ Ch 414 at 429. Reardon Smith Line v Hansen-Tangen [1976] 1 WLR 989 at 995.

10. 11.

Reardon Smith Line v Hansen-Tangen [1976] 1 WLR 989 at 995–6. Reardon Smith Line v Hansen-Tangen [1976] 1 WLR 989 at 996.

12. 13.

[1933] 39 Com Cas 1. [1914] AC 71 at 77, 70, 82.

14. 15.

DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 at 429. McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579 at 589; Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at 462; International Air Transport Association v Ansett Australia Holdings Ltd (2008) 234 CLR 151 at 160; see further Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 at 188. See also Homburg Houtimport BV v Agrosin Private Ltd [2004] 1 AC 715 at 737.

16.

See, for example, Hydarnes Steamship Co v Indemnity Mutual Marine Assurance Co [1895] 1 QB 500 at 504; Bergl (Australia) Ltd v Moxon Lighterage Co Ltd (1920) 28 CLR 194 at 199; see generally Lord Bingham of Cornhill, ‘A New Thing Under the Sun? The Interpretation of Contract and the ICS Decision’ (2008) 12 Edinburgh Law Review 374. Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 350. See also Zhu v Treasurer of New South Wales (2004) 218 CLR 530 at 559; International Air Transport Association v

17.

Ansett Australia Holdings Ltd (2008) 234 CLR 151 at 160. 18. 19.

[2009] EWCA Civ 636 at [28]. Zhu v Treasurer of New South Wales (2004) 218 CLR 530 at 559. See also Gollin & Co Ltd v Karenlee Nominees Pty Ltd (1983) 153 CLR 455 at 464.

20. 21.

Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 144; Cypjayne Pty Ltd v Babcock & Brown International Pty Ltd (2011) 282 ALR 152 at 163. Transfield Pty Ltd v Arlo International Ltd (1980) 144 CLR 83 at 101.

22. 23.

(1984) 156 CLR 41 at 91–2. Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 92.

24. 25.

(1952) 69 RPC 234 at 236. [1998] 1 WLR 896 at 912–13.

26. 27.

East v Pantiles (Plant Hire) Ltd (1981) 263 EG 61. Prenn v Simmonds [1971] 1 WLR 1381 at 1384.

28. 29.

Prenn v Simmonds [1971] 1 WLR 1381 at 1384. [2001] 1 NZLR 523.

30. 31.

[1998] 1 WLR 896 at 912–13. [1993] AC 593.

32.

[2004] 1 AC 715.

[page 252]

13 CONSTRUCTION OF EXCLUSION CLAUSES

INTRODUCTION 13.1 This chapter deals with exclusion clauses, which are terms that seek to exclude or limit the liability of one or both contracting parties for breach of a contract or for breach of some statutory or tortious obligation. Such clauses are often used in commercial contracts, with parties apportioning and negotiating over the risk of loss in their transactions. Generally, a party seeking to enforce the clause will need to establish on the evidence that it is incorporated as an express term of the contract and, if so, that it does on its proper construction adequately cover the liability that has arisen. The issue of incorporation is covered in Chapter 10, whereas this chapter deals with the construction or interpretation of the term. Once the clause is held to be an express term of the contract, a court will attempt to objectively determine the true intention of the parties. The general approach to this end is that taken by the High Court in Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 (see 13.2C), which sets out two fundamental principles: first, an exclusion clause should be construed according to its natural and ordinary meaning, read in the light of the contract as a whole and the context in which it appears; second, any ambiguity in its meaning is resolved according to the contra proferentem rule, by which the clause will be construed against the party relying on the clause. In the context of commercial contracts, courts are more likely than in the past to uphold an

exclusion clause that is clearly incorporated and expressed unambiguously, notwithstanding that it may have severe consequences for one or other of the parties. In consumer contracts, however, exclusion clauses are interpreted less liberally in order to protect vulnerable consumers and are often specifically prohibited by statute, such as in the Australian Consumer Law. Where a contracting party seeks to exclude or limit its liability — not only for breach of contract but also for negligence during the performance of its contractual obligations — it must be clearly intended that the clause covers negligence. This will generally be the case where negligence is expressly referred to in the clause. If it is not, liability for negligence may still be excluded if the words used are wide enough to exclude negligence. However, if the words are so wide as to also encompass other grounds for liability, the clause will be read as applying only to those other grounds. Two cases that showed different results in the application of this test are Alderslade v Hendon Laundry Ltd [1945] KB 189 (see 13.3C) and White v John Warwick & Co Ltd [1953] 1 WLR 1285 (see 13.4C). The benefit of an exclusion clause may be lost if a carrier deviates from an agreed voyage or route. Further, to be valid, an exclusion clause will also need to comply with the ‘four corners rule’, meaning that the acts for which exclusion from liability is sought must not be outside the [page 253] scope of the contract. The acts will be outside its scope if the acts are not authorised by the contract or contemplated by the parties. This is illustrated in Council of the City of Sydney v West (1965) 114 CLR 481 (see 13.5C).

GENERAL PRINCIPLES OF CONSTRUCTION OF EXCLUSION CLAUSES 13.2C Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500

Court: High Court of Australia Facts: By written contract, in June 1981 Delco instructed Darlington, a commodity futures broker, to enter into certain dealings on its behalf with a view to tax savings. Two clauses in the agreement dealt with the liability of Darlington as Delco’s agent. First, clause 6 purported to exclude Darlington’s liability ‘for any loss … arising from trading by [Darlington] on behalf of [Delco] whether pursuant to this agreement or not’. Second, clause 7(c) provided that ‘any liability on [Darlington’s] part … for damages for or in respect of any claim arising out of or in connection with the relationship established by this agreement or any conduct under it or any orders or instructions given … shall not in any event … exceed one hundred dollars’. Without Delco’s authority, Darlington acted on its behalf in day trading of certain coffee and silver futures. As a result of this unauthorised trading, Delco suffered monetary losses of almost $280,000. When Delco sued to recover, Darlington relied on the exclusion and limitation clauses in the contract. Issue: The issue before the High Court was whether the two clauses in Darlington’s agency agreement could serve, under the rules of construction, to limit its liability for the unauthorised losses suffered by Delco. Decision: In a unanimous decision the High Court (Mason, Wilson, Brennan, Deane, and Dawson JJ) ruled that clause 6 could not be relied on, since it could only be seen to refer to authorised trading by Darlington on Delco’s behalf. However, clause 7(c) was effective in limiting Darlington’s liability to $100, even though its actions were in breach of authority, since Delco’s claim arose in connection with the relationship of broker and client as envisaged under the contract. Extract: The extracts below from the High Court’s joint judgment contain authoritative principles on the construction of exclusion clauses.

Mason, Wilson, Brennan, Deane, and Dawson JJ

The question … is whether cl 6 protects [Darlington] from the consequences of what otherwise would be breaches of contract. [Counsel for Darlington] relies on statements in recent decisions of the House of Lords to support the approach that exclusion clauses should be simply construed in accordance with their language and that they should not be subjected to a strained construction in order to reduce the ambit of their operation. These statements [page 254] have been made in a series of cases beginning with Photo Production Ltd v Securicor Ltd1 in which the House of Lords rejected the doctrine of fundamental breach previously adopted in Suisse Atlantique Societe d’Armement Maritime SA v NV Rotterdamsche Kolen Centrale.2 In place of that doctrine their Lordships have stated that, although an ambiguous exclusion clause will be construed contra proferentem, such a clause is to be given its natural construction. So, in Photo Production, a case decided on a contract entered into before the Unfair Contract Terms Act 1977 (UK) came into operation, Lord Diplock, observing that the court was not entitled to reject the exclusion clause ‘however unreasonable the court itself may think it is, if the words are clear and fairly susceptible of one meaning only’, said: In commercial contracts negotiated between businessmen capable of looking after their own interests and of deciding how risks inherent in the performance of various kinds of contract can be most economically borne (generally by insurance), it is, in my view, wrong to place a strained construction upon words in an exclusion clause which are clear and fairly susceptible of one meaning only even after due allowance has been made for the presumption in favour of the implied primary and secondary obligations.3 This approach to the construction of exclusion clauses was subsequently reiterated in Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd4 where a distinction was drawn between exclusion and limitation clauses. Lord Fraser of Tullybelton, with whom Lord Elwyn-Jones, Lord Salmon and

Lord Lowry concurred, observed that the principles applicable to exclusion clauses do not apply ‘in their full rigour’ to conditions which merely limit liability, though such conditions will be read contra proferentem.5 This distinction in the treatment of the two types of clause was subsequently endorsed in George Mitchell Ltd v Finney Lock Seeds Ltd.6 There the House of Lords concluded that the conditions of a contract for the sale of late cabbage seed limited the liability of the seller to a refund of the price paid or replacement of the seeds and that the ambit of the conditions could not be confined to breaches of contract arising without negligence on the part of the seller. The condition, read as a whole, unambiguously limited the seller’s liability to replacement of the seeds or refund of the price. Their Lordships declined to read an ambiguity into it by the process of strained construction deprecated by Lord Diplock in Photo Production7 and subsequently by Lord Wilberforce in Ailsa Craig.8 … Although these three decisions contain statements giving empha--sis to the natural meaning of the words of exclusion and limitation clauses read as a whole, we do not understand the statements to deny the legitimacy, indeed the necessity, of construing the language of such a clause in the context of the entire contract of which it forms part. The formulation by the House of Lords of a new approach to the construction of exclusion and [page 255] limitation clauses in place of the earlier approach based on the doctrine of fundamental breach explains why the emphasis in these statements is upon the language of the particular clauses rather than upon the context in which they appear. Be this as it may, this court has in past decisions authoritatively stated the approach to be adopted in Australia to the construction of exclusion and limitation clauses, without relying on the doctrine of fundamental breach. In [The Council for the City of Sydney] v West,9 the plaintiff, who had parked his car in the defendant’s parking station, received a parking ticket, containing the following condition: ‘The Council does not accept any responsibility for the loss or damage to any vehicle … however such loss, damage … may arise or be caused’. The ticket also contained a statement

which required that the ticket be presented for time-stamping and payment before delivery was taken of the vehicle. The plaintiff’s car was taken from the parking station by an unauthorised person who surrendered to the attendant a duplicate parking ticket relating to another car which he had obtained by falsely representing that he had lost his ticket. It was the attendant’s duty not to allow cars to proceed out of the station otherwise than upon the surrender by the driver of the appropriate ticket. The court held that the defendant was not excused from liability for the loss of the plaintiff’s vehicle. … [Barwick CJ and Taylor J] … made it clear that they reached this result by a process of construction of the contract and not by applying the doctrine of fundamental breach. Their Honours continued: But we would deny the application of such a clause in those circumstances simply upon the interpretation of the clause itself. Such a clause contemplates that loss or damage may occur by reason of negligence on the part of the warehouseman or his servants in carrying out the obligations created by the contract. But in our view it has no application to negligence in relation to acts done with respect to a bailor’s goods which are neither authorised nor permitted by the contract. … Negligence in these circumstances would be right outside the purview of the clause.10 … [T]he interpretation of an exclusion clause is to be determined by construing the clause according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract, and, where appropriate, construing the clause contra proferentem in case of ambiguity. … [T]he same principle applies to the construction of limitation clauses. As King CJ noted in his judgment in the Supreme Court, a limitation clause may be so severe in its operation as to make its effect virtually indistinguishable from that of an exclusion clause. And the principle, in the form in which we have expressed it, does no more than express the general approach to the interpretation of contracts and it is of sufficient generality to accommodate the different considerations that may arise in the interpretation of a wide variety of exclusion and

limitation clauses in formal commercial contracts between business people where no question of the reasonableness or fairness of the clause arises. [page 256] Turning now to cl 6 of the contract … the question is whether the relevant losses arose ‘in any way out of any trading activity undertaken on behalf of [Delco] whether pursuant to this Agreement or not’. Read in context these words plainly refer to trading activity undertaken by [Darlington] for [Delco] with [Delco’s] authority, whether pursuant to the Agreement or not. It can scarcely be supposed that the parties intended to exclude liability on the part of [Darlington] for losses arising from trading activity in which it presumed to engage on behalf of [Delco] when [Darlington] had no authority so to do. The final question is whether [Darlington] is protected by cl 7(c) of the contract. This provision limits [its] liability … to $100 in relation to claims of three kinds: (1) claims arising out of or in connection with the relationship established by the agreement; (2) claims arising out of or in connection with any conduct under the agreement; and (3) claims arising out of or in connection with any orders or instructions given by the client to the broker. The Full Court of the Supreme Court considered that cl 7(c) by its terms had no application to claims arising out of conduct which is outside the scope of the agreement and the relationship between the parties established by it. This, in our opinion, is to place a more restrictive interpretation on the clause than its language will naturally bear. In particular, it is expressed to comprehend claims arising out of or in connection with the relationship established by the agreement. A claim in respect of an unauthorised transaction may none the less have a connection, indeed a substantial connection, with the relationship of broker and client established by the agreement. We are unable to discern any basis on which cl 7(c) can be construed so as not to apply to such a claim. The present case is one in which [Delco’s] claim arises in connection with the relationship of broker and client established by the contract between the parties, notwithstanding the finding that the relevant transactions were not authorised.

In the result cl 7(c) operates to limit [Darlington’s] liability to $100 in respect of each of the unauthorised coffee and silver contracts. We would allow the appeal.

Comments 13.2.1 See Radan, Gooley, and Vickovich at 13.4–13.14.

EXCLUSION CLAUSES AND LIABILITY IN NEGLIGENCE 13.3C

Alderslade v Hendon Laundry Ltd [1945] KB 189

Court: Court of Appeal in England Facts: Alderslade left 10 large Irish linen handkerchiefs with Hendon for laundering. One of the conditions on which Hendon accepted items for laundering was expressed as follows: ‘The maximum amount allowed for lost or damaged articles is 20 times the charge made for laundering.’ The handkerchiefs were lost, apparently through the negligence [page 257] of Hendon’s employees. Hendon agreed to pay the sum referred to in the condition, amounting to about 11 and a half shillings, but Alderslade sued for £5, being their alleged replacement cost. A county court judge found in Alderslade’s favour on the ground that the limitation clause was not sufficiently clear to exclude liability for negligence. Hendon appealed to the Court of Appeal. Issue: The issue before the Court of Appeal was whether the words of Hendon’s condition could be construed to exclude any liability for negligence.

Decision: The Court of Appeal (Lord Greene MR, MacKinnon LJ, and Uthwatt J) relied on authoritative decisions to construe the condition as valid and unanimously allowed Hendon’s appeal. The basis for the Court of Appeal’s reasoning was that, where on the facts the only ground for liability could be tortious, such as in negligence, the clause must be construed to cover negligence; but where the defendant could also be liable on other heads of damage, such as contractual breach, the clause should be construed as extending to those issues only unless there is also express reference to exclusion of liability for negligence. Extract: The extracts from Greene MR’s judgment contain a useful summary of the rules relating to exclusion clauses as they relate to negligence.

Lord Greene MR It was argued before us for [Hendon Laundry] that the clause did apply and was effective to limit liability for lost articles; and reliance was placed on a well-known line of authority dealing with clauses of this description. The effect of those authorities can I think be stated as follows: where the head of damage in respect of which limitation of liability is sought to be imposed by such a clause is one which rests on negligence and nothing else, the clause 0must be construed as extending to that head of damage, because if it were not so construed it would lack subject-matter. Where, on the other hand, the head of damage may be based on some ground other than that of negligence, the general principle is that the clause must be confined to loss occurring through that other cause to the exclusion of loss arising through negligence. The reason for that is that if a contracting party wishes in such a case to limit his liability in respect of negligence, he must do so in clear terms, and in the absence of such clear terms the clause is to be construed as relating to a different kind of liability and not to liability based on negligence. A common illustration of the principle is to be found in the case of common carriers. A common carrier is, to use a common expression though it may not be quite accurate, an insurer, and his liability in respect of articles entrusted to him is not necessarily based on negligence at all. Accordingly, if a common carrier

wishes to limit his liability for lost articles and does not make it quite clear that he is desiring to limit it in respect of his liability for negligence, then the clause will be construed as only extending to his liability on grounds other than negligence. But if, on the other hand, the carrier, not being a common carrier and being only under an obligation to take reasonable care, makes use of that clause, then unless it is construed so as to cover the case of negligence there would be no content for it at all. That, broadly speaking, is the principle which falls to be applied in this case. [page 258] I do not propose to go through the various authorities to which we have been referred, but I may mention: Rutter v Palmer;11 Turner v The Civil Service Supply Association;12 Fagan v Green & Edwards Ltd.13 … It must be remembered that a limitation clause of this kind only applies where the damage, in respect of which the limitation clause is operative, takes place within the four corners of the contract. A contracting party who goes outside his contract cannot rely upon the clause if the loss occurs during operations outside the contract as distinct from operations which the contract contemplates. But there is no room for the application of that principle in the present case because there is no material for finding that the loss of these handkerchiefs was due to some act by [Hendon Laundry] outside what it had contracted to do. It was argued by counsel on behalf of [Alderslade] that the clause must be construed in the present case so as to exclude loss by negligence, and the learned county court judge so held. It was said that the loss of a customer’s property might take place for one of two reasons, namely, negligence and mere breach of contract, and that in the absence of clear words referring to negligence, loss through negligence cannot be taken to be covered by the clause. In my opinion that argument fails. It is necessary to analyse the legal relationship between the customer and [Hendon Laundry]. What I may call the hard core of the contract, the real thing to which the contract is directed, is the obligation of [Hendon Laundry] to launder. That is the primary obligation. It is the contractual obligation which must be performed according to its terms, and no question of taking

due care enters into it. [Hendon Laundry] undertakes, not to exercise due care in laundering the customer’s goods, but to launder them, and if it fails to launder them it is no use saying, ‘We did our best, we exercised due care and took reasonable precautions, and we are very sorry if as a result the linen is not properly laundered’. That is the essence of the contract, and in addition there are certain ancillary obligations into which [Hendon Laundry] enters if it accepts goods from a customer to be laundered. The first relates to the safe custody of the goods while they are in the possession of the company. The customer’s goods may have to wait for a time in the laundry premises to be washed, and while they are so waiting there is an obligation to take care of them, but it is in my opinion not the obligation of an insurer but the obligation to take reasonable care for the protection of the goods. If while they are waiting to be washed in the laundry a thief, through no fault of [Hendon Laundry], steals them, the laundry company is not liable. The only way in which the company could be made liable for the loss of articles which are awaiting their turn to be washed would, I think, quite clearly be if it could be shown that [it] had been guilty of negligence in performing their duty to take care of the goods. That is one ancillary obligation which is inherent in a contract of this kind. Another relates to the delivery of the goods. The laundry company in most cases, and indeed in this case, makes a practice of delivering the goods to the customer, and in the ordinary way the customer expects to receive that service. But what is the precise obligation of the laundry in respect of the return of the goods after the laundering has been com--pleted? In my opinion it [page 259] stands on the same footing as the other ancillary obligation that I have mentioned, namely, the obligation to take reasonable care in looking after and safeguarding the goods. It cannot, I think, be suggested that the obligation of the laundry company in the matter of returning the goods after they have been laundered is the obligation of an insurer. To say that they have undertaken by contract an absolute obligation to see that they are returned seems to me to go against common sense. Supposing the laundry is returning the goods by van to its customer and while the van is on its way a negligent driver of a lorry drives into it and overturns it with the result

that it is set on fire and the goods destroyed. No action would lie by the customer for damages for the loss of those goods any more than it would lie against any ordinary transport undertaking which was not a common carrier. To hold otherwise would mean that in respect of that clearly ancillary service the laundry company were undertaking an absolute obligation that the goods would, whatever happened, be returned to the customer. It seems to me therefore that the only obligation on the company in the matter of returning the goods is an obligation to take reasonable care. In the present case all that we know about the goods is that they are lost. There seems to me to be no case of lost goods in respect of which it would be necessary to limit liability, unless it be a case where the goods are lost by negligence. Goods sent to the laundry will not be lost in the act of washing them. On the other hand, they may be lost while they are in the custody of the laundry company before washing or after washing has been completed. They may be lost in the process of returning them to the customer after they have been washed, but in each of those two cases, if my view is right, the obligation of the laundry company is an obligation to take reasonable care and nothing else. Therefore, the claim of a customer that the company is liable to him in respect of articles that have been lost must, I think, depend upon the issue of due care on the part of the company. If that be right, to construe this clause, so far as it relates to loss, in such a way as to exclude loss occasioned by lack of proper care would be to leave the clause so far as loss is concerned — I say nothing about damage — without any content at all. The result, in my opinion, is that the clause must be construed as applying to the case of loss through negligence.

Comments 13.3.1 See Radan, Gooley, and Vickovich at 13.19–13.21. 13.3.2 Lord Greene’s comments at page 192 of the judgment in this case formed the basis for the third rule in relation to exclusion clauses in the context of a defendant’s liability in the tort of negligence in Canada Steamship Lines Ltd v The King [1952] AC 192 at 208, where the Privy Council said the following: (i) an express exemption of liability for negligence will

effectively exclude liability on the part of the defendant; (ii) where there is no express reference to negligence, the court needs to determine if the words used are wide enough to exclude negligence, with any doubts on this to be resolved by applying the contra proferentum principle; (iii) if the words used are [page 260] wide enough to cover negligence but also encompass other grounds of liability other than negligence, the clause will be read as applying only to the other grounds of liability and will not operate to exclude the claim for negligence, provided that the other ground is not ‘so fanciful or remote that the proferens cannot be supposed to have desired protection against it’. 13.3.3 For a discussion of the status of these rules in the light of the High Court’s decision in Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500, see Radan, Gooley, and Vickovich at 13.24–13.33. 13.4C

White v John Warwick & Co Ltd [1953] 1 WLR 1285

Court: Court of Appeal in England Facts: White hired a tradesman’s cycle from Warwick for the purpose of conducting a newspaper run as part of his newsagency business. The written agreement between the parties provided for a replacement cycle at times of repair and maintenance, and included clause 11 which stated: ‘Nothing in this agreement shall render the owners liable for any personal injuries to the riders of the machines hired nor for any third-party claims, nor loss of any goods, belonging to the hirer, in the machines.’ A replacement cycle given to White had a loose seat that slipped forward when he was riding it, causing

him to fall to the ground and suffer a serious knee injury. Examination of the seat revealed that the nuts underneath were too rusted to be tightened. White sued for breach of contract, alleging that Warwick had supplied a defective cycle, as well as for breach of duty of care, claiming Warwick had been negligent in maintaining the cycle in good repair. Issue: The issue before the Court of Appeal was whether the exclusion clause validly excluded Warwick’s liability for negligence. Decision: The Court of Appeal (Singleton, Denning, and Morris LJJ) unanimously allowed White’s appeal on the ground that there were two causes of action on the facts. First, there was breach of an implied contractual term that the cycle would be reasonably safe for the intended purpose, but there was also a breach of duty of care in tort. Accordingly, the exclusion clause, without express reference to negligence, served only to protect Warwick from liability for breach of the contractual term. Since liability for negligence remained unprotected, White could succeed. Extract: The extracts from the judgments of Singleton LJ and Denning LJ illustrate the position that where there is concurrent liability in both contract and tort, an exclusion clause that does not specifically refer to negligence will fail to protect from liability in negligence, although it may be effective against contractual breach.

[page 261]

Singleton LJ [White submitted] that, though clause 11 relieved [Warwick] in respect of a claim for breach of contract arising from the agreement, it did not absolve them if there is a cause of action established on the ground of negligence. Counsel [for Warwick] submitted that, if there was negligence, it was negligence in connection with the performance of the contract; that the

machine which was supplied was supplied in performance of the obligation arising under the contract, and that that which was done was under the agreement; that, consequently, the cause of action, if there was one, arose out of the agreement, and that, whether there was negligence or not, clause 11 prevented [White] from succeeding in an action of this nature. That gives rise to a question of some nicety. … I am inclined to think for the present purpose most help is given by reference to the speech of Lord Macmillan in Donoghue v Stevenson. The passage is as follows: On the one hand, there is the well established principle that no one other than a party to a contract can complain of a breach of that contract. On the other hand, there is the equally well established doctrine that negligence apart from contract gives a right of action to the party injured by that negligence — and here I use the term negligence, of course, in its technical legal sense, implying a duty owed and neglected. The fact that there is a contractual relationship between the parties which may give rise to an action for breach of contract, does not exclude the co-existence of a right of action founded on negligence as between the same parties, independently of the contract, though arising out of the relationship in fact brought about by the contract. Of this the best illustration is the right of the injured railway passenger to sue the railway company either for breach of the contract of safe carriage or for negligence in carrying him. And there is no reason why the same set of facts should not give one person a right of action in contract and another person a right of action in tort.14 … It is clear from those words … that there may be, arising from the same set of facts, an action for damages for breach of contract and an action for a tort. It is said that that position arises in this case, and that though an action for damages for breach of contract may be said to be barred by clause 11 of the contract, it cannot be said that the words of that clause operate to shut out [White] from what he would normally have, namely, an action for damages for the tort of negligence. … [Counsel for White] also referred the court to Alderslade v Hendon

Laundry Ltd and in particular, to the words of Lord Greene MR, where he summarized the effect of the authorities in this way: The effect of those authorities can I think be stated as follows: where the head of damage in respect of which limitation of liability is sought to be imposed by such a clause is one which rests on negligence and nothing else, the clause must be construed as extending [page 262] to that head of damage, because if it were not so construed it would lack subject-matter. Where, on the other hand, the head of damage may be based on some other ground than that of negligence, the general principle is that the clause must be confined to loss occurring through that other cause, to the exclusion of loss arising through negligence.15 In the circumstances of the present case the primary object of the clause, one would think, is to relieve [Warwick] from liability for breach of contract or for breach of warranty. Unless, then, there be clear words which would also exempt from liability for negligence, the clause ought not to be construed as giving absolution to [Warwick] if negligence is proved against them. The result is that clause 11 ought not, I think, to be read as absolving [Warwick] from liability for negligence; that is, if it is proved that the injury which [White] sustained was due to lack of that care which one in [Warwick’s] position ought to take when supplying a tricycle for the use of [White]. If that is proved, then [Warwick] do not escape liability by reason of clause 11.

Denning LJ In this type of case, two principles are well settled. The first is that, if a person desires to exempt himself from a liability which the common law imposes on him, he can only do so by a contract freely and deliberately entered into by the injured party in words that are clear beyond the possibility of misunderstanding. The second is: if there are two possible

heads of liability on the part of [the] defendant, one for negligence, and the other a strict liability, an exemption clause will be construed, so far as possible, as exempting the defendant only from his strict liability and not as relieving him from his liability for negligence. In the present case, there are two possible heads of liability on [Warwick], one for negligence, the other for breach of contract. The liability for breach of contract is more strict than the liability for negligence. [Warwick] may be liable in contract for supplying a defective machine, even though they were not negligent. In these circumstances, the exemption clause must, I think, be construed as exempting [Warwick] only from their liability in contract, and not from their liability for negligence. [Counsel for Warwick] admitted that, if the negligence was a completely independent tort, the exemption clause would not avail; but he said that the negligence here alleged was a breach of contract, not an independent tort. The facts which gave rise to the tort were, he said, the same as those which gave rise to the breach of contract, and [White] should not be allowed to recover merely by framing his action in tort instead of contract. That was the view which appealed to [the trial judge], but I cannot agree with it. In my opinion, the claim for negligence in this case is founded in tort and not on contract. That can be seen by considering what would be the position if, instead of [White] himself, it was his servant who had been riding the cycle and had been injured. If the servant could show that [Warwick] had negligently sent out a defective machine for immediate use, he would have had a cause of action in negligence on the principle stated in Donoghue v Stevenson, and, as against the servant, the exemption clause would be no defence. That shows that [Warwick] [page 263] owed a duty of care to the servant. A fortiori they owed a like duty to [White] himself. In either case, a breach of that duty is a tort, which can be established without relying on any contract at all. It is true that [White] … could also rely on a contract, if he had wished, but he is not bound to do so,

and if he can avoid the exemption clause by framing his claim in tort he is, in my judgment, entitled to do so. … [Counsel for Warwick] … relied on the judgment of Scrutton LJ in Hall v Brooklands Auto-Racing Club, where he said: When the defendant has protection under a contract, it is not permissible to disregard the contract and allege a wider liability in tort.16 This passage only refers to cases where there is a contract by the plaintiff which plainly gives an exemption to the defendant from liability for the tort. For instance, if a transport company expressly stipulates with the plaintiff for exemption from liability for damage, howsoever caused, the plaintiff cannot overcome that exemption by suing in negligence instead of contract. But the contract in such a case must be by and with the plaintiff. In a case such as Donoghue v Stevenson a manufacturer cannot exempt himself from liability to the consumer simply by putting an exemption clause in his contract with the wholesaler, even though the clause is brought to the consumer’s notice and says that the consumer is to have no claim for negligence. It is not a clause for the benefit of a third party, but to his prejudice and is not binding on him. [This does not] affect the present case, which turns on the construction of the exemption clause. In my judgment, it exempts [Warwick] from liability in contract, but not from liability in tort. If [White] can make out his cause of action in negligence, he is, in my opinion, entitled to do so, although the same facts also give a cause of action in contract from which [Warwick] are exempt.

[page 264]

Comment 13.4.1 See Radan, Gooley, and Vickovich at 13.22–13.23.

THE FOUR CORNERS RULE 13.5C

Council of the City of Sydney v West (1965) 114 CLR 481

Court: High Court of Australia Facts: West parked his car in the Domain Parking Station in Sydney, which was owned and operated by the Sydney City Council. The parking ticket contained certain conditions, one of which stated: ‘The Council does not accept any responsibility for the loss or damage to any vehicle or for loss of or damage to any article or thing in or upon any vehicle or for any injury to any person however such loss, damage or injury may arise or be caused.’ It also included an ‘important’ instruction for patrons to present the ticket for time stamping and payment before they picked up their vehicles. A man entered the parking station and claimed to have lost his ticket and, after giving a false name and address, convinced a parking station employee to issue him with a duplicate ticket. West’s car subsequently disappeared, only to be found later in a damaged state. West brought an action in detinue against the Council, and also sued the Council for damages, alleging a breach of the contract of bailment. Issue: The issue before the High Court was whether the construction of the exclusion clause meant that the Council was protected from liability to West. Decision: A majority of the High Court (Barwick CJ, Taylor and Windeyer JJ; Kitto and Menzies JJ dissenting) held that, even if the exclusion clause could be construed to be a term of the contract, it was unenforceable. Extract: The extracts from the judgment of Barwick CJ and Taylor J highlight their position that the clause could not extend to cover negligent acts that were unauthorised or not permitted under the contract. Windeyer J’s judgment emphasised that the clause could not protect the Council, since it had breached its contract with West.

Barwick CJ and Taylor J After some discussion of a number of cases in which the effect of a breach of ‘a fundamental term’ of a contract containing an exemption clause of the type in question here was considered, the Full Court held that the evidence showed that there had been such a breach of the contract of bailment and, that being so, [the Council] was not entitled to rely upon the exemption clause. They expressed this view after quoting the following passage from the judgment of Denning LJ … in J Spurling Ltd v Bradshaw: [page 265] The essence of the contract by a warehouseman is that he will store the goods in the contractual place and deliver them on demand to the bailor or his order. If he stores them in a different place, or if he consumes or destroys them instead of storing them, or if he sells them, or delivers them without excuse to somebody else, he is guilty of a breach which goes to the root of the contract and he cannot rely on the exempting clause. But if he should happen to damage them by some momentary piece of inadvertence, then he is able to rely on the exempting clause: because negligence by itself, without more, is not a breach which goes to the root of the contract … any more than non-payment by itself is such a breach.17 They noted that his Lordship cited the case of a warehouseman who delivers the bailor’s goods without excuse to somebody else and they agreed with this ‘as a simple illustration of the general rule’ and added that: … it follows almost as of course that what is said to have happened in this case similarly amounted to a fundamental breach with the result that the defendant cannot rely on the exclusion clause.18 … We find difficulties in the way of solving the problem in the manner in which it was solved by the Full Court. First of all we have some difficulty, as Devlin J (as he then was) had in Smeaton Hanscomb & Co Ltd v Sassoon I. Setty, Son & Co,19 in understanding precisely what is meant by the expression ‘fundamental term’ and we find further difficulty in the

illustration given by Denning LJ when he denied the application of an exemption clause to a case where a warehouseman misdelivers goods left in his custody without excuse. There is no doubt, of course, that in the case where a contract of bailment contains an exempting clause much as we have to consider the protection afforded by the clause will be lost if the goods the subject of the bailment are stored in a place or in a manner other than that authorized by the contract or if the bailee consumes or destroys them instead of storing them or if he sells them. But we would deny the application of such a clause in those circumstances simply upon the interpretation of the clause itself. Such a clause contemplates that loss or damage may occur by reason of negligence on the part of the warehouseman or his servants in carrying out the obligations created by the contract. But in our view it has no application to negligence in relation to acts done with respect to a bailor’s goods which are neither authorized nor permitted by the contract. For instance, if, in the present case, one of the attendants at the parking station had been allowed by the management to use [West’s] car for his own purposes and, in the course of driving it, had caused damage to it by his negligent driving, the clause would afford no protection. Negligence in these circumstances would be right outside the purview of the clause. The same result would follow if an attendant had proceeded, without authority, to make adjustments or repairs to [West’s] vehicle while it was in the parking station and had carried out such work negligently and thereby caused damage. To our minds the clause clearly appears as one which contemplates that, in the performance of the Council’s [page 266] obligations under the contract of bailment, some loss or damage may be caused by reason of its servants’ negligence but it does not contemplate or provide an excuse for negligence on the part of the Council’s servants in doing something which it is neither authorized nor permitted to do by the terms of the contract. … It is, therefore, necessary to consider the question whether the loss, in the circumstances deposed to, was a loss resulting merely from the failure on

the part of [the Council] to use reasonable care to keep the car safely whilst it was in its possession as a bailee or whether by some positive act [the Council] can be said to have delivered possession of the car to [the thief]. If it did then, in our view, this constituted an unauthorized act performed by [the Council] in relation to [West’s] car and he is entitled to recover. … Possession of any car leaving the station, it seems to us, was, therefore, retained by [the Council] until presentation and surrender of such a ticket by the driver of the car. To our minds, therefore, the act of the attendant in permitting [the thief] to proceed after handing over the duplicate ticket which he had obtained constituted an unauthorized delivery of possession by him to [the thief] and not a mere act of negligence in relation to some act authorized by the contract of bailment. … The fact that the attendant at the exit through which the car was driven was negligent is of no consequence in the case; the act of delivery was one which was neither authorized nor permitted by the contract and in our view the appellant was not entitled to be exonerated by the exempting clause. This conclusion is, we think, in accordance with the unanimous view of the members of this Court in Tozer Kemsley & Millbourn (A/asia) Pty Ltd v Collier’s Interstate Transport Service Ltd.20 In that case the facts showed that a bailee had delivered goods of the bailor to a third party who had no authority to receive them and it was held that the bailor was not entitled to be exonerated by a clause which provided that the bailor would not, in respect of the goods bailed, be responsible for any loss or damage arising from a great many specified causes or for ‘any other loss or damage (whether caused by or arising from any negligence of the proprietors or of their servants or agents or otherwise) which can be covered by insurance by the owner or depositor of the goods’. All members of the Court were of the opinion that in the absence of express words or necessary intendment it would be going too far to construe the clause as excusing loss by misdelivery or delivery to an unauthorized person.

Windeyer J I go … to the words on the card and I read them with two things particularly in mind. One is that the common-law obligation of a bailee is to keep secure the thing bailed; and, the proper charges having been paid, to

deliver it to the bailor on demand. The other is that these obligations are not absolute: all that is required of the bailee is that he exercise due care to perform them. In short, apart from whatever is written on the card, [the Council] would be liable for damage to or loss of the car if, but only if, that damage or loss was caused by the fault (deliberate or negligent) of its servants. Now what does the card say? It must be read as a whole so far as it records the terms of the bailment. It seems to me that it says two things. The first [page 267] puts a higher duty on [the Council] in respect of delivery or misdelivery than the law would otherwise impose. The second gives an immunity from liability that in other respects might arise from negligence or misconduct by [the Council’s] servants in relation to the custody of the car. The contract between the parties thus makes the obligation of [the Council] more strict in respect of one matter, while relieving it of liability in respect of others. As to the first, the card states ‘This card must be presented to Attendant to obtain release of vehicle’. Later it states under a heading ‘Important — This ticket must be presented for time stamping and payment before taking delivery of the vehicle’. These statements seem to me to mean that a term on which the vehicle was accepted was that it would not be released by [the Council] from its custody except on the presentation of the card. … [The Council], however, relies upon the words … ‘The Council does not accept any responsibility for the loss or damage to any vehicle or for loss of or damage to any article or thing in or upon any vehicle or for any injury to any person however such loss, damage or injury may arise or be caused’. … The clause is in very wide terms … [and] would, I think, cover any loss by explosion or fire occurring on the premises and probably too any loss by theft which did not involve an actual release or delivery of the vehicle to a person not presenting the card. It would also, I do not doubt, cover damage to the vehicle while on the premises caused by the negligence of [the Council’s] servants, or by the negligence or deliberate intent of some other person for example another user of the service station. But I doubt whether it should be read as extending to harm done deliberately by a

servant or agent of [the Council] for which [it] would ordinarily be vicariously liable. … In this case the contract was broken because [the Council] did not do the thing it had contracted to do in the way in which it had contracted to do it.

Comment 13.5.1 See Radan, Gooley, and Vickovich at 13.37–13.40.

1.

[1980] AC 827.

2. 3.

[1967] 1 AC 361. Photo Production Ltd v Securicor Ltd [1980] AC 827 at 851.

4. 5.

[1983] 1 All ER 101. Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd [1983] 1 All ER 101 at 105.

6. 7.

[1983] 2 AC 803 at 813–14. Photo Production Ltd v Securicor Ltd [1980] AC 827 at 851.

8. 9.

Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd [1983] 1 All ER 101 at 102. (1965) 114 CLR 481.

10. 11.

The Council for the City of Sydney v West (1965) 114 CLR 481 at 488. [1922] 2 KB 87.

12. 13.

[1926] 1 KB 50. [1926] 1 KB 102.

14. 15.

Donoghue v Stevenson [1932] AC 562 at 609–10. Alderslade v Hendon Laundry Ltd [1945] KB 189 at 192.

16. 17.

Hall v Brooklands Auto-Racing Club [1933] 1 KB 205 at 213. J Spurling Ltd v Bradshaw (1956) 1 WLR 461 at 465.

18. 19.

[West v Sydney City Council] (1964) 82 WN (Pt 1) (NSW) 139 at 487. (1953) 1 WLR 1468.

20.

(1956) 94 CLR 384.

[page 269]

Part IV: Vitiating Factors

[page 271]

14 MISREPRESENTATION

INTRODUCTION 14.1 This chapter deals with misrepresentations made during the course of negotiations leading to a contract. For a pre-contractual statement to constitute a misrepresentation at common law, it must be a false statement of fact that induces the representee to enter into the contract. The effect of a misrepresentation may give rise to a right of rescission on the part of the representee. However, notwithstanding that a party may potentially have a right to rescind a contract because of a misrepresentation, it is nevertheless recognised that the right may have been lost or is not available in the particular circumstances. It should be noted that false representations may also lead to statutory remedies because, for example, they are misleading or deceptive representations as is understood under the Australian Consumer Law, or because to otherwise allow the representor to rely upon the false representations is unconscionable or unfair. Such situations may give rise to statutory causes of action and to statutory remedies. These matters are analysed in Chapter 15. As noted above, in the context of misrepresentations at common law, one central issue is whether a representor’s statement is one of fact. In Balfour & Clark v Hollandia Ravensthorpe NL (1978) 18 SASR 240 (see 14.2C) a central issue was whether certain statements made by a real estate agent about a proposed loan from a building society was a representation of fact and, if so, whether it was false. Likewise, in Edgington v Fitzmaurice (1885) 29 Ch D 459

(see 14.3C) a question arose as to whether there had been a false statement of fact and whether that induced a person to invest in particular debenture bonds. In Smith v Land and House Property Corporation (1885) 28 Ch D 7 (see 14.4C) it was also held that a particular opinion that had been expressed by an auctioneer was a statement of fact that was sufficient to amount to a misrepresentation. Another element required to be satisfied in order for there to be actionable misrepresentation at common law is whether the representation made actually induced the person to enter into the contract. If circumstances exist that the person to whom the representation was made knew of facts proving the representation to be untrue or expressly or impliedly demonstrated that they did not rely upon the false representation, then it could be argued that there was no inducement by the representation in entering the contract. This was discussed in Redgrave v Hurd (1881) 20 Ch D 1 (see 14.5C). In relation to misrepresentation, materiality of the statement of fact also needs to be determined. This was illustrated in Nicholas v Thompson [1924] VLR 554 (see 14.6C). [page 272]

STATEMENT OF FACT 14.2C Balfour & Clark v Hollandia Ravensthorpe NL (1978) 18 SASR

240 Court: Full Court of the Supreme Court of South Australia Facts: Hollandia Ravensthorpe NL was one of a group of three related companies operating in the property market. It constructed residential dwellings and the other two companies sold and financed them. Balfour and Clark were a young couple interested in buying their first home. They were told by a real estate agent working for one of the companies that they could buy a house with the payment of a minimal deposit and a two-year loan that could be arranged through the group. The agent also told them that at the end of the

two-year period they could refinance by borrowing from the Hindmarsh Building Society a sum equal to 90 per cent of the value of the property, provided they opened an account with them and saved 10 per cent of the purchase price of the property during the initial two-year period. They contracted to purchase a house in January 1977 and settled a month later with a mortgage to one of the companies for $36,155 repayable after two years. Four months later Balfour and Clark’s solicitor sent a letter alleging that the contract had been entered into upon the making of fraudulent misrepresentations by the agent. They claimed that when the agent advised them about the refinance arrangement, he knew they would not have been able to afford the Hindmarsh Building Society loan on their combined income. They sought to have the purchase set aside on that basis. Issue: The issue before the Full Court was whether the statement made by the agent about the future loan from the building society was an assurance as to the future or a statement about a present fact, and therefore a representation capable of being proved false. Decision: The Full Court (Bray CJ, Hogarth and Zelling JJ) unanimously held in favour of Balfour and Clark on the ground that the agent’s statement about the future loan was a statement of fact because it misrepresented the building society’s present lending policy. Extract: The extracts below from the judgment of Bray CJ highlight that, in certain circumstances, a statement about the future may constitute a statement about presently existing facts.

Bray CJ There was evidence before the learned Judge which clearly justified the finding that [the agent] represented to [Balfour and Clark] that in two years’ time they would be able to borrow from the Hindmarsh Building Society a sum equal to 90 per cent of the value of the property, if it was only secured by a first mortgage, on two conditions, and two conditions alone: first that they promptly opened an account with the Society and, second,

that they had saved 10 per cent of the purchase price of the property within the two years. [page 273] The truth as found by her Honour was that the Hindmarsh Building Society would lend, not up to 90 per cent, but up to 95 per cent of the value of the property, but not only on the conditions referred to in the representation. The requirements were that the prospective borrower should have saved with the society for two years and have had 10 per cent of the amount he wished to borrow in his account with the society for three months, but the maximum loan would be either 95 per cent of the value, or 2.3 times the gross annual income, or 119.6 times the gross weekly income of the borrower, whichever was the less. The representation found contains no reference to the inability of [Balfour and Clark] in any event to borrow from the Hindmarsh Building Society anything more than those multiples of their gross annual or weekly incomes as the case may be. In fact neither of those multiples could have been reached on their existing incomes at the date of the contract and it was unlikely that they could have been reached during the subsequent two years. Thus an important, nay, from the point of view of [Balfour and Clark], a vital, element of the lending terms of the Hindmarsh Building Society was never disclosed to them. In my view in the circumstances of this case the representation was clearly false by reason of what was omitted from it. Fraud may consist in suppressio veri as well as in suggestio falsi.1 However, that in itself is not an answer to the principal ground of appeal, that the representation was not a representation of present fact but only a promise as to or a forecast of the future intention of someone else. I think that contention is completely untenable. It is true that the representation found by the learned Judge is expressed in the future conditional tense: but grammar is not decisive of this question. There are many cases where a statement expressed in the future tense is really a representation of an existing fact. If I say that a department store is selling certain goods at 15 per cent discount, that is a statement in the present tense and a representation of an existing fact; if I say, ‘If you go to that department

store, they will sell you the goods in question at a discount of 15 per cent’, that is a statement in the future tense, but it is none the less a representation of an existing fact. It means exactly the same as the first statement. There is no doubt that a mere promise that something will be done in the future is not a representation of an existing fact unless out of it can be spelt a representation as to the present existence of an intention, belief or state of knowledge on the part of the promisor. But nevertheless there are many cases in the books where a statement in the future tense has been held to amount to a representation of an objective existing fact.2 In Aaron’s Reefs Ltd v Twiss Lord Halsbury LC expressed himself on the point with typical forthrightness. He said: … I do not think any particular form of words is necessary to convey a false impression. Supposing a person goes to a bank where the people are foolish enough to believe his words and says ‘I want a mortgage upon my house and my house is not completed, but [page 274] in the course of next week I expect to have it fully completed’. Suppose there was not a house upon his land at all and no possibility, therefore, that it could be fully completed next week, can anyone say that that was not an affirmative representation that there was a house which was so near to completion that it only required another week’s work upon it to complete it? … So, here, when I look at the language in which this prospectus is couched and see that it speaks of a property which requires only the erection of machinery to be either at once or shortly in a condition to do work so as to obtain all this valuable metal from the mine, it seems to me that, although it is put in ambidextrous language, it means as plainly as can be that this is now the condition of the mine that such and such additions to it will enable it shortly to produce all those great results and that that is a representation of an actually existing fact. I should quite agree with the proposition that the Lord Chancellor of Ireland and the Master of the Rolls put forward — if you are looking

to the language as only the language of hope, expectation and confident belief that is one thing; but it does not seem to have been in the minds of the learned judges that you may use language in such a way as, although in the form of hope and expectation, it may become a representation as to existing facts; and if so, and if it is brought to your knowledge that those facts are false, it is a fraud.3 So in the present case I think there is no difficulty in construing the representation found by the learned Judge as a representation that the existing policy of the Hindmarsh Building Society was to lend the amount stated subject to two conditions and to those conditions alone. The representation so construed was a representation of an existing fact and it was false.

[page 275]

Comment 14.2.1 See Radan, Gooley, and Vickovich at 14.9–14.11. 14.3C

Edgington v Fitzmaurice (1885) 29 Ch D 459

Court: Court of Appeal in England Facts: In 1880 Fitzmaurice and other directors of the Army and Navy Provision Market issued a prospectus calling for debenture subscriptions. The document referred to the company’s recent acquisition of property and then stated that the company was raising capital in order to develop and renovate the new premises and to buy horses and vans to ensure the direct supply of cheap fish from the coast. Other information in the prospectus implied that the debenture holders would be given a charge over the property and that certain mortgages were not immediately payable by the company. Edgington invested £1500 to purchase debenture bonds

in the company. The bonds in fact created no charge over company assets and, instead, the board of directors used the money raised to pay off pressing debts. The company was eventually wound up, with Edgington receiving a dividend of only £45 as an unsecured creditor. He sued the directors in deceit, claiming he would not have subscribed for the debentures without the board’s fraudulent misrepresentation that his investment was secured by a charge. At trial, Edgington obtained judgment for £1500 less the amount received on the winding up. The directors appealed to the Court of Appeal. Issue: The issue before the Court of Appeal was whether the trial judge had erred in holding there was a misrepresentation. Fitzmaurice argued there was no false statement of facts known by the board to be false when the statement was made. Decision: The Court of Appeal (Cotton, Bowen, and Fry LJJ) unanimously dismissed the appeal, deciding the statement made by the board about its intentions was false and was made recklessly as to its truth, if not knowingly as to its falsity. Extract: The extract from the judgment of Bowen LJ explains why there was a misrepresentation in this case and contains his often quoted words: ‘[T]he state of a man’s mind is as much a fact as the state of his digestion. … A misrepresentation as to the state of a man’s mind is therefore a misstatement of fact.’

Bowen LJ This is an action for deceit, in which [Edgington] complains that he was induced to take certain debentures by the misrepresentation of [the directors], and that he sustained damage thereby. The loss which [Edgington] sustained is not disputed. In order to sustain his action he must first prove that there was a statement as to facts which was false; and, secondly, that it was false to the knowledge of [the directors], or that they made it not caring whether it was true or false. For it is immaterial whether they made the statement knowing

[page 276] it to be untrue, or recklessly without caring whether it was true or not, because to make a statement recklessly for the purpose of influencing another person is dishonest. It is also clear that it is wholly immaterial with what object the lie is told. That is laid down in Lord Blackburn’s judgment in Smith v Chadwick4 but it is material that the defendant should intend that it should be relied on by the person to whom he makes it. But, lastly, when you have proved that the statement was false, you must further show that the plaintiff has acted upon it, and has sustained damage by so doing; you must show that the statement was either the sole cause of the plaintiff’s act or materially contributed to his so acting. So the law is laid down in Clarke v Dickson5 and that is the law which we have now to apply. The alleged misrepresentations were three: First, it was said that the prospectus contained an implied allegation that the mortgage for £21,500 could not be called in at once, but was payable by instalments. I think that upon a fair construction of the prospectus it does so allege, and therefore that the prospectus must be taken to have contained an untrue statement on that point, but it does not appear to me clear that the statement was fraudulently made by [the directors]. It is therefore immaterial whether [Edgington] was induced to act as he did by that statement. Secondly, it is said that the prospectus contains an implied allegation that there was no other mortgage affecting the property except the mortgage stated therein. I think there was such an implied allegation, but I think it is not brought home to [the directors] that it was made dishonestly; accordingly, although [Edgington] may have been damnified by the weight which he gave to the allegation, he cannot rely on it in this action, for in an action of deceit the plaintiff must prove dishonesty. Therefore, if the case had rested on these two allegations alone, I think it would be too uncertain to entitle [Edgington] to succeed. But when we come to the third alleged misstatement, I feel that [Edgington’s] case is made out. I mean the statement of the object for which the money was to be raised. These were stated to be to complete the alterations and additions to the buildings, to purchase horses and vans, and

to develop the supply of fish. A mere suggestion of possible purposes to which a portion of the money might be applied would not have formed a basis for an action of deceit. 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. Having applied as careful consideration to the evidence as I could, I have reluctantly come to the conclusion that the true objects of [the directors] in raising the money were not those stated in the circular. I will not go through the evidence, but, looking only to the cross-examination of [the directors], I am satisfied that the objects for which the loan was wanted were misstated by [them]. I will not say knowingly, but so recklessly as to be fraudulent in the eye of the law. [page 277] Then the question remains — Did this misstatement contribute to induce [Edgington] to advance his money? [Counsel for the directors’] argument has not convinced me that it did not. He contended that [Edgington] admits that he would not have taken the debentures unless he had thought they would give him a charge on the property, and therefore he was induced to take them by his own mistake, and the misstatement in the circular was not material. But such misstatement was material if it was actively present to his mind when he decided to advance his money. The real question is what was the state of [Edgington’s] mind, and if his mind was disturbed by the misstatement of [the directors], and such disturbance was in part the cause of what he did, the mere fact of his also making a mistake himself would make no difference. It resolves itself into a mere question of fact. … But the balance of my judgment is weighed down by the probability of the case. What is the first question which a man asks when he advances money? It is, what is it wanted for? Therefore I think that the statement is material, and that [Edgington] would be unlike the rest of his race if he was not influenced by the statement of the objects for which the loan was required. The learned judge in the court below came to

the conclusion that the misstatement did influence him, and I think he came to a right conclusion.

Comment 14.3.1 See Radan, Gooley, and Vickovich at 14.13–14.14 and 14.46. 14.4C Smith v Land and House Property Corporation (1885) 28 Ch D

7 Court: Court of Appeal in England Facts: In 1882 Smith and others, in their capacity as mortgagees exercising a power of sale, listed a hotel for sale and engaged an auctioneer to act on their behalf. The hotel was promoted as having a ‘most desirable tenant’ paying an annual rental of £400 in a lease with a term of over 27 years remaining. The Land and House Property Corporation sent its secretary to investigate the site and report to its committee. The report outlined the generally depressed state of the surrounding locality and expressed the view that purchase of the hotel could be profitable only with some redevelopment. The committee instructed the secretary to attend the auction and bid no more than £5000. At auction, the property was passed in and the secretary then secured a contract for the Corporation for a purchase price of £4700. Before the conveyance was completed, the tenant was bankrupted and the Corporation discovered he had in fact been making rental payments irregularly and was in arrears at the time of the sale. The Corporation refused to complete the purchase on the basis that a misrepresentation had been made by the vendors, claiming they would not have entered into the contract had they known the truth about the tenant. Smith commenced an action for specific performance. The Corporation counter-claimed for return of deposit, expenses, and cancellation of the contract or compensation for misdescription.

[page 278] Issues: The issues before the Court of Appeal were whether the opinion expressed by the auctioneer on Smith’s behalf was a statement of fact sufficient to amount to a misrepresentation and whether the Corporation relied on that statement to enter into the contract. Decision: The Court of Appeal (Baggallay, Bowen, and Fry LJJ) unanimously held in favour of the Corporation. It was found that a material misrepresentation had been made and that the Corporation relied on it. Extract: The extracts from Bowen LJ’s judgment show that where the facts are available to one party only, an opinion may amount to a statement of fact because the party making the statement is effectively asserting that the facts would reasonably support such an opinion.

Bowen LJ The action is by [Smith] for specific performance, and [the Corporation] allege[s] that there is in the particulars a misrepresentation which disentitles [Smith] to specific performance. To sustain this defence [the Corporation] must prove that there was a material misrepresentation, and that they entered into the contract on the faith of the representation. Was there then a misrepresentation of a specific fact? This partly depends on the question, whether on the construction of the particulars, what [was said about the tenant] is a representation of a specific fact, a question which the Court of Appeal has the same means of deciding as the Judge in the Court below. Whether [the Corporation] relied upon it is a question of fact which the Judge of the Court below had better means of deciding than we have, for he saw and heard the witnesses. In considering whether there was a misrepresentation, I will first deal with the argument that the particulars only contain a statement of opinion about the tenant. It is material to observe that it is often fallaciously assumed that

a statement of opinion cannot involve the statement of a fact. In a case where the facts are equally well known to both parties, what one of them says to the other is frequently nothing but an expression of opinion. The statement of such opinion is in a sense a statement of a fact, about the condition of the man’s own mind, but only of an irrelevant fact, for it is of no consequence what the opinion is. But if the facts are not equally known to both sides, then a statement of opinion by the one who knows the facts best involves very often a statement of a material fact, for he impliedly states that he knows facts which justify his opinion. Now a landlord knows the relations between himself and his tenant, other persons either do not know them at all or do not know them equally well, and if the landlord says that he considers that the relations between himself and his tenant are satisfactory, he really avers that the facts peculiarly within his knowledge are such as to render that opinion reasonable. Now are the statements here statements which involve such a representation of material facts? They are statements on a subject as to which prima facie the vendors know everything and the purchasers nothing. [Smith states] that the property is let to a most desirable tenant, what does that mean? I agree that it is not a guarantee that the tenant will go on paying his rent, but it is to my mind a guarantee of a different sort, and [page 279] amounts at least to an assertion that nothing has occurred in the relations between [Smith] and the tenant which can be considered to make the tenant an unsatisfactory one. That is an assertion of a specific fact. Was it a true assertion? Having regard to what took place between Lady Day and Midsummer, I think that it was not. On the 25th of March, a quarter’s rent became due. On the 1st of May, it was wholly unpaid and a distress was threatened. The tenant wrote to ask for time. [Smith] replied that the rent could not be allowed to remain over Whitsuntide. The tenant paid on the 6th of May £30, on the 13th of June £40, and the remaining £30 shortly before the auction. Now could it at the time of the auction be said that nothing had occurred to make [the tenant] an undesirable tenant? In my opinion a tenant who had paid his last quarter’s rent by driblets under pressure must be regarded as an undesirable tenant.

Treating this then as a misrepresentation, did it induce [the Corporation] to buy? It appears to me that it is in every case a question of fact whether a person is induced to buy by a particular representation. We may obtain valuable hints from reported cases, but none of the cases appear to me to impugn the proposition that the question is one of fact to be decided on the circumstances of each particular case. A representation in the particulars must be taken as made for the purpose of influencing the purchaser’s mind. Then did [the Corporation] rely upon it? I cannot quite agree with the remark of the late Master of the Rolls in Redgrave v Hurd6, that if a material representation calculated to induce a person to enter into a contract is made to him it is an inference of law that he was induced by the representations to enter into it, and I think that probably his Lordship hardly intended to go so far as that, though there may be strong reason for drawing such an inference as an inference of fact. But here we are not left to inference. The chairman of [the Corporation] was called and swore in the most distinct and positive way that it did influence him, and that but for the representation he would not have purchased. The Judge was at liberty to disbelieve him, but I see no reason why he was bound so to do. His evidence was not shaken on cross-examination, and the Judge believed him. He uses the very argument that the property had been examined on behalf of [the Corporation] as strengthening the statement that [it] relied on the representation, for he says the report of the secretary was so unfavourable that but for the representation as to the tenant they would not have bought. Redgrave v Hurd shows that a person who has made a misrepresentation cannot escape by saying, ‘You had means of information, and if you had been careful you would not have been misled’. It was urged that [the chairman of the Corporation] would not have relied on the representation had he not put on it a construction that it will not bear, viz, that it was a guarantee that the tenant would go on paying the rent. I do not think that he understood it so. I think he merely understood it as a representation that, so far as [Smith] knew, the tenant was likely to go on paying the rent for the rest of the term. If we had merely to deal with the evidence of [the chairman of the Corporation] on paper, I should not feel quite satisfied that we ought to treat it as satisfactory, but as the Judge who heard and saw him was satisfied, I think that we ought not to differ from his conclusion.

[page 280]

Comment 14.4.1 See Radan, Gooley, and Vickovich at 14.18.

INDUCEMENT 14.5C

Redgrave v Hurd (1881) 20 Ch D 1

Court: Court of Appeal in England Facts: Redgrave, an elderly Birmingham solicitor, placed an advertisement in a legal journal for a partner who ‘would not object to purchase advertiser’s suburban residence, suitable for a family, value £1,600’. Hurd responded and during initial negotiations Redgrave told him the practice had been making between £300 and £400 per annum over the previous three years. When Hurd asked to see evidence of the takings, he was shown summaries that accounted for only about £200 per annum. Redgrave told him the balance was made up of other business that had not been summarised and he produced some letter-books, diaries, and a daybook as evidence. Hurd perused these documents, but did not inspect them carefully. When the parties agreed to proceed, Redgrave refused to include any reference to the practice in the contract, which provided only for sale of the residence for £1600. Hurd paid a £100 deposit and moved into the house with his family. He soon discovered the balance of unaccounted business referred to by Redgrave had a value of no more than £6 per annum and that the legal practice was ‘utterly worthless’. He gave up possession of the residence and refused to complete the purchase. Redgrave sought an order for specific performance. Hurd’s defence was based on fraudulent misrepresentation and he counter-claimed for rescission of the contract, return of deposit, and damages. At trial Redgrave was

found to have misrepresented the takings of the business. However, Hurd was ruled not to have relied on those misrepresentations because he had been careless in giving up the opportunity to inspect the true position of the practice. Hurd appealed. Issue: The issue before the Court of Appeal was whether a representee who fails to take up a reasonable opportunity to verify the accuracy of a representation can be said to have relied on the misrepresentation. Decision: The Court of Appeal (Jessel MR, Lush and Baggallay LJJ) unanimously allowed Hurd’s appeal. The contract was rescinded and the deposit returned. But because Hurd failed to prove Redgrave had acted fraudulently, the panel refused to award damages. Extract: The extracts from the judgment of Jessel MR reveal the Court of Appeal’s reasoning. Reliance on a misrepresentation will be negated only if it can be shown the representee had knowledge of facts proving it to be untrue or had stated expressly, or shown impliedly by conduct, that there was no reliance.

[page 281]

Jessel MR As regards the rescission of a contract, there was no doubt a difference between the rules of Courts of Equity and the rules of Courts of Common Law — a difference which of course has now disappeared by the operation of the Judicature Act, which makes the rules of equity prevail. According to the decisions of Courts of Equity it was not necessary, in order to set aside a contract obtained by material false representation, to prove that the party who obtained it knew at the time when the representation was made that it was false. It was put in two ways, either of which was sufficient. One way of putting the case was, ‘A man is not to be allowed to get a benefit from a statement which he now admits to be false. He is not to be allowed to say, for the purpose of civil jurisdiction, that when he made it he did not know it to be false; he ought to have found that

out before he made it.’ The other way of putting it was this: ‘Even assuming that moral fraud must be shown in order to set aside a contract, you have it where a man, having obtained a beneficial contract by a statement which he now knows to be false, insists upon keeping that contract. To do so is a moral delinquency: no man ought to seek to take advantage of his own false statements.’ The rule in equity was settled, and it does not matter on which of the two grounds it was rested. As regards the rule of Common Law there is no doubt it was not quite so wide. There were, indeed, cases in which, even at Common Law, a contract could be rescinded for misrepresentation, although it could not be shown that the person making it knew the representation to be false. They are variously stated, but I think, according to the later decisions, the statement must have been made recklessly and without care, whether it was true or false, and not with the belief that it was true. But, as I have said, the doctrine in equity was settled beyond controversy, and it is enough to refer to the judgment of Lord Cairns in the Reese River Silver Mining Company v Smith,7 in which he lays it down in the way which I have stated. There is another proposition of law of very great importance which I think it is necessary for me to state, because, with great deference to the very learned Judge from whom this appeal comes, I think it is not quite accurately stated in his judgment. If a man is induced to enter into a contract by a false representation it is not a sufficient answer to him to say, ‘If you had used due diligence you would have found out that the statement was untrue. You had the means afforded you of discovering its falsity, and did not choose to avail yourself of them.’ I take it to be a settled doctrine of equity, not only as regards specific performance but also as regards rescission, that this is not an answer unless there is such delay as constitutes a defence under the Statute of Limitations. That, of course, is quite a different thing. Under the statute delay deprives a man of his right to rescind on the ground of fraud, and the only question to be considered is from what time the delay is to be reckoned. It had been decided, and the rule was adopted by the statute, that the delay counts from the time when by due diligence the fraud might have been discovered. Nothing can be plainer, I take it, on the authorities in equity than that the effect of false representation is not got rid of on the ground that the person to whom it was made has been guilty of negligence. One of the most familiar instances in modern times is where men issue a prospectus in which they

make false statements of the contracts made before the formation of a company, and then say that the [page 282] contracts themselves may be inspected at the offices of the solicitors. It has always been held that those who accepted those false statements as true were not deprived of their remedy merely because they neglected to go and look at the contracts. Another instance with which we are familiar is where a vendor makes a false statement as to the contents of a lease, as, for instance, that it contains no covenant preventing the carrying on of the trade which the purchaser is known by the vendor to be desirous of carrying on upon the property. Although the lease itself might be produced at the sale, or might have been open to the inspection of the purchaser long previously to the sale, it has been repeatedly held that the vendor cannot be allowed to say, ‘You were not entitled to give credit to my statement.’ It is not sufficient, therefore, to say that the purchaser had the opportunity of investigating the real state of the case, but did not avail himself of that opportunity. It has been apparently supposed by the learned Judge in the Court below that the case of Attwood v Small conflicts with that proposition. He says this: He inquired into it to a certain extent, and if he did that carelessly and inefficiently it is his own fault. As in Attwood v Small, those directors and agents of the company who made ineffectual inquiry into the business which was to be sold to the company were nevertheless held by their investigation to have bound the company, so here, I think, the Defendant who made a cursory investigation into the position of things on the 17th of February must be taken to have accepted the statements which were in those papers.8 I think that those remarks are inaccurate in law, and are not borne out by the case to which the learned Judge referred. … In no way, as it appears to me, does the decision, or any of the grounds of decision, in Attwood v Small, support the proposition that it is a good defence to an action for rescission of a contract on the ground of

fraud that the man who comes to set aside the contract inquired to a certain extent, but did it carelessly and inefficiently, and would, if he had used reasonable diligence, have discovered the fraud. As regards the facts of this case, I agree with the conclusions of [the trial judge] on every point but one, and my failure to agree with him in that one is the cause of my concurring in reversing his decision. What he finds in effect is that [Hurd] was induced to enter into the contract by a material misrepresentation made to him by [Redgrave], but he comes to the conclusion that either he did not finally rely upon that representation, or that if he did rely upon it he made an inquiry which, although ineffectual and made, as he says, carelessly and inefficiently, bound him in a Court of Equity, and prevented him from saying that he relied on the representation. I have already dealt with that as a matter of law, and I will deal with it presently as a matter of fact, because I think there was an omission to notice a most material fact, or rather, I should say, an omission to give sufficient weight to it, for it is noticed in the judgment which is now appealed from. … … [T]he learned [trial judge] came to the conclusion either that [Hurd] did not rely on the statement, or that if he did rely upon it he had shown such negligence as to deprive him of [page 283] his title to relief from this Court. As I have already said, the latter proposition is in my opinion not founded in law, and the former part is not founded in fact; I think also it is not founded in law, for when a person makes a material representation to another to induce him to enter into a contract, and the other enters into that contract, it is not sufficient to say that the party to whom the representation is made does not prove that he entered into the contract, relying upon the representation. If it is a material representation calculated to induce him to enter into the contract, it is an inference of law that he was induced by the representation to enter into it, and in order to take away his title to be relieved from the contract on the ground that the representation was untrue, it must be shown either that he had knowledge of the facts contrary to the representation, or that he stated

in terms, or showed clearly by his conduct, that he did not rely on the representation. If you tell a man, ‘You may enter into partnership with me, my business is bringing in between £300 and £400 a year,’ the man who makes that representation must know that it is a material induce-ment to the other to enter into the partnership, and you cannot investigate as to whether it was more or less probable that the inducement would operate on the mind of the party to whom the representation was made. Where you have neither evidence that he knew facts to show that the statement was untrue, or that he said or did anything to show that he did not actually rely upon the statement, the inference remains that he did so rely, and the statement being a material statement, its being untrue is a sufficient ground for rescinding the contract. For these reasons I am of opinion that the judgment of the learned [trial judge] must be reversed and the appeal allowed.

Comment 14.5.1 See Radan, Gooley, and Vickovich at 14.38 and 14.44.

THE RELEVANCE OF THE MATERIALITY OF THE STATEMENT OF FACT 14.6C

Nicholas v Thompson [1924] VLR 554

Court: Full Court of the Supreme Court of Victoria Facts: Alfred and George Nicholas agreed with Thompson that they were to purchase his interest in an investment scheme involving a new process for film development for £10,000. Thompson told them he had previously been offered a large amount of money for his interest and that he had rejected it at the time. After the contract had been executed, the Nicholases discovered that Thompson made the statement fraudulently and they sued for return of the purchase price. A jury found that Thompson had made a fraudulent

misrepresentation that had induced the buyers to enter into the contract. The trial judge declared the agreement void and ordered the refund of the purchase price. Thompson appealed to the Full Court. [page 284] Issue: The Full Court had to determine whether Thompson’s misrepresentation had involved a material fact so that it was capable of inducing the Nicholases into the contract. Decision: The Full Court (Cussen ACJ, McArthur J, and Weigall AJ) unanimously found in favour of the Nicholases and rejected Thompson’s appeal. It held that the misrepresentation was material in that it operated on the minds of the buyers in such a way as to amount to an inducement sufficient to ground rescission of the contract. Extract: The extracts from the judgment of McArthur J reveal the Full Court’s view that materiality is not a separate element of misrepresentation.

McArthur J [Counsel for Thompson’s] contention was (1) that the statements were not and could not in law be regarded as representations of fact; (2) that the statements were not and could not be regarded in law as material. … In my opinion … the statement found by the jury in the present case to have been made is not only capable in law of being a statement of fact, but is a statement of fact. Whether it is a ‘material’ statement is another matter. In support of his contention ‘that the statements were not and could not be regarded in law as material’, [Counsel for Thompson] argued, first, that it is an essential part of the cause of action that the statement was a material statement; and, secondly, that to constitute a material statement the statement must be of such a nature that it would be likely to induce an

ordinary, reasonable man (as distinguished from the particular plaintiff in the particular case) to enter into the contract. He pushed this argument to this length, that, even if a false statement were made for the purpose of inducing a person to enter into a contract, and such person were in fact thereby induced to do so, he would have no remedy against the person making the statement unless he could prove, not only that the statement induced him, but that it was of such a nature that it would have been likely to have induced an ordinary reasonable man. In my opinion this argument is untenable. In the first place, notwithstanding opinions to the contrary expressed by text-writers,9 I doubt whether it is strictly and technically an essential part of the cause of action, which must be alleged and proved, that the statement was a material statement. If the defendant makes the statement for the purpose of inducing, and the plaintiff is thereby induced, that, I think, is sufficient.10 … [page 285] In Smith v Kay, the headnote, based on the judgment of Lord Chelmsford LC, puts the proposition shortly thus: When a party has practised a deception with a view to a particular end which has been attained by it, he cannot be allowed to deny its materiality.11 Lord Chelmsford LC says: The bill, therefore, being taken to contain a sufficient statement of a case against Smith, the next objection which he makes is that the representation which is alleged, if proved, is immaterial, as it could not have been the cause of the securities being given.12 And he says that the only point which could vitiate the securities would be a fraud dans locum contractui — that is, such a fraud as occasioned the contract. Now, it is contended … that this representation is wholly immaterial, that it

was perfectly indifferent to Kay in what manner Smith became the holder of the bills, provided he gave consideration for them, and that if Kay had been told the whole truth he would equally have been willing to give the securities. But can it be permitted to a party who has practised a deception, with a view to a particular end which has been attained by it, to speculate upon what might have been the result if there had been a full communication of the truth?13 The materiality of the statement is no doubt of great importance as evidence from which the inference may be drawn, first, that it was made for the purpose of inducing, and, secondly, that it did in fact induce … and no doubt in practice it has in almost all cases to be proved; but it does not appear to me to be, strictly speaking, an essential element of the cause of action.

[page 286]

Comment 14.6.1 See Radan, Gooley, and Vickovich at 14.52.

1.

See Halsbury’s Laws of England, 3rd ed, vol 26, par 1563, pp 839–40.

2. 3.

See Halsbury’s Laws of England, 3rd ed, vol 26, par 1520, p 823; Duffel v Wilson (1808) 170 ER 999; Willes v Glovers (1804) 127 ER 362; In re Pacaya Rubber & Produce Co Ltd [1914] 1 Ch 542 at 549–50. Aaron’s Reefs Ltd v Twiss [1896] AC 273 at 283–4.

4. 5.

(1884) 9 AC 187. (1859) 6 CBNS 453.

6. 7.

(1881) 20 Ch D 1 at 21. (1869) LR 4 HL 64.

8. 9.

Attwood v Small (1835–1840) 7 ER 684. See Kerr on Fraud (5th ed), pp 43, 44; Spencer-Bower on Misrepresentation, p 11, art 28; Halsbury’s Laws of England, vol xx, p 724, sec 1722.

10. 11.

Smith v Kay (1859) 7 HLC 750. Smith v Kay (1859) 7 HLC 750 at 760.

12.

Smith v Kay (1859) 7 HLC 750 at 758.

13.

Smith v Kay (1859) 7 HLC 750 at 759.

[page 287]

15 MISLEADING OR DECEPTIVE CONDUCT

INTRODUCTION 15.1 This chapter is concerned with specific legislation proscribing misleading or deceptive conduct. Originally this form of conduct was an integral feature of the consumer protection provisions that were formally contained in s 52 of the Trade Practices Act 1974 (Cth). These consumer protection provisions are now contained in the Australian Consumer Law, which is set out in Sch 2 of the Competition and Consumer Act 2010 (Cth). The regulatory provisions were replicated in numerous State Fair Trading Acts and have been incorporated into other Commonwealth statutes, such as s 1041H of the Corporations Act 2001 (Cth) and s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth). For the purposes of this chapter, emphasis will be placed upon the regulation of misleading and deceptive conduct that is currently contained in s 18 of the Australian Consumer Law together with the earlier statutory influences to that legislation. The provisions of the Australian Consumer Law are set out in Sch 2 of the Competition and Consumer Act 2010 (Cth). Section 18 of the Australian Consumer Law stipulates that ‘a person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive’. A breach of s 18 may result in various remedies that are set out in Ch 5 of the Australian Consumer Law, such as injunctions, damages, and compensatory orders. It is often the case that statutory claims arising from a breach of s 18 will also include independent and alternative claims for misrepresentation.

One preliminary step that needs to be taken before a remedy can be obtained for breach of s 18 of the Australian Consumer Law is to identify misleading and deceptive conduct that has resulted in loss or damage. In Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 79 ALR 83 (see 15.2C) and Taco Co of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177 (see 15.3C), two cases dealing with the misleading and deceptive conduct provisions that were contained in s 52 of the Trade Practices Act, the central issues before the courts related to the need to identify conduct that could be said to be misleading. In Henjo Investments the conduct alleged to be misleading and deceptive was silence by a vendor of a restaurant. A related issue was whether an exclusion clause or disclaimer contained in the contract of purchase could exclude liability if misleading and deceptive conduct was found to exist. In Taco Co of Australia Inc the issue was once again whether particular conduct was misleading and deceptive. However, of particular interest in that case was the discussion by the Federal Court of the interaction between s 52 and the tort of passing off. [page 288] Allied to consideration of the misleading or deceptive conduct provisions are the statutory remedies available where misleading or deceptive conduct is found to have occurred. In this respect, questions arise as to whether or not a person has suffered loss as a result of breach of the misleading and deceptive conduct provisions. The causal connection between loss and breach was considered in Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494 (see 15.4C) and in Henville v Walker (2001) 206 CLR 459 (see 15.5C). More complicated questions arise where breach of the misleading and deceptive conduct provisions are one of two concurrent causes of loss. This question is considered in Henville. Finally, the issue of whether an agent can avoid liability for misleading and deceptive conduct on the basis that they were doing no more than passing on as a conduit representations made to them by their principal was illustrated in Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592 (see 15.6C).

THE MEANING OF MISLEADING OR DECEPTIVE CONDUCT 15.2C

Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 79 ALR 83

Court: The Full Court of the Federal Court of Australia Facts: In June 1984 Henjo Investments Pty Ltd opened a licensed restaurant business known as ‘The New York Deli’ in Double Bay in Sydney, after having received an approval from Woollahra Council which limited the seating at the restaurant to 84 people. In July 1984 the restaurant manager, Saade, on behalf of one of the directors and controllers of Henjo, applied to the Licensing Court of New South Wales for the grant of an ‘On-Licence (Restaurant)’ in respect of the premises. The application referred to a maximum seating capacity of 84 persons to be seated at 26 tables. Notice of the application was served upon the Council, which offered no objection. In August 1984 the Licensing Court granted the licence. Soon after the restaurant opened, 120 chairs were placed in the restaurant, arranged at 39 separate tables. In early 1985 Henjo and its directors decided to sell the restaurant business and engaged Le May, a licensed business agent, for that purpose. Le May was given an instruction card by one of the directors of Henjo on which the following was stated: ‘Seats 128. Licensed.’ It was accepted in court proceedings that the card that had been signed on one side contained those words prior to it being signed by that director and prior to it being given to the business agent. Collins Marrickville Pty Ltd contracted to purchase the restaurant from Henjo. During the sale negotiations Collins Marrickville was informed that the business was ‘a licensed coffee lounge restaurant with about 120 seats known as the New York Deli’. Further, a director of Collins Marrickville was shown the instruction card containing the reference to 128 seats and, when he was taken to the restaurant, he observed that it had been set with 39 tables and 128 chairs together

with eight stools at the bar area. The contract of purchase also contained two exclusion clauses in special conditions 6 and 7. Despite being instructed to do so by one of the directors of Collins Marrickville, the solicitor for Collins Marrickville failed to make any inquiries about the licence. [page 289] Such inquiries would have revealed the limits of the approved user and, in particular, that the restaurant was being operated in a manner substantially different from that permitted by law. The purchase was completed before Collins Marrickville became aware of the true position. Collins Marrickville subsequently opened and operated the business unsuccessfully. Collins Marrickville commenced proceedings against Henjo claiming damages for misleading or deceptive conduct under s 52 of the Trade Practices Act 1974 (Cth) and later sought relief under s 87 of that Act. Issues: The principal issues before the Full Court of the Federal Court were whether Henjo had contravened s 52 of the Act by remaining silent as to the true seating capacity of the restaurant and whether Collins Marrickville relied on any such misleading conduct. Furthermore, a question arose as to whether the exclusion clauses could operate to defeat claims made under s 52. Decision: The Full Court of the Federal Court (Lockhart, Burchett, and Foster JJ) unanimously held that Collins Marrickville succeeded on the issue of liability, holding that silence may be relied on to show a breach of s 52 in circumstances that gave rise to an obligation or duty to disclose relevant facts, and that the existence of such an obligation or duty was not negated because inquiries could be made that would have disclosed the true position. The court also found that recovery pursuant to s 52 of the Act was founded on actual reliance upon the misleading or deceptive conduct, although it was acknowledged that that conduct did not need to be the only factor

in inducing the innocent party to enter into the agreement. Furthermore, the court found that exclusion clauses of the type contained in the business sale agreement could not operate to defeat claims under s 52. Extract: The extract from the judgment of Lockhart J discusses the meaning of s 52 and whether exclusion clauses can exclude liability for breaches of the section.

Lockhart J Section 52 has been considered by the High Court and this court in many cases, and its interpretation and breadth have evolved in the light of the facts of each case. The section is expressed in general terms and is designed to have ‘a broad reach’.1 It is a provision to protect the consuming public from unfair trading practices, namely, from being misled or deceived.2 It is now established that intent is not a necessary element in a contravention of the section.3 However, as I observed in Bridge Stockbrokers Ltd v Bridges,4 there are cases where [page 290] there will be deceptive conduct only where the intention of the alleged contravenor is established. The Compact Edition of the Oxford English Dictionary 1987 defines the word ‘mislead’ in its transitive sense as ‘to lead astray in action or conduct; to lead into error; to cause to err’. ‘Deceive’ is defined as ‘to ensnare; to take unawares by craft or guile; to overcome, overreach, get the better of by trickery; to beguile or betray into mischief or sins; to mislead’. This approach to determining the meanings of the terms appearing in s 52 is consistent with the approach adopted by Franki J in Weitmann v Katies Ltd.5 The two words, ‘misleading’ and ‘deceptive’, are plainly not synonymous. That is not to say that each word may not catch some of the same conduct

and that there may not be some degree of overlap. ‘Mislead’ does not necessarily involve an element of intent and it is a word of wider reach than ‘deceive’. However, it is difficult, in my opinion, to read the word ‘deceive’ in s 52 other than as involving some degree of moral turpitude as it does in ordinary English usage. Trickery, craft and guile, though not essential elements of liability, are typically at the heart of this second element of the statutory provision directed to the protection of the public from unfair trading practices. Misleading or deceptive conduct generally consists of representations, whether express or by silence; but it is erroneous to approach s 52 on the assumption that its application is confined exclusively to circumstances which constitute some form of representation. The section is expressed briefly, indeed tersely, in plain and simple words which, if I may be forgiven for repeating them, say simply: ‘a corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive’. There is no need or warrant to search for other words to replace those used in the section itself. Dictionaries, one’s own knowledge of the developing English language and ordinary experience are useful touchstones, but ultimately in each case it is necessary to examine the conduct, whether representational in character or not, and ask the question whether the impugned conduct of its nature constitutes misleading or deceptive conduct. This will often, but not always, be the same question, as whether the conduct is likely to mislead or deceive. … In my opinion the real complaint against the conduct of Henjo and Mr Saade in this case arises from their silence in not informing Collins Marrickville of the true position with respect to the limitations on seating capacity and the use to which the bar area could be put. … At common law, silence can give rise to an actionable misrepresentation where there is a duty upon the representor to reveal a matter if it exists, and where the other party is therefore entitled to infer that matter does not exist from the silence of the representor.6 The circumstances in which silence may constitute misleading conduct under the Act were referred to in Rhone-Poulenc Agrochimie SA v UIM Chemical Services Pty Ltd. That case established that silence may be relied on in order to show a breach of s 52 when the

[page 291] circumstances give rise to an obligation to disclose relevant facts.7 The duty to disclose is not confined to cases where there are particular relationships, such as trustee and beneficiary or solicitor and client, principal and agent and guardian and ward. There is no useful purpose in seeking to analyse the circumstances in which the duty to disclose will arise as this must depend on the facts of each case. In the present case the vendor sold a business knowing that it was subject to serious limitations upon its lawful seating capacity, limitations imposed by both the licensing authorities and the local council which vitally affected the business, its goodwill, takings and profitability and knowing that in fact the restaurant was being conducted contrary to law with a substantial element of overseating. The vendor’s agent had given the purchaser to understand that the limitations upon the seating capacity and the limitations arising from the licensing of the restaurant were less restrictive than was in fact the case, while the manner in which the business was conducted at the time of sale supported this understanding. In my opinion these circumstances gave rise to a duty on the part of Henjo as vendor to reveal the true position to Collins Marrickville, the potential purchaser, before any contract was signed. It is no answer to say that Collins Marrickville should have made its own inquiries and that, if it had done so, it would have found out the true position: see Redgrave v Hurd,8 in the context of the equitable right to rescind for innocent misrepresentation. It is true that Mr Collins recognised the importance of verifying the material given to him by Mr Le May about the seating capacity of the restaurant and that, had his solicitor done what he should have done, the true position would have emerged and the sale probably would not have proceeded. But these circumstances did not negate the duty to disclose which the circumstances otherwise imposed. … It is broadly true that an applicant in an action under s 52 cannot recover damages unless he establishes that he acted on or was influenced by the conduct contravening the section.9 The issue of the applicant’s reliance upon such conduct is, however, more complex than such a formulation indicates. The trial judge noted the similarity between conduct constituting

deceit at common law and conduct contravening s 52, and referred to the principles which determine whether there has been inducement in actions for deceit. These principles were reviewed by Wilson J in Gould v Vaggelas.10 His Honour there observed that the inference that the applicant relied upon a material representation calculated to induce him to enter a contract might be rebutted by showing that ‘whether he knew the true facts or not he did not rely upon the representation’. His Honour noted that the representation made ‘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’. In Nielsen v Hempston Holdings Pty Ltd,11 a case which concerned an action for damages under s 52 where misleading statements had been [page 292] made to the applicant as to the occupancy rate of a motel, Pincus J held that the causal chain allowing recovery of damages under s 52 of the Trade Practices Act was not broken even where the applicant had failed to take reasonable care of his own interests by undertaking a proper investigation of the figures presented. These decisions support the view that recovery under s 52 is founded by the applicant’s actual reliance upon the misleading or deceptive conduct of the respondent, although that conduct was not the only factor in the applicant’s decision to enter a particular agreement, and although the applicant did not seek to verify the representations or did so inadequately and so failed to discover their falsity. … Doubtless Collins Marrickville could have ascertained the true position about the restaurant’s licences if it had inquired about them; but it did not do so. Even if Mr Tadd or Mr Jones, as advisers to [Collins Marrickville], were on inquiry as to the matter in issue, this should not itself be taken to exclude recovery under s 52. It is true that at common law, the principal has imputed knowledge of that which is, or ought to be, known by his agent. There is authority that a client who employs a solicitor in a conveyancing transaction has imputed to him knowledge of anything which is known to his solicitor or would have been known to his solicitor on the proper inquiries.12 In an action under s 52, however, the issue is whether

the misleading and deceptive conduct alleged continues to be operative in fact, whatever the knowledge which might have been obtained had the applicant’s advisers conducted their investigations in a proper manner, and whatever the matters of which those advisers might have constructive notice.13 This reasoning is the stronger where a party who would otherwise be liable on account of conduct found to be misleading or deceptive seeks to rely upon knowledge notionally attributed to the innocent party so as to avoid liability. In my opinion the trial judge correctly rejected the argument that Collins Marrickville had constructive notice of these matters. I turn now to the two special conditions, 6 and 7. The trial judge considered the effect of special conditions 6 and 7 of the contract for sale and found that they did not operate to defeat a claim under s 52, whatever effect they may have in the law of contract, because an exclusion clause of that kind cannot oust the effect of the Act or deprive an applicant of remedies under it. If in fact there was misleading conduct by Henjo which induced Collins Marrickville to enter into the contract, that inducement was not negated because, in the agreement itself, the parties may have said to the contrary. Special condition 6 is expressed simply as an acknowledgement by the purchaser. In my opinion the acknowledgement by the purchaser contained in the special condition … is an acknowledgement essentially as to the physical state of the premises themselves together with rights and privileges, if any, which pertain to the premises as a physical structure. The special condition is not concerned with the use to which the premises may be put. It is not directed to licences or other rights from statutory authorities to conduct business on the premises of a certain kind and it does not encompass rights of the kind with which this case is concerned, [page 293] namely, the rights from the council and the Licensing Court as to the number of persons who may be seated and the number of tables at which they may be seated in the restaurant premises and served with liquor or whether certain parts of the premises may or may not be used for the service of liquor. Although these restrictions from the authorities are issued

with respect to the premises themselves, they have relevance only to the use to which the premises may be put in carrying on business upon them. They do not fall within the ambit of special condition 6, having no substantial nexus with the condition or location or physical structure of the premises. Although special condition 7 is couched in wide language, in my opinion it purports to exclude promises, representations, warranties and undertakings or conditions of a contractual kind not embodied in the contract for sale itself and is not directed to representations by silence which have origin or effect outside the law of contract. It may be that special condition 7 would deny [Collins Marrickville] a right of contractual damages arising from the misrepresentation as to seating capacity, and would exclude an action based on common law misrepresentation in the absence of fraud preventing the defendant from relying upon the condition. It remains that, even if the intention of special condition 7 was to restrict the terms of the transaction to those embodied in the written agreement, on construction the condition addresses active representations rather than the failure of one party to the agreement to make disclosure to the other where circumstances required it to do so. Irrespective of the construction of these two special conditions it does not matter ultimately whether the impugned conduct with which this case is concerned falls literally within them or not. Section 52 is a section in the consumer protection provisions of an Act concerned to protect the public from misleading or deceptive conduct and unfair trade practices which may result in contravention of the Act. It has been held that exclusion clauses, of which special conditions 6 and 7 are examples, cannot operate to defeat claims under s 52. It may be, as the judgment of Sweeney J in P J Berry Estates Pty Ltd v Mangalore Homestead Pty Ltd14 suggests, that such exclusion clauses will generally be ineffective because they cannot break the nexus between the conduct in contravention of s 52 and the making of the agreement in issue. Where the conduct of the defendant is alleged to be fraudulent in character, then an exclusion clause will be no more effective to defeat the action than it would be effective if the action were brought in the tort of deceit in relation to conduct antecedent to the contract.15 There are wider objections to allowing effect to such clauses. Otherwise the operation of the Act, a public policy statute, could be ousted by private

agreement. Parliament passed the Act to stamp out unfair or improper conduct in trade or in commerce; it would be contrary to public policy for special conditions such as those with which this contract was concerned to deny or prohibit a statutory remedy for offending conduct under the Act.

[page 294]

Comment 15.2.1 See Radan, Gooley, and Vickovich at 15.29, 15.31, and 15.35. 15.3C

Taco Company of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177

Court: The Full Court of the Federal Court of Australia Facts: Taco Company of Australia Inc (Taco Australia) was incorporated in Delaware in the United States for the purpose of establishing and operating Taco Bell restaurants in Australia. Commencing in the 1970s, Taco Bell Pty Ltd (Taco Bell), under its former name of B & B Mexican Enterprises Pty Ltd, conducted a Mexican food restaurant at Bondi under the name ‘Taco Bell’s Casa’. In December 1976 B & B changed its name to Taco Bell Pty Ltd. In 1981 Taco Australia opened two Mexican food restaurants in Sydney and by September 1981 each traded under the name ‘Taco Bell’. Subsequently proceedings were commenced by Taco Bell against Taco Australia seeking injunctions first to restrain Taco Australia from operating any restaurant in the Sydney metropolitan area under the name ‘Taco Bell’ or any name deceptively or misleadingly similar thereto or which was likely to deceive or mislead by reason of its similarity thereto, and second to restrain Taco Australia from passing off goods and services supplied in any restaurant in the Sydney metropolitan area not supplied by Taco Bell as and for goods and services supplied by Taco Bell. Taco Australia cross-claimed for the

same reasons. The trial judge found in favour of Taco Bell. Taco Australia then appealed to the Full Court of the Federal Court. Issue: The issue before the Full Court of the Federal Court was whether Taco Australia had engaged in misleading or deceptive conduct. This involved an assessment of what constituted conduct that amounted to a breach of s 52 of the Trade Practices Act. Decision: The Federal Court (Franki, Deane, and Fitzgerald JJ) unanimously dismissed Taco Australia’s appeal. Extract: The extract from the joint judgment of Deane and Fitzgerald JJ discusses the meaning of s 52 and its relationship with the tort of passing off. (The tort of passing off is an action by A to prevent financial loss arising from a representation by B that his or her services are those of A.)

Deane and Fitzgerald JJ The relationship between s 52(1) and passing-off In Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd,16 the High Court considered the operation of s 52(1). The decision involved, directly, only the [page 295] narrow issue of whether the use by one party of a name which was accurately descriptive of the nature of its business was misleading or deceptive because its use led persons to believe that it was associated with another party which had a similar descriptive name. The court allowed an appeal from the Commonwealth Industrial Court which had granted an interlocutory injunction. The decision was delivered before the words ‘or is likely to mislead or deceive’ were introduced in s 52(1) in 1977. The leading judgment was delivered by Stephen J. … Whilst, as was pointed out by Stephen J,17 the long experience in the courts

in relation to passing-off should not be disregarded and some principles which have been developed in that context may be also applicable to s 52, it is, in our opinion, important to heed his Honour’s emphatic rejection … of any suggestion that s 52 is no more than a statutory re-enactment of passing-off principles.18 The backgrounds of s 52 and of the law of passingoff are quite different. Their respective purposes and the interests which they primarily protect are contrasting. Their areas of operation do not coincide. The indiscriminate importation into s 52 cases of principles and concepts involved in passing-off and the associated area of trade mark law is likely to be productive of error and to give rise to arguments founded on false assumptions.

Deception up to ‘the point of sale’ It was submitted by [Taco Australia] that conduct cannot constitute a contravention of s 52 unless it causes, or is likely to cause, misleading or deception which continues to what was described as ‘the point of sale’. This submission involved the application to s 52 of what was said to be a principle of the law of passing-off. In support of it, reliance was placed upon the following comments of Lockhart J in Stuart Alexander & Co (Interstate) Pty Ltd v Blenders Pty Ltd: There is evidence that some buyers in supermarkets seeking Moccona first mistakenly select Andronicus; but realize their mistake before paying for their purchases at the cashier’s desk. These incidents do not support the applicant’s case. I adopt the following passage from the opinion of the Judicial Committee, given by Lord Scarman, in Cadbury-Schweppes Pty Ltd v Pub Squash Co Pty Ltd: ‘He (the learned trial judge) accepted that on occasions there was confusion at the point of sale: but he found, and there was plenty of evidence on which he could find, that the confusion was almost always corrected before the moment of sale. Such confusion as there was arose, in his view, from the casual attitude of many purchasers in the market to the product offered and not from any failure of the defendant sufficiently to distinguish its product from “Solo”’.19 The Pub Squash case concerned passing off and not misleading or deceptive conduct under the Trade Practices Act

1974; but the passage which I have cited applies in my opinion to the present case.20 [page 296] It is, however, apparent that Lockhart J was not … seeking to lay down any general principle of law either as to the point at which or as to the period for which there must be misleading or deception or a likelihood of misleading or deception before one can have a contravention of s 52. His Honour’s remarks and the quoted comments from the opinion of the Privy Council in Cadbury-Schweppes v Pub Squash were, in each case, made in connection with what was alleged to be deceptively similar labelling and packaging of two brands of a product, and were particularly concerned with the presentation of the rival brands for sale, rather than with advertising or other aspects of the respondent’s conduct. In each there was a critical finding of fact that the evidence did not establish even confusion between the two brands except in the casual act of initially picking up the one brand for the other. Neither brand was deliberately selected for purchase, and neither was purchased, under a mistaken belief. The passage quoted from Stuart Alexander v Blenders fits easily into place if taken in conjunction with another passage from Lockhart J’s judgment: The plain fact is that the two brands of coffee are well known and the brand names are prominently displayed on every label. In my view there is no real likelihood of confusion, let alone confusion to the extent of being misled or deceived.21 Nor would it accord with the legislative purpose underlying s 52 to import from the law of passing-off a limitation restricting the applicability of the section to conduct which misleads or deceives, or is likely to mislead or deceive, ‘up to the point of sale’. The mere fact that such a principle existed in a field of law concerned primarily with protecting the business or goodwill of a trader against the conduct of others would be of little relevance in determining the scope of the statutory provisions of s 52. It is true that a rival trader may take advantage of that section to obtain an effective remedy in respect of conduct which answers the statutory

description and causes damage to the goodwill of his business.22 It is, however, a matter of debate as to whether such protection of rival traders should properly be seen as part of the legislative purpose to be discerned in s 52.23 Even if it should, it is plain that the primary legislative purpose which s 52 was intended to serve is consumer protection.24 It would ill accord with that primary purpose to restrict the operation of the section to conduct which, at common law, would entitle a trader to sue a rival or to impose a limitation upon that operation merely because the common law accepted, or was thought to accept, such a limitation as applicable to proceedings for passing-off. It is, in the circumstances, unnecessary that we form or express any concluded view on the question whether it is a principle of the law of passing-off that deception must continue, or be likely to continue, to the ‘point of sale’. As a matter of principle and of logic, it is difficult to see why it should be. For the purposes of the present appeal, it suffices to say that, even [page 297] if such a limitation should be recognized in the law of passing-off, we see no ground for importing it into the provisions of s 52 of the Act. In our view, it is sufficient to enliven s 52 that the conduct, in the circumstances, answers the statutory description, that is to say, that it is misleading or deceptive or is likely to mislead or deceive. It is unnecessary to go further and establish that any actual or potential consumer has taken or is likely to take any positive step in consequence of the misleading or deception. That is not to say that evidence of actual misleading or deception at the point of sale and of steps taken in consequence thereof is not likely to be both relevant and important on the question whether the relevant conduct in fact answers the statutory description and as to the relief, if any, which should be granted.

McWilliam’s v McDonald’s and ‘erroneous assumption’ The question whether particular conduct of which complaint is made is misleading or deceptive or likely to mislead or deceive is, in the ordinary case, a question of fact to be answered in the context of the evidence as to

the alleged conduct and as to relevant surrounding facts and circumstances. If the resolution of the question were entrusted to a jury, the question whether a respondent had engaged in conduct of the type described in s 52 would be susceptible of a simple monosyllabic answer without disclosure or record of reasoning processes. Where resolution of the question is entrusted to a court constituted by a judge without a jury, however, it is encumbent upon the court to indicate the process of reasoning which has led to the answer which is given. It is inevitable that that process of reasoning will tend to be worded in the language of the lawyer and that the path to decision of the factual question will be paved with generalizations which, particularly when enshrined in the volumes of law reports, bear a superficial resemblance to formulations of legal principle but which are, in truth, no more than part of an exposed process of reasoning in the course of deciding the question of fact. In McWilliam’s v McDonald’s a Full Court of this court held that conduct of McWilliam’s in using the expression ‘BIG MAC’ in connection with the supply or possible supply of wine, in a context where that expression was well known as the name of a particular type of hamburger sold by McDonald’s, did not constitute conduct which was misleading or deceptive or likely to mislead or deceive within the meaning of s 52(1) of the Act. In the course of their respective judgments, Smithers and Fisher JJ placed particular emphasis on the fact that a person would only be misled or deceived into thinking that the use of the expression ‘BIG MAC’ by McWilliam’s indicated some arrangement between McWilliam’s and McDonald’s if he made the erroneous assumption that the expression could not have been used by McWilliam’s in the absence of such an arrangement. There has been a tendency — in our view mistaken — to see their Honours’ comments in that regard as involving some 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. In truth, of course, no conduct can mislead or deceive unless the representee labours under some erroneous assumption. Such an assumption can range from the obvious, such

[page 298] as a simple assumption that an express representation is worthy of credence, through the predictable, such as the common assumption in a passing-off case that goods marketed under a trade name which corresponds to the well-known trade name of goods of the same type have their origins in the manufacturer of the well-known goods, to the fanciful, such as an assumption that the mere fact that a person sells goods means that he is the manufacturer of them. The nature of the erroneous assumption which must be made before conduct can mislead or deceive will be a relevant, and sometimes decisive, factor in determining the factual question whether conduct should properly be categorized as misleading or deceptive or as likely to mislead or deceive. Beyond that, generalizations are themselves liable to be misleading or deceptive. Thus, one might generalize that the need for a simple assumption that an express representation is literally true could never be a factor militating against a finding that conduct which has misled or deceived is of its nature misleading or deceptive. Such a generalization would, however, ignore the part that irony can legitimately play in human communications. On the other hand, conduct which could only mislead or deceive if the representee were to make a fanciful assumption and which ordinarily would be innocent, may be misleading or deceptive if it appears that the person engaging in the conduct knew that the person to whom the relevant conduct was directed was convinced of the validity of that assumption.

Confusion In McWilliam’s v McDonald’s, the Full Court held that, although the conduct of McWilliam’s was likely to have caused confusion or wonderment, it did not appear that in the particular circumstances of that case the conduct was misleading or deceptive or likely to mislead or deceive. As we read their Honours’ judgments, that was a factual conclusion. Their Honours were not suggesting that there is, for the purposes of s 52 of the Act, a necessary dichotomy between ‘confusion’ on the one hand and ‘misleading or deception’ on the other. Conduct which produces or contributes to confusion or uncertainty may or

may not be misleading or deceptive for the purposes of s 52. In some circumstances, conduct could conceivably be properly categorized as misleading or deceptive for the very reason that it represents that confusion or uncertainty exists where, in truth, there is no proper room for either. Ordinarily, however, a tendency to cause confusion or uncertainty will not suffice to establish that conduct is of the type described in s 52. The question whether particular conduct causes confusion or wonderment cannot be substituted for the question whether the conduct answers the statutory description contained in s 52. As has already been noted, the High Court in Hornsby Building Information Centre v Sydney Building Information Centre 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 [page 299] that the Hornsby Centre was a branch of, or otherwise associated with, the Sydney Centre. 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.25 The case of Hornsby Building Information Centre v Sydney Building Information Centre provides guidance as to the general approach to be adopted in s 52 cases involving the use of similar names. As Stephen J said, 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’.26 In World Series Cricket v Parish 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’.27 Irrespective of whether conduct produces or is likely to produce confusion or misconception, it cannot, for the purposes of s 52, be categorized as misleading or deceptive unless it contains or conveys, in all the circumstances of the case, a misrepresentation. The difficulty which will commonly arise in a s 52 case is in determining whether the conduct contains or conveys, in all the circumstances, a misrepresentation and in assessing the significance to that question of evidence that one or more persons were in fact led into error. In extreme, but not necessarily infrequent, cases, it may be correct to hold that, as a matter of law, conduct said to contravene s 52 is incapable of conveying the untrue meaning alleged or any other false meaning. Such cases aside, whether or not conduct amounts to a misrepresentation is a question of fact to be decided by considering what is said and done against the background of all surrounding circumstances. In some cases, such as an express untrue representation made only to identified individuals, the process of deciding that question of fact may be direct and uncomplicated. In other cases, the process will be more complicated and call for the assistance of certain guidelines upon the path to decision. In a case, such as the present, where the suggested misrepresentation has not been expressly made and it is alleged that the relevant deception or misleading is, or is likely to be, of the public, the following propositions appear to be established as affording guidance. [page 300] 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.28 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’.29 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.30 Finally, it is necessary to inquire why proven misconception has arisen.31 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.

[page 301]

Comment 15.3.1 See Radan, Gooley, and Vickovich at 15.39, 15.44, and 15.54.

STATUTORY REMEDIES FOR MISLEADING OR DECEPTIVE CONDUCT 15.4C

Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494

Court: High Court of Australia Facts: Marks and a number of other borrowers borrowed money

from one of the four members of the GIO group of companies. GIO called the loan facility an ‘Asset Accumulator Account’. GIO told the borrowers that it would charge interest on the loans at a rate calculated as a base rate plus a margin of 1.25 per cent and that the margin would not change during the term of the loan. The borrowers relied on this representation in entering into the loan transaction. The base rate was the average for the month of the daily 90-day bank bill rate. On 21 April 1992 the borrowers received a letter from GIO telling them that GIO proposed to increase the interest rate margin from 1.25 per cent to 2.25 per cent with effect from 1 August 1992. The loan agreements that the borrowers had signed permitted GIO to change the interest rate margin in this way. The borrowers sued GIO in the Federal Court, seeking relief for misleading or deceptive conduct contrary to s 52 of the Trade Practices Act 1974 (Cth) in relation to the loan facility. The trial judge found that GIO engaged in misleading or deceptive conduct, as the borrowers had relied on the fact that the 1.25 per cent margin would be stagnant for the life of the loan, and awarded damages pursuant to s 82 of the Act, but rejected the borrowers’ claim for relief under s 87 of the same Act. GIO’s appeal to the Full Court of the Federal Court was successful. The borrowers then appealed to the High Court. On appeal there was no issue that GIO had engaged in misleading or deceptive conduct. Issue: The issue before the High Court was whether the borrowers were entitled to relief under the Trade Practices Act. Decision: The majority of the High Court (Gaudron, McHugh, Gummow, Hayne, and Callinan JJ; Kirby J dissenting) dismissed the appeal, holding that the borrowers were not entitled to damages under s 82, as they had suffered no loss as a result of the contravention of s 52. Extract: The extracts from the three judgments of the majority judges discuss the availability of remedies pursuant to ss 82 and 87 of the Trade Practices Act in the context of the facts of the case.

[page 302]

Gaudron J Before turning to the argument, it is convenient to note two matters which are clear from the terms of ss 82 and 87. The first is that for a person to obtain relief under those sections he or she must have suffered loss or damage or, in the case of s 87, be likely to suffer loss or damage. The second is that there is no punitive aspect to these provisions, they being concerned solely to provide for recovery of ‘the amount of the loss or damage [suffered]’ (s 82) or to ‘compensate’ for or ‘prevent or reduce’ loss or damage (s 87). Section 82 of the Act was considered by this court in Gates v City Mutual Life Assurance Society Ltd. That, too, was a case involving a contract that did not incorporate the terms as represented. And as in this case, the representation was not contractual. The question in Gates was identified as ‘the appropriate measure of damages recoverable by a plaintiff who suffers loss or damage by conduct done in contravention of [Pts IV and V of the Act]’.32 The Full Court’s distinction between ‘expectation’ loss and ‘consequential’ loss for the purposes of ss 82 and 87 of the Act may be traced to the joint judgment of Mason, Wilson and Dawson JJ in Gates. Their Honours said: The Act does not prescribe the measure of damages recoverable by a plaintiff for contravention of the provisions of Pts IV and V. Accordingly, it is for the courts to determine what is the appropriate measure of damages recoverable by a plaintiff who suffers loss or damage by conduct done in contravention of the relevant provisions. Two established measures of damages, those applicable in contract and tort respectively, compete for acceptance. In contract, damages are awarded with the object of placing the plaintiff in the position in which he would have been had the contract been performed — he is entitled to damages for loss of bargain (expectation loss) and damage suffered, including expenditure incurred, in reliance on the contract (reliance loss). In tort, on the other hand, damages are awarded with the object of placing the plaintiff in the position in which he would have been had the tort not been committed (similar to reliance loss).33

Their Honours concluded that, although not bound to make a definitive choice, there was ‘much to be said for the view that the measure of damages in tort is appropriate in most, if not all, Pt V cases, especially those involving misleading or deceptive conduct and the making of false statements’. Their Honours added that ‘[s]uch conduct is similar both in character and effect to tortious conduct, particularly fraudulent misrepresentation and negligent misstatement’.34 The distinction between ‘expectation’ loss and ‘reliance’ loss for the purposes of the law of contract is well recognised. However, it is a distinction that is apt to mislead if transposed into other contexts. Contrary to what might be thought, the term ‘expectation’ loss does not indicate that damages are payable simply for thwarted expectations.35 Rather, damages [page 303] are payable for the loss involved in non-performance of the contract. Even if a contract is not susceptible of specific performance, the other party is legally entitled to expect its performance. Hence the expression ‘expectation loss’!36 The matter may be put another way. Non-performance is, in effect, the loss of a contractual promise which, itself, is a valuable right. That loss must be compensated by an award of damages in the sum that represents the value of that right.37 Moreover, other losses may be sustained in consequence of the breach and, if so, they, too, must be compensated by an award of damages. On the other hand, the law of tort confers no right over and above a right to recover damages for loss sustained in consequence of the wrongful act involved. When regard is had to the different nature of contractual and tortious liability it is apparent that the so-called different ‘measure of damages’ in contract and tort is no more than a convenient way of indicating that the wrong involved and, thus, the loss occasioned by a breach of contract is of a different kind from that involved in and occasioned by the commission of a tort. The position is explained in McGregor on Damages: In contract … the wrong consists not in the making but in the

breaking of the contract and therefore the plaintiff is entitled to be put into the position he would have been in if the contract had never been broken, or in other words, if the contract had been performed. The plaintiff is entitled to recover damages for the loss of his bargain. In tort, on the other hand, no question of loss of bargain can arise: the plaintiff is not complaining of failure to implement a promise but of failure to leave him alone.38 Once it is appreciated that references to the ‘established measures of damages … [for] contract and tort’, as in Gates, signify different kinds of loss and not different methods by which loss is measured, it is irrelevant to inquire as to the appropriate measure of damages for the purposes of ss 82 and 87 of the Act. Rather, the task is simply to identify the loss or damage suffered or likely to be suffered and, then, to make orders for recovery of that amount under s 82 or to compensate for or prevent or reduce that loss or damage under s 87 of the Act. Moreover, once it is appreciated that, for the purposes of the law of contract ‘expectation’ loss signifies the loss of a valuable right, namely, the contractual promise, it is irrelevant and quite misleading to ask whether, in the case of misleading and deceptive conduct under s 52 of the Act, ss 82 and 87 allow for ‘expectation’ loss or ‘consequential’ loss. It is irrelevant, because, if the misrepresentation is not contractual, there can be no loss of a contractual promise. It is misleading because it tends to suggest that if ‘expectation’ loss is not recoverable, the claimant can never be compensated in an amount equivalent to that which would be payable if the representation were contractual. Not only is it misleading to speak of ‘expectation’ loss and ‘reliance’ loss in the context of s 82, but there is no basis for thinking that relief under s 82 is to be confined by analogy either with actions in contract or in tort. With regard to that last matter, all members of the court [page 304] are agreed. We differ only in our approach to the question whether, in the

circumstances, the [borrowers] suffered or were likely to suffer loss or damage. In the view taken by McHugh, Hayne and Callinan JJ, the [borrowers] did not establish that they were worse off as a result of entering into loan agreements with the GIO. Gummow J is of the view that it may be assumed that they would or would likely have been worse off but for the GIO’s allowing them to elect to refinance without penalty, while Kirby J is of the view that the [borrowers] were worse off and are thereby entitled to recovery. For the reasons which follow, I am in substantial agreement with the approach taken by Gummow J. There being nothing in the Act to suggest otherwise, it is for an applicant for relief under s 82 or s 87 to establish what he or she has lost or, in the case of s 87, what he or she is likely to lose. In a case such as the present, if an applicant can establish that, but for the misleading and deceptive conduct, he or she would have entered into a contract that would have returned the very benefit that was represented, damages will be the same as if the representation had been contractual. … In that situation, however, ‘it is for the [applicant] to establish that he could and would have entered into [that other] contract’.39 Moreover, there may be cases where an applicant establishes that, but for the contravention of s 52 of the Act, he or she would not have entered into the contract in question or into any other contract or arrangement of that kind. It is possible — although not inevitable — that, in that situation also, the loss will be the same in money terms as it would have been if the representation were contractual. In this case, the [borrowers] did not assert that, but for the contravention of s 52 of the Act, they would have entered into loan agreements which accorded with their understanding of their arrangement with the GIO. Indeed, there was no evidence that loan facilities of that kind were available. Nor did the [borrowers] establish that, but for the contravention, they would have entered into loan agreements which were more beneficial than those entered into with the GIO. Again the evidence is that that was not possible. Nor did they claim that, but for the contravention, they would not have taken out loans at all. Rather, their case was simply that they suffered loss simply by variation of the margin.

There being no evidence of the kind to which I have referred, the [borrowers] failed to establish that they had suffered any loss or damage and were, thus, not entitled to any remedy under s 82 of the Act. However, the [borrowers’] entitlement to relief under s 87 does not depend on proof of actual loss or damage. Relief may be granted under that section if a person is ‘likely to suffer’ loss or damage. And as a matter of ordinary language, the expression ‘likely to suffer’ imports only that loss or damage is a real chance or possibility, not that it is more likely than not. It may be that the [borrowers] could have put a case that, if held to their arrangements with the GIO, they either suffered or were likely to suffer loss or damage of a kind that should attract relief under s 87 of the Act. In this regard, it might have been put, for example, that it was likely that the margin might be increased so that interest was payable at a rate so much [page 305] in excess of prevailing commercial rates that the [borrowers] would then say that, had they appreciated that at the time, they would either have entered into more beneficial arrangements with other finance providers or, perhaps, not have entered into any loan arrangement at all. It is apparent from its terms that s 87 allows for relief which is tailored to the particular case and is not confined by notions drawn from equity although … the principles which govern equitable remedies may provide guidance as to the appropriate order in a particular case. Had the [borrowers] been held to their contracts, s 87 may well have authorised orders preventing loss or damage in the event that the margins were to be varied so that the interest payable exceeded prevailing rates. However, … the [borrowers] were given the opportunity to refinance without penalty. They elected not to. Not having been held to their contracts, they are not entitled to relief on the basis indicated. And as already pointed out, nor was it sought.

McHugh, Hayne, and Callinan JJ [B]oth ss 82 and 87 require examination of whether a person has

suffered (or, in the case of s 87, is likely to suffer) loss or damage ‘by conduct of another person’ that was engaged in the contravention of one of the identified provisions of the Act. That inquiry is one that seeks to identify a causal connection between the loss or damage that it is alleged has been or is likely to be suffered and the contravening conduct. But once that causal connection is established, there is nothing in s 82 or s 87 (or elsewhere in the Act) which suggests either that the amount that may be recovered under s 82(1), or that the orders that may be made under s 87, should be limited by drawing some analogy with the law of contract, tort or equitable remedies. Indeed, the very fact that ss 82 and 87 may be applied to widely differing contraventions of the Act, some of which can be seen as inviting analogies with torts such as deceit (eg, s 52) or with equity (eg, s 51AA) but others of which find no ready analogies in the common law or equity, shows that it is wrong to limit the apparently clear words of the Act by reference to one or other of these analogies. Gates did not hold to the contrary. In that case [Mr Gates] claimed that he had been misled by a misrepresentation about the circumstances in which benefits would be payable under a total disability clause which he had added to his existing superannuation policy issued by the respondent. In fact, the clause provided for payment of benefits only where [Mr Gates] was incapable of attending to any gainful occupation; he had been told it would apply if he could not attend to his occupation. It was found that ‘but for the statements, Mr Gates would have proceeded exactly as he did save that he would not have paid extra for total disability cover’.40 The majority in Gates went on to say: The question then is whether it is appropriate to apply the contract measure of damages to the contraventions found to have taken place. The courts are not bound to make a definitive choice between the two measures of damages so that one applies to all contraventions to the exclusion of the other. However, there is much to be said for the view that the measure of damages in tort is appropriate in most, if not all, Pt V cases, especially [page 306]

those involving misleading or deceptive conduct and the making of false statements. Such conduct is similar both in character and effect to tortious conduct, particularly fraudulent misrepresentation and negligent misstatement. The disappointed expectations of a person induced by a misrepresentation to believe erroneously that his insurance policy entitles him to the payment of benefits on maturity or on the happening of a certain event are sometimes so great as to encourage the thought that compensation on the basis of lost expectations would be appropriate. However, neither authority nor principle offer support for adopting this approach. In all the cases in which a plaintiff has sought to recover damages on the footing that a representation amounts to a collateral contract, a fraudulent misrepresentation or a negligent misstatement, damages for expectation loss have only been awarded when the representation amounted to a collateral contract. Neither the fact that the representation induces entry into a contract nor the fact that it is a statement of the benefits to which the plaintiff will be entitled under that contract is enough to justify compensation for expectation loss. Just as it is impossible to suppose that there is any difference in the measure of damages in deceit depending upon the nature of the contract into which the plaintiff is induced to enter, so there can be no variation in the measure of damages awarded under the Act for contraventions of ss 52 and 53(g) depending on the nature of the contract. This conclusion involves no element of injustice to a plaintiff who is entitled to damages reflecting the loss of benefits he would have obtained under a contract which he could and would have entered into but for his reliance on the contravening conduct of the defendant. Of course he must prove such loss but there is nothing unfair in requiring him to do so. [Mr Gates’] failure to prove this loss is fatal also to his claim for other consequential losses which arose out of additional expenses and losses which he sustained as a result of the respondent’s nonpayment of the benefits under the insurance policies.41

Although Gibbs CJ held that the measure of damages in tort, not contract, should apply in the assessment of damages under s 82 where there has been a contravention of ss 52 and 53,42 the other members of the court said expressly that ‘[t]he courts are not bound to make a definitive choice between the two measures of damages so that one applies to all contraventions to the exclusion of the other’.43 Further, none of the members of the court in Gates considered the circumstances in which relief under s 87 should be granted. Nor do the later decisions of this court in Wardley Australia Ltd v Western Australia44 or Kizbeau Pty Ltd v WG & B Pty Ltd45 hold that the remedies provided by ss 82 and 87 are to be confined by analogies, whether with tort or otherwise. [page 307] This is not to say that no help can be had from the common law in deciding what damages may be allowed under s 82 in cases of conduct contravening s 52. Very often, the amount of the loss or damage caused by a contravention of s 52 will coincide with what would have been allowed in an action for deceit. But that is because the inquiry in both cases is to find out what damage flowed from (in the sense of being caused by) the deceit or contravention. Leaving aside questions of remoteness of damages in assessing damages for deceit … the damages for deceit will be the sum representing the loss suffered by the plaintiff because the plaintiff altered its position in reliance on the defendant’s misrepresentation. But the analogy cannot be pressed too far. It should not be pressed to the point of concluding that the only damages that may be allowed under s 82 are those that would be allowed in an action for deceit. The question presented by s 82 is not what would be allowed in deceit, it is what loss or damage has been caused by the conduct contravening the Act. It follows, then, that a comparison must be made between the position in which the party that allegedly has suffered loss or damage is and the position in which that party would have been but for the contravening conduct. And even this inquiry may not conclude the question. Analysing the question of causation only by reference to what is, in essence, a ‘but for’

test has been found wanting in other contexts and it may well be that it is not an exclusive test of causation in this area either. But that is not a question which we need to consider in this case. For the moment it is enough to say that s 82 requires identification of a causal link between loss or damage and conduct done in contravention of the Act. If loss or damage is shown to have been suffered or to be likely to be suffered, orders of the kind prescribed by s 87 may be made. Proof of loss or damage (actual or potential) is therefore the gateway to the s 87 remedies. But the identification of loss or damage is important in the operation of s 87 not only for this reason but also because the power to make orders under s 87 is limited to making orders ‘if the Court considers that the order or orders concerned will compensate … in whole or in part for the loss or damage or will prevent or reduce the loss or damage …’ (s 87(1) and (1A)). That is, the Court can make orders under s 87 only in so far as those orders will compensate (or will prevent or reduce) the loss or damage that is identified. In Wardley the majority of the court held that ‘[u]nder s 82(1), as under the common law, a plaintiff can only recover compensation for actual loss or damage incurred, as distinct from potential or likely damage’ although, as their Honours noted, ‘[t]he Act draws a clear distinction in Pt VI between loss or damage which may be recovered under s 82 and the likelihood of loss or damage which may be prevented or, if not prevented, reduced by one of the remedies under s 87’.46 Thus under s 87, actual loss or damage need not have been suffered before an order is made. Nevertheless, although ‘[s] 87 of the Act confers a wide discretionary power on courts to make remedial orders in appropriate cases to ensure a fair result’,47 that power may be exercised only if a person has suffered or is likely to suffer loss or damage as a result of a contravention. [page 308] The loss or damage spoken of in ss 82 and 87 is not confined to economic loss. Section 4K makes that clear. But loss or damage caused by a contravention of the Act will often be economic loss. As was said in

Wardley ‘[e]conomic loss may take a variety of forms’.48 But central to them all, when it is said that the loss was, or will probably be, caused by misleading or deceptive conduct, is that the plaintiff has sustained (or is likely to sustain) a prejudice or disadvantage as a result of altering his or her position under the inducement of the misleading conduct. The bare fact that a contract has been made which confers rights or imposes obligations that are different from what one party represented to be the case does not demonstrate that the party that was misled has suffered loss or damage. … A party that is misled suffers no prejudice or disadvantage unless it is shown that that party could have acted in some other way (or refrained from acting in some way) which would have been of greater benefit or less detriment to it than the course in fact adopted. Thus, the party that is misled will have suffered loss if a chose in action which was acquired was worth less than the amount paid for it. There may well be other ways in which it might suffer loss or damage. For example, consequential loss may be suffered. But no loss of that kind was alleged in this case and, putting that kind of loss to one side, we focus only on loss said to be suffered by the making of the contract. It is necessary, then, to determine whether the value of what was acquired is less than what was paid. How is value to be assessed? It is to be assessed objectively, not according to what either or both of the parties to the contract believed that it would obtain from the contract. That is, the value of what in fact was acquired is to be identified according to what price freely contracting, fully informed parties would have offered and accepted for it. It is only by comparison with the value assessed in this way that there can be an assessment of whether the party that is misled could have obtained some greater benefit or incurred less detriment. What is important is what that party could have done, not what it might have hoped for or expected. Some examples may serve to illustrate the point. If a person agrees to pay $50,000 for goods which the vendor falsely represents are worth $100,000 but which are, in fact, worth $50,000, what loss has the purchaser who is misled suffered by agreeing to buy (assuming no more is known)? If a person agrees to pay interest at the rate of 10 per cent for a loan which the lender falsely represents would ordinarily

command interest at a rate of 15 per cent but which, in fact, would ordinarily command interest at 12 per cent, what loss has the borrower who is misled suffered by agreeing to borrow (again, assuming no more is known)? And so the examples could be multiplied. The reason that neither of these persons suffers a loss is that viewed objectively each obtained rights having a value (a value determined objectively) at least equal to what it paid for those rights. It is only if some alternative (less detrimental or more beneficial course) were available, that it can be said that the contract which was made was less valuable to the party [page 309] that was misled than had been represented — for it is only then that a comparison of value can be made. The fact that each of the misled parties in the examples given may have thought that it was to obtain some advantage from the transaction is not to the point. The contravening conduct has left the party that was misled no worse off than it was before the contravention occurred. Nor do we accept that the extension by s 4K of loss or damage to ‘injury’ leads to any different conclusion. It may be that ‘injury’ in s 4K is intended to refer to injury to the person but we do not need to decide if that is so. Even if ‘injury’ is to be given some wider meaning than personal injury, we do not accept that a person suffers injury simply because a hoped for advantage does not materialise. The central inquiry is what consequence has the contravention of the Act had on the party in question. That requires comparison between the position in fact of the party which alleges loss and the position that would have obtained had there been no contravention. This is not to be taken as confining the operation of s 87 to cases where loss or damage has been sustained. It is not confined in that way; it applies to cases in which it is shown that a person is likely to suffer loss or damage. But the inquiry remains an inquiry about whether it is likely that as a result of the contravention the party concerned will suffer some prejudice or disadvantage. If, as we consider to be the case, the bare fact that making a

contract different from what was represented is not loss or damage, something more must be shown to be likely to occur in the future before it can be said that it is likely that loss or damage will be suffered. Ordinarily this will present the plaintiff with no difficulty. It will be rare that the difference between what was represented and what was given will not be reflected in some difference in value or other manifestation of actual loss to the party that was misled either now or in the future. But if it does not, we consider that neither s 82 nor s 87 relief is available. To the extent that the contrary was held in Demagogue Pty Ltd v Ramensky,49 we consider it to be wrong. In reaching the conclusion that we do, we are mindful that the object of the Act is said to be ‘to enhance the welfare of Australians through the promotion of competition and fair trading and provision for consumer protection’ (s 2). No narrow construction of the Act should be adopted. But neither should the words of the Act be stretched beyond their limit. It may be said, as a matter of abstract or intuitive assessment, that it is ‘wrong’ if a party that has been found to have engaged in misleading or deceptive conduct does not ‘pay a price’ for its misleading. But the question is what does the Act provide? … Accordingly, the position of the borrowers is that they were misled into taking a loan which cost them more than was represented to them but which, even so, cost less than any other loan available to them in the market. They suffered and will suffer no loss or damage as a result of the misleading and deceptive conduct of [GIO]. No order can be made under s 82 or s 87. [page 310]

Gummow J In my view, Gates does not determine that the measure of compensation under s 82, in Pt V cases or otherwise, is that in tort, in particular in the tort of deceit. I agree with the analysis by Gaudron J in her reasons for judgment on this appeal with respect to what was said in Gates as to the distinction between ‘expectation’ loss and ‘reliance’ loss, and to the

confusion which would be encouraged by the transposition of that distinction into the construction of ss 82 and 87. Further, and in any event, s 87, upon which the borrowers primarily rely, goes beyond the provision of pecuniary remedies as understood in tort. It follows that the [borrowers’] case should not have failed for the reasons which the Full Court believed it was obliged to accept. Nevertheless, on other grounds, the [borrowers’] case was bound to fail. To these I now turn. In short, (a) the liability of the borrowers for any additional margin which was payable after 1 August 1992 was the consequence of their failure to exercise the choice given them by GIO in April 1992; and (b) an appropriate exercise of the discretionary powers conferred by s 87(1A) would have been an order obliging GIO to provide the borrowers with an election to the effect of that in fact provided by the letter dated 21 April 1992 but not taken up by them. … The TP Act is a fundamental piece of remedial and protective legislation which gives effect to ‘matters of high public policy’.50 It is to be construed so as ‘to give the fullest relief which the fair meaning of its language will allow’.51 Section 82 applies across a spectrum of diverse legal norms created by Pts IV and V. A number of these will have no direct analogue in the general law. Given the objective of the legislation that is not surprising. However, it does emphasise the need for caution against treating a provision such as s 82 ‘as a mere supplement to or eking out of’ pre-existing law.52 To the contrary, as Mason P put it, the courts should not be ‘fearing to move far from the familiar coastline of traditional common law and equitable approaches’.53 … [W]hat was said by this Court in Gates … does not determine that the measure of compensation which is recoverable in an action under s 82 is confined by analogies with tort or otherwise. The measure of damages recoverable in actions of a varied nature for which s 82 provides is not to be determined on the basis that the appropriate guide in most cases will be found by asking what would have been the measure if the common law did what it does not do, namely treat as a tort any facts which happen to give rise to an action under s 82. Analogy, like the rules of procedure, is a servant not a master. …

In the present case, a cause of action under s 82 would not have accrued in favour of the borrowers before 1 August 1992. However, before that date, they had been given by GIO an opportunity to escape the imposition of what otherwise would have been an increased [page 311] contractual liability upon them by taking the steps specified in the GIO letter dated 21 April 1992. As a practical matter, the imposition of the higher rate upon the borrowers was the sequel to their exercise of choice not to accept the proposal made by GIO. The ‘common sense’ answer to the question of causation which arises under a provision such as s 82 cannot be given … ‘without knowing the purpose and scope of the rule’54 enacted by s 82. The borrowers appear to have approached the matter upon the footing that, there having been contravention of s 52 which induced their entry into the AAA facilities, the remedial provisions of the TP Act might be utilised to put them in the same position as if the representations were terms of the facilities. It is true that the discretionary remedies provided by s 87 are of sufficient width that, in an appropriate case, contractual terms themselves may be varied. Section 82 stands in a different light. It confers a right of action not a discretionary remedy. The purpose and scope of s 82 is to provide compensation for the injuries sustained by contravention, in the present case, of s 52. The measure of compensation will not necessarily reflect that which would have been the position of the borrowers if the AAA facility had not included the broad power of variation conferred by cl 11.1. The primary judge fell into error in (a) applying s 82 to the facts of the present case on the footing that the borrowers had been justified in refusing to take advantage of the opportunity provided by GIO; and (b) providing a remedy, the effect of which was, up to the time of judgment and notwithstanding the intervening events, to treat GIO as obliged to make good its representations. In reaching these conclusions, I have assumed that, in an appropriate case, the exercise by one party of a contractual power to increase the legal

obligations of another may be an injury to the second party, which answers the description of ‘loss or damage’ in the first sense in which that phrase is used in s 82. It will be for the second party, as an applicant under s 82, to establish the necessary causal link with a contravention of Pt IV or V and to prove the measure of compensation. In the present case, that causal link could not be demonstrated.

Section 87 The [borrowers] seek an order pursuant to s 87(2)(b) of the TP Act varying each of the borrowers’ contracts by adding a term to the effect that, notwithstanding any other contractual term, the margin applicable to the AAA facility is ‘fixed at 1.25 per cent for the life of [that] facility’, together with an order that this variation take effect as and from the date of entry by each borrower into the relevant contract. They also seek an order remitting the proceedings to the primary judge to ascertain the amounts, if any, to be refunded under an order to be made under s 87(2)(c). Section 87(2) identifies those orders which may be made under the powers conferred by subs (1) and subs (1A) of s 87. Orders in respect of contraventions of Pt IV may be made only under s 87(1). Contraventions of Pt IVA or Pt V (which includes s 52) attract both subsections. However, although the exercise of the power to grant relief under subs (1) is [page 312] not dependent upon the actual grant of relief under other provisions of Pt VI, the power is enlivened only by the institution of a proceeding seeking relief beyond that under s 87(1).55 On the other hand, an application may be made under s 87(1A) in relation to a contravention of Pt IVA or Pt V notwithstanding that no proceeding has been instituted under any other provision of Pt VI in relation to that contravention. Section 87(1C) expressly so provides. In the present litigation, reliance is placed upon s 87(1A). … [The] paragraphs of s 87(2), including para (b), upon which the [borrowers] place primary reliance, create new remedies which have an

affinity to the equitable remedies of rescission and rectification. This is consistent with the scheme of s 87. Both s 87(1) and s 87(1A) are expressed not to limit ‘the generality of s 80’. Section 80 confers powers to grant remedies identified as ‘injunctions’ but which differ from the injunctions traditionally granted by courts of equity.56 The principles regulating the administration of equitable remedies afford guidance for, but do not dictate, the exercise of the statutory discretion conferred by s 87.57 Orders under provisions of s 87(2) which vary the contracts or declare them void ab initio may be granted on terms.58 Such remedies, like their equitable analogues, are not directed to providing a measure of damages by way of monetary compensation. Statements in authorities such as Gates with respect to measure of damages thus stand quite apart. … [I]n respect of borrowers who declined the GIO offer, an order adding a term to their AAA facilities to the effect that the margin was fixed at 1.25 per cent for the life thereof would not be a proper exercise of the discretion conferred upon the court by s 87(1A). It would not be an appropriate measure to prevent or reduce loss or damage suffered or likely to be suffered by the borrowers by reason of the increase of the margin to 2.25 per cent with effect from 1 August 1992. The increased contractual liability of the borrowers would be the product of their own exercise of choice, not the taking by GIO of advantage of its misleading or deceptive conduct by insisting upon keeping the borrowers to the terms of their facilities.

[page 313]

Comment 15.4.1 See Radan, Gooley, and Vickovich at 15.86. 15.5C

Henville v Walker (2001) 206 CLR 459

Court: High Court of Australia

Facts: Henville and another (Henville) contemplated the purchase of land in a residential area for the purpose of development by the construction of a small block of home units. In considering whether to buy the land for that purpose, they did a feasibility study which calculated the likely return from the project. The feasibility study was based upon estimates of construction and other costs as well as anticipated selling prices of the units. Henville relied upon their own expertise for the cost estimates, but relied upon the vendor’s agent, Walker, as to selling prices and marketability for the purpose of estimating gross revenue. The costs were substantially underestimated and the selling prices were substantially over-estimated. Further, the state of the market for home units was misrepresented. Henville acquired the land and the project was undertaken, resulting in significant losses to Henville. Subsequently Henville sued Walker and another (Walker) in the Supreme Court of Western Australia, in which claims were made under the Trade Practices Act 1974 (Cth), the Fair Trading Act 1987 (WA), and for negligent misrepresentation. Because it was found that the claim under the Trade Practices Act succeeded, it was unnecessary for the trial judge, Anderson J, to deal with the other claims. In consequence of the successful claim under the Trade Practices Act, Anderson J held that Walker was liable under s 82 of the Act for part of the loss sustained on the project. On appeal the Full Court of the Supreme Court of Western Australia held that the necessary causal connection between Walker and the loss suffered by Henville had not been established; rather that Henville was the author of their own misfortune and their conduct in preparing and relying on the erroneous feasibility study was to be regarded as the sole cause of their decision to proceed with the development. Henville appealed to the High Court of Australia. Issues: The issues before the High Court related to extent of liability under s 82 of the Trade Practices Act and of causation. Decision: The High Court (Gleeson CJ, Gaudron, Gummow, McHugh, and Hayne JJ) upheld Henville’s appeal on the ground that Walker’s contravention of s 52 was one of two concurrent causes of Henville’s

loss and that that was enough to enable damages to be recovered under s 82. Extract: The extracts from the judgments of Gleeson CJ, Gaudron J, McHugh J, and Hayne J discuss the principles relating to the assessment of damages pursuant to s 82 and of causation.

[page 314]

Gleeson CJ It will commonly be the case that a person who is induced by a misleading or deceptive representation to undertake a course of action will have acted carelessly, or will have been otherwise at fault, in responding to the inducement. The purpose of the legislation is not restricted to the protection of the careful or the astute. Negligence on the part of the victim of a contravention is not a bar to an action under s 82 unless the conduct of the victim is such as to destroy the causal connection between contravention and loss or damage. [Walker] knew the purpose for which their representations were being relied upon by [Henville]. The Full Court accepted that the making of the representations amounted to engaging in misleading or deceptive conduct in trade or commerce. There was no warrant for a conclusion that the negligence of [Henville] in relation to the feasibility study was the sole cause of the decision to undertake the project. For there to be the necessary causal relationship between a contravention of s 52, and loss or damage, so as to satisfy the requirements of s 82(1), it is not essential that the contravention be the sole cause of the loss or damage. As Brennan J pointed out in Sellars v Adelaide Petroleum NL, where the making of a false representation induces a person to act in a certain manner, loss or damage may flow directly from the act and only indirectly from the making of the representation; but in such a case the act ‘is a link — not a break — in the chain of causation’.59 In the present case there were two concurrent causes of the imprudent decision to buy the land and

undertake the development project. The conduct of [Walker] was one of those causes. That is enough. Having concluded correctly that the misrepresentations as to the state of the market and as to likely selling prices, which constituted the contravention of s 52, were a cause of [Henville’s] loss, Anderson J said: A representation that a development will be worth a certain amount when completed has no capacity to cause losses at large. It is no warrant to design units that will end up costing more than the amount for which it was represented that they could be sold. Losses which are really down to extravagant design, to the lack of a proper costing of the proposed design, to the lack of financial resources to complete the development embarked on and to the failure to get the project finished in a reasonable time are not losses suffered by a misrepresentation as to the market value which the development will have on completion. Therefore in a case like this I do not think the amount which the units actually cost to build is an appropriate basis from which to measure the plaintiff’s recoverable loss. It is convenient to commence a consideration of the relevant principles by examining that proposition. [Henville] undertook a risky business venture, which resulted in a loss. The decision to embark upon the venture was made because of an expectation of a certain level of profit regarded as sufficient to justify taking the risk. That expectation was the consequence of the combined effect of two errors, one made directly by [Henville], and the other made as a [page 315] result of their reliance upon misrepresentations made by [Walker] in contravention of s 52 of the Act. The ultimate loss also resulted in part from factors which were unrelated to the contravention of s 52 in any sense except that they would not have come into play if the business venture had never been undertaken. Leaving aside, for the moment, the problem of measuring the extent to which the loss resulted from those factors, there arises a question of the causal relationship between the

ultimate loss and [Walker’s] misrepresentations. Were they, to use the words of Lord Hoffmann in Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd ‘losses attributable to causes which negative the causal effect of the representation’?60 Section 82 of the Act is the statutory source of [Henville’s] entitlement to damages. The only express guidance given as to the measure of those damages is to be found in the concept of causation in the word ‘by’. The task is to select a measure of damages which conforms to the remedial purpose of the statute and to the justice and equity of the case. The purpose of the statute, so far as presently relevant, is to establish a standard of behaviour in business by proscribing misleading and deceptive conduct, whether or not the misleading or deception is deliberate, and by providing a remedy in damages. The principles of common law, relevant to assessing damages in contract or tort, are not directly in point. But they may provide useful guidance, for the reason that they have had to respond to problems of the same nature as the problems which arise in the application of the Act. They are not controlling, but they represent an accumulation of valuable insight and experience which may well be useful in applying the Act. The assessment of damages for deceit, or for negligent misstatement, has confronted courts with issues similar to those which arise in the present case. In Clark v Urquhart Lord Atkin said: I find it difficult to suppose that there is any difference in the measure of damages in an action of deceit depending upon the nature of the transaction into which the plaintiff is fraudulently induced to enter. Whether he buys shares or buys sugar, whether he subscribes for shares, or agrees to enter into a partnership, or in any other way alters his position to his detriment, in principle, the measure of damages should be the same, and whether estimated by a jury or a judge. I should have thought it would be based on the actual damage directly flowing from the fraudulent inducement.61 [Walker’s] misleading representations, made in contravention of s 52 of the Act, induced [Henville] to alter their position to their detriment, by purchasing land and proceeding with the home unit development. An

assessment of ‘the actual damage directly flowing from the … inducement’ accords with the language and purpose of s 82. But how is that assessment affected by the matters that were regarded by Anderson J as extraneous factors contributing to the ultimate loss suffered on the project? One possible answer is that those matters should have no effect on the assessment; that the whole financial loss suffered on the [page 316] project was actual damage flowing from the contravention of s 52, and was therefore damage suffered ‘by’ the contravention. If that answer be correct, then Anderson J underestimated the amount to which [Henville] were entitled and, because they seek no more than he awarded, his judgment must be restored. I am not persuaded that the position is so simple. No one suggests that it is proper to regard the present as a case where the only relevant effect of the misleading conduct was to induce the purchase of an asset at an overvalue, or that the damage is to be measured by comparing the price paid by [Henville] for the real estate with the true value of the real estate at the time of purchase. The land was purchased for a specific purpose and, as [Walker] understood, the development project involved not only the acquisition of the land but also the building and marketing of units, and the borrowing of most of the money required for that purpose. In assessing damages for deceit, where a person has been induced to enter into a business venture by the fraudulent misrepresentations of another, the courts have long had to deal with the problem of deciding whether all or only some of the losses incurred in the venture are properly to be regarded as damage caused by the deceit. If a defendant fraudulently induces a plaintiff to buy grazing land and undertake a pastoral business, the defendant does not thereby become an underwriter of all losses incurred by the plaintiff’s business for so long as it continues to be carried on, whenever and however those losses may arise. That simple example states the problem; it does not solve it. Although there has been some discontent with its apparent rigidity,62 a primary reason for the general principle that damages in deceit, where there

has been a fraudulent inducement to acquire shares in a company, are measured by the difference in the value of the shares at the time of acquisition and the price paid for them, is the need to separate out losses resulting from extraneous factors in the later conduct of the company’s business. Peek v Derry was a case concerning shares in a tramway company that were taken up on the faith of a false prospectus. Cotton LJ said: Neither can the Plaintiff get the benefit of any loss or depreciation in the shares which was occasioned by subsequent acts. If the company at the time was a good company and the shares had an intrinsic value, then no fact which subsequently occurred, as for instance, some Act of Parliament being passed to prevent such tramways from using steam-power, or anything else, ought to add to the damages to be paid by the Defendants. And of course a plaintiff cannot aggravate the damages he is to get by acting unreasonably, and if here the Plaintiff had in any way acted unreasonably, then any loss which was the consequence of that would not be added to the damages which were to be paid by the Defendants.63 [page 317] Later, his Lordship referred to ‘events injurious to the company, which occurred not from intrinsic defects in it, but from events which happened after the purchase’, which ‘cannot be taken into account’.64 Since we are not here concerned with a simple purchase of an asset, the refinements sometimes involved in seeking to distinguish between subsequent loss or deterioration in an asset which occurs as a result of the ‘normal nature and characteristics’65 of the thing bought, and loss resulting from other causes, are not directly relevant. But a related problem arises. Similarly, in the area of negligent misstatement, especially in cases involving business arrangements entered into in reliance upon faulty valuations of property, the problem of identifying losses resulting from the negligence as distinct from losses resulting from extraneous causes has emerged. In Australia, this is still seen as involving questions of causation.66 In Gould v Vaggelas, a case of deceit which induced the purchase of a

business, Gibbs CJ said: There is no reason in principle why the defrauded purchaser should not recover damages for all the loss that flowed directly from the fraudulent inducement (unless, possibly, the loss was not foreseeable). If the purchaser, besides paying more for the business than it was worth, has suffered additional losses which resulted directly from the fraud he ought to be compensated for them. Of course, the court must be satisfied that the loss did result directly from the fraud and not from some supervening cause such as the folly, error or misfortune of the purchaser himself….67 Dawson J said in the same case: Moreover, for a loss to be recoverable it must be clear that it is suffered as a direct consequence of the deceit and is not referable to something else such as the purchaser’s ineptitude in the conduct of the business.68 The principles concerning measuring damages for deceit resulting in the purchase of an asset, where there was consequential loss following the retention of the asset, were considered by the House of Lords in Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd.69 In that case approval was given to Doyle v Olby (Ironmongers) Ltd, including a passage in the judgment of Winn LJ who said: It appears to me that in a case … where there has been a tortious wrong consisting of a fraudulent inducement, the proper startingpoint for any court called upon to consider what damages are recoverable by the defrauded person is to compare his position before [page 318] the representation was made to him with his position after it, brought about by that representation, always bearing in mind that no element in the consequential position can be regarded as

attributable loss and damage if it be too remote a consequence: it would be too remote not necessarily because it was not contemplated by the representor, but in any case where the person deceived has not himself behaved with reasonable prudence, reasonable common sense, or can in any true sense be said to have been the author of his own misfortune. The damage that he seeks to recover must have flowed directly from the fraud perpetrated upon him.70 The passages quoted from Peek v Derry and Gould v Vaggelas indicate that the qualification expressed by Winn LJ may not cover all cases where consequential loss would be regarded as too remote. Subject to that comment, similar principles are appropriate to the application of s 82 of the Act in a case such as the present, and they were the principles which Anderson J was seeking to apply. … The appeal should be allowed.

Gaudron J On the trial judge’s finding of facts and, indeed, on the findings of the Full Court, Mr Walker’s misrepresentations materially contributed to the loss sustained by Mr Henville and, thus, caused his loss. The Full Court erred in holding otherwise. The question whether Mr Henville failed to prove his damages is a separate question which necessitates consideration of the precise terms of s 82(1) of the Act. Subsection (1) of s 82 of the Act allows ‘[a] person who suffers loss or damage by [contravening] conduct’ to recover ‘the amount of the loss or damage’. There is nothing to suggest that the subsection does not entitle full recovery of the loss or damage suffered by the conduct in question. Nor is there anything in the Act to suggest that the loss or damage is to be calculated in any particular way — a matter which has led to questions being raised as to the ‘measure of damages’ under s 82(1). For the purposes of the law of negligence, liability for an act or omission which materially contributed to loss or injury which would not have happened but for the occurrence of another event, may be limited by resort to considerations of foreseeability of damage and/or contributory negligence. And questions have been raised as to whether foreseeability and

contributory negligence have a role to play in determining the extent of a person’s liability under s 82(1) of the Act, particularly where the contravening conduct also constitutes a negligent misstatement. A similar question may be asked in cases where the contravening conduct also constitutes deceit. As a general rule, damages for deceit are confined to those that ‘result directly from the fraud and not from some supervening cause such as the folly, error or misfortune of [the plaintiff]’.71 [page 319] Where loss or injury results from two or more acts or events, questions of ‘foreseeability’ and ‘contributory negligence’ have rendered nice questions of causation largely irrelevant to the exercise of determining the extent of a negligent defendant’s liability. Indeed, the role of causation in that exercise was trenchantly criticised in Overseas Tankship (UK) Ltd v Morts Dock & Engineering Co Ltd (The Wagon Mound) (No 1).72 However, the question asked in relation to damages for deceit, namely, whether ‘the loss … result[ed] directly from the fraud and not from some supervening cause’,73 would seem to be one firmly based in causation. It was held in Marks v GIO Australia Holdings74 that the relief available under s 82(1) of the Act is not to be confined by analogy either with actions in contract or in tort. Rather, the task under that subsection is to ascertain the loss suffered by the contravening conduct and to assess the amount necessary to compensate for that loss. Once that is accepted, it follows, in my view, that considerations of foreseeability and contributory negligence are irrelevant to the exercise required by s 82(1). However, that does not mean that, where the loss is the result of two or more acts or events, causation is irrelevant to the task of identifying the loss or the amount of the loss recoverable. To treat causation as irrelevant would be to ignore the requirement in s 82(1) that a person suffer loss or injury by contravening conduct.

McHugh J In my opinion, the Full Court erred in holding that Mr Henville had not suffered loss by reason of the false and misleading statements of

[Walker]. The statements concerned the general demand for units of the kind being contemplated, the likely prices that such units would fetch and the time within which they could be sold for those prices. They were as inextricably linked with Mr Henville’s decision to proceed with the project, as they were at the heart of the profitability computation in the feasibility study. It was that computation that led Mr Henville to proceed with the project and incur the loss. That factors, other than a respondent’s contravention of the Act, have operated to induce a person to act in a way that results in loss or damage does not prevent that person from recovering the amount of loss or damage under s 82 of the Act. The existence of other operative factors may be relevant in assessing the amount of the loss or damage, but it does not deny an applicant a remedy under s 82. … Section 82 now applies to the contravention of any provision of Pts IV, IVB or V, or s 51AC of the Act. In Marks v GIO Australia Holdings Ltd, Hayne and Callinan JJ and I pointed out that the section can apply to many different kinds of cases, not just those where a breach of s 52 is alleged.75 Moreover, the objects of the Act indicate that a court should strive to apply s 82 in a way that promotes competition and fair trading and protects consumers. The width of the potential application of s 82 and the objects of the Act tell against a narrow, inflexible construction of the section.76 No doubt in most cases, applying common law conceptions of causation will be sufficient to answer the issues posed by s 82 in its application to contraventions of the [page 320] Act. But care must be taken to avoid a mechanical application of those conceptions to issues arising under the section. In Elna Australia Pty Ltd v International Computers (Aust) Pty Ltd (No 2), Gummow J pointed out: [I]t would be an error to translate automatically to the particular statute what appeared the closest analogue from the common law ‘rules’ as to causation. It is rather a question of statutory construction. … Thus, in construing s 82 it is appropriate to bear in mind such matters as the scope and purpose of Pts IV and V …

[and] the wide range of subject-matters dealt with in Pts IV and V but all linked to s 82.77 … [I]n respect of claims under s 82, courts have accepted that loss or damage is causally connected to a contravention of the Act if a misrepresentation was one of the causes of the loss or damage sustained by the claimant.78 … This Court has addressed the question of assessment of damages under s 82 on several occasions. The Court has concluded that in most cases the measure of damages in tort is the appropriate guide in determining an award of damages under s 82. However, in assessing damages under s 82, courts are not bound to choose between the measure of damages in deceit or other torts or contract. In Marks v GIO Australia Holdings Ltd, the Court said that the central issue under s 82 is to establish a causal connection between the loss claimed and the contravening conduct.79 Once such a connection is found to exist, nothing in s 82 suggests that the recoverable amount should be limited by drawing an analogy with contract, tort or equitable remedies although they will usually be of great assistance. As Gummow J said in Marks, ‘[a]nalogy, like the rules of procedure, is a servant not a master’.80 Indeed, general principles for assessing damages may have to give way altogether in particular cases to solutions best adapted to give the injured claimant an amount which will most fairly compensate for the wrong suffered. In this case, the most appropriate approach is to identify what Mr Henville has suffered by way of prejudice or disadvantage in consequence of altering his position by reason of the breach of the Act. The measure of that loss is not determined by reference to what he would have received if Mr Walker’s representations had been true. … The purposes of the Act include promoting fair trading and protecting consumers from contraventions of the Act. Those purposes are more readily achieved by ensuring that consumers recover the actual losses they have suffered as the result of contraventions of the Act. Where a person contravenes the Act and induces a person to enter upon a course of conduct that results in loss or damage, an award of damages that compensates for the actual losses incurred in embarking on that course of

conduct best serves the purposes of the Act and should ordinarily be awarded. … [page 321] Given the long history of the common law’s recognition of the concept of remoteness in assessing damages in contract and tort and its relationship with the issue of causation, it seems proper to read the term ‘by’ in s 82 as including the concept of remoteness. By remoteness, I mean that the loss or damage was not reasonably foreseeable even in a general way by the contravener. Remoteness in this sense is very different from the concept of remoteness formulated by Winn LJ in Doyle v Olby (Ironmongers) Ltd. … In Doyle, Winn LJ said that in an action for fraud ‘no element in the consequential position can be regarded as attributable loss and damage if it be too remote a consequence’. But he then went on to say: [I]t will be too remote not necessarily because it was not contemplated by the representor, but in any case where the person deceived has not himself behaved with reasonable prudence, reasonable common sense, or can in any true sense be said to have been the author of his own misfortune.81 With great respect, this passage with its references to ‘reasonable prudence’ and ‘reasonable common sense’ confuses remoteness with contributory negligence and causation. … In my opinion, the remarks of Winn LJ in Doyle are wrong in principle. They should not be followed even in actions for fraud, the class of action with which Doyle was concerned. And they certainly should not be regarded as having any authority in respect of actions concerned with s 82 of the Act. Nothing in the common law, in ss 52 or 82 or in the policy of the Act supports the conclusion that a claimant’s damages under s 82 should be reduced because the loss or damage could have been avoided by the exercise of reasonable care on the claimant’s part. There is no ground for reading

into s 82 doctrines of contributory negligence and apportionment of damages. No doubt, if part of the loss or damage would not have occurred but for the unreasonable conduct of the claimant, it will be appropriate in assessing damages under s 82 to apply notions of reasonableness in assessing how much of the loss was caused by the contravention of the Act.82 But that proposition is concerned with the items that go to the computation of the loss …. [N]othing in the judgments of the courts below shows that there was any unreasonable conduct on the part of Mr Henville in incurring costs or raising revenue.

Hayne J The question which is presented in this case then becomes whether s 82(1) of the Act requires some limiting of the consequences for which [Walker] are to be held liable. … [I]s s 82 concerned only with establishing that the contravening conduct played a role in the history of the events that culminated in the loss sustained? Are there some limits to the recovery that is permitted, or are [Walker] to be liable for all of the loss that [Henville] sustained? [page 322] It is clear that s 82 requires that the contravening conduct have played a role in the history of the events and that the role required is one of causation. Section 82(1) of the Act speaks of ‘[a] person who suffers loss or damage by conduct of another person that was done in contravention’ (among other things) of Pt V of the Act being entitled to recover ‘the amount of the loss or damage’. That is, s 82 provides that a person may recover the amount of the loss or damage caused by the conduct in question, here a contravention of Pt V. In the present case, [Walker’s] contravention of the Act can be seen to have caused [Henville] damage because [Henville] relied on [Walker’s] misleading or deceptive conduct in deciding to proceed with the project. The amount of the loss ultimately suffered by [Henville] was, however, brought about by the combination of circumstances of which [Walker’s] misleading and deceptive conduct was only one factor. [Henville’s]

mistaken estimate of costs was another. How is s 82(1) of the Act to operate in such a case? First, it is necessary to identify the loss sustained by [Henville]. The loss which [Henville] suffered is a single sum. It is the amount by which their expenditures exceeded their receipts. Several different items must be taken into account in computing the amount expended and the amount received, but the loss is the single sum remaining after receipts are subtracted from expenditures. Further, the whole of that loss was brought about by the decision to proceed with the project, a decision which was, as I say, made in reliance upon the wrong estimates of both costs and likely receipts. (Other considerations may well intrude if, for example, the amount of the loss had been inflated by a decision to change the plans in the course of construction.) Both the estimate of likely receipts and the estimate of likely expenditures were wrong. That does not mean, however, that, in this case, attention can be confined to one side of the profit and loss account in determining what loss and damage was caused by [Walker’s] misleading and deceptive conduct. The question presented by the statute is what loss was suffered by [Henville] that was caused by the relevant contravention? The conclusion that [Henville] suffered loss requires comparison between the position in which [Henville] found themselves after the project was finished, and the position in which they would have been if, instead of relying on what they were told by [Walker], they had not undertaken the project. It does not invite attention to what would have been their position if an accurate estimate of selling price had been given by [Walker].83 Moreover, the conclusion that [Henville] suffered loss neither requires nor permits consideration of some third or intermediate position in which [Henville] undertook some project or transaction other than the one they did. It is, therefore, not relevant to consider what the loss might have been if costs had been estimated properly. Secondly, seldom, if ever, will contravening conduct be the sole cause of a person suffering loss. Other factors will always be capable of identification as a cause of the person suffering loss. In a case like the present, [Henville’s] relying on [Walker’s] estimate of likely receipts can be seen to be a cause of their loss. What the Act directs attention to is whether the

[page 323] contravening conduct was a cause. It does not require, or permit, the attribution of some qualification such as ‘solely’ or ‘principally’ to the word ‘by’. Thirdly, it is necessary to recognise that, on its face, the section permits recovery of the whole of the loss sustained by a person who demonstrates that a contravention of Pt V of the Act was a cause of that loss. Neither the words of s 82(1) nor anything in the intended scope and context of the Act suggest some narrower conclusion. In particular, nothing in the text of s 82(1) (or any of the other provisions of the Act) suggests that the carelessness of the person who suffers loss or damage as the result of contravention of the Act should be taken into account in deciding what was the amount of loss or damage actually suffered. Nor is some such limitation to be derived from considering the intended purposes of the Act. The very simplicity of the language used in s 82(1) appears to confine attention to the limited question of the historical relevance of the contravening conduct to the loss or damage sustained. It does not provide a basis for concluding that notions of contributory fault are to be given a place in its operation. There may be cases where some of the loss suffered by a person following — and I use the word ‘following’ in a neutral sense — the conduct of another in contravention of the Act may not be loss suffered by that person by the contravening conduct. Had [Henville] chosen, for wholly extraneous reasons, to change the design of the units, part way through their construction, in such a way as to waste some costs of construction already incurred, it might be said that the extra costs incurred were not caused by [Walker’s] contravention. Whether, as Gaudron J suggests,84 it would be for the contravener to demonstrate in such a case that part of the loss suffered was not attributable to the contravention is a point I need not decide. For the moment, it is enough to say that it seems to me that such questions must find their answers within the Act rather than in analogies with common law. Thus, if notions of remoteness of damage or reasonableness are to find reflection in s 82(1) it seems probable that they may do so only through consideration of the causation question which the sub-section

poses. As Professor Stapleton has pointed out, questions of remoteness of damage in tort can be seen in terms of causation. Likewise, asking what is ‘reasonable’ in assessing how much of the loss was caused by the contravention may invite attention to the nature and extent of the causal connection between the loss and contravening conduct. This case does not present such questions and it is not necessary to decide them.

[page 324]

Comment 15.5.1 See Radan, Gooley, and Vickovich at 14.46, 15.79, and 15.86.

THE ‘CONDUIT’ ARGUMENT 15.6C

Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592

Court: High Court of Australia Facts: The appellants were purchasers of land from its then registered proprietor, Harkins. The respondent real estate agent, Lachlan Elder Realty Pty Ltd, acted for the vendor in that sale. The appellants sued the agent for damages for misleading or deceptive conduct. The appellants claimed (among other things) that a colour advertising brochure issued by the agent was misleading because it misrepresented the location of the boundary of the property as being on the waterside of a swimming pool that was located on the land. In other words, it was said that the agent had represented that the swimming pool was within the freehold of the property. The appellants also sought damages against the vendor for misrepresentation and misleading or deceptive conduct based on the incorrect survey diagram.

In the Supreme Court Austin J found that the brochure contained a copy of a survey diagram, which suggested that the swimming pool was wholly within the vendor’s freehold land. His Honour found that the vendor had made a misrepresentation that the mean high-water mark was located beyond the swimming pool. However, the trial judge found that Lachlan Elder had not engaged in misleading or deceptive conduct within the meaning of s 52 in distributing the brochure, even though the appellants had reasonably relied on the diagram in the brochure. His Honour held that the class of potential purchasers of waterfront homes in a price bracket above $1m, independently advised by their own solicitors, would be unlikely to be misled by the brochure read as a whole, having regard, in particular, to its disclaimer provisions. His Honour found that, even if the brochure had been misleading or deceptive, Lachlan Elder had done no more than pass on the survey diagram, making it clear that it was not the source of the information. The appellants appealed to the New South Wales Court of Appeal, which unanimously dismissed their appeal. Subsequently, the appellants appealed to the High Court. Issue: One of the issues before the High Court was whether the lower court erred in finding that Lachlan Elder did not engage in misleading and deceptive conduct. Decision: The majority of the High Court dismissed the appeal. Extract: The extracts highlight the circumstances that gave rise to the finding in that case that there was no misleading conduct.

[page 325]

Gleeson CJ, Hayne and Heydon JJ The alleged representation made The relevant class addressed. Questions of allegedly misleading conduct, including questions as to what the conduct was, can be analysed from two

points of view. One is employed in relation to ‘members of a class to which the conduct in question [is] directed in a general sense’. The other, urged by the purchasers here, is employed where the objects of the conduct are ‘identified individuals to whom a particular misrepresentation has been made or from whom a relevant fact, circumstance or proposal was withheld’; they are considered quite apart from any class into which they fall. Adoption of the former point of view requires isolation by some criterion or criteria of a representative member of the class. To some extent the trial judge adopted the former approach, pointing out that the class — potential home buyers for Pittwater properties in a price range exceeding $1 million — was small (as suggested by the fact that only 100 brochures were printed), and its members could be expected to have access to legal advice. The former approach is common when remedies other than those conferred by s 82 (or s 87) of the Act are under consideration. But the former approach is inappropriate, and the latter is inevitable, in cases like the present, where monetary relief is sought by a plaintiff who alleges that a particular misrepresentation was made to identified persons, of whom the plaintiff was one. The plaintiff must establish a causal link between the impugned conduct and the loss that is claimed. That depends on analysing the conduct of the defendant in relation to that plaintiff alone. So here, it is necessary to consider the character of the particular conduct of the particular agent in relation to the particular purchasers, bearing in mind what matters of fact each knew about the other as a result of the nature of their dealings and the conversations between them, or which each may be taken to have known. Indeed, counsel for the purchasers conceded that the mere fact that a person had engaged in the conduct of supplying a document containing misleading information did not mean that that person had engaged in misleading conduct: it was crucial to examine the role of the person in question. The relevant principles. In Yorke v Lucas, Mason A-CJ, Wilson, Deane and Dawson JJ said that a corporation could contravene s 52 even though it acted honestly and reasonably: ‘That does not, however, mean that a corporation which purports to do no more than pass on information supplied by another must nevertheless be engaging in misleading or deceptive conduct if the information turns out to be false. If the circumstances are such as to make it apparent that the corporation is not

the source of the information and that it expressly or impliedly disclaims any belief in its truth or falsity, merely passing it on for what it is worth, we very much doubt that the corporation can properly be said to be itself engaging in conduct that is misleading or deceptive.’ In applying those principles, it is important that the agent’s conduct be viewed as a whole. It is not right to characterise the problem as one of analysing the effect of its ‘conduct’ divorced from ‘disclaimers’ about that ‘conduct’ and divorced from other circumstances which might qualify its character. Everything relevant the agent did up to the time when the [page 326] purchasers contracted to buy the Rednal land must be taken into account. It is also important to remember that the relevant question must not be reduced to a crude inquiry: ‘Did the agent realise the purchasers were relying on the diagram?’ To do that would be impermissibly to dilute the strict liability which s 52 imposes. For the following reasons, the agent did not engage in conduct towards the purchasers which was misleading. Whatever representation the vendor made to the purchasers by authorising the agent to issue the brochure, it was not made by the agent to the purchasers. The agent did no more than communicate what the vendor was representing, without adopting it or endorsing it. That conclusion flows from the nature of the parties, the character of the transaction contemplated, and the contents of the brochure itself. The nature of the parties. The parties were, on the one side, a company director and his de facto wife. They engaged in a carpet cleaning business conducted from their home. They were proposing to engage in an investment for family purposes. The search for and making of that investment was the result of a three to five year plan designed to achieve long-term financial security, to educate their four children, and to provide for the wellbeing of the family. The plan involved making strategic investments in properties and shares. It involved the sale of an apparently valuable motor yacht. The purchasers were contemplating the expenditure

of over $1 million to be funded by the sale of another piece of valuable land for over $1 million — land which, according to the agent, had had ‘absolutely magnificent’ renovations effected and for which the purchasers hoped to get at least $1.2–1.3 million. The purchasers were persons who were quite wealthy, and certainly aspired to become wealthier, by means of complex property and financial dealings. The transcript of their oral evidence reveals each of the purchasers to have been intelligent, shrewd and self-reliant. No doubt they appeared that way to the officers of the agent. On the other side, the relevant party was a suburban real estate agent — a corporation, a franchisee of L J Hooker, but still a suburban real estate agent, which took the name of the man who was its principal. Its office was Shop 2, 19 Bungan Street, Mona Vale. Nothing in the evidence suggests that it had more than a very small staff, or that the purchasers believed that it had more than a very small staff. The representation alleged was a representation about title. It is a matter of common experience that the skill of suburban real estate agents lies in making contracts on behalf of sellers with buyers, in locating persons who wish to sell real property and interesting in that real property persons who might wish to buy it, and in advising the former what prices are obtainable and the latter what prices might have to be paid. Suburban real estate agents do not hold themselves out — and this agent did not hold itself out — as possessing research skills or means of independently verifying title details about the properties they seek to sell. It is also a matter of common experience — and it was certainly the fact here — that real estate agents, while they carry out tasks on behalf of their principals, are not agents in the sense of creating legal relationships between their principals and others. Here, the agent was obviously an agent for the vendor, but only in a limited sense. The legal relationship to be created by any contract of purchase was to be created by the purchasers directly — by bidding at the auction and then signing a contract. [page 327] It is a matter of common experience that questions of title to land can be complex, both legally and factually. Hence they have to be dealt with by specialists. So far as the complexity is factual, the specialists are surveyors.

So far as the complexity is legal, the specialists are solicitors or conveyancers, relying on specialists like surveyors. The skills of these specialists, and the problems on which those skills are brought to bear, are quite outside what suburban real estate agents hold themselves out as doing and are likely to be able to do. While Mr Butcher said he regarded the agent as an expert in appraising property values, the appeal papers do not record any evidence from the purchasers that they regarded the agent as an expert in surveying or in land title. The character of the transaction. The transaction was the purchase of very expensive property, to be used as an investment — a means of gaining future profits. While the purchasers initially told the agent that they were interested in properties to the value of between $800,000 and $1 million, they did not decline the agent’s invitation to inspect the Rednal land, which was expected to sell for $1.3–1.5 million according to Mr Spring, well above that level, and which was in due course sold to them for $1.36 million, including an unusually large deposit of $272,000. The area of which the Rednal land was part was ‘a well regarded, prestige, waterfront location’. The purchasers bought it despite the fact that, as they told the agent, they saw it as needing ‘a huge amount of’ building work in the form of ‘major corrective renovations’. They intended to carry on their carpet cleaning business from the premises. The purchasers were contemplating extensive changes to the entertaining area of the Rednal land if they bought it. The changes would also be expensive, for, as Mr Elder told the purchasers, ‘it would cost a fortune’. The purchasers engaged appropriate professional advisers to assist them — Mr Gordon, an accountant; Mr Gillmer, an architectural designer and building consultant; and Mr Hindmarch, a licensed builder. They also engaged solicitors to assist with the actual process of making and completing the contract. The agent was acting for the purchasers not only on the purchase of the Rednal land but also on the sale of 41 Calvert Parade. The agent worked closely with the purchasers in both respects. The agent knew most of the key characteristics of the purchasers and the properties they wished to sell and to acquire — the fact that the purchasers owned a valuable house, their desire to use the equity in it to buy a valuable property to be redeveloped

and on-sold, and their access to and reliance on various forms of professional advice. The contents of the brochure. As counsel for the purchasers acknowledged, the diagram on the back of the brochure was a survey diagram and ‘looks like’ a copy of an original prepared by a professional surveyor. Mr Butcher appreciated that it was a survey diagram. Mr Hindmarch recognised it as ‘a survey’ or a ‘survey document’, and rejected any suggestion that it was merely a sketch. The trial judge found that potential purchasers would be likely to assume that the diagram had been taken from an identification survey report. Not only was it plain that the diagram had not been made by the agent, the circumstances also negated any suggestion that the agent had adopted the surveyor’s diagram as its own, or that it had verified its accuracy. The losses allegedly suffered by the purchasers arose from their entry into the contract to buy the Rednal land on 18 February 1997. Before they entered it, their solicitor [page 328] had received a copy of the contract, and they themselves entered the contract by signing it. If they had not previously realised that the diagram in the brochure was from a survey not conducted by or on the instructions of the agent, they must have realised it then, because the contract annexed Mr Hannagan’s survey report dated 4 August 1980, containing the survey diagram bearing that date. It is now necessary to consider the two disclaimers, one on the front and one on the back. The courts below treated the one on the back as relating to the position of the agent. It may instead relate to the position of Williams Design Associates, on whose role the evidence is silent, save that it may be inferred that they played some role in producing the brochure. But it does not matter, for present purposes, whether both disclaimers relate to the agent or only one. If the disclaimers are examined from the point of view of what the agent was trying to do, the first at least establishes that it was trying not to make any representations about the accuracy of the

information conveyed, save that it believed the sources of it to be reliable. If the disclaimers are examined from the point of view of a careful reader, they communicate the same message. In fact, Mr Butcher said that he did not notice either disclaimer when he received the brochure on or about 6 February 1997. Though he apparently studied the brochure, including the diagram, with sufficient care to pass on his impressions of it to Mr Gillmer and Mr Hindmarch, the evidence in the appeal papers does not suggest that he ever noticed them. There is no evidence in the appeal papers that Ms Radford noticed the disclaimers either. Yet, though the disclaimers were in small type, the brochure was a short document, there was very little written on it, and the disclaimers were there to be read. Only persons of very poor eyesight would find them illegible, and there is no evidence that the eyesight of Mr Butcher or Ms Radford was in any way defective. The Court of Appeal declined to ‘accord [the disclaimers] decisive significance’, but they do have some significance. If the ‘conduct’ of the agent is what a reasonable person in the position of the purchasers, taking into account what they knew, would make of the agent’s behaviour, reasonable purchasers would have read the whole document, given its importance, its brevity, and their use of it as the source of instructions to professional advisers. There are circumstances in which the ‘conduct’ of an agent would depend on different tests. For example, those tests might turn on what purchasers actually made of the agent’s behaviour, whether they were acting reasonably or not, and they might also call for consideration of how the agent perceived the purchasers. Tests of that latter kind might be appropriate for plaintiffs of limited experience acting without professional advice in rushed circumstances. They are not appropriate in the present circumstances. Hence, in the circumstances, the brochure, read as a whole, simply meant: ‘The diagram records what a particular surveyor found on a survey in 1980. We are not surveyors. We did not do the survey. We did not engage any surveyor to do the survey. We believe the vendor and the surveyor are reliable, but we cannot guarantee the accuracy of the information they have provided. Whatever you rely on, you must rely on your own enquiries.’ Hence it would have been plain to a reasonable purchaser that the agent was not the source of the information which was said to be misleading. The agent did not purport to do anything

[page 329] more than pass on information supplied by another or others. It both expressly and implicitly disclaimed any belief in the truth or falsity of that information. It did no more than state a belief in the reliability of the sources.

Specific contentions of the purchasers It is convenient to deal briefly with several specific contentions advanced by the purchasers. First, it was said that the disclaimers were to be read down, because the agent was not the source of all the information: it was plainly the source of the information and the photographs on the front of the brochure. That assertion is not correct: it is possible that the agent was the source of everything on the front of the brochure, but it has not been demonstrated that it was. Secondly, it was submitted that there should have been ‘something … in plain print near the [allegedly misleading] information that [readers] should check its accuracy and [the agent does] not stand behind it’. The statement that the agent did not guarantee the accuracy of any information and that readers should make their own inquiries meant that readers should check its accuracy. That statement was sufficiently near both the picture of the back garden on the front and the diagram on the rear, since it was reproduced on both pages where the allegedly misleading information appeared and clearly applied to everything on the respective pages. Thirdly, it was submitted that the location of the boundary was a matter highly material to a valuable property being sold specifically as a waterfront property, and the agent should have given a proper warning disassociating itself from any representation on that subject. Yet there were two explicit warnings, which, although general, were for that reason comprehensive, and there were other warnings implicit in the totality of the brochure. Fourthly, it was contended that agents carrying on business in the Pittwater area ‘presumably ought to know about mean high-water marks around Pittwater’. That submission is highly questionable factually and asserts no more than part of what it is trying to prove.

Fifthly, stress was placed on the large commission that the agent was probably seeking, and the expectation this would generate in the purchasers that any representations about the property would be correct. There is no evidence that the purchasers knew what commission the agent would get, and whatever the size of the agent’s commission, the circumstances remain inconsistent with its having made any relevant representation. Sixthly, it was submitted that while it was open to an estate agent to put a disclaimer on marketing brochures which could prevent its conduct from falling within s 52, the disclaimer would be so antithetical to the goal of selling properties that no estate agent would ever employ it. Yet the disclaimers on the brochure are not of that character, and they do negate any relevant representation. Extreme consequences of the purchasers’ arguments. Further difficulties are created by certain extreme consequences which counsel for the purchasers acknowledged would flow from their arguments. It was accepted that if their arguments were sound, it must follow that when [page 330] a real estate agent produces a brochure offering land for sale by a vendor, the real estate agent is representing that the vendor had good title. That would be so radical a conclusion as to suggest that even the wide words of s 52 could not bring it about; that in turn suggests that the principles that supposedly lead to that radical conclusion are unsound. It was also said that while Mr Spring’s handing over of the brochure made the agent liable, the handing over of it by a junior employee at the front desk could not. The basis for this distinction was not explained. If the brochure made any representation, the conduct of the junior employee in handing it over would be engaged in on behalf of the agent as much as the conduct of the senior officer, and would therefore be deemed by s 84(2) to have been engaged in by the agent. The status of the employee might be relevant to whether it was probable that the employee was personally liable as a secondary party (eg, an aider or abettor) by reason of having knowledge

of the essential elements of the contravention; but it is not, subject to s 84(2), relevant to whether the corporation — here, the agent — is liable. Authorities analysed by the purchasers. Counsel for the purchasers submitted that the Federal Court had repeatedly held ‘that disclaimers of this nature are not likely to overturn the effect of otherwise misleading and deceptive conduct’. However, the Federal Court authorities do not say that disclaimers cannot make clear who is and who is not the author of misleading or deceptive conduct. While acknowledging that each case depended on its own facts, the purchasers relied on various authorities as supporting their argument. In John G Glass Real Estate Pty Ltd v Karawi Constructions Pty Ltd, a real estate agent (John G Glass) placed a typed document emanating from the principal of a firm of consultants acting for the vendor with other materials in a folder with a glossy cover. The typed document showed that the net lettable area of a building being offered for sale was 180 m. In fact, the net lettable area was 137.4 m. John G Glass contended that the only representation it had made was that it had obtained the information in the brochure from the vendor; that it had not endorsed or approved the information in the brochure; and that it was no more than a conduit. These contentions relied on the following statement in the brochure on a page immediately before the back cover: The information contained herein has been prepared with care by our Company or it has been supplied to us by apparently reliable sources. In either case we have no reason to doubt its completeness or accuracy. However, neither John G Glass Real Estate Pty Ltd, its employees or its clients guarantee the information nor does it, or is it intended, to form part of any contract. Accordingly, all interested parties should make their own enquiries to verify the information as well as any additional or supporting information supplied and it is the responsibility of interested parties to satisfy themselves in all respects. The Full Federal Court (Davies, Heerey and Whitlam JJ) upheld the trial judge’s rejection of these contentions. Counsel for the purchasers here contended that if John G Glass there failed, with its ‘more ample disclaimer’, going ‘much further than the suggested disclaimer here’, the

agent must fail in the present case. The case is distinguishable on two grounds. [page 331] The first ground of distinction is that in the brochure John G Glass held itself out as ‘consultants to institutional investors and to developers of major properties’, and the Full Federal Court held that such an agent ‘would not be regarded by potential purchasers of properties as merely passing on information about the property “for what it is worth and without any belief in its truth or falsity”’. The second ground of distinction is that the Full Federal Court said that the net lettable area figure was ‘one of hard physical fact’, and an essential matter in determining the profitability and value of the building. The issue of whether there was a precise correspondence between the Pittwater boundary of the Rednal land and the ‘MHWM’ line on the surveyor’s diagram here, however, is not a matter of hard physical fact. What is more, there was nothing to indicate that the net lettable area figure had not been calculated by John G Glass itself: indeed, the part of the disclaimer which stated that some of the information had been ‘prepared with care by’ John G Glass suggested that it had, since it is the type of information an estate agent might be capable of working out for itself. It is quite different from the survey diagram, which had obviously not been prepared by the agent here. Hence Handley JA’s succinct explanation of why the case was distinguishable is correct: In that case the agents claimed relevant expertise, adopted the figures as their own, and put them forward without any reference to their source. In the present case the agents claimed no relevant expertise, and the diagram itself indicated that it was the work of a professional surveyor. Not only is the case distinguishable, but its reasoning in one respect is questionable. The Full Federal Court said: There was certainly no express disclaimer of the [estate agent’s]

belief in the truth of the information in the brochure — indeed there was an express assertion of such belief. It does not seem quite correct to describe an estate agent which says it has no reason to doubt the accuracy of information but says it does not guarantee it, advises interested parties to make their own inquiries, and says interested parties have the responsibility of satisfying themselves in all respects, as making an ‘express assertion’ of belief in the information. … The purchasers next referred to a case on which the Court of Appeal relied, Argy v Blunts & Lane Cove Real Estate Pty Ltd, where Hill J suggested that a solicitor would not be guilty of misleading conduct in annexing to a contract for the sale of land a certificate issued by a local council under s 149 of the Environmental Planning and Assessment Act 1979 (NSW) which wrongly described the zoning of the land, so long as the whole of the certificate was annexed. It was said to be distinguishable in that the solicitor in that case merely attached a document prepared by another, while here the agent incorporated the document as part of its brochure in conjunction with other material, particularly the photographs on the front. The purchasers’ attempt to distinguish this case rested on an unsatisfactory distinction between survey diagrams included in brochures and survey diagrams annexed to brochures. … The purchasers did not submit that Argy v Blunts & Lane Cove Real Estate Pty Ltd and Dean v Allin & Watts were incorrect, but said that they were cases in which a solicitor did [page 332] no more than present a principal’s document to a plaintiff, not cases in which a principal’s document was incorporated into the agent’s document. The purchasers submitted that the Court of Appeal in this case had failed to understand that, and had failed to understand that the misleading quality of the conduct of the agent in this case arose not only from the inclusion of the survey diagram, but from its juxtaposition with the photographs on the front of the brochure. The distinction relied on by the purchasers has a formal character, and will not always be satisfactory. Its soundness in

particular contexts must depend on the circumstances of those contexts. There could be cases where the presentation by an agent of a principal’s document to a plaintiff does involve the agent in making a representation about the objective truth of the document’s contents; and there could be cases where the incorporation of a principal’s document into another document prepared by an agent will not involve the agent in making a representation about any matter of objective truth, whether the principal’s document is considered by itself or in conjunction with other material in the agent’s document. For the reasons given above, the present circumstances fall within the latter category. Appropriate level of analysis. Finally, it is necessary to deal with a submission made by the purchasers that it was wrong to analyse the structure and language of the brochure too minutely. It is true that the level of analysis which is appropriate might vary from case to case. A more impressionistic analysis, concentrating on the immediate impact of the conduct, might be sounder where the document was only briefly looked at before a decision was made. In other cases a more detailed examination may be more appropriate. Here, the purchasers had the brochure for twelve days before the auction. They relied on it in instructing professional advisers, and they were embarking on a very serious venture. It is not inappropriate to look closely at the contents of the brochure before deciding whether the agent had made a representation.

Comment 15.6.1 See Radan, Gooley, and Vickovich at 15.3, 15.21, 15.40, 15.46–15.53, 15.59, 15.62, 15.63, and 15.74.

1.

Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216 at 225.

2.

World Series Cricket Pty Ltd v Parish (1977) 16 ALR 181 at 186–7, 196, 199; Ex parte Pilkington ACI (Operations) Pty Ltd (1978) 142 CLR 113 at 128. Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216 at 228.

3. 4.

(1985) 57 ALR 401 at 415.

5.

(1977) 29 FLR 336 at 343.

6. 7.

W Scott Fell & Co Ltd v Lloyd (1906) 4 CLR 572 at 577. Rhone-Poulenc Agrochimie SA v UIM Chemical Services Pty Ltd (1986) 68 ALR 77 at 84, 98–9, 102–3.

8. 9.

(1881) 20 Ch D 1 at 14, 17, 23. Mister Figgins Pty Ltd v Centrepoint Freeholds Pty Ltd (1981) 36 ALR 23 at 48.

10. 11.

(1984) 157 CLR 215 at 236. (1986) 65 ALR 302 at 313.

12.

Kadner v Brune Holdings Pty Ltd [1973] 1 NSWLR 498 at 501; Sargent v ASL Developments Ltd (1974) 131 CLR 634 at 649, 658–9. Obacelo Pty Ltd v Taveraft Pty Ltd (1986) ATPR 40-703 at 47,688.

13. 14. 15.

(1984) 6 ATPR 40-459 at 45,638. Commercial Banking Co of Sydney Ltd v R H Brown & Co (1972) 126 CLR 337 at 344; Petera Pty Ltd v EAJ Pty Ltd (1985) ATPR 40-605 at 46,887.

16. 17.

(1978) 140 CLR 216. Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216 at 227.

18. 19.

World Series Cricket Pty Ltd v Parish (1977) 16 ALR 181 at 199; McWilliam’s Wines Pty Ltd v McDonald’s System of Australia Pty Ltd (1980) 33 ALR 394 at 405ff. Cadbury-Schweppes Pty Ltd v Pub Squash Co Pty Ltd (1980) 32 ALR 387 at 398.

20. 21.

Stuart Alexander & Co (Interstate) Pty Ltd v Blenders Pty Ltd (1981) 37 ALR 161 at 169. Stuart Alexander & Co (Interstate) Pty Ltd v Blenders Pty Ltd (1981) 37 ALR 161 at 168.

22.

Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216 at 226, 234; R v Federal Court of Australia; Ex parte Pilkington ACI (Operations) Pty Ltd (1978) 142 CLR 113 at 128–9. Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216; Snoid v Handley (1981) 38 ALR 383.

23. 24. 25.

McWilliam’s Wines Pty Ltd v McDonald’s System of Australia Pty Ltd (1980) 33 ALR 394. Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216 at 230.

26.

Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216 at 228. World Series Cricket v Parish (1977) 16 ALR 181 at 201. See, to the same effect Hornsby Building Information Centre v Sydney Building Information Centre (1978) 140 CLR 216 at 227–8.

27. 28. 29.

Weitmann v Katies Ltd (1977) 29 FLR 336 at 339–40. Puxu Pty Ltd v Parkdale Custom Built Furniture Pty Ltd (1980) 31 ALR 73 at 93.

30.

Annand & Thompson Pty Ltd v Trade Practices Commission (1979) 25 ALR 91 at 102; Sterling v Trade Practices Commission (1981) 35 ALR 59 at 66, 69. Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216 at 228.

31. 32. 33.

Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 at 11. Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 at 11–12.

34.

Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 at 14.

35.

Cf Hill v Van Erp (1997) 188 CLR 159 at 179–80.

36. 37.

See Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 80. See Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 134.

38. 39.

McGregor on Damages, 16th ed (1997) at 543–4. Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 at 13.

40. 41.

Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 at 14. Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 at 14–15.

42. 43.

Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 at 6–7. Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 at 14.

44. 45.

(1992) 175 CLR 514. (1995) 184 CLR 281.

46. 47.

Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 at 527. Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281 at 298.

48. 49.

Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 at 527. (1992) 110 ALR 608.

50. 51.

ICI Australia Operations Pty Ltd v Trade Practices Commission (1992) 38 FCR 248 at 256. Bull v Attorney-General (NSW) (1913) 17 CLR 370 at 384; Devenish v Jewel Food Stores Pty Ltd (1991) 172 CLR 32 at 44; Webb Distributors (Aust) Pty Ltd v Victoria (1993) 179 CLR 15 at 41.

52. 53.

Pound, ‘Common Law and Legislation’ (1908) 21 Harvard Law Review 383 at 388. Akron Securities Ltd v Iliffe (1997) 41 NSWLR 353 at 364.

54. 55.

Environment Agency v Empress Car Co (Abertillery) Ltd [1999] AC 22 at 30–32. Sent v Jet Corp of Australia Pty Ltd (1986) 160 CLR 540 at 543.

56.

ICI Australia Operations Pty Ltd v Trade Practices Commission (1992) 38 FCR 248 at 254–7, 263–4, 266–7; Akron Securities Ltd v Iliffe (1997) 41 NSWLR 353 at 369–70. Munchies Management Pty Ltd v Belperio (1988) 58 FCR 274 at 282–3, 288; Akron Securities Ltd v Iliffe (1997) 41 NSWLR 353 at 367.

57. 58. 59.

ASX Operations Pty Ltd v Pont Data Australia Pty Ltd (No 2) (1991) 27 FCR 492 at 498–507. Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 at 356–7.

60. 61.

Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1997] AC 191 at 216. Clark v Urquhart [1930] AC 28 at 67–8.

62. 63.

Cf Potts v Miller (1940) 64 CLR 282 at 296–8. Peek v Derry (1887) 37 Ch D 541 at 592.

64. 65.

Peek v Derry (1887) 37 Ch D 541 at 593. Potts v Miller (1940) 40 SR (NSW) 351 at 357.

66. 67.

Kenny & Good Pty Ltd v MGICA (1992) Ltd (1999) 199 CLR 413; cf Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1997] AC 191. Gould v Vaggelas (1984) 157 CLR 215 at 221–2.

68. 69.

(1984) 157 CLR 215 at 267. [1997] AC 254.

70. 71.

Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158 at 168. Gould v Vaggelas (1984) 157 CLR 215 at 222.

72. 73.

[1961] AC 388 at 422–6. Gould v Vaggelas (1984) 157 CLR 215 at 222.

74. 75.

(1998) 196 CLR 494 at 503–4, 510, 528–9, 549. Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494 at 509.

76. 77.

Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494 at 515, 528–9. Elna Australia Pty Ltd v International Computers (Aust) Pty Ltd (No 2) (1987) 16 FCR 410 at 418–19.

78. 79.

Argy v Blunts & Lane Cove Real Estate Pty Ltd (1990) 26 FCR 112; Ricochet Pty Ltd v Equity Trustees Executors and Agency Co Ltd (1993) 41 FCR 229 at 235. Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494 at 529.

80. 81.

Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494 at 503–4. Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158 at 168.

82. 83.

Tefbao Pty Ltd v Stannic Securities Pty Ltd (1993) 118 ALR 565 at 575. Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494 at 514–15.

84.

Reasons of Gaudron J, at 483, in this case.

[page 333]

16 MISTAKE

INTRODUCTION 16.1 This chapter is concerned with contracts entered into as the result of a mistake made by one or both of the parties. Where both parties are mistaken, the mistake is either a common or mutual mistake, depending upon whether they make the same mistake or different mistakes. Where one party is mistaken, the mistake is a unilateral mistake. If a mistake is made by a party or parties to a contract and that mistake falls within the various common law principles relating to mistake, the contract is void ab initio at common law. If the mistake falls within equitable principles relating to mistake, the contract is voidable and therefore one that is capable of being rescinded subject to circumstances whereby the right to rescind is lost or not available. For the purposes of illustrating the operation and effect of the doctrine of mistake in its various forms, this chapter focuses on providing examples of situations where mistake has been alleged and the rules that have been applied in determining the issue and any effect. In McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 (see 16.2C) the relevant central issues before the court were whether a particular contract between the parties was void for common mistake and, if not, whether damages could be recovered for breach of an implied term of the contract. In that case a question arose as to whether a contract had been made in circumstances where the subject matter of the contract did not exist, although one party to the contract believed that it did, with the other party accepting what it had

been told about the existence of the subject matter. It was in those circumstances that a subsequent question arose as to whether there nevertheless existed an implied term that the subject matter of the contract did exist and whether damages flowed from a breach of that term. Bell v Lever Brothers Ltd [1932] AC 161 (see 16.3C) provides a further illustration of the criteria to be satisfied before an operable mistake at law will be found at common law. By way of contrast, recognition needs to be given to the possibility that notwithstanding the proven existence of a common mistake, it may nevertheless be possible to rescind the contract in equity. The operation and intervention of equity in this context is illustrated in Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2003] QB 679 (see 16.4C). In that case the court overruled the earlier decision in Solle v Butcher [1950] 1 KB 671 (see 16.5C) and endorsed the House of Lords’ approach in Bell v Lever Brothers Ltd. As noted above, there are other forms of mistake that may have an impact on a contract. In Shogun Finance Ltd v Hudson [2004] 1 AC 919 (see 16.6C) the effect on a contract of a unilateral mistake as to the identity of the other contracting party was examined in the light of many of the [page 334] earlier mistaken identity cases that have come before the courts. In addition, in Taylor v Johnson (1983) 151 CLR 422 (see 16.7C) the relevant principles to be applied where a unilateral mistake impacts upon the terms of the contract are revealed. In addition to the above areas relating to mistake, this chapter looks at the operation and effect of the doctrine of non est factum through the decision in Ford v Perpetual Trustees Victoria Ltd (2009) 75 NSWLR 42 (see 16.8C).

COMMON MISTAKE AT COMMON LAW 16.2C

McRae v Commonwealth Disposals Commission (1951) 84 CLR 377

Court: High Court of Australia Facts: Shortly after the end of the Second World War the Commonwealth Disposals Commission invited tenders ‘for the purchase of an oil tanker lying on Jourmaund Reef’ near Milne Bay in New Guinea, in which there was reported to be oil. McRae, on behalf of his company, successfully tendered for the tanker and entered into a contract with the Commission to buy it for £285. McRae then organised an expedition at considerable expense to locate and salvage the tanker at the place indicated by the Commission. However, no tanker was ever found at that location. In an action by McRae for damages on the grounds of breach of contract and misrepresentation, the Commission argued there was a common mistake about the existence of the tanker and that therefore the agreement was void. Issues: The issues before the High Court were whether the contract between the parties was void for common mistake and, if not, what the measure of damages, if any, recoverable by McRae was. Decision: The High Court (Dixon, Fullagar, and McTiernan JJ) unanimously held in favour of McRae. It found that there was no common mistake and that the contract was enforceable. It further held that the Commission was liable to McRae for damages for breach of an implied term that the tanker existed. Extract: The extract from the joint judgment of Dixon and Fullagar JJ reveals the High Court’s reasoning that where both parties are mistaken about the same material fact, a warranty is likely to be implied where the warrantor has access to relevant information and expertise not available to the other party.

Dixon and Fullagar JJ The first question to be determined is whether a contract was made between [McRae] and the Commission. The argument that the contract was void, or, in other words, that there was no contract, was based, as has been observed, on Couturier v Hastie,1 [which] has been commonly treated in the text-books as a case of a contract avoided by mutual mistake. …

[page 335] The case has not, however, been universally regarded as resting on mistake, and Sir Frederick Pollock says: Couturier v Hastie shows how a large proportion of the cases which swell the rubric of relief against mistake in the textbooks (with or without protest from the text-writer) are really cases of construction.2 And in Solle v Butcher,3 Denning LJ observed that the cases which it had been usual to classify under the head of ‘mistake’ needed reconsideration since the decision of the House of Lords in Bell v Lever Bros Ltd.4 No occasion seems to have arisen for a close examination of Couturier v Hastie, but such an occasion does now arise. … In considering Couturier v Hastie it is necessary to remember that it was, in substance, a case in which a vendor was suing for the price of goods which he was unable to deliver. … [T]he vendor founded his claim on the provision for ‘payment upon handing over shipping documents’. He was not called upon to prove a tender of the documents, because the defendant had ‘repudiated’ the contract, but he was able and willing to hand them over, and his argument was, in effect, that by handing them over he would be doing all that the contract required of him. The question thus raised would seem to depend entirely on the construction of the contract, and it appears really to have been so treated throughout. In the Court of Exchequer, Pollock CB, in the course of argument, said: The question is purely one of construction. I certainly think that the plain and literal meaning of the language here used imports that the thing sold, namely the cargo, was in existence and capable of being transferred.5 Parke B, in giving the judgment of the majority of the Court, said: It is very true that, when there is a sale of a specific chattel, there is an implied undertaking that it exists; and, if there were nothing in this case but a bargain and sale of a certain cargo … there would be

an engagement by the vendor, or a condition, that the cargo was in existence at that time.6 He went on to say, however, that there was very much more in the contract, and that there was enough to make it plain: … that the true meaning of the contract was that the purchaser bought the cargo if it existed at the date of the contract, but that, if it had been damaged or lost, he bought the benefit of insurance but no more.7 [page 336] The judgment of the Exchequer Chamber was delivered by Coleridge J. The view that the contract was void is probably derived from certain expressions which were used in the course of this judgment. But it does seem clear that again the question of construction was regarded as the fundamental question in the case. … The final conclusion reached [by Coleridge J] is expressed at the end of the judgment by saying that: … the basis of the contract in this case was the sale and purchase of goods, and all the other terms in the bought note were dependent upon that, and we cannot give to it the effect of a contract for goods lost or not lost.8 In the light of these passages it seems impossible to regard the expressions ‘If the contract for the sale of the cargo was valid’ and ‘the contract failed as to the principal subject matter of it’9 as meaning that the contract was treated as being void. All that the passages in which those expressions occur seem in their context to mean is that the principal subject matter of the contract was a cargo of goods, that the purchaser did not buy shipping documents representing non-existent goods, that the consideration to the purchaser had failed, and that he could not therefore be liable to pay the contract price. In the House of Lords again the Lord Chancellor, in giving judgment said: ‘The whole question turns upon the meaning and construction of the contract’. A little later he said:

What the parties contemplated … 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.10 In other words, there was not an absolute obligation to pay the price on delivery of the shipping documents (as the plaintiff contended), but an obligation to pay on delivery of those documents only if they represented at the time of the making of the contract goods in existence and capable of delivery. … In Bell v Lever Bros Ltd Lord Atkin … says: In these cases I am inclined to think that the true analysis is that there is a contract, but that the one party is not able to supply the very thing, whether goods or services, that the other party contracted to take; and therefore the contract is unenforceable by the one if executory, while, if executed, the other can recover back money paid on the ground of failure of the consideration.11 [This] observation … seems entirely appropriate to Couturier v Hastie. In that case there was a failure of consideration, and the purchaser was not bound to pay the price: if he had paid it before the truth was discovered, he could have recovered it back as money had and received. The construction of the contract was the vital thing in the case because, and only because, on the construction of the contract depended the question whether the consideration had really [page 337] failed, the vendor maintaining that, since he was able to hand over the shipping documents, it had not failed. The truth is that the question whether the contract was void, or the vendor excused from performance by reason of the non-existence of the supposed subject matter, did not arise in Couturier v Hastie. It would have arisen if the purchaser had suffered loss through non-delivery of the corn and had sued the vendor for damages. If it had so arisen, we think that the real question would have

been whether the contract was subject to an implied condition precedent that the goods were in existence. Prima facie, one would think, there would be no such implied condition precedent, the position being simply that the vendor promised that the goods were in existence. … When once the common law had made up its mind that a promise supported by consideration ought to be performed, it was inevitable that the theorisings of the civilians about ‘mistake’ should mean little or nothing to it. On the other hand, the question whether a promisor was excused from performance by existing or supervening impossibility without fault on his part was a practical every-day question of which the common law has been vividly conscious, as witness Taylor v Caldwell12 with its innumerable (if sometimes dubious) successors. But here too the common law has generally been true to its theory of simple contract, and it has always regarded the fundamental question as being: ‘What did the promisor really promise?’ Did he promise to perform his part at all events, or only subject to the mutually contemplated original or continued existence of a particular subject matter? So questions of intention or ‘presumed intention’ arise, and these must be determined in the light of the words used by the parties and reasonable inferences from all the surrounding circumstances. … If the view so far indicated be correct, as we believe it to be, it seems clear that the case of Couturier v Hastie does not compel one to say that the contract in the present case was void. But, even if the view that Couturier v Hastie was a case of a void contract be correct, we would still think that it could not govern the present case. … [I]t must be true to say that a party cannot rely on mutual mistake where the mistake consists of a belief which is, on the one hand, entertained by him without any reasonable ground, and, on the other hand, deliberately induced by him in the mind of the other party. … The position so far, then, may be summed up as follows. It was not decided in Couturier v Hastie that the contract in that case was void. The question whether it was void or not did not arise. If it had arisen, as in an action by the purchaser for damages, it would have turned on the ulterior question whether the contract was subject to an implied condition precedent. Whatever might then have been held on the facts of Couturier v Hastie, it is impossible in this case to imply any such term. The terms of the

contract and the surrounding circumstances clearly exclude any such implication. [McRae] relied upon, and acted upon, the assertion of [the Commission] that there was a tanker in existence. It is not a case in which the parties can be seen to have proceeded on the basis of a common assumption of fact so as to justify the conclusion that the correctness of the assumption was intended by both parties to be a condition precedent to the creation of contractual obligations. The officers of [the Commission] made an assumption, but [McRae] did not make an assumption [page 338] in the same sense. [McRae] knew nothing except what [the Commission] had told them. If they had been asked, they would certainly not have said: ‘Of course, if there is no tanker, there is no contract’. They would have said: ‘We shall have to go and take possession of the tanker. We simply accept [the Commission’s] assurance that there is a tanker and [its] promise to give us that tanker.’ The only proper construction of the contract is that it included a promise by [the Commission] that there was a tanker in the position specified. [The Commission] contracted that there was a tanker there. … If, on the other hand, the case of Couturier v Hastie and this case ought to be treated as cases raising a question of ‘mistake’, then [the Commission] cannot in this case rely on any mistake as avoiding the contract, because any mistake was induced by the serious fault of their own servants, who asserted the existence of a tanker recklessly and without any reasonable ground. There was a contract, and [the Commission] contracted that a tanker existed in the position specified. Since there was no such tanker, there has been a breach of contract, and [McRae is] entitled to damages for that breach.

Comments 16.2.1 See Radan, Gooley, and Vickovich at 16.5, 16.13–16.15, 16.45, 29.45, 29.65, 29.69–29.70, 29.72, 29.76, 29.80, 29.85, and 29.124. 16.2.2 On the High Court’s assessment of damages in favour of McRae,

see Radan, Gooley, and Vickovich at 29.45, 29.65, 29.69–29.70, 29.72, 29.76, 29.80, 29.85, and 29.124. 16.3C

Bell v Lever Brothers Ltd [1932] AC 161

Court: House of Lords Facts: Bell and Snelling were appointed to senior executive positions in the Niger Company, a subsidiary of Lever Brothers Ltd. Their employment contracts contained a term to the effect that they were not to make secret profits from their positions and provided for redundancy payments in the event of termination. The Niger Company prospered and their positions were renewed. At one point Lever Brothers negotiated the merger of the Niger Company with its main competitor, with the result that Bell and Snelling’s positions became redundant. After negotiations both men signed settlements providing for compensation payouts of £30,000 to Bell and £20,000 to Snelling. Some months after their termination and payout Lever Brothers were informed that both men had engaged in certain anticompetitive ‘pooling’ arrangements with competitors during their time as officers of the Niger Company. This had given them inside information about the price of cocoa, enabling them to make secret profits in direct conflict with their fiduciary duties. Lever Brothers took legal action for rescission of the agreements of settlement and repayment of the compensation. [page 339] Issue: The issue before the House of Lords was whether there was common mistake as to the nature of the employment contracts and unilateral mistake in Bell and Snelling’s failure to disclose their breaches of duty when the settlements were executed. Decision: The House of Lords by majority (Lords Blanesburgh, Atkin, and Thankerton; Viscount Hailsham and Lord Warrington of Clyffe

dissenting) held in favour of Bell and Snelling. Their Lordships held there was no mistake as to the existence or nature of the employment contracts that constituted the subject matter of the settlement agreements. Ignorance of facts affecting the quality of the subject matter did not justify rescission of the settlement agreements. There was also no duty to disclose past breaches of duty under ordinary service contracts, meaning that innocent concealment did not amount to unilateral mistake when the payouts were agreed. Extract: The extracts below from the judgment of Lord Atkin reflect the majority’s reasoning in relation to mistake. (Due to the inconsistent use of words describing certain categories of mistake by the courts, it should be noted that references to ‘mutual mistake’ in the extracts relate to common mistake as used in this text.)

Lord Atkin [T]he rules of law dealing with the effect of mistake on contract appear to be established with reasonable clearness. If mistake operates at all it operates so as to negative or in some cases to nullify consent. The parties may be mistaken in the identity of the contracting parties, or in the existence of the subject-matter of the contract at the date of the contract, or in the quality of the subject-matter of the contract. These mistakes may be by one party, or by both, and the legal effect may depend upon the class of mistake above mentioned. Thus a mistaken belief by A that he is contracting with B, whereas in fact he is contracting with C, will negative consent where it is clear that the intention of A was to contract only with B. So the agreement of A and B to purchase a specific article is void if in fact the article had perished before the date of sale. In this case, though the parties in fact were agreed about the subject-matter, yet a consent to transfer or take delivery of something not existent is deemed useless, the consent is nullified. As codified in the Sale of Goods Act the contract is expressed to be void if the seller was in ignorance of the destruction of the specific chattel. I apprehend that if the seller with knowledge that a chattel was destroyed purported to sell it to a purchaser, the latter might sue for damages for non-delivery though the former could not sue for non-

acceptance, but I know of no case where a seller has so committed himself. This is a case where mutual mistake certainly and unilateral mistake by the seller of goods will prevent a contract from arising. Corresponding to mistake as to the existence of the subject-matter is mistake as to title in cases where, unknown to the parties, the buyer is already the owner of that which the seller purports to sell to him. The parties intended to effectuate a transfer of ownership: such a transfer is impossible: the stipulation is naturali ratione inutilis. This is the case of Cooper v Phibbs,13 where A agreed to take a lease of a fishery from B, though contrary to [page 340] the belief of both parties at the time A was tenant for life of the fishery and B appears to have had no title at all. To such a case Lord Westbury applied the principle that if parties contract under a mutual mistake and misapprehension as to their relative and respective rights the result is that the agreement is liable to be set aside as having proceeded upon a common mistake. Applied to the context the statement is only subject to the criticism that the agreement would appear to be void rather than voidable. Applied to mistake as to rights generally it would appear to be too wide. Even where the vendor has no title, though both parties think he has, the correct view would appear to be that there is a contract: but that the vendor has either committed a breach of a stipulation as to title, or is not able to perform his contract. The contract is unenforceable by him but is not void. Mistake as to quality of the thing contracted for raises more difficult questions. In such a case a mistake will not affect assent unless it is the mistake of both parties, and is as to the existence of some quality which makes the thing without the quality essentially different from the thing as it was believed to be. Of course it may appear that the parties contracted that the article should possess the quality which one or other or both mistakenly believed it to possess. But in such a case there is a contract and the inquiry is a different one, being whether the contract as to quality amounts to a condition or a warranty, a different branch of the law. … We are now in a position to apply to the facts of this case the law as to mistake so far as it has been stated. It is essential on this part of the

discussion to keep in mind the finding of the jury acquitting [Bell] of fraudulent misrepresentation or concealment in procuring the agreements in question. Grave injustice may be done to [Bell] and confusion introduced into the legal conclusion, unless it is quite clear that in considering mistake in this case no suggestion of fraud is admissible and cannot strictly be regarded by the judge who has to determine the legal issues raised. The agreement which is said to be void is the agreement contained in the letter of March 19, 1929, that Bell would retire from the Board of the Niger Company and its subsidiaries, and that in consideration of his doing so Levers would pay him as compensation for the termination of his agreements and consequent loss of office the sum of £30,000 in full satisfaction and discharge of all claims and demands of any kind against Lever Brothers, the Niger Company or its subsidiaries. The agreement, which as part of the contract was terminated, had been broken so that it could be repudiated. Is an agreement to terminate a broken contract different in kind from an agreement to terminate an unbroken contract, assuming that the breach has given the one party the right to declare the contract at an end? I feel the weight of [Lever Bros’] contention that a contract immediately determinable is a different thing from a contract for an unexpired term, and that the difference in kind can be illustrated by the immense price of release from the longer contract as compared with the shorter. And I agree that an agreement to take an assignment of a lease for five years is not the same thing as to take an assignment of a lease for three years, still less a term for a few months. But, on the whole, I have come to the conclusion that it would be wrong to decide 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. The contract released is the identical contract in both cases, and the party paying for release gets [page 341] exactly what he bargains for. It seems immaterial that he could have got the same result in another way, or that if he had known the true facts he would not have entered into the bargain. A buys B’s horse; he thinks the horse is sound and he pays the price of a sound horse; he would certainly

not have bought the horse if he had known … that the horse is unsound. If B has made no representation as to soundness and has not contracted that the horse is sound, A is bound and cannot recover back the price. A buys a picture from B; both A and B believe it to be the work of an old master, and a high price is paid. It turns out to be a modern copy. A has no remedy in the absence of representation or warranty. A agrees to take on lease or to buy from B an unfurnished dwelling-house. The house is in fact uninhabitable. A would never have entered into the bargain if he had known the fact. A has no remedy, and the position is the same whether B knew the facts or not, so long as he made no representation or gave no warranty. A buys a roadside garage business from B abutting on a public thoroughfare: unknown to A, but known to B, it has already been decided to construct a bypass road which will divert substantially the whole of the traffic from passing A’s garage. Again A has no remedy. All these cases involve hardship on A and benefit B, as most people would say, unjustly. They can be supported on the ground that it is of paramount importance that contracts should be observed, and that 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 facts unknown to them. This brings the discussion to the alternative mode of expressing the result of a mutual mistake. It is said that in such a case as the present there is to be implied a stipulation in the contract that a condition of its efficacy is that the facts should be as understood by both parties — namely, that the contract could not be terminated till the end of the current term. The question of the existence of conditions, express or implied, is obviously one that affects not the formation of contract, but the investigation of the terms of the contract when made. A condition derives its efficacy from the consent of the parties, express or implied. They have agreed, but on what terms. One term may be that unless the facts are or are not of a particular nature, or unless an event has or has not happened, the contract is not to take effect. With regard to future facts such a condition is obviously contractual. Till the event occurs the parties are bound. Thus the condition (the exact terms of which need not here be investigated) that is generally accepted as underlying the principle of the frustration cases is contractual, an implied condition. [Counsel for Lever Brothers] formulated

for the assistance of your Lordships a proposition which should be recorded: Whenever it is to be inferred from the terms of a contract or its surrounding circumstances that the consensus has been reached upon the basis of a particular contractual assumption, and that assumption is not true, the contract is avoided: i.e., it is void ab initio if the assumption is of present fact and it ceases to bind if the assumption is of future fact. I think few would demur to this statement, but its value depends upon the meaning of ‘a contractual assumption’, and also upon the true meaning to be attached to ‘basis’, a metaphor which may mislead. When used expressly in contracts, for instance, in policies of insurance, which state that the truth of the statements in the proposal is to be the basis of the contract [page 342] of insurance, the meaning is clear. The truth of the statements is made a condition of the contract, which failing, the contract is void unless the condition is waived. The proposition does not amount to more than this that, if the contract expressly or impliedly contains a term that a particular assumption is a condition of the contract, the contract is avoided if the assumption is not true. But we have not advanced far on the inquiry how to ascertain whether the contract does contain such a condition. Various words are to be found to define the state of things which make a condition. ‘In the contemplation of both parties fundamental to the continued validity of the contract’, ‘a foundation essential to its existence’, ‘a fundamental reason for making it’, are phrases found in the important judgment of Scrutton LJ [in the Court of Appeal] in the present case. The first two phrases appear to me to be unexceptionable. They cover the case of a contract to serve in a particular place, the existence of which is fundamental to the service, or to procure the services of a professional vocalist, whose continued health is essential to performance. But ‘a fundamental reason for making a contract’ may, with respect, be misleading. The reason of one party only is presumedly not intended, but in

the cases I have suggested above, of the sale of a horse or of a picture, it might be said that the fundamental reason for making the contract was the belief of both parties that the horse was sound or the picture an old master, yet in neither case would the condition as I think exist. Nothing is more dangerous than to allow oneself liberty to construct for the parties contracts which they have not in terms made by importing implications which would appear to make the contract more businesslike or more just. The implications to be made are to be no more than are ‘necessary’ for giving business efficacy to the transaction, and it appears to me that, both as to existing facts and future facts, a condition would not be implied unless the new state of facts makes the contract something different in kind from the contract in the original state of facts. Thus, in Krell v Henry,14 Vaughan Williams LJ finds that the subject of the contract was ‘rooms to view the procession’: the postponement, therefore, made the rooms not rooms to view the procession. … We therefore get a common standard for mutual mistake, and implied conditions whether as to existing or as to future facts. Does the state of the new facts destroy the identity of the subject-matter as it was in the original state of facts? To apply the principle to the infinite combinations of facts that arise in actual experience will continue to be difficult, but if this case results in establishing order into what has been a somewhat confused and difficult branch of the law it will have served a useful purpose.

[page 343]

Comment 16.3.1 See Radan, Gooley, and Vickovich at 14.25, 16.5, 16.14, 16.17, 16.18, 16.21, 16.23, 16.30, 16.32, 16.33, 16.42, 16.45, 16.46, and 16.51.

NO COMMON MISTAKE IN EQUITY

16.4C

Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2003] QB 679

Court: Court of Appeal in England Facts: The Tsavliris salvage company entered into an agreement to provide salvage services to the owners of the bulk carrier Cape Providence, which had been damaged in the South Indian Ocean. As part of the salvage operation Tsavliris engaged the services of a tug, but concluded that it also needed a merchant vessel to help with the possible evacuation of the Cape Providence crew. It was informed by the owners of the stranded vessel that a ship by the name of Great Peace was within reasonable sailing distance — 35 miles — and could arrive within 12 hours. Tsavliris entered into a contract, based on daily hire rates, for the merchant vessel on the basis of this information. Subsequently, Tsavliris discovered the merchant vessel was in fact 400 miles away and that it would take about 39 hours to reach the salvage area. It cancelled the agreement and engaged the services of another vessel that happened to be in the vicinity. When the Great Peace owners presented their invoice, Tsavliris refused to pay, claiming the contract had been formed on the basis of a common assumption by the parties that the merchant vessel was ‘in close proximity’ to the stranded ship. It claimed both parties had been mistaken about the same material fact, so the contract was void for mistake. Issues: The issues before the Court of Appeal were whether Tsavliris could escape liability to the owners of the Great Peace on the basis that the contract was void for common mistake or, alternatively, that it could be rescinded in equity for mistake. Decision: The Court of Appeal (Lord Phillips of Worth Matravers MR, May and Laws LJJ) unanimously rejected Tsavliris’s arguments and held it liable to the owners of Great Peace. In so doing, it overruled its 1950 decision in Solle v Butcher [1950] 1 KB 671 and endorsed the House of Lords’ approach to mistake as expressed in Bell v Lever Brothers Ltd [1932] AC 161.

Extract: The judgment of Lord Phillips of Worth Matravers MR, extracted below, represents a modern interpretation of the role of common mistake in rendering a contract void.

Lord Phillips of Worth Matravers MR A number of cases, albeit a small number, in the course of the last 50 years have purported to follow Solle v Butcher,15 yet none of them defines the test of mistake that gives [page 344] rise to the equitable jurisdiction to rescind in a manner that distinguishes this from the test of a mistake that renders a contract void in law, as identified in Bell v Lever Bros Ltd.16 This is, perhaps, not surprising, for Denning LJ, the author of the test in Solle v Butcher, set Bell v Lever Bros Ltd at nought. It is possible to reconcile Solle v Butcher … with Bell v Lever Bros Ltd only by postulating that there are two categories of mistake, one that renders a contract void at law and one that renders it voidable in equity. Although later cases have proceeded on this basis, it is not possible to identify that proposition in the judgment of any of the three Lords Justices, Denning, Bucknill or Fenton Atkinson, who participated in the majority [decision in Solle v Butcher]. Nor, over 50 years, has it proved possible to define satisfactorily two different qualities of mistake, one operating in law and one in equity. In Solle v Butcher Denning LJ identified the requirement of a common misapprehension that was ‘fundamental’, and that adjective has been used to describe the mistake in those cases which have followed Solle v Butcher. We do not find it possible to distinguish, by a process of definition, a mistake which is ‘fundamental’ from Lord Atkin’s mistake as to quality which ‘makes the thing contracted for essentially different from the thing that it was believed to be’.17 A common factor in Solle v Butcher and the cases which have followed it can be identified. The effect of the mistake has been to make the contract a

particularly bad bargain for one of the parties. Is there a principle of equity which justifies the court in rescinding a contract where a common mistake has produced this result? Equity is … a body of rules or principles which form an appendage to the general rules of law, or a gloss upon them. In origin at least, it represents the attempt of the English legal system to meet a problem which confronts all legal systems reaching a certain stage of development. In order to ensure the smooth running of society it is necessary to formulate general rules which work well enough in the majority of cases. Sooner or later, however, cases arise in which, in some unforeseen set of facts, the general rules produce substantial unfairness.18 Thus the premise of equity’s intrusion into the effects of the common law is that the common law rule in question is seen in the particular case to work injustice, and for some reason the common law cannot cure itself. But it is difficult to see how that can apply here. Cases of fraud and misrepresentation, and undue influence, are all catered for under other existing and uncontentious equitable rules. We are only concerned with the question whether relief might be given for common mistake in circumstances wider than those stipulated in Bell v Lever Bros Ltd. But that, surely, is a question as to where the common law should draw the line; not whether, given the common law rule, it needs to be mitigated by application of some other doctrine. The common law has drawn the line in Bell v Lever Bros Ltd. The effect of Solle v Butcher is not to supplement or mitigate the common law; it is to say that Bell v Lever Bros Ltd was wrongly decided. [page 345] Our conclusion is that it is impossible to reconcile Solle v Butcher with Bell v Lever Bros Ltd. The jurisdiction asserted in the former case has not developed. It has been a fertile source of academic debate, but in practice it has given rise to a handful of cases that have merely emphasised the confusion of this area of our jurisprudence. … If coherence is to be restored to this area of our law, it can only be by declaring that there is no

jurisdiction to grant rescission of a contract on the ground of common mistake where that contract is valid and enforceable on ordinary principles of contract law. That is the conclusion of [the trial judge]. Do the principles of case precedent permit us to endorse it? What is the correct approach where this court concludes that a decision of the Court of Appeal cannot stand with an earlier decision of the House of Lords? … It was unquestionably a common assumption of both parties when the contract was concluded that the two vessels were in sufficiently close proximity to enable the Great Peace to carry out the service that she was engaged to perform. Was the distance between the two vessels so great as to confound that assumption and to render the contractual adventure impossible of performance? If so, [Tsavliris] would have an arguable case that the contract was void under the principle in Bell v Lever Bros Ltd. [The trial judge] addressed this issue in the following paragraph: Was the Great Peace so far away from the Cape Providence at the time of the contract as to defeat the contractual purpose — or in other words to turn it into something essentially different from that for which the parties bargained? This is a question of fact and degree, but in my view the answer is No. If it had been thought really necessary, the Cape Providence could have altered course so that both vessels were heading toward each other. At a closing speed of 19 knots, it would have taken them about 22 hours to meet. A telling point is the reaction of [Tsavliris] on learning the true positions of the vessels. They did not want to cancel the agreement until they knew if they could find a nearer vessel to assist. Evidently [they] did not regard the contract as devoid of purpose, or they would have cancelled at once.19 [Counsel for Tsavliris] has attacked this paragraph on a number of grounds. He has submitted that the suggestion that the Cape Providence should have turned and steamed towards the Great Peace is unreal. We agree. [Tsavliris] were sending a tug from Singapore in an attempt to salve the Cape Providence. The Great Peace was engaged by [Tsavliris] to act as a stand-by vessel to save human life, should this prove necessary, as an ancillary aspect of the salvage service. The suggestion that the Cape Providence should have turned and steamed away from the salvage tug which was on its way

towards her in order to reduce the interval before the Great Peace was in attendance is unrealistic. Next [Counsel for Tsavliris] submitted that it was not legitimate for the judge to have regard to the fact that [Tsavliris] did not want to cancel the agreement with the Great Peace until they knew whether they could get a nearer vessel to assist. We do not agree. This reaction was a telling indication that the fact that the vessels were considerably further apart than [Tsavliris] [page 346] had believed did not mean that the services that the Great Peace was in a position to provide were essentially different from those which the parties had envisaged when the contract was concluded. The Great Peace would arrive in time to provide several days of escort service. [Tsavliris] would have wished the contract to be performed but for the adventitious arrival on the scene of a vessel prepared to perform the same services. The fact that the vessels were further apart than both parties had appreciated did not mean that it was impossible to perform the contractual adventure. The parties entered into a binding contract for the hire of the Great Peace. That contract gave [Tsavliris] an express right to cancel the contract subject to the obligation to pay the ‘cancellation fee’ of five days’ hire. When they engaged the Nordfarer they cancelled the Great Peace. They became liable in consequence to pay the cancellation fee. There is no injustice in this result.

Comments 16.4.1 See Radan, Gooley, and Vickovich at 16.5, 16.30–16.37, 16.39, 16.42–16.43, 16.45–16.48, 16.50, 16.51, 16.53, and 16.78. 16.4.2 For a discussion of this case and the issues it raises, see A Chandler, J Devenney, and J Poole, ‘Common Mistake: Theoretical Justification and Remedial Inflexibility’ [2004] Journal of Business Law 34.

16.5C

Solle v Butcher [1950] 1 KB 671

Court: English Court of Appeal Facts: Butcher, a landlord, agreed to lease a flat to Solle for seven years at an annual rent of £250. Both parties believed that extensive structural alterations made to the premises would cause it to be regarded as a new flat and not subject to rent control legislation that limited the maximum chargeable rent. The parties were mistaken about their understanding of the effect of that legislation as it applied to the premises. This meant that the maximum annual rent was £140 and not £250. Two years after the commencement of the lease Solle sued for the return of the excess rent that he had paid under the lease. Butcher argued that there had been a common mistake that made the lease void. Issues: The issues before the Court of Appeal were whether the lease was void for mistake and, if so, what effect that would have on the ability of Solle to be reimbursed the excess rent paid. Decision: The English Court of Appeal held that the mistake did not void the contract at common law because the subject matter of the contract had not changed. However, the court ordered equitable relief, setting the agreement aside. [page 347] Extract: The extract from the judgment of Denning LJ illustrates that equitable relief may be available notwithstanding that the parties may have been mistaken in the circumstances.

Denning LJ … The first question is: What is the rent which may lawfully be charged for this flat and garage? The judge has, I think, misdirected himself

in several respects, so it is open to this court to review his findings: British Launderers Research Association v Central Middlesex Assessment Committee & Hendon Rating Authority. On this review I think that the structural alterations and improvements were not such as to destroy the identity of the original flat. The landlord was entitled, therefore, to increase the rent by eight per cent of their cost, but was not able on this account to charge a new rent unrestricted by the Rent Acts. The inclusion in the lease of a garage, which had previously not formed part of the demise, gives rise to difficult questions. Even when taken together with the structural alterations, the addition of the garage does not change the identity of the flat. The standard rent, therefore, remains at £140: Hemms v Wheeler; Langford Property Co Ltd v Batten. It does not follow, however, that the tenant gets the benefit of the garage for nothing. The landlord is probably entitled to increase the rent on account of it. Such an increase is justified by s 2(3) of the Act of 1920 as interpreted by this court in Seaford Court Estates Ltd v Asher. Just as the landlord was entitled in that case to increase the rent because the tenant was relieved of the contingent burden of providing himself with hot water, if he wanted it, so here the tenant is relieved of the contingent burden of providing himself with a garage, if he wants one. I do not, however, pursue the point because it was not argued before us. It is said that, even allowing nothing for the garage, the permitted increases for structural alterations and improvements and increase of rates bring up the rent lawfully payable from £140 to £250. If, therefore, the landlord had served the prospective tenant with a proper notice of increase, the lease at £250 a year would have been valid. But he did not serve any notice at all because he thought that, owing to the improvements, the new rent was not restricted by the Acts. The tenant says that, there having been no notice, the landlord can only recover £140 a year for the seven years of the lease. So long as the lease stands the tenant’s argument is unanswerable. The Acts prevent the landlord from recovering any more than the standard rent unless a notice of increase is given either to the sitting tenant or to a prospective tenant, and, although errors or omissions in a notice are not necessarily fatal, nevertheless there must be a notice, however informal. In this case the landlord conceded that no notice was served before the new lease was granted. It follows that the raising of the rent from £140 to £250 was invalid, and the landlord can do nothing now to repair the omission because no fresh notice of increase can be

effective so long as the lease continues. The landlord tried to overcome this difficulty by saying that the tenant was estopped from saying that the rent of £250 was invalid, but, just as parties cannot contract out of the Acts, so they cannot defeat them by any estoppels. In this plight the landlord seeks to set aside the lease. He says with truth that it is unfair that the tenant should have the benefit of the lease for the outstanding five years of the term at [page 348] £140 a year when the proper rent is £250 a year. If he cannot give a notice of increase now, can he not avoid the lease? The only ground on which he can avoid it is on the ground of mistake. It is quite plain that the parties were under a mistake. They thought that the flat was not tied down to a controlled rent, whereas in fact it was. In order to see whether the lease can be avoided for this mistake it is necessary to remember that mistake is of two kinds: first, mistake which renders the contract void, that is, a nullity from the beginning, which is the kind of mistake which was dealt with by the courts of common law, and, secondly, mistake which renders the contract not void, but voidable, that is, liable to be set aside on such terms as the court thinks fit, which is the kind of mistake which was dealt with by the courts of equity. Much of the difficulty which has attended this subject has arisen because, before the fusion of law and equity, the courts of common law, in order to do justice in the case in hand, extended this doctrine of mistake beyond its proper limits and held contracts to be void which were really only voidable, a process which was capable of being attended with much injustice to third persons who had bought goods or otherwise committed themselves on the faith that there was a contract. Since the fusion of law and equity there is no reason to continue this process, and it will be found that only those contracts are now held void where the mistake was such as to prevent the formation of any contract at all. Let me first consider mistakes which render a contract a nullity. All previous decisions on this subject must now be read in the light of Bell v Lever Bros Ltd. The correct interpretation of that case, to my mind, is that

once a contract has been made, that is to say, once the parties, whatever their inmost states of mind, have to all outward appearances agreed with sufficient certainty in the same terms on the same subject-matter, then the contract is good unless and until it is set aside for breach of some condition expressed or implied in it, or for fraud, or on some equitable ground. Neither party can rely on his own mistake to say it was a nullity from the beginning, no matter that it was a mistake which to his mind was fundamental, and no matter that the other party knew he was under a mistake. A fortiori if the other party did not know of the mistake, but shared it. The cases where goods have perished at the time of sale, or belong to the buyer, are not really contracts which are void for mistake, but are void by reason of an implied condition to that effect, and even cases like Smith v Hughes turn at law on whether there was a contractual condition or not. So far as cases later than Bell v Lever Bros Ltd are concerned, I do not think that Sowler v Potter can stand with King’s Norton Metal Co Ltd v Edridge, Merrett & Co Ltd, which shows that the doctrine of French law as enunciated by Pothier is no part of English law. Nor do I think that the contract in Nicholson and Venn v Smith Marriott was void from the beginning. Applying these principles it is clear that here there was a contract. The parties agreed in the same terms on the same subject-matter. It is true that the landlord was under a mistake which was to him fundamental. He would not for one moment have considered letting the flat for seven years if it meant that he could only charge £140 a year for it. He made the fundamental mistake of believing that the rent he could charge was not limited to a controlled rent, but, whether it was his own mistake or a mistake common to both him and the tenant, it is not a ground for saying that the lease was from the beginning a nullity. Any other view would lead to remarkable results, for it would mean that in the many cases where the parties mistakenly think the house is outside the Rent Acts when it is really within them, the tenancy would be a nullity, and the tenant would have [page 349] to go, with the result that tenants would not dare to seek to have their rents reduced to the permitted amounts lest they should be turned out.

Let me next consider mistakes which render a contract voidable, that is, liable to be set aside on some equitable ground. While presupposing that a contract was good at law, or at any rate not void, the court of equity would often relieve a party from the consequences of his own mistake, so long as it could do so without injustice to third parties. The court had power to set aside the contract whenever it was of opinion that it was unconscientious for the other party to avail himself of the legal advantage which he had obtained: Torrance v Bolton. This branch of equity has shown a progressive development. It is now clear that a contract will be set aside if the mistake of the one party has been induced by a material misrepresentation of the other, even though it was not fraudulent or fundamental, or if one party, knowing that the other is mistaken about the terms of an offer, or the identity of the person by whom it is made, lets him remain under his delusion and conclude a contract on the mistaken terms instead of pointing out the mistake, which is, I venture to think, the ground on which the defendant in Smith v Hughes would be exempted nowadays, and on which, according to Blackburn J’s view of the facts (1 QBD 355), the contract in Lindsay v Cundy was voidable and not void, and on which the lease in Sowler v Potter was, in my opinion, voidable and not void. A contract is also liable in equity to be set aside if the parties were under a common misapprehension either as to 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. … … In my opinion, therefore, the appeal should be allowed. The declaration that the standard rent of the flat is £140 per annum should stand. An order should be made on the counter-claim that, on the landlord giving the undertakings which I have mentioned, the lease be set aside. An account should be had to determine the sum payable for use and occupation. The tenant’s claim for repayment of rent and for breach of covenant should be dismissed. In respect of the tenant’s occupation during the rescinded lease and subsequent licence, he will be liable to pay a reasonable sum for use and occupation. That sum should, prima facie, be assessed at the full amount permitted by the Acts, not, however, exceeding £250 a year. Mesne profits as against a trespasser are assessed at the full amount permitted by the Acts, even though notices of increase have not been served, because that is the amount lost by the landlord. The same assessment should be made here because the sums payable for use and

occupation are not rent, and the statutory provisions about notices of increase do not apply to them. All necessary credits must, of course, be given in respect of past payments, and so forth. …

Jenkins LJ … The only relevant questions for the court are: (i) Whether on the facts of the case the tenant is right in law in his contention that the standard rent of the premises is £140 per annum, and (ii) If so, whether the landlord can save himself from the disastrous consequences I have already mentioned by making out a case for rescission of the lease or, alternatively, for holding the tenant estopped from claiming the benefit of the Acts. The question as to the [page 350] standard rent of the demised premises turns on the nature, extent and effect of the alterations and improvements made by the landlord before the letting to the tenant, the inclusion in the tenant’s lease of the garage which was not included in Mr Howard Taylor’s lease being taken into account as well as the physical alterations and improvements made in and to the subjectmatter of the demise. The duty of the learned county court judge as regards this issue was to consider the nature, extent and effect of these alterations and improvements and ask himself whether, having regard to their nature, extent and effect, the premises let to the tenant in 1947 at the rent of £250 per annum constituted substantially the same dwelling-house as the premises let to Mr Howard Taylor in 1938 at the rent of £140 per annum. An affirmative answer to this question must lead to the conclusion as a matter of law that the standard rent of the premises let to the tenant is £140, while a negative answer would mean that the premises let to the tenant constituted for the purposes of the Acts a new dwelling-house to which no existing standard rent applied, with the result that the landlord was free under the Acts to charge the rent of £250 per annum expressed to be reserved by the lease, which would itself constitute the standard rent for the purposes of future control. Given the application of the correct test, which I have endeavoured to state

in the form of the question posed above, the result of its application depends essentially on matters of fact and degree on which the findings of the learned county court judge must not be disturbed unless there was no evidence on which he could reasonably come to his conclusion. … … The landlord’s claim for rescission is based on the alternative grounds of misrepresentation and mutual mistake. As to misrepresentation, it is important to observe that fraud is not alleged. Therefore, any misrepresentation shown to have been made by the tenant must be taken to have been an innocent misrepresentation. Moreover, the contract of which rescission is claimed is one which has been executed by the grant of a lease under seal. An executed contract will, no doubt, be set aside notwithstanding completion when it is shown to have been induced by fraudulent misrepresentation, but it has been repeatedly held that an innocent misrepresentation affords no sufficient ground for rescission after completion, and there is authority for the view that this applies to a lease no less than to a conveyance: see Angel v Jay, and the cases there cited. I appreciate that, as Denning LJ has pointed out, doubts have of comparatively recent years been expressed as to the validity of this principle, but, for my part, I am not prepared to hold that it is no longer to be regarded as the law, and, accepting it as I do, I think it suffices to dispose of the claim for rescission on the ground of misrepresentation in the present case. I should, however, add that the evidence in the case seems to me to disclose nothing amounting to a misrepresentation on the part of the tenant. The most that can be held against him is that he gave the landlord his opinion that the landlord ‘could charge £250 and that there was no previous control.’ According to the landlord the tenant said he (the landlord) ‘was clear’ (ie clear of any previous control under the Rent Restrictions Acts), but I think this comes to the same thing. In either case the tenant was merely giving the landlord his view of the law. Fraud being neither charged nor proved, the tenant must be taken to have been expressing the opinion he genuinely held at that time. The expression of an opinion bona fide held on a question of law is not misrepresentation. [page 351]

As regards the alternative ground of mutual mistake, it is pertinent to note the learned county court judge’s finding of fact on this issue which appears in the note of his judgment in these terms: I find there was no mistake of fact — possibly a mistake of law in that both parties for some obscure reason imagined that the Rent Acts did not apply. I don’t think they ever addressed their minds to the material issue of identity. This finding was subjected to considerable criticism in the course of the argument before us, but I think there was ample evidence to justify the learned county court judge, preferring as he did the landlord’s evidence to the tenant’s, in concluding that before the grant of the lease was completed both parties knew all the material facts about Maywood House and the flats into which it had been divided. That is to say, they knew that in 1939 the building consisted of five separate flats separately let, they also knew the rents at which the flats were then let, and, in particular, that the rent of No 1 (then known as No 2) had been £140. They also knew the nature and extent and effect on the lay-out and character of the flats of the alterations and improvements that had been made in conjunction with the restoration of the war damage; and they also knew the rateable value of each flat. These were all the facts necessary to be known in order to form a conclusion on the question whether the flat proposed to be let to the tenant was, under the Acts, subject to a standard rent of £140 fixed by reference to the pre-war letting of the corresponding flat to Mr Howard Taylor. The mistake consisted simply in the drawing by the parties of an erroneous conclusion from these facts to the effect that the standard rent of £140 was no longer applicable on account of the alterations and improvements which had been made since Mr Howard Taylor’s time.

Comments 16.5.1 See Radan, Gooley, and Vickovich at 16.5, 16.14, 16.17, 16.26–16.33, 16.37–16.39, 16.41–16.42, 16.46–16.47, and 16.51. 16.5.2 See also the decisions in Classic International v Lagos (2002) 60 NSWLR 241 and Australian Estates Pty Ltd v Cairns City Council

(2005) QCA 328.

UNILATERAL MISTAKE AS TO IDENTITY 16.6C

Shogun Finance Ltd v Hudson [2004] 1 AC 919

Court: House of Lords Facts: A rogue dishonestly obtained the driver’s licence of a Mr Patel and negotiated the purchase of a motor vehicle from a car dealer for £22,250. The dealer produced the standard-form hire-purchase agreement of Shogun Finance, into which were inserted Patel’s particulars. The rogue then signed the form with a signature similar to the one on Patel’s driver’s licence. The dealer faxed the particulars to the Shogun Finance office, where an immediate search was undertaken in relation to Patel’s creditworthiness. [page 352] The signatures were compared and the finance proposal was accepted. The rogue paid a deposit and took delivery of the vehicle, whereupon he sold it for £17,000 to Hudson, who bought it in good faith. After the rogue disappeared and Shogun Finance discovered what had taken place, the finance company sued to recover possession of the vehicle from Hudson. Hudson defended the claim on the basis that he was protected under the hire-purchase legislation as a bona fide purchaser for value without notice of the fraud. Issue: The House of Lords faced the issue of whether a contract entered into in such circumstances should be held to be void on the basis that there was a unilateral mistake as to the identity of one of the parties. In doing so, it had to review this contentious area of the law.

Decision: By a majority the House of Lords (Lords Hobhouse of Woodborough, Phillips of Worth Matravers, and Walker of Gestingthorpe; Lords Nicholls of Birkenhead and Millett dissenting) held in favour of Shogun Finance. It ruled that the form of the agreement made it clear that Shogun Finance intended to contract only with Patel and that Hudson acquired no title from the rogue. Extract: The extract from the speech of Lord Phillips of Worth Matravers reveals the majority’s reasoning. The extract from the dissenting speech of Lord Nicholls of Birkenhead focuses on the view that there should be a final departure from the legacy of the decision in Cundy v Lindsay (1878) 3 App Cas 459 in order to protect innocent third parties.

Lord Phillips of Worth Matravers My Lords, this appeal is a variation on a theme that has bemused courts and commentators alike for over 150 years. Two individuals conduct negotiations in which all the terms necessary to constitute a binding contract are agreed. One of those individuals has, however, been masquerading as a third party. Does a binding contract result? … It is a fundamental principle of the English law of sale of goods that a vendor cannot convey to a purchaser a better title to a chattel than that which he enjoys himself. There are however exceptions to this rule. One arises under s 27 of the [Hire-Purchase Act 1964], as amended, which provides, so far as material: (1) This section applies where a motor vehicle has been bailed or (in Scotland) hired under a hire-purchase agreement, or has been agreed to be sold under a conditional sale agreement, and, before the property in the vehicle has become vested in the debtor, he disposes of the vehicle to another person. (2) Where the disposition referred to in subsection (1) above is to a private purchaser, and he is a purchaser of the motor vehicle in good faith without notice of the hire-purchase or conditional sale agreement (the ‘relevant agreement’), that disposition shall have effect as if the creditor’s title to the

vehicle has been vested in the debtor immediately before that disposition. Section 29(4) defines the debtor as, for present purposes, the person to whom the vehicle is bailed. [page 353] The critical issue in this case is whether a hire-purchase agreement was ever concluded between Shogun and the rogue. If an agreement was concluded, then the rogue was the ‘debtor’ under s 27 of the 1964 Act and passed good title in the vehicle to Mr Hudson. If no agreement was concluded, then the rogue stole the vehicle by deception and passed no title to Mr Hudson.

Formation of contract A contract is normally concluded when an offer made by one party (the offeror) is accepted by the party to whom the offer has been made (the offeree). Normally the contract is only concluded when the acceptance is communicated by the offeree to the offeror. A contract will not be concluded unless the parties are agreed as to its material terms. There must be ‘consensus ad idem’. Whether the parties have reached agreement on the terms is not determined by evidence of the subjective intention of each party. It is, in large measure, determined by making an objective appraisal of the exchanges between the parties. If an offeree understands an offer in accordance with its natural meaning and accepts it, the offeror cannot be heard to say that he intended the words of his offer to have a different meaning. The contract stands according to the natural meaning of the words used. There is one important exception to this principle. If the offeree knows that the offeror does not intend the terms of the offer to be those that the natural meaning of the words would suggest, he cannot, by purporting to accept the offer, bind the offeror to a contract.20 Thus the task of ascertaining whether the parties have reached agreement as to the terms of a contract can involve quite a complex amalgam of the objective and the subjective and involve the application of a principle that bears close comparison with the doctrine of estoppel. Normally, however, the task

involves no more than an objective analysis of the words used by the parties. The object of the exercise is to determine what each party intended, or must be deemed to have intended. The task of ascertaining whether the parties have reached agreement as to the terms of a contract largely overlaps with the task of ascertaining what it is that the parties have agreed. The approach is the same. It requires the construction of the words used by the parties in order to deduce the intention of the parties.21 This is true, whether the contract is oral or in writing. The words used fall to be construed having regard to the relevant background facts and extrinsic evidence may be admitted to explain or interpret the words used. Equally, extrinsic evidence may be necessary to identify the subject matter of the contract to which the words refer. Just as the parties must be shown to have agreed on the terms of the contract, so they must also be shown to have agreed the one with the other. If A makes an offer to B, but C purports to accept it, there will be no contract. Equally, if A makes an offer to B and B addresses his acceptance to C there will be no contract. Where there is an issue as to whether two persons have reached an agreement, the one with the other, the courts have tended to adopt the same approach to resolving that issue as they adopt when considering whether there has [page 354] been agreement as to the terms of the contract. The court asks the question whether each intended, or must be deemed to have intended, to contract with the other. That approach gives rise to a problem where one person is mistaken as to the identity of the person with whom he is dealing, as the cases demonstrate. … In Cundy v Lindsay, a dispute about title to goods reached the House of Lords. A rogue called Blenkarn had a room at 37 Wood Street, Cheapside. A well-known firm called W Blenkiron & Son carried on business at 123 Wood Street. Blenkarn placed written orders for goods from 37 Wood Street with the plaintiffs. He signed the orders in such a way that the signature appeared to be Blenkiron & Co. The plaintiffs, who knew of

Blenkiron & Son, though not the number at which they carried on business in Wood Street, accepted the orders and despatched goods addressed to ‘Messrs Blenkiron & Co, 37 Wood Street, Cheapside’. Blenkarn sold some of these goods to the defendants, against whom the plaintiffs claimed in conversion. The House held that no contract had been concluded with Blenkarn and that, accordingly, the property in the goods had remained vested in the plaintiffs. Lord Cairns LC remarked that the plaintiffs and Blenkarn never came into contact personally and that everything that was done was done by writing. The problem was the conclusion to be derived from the writing, as applied to the facts of the case. He held that Blenkarn had deliberately led the plaintiffs to believe that they were contracting with Blenkiron & Co, an existing firm. He asked: … how is it possible to imagine that in that state of things any contract could have arisen between the Respondents 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 Lord Hatherly said: … from beginning to end the Respondents believed they were dealing with Blenkiron & Co, they made out their invoices to Blenkiron & Co, they supposed they sold to Blenkiron & Co, they never sold in any way to Alfred Blenkarn; and therefore Alfred Blenkarn cannot, by so obtaining the goods, have by possibility made a good title to a purchaser, as against the owners of the goods, who had never in any shape or way parted with the property nor with anything more than the possession of it.23 Lord Penzance said: In the present case Alfred Blenkarn pretended that he was, and acted as if he was, Blenkiron & Co with whom alone the vendors

meant to deal. No contract was ever intended with him, and the contract which was intended failed for want of another party to it.24 [page 355] Here, once again, the focus was on the intention of the offeree. In deciding that his intention was to contract with Blenkiron & Co, the House had regard to the fact that the order was apparently signed ‘Blenkiron & Co’ and to the fact that the plaintiffs knew of a firm of that name and intended to deal with that firm. Thus extrinsic evidence was admitted in addition to the wording of the order in order to ascertain the intention of the plaintiffs. … Phillips v Brooks Ltd, is the first case that involved a face-to-face transaction. A rogue called North entered the plaintiff’s jewellery shop. He selected some pearls and a ring and wrote out a cheque for the total price of £3,000. He stated that he was Sir George Bullough and gave an address in St James’s Square. The plaintiff, who knew of the existence of Sir George Bullough, referred to a directory and found that Sir George did, indeed, live at that address. He then permitted North to take away the ring before the cheque was cleared. Horridge J held that a contract was concluded between the plaintiff and North. At the outset of his judgment he set out his conclusion: I have carefully considered the evidence of the plaintiff, and have come to the conclusion that, although he believed the person to whom he was handing the ring was Sir George Bullough, he in fact contracted to sell and deliver it to the person who came into his shop, and who was not Sir George Bullough, but a man of the name of North, who obtained the sale and delivery by means of the false pretence that he was Sir George Bullough. It is quite true the plaintiff in re-examination said he had no intention of making any contract with any other person than Sir George Bullough; but I think I have myself to decide what is the proper inference to draw where a verbal contract is made and an article delivered to an individual describing himself as somebody else.25 … Phillips v Brooks Ltd well illustrates the conundrum that the

application of the test of intention raises when terms are negotiated between two persons who are face-to-face. It arises where the two persons, A and B, are not known to each other and where A gives a name which is not his own. If B is unaware of the existence of a third person who bears that name, there will be no problem. B will clearly intend to contract with A, treating the name given by A simply as the label by which A identifies himself. Equally A will know that B intends to contract with him. The problem arises where B is aware of a third person, C, who bears the name falsely adopted by A. In that situation it is B’s intention to contract both with A and with C, for he does not distinguish between the two. No sensible answer can be given to the question: does B intend to contract with A or C? Nor can any sensible answer be given to the question: does A believe that B intends to contract with him or with C? [The proper approach is to draw] an ‘inference’ that the plaintiff intended to contract with the rogue, who was present, and not with the individual whose identity the rogue had assumed. … In Ingram v Little26 a rogue, in the course of negotiating to buy a car from three ladies, the plaintiffs, who were reluctant to take his cheque, stated that his name was PGM Hutchinson [page 356] and gave an address in Caterham. One of the vendors went to the local post office and ascertained from the telephone directory that there was indeed a Mr PGM Hutchinson, who lived at that address. The ladies parted with possession of the car in exchange for a worthless cheque. The rogue sold the car to the defendant. The situation was similar to that in Phillips v Brooks Ltd, and all members of the Court of Appeal referred to that case. Sellers LJ doubted whether it was correctly decided. He said: It is not an authority to establish that where an offer or acceptance is addressed to a person (although under a mistake as to his identity) who is present in person, then it must in all circumstances be treated as if actually addressed to him.27 Earlier, he said:

Where two parties are negotiating together and there is no question of one or the other purporting to act as agent for another and an agreement is reached, the normal and obvious conclusion would no doubt be that they are the contracting parties. A contrary finding would not be justified unless very clear evidence demanded it.28 Relevant factors that might displace the presumption that the parties faceto-face were the contracting parties were whether the party impersonated was known to the other party and the importance attached to the identity of that person. The question in each case should be solved by asking the question ‘how ought the promisee to have interpreted the promise?’ Sellers LJ accepted the judge’s conclusion that, on the facts of the case, the rogue knew that the offer was not made to him as he was, but only to an existing person whom he represented himself to be. The offer was one which was capable of being accepted only by the honest PGM Hutchinson and not by the rogue. … Devlin LJ gave a powerful dissenting judgment. He held that there were two questions: (1) was a contract properly formed? If so, (2) was it void for mistake? As to form, he said that there could be no doubt that this had to be settled by inquiring with whom Miss Ingram intended to contract. That was a mixed question of fact and law. There was a presumption that a person intended to contract with the person to whom he was addressing the words of the contract. That presumption was not conclusive, at least where the party addressed purported to be acting as an agent. The presumption could not, however, be rebutted simply by showing that Miss Ingram would not have contracted with the rogue unless she had thought that he was Mr Hutchinson. There was nothing to rebut the presumption that she was addressing her acceptance to the rogue, in law as well as in fact. There was offer and acceptance in form. Turning to the question of mistake, Devlin LJ held that there could be no question of the mistake as to identity rendering the contract void, for the identity of the purchaser was immaterial, although his creditworthiness was not. All three members of the court adopted the approach of identifying the

intention of Miss Ingram. The difference between them was as to the manner of application of that approach [page 357] where an agreement was negotiated face-to-face. The majority considered that a sensible answer could be given to the question ‘with whom did Miss Ingram intend to contract?’ as a question of fact. Devlin LJ considered that this question could only be answered by the application of a legal presumption, which would not be rebutted where the only reason for interest in the identity of the contracting party was concern that the contracting party should be creditworthy. Ten years later a case of very similar facts was before the Court of Appeal. In Lewis v Averay, the plaintiff advertised his car for sale in a newspaper. A rogue telephoned and asked to see it. He arrived and told the plaintiff and his fiancée that he was Richard Greene and led them to believe that he was a well-known film actor of that name, who was playing the role of Robin Hood in a television series. A sale was agreed and the rogue wrote out a cheque for the purchase price. The plaintiff demurred at letting the rogue take the car before his cheque was cleared, whereupon the rogue produced a pass of admission to Pinewood Studios, with an official stamp on it, the name Richard A Greene and the rogue’s photograph. On sight of this, the plaintiff permitted the rogue to take the car and the documents that related to it. The cheque bounced and the rogue sold the car to the defendant, pretending at this point that he had the plaintiff’s name. The Court of Appeal held that a valid contract had been concluded between the plaintiff and the rogue and that good title had passed to the defendant. Giving the leading judgment, Lord Denning MR commented that it was impossible to distinguish between Phillips v Brooks Ltd … and Ingram v Little … on the facts. He held that Phillips v Brooks Ltd was to be preferred. He said: … 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. … In this case Mr Lewis made a contract of sale with the very man, the rogue, who came to the flat. I say that he ‘made a contract’ because in this regard we do not look into his intentions, or into his mind to know what he was thinking or into the mind of the rogue. We look to the outward appearances. On the face of the dealing, Mr Lewis made a contract under which he sold the car to the rogue, delivered the car and the log book to him, and took a cheque in return. The contract is evidenced by the receipts which were signed. It was, of course, induced by fraud. The rogue made false representations as to his identity. But it was still a contract, though voidable for fraud. It was a contract under which this property passed to the rogue, and in due course passed from the rogue to Mr Averay, before the contract was avoided.29 … Lord Denning MR did not apply the approach of attempting to identify the intention of the plaintiff. He proceeded on the simple basis that, to all outward appearances, the plaintiff entered into an agreement with the rogue, with whom he was dealing. Both he and [page 358] Phillimore LJ considered that the case was on all fours with Phillips v Brooks Ltd, which had been rightly decided. The difficulty in applying a test of intention to the identification of the parties to a contract arises, so it seems to me, only where the parties conduct their dealings in some form of interpersonal contact, and where one purports to have the identity of a third party. There the innocent party will have in mind, when considering with whom he is contracting, both the person with whom he is in contact and the third party whom he imagines that person to be. The same problem will not normally arise where the dealings are carried

out exclusively in writing. The process of construction of the written instruments, making appropriate use of extrinsic evidence, will normally enable the court to reach a firm conclusion as to the person with whom a party intends to contract. … There is a substantial body of authority that demonstrates that the identity of a party to a contract in writing falls to be determined by a process of construction of the putative contract itself. … The effect of these authorities is that a person carrying on negotiations in writing can, by describing as one of the parties to the putative agreement an individual who is unequivocally identifiable from that description, preclude any finding that the party to the putative agreement is other than the person so described. The process of construction will lead inexorably to the conclusion that the person with whom the other party intended to contract was the person thus described. …

The result in the present case I have had the advantage of reading in draft the opinions of my noble and learned friends who have sat with me on this appeal. Lord Hobhouse of Woodborough and Lord Walker of Gestingthorpe have concluded that, as the contract was a written document, the identity of the hirer falls to be ascertained by construing that document. Adopting that approach, the hirer was, or more accurately purported to be, Mr Patel. As he had not authorised the conclusion of the contract, it was void. Lord Nicholls of Birkenhead and Lord Millett have adopted a different approach. They point out the illogicality of applying a special approach to face-to-face dealings. What of dealings on the telephone, or by videolink? There also it could be said that each of the parties to the dealings is seeking to make a contract with the other party to the dealings. And this can even be said when the dealings are conducted by correspondence. If A writes to B making an offer and B writes back responding to that offer, B is intending to contract with the person who made that offer. If a contract is concluded in face-to-face dealings, notwithstanding that one party is masquerading as a third party, why should the result be different when the dealings are by letter? Lord Nicholls of Birkenhead and Lord Millett propose an elegant solution

to this illogicality. Where two individuals deal with each other, by whatever medium, and agree terms of a contract, then a contract will be concluded between them, notwithstanding that one has deceived the other into thinking that he has the identity of a third party. In such a situation the contract will be voidable but not void. While they accept that this approach cannot be [page 359] reconciled with Cundy v Lindsay, they conclude that Cundy v Lindsay was wrongly decided and should no longer be followed. While I was strongly attracted to this solution, I have found myself unable to adopt it. Cundy v Lindsay exemplifies the application by English law of the same approach to identifying the parties as is applied to identifying the terms of the contract. In essence this focuses on deducing the intention of the parties from their words and conduct. Where there is some form of personal contact between individuals who are conducting negotiations, this approach gives rise to problems. In such a situation I would favour the application of a strong presumption that each intends to contract with the other, with whom he is dealing. Where, however, the dealings are exclusively conducted in writing, there is no scope or need for such a presumption. This can be illustrated by a slight adaption of the facts of the present case. Assume that the rogue had himself filled in the application form and sent it and a photocopy of Mr Patel’s driving licence to Shogun. Assume further that he had been authorised to do so by Mr Patel. There can be no doubt that a contract would have been concluded between Shogun and Mr Patel. Mr Patel would have intended to contract with Shogun; Shogun would have intended to contract with Mr Patel; and this would have been demonstrated by the application form. Assume now that the rogue had wrongly understood that he had been requested by Mr Patel to fill in and submit the application form on his behalf, but in fact had no authority to do so. In this situation, according to established principles of the law of agency, an apparent contract would have been concluded between Shogun and Mr Patel but, being concluded without the latter’s authority, it would be a nullity. Shogun might have a

claim against the rogue for breach of warranty of authority, but could not have demonstrated that a contract had been concluded with the rogue. Turning to the true position — that the rogue knew he had no authority to conclude a contract in the name of Mr Patel, but fraudulently wished to induce Shogun to believe that they were entering into such a contract — I do not see by what legal principle this change in the mental attitude of the rogue could result in a binding contract being concluded with him. The position is not, of course, as simple as that. Negotiations between the rogue and Shogun were not conducted exclusively by written correspondence. They were conducted with the aid of the dealer and the use of fax and telephone communications. Acceptance of the offer was conveyed by telephone via the dealer — and this might have been capable of concluding a contract, notwithstanding that cl 1 of the standard terms provided for acceptance by signature. Sedley LJ considered that the dealings were analogous to face-to-face dealings and that the dealer was, in effect, the face of Shogun Finance Ltd. He considered that the face-to-face presumption should be applied. The majority of the Court of Appeal considered that Hector’s case30 required them to determine the identity of the parties to the putative contract as a simple question of construction. [page 360] On that basis they concluded that the putative hirer was Mr Patel and that, as the apparent contract was concluded without his authority, it was a nullity. Dyson LJ considered what the result would have been had the negotiations been treated as face-to-face. He concluded that the presumption would have been displaced by the importance that Shogun attached to the identity of the person with whom they were contracting. My Lords, I started this opinion by quoting Gresson P’s remark31 that the difficulty in a case such as this is a proper assessment of the facts rather than an assessment of the law. I have not found the assessment of the law easy, but nor is the application of the law to the facts. Shogun’s

representatives were aware of the presence of the prospective hirer in the dealer’s showrooms in Leicester. To an extent the dealings were interpersonal through the medium of the dealer. Should one treat them as comparable to face-to-face dealings and conclude that there was a presumption that Shogun intended to contract with the man with whom they were dealing? Should one treat the written agreement as no more than peripheral to the dealings and conclude that it does not override that presumption? I have concluded that the answer to these questions is ‘no’. Shogun had, on the evidence, set up a formal system under which contracts would be concluded in writing on a standard form. This form was designed to cater for both regulated and non-regulated hire-purchase agreements. In order to be suitable for the former it had to comply with the requirements of the Consumer Credit (Agreements) Regulations 1983. … Schedule 1 to these regulations, under the heading ‘Parties to the agreement’, requires the agreement to set out ‘The name and a postal address of the creditor’ and ‘The name and a postal address of the debtor’. The agreement with which this appeal is concerned was not a regulated agreement, for the purchase price of the vehicle exceeded what was, at the time, the maximum to which the relevant provisions of the Consumer Credit Act 1974 applied. I do not see, however, that the approach to the identification of the parties to the putative agreement can turn on whether or not the agreement was subject to the regulations. Shogun put in place a system for concluding contracts that required both regulated and unregulated agreements to be entered into in writing in a form which provided essential information, including the identity of the parties to the agreement. These considerations lead me to conclude that the correct approach in the present case is to treat the agreement as one concluded in writing and to approach the identification of the parties to that agreement as turning upon its construction. The particulars given in the agreement are only capable of applying to Mr Patel. It was the intention of the rogue that they should identify Mr Patel as the hirer. The hirer was so identified by Shogun. Before deciding to enter into the agreement they checked that Mr Patel existed and that he was worthy of credit. On that basis they decided to contract with him and with no-one else. Mr Patel was the hirer under the agreement. As the agreement was concluded without his authority, it was a nullity. The

rogue took no title under it and was in no position to convey any title to Mr Hudson. [page 361]

Lord Nicholls of Birkenhead (dissenting) The legal principle applicable in these cases cannot sensibly differ according to whether the transaction is negotiated face-to-face, or by letter, or by fax, or by email, or over the telephone or by video-link or videotelephone. Typically today a purchaser pays for goods with a credit or debit card. He produces the card in person in a shop or provides details of the card over the telephone or by email or by fax. When a credit or debit card is fraudulently misused in this way the essence of the transaction is the same in each case. It does not differ from one means of communication to the next. The essence of the transaction in each case is that the owner of the goods agrees to part with his goods on the basis of a fraudulent misrepresentation made by the other regarding his identity. Since the essence of the transaction is the same in each case, the law in its response should apply the same principle in each case, irrespective of the precise mode of communication of offer and acceptance. Accordingly, if the law of contract is to be coherent and rescued from its present unsatisfactory and unprincipled state, the House has to make a choice: either to uphold the approach adopted in Cundy v Lindsay32 and overrule the decisions in Phillips v Brooks Ltd33 and Lewis v Averay,34 or to prefer these later decisions to Cundy v Lindsay. I consider the latter course is the right one, for a combination of reasons. It is in line with the direction in which, under the more recent decisions, the law has now been moving for some time. It accords better with basic principle regarding the effect of fraud on the formation of a contract. It seems preferable as a matter of legal policy. As between two innocent persons the loss is more appropriately borne by the person who takes the risks inherent in parting with his goods without receiving payment. This approach fits comfortably with the intention of Parliament in enacting the limited statutory exceptions to the proprietary principle of nemo dat non

quod habet. … Further, this course is supported by writers of the distinction of Sir Jack Beatson.35 It is consistent with the approach adopted elsewhere in the common law world, notably in the United States of America in the Uniform Commercial Code, 14th edition, section 2-403. And this course makes practical sense. In a case such as the present the owner of goods has no interest in the identity of the buyer. He is interested only in creditworthiness. It is little short of absurd that a subsequent purchaser’s rights depend on the precise manner in which the crook seeks to persuade the owner of his creditworthiness and permit him to take the goods away with him. This ought not to be so. The purchaser’s rights should not depend upon the precise form the crook’s misrepresentation takes. Cundy v Lindsay has stood for a long time. But I see no reason to fear that adopting this conclusion will unsettle the law of contract. In practice the problems surrounding Cundy v Lindsay arise only when third parties’ rights are in issue. To bring the law here into line with the law already existing in ‘face-to-face’ cases will rid the law of an anomaly. Devlin LJ’s [page 362] starting point presumption is a workable foundation which should apply in all cases. A person is presumed to intend to contract with the person with whom he is actually dealing, whatever be the mode of communication. …

The present case … The principles applicable to the formation of a contract of sale are equally applicable to the formation of a hire-purchase agreement. The document submitted to Shogun Finance, and signed by the crook in the name of Mr Patel, does of course refer unequivocally to Mr Patel. The document identifies him with some particularity: his full name and address, his date of birth, his driving licence number, and his employer’s name and address. These details were of prime importance to Shogun Finance because they identified the person whose credit rating it had checked and approved. The company intended to contract with this person. But it is clear from the evidence that Shogun Finance, as much as the dealer in the car showroom,

thought this was one and the same person as the individual in the showroom. Shogun Finance proceeded in this (fraud-induced) belief. This is manifest because Shogun Finance authorised the dealer to hand over the car to the person in the showroom, he being (as the finance company knew) the person who had signed the agreement and he being (so the finance company believed) the person whose credit rating it had checked. … In the belief that the person in the dealer’s showroom was Mr Patel, Shogun Finance intended to hire the car to that person. That is what the finance company intended to do by the written hire-purchase agreement, and that is what it thought it had done. Had this not been so it would not have released the car to him. Shogun Finance was mistaken in its belief about the identity of the person in the showroom, in the same way as the jeweller was mistaken in his belief about the identity of the person in his shop. But that mistaken belief, induced by the crook’s fraudulent misrepresentation, did not negative the finance company’s intention to let the car on hire to the person in the showroom on the terms set out in the hire-purchase agreement. Nor could the crook assert he had no contractual intention: he signed the hire-purchase agreement, albeit using a false name and address. The alternative conclusion involves the proposition that when the dealer released the car to the crook, the dealer was guilty of converting the car and was liable to the finance company accordingly. That would be a distorted appraisal of the facts.

Comments 16.6.1 See Radan, Gooley, and Vickovich at 10.78 and 16.74. 16.6.2 For discussions of this case, see C Hare, ‘Identity Mistakes: A Missed Opportunity?’ (2004) 67 Modern Law Review 993; D W McLauchlan, ‘Mistake of Identity and Contract Formation’ (2005) 21 Journal of Contract Law 1. 16.6.3 See also Casquash Pty Ltd v NSW Squash Ltd (No 2) [2012] NSWSC 522.

[page 363]

UNILATERAL MISTAKE AS TO THE TERMS OF A CONTRACT 16.7C

Taylor v Johnson (1983) 151 CLR 422

Court: High Court of Australia Facts: Johnson granted an option to Taylor for him or his nominee to purchase two adjoining five-acre lots of land for $15,000. Taylor exercised the option and nominated his children. A contract for sale of land was entered into between Johnson as vendor and Taylor’s children as purchasers. Later Johnson refused to proceed with the sale on the basis that she had mistakenly believed the option and contract for sale had provided for a purchase price of $15,000 per acre. The price, according to her, should have been $150,000, although the market value of the land at the time was around $50,000. There was evidence that a proposed rezoning would have increased the price to about $195,000 if it eventuated. When Taylor’s children sought an order for specific performance, Johnson pleaded that the contract be set aside. Issue: The issue before the High Court was whether unilateral mistake by Johnson had been established. Decision: The High Court majority (Mason ACJ, Murphy and Deane JJ; Dawson J dissenting) found in favour of Johnson and held that specific performance of the contract be refused on the basis of the unilateral mistake made by Johnson. The majority held that the written contract for sale of land was voidable since Johnson was mistaken as to a fundamental term and the Taylors had acted unconscionably in full knowledge of the mistake. Extract: The extracts from the joint judgment of the majority highlight the circumstances in which unilateral mistake as to fundamental terms may render a contract voidable.

Mason ACJ, Murphy and Deane JJ

The judgments of Blackburn and Hannen JJ in Smith v Hughes36 provide support for the proposition that a contract is void if one party to the contract enters into it under a serious mistake as to the content or existence of a fundamental term and the other party has knowledge of that mistake. That approach accorded with what has been called the ‘subjective theory’ of the nature of the assent necessary to constitute a valid contract. … The ‘subjective theory’ … was advanced by, among others, Mr T Cyprian Williams in his Vendor and Purchaser37 and is that the true consent of the parties is essential to a valid contract. The contrary view, namely that described as the ‘objective theory’, was asserted by, among others, Holmes J in The Common Law (1881), Lecture IX, and is that the law is concerned, not with the real intentions of the parties, but with the outward manifestations of those intentions. In practice, as between the contracting parties, there is little difference in the result of the [page 364] application of the two competing theories since allied with any assertion of the ‘subjective theory’ is acceptance of one manifestation of the doctrine of estoppel which would ordinarily operate to preclude one, who had so conducted himself that a reasonable man would believe that he was assenting to the terms of a proposed contract, from leading evidence as to what his real intentions were. As a matter of legal technique there is a significant difference between the two theories. This is best illustrated by setting out the consequences which flow from the application of each theory to a case in which a contract is successfully impeached on the ground of unilateral mistake. 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. While the sounds of conflict have not been completely stilled, the clear trend in decided cases and academic writings has been to leave the objective theory in command of the field. It is unnecessary to examine the reasons for this. A convenient statement of them can be found in Williston on Contracts.38 In the United Kingdom, the decisive turning point leading to the near eclipse of the subjective theory was probably the speech of Lord Atkin in Bell v Lever Brothers Ltd.39 In due course, Denning LJ, basing himself on Lord Atkin’s speech, formulated a more general proposition than Lord Atkin’s comments would, on analysis, warrant (see Lord Atkin’s example of a case where ‘unilateral mistake by the seller of goods will prevent a contract from arising’: at 217–218). In Solle v Butcher, Denning LJ said: … [O]nce a contract has been made, that is to say, once the parties, whatever their inmost states of mind, have to all outward appearances agreed with sufficient certainty in the same terms on the same subject matter, then the contract is good unless and until it is set aside for failure of some condition on which the existence of the contract depends, or for fraud, or on some equitable ground.40 His Lordship then went on to say: Neither party can rely on his own mistake to say it was a nullity from the beginning, no matter that it was a mistake which to his mind was fundamental, and no matter that the other party knew that he was under a mistake.41 [page 365] While the mistake in Solle v Butcher was a mistake of fact which affected the operation of a formal written contract, it is plain that the above

remarks of Denning LJ were intended to extend to a mistake as to the existence or content of an actual term of such a contract. In McRae v Commonwealth Disposals Commission42 and in Svanosio v McNamara,43 which were cases involving formal written contracts, Dixon CJ and Fullagar J referred with approval to the remarks of Denning LJ. In Svanosio, their Honours quoted those remarks and continued: ‘Mistake’ might, of course, afford a ground on which equity would refuse specific performance of a contract, and there may be cases of ‘mistake’ in which it would be so inequitable that a party should be held to his contract that equity would set it aside. No rule can be laid down a priori as to such cases. … But we would agree … that it is difficult to conceive any circumstances in which equity could properly give relief by setting aside the contract unless there has been fraud or misrepresentation or a condition can be found expressed or implied in the contract.44 Denning LJ in Solle v Butcher had likewise expressed the view that, in the absence of fraud or misrepresentation, resort must be had to equity to escape from the terms of a contract on the ground of unilateral mistake. McRae and Svanosio, like Solle v Butcher, were not cases involving a mistake as to the existence or content of an actual term of the written contract. There is, however, nothing in the joint judgments of Dixon CJ and Fullagar J which would exclude such a case from their acceptance of the general proposition that neither party to a contract: … can rely on his own mistake to say it was a nullity from the beginning, no matter that it was a mistake which to his mind was fundamental, and no matter that the other party knew that he was under a mistake.45 Whether that proposition should properly be accepted as applying in the case of an informal contract or in the case where there is a mistake as to the identity of the other party are questions which can be left to another day. It would seem that it does not apply in a case where the mistake is as to the nature of the contract. For the present, but not without hesitation,46 we are prepared to accept it as applicable to a case, such as the present, where the mistake is as to the existence or content of an actual term in a

formal written contract. It therefore becomes necessary to consider the scope of the basis upon which relief in equity is available from the contractual consequences of unilateral mistake. Dixon CJ and Fullagar J referred, in the above passage from their judgment in Svanosio, to a difficulty in conceiving circumstances in which equity could properly give relief by setting aside the contract unless there had been fraud or misrepresentation or a condition could be found expressed or implied in the [page 366] contract. Presumably, their Honours were referring to ‘fraud’ in the wide equitable sense, which includes unconscionable dealing. If they were not, we do not share the difficulty to which they referred. To the contrary, it seems to us that the reported cases, including Solle v Butcher itself, readily provide concrete examples of such circumstances. In Torrance v Bolton, James LJ (with whom Mellish LJ agreed) explained the basis upon which a contract for sale was set aside in a case of unilateral mistake as being 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.47 Special circumstances will ordinarily need to be shown before it would be unconscientious for one party to a written contract to enforce it against another party who was under a mistake as to its terms or its subject matter. In Solle v Butcher Denning LJ gave, as examples of such special circumstances, the case where the mistake of the one party has been induced by a material misrepresentation of the other and the case where: … one party, knowing that the other is mistaken about the terms of an offer, or the identity of the person by whom it is made, lets him remain under his delusion and concludes a contract on the mistaken terms instead of pointing out the mistake.48

In Riverlate Properties Ltd v Paul,49 the English Court of Appeal accepted that a conveyance which included a building, due to a mistake on the part of one party which was known to the other party, could be rescinded, though rectification in that situation appeared to be a preferable remedy. … In the United States and Canada, the rule that relief from contractual obligations on the ground of unilateral mistake will be granted where enforcement of the contract would be unconscionable is well established. Indeed, in those jurisdictions the rule is expressed to apply to all contracts, formal and informal, when one party knows or ought to know that the other party is mistaken. … It has been said that the rule applies when one party knows that the other party is, or might well be, mistaken. The same result ensues when one party causes the other party’s mistake. And it matters not that the mistake is, or may be, due to negligence or want of care on the part of the party who is mistaken when the other party has not materially changed his position and third party rights are not in question. Professor Corbin summarized the United States position as follows: There is practically universal agreement that, if the material mistake of one party was caused by the other, either purposely or innocently, or was known to him, or was of such character and accompanied by such circumstances that he had reason to know of it, the mistaken party has a right to rescission.50 [page 367] 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 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. 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. Our comment can, for present purposes, be limited in its application to the case where the second party has not materially altered his position and the rights of strangers have not intervened. Applying the above-mentioned principle to the present case, it is apparent that the appeal must fail. It is now common ground between the parties that, at the time she signed both option and contract, Mrs Johnson mistakenly believed that the relevant document stipulated that the purchase price was $15,000 per acre whereas the stipulated purchase price was $15,000 in total. The stipulation as to price was plainly a fundamental term of the contract. … As we have already indicated, we are of the view that the proper inference to be drawn from the evidence is that, both at the time when Mrs Johnson executed the option and at the time when she executed the contract, Mr Taylor believed that she was under some serious mistake or misapprehension about either the terms (the price) or the subject matter (its value) of the relevant transaction. The avoidance of mention of the purchase price after the ‘idle curiosity’ conversation and the circumstances in which Mr Taylor procured the execution of the option, including his wrong statement that he did not have a copy of the option which he could make available to Mrs Johnson, lead, in our view, plainly to the inference that he deliberately set out to ensure that Mrs Johnson did not become aware that she was being induced to grant the option and, subsequently, to enter into the contract by some material mistake or misapprehension as to its terms or subject matter.

Comment 16.7.1 See Radan, Gooley, and Vickovich at 16.5, 16.43, 16.44, 16.46, 16.48–16.49, 16.61, 16.79–16.81, and 16.87.

[page 368]

THE DOCTRINE OF NON EST FACTUM 16.8C

Ford v Perpetual Trustees Victoria Ltd (2009) 75 NSWLR 42

Court: Court of Appeal in New South Wales Facts: Ford signed a loan contract and mortgage with Perpetual Trustees Victoria for the loan of $200,000 secured over Ford’s residential property. The loan funds were used to purchase a cleaning business in his name, although the reality was that the business was to be for the benefit of Ford’s son, who had manipulated his father’s entry into the transaction. Ford had a congenital intellectual impairment, was illiterate, and had no understanding at all of the transaction of purchase and the loan and mortgage. The business subsequently failed and Ford defaulted on the loan agreement. Perpetual Trustees Victoria commenced proceedings for possession of the property. Ford claimed that he was not bound by the loan agreement. Issue: The issue before the Court of Appeal was whether Ford was able to successfully plead the doctrine of non est factum as a defence to liability under the loan contract with Perpetual Trustees Victoria. Decision: The Court of Appeal unanimously held that the defence of non est factum applied in favour of Ford and declared the loan contract void ab initio. The fact that Ford also lacked mental capacity to enter into the loan contract did not mean that there could not be a finding of non est factum. However, the court ordered that Ford was liable in restitution to Perpetual Trustees Victoria for $24,857, which was the amount that was paid into Ford’s personal bank account after all other funds had been used by the son to purchase the business.

Extract: The extracts from the joint judgment of Allsop P and Young JA discuss the principles relating to the doctrine of non est factum as well as its relationship to a finding of incapacity on the part of the signatory.

Allsop P and Young JA The first submission of Perpetual was that in circumstances such as the present, where the findings were that Mr Ford had no capacity to understand, and did not understand, the document at all, non est factum was not available as a defence. Rather, it was submitted, only the defence of incapacity was available, in respect of which to succeed, it was necessary to prove that Perpetual knew of Mr Ford’s incapacity. The proposition was said to be made good by the expression of principle in Petelin v Cullen. There, in the reasons of the Court … the following was 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 [page 369] 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’51 and in the qualifications attaching to the defence which are designed to achieve this objective. 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. Finally, it is accepted that there is a heavy onus on a defendant who seeks to establish the defence. All this is made clear by the recent decision of the House of Lords in Saunders v Anglia Building Society (Gallie v Lee).52 … It is now settled beyond any shadow of doubt that when we speak of negligence or carelessness in connexion with non est factum we are not referring to the tort of negligence but to a mere failure to take reasonable precautions in ascertaining the character of a document before signing it. The insistence that such precautions should be taken as a condition of making out the defence is of fundamental importance when the defence is asserted against an innocent person, whether a third party to the transaction or not, who relies on the document and the signature which it bears and who is unaware of the circumstances in which it came to be executed. It is otherwise when the defence is asserted against the other party to the transaction who is aware of the circumstances in which it came to be executed and who knows (because the document was signed on his representation) or has reason to suspect that it was executed under some misapprehension as to its character. In such a case the law must give effect to the policy which requires that a person should not be held to a bargain to which he has not brought a consenting mind for there is no conflicting or countervailing consideration to be accommodated — no innocent person has placed reliance on the signature without reason to doubt its validity. … The other element in the defence which requires to be mentioned is the necessity that the appellant should show that he believed the document to be radically different from what it was in fact. Once it is accepted that the primary judge could properly find that the appellant believed it to be a receipt, this point of contention

disappears from the case. The respondent urged that the evidence was so slight as not to overcome the ‘heavy’ onus which rested with the appellant. The existence of that onus unquestionably was present to the mind of the primary judge when he came to assess the credibility of the appellant. But once he accepted the appellant’s evidence the question of onus in our opinion was set at rest.53 [page 370] In our view, it is clear from the terms of these reasons of the High Court that the central question in the operation of the plea concerns the true consent of the signer to the act of signature. That is clear from the court’s expression of the first policy consideration: ‘the injustice of holding a person to a bargain to which he has not brought a consenting mind’. It is reinforced by the identification of the class of persons who can avail themselves of the defence. The court said that the class includes ‘those who through no fault of their own are unable to have any understanding of the purport of a particular document’. It is in that context that the court referred to the person showing that he (or she) signed in the belief that the document was radically different from which it in fact was. If a person, who has capacity to form a belief that a document has a certain character, but is radically wrong in that belief, can qualify for the defence it makes no coherent logical sense for the law to deny the same defence (reflecting the policy consideration to which the High Court referred) to someone without any capacity for forming any relevant belief. We do not read the words of the Court in Petelin as removing from the operation of the defence circumstances which fall within its clear informing policy and which are even more clearly demonstrative of a lack of consent than the narrow confines articulated for someone capable of forming a relevant belief. A further matter arising out of the judgment in Petelin with which it is convenient to deal here is the question of the required lack of negligence. … From the facts [of that case], it is clear that their Honours were directing the enquiry as to satisfaction of that standard of reasonableness, bearing in mind the circumstances of the person in question. It is clear from this approach that one does not posit an objective standard of a reasonable man

shorn of the disability that the person may have — whether blindness, illiteracy or other impairment. It is negligence or lack of reasonableness of a person in the position of the signer that is the relevant enquiry. The above reading of the reasons in Petelin is reinforced when one reads the speeches in Saunders v Anglia Building Society (Gallie v Lee), which was referred to in Petelin. The five speeches in Gallie reflect the content of the High Court’s expression of principle. … [P]assages [in Gallie] from the speeches of Lords Reid, Wilberforce and Pearson, which were not contradicted in any of the other speeches, make clear that incapacity is a potentially qualifying, not a disqualifying, characteristic; that the underlying consideration informing the plea is true consent; that the relevant difference required between the document and the belief is ‘radical’, but that is the measure of the lack of consent not a mechanical requirement of a positive informed belief; and that the lack of negligence required to be displayed is to be judged according to the circumstances of the person in question. The submissions of Perpetual in support of the proposition that incapacity in fact disqualified a party from the plea of non est factum stressed what was said to be the inconsistency of the pleas of non est factum and incapacity. Particular reliance was placed on Gibbons v Wright.54 … [page 371] The relationship between incapacity and non est factum was dealt with by the court in Gibbons. … The two pleas (non est factum and incapacity) must be distinguished, as is clear from Gibbons.55 Each may be seen to occupy distinct areas and each is theoretically distinct from the other. But it goes too far, in our respectful view, to say that the two pleas are ‘incompatible’.56 Facts which, if known by the other party, would make the deed voidable may also, if sufficient in themselves, found a conclusion that the document was not signed. The two pleas may be made in the same case (as they were here). Nothing in Gibbons is support for the conclusion that incapacity cannot be a ground for a plea of non est factum if the facts

as to the incapacity are sufficient to enable a conclusion to be drawn that the document was not signed.

[page 372]

Comment 16.8.1 See Radan, Gooley, and Vickovich at 9.50, 16.93–16.95, 20.25, 20.37, and 38.86–38.88.

1.

(1852) 155 ER 1250.

2. 3.

In his preface to vol 101 of the Revised Reports at vi. [1950] 1 KB at 691.

4. 5.

[1932] AC 161. Couturier v Hastie (1852) 155 ER 1250 at 1254.

6. 7.

Couturier v Hastie (1852) 155 ER 1250 at 1256–7. Couturier v Hastie (1852) 155 ER 1250 at 1257.

8. 9.

Hastie v Couturier (1853) 156 ER 43 at 46, 47. Hastie v Couturier (1853) 156 ER 43 at 46.

10. 11.

Couturier v Hastie (1856) 10 ER 1065 at 1068, 1069. Bell v Lever Bros Ltd [1932] AC 161 at 218–22.

12. 13.

(1863) 122 ER 309. (1867) LR 2 HL 149.

14. 15.

[1903] 2 KB 740 at 754. [1950] 1 KB 671.

16. 17.

[1932] AC 161. Bell v Lever Bros Ltd [1932] AC 161 at 218.

18. 19.

Snell’s Equity (30th ed, 2000), p 4, para 1-03. [2001] All ER (D) 152.

20. 21.

Hartog v Colin & Shields [1939] 3 All ER 566; Smith v Hughes (1871) LR 6 QB 597. See Chitty on Contracts (28th ed, 1999), vol 1, paras 12-042, 12-043 and the cases there cited.

22. 23.

Cundy v Lindsay (1878) 3 App Cas 459 at 465. Cundy v Lindsay (1878) 3 App Cas 459 at 469.

24.

Cundy v Lindsay (1878) 3 App Cas 459 at 471.

25.

Phillips v Brooks Ltd [1919] 2 KB 243 at 246.

26. 27.

[1960] 3 All ER 332. Ingram v Little [1960] 3 All ER 332 at 337–8.

28. 29.

Ingram v Little [1960] 3 All ER 332 at 335–6. Lewis v Averay [1971] 3 All ER 907 at 911–12.

30. 31.

(1988) 58 P&CR 156. Fawcett v Star Car Sales Ltd [1960] NZLR 406 at 413.

32. 33.

(1878) 3 App Cas 459. [1919] 2 KB 243.

34. 35.

[1972] 1 QB 198. Anson’s Law of Contract (28th ed, 2002), p 332.

36. 37.

(1871) LR 6 QB 597 at 607 and 609. 4th ed (1936) p 748 fn (m).

38. 39.

3rd ed (1970), vol 13, s 1537. [1932] AC 161 at 217–27.

40. 41.

Solle v Butcher [1950] 1 KB 671 at 691. Solle v Butcher [1950] 1 KB 671 at 691.

42. 43.

(1951) 84 CLR 377 at 407–8. (1956) 96 CLR 186 at 195–6.

44. 45.

(1956) 96 CLR 186 at 196. Solle v Butcher [1950] 1 KB 671 at 691.

46. 47.

See, eg Robert A Munro & Co v Meyer [1930] 2 KB 312 at 333–4; Joscelyne v Nissen [1970] 2 QB 86 at 95–7. Torrance v Bolton (1872) 8 Ch App 118 at 124.

48. 49.

Solle v Butcher [1950] 1 KB 671 at 692. [1975] Ch 133 at 145.

50. 51.

Corbin on Contracts (1960), vol 3, s 608, p 692. Muskham Finance Ltd v Howard [1963] 1 QB 904 at 912.

52. 53.

[1971] AC 1004 at 1019. Petelin v Cullen (1975) 132 CLR 355 at 359–61.

54. 55.

(1954) 91 CLR 423. (1954) 91 CLR 423 at 443.

56.

Crago v McIntyre [1976] 1 NSWLR 729 at 737.

[page 373]

17 DURESS

INTRODUCTION 17.1 This chapter deals with contracts entered into as the result of duress exerted by one party to it over the other party. Duress is constituted by the use of illegitimate pressure by one party to coerce the other party to enter into the contract. There are three categories of duress, namely, duress of the person, duress of goods, and economic duress. A central issue in examining whether duress has occurred is applying an accepted definition of that concept to proven conduct. Lord Scarman in Universe Tankships Inc of Monrovia v International Transport Workers Federation [1983] 1 AC 366 (see 17.2C) stated that duress involves two elements: first, there needs to be pressure amounting to compulsion of the will of the victim; and second, that pressure needs to be illegitimate. Both elements need to be satisfied before duress will impact upon a contract. Duress of the person involves actual or threatened violence to or actual or threatened imprisonment of the person coerced or an associate of that person. An illustration of duress of the person is to be found in Barton v Armstrong [1976] AC 104 (see 17.3C). Where there is improper pressure by a person aimed at the contractual, proprietary, or other rights of a party, whether actual or threatened, in order to obtain some benefit to which that person is not entitled, a court may infer that the benefit has been obtained through economic duress. Illustrations of the impact of economic duress are seen in Crescendo Management Pty Ltd v

Westpac Banking Corporation (1988) 19 NSWLR 40 (see 17.4C) and North Ocean Shipping Company Ltd v Hyundai Construction Company Ltd [1979] 1 QB 705 (see 17.5C). The existence of duress renders the contract voidable. The primary remedy for duress is rescission. In addition, proven rescission may result in a finding that a contract was unjust within the meaning of legislation such as the Contracts Review Act 1980 (NSW), which is discussed in Chapter 20. [page 374]

THE MEANING OF DURESS 17.2C Universe Tankships Inc of Monrovia v International Transport

Workers Federation [1983] 1 AC 366 Court: House of Lords Facts: The International Transport Workers Federation imposed a black ban on a ship because it did not hold a certificate issued by the union indicating that the ship owners had met the union’s wages and conditions standards for crew members. The effect of the black ban was that the ship could not be serviced by tugs after docking at Milford Haven. This threatened to strand the vessel and inflict heavy economic losses on the owners. After discussions with the union, the ship owners agreed to make a payment of US$80,000 to the union to be used to cover alleged back pay for the crew of the ship. In addition, the union insisted on payment of $6480 to its welfare fund. After the payments were made, the union ban was lifted and the ship was able to proceed. Some time later the ship owners commenced legal action for recovery of the money on the ground that the agreement had been made under duress. The owners abandoned the action to recover the $80,000 after it became clear the union’s demand amounted to conduct that was protected by industrial relations legislation. However, they continued to press for return of the smaller amount paid to the union’s welfare fund on the basis of

duress. The ship owners succeeded initially, but the union had the decision overturned in the Court of Appeal. The ship owners appealed to the House of Lords. Issues: There were two major issues before the House of Lords. The first was whether the union was correct in arguing that the payment to the welfare fund was to be held on trust and was therefore irrecoverable. The second was whether the circumstances in which the $6480 had been paid could be classified as economic duress and if, in any event, the union could claim immunity for the demand as a legitimate ‘trade dispute’ under the industrial relations laws, making the payment irrecoverable as ‘money had and received’. Decision: The House of Lords (Lords Diplock, Cross of Chelsea, Russell of Killowen, Scarman, and Brandon of Oakbrook) unanimously rejected the trust argument, but a majority found in favour of the ship owners on the duress issue. Extract: The extract from the speech of Lord Scarman, who dissented on the facts of the case on the duress issue, focuses on the requirements for duress to be established.

Lord Scarman It is … 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.1 The authorities upon which these two cases were based reveal two elements in the wrong of [page 375] duress: (1) pressure amounting to compulsion of the will of the victim; and (2) the illegitimacy of the pressure exerted. There must be pressure, the practical effect of which is compulsion or the absence of choice. Compulsion is variously described in the authorities as coercion or the vitiation of consent. The classic case of duress is, however, not the lack of

will to submit but the victim’s intentional submission arising from the realisation that there is no other practical choice open to him. This is the thread of principle which links the early law of duress (threat to life or limb) with later developments when the law came also to recognise as duress first the threat to property and now the threat to a man’s business or trade. … The absence of choice can be proved in various ways, eg 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.2 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: It was a matter of the most urgent commercial necessity that [the owners] 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.3 The real issue in the appeal is, therefore, as to the second element in the wrong duress: was the pressure applied by the [union] 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: … the pressure must be one of a kind which the law does not regard as legitimate.4 As the two noble and learned Lords remarked, … 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 [page 376] depends upon the nature of the demand. Blackmail is often a demand supported by a threat to do what is lawful, eg to report criminal conduct to the police. In many cases, therefore, ‘What [one] has to justify is not the threat, but the demand. …’5 The present is a case in which the nature of the demand determines whether the pressure threatened or applied, ie 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 [Trade Union and Labour Relations Act 1974]. Although no question of tortious liability arises in this case and section 13(1) is not, therefore, directly in point, it is not possible, in my view, to say of acts which are protected by statute from suit in tort that they nevertheless can amount to duress. Parliament having enacted that such acts are not actionable in tort, it would be inconsistent with legislative policy to say that, when the remedy sought is not damages for tort but recovery of money paid, they become unlawful. … I conclude that the demand for contributions related to the terms and conditions of employment on the ship, and, if it had been resisted by the owner, would have led to a trade dispute. Blacking the ship in support of the demand was, therefore, not actionable in tort. It was, accordingly, a legitimate exercise of pressure and did not constitute duress. The owner cannot recover the contributions. I would dismiss the appeal.

[page 377]

Comments 17.2.1 See Radan, Gooley, and Vickovich at 17.1, 17.2, 17.5, 17.13, 17.25, and 17.26. 17.2.2 In McIntyre v Nemesis DBK Ltd [2009] NZCA 329 at [19]–[20], the New Zealand Court of Appeal, drawing upon Lord Scarman’s speech in this case, said the following in relation to the meaning of duress: Contractual duress is the imposition of improper pressure by threats that coerce a party to enter a contract. Contracts that have been procured by duress are voidable at the discretion of the coerced party, unless that party has subsequently affirmed the contract. While originally duress was restricted to threats of physical injury, it has subsequently expanded to encompass both threats in relation to property and the exertion of economic pressure. … Duress involves two fundamental elements. … First, there must be the exertion of illegitimate pressure on a victim. Secondly, the imposition of that pressure must have compelled the victim to enter the contract. 17.2.3 The meaning of duress is also discussed in Crescendo Management Pty Ltd v Westpac Banking Corporation (1998) 19 NSWLR 40 at 45–6: see Radan, Gooley, and Vickovich at 17.7 and 17.22.

DURESS TO THE PERSON 17.3C

Barton v Armstrong [1976] AC 104

Court: Judicial Committee of the Privy Council Facts: Barton was general manager of a company of which

Armstrong was chairman of the board of directors. The complex array of shareholdings in the principal company and its related entities revolved chiefly around a Surfers Paradise development in which both men had significant interests. Their relationship broke down and negotiations took place with the aid of intermediaries for the purchase of Armstrong’s interests. Barton alleged that he signed under duress a deed on terms sought by Armstrong after a series of provocations against him and his family, including death threats. Armstrong denied the allegations and claimed Barton executed the deed because he had concluded the deal to be favourable. Street J in the Supreme Court of New South Wales found as a matter of fact that death threats had been made against Barton and that he had taken them seriously with justification. But he also held that the threats did not actually coerce him into executing the deed, which he had signed for sound business reasons. A majority of the Court of Appeal dismissed Barton’s appeal on the ground that he had failed to establish he would not have executed the deed but for Armstrong’s threats. Barton appealed to the Privy Council. Issue: The issue before the Privy Council was whether a party who had entered into a contract under duress would lose the right to rescind if it was established they also had separate reasons for entering into the agreement. [page 378] Decision: A majority of the Privy Council (Lords Cross of Chelsea, Kilbrandon, and Sir Garfield Barwick; Lords Wilberforce and Simon of Glaisdale dissenting) found against Barton. It was acknowledged that Barton could have executed the deeds on the ground that they were in his interest, even if Armstrong had made no threats and exerted no unlawful pressure to induce him to do so. However, because the threats and unlawful pressure did in fact contribute to his decision to execute them, the deeds were held to be void insofar as they related to Barton. Extract: The extracts from the speech of Lord Cross of Chelsea reflect

the reasoning of the majority on the issue of duress as a vitiating factor.

Lord Cross of Chelsea The three judges in the Court of Appeal Division were in substantial agreement on the facts of the case but they reached different conclusions because they differed as to the law applicable to them. Mason JA and Taylor AJA thought that Barton could not succeed unless he could establish that but for the threats he would not have signed the agreement and that he had failed to establish that fact. Jacobs JA [the dissenting judge in the Court of Appeal] agreed that if Barton had indeed to show that but for the threats he would not have signed the agreement he had failed to do so. He thought, however, that if the evidence showed that one party to the transaction had put the other in fear of his life during the negotiations leading up to the execution of the deed in question the common law would assume that he was not ‘a free agent’ and that he could consequently avoid the transaction. Furthermore, he thought that, in any case, equity would allow him to avoid the transaction if the evidence showed that the threats had any appreciable effect in inducing him to execute the agreement even if he would in fact have executed it if there had been no threats and that the evidence did at least establish that. Their Lordships turn now to consider the question of law which provoked a difference of opinion in the Court of Appeal Division. 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. In answering this question in favour of Barton, Jacobs JA relied both on a number of old common law authorities on the subject of ‘duress’ and also — by way of analogy — on later decisions in equity with regard to the avoidance of deeds on the ground of fraud. Their Lordships do not think

that the common law authorities are of any real assistance for it seems most unlikely that the authors of the statements relied on had the sort of problem which has arisen here in mind at all. On the other hand they think that the conclusion to which Jacobs JA came was right and that it is supported by the equity decisions. The scope of common law duress was very limited and at a comparatively early date equity began to grant relief in cases where the [page 379] disposition in question had been procured by the exercise of pressure which the Chancellor considered to be illegitimate — although it did not amount to common law duress. There was a parallel development in the field of dispositions induced by fraud. At common law the only remedy available to the man defrauded was an action for deceit but equity in the same period in which it was building up the doctrine of ‘undue influence’ came to entertain proceedings to set aside dispositions which had been obtained by fraud. … There is an obvious analogy between setting aside a disposition for duress or undue influence and setting it aside for fraud. In each case — to quote the words of Holmes J in Fairbanks v Snow — ‘the party has been subjected to an improper motive for action’.6 … Their Lordships think that … if Armstrong’s threats were ‘a’ reason for Barton’s executing the deed he is entitled to relief, even though he might well have entered into the contract if Armstrong had uttered no threats to induce him to do so. … If Barton had to establish that he would not have made the agreement but for Armstrong’s threats then their Lordships would not dissent from the view that he had not made out his case. But no such onus lay on him. On the contrary it was for Armstrong to establish, if he could, that the threats which he was making and the unlawful pressure which he was exerting for the purpose of inducing Barton to sign the agreement and which Barton knew were being made and exerted for this purpose in fact contributed nothing to Barton’s decision to sign. The judge has found that during the ten days or so before the documents were executed Barton was in genuine fear that Armstrong was planning to have him killed if the agreement was not signed. His state of mind was described by the judge as

one of ‘very real mental torment’ and he believed that his fears would be at an end when once the documents were executed. … It is true that on the facts as their Lordships assume them to have been Armstrong’s threats may have been unnecessary; but it would be unrealistic to hold that they played no part in making Barton decide to execute the documents. The proper inference to be drawn from the facts found is, their Lordships think, that though it may be that Barton would have executed the documents even if Armstrong had made no threats and exerted no unlawful pressure to induce him to do so the threats and unlawful pressure in fact contributed to his decision to sign the documents and to recommend their execution by [the company] and the other parties to them. … In the result, therefore, the appeal should be allowed and a declaration made that the deeds in question were executed by Barton under duress and are void so far as concerns him.

[page 380]

Comment 17.3.1 See Radan, Gooley, and Vickovich at 17.10 and 17.17.

ECONOMIC DURESS 17.4C

Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40

Court: Court of Appeal in New South Wales Facts: Hilbrink was a director of the Upward Group of Companies, which comprised two companies that were in a state of indebtedness to Westpac. The directors of the Upward Group decided to relocate the company premises from Mortdale in Sydney

to Picton. As a result Hilbrink and his wife decided to sell their residence in Oyster Bay and move to Picton. They sold their home in July 1977, with the net proceeds of $31,268.38 being received by Westpac head office as mortgagees. Hilbrink claimed Westpac was authorised to deduct an amount to discharge a long-term loan secured by the Oyster Bay property and overdrafts on his own personal accounts. One half of the balance of the proceeds of sale was to be credited to Hilbrink’s account with Westpac, while the other half was to be transferred to an account held in his wife’s name at the Picton branch of the Commercial Banking Co. However, Westpac transferred the entire balance of $27,713.74 to its ‘Mortdale Branch A (Upward Publishing Co Pty Ltd and Upward Productions Pty Ltd)’. The bank refused to release the moneys until mortgages had been executed by the Hilbrinks’ company, Crescendo Management Pty Ltd, to secure the debts outstanding in the name of the Upward Group. Because the moneys were required to complete the Picton purchase, the Hilbrinks signed the documents. However, and despite their apparent lack of protest, they then claimed that the documents were executed under duress. Issue: The issue before the Court of Appeal was whether the withholding of the balance of proceeds of sale until documents had been executed to secure the indebtedness of the Upward Group amounted to economic duress. Decision: The Court of Appeal (Samuels, Mahoney, and McHugh JJA) unanimously held that, although a prima facie case of economic duress could be made out against Westpac, the pressure caused by the bank’s conduct played no part in Crescendo Management’s decision to execute the documents. Extract: The extracts from the judgment of McHugh JA set out the principles of duress and why there was no operative duress on the facts of this case.

[page 381]

McHugh JA Duress Upon these facts I think that [the trial judge] was correct in holding that Crescendo had not made out a case of economic duress. The rationale of the doctrine of economic duress is that the law will not give effect to an apparent consent which was induced by pressure exercised upon one party by another party when the law regards that pressure as illegitimate. … As [Lord Diplock] pointed out, the consequence is 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 [the party’s] mind.7 In the same case Lord Scarman declared that the authorities show that there are two elements in the realm of duress: (a) pressure amounting to compulsion of the will of the victim and (b) the illegitimacy of the pressure exerted. [He said]: There must be pressure, the practical effect of which is compulsion or the absence of choice.8 The reference in Universe Tankships Inc of Monrovia v International Transport Workers Federation and other cases to compulsion ‘of the will’ of the victim is unfortunate. They appear to have overlooked that in Director of Public Prosecutions for Northern Ireland v Lynch,9 a case concerned with duress as a defence to a criminal proceeding, the House of Lords rejected the notion that duress is concerned with overbearing the will of the accused. The Law Lords were unanimous in coming to the conclusion, perhaps best expressed in the speech of Lord Simon of Glaisdale: … that duress is not inconsistent with act and will, the will being deflected, not destroyed.10 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. 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? 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. [page 382] In their dissenting advice in Barton v Armstrong, Lord Wilberforce and Lord Simon of Glaisdale pointed out: … in life, including the life of commerce and finance, many acts are done under pressure, sometimes overwhelming pressure, so that one can say that the actor had no choice but to act. Absence of choice in this sense does not negate consent in law: for this the pressure must be one of a kind which the law does not regard as illegitimate. Thus, out of the various means by which consent may be obtained — advice, persuasion, influence, inducement, representation, commercial pressure — the law has come to select some which it will not accept as a reason for voluntary action: fraud, abuse of relation of confidence, undue influence, duress or coercion.11 In Pao On v Lau Yiu Long,12 the Judicial Committee [of the Privy Council] accepted (at 635) that the observations of Lord Wilberforce and Lord Simon in Barton v Armstrong were consistent with the majority judgment in that case and represented the law relating to duress. It is unnecessary, however, for the victim to prove that the illegitimate pressure was the sole reason for him entering into the contract. It is sufficient that the illegitimate pressure was one of the reasons for the person entering into the agreement. Once the evidence establishes that the pressure

exerted on the victim was illegitimate, the onus lies on the person applying the pressure to show that it made no contribution to the victim entering into the agreement.13 …

No operative duress In the present case, the assertion by Westpac that it would detain the whole of the sum of $27,000 until various documents were executed was improper and constituted an unlawful detention of Mrs Hilbrink’s half interest in the proceeds of the sale of the Oyster Bay property. [The trial judge] expressed the view that the sale price of the Oyster Bay property was jointly and severally owned by the Hilbrinks. However, the joint tenancy in respect of the Oyster Bay property was severed by the sale and any interest which Mr Hilbrink might have had in the whole of the moneys was negatived by the direction to the Bank that 50 per cent of the fund was to be sent to the account of Mrs Hilbrink at the Commercial Banking Co of Sydney at Picton.14 Westpac had no right to retain the moneys which represented Mrs Hilbrink’s interest in the fund. Moreover, I do not think that Westpac was entitled to deal with the moneys owing to Mr Hilbrink in the way in which it did. Westpac was certainly entitled to appropriate part of the moneys to pay out Mr Hilbrink’s personal accounts. It was also entitled under its guarantee to appropriate the balance of the moneys owing to Mr Hilbrink from the Oyster Bay sale to reduce the indebtedness of Upward Publishing Co Pty Ltd and Upward Productions Pty Ltd. However, Westpac did not purport to appropriate the money for that purpose. It simply refused to hand it over to Mr Hilbrink unless Crescendo executed the mortgage in question. Although the pressure applied by Westpac to Mr and Mrs Hilbrink was unlawful, I am of opinion that it played no part in the execution of the mortgage which had occurred before the [page 383] pressure was applied. I shall assume in favour of Crescendo that the pressure applied to Mr and Mrs Hilbrink was pressure applied to them in their capacity as directors of Crescendo as well as in their personal capacity.

But the pressure had no causal connection with the execution of the mortgage. … The execution of the mortgage took place, therefore, before 21 July when Westpac wrote to the Hilbrinks informing them that the sum of $27,713.74 had been sent to the Mortdale branch and that the moneys would be released only after certain documents were executed. It is true that the mortgage was executed before the sale of the Kent Street property was completed and that until completion it was held in escrow. But the relevant point is that the execution of the mortgage was not associated with any threat by Westpac. No doubt it was executed because the Hilbrinks were anxious to fend off the pressure coming from Westpac to make provision for the debts of Upward Publishing Co Pty Ltd. If the letter of Mr Hilbrink dated 27 July 1977 is accurate, Westpac did not apply pressure until 14 July 1977. It then did so by refusing to hand over the $27,713.74 until the directors and their wives executed guarantees to cover the amalgamation of the debts of Upward Publishing Co Pty Ltd and Upward Production Co Pty Ltd and mortgages were executed by [other directors]. The letter also states that the board of directors was complying with the request. There is not a mention in this important letter of the mortgage executed by Crescendo. The overall impression of this letter is that the directors and their wives were aware of the need to amalgamate the debts of the two companies and enter into an arrangement with Westpac so as to enable the companies to carry on operations. They seem to have been quite happy to give the guarantees and mortgages. Certainly they raised no objection. Indeed they were simply bowing to the inevitable. Refusal to enter into the arrangements would have probably brought immediate problems for the companies. In my opinion the correct conclusion is that the mortgage by Crescendo was executed on 8 July on the assumption that the moneys would be released. It is possible that Westpac made some express or implied representation to that effect. However, at no stage of the proceedings has Crescendo made an allegation that it executed the mortgage because of a false or fraudulent representation to that effect on 8 July. I do not suggest for a moment that such a case could have succeeded. But I point to it because in my opinion that was the only possible case which Crescendo could have run.

Comments 17.4.1 See Radan, Gooley, and Vickovich at 17.7 and 17.22. 17.4.2 In Australia & New Zealand Banking Group Ltd v Karam (2005) 64 NSWLR 149 at 168, the New South Wales Court of Appeal rejected the suggestion by McHugh JA that ‘unconscionable conduct’ could amount to illegitimate pressure: see Radan, Gooley, and Vickovich at 17.8–17.10 and 17.23. 17.4.3 For discussions of economic duress see M H Ogilvie, ‘Economic Duress: An Elegant and Practical Solution’ [2011] 3 Journal of Business Law 239; and M Sindone, ‘The Doctrine of Economic Duress’ (1996) Australian Bar Review 34 (Pt 1) and 114 (Pt 2).

[page 384] 17.5C North Ocean Shipping Company Ltd v Hyundai Construction

Company Ltd [1979] 1 QB 705 Court: Queen’s Bench Division Facts: In 1972 Hyundai agreed to build a tanker for North Ocean for an agreed price of US$30,950,000, payable in five instalments. It was agreed that Hyundai would open a letter of credit to provide security for repayment of instalments in the event of their failure to perform. After North Ocean paid the first instalment, there was a 10 per cent devaluation of the US dollar. Hyundai claimed for a 10 per cent increase for the remainder of the instalment payments, despite the fact the contract did not anticipate any price adjustment in such case. North Ocean initially rejected the claim. However, it decided to refer the matter to arbitration in order to avoid any delays in the construction, since it had already found a charterer for the tanker. Hyundai wished to avoid arbitration and gave North Ocean a final

opportunity to agree to the increase, failing which they threatened to terminate the contract. North Ocean relented and agreed ‘without prejudice to [their] rights’, requesting at the same time that Hyundai make a corresponding increase to their letter of credit. Construction of the tanker then proceeded and all instalments were paid, including the additional 10 per cent amounts. North Ocean took delivery of the tanker and completed formalities without protest. It then made a claim for the return of all payments made above the original contract price, arguing the agreement to pay the additional 10 per cent was either void for lack of consideration or voidable since it was made under economic duress. Two arbitrators decided in Hyundai’s favour and North Ocean appealed. Issues: The main issue before the Queen’s Bench Division was whether, if an agreement with consideration is made under economic duress to pay a sum of money, the excess sum could be recovered. The court also had to consider whether the right to rescind a contract for duress was lost by affirmation. Decision: Mocatta J held that a threat to break a contract could amount to economic duress and that this had in fact taken place. However, by reserving its right to take recovery action after the contract had been completed and not indicating to Hyundai its intentions, North Ocean had affirmed the contract and could not recover the excess payment. Extract: The extracts from the judgment of Mocatta J relate only to the issue of economic duress.

Mocatta J There has been considerable discussion in the books whether, if an agreement is made under duress of goods to pay a sum of money and there is some consideration for the agreement, the excess sum can be recovered. The authority for this suggested distinction is Skeate v Beale.15 It was there said by Lord Denman CJ that an agreement was not void because [page 385]

it was made under duress of goods, the distinction between that case and the cases of money paid to recover goods wrongfully seized being said to be obvious in that the agreement was not compulsorily but voluntarily entered into. In the slightly later case of Wakefield v Newbon,16 Lord Denman CJ referred to cases such as Skeate v Beale as ‘that class where the parties have come to a voluntary settlement of their concerns, and have chosen to pay what is found due’. Kerr J in The ‘Siboen’ and The ‘Sibotre’, gave strong expression to the view that the suggested distinction based on Skeate v Beale would not be observed today. He said, though obiter, that Skeate v Beale would not justify a decision: … [that if], [f]or instance … I should be compelled to sign a lease or some other contract for a nominal but legally sufficient consideration under an imminent threat of having my house burnt down or a valuable picture slashed, though without any threat of physical violence to anyone, I do not think the law would uphold the agreement.17 It would seem … that the Australian courts would be prepared to allow the recovery of excess money paid, even under a new contract, as the result of a threat to break an earlier contract, since the threat or compulsion would be applied to the original contractual right of the party subject to the compulsion or economic duress. This also seems to be the view in the United States, where this was one of the grounds of decision in King Construction Company v Smith Electric Co.18 This view also accords with what was said in D & C Builders Ltd v Rees [by] Lord Denning MR: ‘No person can insist on a settlement procured by intimidation’.19 … I may here usefully cite a further short passage from the valuable remarks of Kerr J in The ‘Siboen’ and The ‘Sibotre’, where after referring to three of the Australian cases I have cited he said: It is true that in that case, and in all the three Australian cases, it was held that there had been no consideration for the settlement which the Courts reopened. But I do not think that it would have made any difference if the defendants in these cases had also insisted on some purely nominal but legally sufficient consideration. If the contract is void the consideration would be recoverable in quasi-

contract: if it is voidable equity could rescind the contract and order the return of the consideration.20 It is also interesting at this point to quote a few sentences from an article … by [Jack] Beatson …: It is submitted that there is no reason for making a distinction between actual payments and agreements to pay. If that is so there is nothing to prevent a court from finding that duress of goods is a ground upon which the validity of a contract can be impeached. … The law was accurately stated by the courts of South Carolina as early as 1795, when it was [page 386] said that ‘… whenever assumpsit will lie for money extorted by duress of goods, a party may defend himself against any claim upon him for money to be paid in consequence of any contract made under similar circumstances’.21 Before proceeding further it may be useful to summarise the conclusions I have so far reached. First, I do not take the view that the recovery of money paid under duress other than to the person is necessarily limited to duress to goods falling within one of the categories hitherto established by the English cases. I would respectfully follow and adopt the broad statement of principle laid down by Isaacs J22 cited earlier and frequently quoted and applied in the Australian cases. Secondly, from this it follows that the compulsion may take the form of ‘economic duress’ if the necessary facts are proved. A threat to break a contract may amount to such ‘economic duress’. Thirdly, if there has been such a form of duress leading to a contract for consideration, I think that contract is a voidable one which can be avoided and the excess money paid under it recovered. I think the facts found in this case do establish that the agreement to increase the price by ten per cent reached at the end of June 1973 was caused by what may be called ‘economic duress’. [Hyundai] were adamant in insisting on the increased price without having any legal justification for

so doing and [North Ocean] realised that [Hyundai] would not accept anything other than an unqualified agreement to the increase. [North Ocean] might have claimed damages in arbitration against [Hyundai] with all the inherent unavoidable uncertainties of litigation, but in view of the position of [North Ocean] vis-à-vis their relations with [charterer] Shell it would be unreasonable to hold that this is the course they should have taken.23 [North Ocean] made a very reasonable offer of arbitration coupled with security for any award in [Hyundai’s] favour that might be made, but this was refused. They then made their agreement, which can truly I think be said to have been made under compulsion … without prejudice to their rights. I do not consider [Hyundai’s] ignorance of the Shell charter material. It may well be that had they known of it they would have been even more exigent. If I am right in the conclusion reached with some doubt earlier that there was consideration for the ten per cent increase agreement reached at the end of June 1973 and if it be right to regard this as having been reached under a kind of duress in the form of economic pressure, then what is said in Chitty on Contracts, to which both counsel referred me, is relevant, namely that a contract entered into under duress is voidable and not void: … [and] consequently a person who has entered into the contract may either affirm or avoid such contract after the duress has ceased; and if he has so voluntarily acted under it with a full knowledge of all the circumstances he may be held bound on the ground of rectification, or if, after escaping from the duress, he takes no steps to set aside the transaction, he may be found to have affirmed it.24

[page 387]

Comment 17.5.1 See Radan, Gooley, and Vickovich at 17.20 and 17.27.

1.

Barton v Armstrong [1976] AC 104; Pao On v Lau Yiu Long [1980] AC 614.

2. 3.

Maskell v Horner [1915] 3 KB 106. Universe Tankships Inc of Monrovia v International Transport Workers Federation [1981] ICR 129 at 143.

4. 5.

Barton v Armstrong [1976] AC 104 at 121. Thorne v Motor Trade Association [1937] AC 797 at 806.

6. 7.

Fairbanks v Snow (1887) 13 NE 596 at 598. Universe Tankships Inc of Monrovia v International Transport Workers Federation [1983] 1 AC 366 at 384.

8. 9.

Universe Tankships Inc of Monrovia v International Transport Workers Federation [1983] 1 AC 366 at 400. [1975] AC 653.

10. 11.

Director of Public Prosecutions for Northern Ireland v Lynch [1975] AC 653 at 695. Barton v Armstrong [1973] 2 NSWLR 598 at 634.

12. 13.

[1980] AC 614. Barton v Armstrong [1973] 2 NSWLR 598 at 633.

14. 15.

Re Allingham; Allingham v Allingham [1932] VLR 469. (1840) 113 ER 688.

16. 17.

(1844) 115 ER 107 at 109. Occidental Worldwide Investment Corp v Skibs A/S Avanti (The ‘Siboen’ and The ‘Sibotre’) [1976] 1 Lloyd’s Rep 293 at 335.

18. 19.

350 SW 2d 940 (1961). D & C Builders Ltd v Rees [1966] 2 QB 617 at 625.

20. 21.

Occidental Worldwide Investment Corp v Skibs A/S Avanti (The ‘Siboen’ and The ‘Sibotre’) [1976] 1 Lloyd’s Rep 293 at 366. Jack Beatson, ‘Duress as a Vitiating Factor in Contract’ (1974) 33 Cambridge Law Journal 97 at 108.

22. 23.

Smith v William Charlick Ltd (1924) 34 CLR 38 at 56. See Astley v Reynolds (1731) 93 ER 939.

24.

Chitty on Contracts, 24th ed (1977), vol 1, para 442, p 207.

[page 388]

18 UNDUE INFLUENCE

INTRODUCTION 18.1 This chapter deals with the equitable doctrine of undue influence, which enables the weaker party in a relationship of undue influence to set aside a contract if it was entered into as a result of undue influence. The doctrine of undue influence depends upon establishing that there is a relationship of undue influence that exists between parties who enter into a contract. If such a relationship exists, there is a presumption that any contract between the parties to that relationship was a product of undue influence exerted by the stronger party over the weaker party to that relationship. There are two categories of undue influence. The first involves cases of actual undue influence, and depends upon actual undue influence being used. It rarely arises in practice. The second and more common category involves cases of presumed undue influence, and arises upon proof of the existence of a relationship of undue influence between the parties. Union Fidelity Trustee Co of Australia Ltd v Gibson [1971] VR 573 (see 18.2C) deals with the essential requirements relating to undue influence. The requisite special relationship in cases of presumed undue influence may be established either by proving that the parties were in one of the traditional relationships of influence, such as solicitor and client, or where the facts and circumstances of the case indicate that undue influence was a factor. In the former case the benefit of the transaction or disposition must flow from the weaker party to the stronger party, and the presumption of undue influence arises by virtue of the legal relationship itself. In cases not involving

legally-recognised special relationships, such as in Johnson v Buttress (1936) 56 CLR 113 (see 18.3C), the onus of proof is on the party claiming it was unduly influenced. In that case the High Court outlined the factors in the weaker party’s case that established the undue influence, which then required rebuttal by the stronger party. Once undue influence has been established, whether by way of special relationship or the facts of the case, rebuttal of the presumption is required in order to avoid the setting aside of the transaction. In Bester v Perpetual Trustee Co Ltd [1970] 3 NSWR 30 (see 18.4C) the Supreme Court adverted to key indicia of rebuttal, such as independent advice, emancipation, and providence of the transaction. A particular problem that has arisen in this context relates to cases of undue influence by third parties who are not privy to the transaction. This has arisen notably with third-party guarantees, by way of which a person may benefit after having influenced a party to effect a transaction with someone else. The High Court held in Yerkey v Jones (1939) 63 CLR 649 (see 18.5C) that a wife who guaranteed her husband’s loan pursuant to a contract was protected by a ‘special [page 389] equity’, so that the creditor who accepted the wife’s guarantee through the husband debtor took the guarantee subject to any invalidating conduct on the part of the husband. This enabled the wife’s interest to be protected. When revisiting the Yerkey v Jones principle in 1998, the High Court in Garcia v National Australia Bank (1998) 194 CLR 395 (see 18.6C) clarified the obligation on the stronger contracting party, the bank, to disclose and explain the transaction to the wife who had guaranteed her husband’s business loan.

THE PRINCIPLES OF UNDUE INFLUENCE 18.2C Union Fidelity Trustee Co of Australia v Gibson [1971] VR 573 Court: Supreme Court of Victoria

Facts: Gibson had acted for many years as estate agent and financial adviser to Lillian Dunn. In August 1957 Dunn loaned £15,000 to Gibson and his brother, an amount that was repayable over 10 years at 6 per cent interest and was secured by a first mortgage over land owned by the brothers. The mortgage document was prepared by Gibson’s solicitor. On 8 April 1960 Dunn signed a discharge of the mortgage, notwithstanding that the loan had not been repaid. Some years passed, during which time there was no attempt by Dunn to set aside the transaction. There was also no attempt by Gibson to register the discharge document until December 1966, about 10 months after Dunn’s death. Her executor sought to have the discharge set aside on the ground of undue influence. Gibson argued that Dunn had made a gift of the outstanding moneys to him and his brother in gratitude for past services. Issue: The Supreme Court had to decide whether the discharge of the mortgage was the ‘pure, voluntary and well-understood act’ of Dunn, or whether it had been the result of undue influence by Gibson. Decision: Gillard J of the Supreme Court held, as a preliminary matter, that the nature of Gibson’s relationship with Dunn raised a presumption of undue influence. His Honour concluded on the facts that Gibson failed to establish that the intention to sign the discharge document was free from undue influence and ordered that the discharge be set aside. Extracts: The extracts from the judgment of Gillard J highlight principal features of undue influence as a factor that may vitiate inequitable transactions.

Gillard J Having regard to the well-established principles of equity, two questions of fact arise for determination: — 1. What on 8 April 1960 was the precise nature of the relationship existing between Miss Dunn and the defendant? 2. Was the discharge of mortgage signed by Miss Dunn ‘the pure,

voluntary and well-understood’ act of Miss Dunn? [page 390] The first question must initially be answered, since the answer to that question may well determine where the onus of proof is imposed in the vital issue in these proceedings. If the relationship is of a character that undue influence should be presumed, then the onus is imposed upon the defendant to prove that the discharge of mortgage was the ‘pure, voluntary and well-understood’ act of Miss Dunn, that is to say, that she made a spontaneous gift to him. On the other hand, if the relationship were not of that character from which the presumption would arise, then the onus would be placed upon the plaintiffs to prove affirmatively the exercise of undue influence by the defendant and that the discharge of mortgage was the result of such influence. [S]ome attention should be given to the principles of equity which should be applied in this case. Although this ground has been extensively ploughed by numerous authorities in the past, in the course of counsel’s submission, it became apparent that different emphasis was being placed by each party on various aspects of the equitable principles. I trust, therefore, I may be pardoned for reiterating those matters which have become well accepted in this branch of law. Despite the warning given by Dixon, J, (as he then was) in Yerkey v Jones1 I shall deal with the principles in a propositional form, viz: — 1.

2.

3.

‘The law does not prohibit persons making gifts to or conferring benefits upon other persons standing in positions of trust and confidence towards them, whether from motives of affection, gratitude or otherwise, so long as the gifts or benefits are the voluntary and well understood acts of such persons’.2 When a person signs a document knowing it is a legal document relating to an interest which he has in property he is, generally speaking, bound by the act of his signature. A person who completes the making of a gift cannot recall the gift, simply because it is a gift. … Courts of equity have never set aside gifts

on the grounds of imprudence, folly or want of foresight on the part of donors. 4.

5.

But such gift may be voidable if the donee has exercised over the donor undue influence in the relevant sense as developed and understood in the courts of equity. Two classes of case have developed in these courts. The first class is where by the evidence, it is established that the gift was the result of influence expressly used by the donee over the donor. The second class of case is when the relations between the donor and donee have at or shortly before the execution of the gift been such as to raise a presumption that the donee had influence over the donor. … It is into the second class this case must fall if the plaintiffs are to succeed. A court of equity will presume undue influence on the part of the donee when the evidence establishes a fiduciary relationship between the donor and donee, whereby at the material time of the gift the donor reposed complete trust and confidence in the donee and thereby placed the donee in a position to exercise ascendancy or dominion over the will or mind of the donor. … Mere agency or a similar relationship will not of itself raise the presumption. There must also exist a trust and confidence reposed by the [page 391]

7.

8.

9.

donor in the donee whereby the donor relying on the donee for advice and assistance may be easily influenced. … Even though a donor may be perfectly competent to understand and intend what he or she did, the equitable principles may be invoked to set aside the gift. It would also seem that, even if the proposal to make the gift came from the donor, it would not preclude the donor from relying upon the equitable principles. Once facts are proved whereby a relationship of the character set out above is established, then the onus is imposed upon the donee to make out the case that the gift was ‘the pure voluntary well-understood act

of the donor’s mind’.3 … He must satisfy the court ‘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’.4 … One of the most difficult matters which the donee is required to prove is to establish how the donor’s intention was produced. … The Privy Council has stated that it is ‘most important from the point of view of public policy to maintain the rule of law which has been laid down and to insist that a gift made under circumstances which give rise to the presumption must be set aside unless the donee is able to satisfy the court of facts sufficient to rebut the presumption’.5 10. In dealing with the evidence of the relationship, and its effect in law a number of important considerations must be constantly borne in mind: — (a) The standard of intelligence and education, and the character and personality of the donor, are relevant matters. Age, state of health, blood relationship, experience, or lack of it, in business affairs of the donor, length of friendship or acquaintanceship between the donor and donee and the intricacy of their business affairs may be factors to influence a donor to depend upon the donee. Equally, the relative strength of character and personality of the donee, the period and closeness of the relationship and the opportunity afforded the donee to influence the donor in his business affairs are correlative considerations to the foregoing. (b) When certain well-established relationships, such as solicitor and client, trustee and cestui que trust, guardian and ward, parent and child, priest and penitent are proved, the presumption referred to arises with and on proof of such relationship. The characteristic common to all these relationships appears to be that the first named in such relationship will advise and afford guidance to the other in and for the purpose of such relationship solely in the interest and for the benefit of the other. (c) But the classes of relationship have not been closed. … The court has deliberately left this matter at large. The vital matter for consideration is whether the relationship existing between a donee and donor possesses such characteristics as to raise a presumption that the donee

had the requisite influence over the donor. … It is necessary for [the executors], if they are to succeed in this case, to establish such characteristics in the relationship between Miss Dunn and [Gibson]. [page 392] (d) Although there is no rule of law that where such a relationship exists the donor should have independent advice at the time of making the gift in order to rebut the presumption (and particularly if the court is of opinion that independent advice would not have had any effect on the transaction … or that the gift was trifling or of a simple character), nevertheless independent advice is an important factor in determining whether the gift is the pure voluntary and well-understood act of the donor. This is particularly so if the gift should be of a large sum of money … or the circumstances of the relationship, however proper the court may regard them, strongly suggest that the donor was in a position of grave inequality in relation to the done … or where the transaction may be of a complicated character. … [T]he donee may rebut the presumption in any manner open to him on the facts which enables him to persuade the court that the gift was really the spontaneous act of a party, comprehending what he did and as a result of his own free will. But it is undoubtedly true that in many authorities the presence or absence of independent advice has had a great influence on the court’s decision on this vital question. If the donor, however, should receive independent advice, and either misunderstands the advice or is given possibly erroneous advice whereby he fails to appreciate or realize the financial implications and the detriment to himself involved in the gift, a court of equity will not set aside the gift if the donor otherwise understood the nature of the transaction and acted therein in the full exercise of his will. (e) A donee often suffers a grave handicap in making out a case of a gift produced by affection or gratitude by laying the foundation for the proof of a relationship which with very little more can be transmuted from an innocent one into one raising the presumption of undue influence against him. … The line of demarcation between the two

relationships is very difficult to discern or define. … (f)

On its face, it is unconscientious for a donee to take a gift of a large amount from a donor where the donor is in such a position that confidence is reposed by him in the donee.

(g) ‘In the relations comprised within the category to which the presumption of undue influence applies, there is another element besides the mere existence of an opportunity of obtaining ascendency or confidence and of abusing it. It will be found that in none of those relations is it natural to expect the one party to give property to the other. That is to say, the character of the relation itself is never enough to explain the transaction and to account for it without suspicion of confidence abused’.6 11. ‘Courts of Equity have set aside gifts made to persons in a position to exercise undue influence over the donors, although there has been no proof of actual exercise of such influence; and the Courts have done this on the avowed ground … to protect persons from 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’.7 … [page 393] Despite my non-acceptance of the account given by [Gibson] as to the signing of the documents on 8 April 1960, one cannot overlook that Miss Dunn, a mature woman of education and business experience, did sign the discharge and accompanying letter and did deliver over the certificate of title and mortgage. These facts cannot be controverted. As a person of intelligence and understanding she must have known what the verbiage meant in the accompanying letter. However suspicious one may feel about certain features in these documents, there under Miss Dunn’s hand was evidence of her intentions and her reasons. Obviously this evidence cannot and should not be lightly disregarded. … Despite the strength of [Gibson’s] case set out above, all the circumstances prevailing at the time of the discharge must be considered. In signing the

discharge, no independent advice was received by Miss Dunn. She only received the advice of [Gibson]. If she had received independent advice at that stage, would she have signed the documents? The nature of the transaction, even as described by [Gibson], called for legal advice being given to Miss Dunn at this period. … In order to have the appropriate careful protection to which she was entitled, Miss Dunn should have received legal advice. This was particularly so having regard to her age, and her obvious reliance upon [Gibson] in confidential matters at this period. Although the accompanying letter over the hand of Miss Dunn is potent evidence of a gift, it was prepared by [Gibson]. I am not persuaded that Miss Dunn was the author of the document or that she requested it to be prepared. … Having rejected [Gibson’s] evidence which would have established that the signing of the discharge was a spontaneous act on Miss Dunn’s part, there is no direct evidence available to the Court as to how or why Miss Dunn formulated the intention or the purpose of signing the two documents bearing date 8 April 1960, that is the discharge of mortgage and the letter accompanying. On the other hand, there is ample proof of a close and confidential relationship between Miss Dunn and [Gibson] whereby he had plenty of opportunity to exercise dominion over her mind. Having regard to the existing relationship, the nature of the transaction and Miss Dunn not having at hand the protection and care of an independent adviser, it was … unconscientious for [Gibson] to take a gift of such a large amount of money. … In the absence of an acceptable and persuasive account by [Gibson] to establish that this was the spontaneous or well-understood act of Miss Dunn, the presumption of undue influence must be invoked in favour of [the executor].

Comment 18.2.1 See Radan, Gooley, and Vickovich at 18.18–18.33, 18.37, and 18.40.

[page 394] 18.3C

Johnson v Buttress (1936) 56 CLR 113

Court: High Court of Australia Facts: Buttress was the son of the late John Buttress and administrator of his father’s estate. During his lifetime John and his wife had befriended her distant relative, Mary Johnson, a woman who later gave aid and comfort to John’s wife during her terminal illness. John continued his friendship with Johnson after his wife’s death and named her as the beneficiary in his will, to the exclusion of his son in whom he had lost confidence. John’s only asset of any significance was a small cottage in the Sydney suburb of Maroubra, in which he lived and from which he earned a small rental income. At one point he told Johnson he wished to transfer his house to her. They attended Johnson’s solicitor’s office where, after some routine questioning, John signed the relevant transfer documents, in which consideration was expressed as ‘natural love and affection’. The rest of John’s family was unaware of the transfer of the cottage to Johnson or of the will he had made in her favour. Shortly before his death John made a new will in which he named his niece, Agnes Hart, as the sole beneficiary. After his father’s death, Buttress, as administrator, commenced proceedings to set aside the transfer to Johnson on the grounds of undue influence. Issue: The issue before the High Court was whether the transfer from John to Johnson should be set aside on the grounds of undue influence. Decision: The High Court (Latham CJ, Starke, Dixon, Evatt, and McTiernan JJ) unanimously found in favour of John’s son and set aside the transfer of the Maroubra cottage to Johnson. It held that an antecedent relationship of influence between John and Johnson had been established on the facts, which imposed on Johnson the burden to prove that John had freely exercised his independent will. Since she had failed to do this, the transfer had to be set aside.

Extract: The extracts from the judgment of Latham CJ reflect the High Court’s reasoning on the matters to be established where undue influence is alleged as a vitiating element. The extracts from the judgment of Dixon J set out the basic principles relevant to undue influence.

Latham CJ 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. [page 395] 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 … ‘the pure, voluntary, well-understood act of the mind’ of the donor.8 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.9 … I apply to this case the words of Sir John Leach VC in Griffiths v Robins, … altering only the pronouns to make the words more plainly applicable to the present case and omitting words referring to independent advice which later authorities … 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.10 Thus, in my opinion, the [facts of this case] show that though it has not been affirmatively proved against [Johnson] 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.

Dixon J 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. [page 396] But the parties may antecedently stand in a relation that gives to one an authority or influence over the other from the abuse of which it is proper that he should be protected. When they stand in such a relation, the party in the position of influence cannot maintain his beneficial title to property of substantial value made over to him by the other as a gift, unless he satisfies the court that he took no advantage of the donor, but that the gift was the independent and well-understood act of a man in a position to exercise a free judgment based on information as full as that of the donee. This burden is imposed upon one of the parties to certain well-known relations as soon as it appears that the relation existed and that he has obtained a substantial benefit from the other. A solicitor must thus justify the receipt of such a benefit from his client, a physician from his patient, a parent from his child, a guardian from his ward, and a man from the woman he has engaged to marry. The facts which must be proved in order to satisfy the court that the donor was freed from influence are, perhaps, not always the same in these different relationships, for the influence which grows out of them varies in kind and degree. But while in these and perhaps one or two other relationships their very nature imports influence, the doctrine which throws upon the recipient the burden of justifying the transaction is confined to no fixed category. It rests upon a principle. It applies whenever one party occupies or assumes towards another a position naturally involving an ascendancy or influence over that other, or a dependence or trust on his part. One occupying such a position falls under a duty in which fiduciary characteristics 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’.11 Further, when the [page 397] transaction is not one of gift but of purchase or other contract, the matters affecting its validity are necessarily somewhat different. Adequacy of consideration becomes a material question. Instead of inquiring how the subordinate party came to confer a benefit, the court examines the propriety of what wears the appearance of a business dealing. These differences form an additional cause why cases which really illustrate the effect of a special relation of influence in raising a presumption of invalidity are often taken to decide that express influence which is undue should be inferred from the circumstances.

Comment 18.3.1 See Radan, Gooley, and Vickovich at 18.29–18.32 and 18.34.

REBUTTING THE PRESUMPTION OF UNDUE INFLUENCE 18.4C

Bester v Perpetual Trustee Co Ltd [1970] 3 NSWR 30

Court: Supreme Court of New South Wales Facts: Bester, a young woman at the time she inherited her father’s estate equally with her brother, was encouraged to make a settlement of her share soon after she turned 21. She was influenced by three much older men — the representative from her trustee company and her two uncles, one of whom was the solicitor who drafted the deed of settlement — to execute the deed on the basis that it was in her interest to protect the capital from access by other people. She was told that the assets would be placed beyond her control and in the hands of trustees, whose duty would be to keep the capital intact for the benefit of any future children. She was entitled to receive a modest income from the assets during her lifetime. The solicitor uncle referred her to an independent solicitor, Emanuel, who simply read the document to her and asked whether she had any questions about it. At the time of settlement the applicant was 21 years of age, without parental guidance, and possessed of extremely limited business experience. She understood the general import of the deed and felt that the three men who arranged it knew best what was in her interest. Many years later, after marrying and having no children, she sought a court order that the deed be set aside on the ground that she had been subjected to undue influence when the document was signed. Issue: The issue before the Supreme Court was whether a deed of settlement could be rescinded for undue influence where the

applicant was advised of the nature of the deed and was in receipt of advice from an independent source. The nature of the independent advice and the settlement itself were crucial to the establishment of undue influence. Decision: In the Supreme Court Street J ruled that undue influence had been established by the degree of confidence placed by Bester in her uncles and trustee. It was also found that the deed had not been executed of her own free will because it was improvident [page 398] (it placed the property irrevocably beyond her control) and because the advice she received was inadequate (it failed to point out there was no obligation to settle her inheritance, that individual terms of the deed could have been negotiated, and that alternative strategies could have been explored). His Honour also rejected the argument that the settlement should not be set aside on the ground of laches. Extract: The extracts from the judgment of Street J focus on the requirements of undue influence and, in particular, on the nature of the independent advice that equity requires.

Street J The issue upon which success or failure turns in a case such as the present was crystallized by the Privy Council in Kali Bakhsh Singh v Ram Gopal Singh: ‘… whether the grantor thoroughly comprehended, and deliberately and of her own free will carried out, the transaction’.12 In determining whether or not this issue should be resolved for or against the plaintiff [Bester], there are a number of circumstances that are traditionally regarded as significant. One of these circumstances is the nature of the transaction itself. If it can be demonstrated that the transaction is, so far as the settlor is concerned, improvident, then that will be a powerful consideration pointing towards success on the part of a settlor seeking to set aside a settlement upon the ground that it was not

thoroughly comprehended, and deliberately and of the settlor’s own free will carried out. A leading case upon the significance of improvidence is the decision of James VC in Everitt v Everitt.13 The improvidence associated with the transaction with which James VC was concerned was in some respects similar to the heads of the present settlement which are relied upon as demonstrating improvidence. Briefly, they may be summarized as being that [Bester] finally, irrevocably and absolutely placed her property beyond all recall so far as she was concerned when she executed this document. In return for whatever protection her property might have from incautious handling on [her] part …, or unscrupulous intervention on the part of some third party, the settlement involves her foregoing every interest whatever in the property during her lifetime except the bare right to receive income, coupled with the prospect of some or all of the money being applied towards providing a residence for her, her husband, and her children, if she should have any. The absence of any power of revocation, absolute or qualified, the absence of any right to have resort to corpus, absolute or qualified, the absence of any right to intervene in the activities of the trustees, either in particular matters or in point of the selection of the trustees, are all factors which go, in my view, to justify this transaction being categorized as in some respects improvident. Another of the indicia to which reference may legitimately be made in determining the critical issue of whether [Bester] thoroughly comprehended the transaction, and entered into it deliberately and of her own free will, is the presence or absence of independent advice [page 399] having been tendered to her. Mr Emanuel was brought into the present transaction with the intention no doubt of his meeting this requirement. I am of the view, however, that such part as he played in connexion with this settlement could not fairly be described as meeting that degree of independent advice that [Bester], as a person subject to a relationship of influence, was entitled to receive. Mr Emanuel was, I accept, most careful to read the document through, and to invite questions of [Bester]. But it was not textual advice upon the engrossment which was of prime importance in

this regard: rather, it was advice upon the more general topic of whether a settlement should be entered into at all, and, if so, the general nature of the settlement, which in my view ought to have been provided for [her]. The document had been completely engrossed, and, indeed, Mr Emanuel’s certificate had been typed at the end of it before it was even shown to [her]. I accept [Bester’s] evidence that she had been advised as to what she should do before she went to Mr Emanuel and, further, that she did not, from her discussion with Mr Emanuel, gain any impression as to whether he was advising her in favour of, or against, the signing. The need to provide meaningful advice in order to enable an independent choice to be made by a person in the position of [Bester] 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.

Comment 18.4.1 See Radan, Gooley, and Vickovich at 18.33, 18.36–18.39, 18.41, and 18.47.

THE WIFE’S GUARANTEE OF HER HUSBAND’S LOAN 18.5C

Yerkey v Jones (1939) 63 CLR 649

Court: High Court of Australia Facts: Estyn Jones became interested in buying a three-acre parcel of land at Payneham in South Australia from Mr and Mrs Yerkey. The

land had a house and other fixtures that made it suitable for his plan to run a poultry farm and breed dogs. His wife, Florence Jones, did not support her husband’s idea. However, Estyn negotiated directly with Mr Yerkey and agreed to buy the property for £3500 by instalment payments on the condition that further security was provided. He had no property in his name, but offered the property in which he and his wife lived at Walkerville, which was owned by Florence. [page 400] He was taken to Yerkey’s solicitor who drew up a letter to reflect the deal, which Estyn signed. It provided for a payment of £200 after two years, with the balance of £3300 to be paid after the expiration of three years from the date of the contract. Florence Jones was to execute a second mortgage over her property at Walkerville for £1000, which would be included in the £3300 payment. Estyn did not tell his wife about this arrangement until a week later, upon which she first opposed and then reluctantly agreed to do as her husband had arranged. The mortgage was executed and the sale proceeded. Estyn Jones failed to develop the poultry farm and the property at Payneham deteriorated. Interest payments on the mortgage fell into arrears and Mr and Mrs Yerkey took legal action in accordance with their rights as mortgagees. Florence brought proceedings to have the mortgage over her Walkerville property set aside. Issue: The issue before the High Court was whether there was a presumption that a wife in such circumstances acts under the influence of her husband. It also had to decide whether Florence had acted under Estyn’s influence when executing the mortgage. Decision: The High Court (Latham CJ, Rich, Dixon, and McTiernan JJ) unanimously held in favour of the Yerkeys. It held that in cases where a wife confers a benefit upon her husband voluntarily, a presumption of undue influence does not arise. Although it may be possible for actual undue influence to be established in such cases, Florence

Jones had failed to prove this on the facts in her case. The Yerkeys were able to enforce their mortgage over the Walkerville property. Extract: The extracts from the judgment of Dixon J explain why the relationship of husband and wife is not one in which it is presumed that the husband has influence over the wife. They also detail the principles of equity that can be invoked by a wife who has guaranteed a loan made to her husband.

Dixon J In In re Lloyds Bank Ltd; Bomze and Lederman v Bomze the present Lord Chancellor (Lord Maugham), speaking of gifts by a wife to her husband, said that it is well settled that the relation is not one of those in which the doctrine of [undue influence] applies, ‘but where there is evidence that a husband has taken unfair advantage of his influence over his wife or her confidence in him, it is not difficult for the wife to establish her title to relief’.14 The reason for excluding the relation of husband and wife from the category to which the presumption applies is to be found in the consideration that there is nothing unusual or strange in a wife from motives of affection or even of prudence conferring a large proprietary or pecuniary benefit upon her husband. The Court of Chancery was not blind to the opportunities of obtaining and unfairly using influence over his wife which a husband often possesses. But in the relations comprised within the category to which the presumption of undue influence applies, there is another element besides the mere existence of an opportunity of obtaining [page 401] ascendancy or confidence and of abusing it. It will be found that in none of those relations is it natural to expect the one party to give property to the other. That is to say, the character of the relation itself is never enough to explain the transaction and to account for it without suspicion of confidence abused. The distinction drawn between large gifts taken by a man from the woman

to whom he is affianced, a case to which the presumption applies, and similar gifts by a wife to her husband, a case to which it does not apply, a distinction sometimes condemned, is explained by this consideration and also, perhaps, by the consideration that the rule is one of policy and, upon a balance, policy is against applying it to husband and wife. But while the relation of a husband to his wife is not one of influence, and no presumption exists of undue influence, it has never been divested completely of what may be called equitable presumptions of an invalidating tendency. In the first place, there is the doctrine, which may now perhaps be regarded as a rule of evidence, that, if a voluntary disposition in favour of the husband is impeached, the burden of establishing that it was not improperly or unfairly procured may be placed upon him by proof of circumstances raising any doubt or suspicion. In the second place, the position of strangers who deal through the husband with the wife in a transaction operating to the husband’s advantage may, by that fact alone, be affected by any equity which as between the wife and the husband might arise from his conduct. In the third place, it still is or may be a condition of the validity of a voluntary dealing by the wife for the advantage of her husband that she really obtained an adequate understanding of the actual nature and consequences of the transaction. It will be seen that all three of these matters must have a special importance when the transaction in question is one of suretyship and the wife without any recompense, except the advantage of her husband, saddles herself or her separate property with a liability for his debt or debts. … Of the three suggested rules or presumptions … the existence of the first appears to be beyond question, but it is somewhat vague and indefinite. It may amount to no more than saying that the opportunities which a wife’s confidence in her husband gives him of unfairly or improperly procuring her to become surety for his debts or to confer some other benefit upon him is recognized as a matter of fact and taken into account with other facts as a reason for calling upon him to explain or justify a given transaction. The second of the three matters is connected with the rule established in the case of relations of influence. That rule is that where there is a relation of influence and the dominant party is the person by or through whom an

instrument operating to his advantage is obtained from the other the instrument is voidable even as against strangers who have become parties to the instrument for value if they had notice of the existence of the relation of influence or of the circumstances giving rise to it. … Although the relation of husband to wife is not one of influence, yet the opportunities it gives are such that if the husband procures his wife to become surety for his debt a creditor who accepts her suretyship obtained through her husband has been treated as taking it subject to any invalidating conduct on the part of her husband even if the creditor be not actually [page 402] privy to such conduct. It is evident, however, that in many cases, though it is the husband who obtains his wife’s consent to act as guarantor or surety, yet the creditor or his agents will deal directly with the wife personally. It must then be a question how far an apparent or real comprehension on the part of the wife or advice or explanation received by her will prevent any earlier improper conduct on the part of the husband from operating to make the transaction voidable. … [T]he course of development which the rules of equity governing the voidability of instruments of suretyship entered into by married women for debts of their husbands have followed has left the state of the law somewhat indefinite, if not uncertain. To such transactions the same general principles are considered applicable as affect the validity of voluntary alienations of valuable property in favour of the husband, but the application of these principles is necessarily qualified by considerations arising out of the position of the creditor as a third party giving value to the husband and possibly bona fide. It is almost needless to say that the equitable grounds for setting aside a voluntary disposition, while well understood, recognize the indefinite variation of form which unconscientious conduct may assume. The difficulty, if not danger, thus created of attempting to state the conditions which must be fulfilled before a given kind of conduct or of

unfairness amounts to an invalidating cause is greatly increased by the introduction of the consideration that the equity must be such as ought to prevail against the claims of the creditor as a possibly innocent third party. But it is clearly necessary to distinguish between, on the one hand, cases in which a wife, alive to the nature and effect of the obligation she is undertaking, is procured to become her husband’s surety by the exertion by him upon her of undue influence, affirmatively established, and on the other hand, cases where she does not understand the effect of the document or the nature of the transaction of suretyship. In the former case the fact that the creditor, on the occasion, for example, of the actual execution of the instrument, deals directly with the wife and explains the effect of the document to her will not protect him. Nothing but independent advice or relief from the ascendancy of her husband over her judgment and will would suffice. If the creditor has left it to the husband to obtain his wife’s consent to become surety and no more is done independently of the husband than to ascertain that she understands what she is doing, then, if it turns out that she is in fact acting under the undue influence of her husband, it seems that the transaction will be voidable at her instance as against the creditor. It is not clear how far the same principle is to be applied to a case where the wife is induced to become surety by the husband making some fraudulent or even innocent misrepresentation of fact which, though material, does not go to the nature and effect of the instrument or transaction. It may be said that the making of such a representation is no more to be anticipated by a creditor when a husband procures his wife’s guarantee than when any other principal debtor procures a surety. On the other hand, the basal reason for binding the creditor with equities arising from the conduct of the husband is that in substance, if not technically, the wife is a volunteer conferring an important advantage upon her husband who in virtue of his position has an opportunity of abusing the confidence she may be expected to place in him and the creditor relies upon the person in that position to obtain her agreement to become [page 403] his surety. Misrepresentation as well as undue influence is a means of abusing the confidence that may be expected to arise out of the relation.

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. If undue influence in the full sense is not made out but the elements of pressure, surprise, misrepresentation or some or one of them combine with or cause a misunderstanding or failure to understand the document or transaction, the final question must be whether the grounds upon which the creditor believed that the document was fairly obtained and executed by a woman sufficiently understanding its purport and effect were

such that it would be inequitable to fix the creditor with the consequences of the husband’s improper or unfair dealing with his wife. Apart from the unwisdom or improvidence of the transaction into which he persuaded her, the facts of the present case do not show that Estyn Jones exercised any influence over his wife which could be considered undue or a ground for interference by a court of equity. His enthusiasm for a project or enterprise that it was foolish to embark upon was not shared by his wife, but it is impossible to believe that she did not understand as well as he that, if the purchase was to be made, whatever money was needed must be found by her. The discussion and difference of opinion between them related to the prudence of the venture and the probabilities of its success. When he committed himself or themselves to buy the bungalow and poultry farm before she had yielded her consent, he may have done so with a view of presenting her with a fait accompli which she would not take the responsibility of rejecting. His statement that he had bound himself [page 404] to get her to finance the purchase and that he would get into trouble if she refused contained no element of falsity. The nature and extent of the trouble into which she thought he would get if she rejected the transaction is not stated by her, and apparently she was faced with the fact that her husband had agreed to buy the property, all parties knowing that she must find the funds which the transaction might call for. In placing his wife in this position, Estyn Jones no doubt did what he ought not to have done. But he created a situation with which his wife had to deal as she thought best in the interests of all concerned. She was not deluded, coerced or overborne. She was placed in a dilemma, a dilemma unfair to a woman, but not in a situation rendering the course she chose to take one from which afterwards she was entitled to be relieved. That which, according to the findings contained in the reasons given by [the trial judge], induced her to agree to the purchase and to take her part by giving a mortgage was her husband’s persuasion in which, to his optimism as to the success of the venture and its consequent ‘safety’, he added the arguments, first, that he had agreed to purchase and was bound, secondly, that he would get into

trouble if she refused to give the mortgage, thirdly, that the mortgage was a guarantee not falling due for three years and, fourthly, that if anything went wrong and she lost her house at Walkerville they would have the bungalow and poultry farm at Payneham. [The Yerkeys] are not shown to have known that [Florence Jones] was definitely opposed to the transaction; they knew that it was not she but Estyn Jones who had the resources enabling them to become purchasers, and in that sense they relied upon him, as the person with whom they negotiated and contracted, to obtain his wife’s security. But it was not a case where a husband having incurred a heavy indebtedness is relied upon by a creditor to obtain from his wife a guarantee which will improve the position of the creditor to the detriment of the wife, who will obtain no benefit except the satisfaction of relieving her husband for a time from one of his embarrassments. It was a transaction in which on the one hand [the Yerkeys] were stating the terms on which they would sell their property and on the other Estyn Jones was negotiating for the acquisition of a home for himself and his wife and a new means of livelihood. The difference might not be enough if Estyn Jones had obtained his wife’s consent by undue influence or fraud. But, for the reasons I have given, the case appears to me to come down to the effect of a combination of matters, consisting in the inducements stated, [Florence Jones’] understanding of the transaction when she attended for the purpose of executing the instrument of mortgage, the actual provisions it contained, the explanation she received and her final comprehension of the matter. She went to the solicitors’ office … believing that she was to give a mortgage over her house at Walkerville for £1,000, forming part of the purchase money falling due in three years, and that the mortgage would operate as a guarantee, so that the burden would fall on her house if her husband then failed to find the £1,000. The solicitors were instructed by [the Yerkeys] and acted solely on their behalf and in their interests. [The Yerkeys] in the course of their evidence said that they did not regard them as their solicitors any more than [the Jones’], and that this was made clear to Estyn Jones. [Florence Jones], however, did not say that she relied upon the solicitors as protecting her

[page 405] interests or acting on her behalf or that of her husband, and Estyn Jones gave no evidence to the effect that he considered the solicitors as in any way acting for him or his wife. I do not think that [Florence Jones] can be regarded as having signed the mortgage in reliance upon the advice or approval of the solicitors and as having mistakenly supposed that they were acting on behalf of herself or her husband. I do not think that such a case was made by her, and the suggestion arose only out of answers given in the cross-examination of [the Yerkeys]. … [Estyn Jones’] explanation of the mortgage appears to me to have been simple enough and complete enough to ensure that any woman of average intelligence would understand that she was making herself liable for interest on the £1,000 and that, if it was not paid, the principal might be called up and that she bound herself to pay it so that she might be sued and her property sold. As to the effect of the clauses directed to the exclusion of the principles of law by which a surety may be discharged from his obligations though the debt is not paid, probably the explanation was incomplete, and, if complete, it doubtless would have failed to produce any impression except a confused idea that some possibility of the mortgagee escaping was excluded. But, if the general nature and effect of an instrument such as a mortgage executed by a married woman is understood or on reasonable grounds the creditor or other party or his agents believes it to have been understood, it is no ground for setting it aside that some of its details or its possible consequences or applications are not comprehended, notwithstanding that the husband is the person who has obtained her consent to the transaction. This observation applies to the suggestion that, even though the £1,000 was paid under the mortgage, the contract might be cancelled for default in the rest of the purchase money and the payment applied to answer damages. If [Florence Jones] grasped the points I have mentioned, I do not think that the provisions of the instrument involved a departure from the nature of the transaction, as she would understand it, sufficient to warrant a court of equity setting it aside. How far she did in fact understand her personal responsibility and the effect of default in interest in causing principal to become immediately payable is a question of fact upon which [the trial

judge] took a view in her favour. But in my opinion the solicitor had no reason to suppose that she did not grasp the essentials of the transaction and on reasonable grounds [the Yerkeys] and their solicitor believed that she had understood the substantial effect in all material respects, of the obligations she was undertaking. In my opinion [Florence Jones] failed to make out a case which under the principles I have discussed entitled her to equitable relief.

Comments 18.5.1 See Radan, Gooley, and Vickovich at 18.57–18.84. 18.5.2 For an analysis of this case and later cases that have applied it, see B Collier, ‘The Rule in Yerkey v Jones: Fundamental Principles and Fundamental Problems’ (1996) 4 Australian Property Law Journal 1. 18.5.3 For an insightful analysis of Dixon J’s reasoning in this case, see J Gava, ‘Another Study in Judging: Sir Owen Dixon and Yerkey v Jones’ (2010) Journal of Contract Law 248.

[page 406] 18.6C

Garcia v National Australia Bank Ltd (1998) 194 CLR 395

Court: High Court of Australia Facts: Jean and Fabio Garcia were a married couple and directors of a gold-trading company, Citizens Gold Bullion Exchange Pty Ltd, which Fabio ran. Jean conducted her own physiotherapy practice. In 1979 they executed a mortgage over their matrimonial home in favour of the National Australia Bank that secured all moneys they might owe to the Bank, including sums owing under any future guarantees. Between 1985 and 1987 Jean signed four guarantees in favour of the Bank, three of which guaranteed repayment to the Bank of debts owed by Citizens Gold. After their marriage was dissolved in January

1990, the Family Court ordered that, subject to the Bank mortgage, Fabio was to transfer his interest in their home to Jean. Citizens Gold was later wound up. In June 1990 Jean sought declarations that the mortgage and the guarantees in respect of the Citizens Gold debts were void. She claimed that Fabio had misrepresented to her the nature and extent of the 1987 guarantee. Although she knew what she was signing, she had done so in the belief that the loan was limited to $270,000 and would be secured by the gold bullion, rather than the home. The trial judge in the Supreme Court found that Jean had signed the guarantee on her husband’s insistence and that she had done so with no advice. On the basis of the principles in Yerkey v Jones, the Supreme Court held that Jean was a volunteer because she had obtained no benefit under the transactions. As a result she was not bound by any of the guarantees she had signed and owed no money to the Bank under the mortgage in respect of her interest in the home before the making of the Family Court order. The Court of Appeal reversed the decision, deciding that the principles in Yerkey v Jones no longer applied in New South Wales because it made outmoded assumptions about the position of married women. Jean appealed to the High Court. Issue: The issue before the High Court was whether the Court of Appeal had erred in rejecting the principles in Yerkey v Jones as no longer being applicable law. Decision: The High Court (Gaudron, McHugh, Gummow, Kirby, Hayne, and Callinan JJ) unanimously held in favour of Jean. With the exception of Kirby J, all of their Honours did so upon the basis that the principles in Yerkey v Jones represented good law in Australia. Accordingly, the guarantees were set aside as unconscionable transactions as they affected Jean. Extract: The extracts from the joint majority judgment of Gaudron, McHugh, Gummow, and Hayne JJ support the view derived from Yerkey v Jones that a creditor with knowledge that the debtor has the benefit of a guarantee provided by his wife is deemed to have notice of undue influence. The separate judgment of Kirby J is extracted in so far as it reflects his view that this is not restricted to husband and

wife situations, but to any relationship in which the creditor has notice that the guarantor manifests an emotional dependency on the debtor.

[page 407]

Gaudron, McHugh, Gummow, and Hayne JJ The Court of Appeal held that it was not bound to follow Yerkey v Jones.15 Sheller JA [in the Court of Appeal] concluded that what had been said to be the principle in Yerkey v Jones is ‘a principle to which [Dixon J] only adhered’. … He [agreed with]: … 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.16 Accordingly, Sheller JA concluded that ‘the so-called principle in Yerkey v Jones should no longer be applied in New South Wales’.17 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. … [W]e 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 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,18 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 Bank of Victoria Ltd v Mueller,19 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, [page 408] 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. … 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. … 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. … 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. The term ‘unconscionable’ does not appear in any of the judgments in Yerkey v Jones. … In Amadio, Mason J said: Historically, courts have exercised jurisdiction to set aside contracts and other dealings on a variety of equitable grounds. They include fraud, misrepresentation, breach of fiduciary duty, undue influence and unconscionable conduct. In one sense they all constitute species of unconscionable conduct on the part of a party who stands to receive a benefit under a transaction which, in the eye of equity, cannot be enforced because to do so would be inconsistent with equity and good conscience. But relief on the ground of

‘unconscionable conduct’ is usually taken to refer to the class of case in which a party makes unconscientious [page 409] use of his superior position or bargaining power to the detriment of a party who suffers from some special disability or is placed in some special situation of disadvantage. … Although unconscionable conduct in this narrow sense bears some resemblance to the doctrine of undue influence, there is a difference between the two. In the latter the will of the innocent party is not independent and voluntary because it is overborne. In the former the will of the innocent party, even if independent and voluntary, is the result of the disadvantageous position in which he is placed and of the other party unconscientiously taking advantage of that position.20 It was submitted that Yerkey v Jones has been overruled by Amadio or that the principles applied in Yerkey v Jones had been subsumed in principles applied in Amadio. There are several answers to this contention. First, there is nothing in Amadio that suggests that it was intended to overrule Yerkey v Jones or to subsume the rules applied there in some broader principle enunciated in Amadio. Secondly, far from anything said in Amadio suggesting that it was intended to mark out the boundaries of the whole field of unconscionable conduct, as Mason J said: It goes almost without saying that it is impossible to describe definitively all the situations in which relief will be granted on the ground of unconscionable conduct.21 Thirdly, Amadio was a case of unconscionable conduct very different from the cases considered in Yerkey v Jones. In Amadio there was actual misconduct on the part of the son of the respondents which affected their entry into the mortgage and guarantee and the bank was on notice of that misconduct. There was no allegation of undue influence by the son with

notice on the part of the bank (a situation corresponding to that in Bank of New South Wales v Rogers),22 nor was the alleged case of undue influence on the part of the bank made out. What Mason J identified as ‘[t]he critical issue’ was whether the plaintiffs were entitled to relief on the ground of unconscionable conduct. The transaction was not enforced against the respondents because it would have been unconscionable for the bank to do so. And it was unconscionable for the bank to enforce it because the bank’s employee had shut his eyes to the vulnerability of the respondents and the misconduct of their son. The principles applied in Yerkey v Jones do not depend upon the creditor having, at the time the guarantee is taken, notice of some unconscionable dealing between the husband as borrower and the wife as surety. Yerkey v Jones begins with the recognition that the surety is a volunteer: a person who obtained no financial benefit from the transaction, performance of the obligations of which she agreed to guarantee. It holds, in what we have called the first kind of case, that to enforce that voluntary transaction against her when in fact she did not bring a free will to its execution would be unconscionable. It holds further, in the second kind of case, that to enforce it against her if it later emerges that she did not understand the purport and effect of the transaction of suretyship would be unconscionable (even though she [page 410] is a willing party to it) if the lender took no steps itself to explain its purport and effect to her or did not reasonably believe that its purport and effect had been explained to her by a competent, independent and disinterested stranger. And what makes it unconscionable to enforce it in the second kind of case is the combination of circumstances that: (a) in fact the surety did not understand the purport and effect of the transaction; (b) the transaction was voluntary (in the sense that the surety obtained no gain from the contract the performance of which was guaranteed); (c) the lender is to be taken to have understood that, as a wife, the surety may repose trust and confidence in her husband in matters of business and therefore to have understood that the husband may not fully and accurately explain the

purport and effect of the transaction to his wife; and yet (d) the lender did not itself take steps to explain the transaction to the wife or find out that a stranger had explained it to her. To hold, as Yerkey v Jones did, that in those circumstances the enforcement of the guarantee would be unconscionable represents no departure from accepted principle. Rather, it: … conforms to the fundamental principle according to which equity acts, namely that a party having a legal right shall not be permitted to exercise it in such a way that the exercise amounts to unconscionable conduct.23 It will be seen that the analysis of the second kind of case identified in Yerkey v Jones is not one which depends upon any presumption of undue influence by the husband over the wife. As we have said, undue influence is dealt with separately and differently. Nor does the analysis depend upon identifying the husband as acting as agent for the creditor in procuring the wife’s agreement to the transaction. Rather, it depends upon the surety being a volunteer and mistaken about the purport and effect of the transaction, and the creditor being taken to have appreciated that because of the trust and confidence between surety and debtor the surety may well receive from the debtor no sufficient explanation of the transaction’s purport and effect. To enforce the transaction against a mistaken volunteer when the creditor, the party that seeks to take the benefit of the transaction, has not itself explained the transaction, and does not know that a third party has done so, would be unconscionable. … [S]ome comparison can be drawn between the refusal to permit enforcement of the guarantee in the circumstances identified in Yerkey v Jones and the equally well recognised and long established principles which would preclude enforcement of a guarantee in some cases where the creditor has not disclosed to the intending surety some features of the transaction.24 We do not pause to attempt to specify what features of such a transaction should be identified by the creditor to the surety and we are not to be taken as suggesting that the principles dealt with in Yerkey v Jones are to be seen

as no more than some particular application of these rules. Nevertheless, the intervention of equity in cases of that kind may also be seen [page 411] as rooted in the conclusion that to permit enforcement of the guarantee against a mistaken surety (mistaken in that kind of case because the creditor should have, but did not, inform the surety of some particular fact) would be unconscionable. No doubt these cases are no more than analogies. They are not to be treated as defining what is meant by ‘unconscionable’ or as, in some way, governing the present circumstances. They are, however, useful illustrations of why the enforcement of the guarantee in this case would be unconscionable. As is implicit in what we have said, we prefer not to adopt the analysis made by Lord Browne-Wilkinson in Barclays Bank Plc v O’Brien which proceeded from identifying ‘the circumstances in which the creditor will be taken to have had notice of the wife’s equity to set aside the transaction’.25 Sir Anthony Mason has pointed out that ‘constructive notice in O’Brien is used in order to ascertain whether a transaction about to be entered into is impeachable, not so as to fix a person who acquires an interest in the property with knowledge of an antecedent interest in property, that being the traditional function of constructive notice’.26 Such an analysis may be required in ordering the priority of competing interests in property but in the present context it may well distract attention from the underlying principle: that the enforcement of the legal rights of the creditor would, in all the circumstances, be unconscionable. We consider that the only question of notice that arises is whether the creditor knew at the time of the taking of the guarantee that the surety was then married to the creditor. Other questions of notice do not intrude. As is apparent from what was said in Yerkey v Jones the creditor may readily avoid the possibility that the surety will later claim not to have understood the purport and effect of the transaction that is proposed. If the creditor itself explains the transaction sufficiently, or knows that the surety

has received ‘competent, independent and disinterested’27 advice from a third party, it would not be unconscionable for the creditor to enforce it against the surety even though the surety is a volunteer and it later emerges that the surety claims to have been mistaken. What then of the present case? The trial judge found that [Jean Garcia] did not understand the purport or effect of the transaction. She knew it was a guarantee but she thought it was a guarantee of limited overdraft accommodation to be applied only in the purchase of gold. Nor did she understand that her obligations under the guarantee were secured by the mortgage which she had given over her home. It being found that the bank took no step to explain the transaction to her and knew of no independent advice to her about it (there having been no such independent advice) the conclusion that [Jean Garcia] was entitled to succeed in her claim to set the transaction aside was inevitable if she was a volunteer. The trial judge found that [Jean Garcia] was not ‘directly involved’ in Citizens Gold. … Although [he] found that from time to time some benefit flowed to the family from the [page 412] companies, he found that they were companies that were in the ‘complete control’ of [Fabio Garcia]. Taken as a whole, those findings demonstrate that [Jean Garcia] in fact obtained no real benefit from her entering the transaction; she was a volunteer. The fact that she was a director of the company is nothing to the point if, as the trial judge’s findings show, she had no financial interest in the fortunes of the company.

Kirby J The issues arising are …: 1.

Does the principle stated by Dixon J in Yerkey express a special rule of equity applicable to a case where a wife gives a guarantee of a debt for the benefit of her husband (or entities controlled by him) and where the wife’s agreement to give the guarantee was obtained by undue influence, pressure or misrepresentation on the part of the husband or

2.

3.

without an adequate understanding of the nature and effect of the transaction? Does that principle represent the holding of this Court or simply an opinion of Dixon J, never specifically endorsed by the Court as a binding rule? (The Yerkey v Jones point). Whatever the status of the opinion of Dixon J in Yerkey, should any rule which Yerkey may have stated in 1939 now be regarded as obsolete and subsumed in the principles expressed in later decisions such as Amadio? Should this be done having regard to changes in society affecting married women, their legal status, the expansion of the availability of financial credit to them and the desirability of avoiding reliance upon discriminatory criteria for the provision of equitable relief and the development of equitable doctrine? (The Commercial Bank of Australia Ltd v Amadio point). If the equitable principle expressed by Dixon J in Yerkey is revealed as his individual opinion, is overruled as obsolete or now treated as absorbed in the broader doctrines of equity, does the exposition of such doctrine in Amadio sufficiently meet the particular problem of sureties who are emotionally vulnerable or dependent on the debtor? Or is a broader statement of equitable principle required than that expressed in Amadio? In particular, should this Court follow the decision of the House of Lords in Barclays Bank Plc v O’Brien28 or some modified version of the principles there stated? (The Barclays Bank Plc v O’Brien point). …

As Sheller JA demonstrated in the Court of Appeal,29 … none of the other Justices constituting this Court in Yerkey expressly agreed in the opinion of Dixon J. Nor did they do so by implication in reasons suggesting the adoption of the same legal analysis.30 … Upon [proper] analysis, the opinion of Dixon J in Yerkey is neither expressly nor impliedly a statement of a holding of this Court. Should it nonetheless, in light of its provenance, apparent durability and suggested continuing applicability now be accepted by the Court, as the majority think? In my opinion, it should not. … [page 413]

I favour a re-formulation of the principle expressed by Lord Browne-Wilkinson in O’Brien. It is my view that the principle should be stated thus: Where a person has entered into an obligation to stand as surety for the debts of another and the credit provider knows, or ought to know, that there is a relationship involving emotional dependence on the part of the surety towards the debtor:31 (1) the surety obligation will be valid and enforceable by the credit provider unless the suretyship was procured by the undue influence, misrepresentation or other legal wrong of the principal debtor; (2) if there has been undue influence, misrepresentation or other legal wrong by the principal debtor, unless the credit provider has taken reasonable steps to satisfy itself that the surety entered into the obligation freely and in knowledge of the true facts, the credit provider will be unable to enforce the surety obligation because it will be fixed with notice of the surety’s right to set aside the transaction; (3) unless there are special exceptional circumstances or the risks are large, a credit provider will have taken such reasonable steps to avoid being fixed with constructive notice if it warns the surety (at a meeting not attended by the principal debtor) of the amount of the surety’s potential liability, of the risks involved to the surety’s own interests and advises the surety to take independent legal advice. Out of respect for economic freedom, the duty of the credit provider will be limited to taking reasonable steps only.32 In this way, equity is capable of affording a principle for relief in cases of this kind which (1) is expressed in non-discriminatory terms; (2) is addressed to the real causes of the vulnerability; and (3) recognises the credit provider’s superior powers to insist that volunteers in a vulnerable position are afforded access to relevant information and, where necessary, independent advice. The House of Lords concluded in this general way in O’Brien. This Court should follow and adopt that decision. It is applicable to the circumstances of this case. The Court can properly do so without procedural unfairness to the Bank. The point was reserved and argued below. It was also debated at some length on the hearing of this appeal. No different evidentiary foundation is suggested by the wife. She merely sought the application of the applicable equitable principles to the facts as found by the primary judge. … When I turn to apply the principle in O’Brien, modified in the way that I have re-expressed it, I consider that (although for reasons different

than he expressed), the orders of the primary judge were correct. The Bank knew, or could readily have discovered, that Mrs Garcia reposed trust and confidence in her husband in relation to her financial affairs. Mrs Garcia was thus in a position of potential vulnerability to demands that she should act as a surety, even if the Bank had no reasonable means of knowing the details of the particular stresses of her personal relationship. Breakdown of personal relationships is sufficiently common in Australia to have alerted a credit provider, such as the Bank, to the potentiality of this surety’s vulnerability. This is particularly so where (as here) a domestic home in which the borrower lived was put at risk by the surety arrangements. The Bank could readily, without unduly intrusive questions, have discovered the nature of the [page 414] parties’ relationship. It was already aware that they were cohabitees. Formalities and public declaration of their relationship (assuming the latter to be possible and appropriate) would not be necessary. Sufficient that basic questioning disclosed a transaction on its face of little or no specific advantage to the proposed surety and that such party stood at high risk in relation to the roof over her head. Misrepresentation by Mr Garcia to his wife being established, together with constructive notice of the potential vulnerability of the wife, the Bank is unable to enforce the surety obligation against her because it is fixed with constructive notice of her right to set aside the transaction having regard to its failure to take reasonable steps to satisfy itself that she entered the obligation freely and with knowledge of the relevant facts. It is here that the principal weakness in the Bank’s case is obvious. As the primary judge found, in this case the Bank’s ordinary procedures were not followed. Mrs Garcia was given no advice or explanation of the documents which she was signing. Still less was she told to seek independent advice or that such evidence would be a pre-condition to the Bank’s acceptance of her guarantee. The fact that she was a director of the company and that she presented as an ‘intelligent articulate lady’ in a professional position is certainly relevant. But it is not ultimately determinative. To the knowledge

of the Bank, the home in which she lived was being placed in jeopardy. The Bank failed to insist that she was made fully aware of that risk. In such circumstances, there being no exceptional reasons to hold otherwise, the Bank was unable to enforce the surety obligation. Although the case is not clear cut and some of the evidence supported the Bank’s arguments, I have concluded that the primary judge was right to hold as he did. Banks and other credit providers can protect themselves from this result. Most already do so. The result to which I have come flows not from the fact that Mrs Garcia was a married woman in need of special protection, as such, from the law of equity. It flows from a broader doctrine by which equity protects the vulnerable parties in a relationship and ensures that in proper cases they have full information and, where necessary, independent advice before they volunteer to put at risk the major asset of their relationship for the primary advantage of those to whose pressure they may be specially vulnerable.

Comments 18.6.1 See Radan, Gooley, and Vickovich at 18.57–18.84. 18.6.2 For discussions of this case, see A Phang and H Tijo, ‘From Mythical Equities to Substantive Doctrines — Yerkey v Jones in the Shadow of Notice and Unconscionability’ (1999) 14 Journal of Contract Law 72; E Stone, ‘The Distinctiveness of Garcia’ (2006) 22 Journal of Contract Law 170; M Brown, ‘The Bank, the Wife and the Husband’s Solicitor’ (2007) 14 Australian Property Law Journal 147; C Chew, ‘Rethinking the Special Equity Rule for Wives: Post Garcia, Quo Vadis, Where to From Here’ (2007) 19 Bond Law Review 1; M Brown, ‘Undue Confusion Over Garcia’ (2009) 3 Journal of Equity 1.

1.

(1939) 63 CLR 649 at 669.

2. 3.

Bank of New South Wales v Rogers (1941) 65 CLR 42 at 54. Rhodes v Bate (1866) 1 Ch App 252 at 257.

4. 5.

Johnson v Buttress (1936) 56 CLR 113 at 134. Inche Noriah v Shaik Allie Bin Omar [1929] AC 127 at 136.

6.

Yerkey v Jones (1939) 63 CLR 649 at 675.

7. 8.

Allcard v Skinner (1887) 36 Ch D 145 at 183. Huguenin v Baseley (1807) 33 ER 526 at 535.

9. 10.

Price v Price (1852) 42 ER 571; Inche Noriah v Shaik Allie Bin Omar [1929] AC 127. Griffiths v Robins (1818) 56 ER 480 at 480.

11. 12.

Lancashire Loans Ltd v Black [1934] 1 KB 380 at 404. Kali Bakhsh Singh v Ram Gopal Singh (1913) 30 TLR 138 at 139.

13. 14.

(1870) LR 10 Eq Cas 405. In re Lloyds Bank Ltd; Bomze and Lederman v Bomze (1931) 1 Ch 289 at 302.

15. 16.

(1939) 63 CLR 649. National Australia Bank Ltd v Garcia (1996) 39 NSWLR 577 at 593.

17. 18.

National Australia Bank Ltd v Garcia (1996) 39 NSWLR 577 at 598. Barclays Bank plc v O’Brien [1994] 1 AC 180 at 198; cf Wilkinson v ASB Bank Ltd [1998] 1 NZLR 674 at 689.

19. 20.

[1925] VLR 642. Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 461, 474.

21. 22.

Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 461. (1941) 65 CLR 42.

23. 24.

Legione v Hateley (1983) 152 CLR 406 at 444. Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 454–5; Union Bank of Australia Ltd v Puddy [1949] VLR 242; Hamilton v Watson (1845) 8 ER 1339; Lee v Jones (1864) 144 ER 194; London General Omnibus Co Ltd v Holloway [1912] 2 KB 72. See also Behan v Obelon Pty Ltd (1985) 157 CLR 326 at 329–30.

25. 26.

Barclays Bank plc v O’Brien [1994] 1 AC 180 at 195. Sir Anthony Mason, ‘The Impact of Equitable Doctrine on the Law of Contract’ (1998) 27 AngloAmerican Law Review 1 at 15.

27. 28.

Yerkey v Jones (1939) 63 CLR 649 at 686. [1994] 1 AC 180.

29. 30.

National Australia Bank Ltd v Garcia (1996) 39 NSWLR 577 at 598. Cf Fehlberg, ‘Women in “Family” Companies: English and Australian Experiences’ (1997) 15 Company and Securities Law Journal 348 at 355.

31.

In Wilkinson v ASB Bank Ltd [1998] 1 NZLR 674 at 691, the New Zealand Court of Appeal expressed the relationship as ‘involving an emotional tie or dependency on the part of the guarantor towards the principal debtor’. Price, ‘Undue Influence: Nullus Finis Litium’ (1998) 114 Law Quarterly Review 186 at 187–8.

32.

[page 415]

19 UNCONSCIONABLE TRANSACTIONS

INTRODUCTION 19.1 This chapter deals with the doctrine of unconscionability, by which equitable relief may be given where there has been an abuse of power by one of the contracting parties over the other by virtue of the latter’s special disadvantage. Equity looks beyond the fiction of equality of bargaining power between the parties, which the common law takes for granted. Australian courts have over the years defined the elements that are required in order to establish unconscionability of one party over the other, thereby enabling the weaker party to seek rescission. First, there is a requirement to establish the existence of a special disadvantage or disability. Second, it is necessary to prove that the stronger party had actual or constructive knowledge of the disadvantage. Third, it must be shown that the stronger party exploited the disadvantage unconscientiously in order to obtain the weaker party’s consent to the transaction. The special disadvantage manifested by the weaker party under the equitable doctrine of unconscionability has been defined widely and seems to include a range of matters, such as physical or mental illness, old age, poverty, illiteracy, language difficulty, inexperience, and lack of independent legal advice. In Blomley v Ryan (1956) 99 CLR 362 (see 19.2C) the High Court held that the elements were evident where a shrewd and experienced purchaser took advantage of an elderly and weak property owner with a pronounced alcohol dependency. Confirming these fundamental requirements, the High Court held in Commercial Bank of Australia v Amadio (1983) 151 CLR 447 (see

19.3C) that a bank had acted unconscionably when it obtained the signatures of an elderly couple, who had no legal advice and a poor command of English, to a guarantee to cover their son’s business loan from the bank. These two cases fall into what have been described as cases of ‘constitutional’ disadvantage. Special disadvantage extends also to cases involving substance abuse and psychological dependency, in which the weaker party’s capacity to rationally assess its own best interests has been undermined and exploited. These cases have been described as cases of ‘situational’ disadvantage. The High Court recognised in Louth v Diprose (1992) 175 CLR 621 that emotional dependence or infatuation could amount to a special disadvantage in the weaker party that may result in that party’s unconscientious exploitation. However, in Kakavas v Crown Melbourne Ltd (2013) 298 ALR 35 (see 19.4C) the High Court found that there was no situational disadvantage in the case of a relationship between a casino and a problem gambler. The concept of unconscionability has been extended to statute and, in particular, to consumer protection legislation that aims to mandate standards of fair dealing in trade and [page 416] commerce. The Australian Consumer Law in ss 21–22, supplements the general law elements of unconscionability with a range of factors for courts to take into account when considering whether a commercial provider has exploited an acquirer of goods or services. This has been extended to transactions between commercial entities that involve the unconscientious exploitation of a small business by a large business. Section 20 of the Australian Consumer Law (formerly s 51AA of the Trade Practices Act 1974 (Cth)) allows claims based on the general law criteria. The High Court decision in Australian Competition and Consumer Commission v C G Berbatis Holdings Pty Ltd (2003) 214 CLR 51 (see 19.5C) highlights that in such cases the disadvantage suffered by the weaker business party must be ‘special’, rather than simply commercial, especially where the weaker party suffers from no lack of ability to judge or protect its financial interests.

UNCONSCIONABILITY AND INTOXICATION AND MENTAL AND PHYSICAL WEAKNESS 19.2C

Blomley v Ryan (1956) 99 CLR 362

Court: High Court of Australia Facts: Ryan was an elderly resident of New South Wales and owner of a grazing property near Goondiwindi known as Worrah. He had a pronounced alcohol dependency and participated in frequent bouts of drinking that often lasted for days at a time. Blomley was a Queenslander interested in purchasing Worrah. He, together with his agent and others, made numerous attempts in discussions with Ryan to convince him to sell Worrah for a total price of £25,000. Blomley’s solicitor drafted a contract to that effect, which also provided for a £5 deposit and annual instalment payments over several years. After it was signed by the parties, Ryan refused to complete. When Blomley sought an order for specific performance, Ryan counter-claimed to have the contract set aside. He alleged that the purchase price was well below market value, that the terms were extremely favourable to Blomley, and that he had been rushed into the sale. He also claimed that Blomley was aware Ryan was, at the time the contract was formed, ‘old, lacking in education, suffering from the effects of intoxication, mentally and physically weak, without proper advice, unable properly to protect himself and on unequal terms with [Blomley]’. Issue: The issue before the High Court was whether the contract should be rescinded on the basis that the contract was an unconscionable transaction, or whether Blomley was entitled to have it specifically enforced. Decision: In a majority decision the High Court (McTiernan and Fullagar JJ; Kitto J dissenting) held that the contract should be rescinded on the basis that it was an unconscionable transaction. Extract: The extracts from the judgment of Fullagar J focus on the indicia of fraud as understood by equity and the circumstances in

which transactions may be set aside on the ground that they are unconscionable transactions.

[page 417]

Fullagar J [This] case is not one of that comparatively rare class where a man’s faculties, whether from age or natural infirmity or drink or any other cause, are so defective that he does not really know what he is doing — that his mind does not go with his deed. In such a case his instrument is void even at law — non est factum. … It is a case, I think, in which relief could be obtained by [Ryan], if at all, only in equity. And, when we look for the principle on which equity did grant relief in such cases, we find as so often in equity, only very wide general expressions to guide us. There was, I think, a typical difference in approach between equity and the common law. To the common law the transaction in question might be void or voidable, but the primary question was as to the reality of the assent of the person resisting enforcement of the contract. Equity traditionally looked at the matter rather from the point of view of the party seeking to enforce the contract and was minded to inquire whether, having regard to all the circumstances, it was consistent with equity and good conscience that he should be allowed to enforce it. … The real effect of the cases on the subject was, I think, stated by Sir William Grant MR in Cooke v Clayworth. … The Master of the Rolls said: I think a Court of Equity ought not to give its assistance to a person who has obtained an agreement, or deed, from another in a state of intoxication; and on the other hand ought not to assist a person to get rid of any agreement, or deed, merely upon the ground of his having been intoxicated at the time: Dunnage v White.1 I say merely upon that ground; as, if there was, as Lord Hardwicke expresses it in Cory v Cory,2 any unfair advantage made of his situation, or as Sir Joseph Jekyll says in Johnson v Medlicott,3 any contrivance or management to draw him in to drink, he might be a proper object of

relief in a Court of Equity. As to that extreme state of intoxication, that deprives a man of his reason, I apprehend, that even at Law it would invalidate a deed, obtained from him while in that condition.4 … [W]hen a court of equity is asked to refuse specific performance of, or to set aside, a contract at the instance of a party who says that he was drunk at the time of making it, the principles applied do not differ in substance from those applied in such cases as Clark v Malpas;5 Fry v Lane,6 and the other cases cited by [the trial judge]. But they show also that cases in which an allegation of intoxication is a main feature are approached with great caution by courts of equity. This is, I think, not so much because intoxication is a self-induced state and a reprehensible thing, but rather because it would be dangerous to lend any countenance to the view that a man could escape the obligation of a contract by simply proving that he was ‘in liquor’ when it was made. So we find it said again and again that mere drunkenness affords no ground for resisting [page 418] a suit to enforce a contract. Where, however, there is real ground for thinking that the judgment of one party was, to the knowledge of the other, seriously affected by drink, equity will generally refuse specific performance at the suit of that other, leaving him to pursue a remedy at law if he so desires. And, where the court is satisfied that a contract disadvantageous to the party affected has been obtained by ‘drawing him in to drink’, or that there has been real unfairness in taking advantage of his condition, the contract may be set aside. One other general observation may be made before proceeding to the facts of the present case. The circumstances adversely affecting a party, which may induce a court of equity either to refuse its aid or to set a transaction aside, are of great variety and can hardly be satisfactorily classified. Among them are poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary. The common characteristic seems to be that they have the effect of placing one party at a

serious disadvantage vis-à-vis the other. It does not appear to be essential in all cases that the party at a disadvantage should suffer loss or detriment by the bargain. In Cooke v Clayworth, in which specific performance was refused, it does not appear that there was anything actually unfair in the terms of the transaction itself. But inadequacy of consideration, while never of itself a ground for resisting enforcement, will often be a specially important element in cases of this type. It may be important in either or both of two ways — firstly as supporting the inference that a position of disadvantage existed, and secondly as tending to show that an unfair use was made of the occasion. Where, as here, intoxication is the main element relied upon as creating the position of disadvantage, the question of adequacy or inadequacy of consideration is, I think, likely to be a matter of major, and perhaps decisive, importance. It will almost always, I think, be: … an important ingredient in considering whether a person did exercise any degree of judgment in making a contract, or whether there is a degree of unfairness in accepting the contract.7 … [T]he wide discrepancy between price and value is not the only interesting feature of this transaction. There are two others. In the first place, the deposit on a contract of sale for £25,000 was £5. In the second place, the sale was on terms, which provided for payment of the price over a period of more than four years, and the rate of interest on unpaid purchase money was four per cent. The bank rate of interest current at the time was five per cent. It may be said that the deposit was a matter of small practical importance, but the only thing that can save it from being justly described as ridiculous is the fact that a purchaser at so very low a price would be likely to move heaven and earth rather than default. It is obviously an additional abnormal element in the transaction itself, as is also, of course, the low rate of interest payable under the contract. The rate of interest was an important matter, because [Ryan] was proposing to ‘retire’, and presumably to live on the interest of his capital. The learned trial judge found the explanation of this remarkable transaction in the facts that [Ryan] was an old man, whose health and faculties had been impaired by habitual drinking to

[page 419] excess over a long period, who was at the material time in the middle of a prolonged bout of heavy drinking of rum, and who was utterly incapable of forming a rational judgment about the terms of any business transaction. Having carefully read and considered the evidence, I agree with this view. His Honour also held that [Ryan’s] condition must have been patent to [Blomley’s] father, who acted as [his] agent, and to Stemm, who acted (ostensibly) as [Ryan’s] agent, and that these persons took such an unfair advantage of that condition that a court of equity could not allow the contract to stand. I agree with this view also. … [Blomley] himself, who is a young man, took little or no part in the proceedings at any stage: the negotiations were conducted by his father. Stemm, an employee of Dalgety & Co Ltd, acted as ‘agent’ for the sale of the property. Ostensibly he was acting in that capacity for [Ryan], to whom his firm would look for their commission. But it is obvious that he was, so to speak, ‘in [Blomley’s] camp’ throughout: his concern was simply to procure a sale, and nothing seems to have been further from his mind than the idea that it was his duty to obtain the best price he could for [Ryan], and generally to look after [Ryan’s] interests. … His Honour expressed his general finding by saying that [Ryan’s] condition was such that: … he was incapable of considering the question of the sale of his property with any real degree of intelligent appreciation of the matters involved.8 More specifically he said that he had: … no doubt that [Ryan’s] drinking bout on this occasion extended from some little time before Saturday, 18th April until, at least, towards the end of the following week and that there were many occasions during this period when he was quite incapable … of transacting the simplest forms of business.9 I take his Honour to have thought that on these ‘occasions’ any instrument signed by [Ryan] must have been held to be void even at law, and that

throughout the period he was incapable of making an intelligent decision or forming a rationally considered judgment on a matter of business. During the night of the 20th to 21st he became again, as his Honour found, ‘grossly intoxicated’,10 and early on the 21st he was ‘barely sensible of what was going on around him’,11 though his condition ‘may have improved a little’12 during the drive (about forty miles) to Goondiwindi. … It was argued that [Ryan] had by conduct affirmed the contract after regaining a normal state of mind. It has been said that, in cases of this type, equity will not relieve unless there has been a prompt repudiation after a cessation of any vitiating circumstances. [Ryan] did not repudiate the contract until 22nd July. In the meantime he had bought another property, in [page 420] which he proposed to reside, and he had allowed certain stock to be placed on ‘Worrah’ by [Blomley] or his father. But [the solicitor] had not supplied him with a copy of the contract, and I do not think, on the evidence, that he had any real understanding of the position until early in July, when he obtained a copy of the document … [and] consulted a firm of solicitors at Moree. After obtaining their advice he acted promptly enough. His drinking bout continued for some days after 21st April, and [the trial judge] thought that at its conclusion he had, at the best, only a hazy recollection of what had actually happened. When — to use his own expressive phrase — the ‘booze got out of his system’, he seems to have begun to think seriously about the position, but there is nothing to suggest that he was aware that the transaction might be successfully challenged, or even alive to what he had really done in April. In all the circumstances it would be wrong, in my opinion, to hold that there was any affirmation of the contract or any failure to repudiate in due time a transaction which, even when he became sober, he did not fully understand and appreciate until the document was in his hands. … [A]fter full consideration of the whole case, I am satisfied that we have here an example of a thoroughly unconscionable transaction, which no court of equity could possibly enforce itself, or allow to be enforced at law. I would

regard specific performance as out of the question, and to let the contract be enforced at law would, in this particular case, be, in effect, to allow the overreaching party to reap the full reward of his inequitable conduct. The appeal should, in my opinion, be dismissed.

Comment 19.2.1 See Radan, Gooley, and Vickovich at 19.9, 19.16–19.17, 19.32, 19.40, and 19.43.

UNCONSCIONABILITY AND BUSINESS INEXPERIENCE 19.3C Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR

447 Court: High Court of Australia Facts: The Amadios were an elderly couple with limited English language skills. They were asked by their son, Vincenzo, to provide a mortgage over commercial premises they owned as further security for his business, Amadio Builders. He told them the mortgage was required for a six-month period and that their liability would be limited to $50,000. The mortgage in favour of the Commercial Bank in fact included a guarantee by the couple to secure the existing debts of the son’s business and any future indebtedness, without restrictions as to amount or time. The bank was well aware of the financial difficulties faced by the business, but the couple was led to believe it was profitable. They signed the mortgage in their own home in the presence of their son and a bank representative, Virgo, but without the benefit of an interpreter or independent legal advice. When the son’s business went into liquidation, the bank made a demand on the Amadios. The couple

[page 421] then commenced action to set aside the mortgage and the bank counter-claimed for the amount owing. Issue: The issue before the High Court was whether the mortgage entered into by the Amadios was an unconscionable transaction. Decision: In a majority decision the High Court (Gibbs CJ, Mason, Wilson, and Deane JJ; Dawson J dissenting) held that the mortgage was an unconscionable transaction. Extract: The extracts from the judgments of Mason J and Deane J set out the High Court’s formulation of the principles relevant to unconscionable transactions.

Mason J Historically, courts have exercised jurisdiction to set aside contracts and other dealings on a variety of equitable grounds. They include fraud, misrepresentation, breach of fiduciary duty, undue influence and unconscionable conduct. In one sense they all constitute species of unconscionable conduct on the part of a party who stands to receive a benefit under a transaction which, in the eye of equity, cannot be enforced because to do so would be inconsistent with equity and good conscience. But relief on the ground of ‘unconscionable conduct’ is usually taken to refer to the class of case in which a party makes unconscientious use of his superior position or bargaining power to the detriment of a party who suffers from some special disability or is placed in some special situation of disadvantage. … Although unconscionable conduct in this narrow sense bears some resemblance to the doctrine of undue influence, there is a difference between the two. In the latter the will of the innocent party is not independent and voluntary because it is overborne. In the former the will of the innocent party, even if independent and voluntary, is the result of the disadvantageous position in which he is placed and of the other party unconscientiously taking advantage of that position. There is no reason for thinking that the two remedies are mutually

exclusive in the sense that only one of them is available in a particular situation to the exclusion of the other. Relief on the ground of unconscionable conduct will be granted when unconscientious advantage is taken of an innocent party whose will is overborne so that it is not independent and voluntary, just as it will be granted when such advantage is taken of an innocent party who, though not deprived of an independent and voluntary will, is unable to make a worthwhile judgment as to what is in his best interest. It goes almost without saying that it is impossible to describe definitively all the situations in which relief will be granted on the ground of unconscionable conduct. As Fullagar J said in Blomley v Ryan: 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 [page 422] or explanation where assistance or explanation is necessary. The common characteristic seems to be that they have the effect of placing one party at a serious disadvantage vis-à-vis the other.13 Likewise Kitto J spoke of it as ‘a well-known head of equity’ which — … applies whenever one party to a transaction is at a special disadvantage in dealing with the other party because illness, ignorance, inexperience, impaired faculties, financial need or other circumstances affect his ability to conserve his own interests, and the other party unconscientiously takes advantage of the opportunity thus placed in his hands.14

Deane J 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.15 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’.16 The equitable principles relating to relief against unconscionable dealing and the principles relating to undue influence are closely related. The two doctrines are, however, distinct. Undue influence, like common law duress, looks to the quality of the consent or assent of the weaker party.17 Unconscionable dealing looks to the conduct of the stronger party in attempting to enforce, or retain the benefit of, a dealing with a person under a special disability in circumstances where it is not consistent with equity or good conscience that he should do so. The adverse circumstances which may constitute a special disability for the purposes of the principles relating to relief against unconscionable dealing may take a wide variety of forms and are not susceptible to being comprehensively catalogued. … In most cases where equity courts have granted relief against unconscionable dealing, there has been an inadequacy of consideration moving from the stronger party. It is not, [page 423] however, essential that that should be so.18 Notwithstanding that adequate consideration may have moved from the stronger party, a transaction may be unfair, unreasonable and unjust from the viewpoint of the party under

the disability. An obvious instance of circumstances in which that may be so is the case where the benefit of the consideration does not move to the party under the disability but moves to some third party involved in the transaction. Thus, it is established that the jurisdiction extends, in an appropriate case, to relieve a guarantor of the burden of a guarantee of existing and future indebtedness.19 Such a guarantee is properly to be viewed in the terms enunciated by Cussen J in Bank of Victoria Ltd v Mueller: In the first place, it is obvious that a large benefit is conferred both on the creditor and the debtor, which, so far as any advantage to the guarantor is concerned, is voluntary, though no doubt ‘consideration’ exists so far as the creditor is concerned, so soon as forbearance is in fact given or advances are in fact made. It is, I think, to some extent by reference to the rule or to an extension of the rule that, in the case of a large voluntary donation, a gift may be set aside in equity if it appears that the donor did not really understand the transaction, that such a guarantee may be treated as voidable as between the husband and wife.20 Cussen J’s above analysis was made in the context of a guarantee procured by a husband from his wife in favour of the husband’s bank. There is, however, no basis in principle or in policy for confining the process of reasoning therein contained to cases of the relief of female spouses. It is appropriate to the circumstances of the present case. I turn to consider the question whether, at the time they executed the guarantee/mortgage, Mr and Mrs Amadio were under a relevant disability in dealing with the bank. This question is best approached by a comparison of the relative positions of the bank on the one hand and Mr and Mrs Amadio on the other. The bank, for its part, was a major national financial institution. It was privy to the business affairs and financial instability of Amadio Builders. It was aware that that company had, for some time, been unable to meet its debts as they fell due. It was aware of the state of Amadio Builders’ two overdrawn accounts with it and of past failures to observe agreed borrowing limits. It had actually suggested … that Mr and Mrs Amadio enter into the mortgage transaction to secure Amadio Builders’ indebtedness to it. It was

aware of the contents of its own document which Mr Virgo presented to Mr and Mrs Amadio for their signature. In contrast was the position of Mr and Mrs Amadio. Their personal circumstances have already been mentioned. They were advanced in years. Their grasp of written English was limited. They relied on Vincenzo for the management of their business affairs and believed that he and Amadio Builders were prosperous and successful. They were approached in their kitchen by the bank, acting through Mr Virgo, at a time when Mr Amadio was reading the [page 424] newspaper after lunch and Mrs Amadio was washing dishes. They were presented with a complicated and lengthy document for their immediate signature. They had received no independent advice in relation to the transaction which that document embodied and about which they had learned only hours earlier from Vincenzo who, it is common ground in the present appeal, had misled them as regards the extent and duration of their potential liability under it. Apart from indicating that the guarantee/mortgage was unlimited in point of time, Mr Virgo made no personal attempt to explain it to them. Foolishly, but — in view of their limited grasp of written English and their knowledge that Mr Virgo came to them with the approval of their son — perhaps understandably, they did not attempt to read the document for themselves. They signed it in the mistaken belief that their potential liability was limited to a maximum of $50,000. It is apparent that Mr and Mrs Amadio, viewed together, were the weaker party to the transaction between themselves and the bank. Their weakness may be likened to that of the defendant in Blomley v Ryan of whom McTiernan J said: His weakness was of the kind spoken of by Lord Hardwicke [in Earl of Chesterfield v Janssen]21 in defining the fraud characterised as taking surreptitious advantage of the weakness, ignorance or

necessity of another. The essence of such weakness is that the party is unable to judge for himself.22 That weakness constituted a special disability of Mr and Mrs Amadio in their dealing with the bank of the type necessary to enliven the equitable principles relating to relief against unconscionable dealing. Put more precisely, the result of the combination of their age, their limited grasp of written English, the circumstances in which the bank presented the document to them for their signature and, most importantly, their lack of knowledge and understanding of the contents of the document was that, to adapt the words of Fullagar J quoted above, they lacked assistance and advice where assistance and advice were plainly necessary if there were to be any reasonable degree of equality between themselves and the bank. The next question is whether the special disability of Mr and Mrs Amadio was sufficiently evident to the bank to make it prima facie unfair or ‘unconscientious’ of the bank to procure their execution of the document of guarantee and mortgage in the circumstances in which that execution was procured. In procuring it, the bank acted through Mr Virgo: his actions were the actions of the bank and his knowledge was the knowledge of the bank. His evidence indicates that he was not unacquainted with the personal circumstances of Mr and Mrs Amadio and their reliance on Vincenzo whom he described as the ‘dominant member of the family’. He was aware of the inability of Amadio Builders to pay its debts as they fell due and must also have been aware of the potential consequences to Mr and Mrs Amadio of the unlimited guarantee in the document which he tendered to them for their immediate execution. [page 425] It has not been argued on behalf of the bank that Mr Virgo was so unaware of the circumstances in which Mr and Mrs Amadio executed the document that he was entitled to believe that the transaction was one where no advice, independent or otherwise, was called for. The argument for the bank has been to the effect that, at relevant times, Mr Virgo honestly and reasonably relied upon a representation made to him, by Vincenzo, that the latter had

discussed the transaction with his parents, informed them of its nature and effect, explained it fully to them and duly obtained their consent to it. The evidence that Vincenzo made any such representation to Mr Virgo is unimpressively sparse. Upon analysis, it consists of Mr Virgo’s own evidence that he assumed that Mr and Mrs Amadio’s ‘agreement or offer to give this mortgage was a result of a family conference of some sort’. When it was suggested to him that there was nothing upon which he could base that assumption apart from the fact that Vincenzo had told him that he had spoken to his parents about the transaction and that the bank could proceed with it, Mr Virgo answered: That is right. The whole thing had come to me as a fait accompli, not only from the bank’s point of view but also having then been informed by Vincenzo that the matter had been agreed within the family and all that required to be done was for the execution of the document. … It must, in fairness, be stressed that there is no suggestion that Mr Virgo or any other officer of the bank has been guilty of dishonesty or moral obliquity in the dealings between Mr and Mrs Amadio and the bank. The evidence does, however, demonstrate that there was no proper basis at all for any assumption that Mr and Mrs Amadio had received adequate advice from Vincenzo as to the effect of the document which Mr Virgo presented to them for their signature. Even if that were not the case, it would be difficult to accept as reasonable a belief that Vincenzo had successfully explained to his parents the content and effect of a document which embodied 18 separate covenants of meticulous and complicated legal wording in circumstances where, to Mr Virgo’s knowledge, Vincenzo had himself never seen the document at the time when any such suggested explanation must have taken place. If there were otherwise room for doubt, what transpired when Mr Virgo called on Vincenzo in his office and on Mr and Mrs Amadio in their kitchen makes clear that Mr Virgo simply closed his eyes to the vulnerability of Mr and Mrs Amadio and the disability which adversely affected them. Mr Virgo gave evidence that Vincenzo did not trouble even to read the document before agreeing that Mr Virgo should take it to Mr and Mrs Amadio for execution. He also gave evidence that Mr and Mrs

Amadio did not read it. In other words, in a situation where it was apparent to him that advice and assistance were necessary, he knew that no one who might have rendered such advice and assistance to Mr and Mrs Amadio had even read the document to ascertain whether its terms imposed no greater potential liability upon [them] than that which they were prepared to undertake. In the circumstances, the only comment which either Mr or Mrs Amadio made as to the contents of the guarantee/mortgage on the occasion when they executed it, namely Mr Amadio’s comment that it was only for six months, was of unmistakable significance. That statement revealed that Mr Amadio and, it must be [page 426] assumed, Mrs Amadio were seriously misinformed as to a basic term of the transaction. It would, at least by that stage, have been plain to any reasonable person, who was prepared to see and to learn, that he was put on inquiry. The stage had been reached at which the bank, through Mr Virgo, was bound to make a simple inquiry as to whether the transaction had been properly explained to Mr and Mrs Amadio. The bank cannot shelter behind its failure to make that inquiry. The case is one in which ‘wilful ignorance is not to be distinguished in its equitable consequences from knowledge’.23 Mr and Mrs Amadio’s disability and the inequality between themselves and the bank must be held to have been evident to the bank and, in the circumstances, it was prima facie unfair and ‘unconscientious’ of the bank to proceed to procure their signature on the guarantee/mortgage. With that conclusion, the onus is cast upon the bank to show that the transaction was ‘in point of fact fair, just, and reasonable’.24 Mr and Mrs Amadio were not wholly misinformed as to the terms and effect of the guarantee/mortgage. The learned trial judge found that they correctly understood that the document which they were signing was a guarantee supported by a mortgage of their Wicks Avenue land. In that regard, it is relevant to mention that the evidence discloses that Mr and Mrs Amadio had, on a number of previous occasions, provided a guarantee, supported by a mortgage of that land, to secure borrowing by a company associated with one or other of their sons. While it is true that Mr and Mrs

Amadio were initially led to believe that the guarantee/mortgage was limited in duration to six months, they were disabused of that notion by the clear indication given by Mr Virgo, prior to execution of the document, that the guarantee/mortgage was a ‘continuing’ one and unlimited in point of time. They executed the document to assist their son’s company in obtaining credit from the bank. Acting on the basis of that execution, the bank extended Amadio Builders’ overdraft limit and advanced further money to that company. If Mr and Mrs Amadio’s potential liability had been limited to a maximum of $50,000, and if they had been informed as to the true financial position of Amadio Builders, it would be strongly arguable that the guarantee/mortgage could not properly be said either to have resulted from their special disability or to be other than fair, just and reasonable. As has been said however, the guarantee/mortgage did not contain any such limit upon potential liability and Mr and Mrs Amadio were under a complete misapprehension as to the financial stability of the company whose indebtedness to the bank they were guaranteeing. The learned trial judge found that had they known of the financial troubles Amadio Builders was then experiencing, they would not have executed the guarantee/mortgage. That finding has not been challenged on the appeal. In the circumstances, the execution of the guarantee/mortgage by Mr and Mrs Amadio flowed from the position of special disability in which they were placed. From Mr and Mrs Amadio’s point of view, the great difference between a potential liability of up to $50,000 under a guarantee of a financially successful company and a potential liability under a guarantee of a financially troubled company in whatever amount that company might become indebted to its bank requires little elaboration. The one would have been within their means to [page 427] incur to assist their son. The other represented their potential financial ruin. In the circumstances in which it was procured, the guarantee/mortgage was unfair, unjust and unreasonable. Indeed, in

fairness to the bank, I did not understand the contrary to be submitted on its behalf. Relief against unconscionable dealing is a purely equitable remedy. The concept underlying the jurisdiction to grant the relief is that equity intervenes to prevent the stronger party to an unconscionable dealing acting against equity and good conscience by attempting to enforce, or retain the benefit of, that dealing. Equity will not, however, ‘restrain a defendant from asserting a claim save to the extent that it would be unconscionable for him to do so. If this limitation on the power of equity results in giving to a plaintiff less than what on some general idea of fairness he might be considered entitled to, that cannot be helped’.25 Where appropriate, an order will be made which only partly nullifies a transaction liable to be set aside in equity pursuant to the principles of unconscionable dealing.26 Where an order is made setting aside the whole of a transaction on the ground of unconscionable dealing, the order will, in an appropriate case, be made conditional upon the party obtaining relief doing equity. While the matter was not raised in the bank’s notice of appeal, I was, at one stage, inclined to think that the appropriate relief in the present case would be an order setting aside the guarantee/mortgage only to the extent to which it imposed upon Mr and Mrs Amadio a potential liability in excess of $50,000 or that any order wholly setting aside the guarantee/mortgage should be conditional upon Mr and Mrs Amadio paying to the bank the amount of $50,000 which represents the amount of the potential liability which they intended to undertake. Ultimately, I have come to the view that Mr and Mrs Amadio are entitled to have the whole transaction set aside unconditionally. It is true that it is not ordinarily encumbent upon a bank to bring to the attention of a potential guarantor of a customer’s account details of a type which are ordinarily to be expected.27 In the present case however, it was, as has been said, evident to the bank that Mr and Mrs Amadio stood in need of advice as to the nature and effect of the transaction into which they were entering. It is apparent that any such advice would have included the importance to a guarantor of ascertaining from the bank the state of the customer’s account which was being guaranteed and any unusual features of the account. If such information had been obtained by Mr and Mrs Amadio, they would not, on the evidence and in the light of the learned trial judge’s finding, have entered into the

guarantee/mortgage at all. The whole transaction should properly be seen as flowing from the special disability which was evident to the bank and as being unfair, unjust and unreasonable.

[page 428]

Comments 19.3.1 See Radan, Gooley, and Vickovich at 19.4, 19.6, 19.18–19.21, 19.28, 19.30, 19.37, and 19.41. 19.3.2 For a useful discussion of the High Court’s judgment against the background of English authorities, see A Black, ‘Unconscionability, Undue Influence and the Limits of Intervention in Contractual Dealings: Commercial Bank of Australia Ltd v Amadio’ (1986) 11 Sydney Law Review 134.

UNCONSCIONABILITY AND PROBLEM GAMBLING 19.4C

Kakavas v Crown Melbourne Ltd (2013) 298 ALR 35

Court: High Court of Australia Facts: Kakavas was a pathological gambler who lost over $20 million playing baccarat at the Crown Casino in Melbourne between June 2005 and August 2006. During that time there were periods when he was winning and there were also times when he chose to stay away and not gamble. He argued that Crown had engaged in unconscionable conduct in relation to his gambling addiction and sought equitable compensation in relation to the losses he suffered. Issue: The issue before the High Court was whether Crown was guilty of unconscionable conduct in relation to Kakavas. Decision: The High Court (French CJ, Hayne, Crennan, Kiefel, Bell,

Gageler, and Keane JJ) unanimously held that Crown was not guilty of any unconscionable conduct. In a joint judgment the court found that none of the three essential elements of unconscionability — special disadvantage, knowledge, and unconscientious exploitation of any disadvantage — were established on the facts. Extract: The extracts from the High Court’s joint judgment discuss the applications of the principles of unconscionability in the context of the facts of this case.

French CJ, Hayne, Crennan, Kiefel, Bell, Gageler, and Keane JJ The decisions of this Court, in which claims for relief from unconscionable conduct have been litigated, illustrate the necessity for close consideration of the facts of each case in order to determine whether a claim to relief has been established. … The principle [of unconscionability] which the appellant invokes is concerned with a species of equitable fraud. In Earl of Chesterfield v Janssen Lord Hardwicke LC explained that it is a ‘kind of fraud … which may be presumed from the circumstances and condition of the parties contracting: … it is wisely established in this court to prevent taking surreptitious advantage of the weakness or necessity of another: which knowingly to do is equally against [page 429] the conscience as to take advantage of his ignorance: a person is equally unable to judge for himself in one as the other’.28 … In Louth v Diprose, Deane J explained the basis on which the conscience of equity is engaged to apply the [unconscionability] principle: The intervention of equity is not merely to relieve the plaintiff from the consequences of his own foolishness. It is to prevent his victimization.29 In proceeding to consider whether equitable intervention is warranted in

this case, a number of points may be made at the outset. First, the principle which [Kakavas] invokes is not engaged by the circumstance that a plaintiff’s transaction with a defendant has resulted in loss to the plaintiff, even loss amounting to hardship. In Tanwar Enterprises Pty Ltd v Cauchi, Gleeson CJ, McHugh, Gummow, Hayne and Heydon JJ said that it is wrong ‘to speak of “unconscionable conduct” [as suggesting] that sufficient foundation for the existence of the necessary “equity” to interfere in relationships established by … the law of contract, is supplied by an element of hardship or unfairness in the terms of the transaction in question, or in the manner of its performance’.30 Secondly, equitable intervention does not relieve a plaintiff from the consequences of improvident transactions conducted in the ordinary and undistinguished course of a lawful business. A plaintiff who voluntarily engages in risky business has never been able to call upon equitable principles to be redeemed from the coming home of risks inherent in the business. The plaintiff must be able to point to conduct on the part of the defendant, beyond the ordinary conduct of the business, which makes it just to require the defendant to restore the plaintiff to his or her previous position. … [Kakavas] 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 [Kakavas’] wish to engage in risky business. … To focus, as [Kakavas’] case now does, on his state of excitement while he was actually at the gaming table is to lose sight of the reality that he was present at the gaming table on each of these occasions because of decisions voluntarily made by him when he was not in the grip of his abnormal enthusiasm. Importantly in this regard, [Kakavas] does not have the benefit of a finding of fact that he suffered from a continuously operating compulsion which disabled him from choosing to stay away from the gaming tables. It was [Kakavas’] choice — exercised many times over a period of many weeks when he was indisputably not at the tables in the casino in the grip of any gambling frenzy — to put himself in the position in which he might lose money at Crown’s tables. …

[page 430] It is also a circumstance relevant to the justice of [Kakavas’] appeal to the conscience of equity that the activities in question took place in a commercial context in which the unmistakable purpose of each party was to inflict loss upon the other party to the transaction. 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. … 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. … 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. … A prominent feature of the relationship between [Kakavas] and Crown was that [Kakavas] was a high roller. At times, he made a lot of money at Crown’s expense: between 24 June 2005 and 13 March 2006, he had made profits of over $2.69 million on a turnover of around $480.5 million. By August 2006, his gambling with Crown had generated a turnover of $1.479 billion and he had lost $20.5 million to Crown. During and after this period he continued to gamble in other casinos around the world. High rollers typically exhibit an abnormal interest in gambling. That abnormality might be described as pathological; it might also be that it is difficult for an observer to distinguish between a pathological high roller and one who is not. That a high roller may incur substantial losses is always, and obviously (and quite literally) on the cards. Motives other than the profit motive may explain the high roller’s behaviour; but whether or not that is so in the case of a particular individual is a question which each high roller is entitled, invoking values of privacy and autonomy, to say is no one else’s business. Whatever a high roller’s motivation may be, members of

that class of gambler present themselves to the casino, and are welcomed by it in the ordinary course of its business, as persons who can afford to lose and to lose heavily. It is for that reason that operators of casinos are prepared to incur heavy expenses to attract their patronage away from other casinos. In return for lavish complimentary benefits, high rollers deliberately put at risk, and regularly lose, vast sums of money. Even if it were open to the courts to second guess the legislature’s judgment to permit this sort of activity, it would be to descend into incoherence for the courts to require the return of losses suffered by high rollers so as to oblige operators of casinos to close their doors to high rollers while leaving them open to ordinary punters who, while less extravagant in their gambling habits, are also less able to absorb their losses. … [T]here is little scope for the intervention of equity to undo the result of transactions undertaken on the unmistakable footing that no quarter is asked and none is given by either party to the transaction, at least so long as the transaction has been conducted honestly in accordance with the rules of the game. It was not suggested that Crown ran a dishonest game. [page 431] It is necessary to be clear that one is not concerned here with a casino operator preying upon a widowed pensioner who is invited to cash her pension cheque at the casino and to gamble with the proceeds. One might sensibly describe that scenario as a case of victimisation. One could also speak sensibly of a gambler, who presents at a casino with the cash necessary to play the game, as a victim of the casino, if there are factors in play other than the occurrence of the outcome that was always on the cards. For example, the gambler may be evidently intoxicated, or adolescent, or senescent, or simply incompetent. But absent additional factors of this nature, it is difficult sensibly to describe the accommodation by an operator of a casino of a patron’s desire to gamble as a case of victimisation. That is especially so in the case of the high roller who has the means, should he or she enjoy a run of luck, to hurt the casino. In the present case, there was no finding that [Kakavas] could not afford to indulge himself as he did, much less that Crown knew that he could not do

so. Nor was there any suggestion that [Kakavas] gambled while intoxicated, or that he was, and was regarded by Crown as, an incompetent card player. He usually, though not always, gambled at Crown’s casino with ‘front money’, that is to say, funds which he brought with him to deposit with the casino for the purpose of gambling as part of the ‘programs’ in which he engaged with Crown. The source of [Kakavas’] funds was not made clear to Crown … but it is clear that [Kakavas] had access to large sums of money and that he presented himself to Crown as a successful businessman whose pleasure it was to gamble and who could afford to sustain heavy losses. … [T]here was no suggestion that Crown was made aware that [Kakavas] had any financial difficulty until the last occasion on which he gambled at Crown’s casino, in August 2006. … [Kakavas] could and did choose to refrain from gambling. He chose to stay away from Crown’s casino when it suited him to do so. [Kakavas] knew that he could self-exclude if he chose: he had done so in the past in relation to Crown’s casino and others. The primary judge found nothing in [Kakavas’] dealings with Crown which would have suggested to Crown that [Kakavas] could not self-exclude if he decided that it was in his interests to do so. … One basis advanced by [Kakavas] for fixing upon Crown as the ‘predator’ who victimised him is that Crown knew or ought to have known of his pathological enthusiasm for gambling and that his gambling had been associated with his troubled past. But [Kakavas] went to considerable lengths to assure Crown that his troubles with gambling were now behind him when he sought to be re-admitted to Crown’s casino. That he did so is a circumstance to be borne in mind in considering his claim upon the conscience of equity. … Finally, … once attention is directed to the effect of [Kakavas’] gambling enthusiasm while at the tables, as the occasion on which his special disadvantage was in play, it becomes difficult to see a good reason to single the appellant out as a person suffering from a ‘special’ disadvantage by reason of his ‘relationship’ with Crown. … [W]e do not accept that [Kakavas’] pathological interest in gambling was a special disadvantage which made him susceptible to exploitation by Crown. He was able to make rational decisions to refrain from gambling

altogether had he chosen to do so. He was certainly able to choose to refrain from gambling with Crown. … [page 432]

Exploitation of [Kakavas’] special disadvantages: constructive notice [Kakavas] submits that the primary judge erred in failing to apply the principles of constructive notice. In particular, it is said that Crown was ‘aware of the possibility that [a] situation [of special disadvantage] may exist or [was] aware of facts that would raise that possibility in the mind of any reasonable person’.31 In Amadio, Mason J said: As we have seen, if A having actual knowledge that B occupies a situation of special disadvantage in relation to an intended transaction, so that B cannot make a judgment as to what is in his own interests, takes unfair advantage of his (A’s) superior bargaining power or position by entering into that transaction, his conduct in so doing is unconscionable. And if, 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.32 [Kakavas] relies upon this passage as authority for importing, into the application of the principle against unconscionable dealing, which is a species of equitable fraud, notions of constructive notice. Constructive notice applies to the resolution of disputes as to priority of interests as between a legal interest and a prior competing equitable interest.33 The rules of constructive notice were developed for the purpose of deciding whether the holder of a later legal estate should prevail over the holder of a prior equitable estate as a bona fide purchaser of the legal estate without notice. As to what is notice for the purpose of this rule, the purchaser is deemed to have constructive notice of all matters of which he or she would

have received notice if he or she had made the investigations usually made in similar transactions, and of which he or she would have received notice had he or she investigated a relevant fact which has come to his or her notice and into which a reasonable person ought to have inquired. Of the concept of constructive notice, in Manchester Trust v Furness, Lindley LJ said: [A]s regards the extension of the equitable doctrines of constructive notice to commercial transactions, the Courts have always set their faces resolutely against it. The equitable doctrines of constructive notice are common enough in dealing with land and estates, with which the Court is familiar; but there have been repeated protests against the introduction into commercial transactions of anything like an extension of those doctrines.34 … In our respectful opinion, Mason J cannot be taken to have supported the importation of the concept of constructive notice into the operation of the principle he enunciated in Amadio. In this regard, the passage from the reasons of Mason J on which [Kakavas] relies followed, and was evidently intended to paraphrase, the statement of Lord Cranworth LC in Owen and Gutch v Homan. There his Lordship said: [page 433] it may safely be stated that if the dealings are such as fairly to lead a reasonable man to believe that fraud must have been used in order to obtain [the advantage], he is bound to make inquiry, and cannot shelter himself under the plea that he was not called on to ask, and did not ask, any questions on the subject. In some cases wilful ignorance is not to be distinguished in its equitable consequences from knowledge.35 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. …

Even if, contrary to the findings of the primary judge, [Kakavas] did suffer from a psychological impairment, the issue here is whether, in all the circumstances of the relationship between [Kakavas] and Crown, it was sufficiently evident to Crown that [Kakavas] was so beset by that difficulty that he was unable to make worthwhile decisions in his own interests while gambling at Crown’s casino. On the findings of fact made by the primary judge as to the course of dealings between the parties, [Kakavas] did not show that his gambling losses were the product of the exploitation of a disability, special to [Kakavas], which was evident to Crown. Equitable intervention to deprive a party of the benefit of its bargain on the basis that it was procured by unfair exploitation of the weakness of the other party requires proof of a predatory state of mind. Heedlessness of, or indifference to, the best interests of the other party is not sufficient for this purpose. The principle is not engaged by mere inadvertence, or even indifference, to the circumstances of the other party to an arm’s length commercial transaction. Inadvertence, or indifference, falls short of the victimisation or exploitation with which the principle is concerned. [Kakavas’] attempt to rely upon constructive notice to supply the want of findings of awareness on the part of Crown’s employees of any personal disability which affected the appellant should be rejected.

[page 434]

Comment 19.4.1 See Radan, Gooley, and Vickovich at 19.2, 19.17, 19.27, 19.29, and 19.38–19.39.

UNCONSCIONABILITY AND BUSINESS REGULATION — THE AUSTRALIAN CONSUMER LAW 19.5C

Australian Competition and Consumer Commission

v C G Berbatis Holdings Pty Ltd (2003) 214 CLR 51 Court: High Court of Australia Facts: Mr and Mrs Roberts were lessees of premises in a shopping centre and wanted to renew or extend their lease so that they could make an advantageous sale of their business. They were keen to do so, as their daughter suffered from a serious illness and they felt unable to keep their business going and provide her with sufficient care. Their existing lease made no provision for renewal or extension and so the Robertses were required to negotiate with the lessors, C G Berbatis Holdings Pty Ltd. Berbatis Holdings agreed to the granting of a new lease, enabling the sale of the business by the Robertses, but, as a condition of doing so, required the Robertses to abandon a legal claim against it based upon overcharging of centre management fees. The Robertses were uncomfortable about surrendering this claim, which other tenants in the centre were also making, believing it entitled them to approximately $50,000. However, they did so, secured the new lease, and sold their business. The settlement of the tenants’ claim subsequently showed that the Robertses would have received only a little under $3000 had they continued their participation in the claim. The Robertses did not pursue any claim against Berbatis Holdings. Rather, it was the Australian Competition and Consumer Commission (ACCC), exercising its powers under the Trade Practices Act 1974 (Cth), which commenced proceedings in the Federal Court seeking injunctive relief and a declaration that Berbatis Holdings had contravened the provisions of s 51AA(1) of the Act (now superseded by s 20 of the Australian Consumer Law). That section stipulated that ‘[a] corporation must not, in trade or commerce, engage in conduct that is unconscionable within the meaning of the unwritten law, from time to time, of the States and Territories’. At first instance, French J found in favour of the ACCC, saying that the Robertses were at a ‘special disadvantage’ of a ‘situational’, rather than ‘constitutional’ nature — that is, their disability arose from the position they were in and their keen desire to be rid of the business.

In doing so, however, French J did not rely upon the daughter’s illness as a factor. French J took the view that the provision of independent advice to Mrs Roberts was of little impact in overcoming the unconscionability arising from the Robertses’ ‘situational disadvantage’. Issue: The issue before the High Court was whether Berbatis Holdings had engaged in unconscionable conduct by contravening s 51AA(1) of the Trade Practices Act 1974 (Cth). [page 435] Decision: The majority of the High Court (Gleeson CJ, Gummow, Hayne, and Callinan JJ; Kirby J dissenting) held that Berbatis had not engaged in unconscionable conduct within the bounds of s 51AA(1). Extract: The extracts from the judgment of Gleeson CJ set out the majority view of the scope of unconscionability under the Trade Practices Act 1974 (Cth). The extracts from the dissenting judgment of Kirby J argue for a broader interpretation of unconscionability in this context.

Gleeson CJ Although he was concerned to make the point that ss 51AB and 51AC of the Act have a wider operation than s 51AA, senior counsel for the [ACCC] argued the case on the basis that the relevant form of unconscionable conduct in question was ‘the knowing exploitation by one party of the special disadvantage of another’. He said that, by special disadvantage, he meant ‘a disabling circumstance seriously affecting the ability of the innocent party to make a judgment in [that party’s] own best interests’. Applied to a case such as the present, that approach is consistent with what the Act calls the unwritten law concerning unconscionable conduct, bearing in mind that the Act also allows for development of the law from time to time. It is also consistent with the legislative history of s

51AA. In the Second Reading speech when the legislation was introduced, it was said: Unconscionability is a well understood equitable doctrine, the meaning of which has been discussed by the High Court in recent times. It involves a party who suffers from some special disability or is placed in some special situation of disadvantage and an ‘unconscionable’ taking advantage of that disability or disadvantage by another. The doctrine does not apply simply because one party has made a poor bargain. In the vast majority of commercial transactions neither party would be likely to be in a position of special disability or special disadvantage, and no question of unconscionable conduct would arise. Nevertheless, unconscionable conduct can occur in commercial transactions and there is no reason why the Trade Practices Act should not recognise this.36 The Explanatory Memorandum referred to the decisions of this Court in Blomley v Ryan37 and Commercial Bank of Australia Ltd v Amadio.38 Those decisions were considered more recently in Bridgewater v Leahy.39 In the context of s 51AA, with its reference to the unwritten law, which is the law expounded in such cases as those mentioned above, unconscionability is a legal term, not a colloquial expression. In everyday speech, ‘unconscionable’ may be merely an emphatic [page 436] method of expressing disapproval of someone’s behaviour, but its legal meaning is considerably more precise. … In the present case, French J said that the lessees suffered from a ‘situational’ as distinct from a ‘constitutional’ disadvantage, in that it did not stem from any inherent infirmity or weakness or deficiency. That idea was developed somewhat in a joint judgment, to which French J was a party, in Australian Competition and Consumer Commission v Samton Holdings Pty Ltd, where it was said that, under the rubric of unconscionable conduct, equity will set aside a contract or disposition resulting from the

knowing exploitation by one party of the special disadvantage of another, and then it was said: The special disadvantage may be constitutional, deriving from age, illness, poverty, inexperience or lack of education: Commercial Bank of Australia Ltd v Amadio. Or it may be situational, deriving from particular features of a relationship between actors in the transaction such as the emotional dependence of one on the other: Louth v Diprose; Bridgewater v Leahy.40 While, with respect to those who think otherwise, I would not assign the facts of Bridgewater v Leahy to such a category, the reference to emotional dependence of the kind illustrated by Louth v Diprose41 as a form of special disadvantage described as ‘situational’ rather than ‘constitutional’ is understandable and acceptable, provided that such descriptions do not take on a life of their own, in substitution for the language of the statute, and the content of the law to which it refers. There is a risk that categories, adopted as a convenient method of exposition of an underlying principle, might be misunderstood, and come to supplant the principle. … One thing is clear, and is illustrated by the decision in Samton Holdings itself. A person is not in a position of relevant disadvantage, constitutional, situational, or otherwise, simply because of inequality of bargaining power. Many, perhaps even most, contracts are made between parties of unequal bargaining power, and good conscience does not require parties to contractual negotiations to forfeit their advantages, or neglect their own interests. … Unconscientious exploitation of another’s inability, or diminished ability, to conserve his or her own interests is not to be confused with taking advantage of a superior bargaining position. There may be cases where both elements are involved, but, in such cases, it is the first, not the second, element that is of legal consequence. It is neither the purpose nor the effect of s 51AA to treat people generally, when they deal with others in a stronger position, as though they were all expectant heirs in the nineteenth century, dealing with a usurer.42 In the present case, there was neither a special disadvantage on the part of the lessees, nor unconscientious conduct on the part of the lessors. All the

people involved in the transaction were business people, concerned to advance or protect their own financial interests. The critical disadvantage from which the lessees suffered was that they had no legal entitlement to [page 437] a renewal or extension of their lease; and they depended upon the lessors’ willingness to grant such an extension or renewal for their capacity to sell the goodwill of their business for a substantial price. They were thus compelled to approach the lessors, seeking their agreement to such an extension or renewal, against a background of current claims and litigation in which they were involved. They were at a distinct disadvantage, but there was nothing ‘special’ about it. … They suffered from no lack of ability to judge or protect their financial interests. What they lacked was the commercial ability to pursue them both at the same time. … French J spoke of the lessors using ‘[their] bargaining power to extract a concession [that was] commercially irrelevant to the terms and conditions of any proposed new lease’. A number of observations may be made about that. Parties to commercial negotiations frequently use their bargaining power to ‘extract’ concessions from other parties. That is the stuff of ordinary commercial dealing. What is relevant to a commercial negotiation is whatever one party to the negotiation chooses to make relevant. And it is far from self-evident that when a landlord is considering a tenant’s request to renew a lease, the existence of disputes between the parties about the current lease is commercially irrelevant to a decision as to whether, and on what terms, the landlord will agree to the request. The reasoning of French J appears to involve a judgment that it was wrong for the lessors to relate the matter of the lessees’ claims to the matter of their request for a renewal of the lease. Why this is so was not explained. It formed a crucial part of the reasoning of French J and, in my view, cannot be sustained. Reference was earlier made to counsel’s submission that there was here a disabling circumstance affecting the ability of the lessees to make a judgment in their own best interests. In truth, there was no lack of ability on their part to make a judgment about anything. Rather, there was a lack of ability to get their own way. That is a disability that affects people in

many circumstances in commerce, and in life. It is not one against which the law ordinarily provides relief.

Kirby J The objects of the Act and of the section: The object of the Act, as stipulated in s 2, is ‘to enhance the welfare of Australians through the promotion of competition and fair trading and provision for consumer protection’. The introduction of statutory notions of unconscionable conduct into the Act was a recognition of the advantages of the ‘unwritten law’ doctrines in promoting fair trading. Such equitable categories developed in order to protect the integrity of the contracting process where a party is induced to act or enter a transaction due to weakness or illegitimate pressure, and does so without full information or appreciation of the extent or nature of the transaction or the way it affects that party’s interests and choices. By enacting s 51AA, the Parliament adopted from the unwritten law the characterisation of conduct as unconscionable, and prohibited such conduct by corporations engaged in trade or commerce. The design of s 51AA was intended not to expand the notions of unconscionable conduct in the unwritten law but to allow the application in such circumstances of the flexible remedies available under the Act. Yet the very fact that such a provision would facilitate more cases coming before the courts than might otherwise be the case inevitably results in a closer elaboration of the concept of unconscionable conduct in new and different factual circumstances. The present is such a case. [page 438] A particular purpose of the inclusion of s 51AA in the Act was to afford more effective remedies to small operators in the marketplace, such as the Roberts. They already had access to remedies of an equitable character. However, in practice, where the stakes were comparatively low (as here) a corporation dealing with such a small player would normally be entitled to assume that it could take advantage of the comparative weakness of that player without any real fear that it would be rendered accountable in a court of law or equity. …

The proper approach to the section: In outlining his approach to the construction and application of s 51AA, the primary judge said, correctly in my view: Section 51AA prohibits corporations from engaging in conduct which is unconscionable within the meaning of the common law of Australia. The meaning of the term is found in the dictionary. Its meaning is not altered by the unwritten law. What the unwritten law does presently is to confine its operation to certain classes of case. The reference in s 51AA to the ‘meaning of the unwritten law’ is a reference to the classes of case in which the unwritten law will award remedies for unconscionable conduct. … There is no distinct rule which defines such conduct. The description embodied in the word ‘unconscionable’ ultimately refers to the normative characterisation of conduct by a judge having jurisdiction in the relevant class of case. … [T]he rules governing the relevant application of the term ‘unconscionable conduct’ and therefore the application of s 51AA are judge-made rules that can change from time to time. The development of doctrine which may alter that application may occur in the judgments of the courts of the States and Territories and of the High Court and of the Federal Court in the exercise of its accrued jurisdiction. This may also occur through the exercise of jurisdiction under s 51AA which itself if valid, will become a significant source of the unwritten law.43 The primary judge also observed that s 51AA ‘uses the unwritten law to the extent that it provides for the characterisation of conduct as unconscionable and then prohibits such conduct’.44 In terms of the type of conduct that would fit the description ‘unconscionable within the meaning of the unwritten law’, the primary judge made three pertinent observations: first, that as a general proposition the object of equity’s intervention is to prevent behaviour contrary to conscience, however, this does not mean that the prohibition in s 51AA encompasses all conduct that would attract the intervention of equity;45 secondly, that within the meaning of the ‘unwritten law’ the notion of unconscionable conduct has no ‘technical meaning’ and provides ‘a standard determined by judicial decision-making rather than a rule’;46 and thirdly, that while the Explanatory Memorandum

prepared in support of the clause in the Bill that became s 51AA of the Act specifically referred to the concept of [page 439] unconscionable conduct explained in Blomley and Amadio, that ‘may turn out to have been an unduly narrow selection of case law’.47 While the present appeal was substantially argued by reference to the principles of unconscionable dealing as elaborated in cases such as Blomley and Amadio, the reach of the section, in my view, goes further. Its full scope remains to be elaborated in this and future cases. … A prime purpose for bringing the notions of unconscionability into the Act, and expressing them as relevant to business standards for Australian corporations engaged in trade and commerce, was to render those standards more effective by creating real sanctions and by affording novel remedies that might on occasion be invoked by the ACCC on behalf of small players. The ACCC is entitled under the Act to bring proceedings (as it did here) in its own name to enforce the rights of others. In this way, it was envisaged by the Parliament that test cases, such as that brought by the ACCC for the Roberts, would help to promote the object of fair trading and translate the principles of the legislation into corporate behaviour, thereby incorporating equitable notions into practical day-to-day application. This point is reinforced by an examination of the kinds of remedies available for a contravention of s 51AA. In particular, recovery of damages under s 82 or pecuniary penalties under s 76 of the Act was not available. In a passage cited [above], the primary judge commented on the relationship between the emerging case law interpreting and applying s 51AA of the Act, and the existing doctrines of the unwritten law. This is an issue that will warrant further examination. It may be that the different policies and concerns that motivate the provision of relief in equity and under the Act, would also translate into subtle differences in the characterisation of conduct as unconscionable. The concern of equity is limited to justice in the individual case given the potential for inadequate results by reason of some of the rules of the common law. Therefore, even if

conduct otherwise exhibits the elements of unconscionable dealing as understood in equity, it may still not receive that characterisation if the traditional equitable remedies (such as setting aside the transaction for instance) are not appropriate in the circumstances of the case. The Act on the other hand provides a wider set of procedures and remedies (as this appeal illustrates) designed to enhance the ‘educative and deterrent effect of [the] legislative prohibition’.48 Given that such purposes would ordinarily be outside equity’s contemplation, a contravention of the Act might yet be found although equitable relief would not lie. It follows that this Court should approach a case such as the present, brought under the Act, recognising that its importance extends beyond the humble case of the Roberts. By upholding the rights of the Roberts — on the face of things small and objectively of limited significance — a message is delivered that the Act is not to be trifled with. Unconscionable conduct, in the sense referred to in s 51AA of the Act, is to be avoided by corporations lest they find themselves on the receiving end of proceedings such as the ACCC brought on behalf of the [page 440] Roberts. Uninstructed by the history and purpose of the Act, and remembering only the cases in equity from which the ‘unwritten law’ on unconscionable conduct is derived, a court might well view the present proceedings differently. But when the place of s 51AA in the Act, its history and its educative and deterrent purposes are remembered, the outcome reached by the primary judge can be better understood.

Comments 19.5.1 See Radan, Gooley, and Vickovich at 19.57–19.62. 19.5.2 In Australian Competition and Consumer Commission v Samton Holdings Pty Ltd (2002) 117 FCR 301 at 317–19, the Full Court of the Federal Court (Grey, French, and Stone JJ) said the following in relation to s 51AA:

Professor Finn (as he then was) [in Finn, ‘Unconscionable Conduct’ (1994) 8 Journal of Contract Law 37 at 38–9] … identified ‘four not altogether distinct ways’ in which the language of unconscionable conduct has been used in the case law: 1. As an organising idea informing specific equitable rules and doctrines which do not in terms refer to, or require, an explicit finding of unconscionable conduct — eg rules on stipulations as to time and notices to complete. 2. In relation to specific equitable doctrines of which estoppel, unilateral mistake, relief against forfeiture and undue influence are examples. They are united by the idea that equity will prevent an unconscionable insistence on strict legal rights and are conditioned upon the explicit finding of unconscionable conduct in the persons against whom they are invoked. 3. In relation to the discrete doctrine of unconscionable dealing which concerns one species of unconscionable conduct. 4. In relation to unconscionable conduct founding a cause of action not mediated by any discrete doctrine. Four classes of case attracting the application of the language of unconscionability are described in LBC, Laws of Australia, vol 35 (at 31 January 2002) Unfair Dealing 35.5 Notion of Unconscionability [1]–[38]: (i) Exploitation of vulnerability or weakness (ii) Abuse of position of trust or confidence (iii) Insistence upon rights in circumstances which make that harsh or oppressive (iv) Inequitable denial of legal obligations. These are said to be supported by three broad standards: (i) That those in positions of strength or influence should not take advantage of another’s relative weakness. (ii) That people should not, by appeal to strict legal rights, cause hardship to others by violating their reasonable expectations. (iii) That those in fiduciary positions should act only in the interests of those to whom those fiduciary duties are owed. Under the rubric of unconscionable conduct, equity will: (i)

Set aside a contract or disposition resulting from the knowing exploitation by one party of the special [page 441] disadvantage of another. The special disadvantage may be constitutional, deriving from age, illness, poverty, inexperience or lack of education. Or it may be situational, deriving from particular features of a relationship between actors in the transaction such as the emotional dependence of one on the other. (ii) Set aside as against third parties a transaction entered into as the result of the defective comprehension by a party to the transaction, the influence of another and the want of any independent explanation to the complaining party. (iii) Prevent a party from exercising a legal right in a way that involves unconscionable departure from a representation relied upon by another to his or her detriment. (iv) Relieve against forfeiture and penalty. (v) Rescind contracts entered into under the influence of unilateral mistake. Each of these categories of case (the list may not be exhaustive) involves the identification of unconscionable conduct, albeit its content and degree will vary according to the category. It is a term which has various shades of meaning according to its context. There are different thresholds of conduct in various categories, all of which may be described as unconscionable. … Ultimately the language of s 51AA requires identification of conduct able to be characterised as unconscionable in a sense known to the unwritten law. In the context of that law as it presently stands, unconscionable conduct is that which supports the grant of relief on the principles set out in specific equitable doctrines. Five categories of case are set out above. … [T]he terms of the section are not limited to those categories. Although the section is confined by the

parameters of the ‘unwritten law’, it is the unwritten law ‘from time to time’. Neither the Explanatory Memorandum nor the Second Reading Speech can be treated as imposing qualifications which are not found in the words of s 51AA. On the other hand, equitable doctrine does not presently provide a remedy against conduct simply on the basis that it is unfair in the opinion of a judge. It cannot be applied to unconscionable conduct at large. 19.5.3 For analyses of this case and of the different views on the scope of s 51AA (and now s 20 of the Australian Consumer Law), see R Bigwood, ‘Australian Competition and Consumer Commission v C G Berbatis Holdings Pty Ltd: Curbing Unconscionability: Berbatis in the High Court of Australia’ (2004) 28 Melbourne University Law Review 203; and B Horrigan, ‘The Expansion of Fairness-Based Business Regulation — Unconscionability, Good Faith and the Law’s Informed Conscience’ (2004) 32 Australian Business Law Review 159.

1.

(1818) 36 ER 329.

2. 3.

(1747) 27 ER 864. (1731) 24 ER at 998.

4. 5.

Cooke v Clayworth (1811) 34 ER 222 at 223. (1862) 54 ER 1067; 45 ER 1238.

6. 7.

(1888) 40 Ch D 312. Wiltshire v Marshall (1866) 14 LT 396 at 397.

8. 9.

Blomley v Ryan (1956) 99 CLR 362 at 370. Blomley v Ryan (1956) 99 CLR 362 at 368.

10. 11.

Blomley v Ryan (1956) 99 CLR 362 at 372. Blomley v Ryan (1956) 99 CLR 362 at 373.

12. 13.

Blomley v Ryan (1956) 99 CLR 362 at 373. Blomley v Ryan (1956) 99 CLR 362 at 405.

14. 15.

Blomley v Ryan (1956) 99 CLR 362 at 415. See O’Rorke v Bolingbroke (1877) 2 App Cas 814 at 822.

16.

See per Lord Hatherley, O’Rorke v Bolingbroke (1877) 2 App Cas 814 at 823; Fry v Lane (1888) 40 Ch D 312 at 322; Blomley v Ryan (1956) 99 CLR 362 at 428–9. See Union Bank of Australia Ltd v Whitelaw [1906] VLR 711 at 720; Watkins v Combes (1922) 30 CLR

17.

180 at 193–4; Morrison v Coast Finance Ltd (1965) 55 DLR (2d) 710 at 713. 18.

19.

See Blomley v Ryan (1956) 99 CLR 362 at 405; Harrison v National Bank of Australasia Ltd (1928) 23 Tas LR 1; but cf Lloyds Bank v Bundy [1975] 1 QB 326 at 337; Cresswell v Potter [1978] 1 WLR 255 at 257. See Owen and Gutch v Homan (1853) 4 HL Cas 997 at 1034–5.

20. 21.

Bank of Victoria Ltd v Mueller [1925] VLR 642 at 649. (1751) 28 ER 82 at 100.

22. 23.

Blomley v Ryan (1956) 99 CLR 362 at 392. Per Lord Cranworth LC, Owen and Gutch v Homan (1853) 4 HL Cas 997 at 1035.

24. 25.

Fry v Lane (1888) 40 Ch D 312 at 321. Per Lord Greene MR, Wrottesley and Evershed LJJ in Re Diplock [1948] 1 Ch 465 at 532.

26. 27.

See Bank of Victoria Ltd v Mueller [1925] VLR 642 at 659 and the cases there cited. See Goodwin v National Bank of Australasia Ltd (1968) 117 CLR 173 at 175.

28. 29.

Earl of Chesterfield v Janssen (1751) 28 ER 82 at 100. Louth v Diprose (1992) 175 CLR 621 at 638.

30. 31.

Tanwar Enterprises Pty Ltd v Cauchi (2003) 217 CLR 315 at 325. Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 467.

32. 33.

Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 467. Garcia v National Australia Bank Ltd (1998) 194 CLR 395 at 410–11.

34. 35.

Manchester Trust v Furness [1895] 2 QB 539 at 545. Owen and Gutch v Homan (1853) 10 ER 752 at 767.

36. 37.

Australian House of Representatives, Parliamentary Debates (Hansard), 3 November 1992, p 24 008. (1956) 99 CLR 362.

38. 39.

(1983) 151 CLR 447. (1998) 194 CLR 457.

40. 41.

(2002) 117 FCR 301 at 318. (1992) 175 CLR 621.

42. 43.

Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 462. Australian Competition and Consumer Commission v C G Berbatis Holdings Pty Ltd [No 2] (2000) 96 FCR 491 at 503–4.

44.

Australian Competition and Consumer Commission v C G Berbatis Holdings Pty Ltd [No 2] (2000) 96 FCR 491 at 504. Australian Competition and Consumer Commission v C G Berbatis Holdings Pty Ltd [No 2] (2000) 96 FCR 491 at 498.

45. 46. 47. 48.

Australian Competition and Consumer Commission v C G Berbatis Holdings Pty Ltd [No 2] (2000) 96 FCR 491 at 502. Australian Competition and Consumer Commission v C G Berbatis Holdings Pty Ltd [No 2] (2000) 96 FCR 491 at 495. Trade Practices Legislation Amendment Bill 1992 (Cth), Explanatory Memorandum at [44].

[page 442]

20 CONTRACTS REVIEW ACT 1980 (NSW)

INTRODUCTION 20.1 This chapter examines the provisions of the Contracts Review Act 1980 (NSW) that regulate unjust contracts. Subject to the circumstances where the Act is expressly stated not to apply,1 the Act has been interpreted as having a very wide application and applies to contracts as a whole and to individual terms of a contract. In addition, it applies to contractual releases that parties may agree to and execute. Importantly, however, the Act also operates in the context of a recognition that it is a public interest consideration that people be kept to their freely negotiated bargains. The application of this consideration raises a dichotomy with respect to the breadth of application of the Act, as it will often be the case that if parties to a contract are left with the bargain they make, it may result in allowing unfair agreements to be enforced. In such situations the question becomes where the line is to be drawn or the balance is to be struck between public interest and the need to strike down unjust contracts or terms. The Contracts Review Act introduces a regime of regulation that operates in circumstances where it is considered that a contract or provision of a contract, if allowed to operate, would be seen as ‘unjust’. The word ‘unjust’ is defined in the Act in a non-exhaustive way so as to include ‘harsh, oppressive or unconscionable’. A number of very wide remedies are available where the court finds a contract or a provision of a contract to have been unjust in the circumstances relating to the contract at the time it was made. In such cases the court may, if it considers it just to do so and for the purpose of avoiding as

far as practicable an unjust consequence or result, do any one or more of the following pursuant to s 7: [page 443] (a) it may decide to refuse to enforce any or all of the provisions of the contract, (b) it may make an order declaring the contract void, in whole or in part, (c) it may make an order varying, in whole or in part, any provision of the contract, (d) it may, in relation to a land instrument, make an order for or with respect to requiring the execution of an instrument that: (i) varies, or has the effect of varying, the provisions of the land instrument, or (ii) terminates or otherwise affects, or has the effect of terminating or otherwise affecting, the operation or effect of the land instrument. The evaluation of what constitutes an unjust contract or term involves a normative evaluation of the totality of the relevant circumstances of a particular case. This means that the application of the Contracts Review Act is very case-specific, and findings in one case will not necessarily have direct application in another case. In order to determine whether relief under the Act ought to be granted, courts look at both the bargaining process, known as procedural unconscionability, and the outcome of the contract, known as substantive unconscionability. If it is found after that assessment that an unjust contract was made or that a term of a contract is unjust, then the discretion of the court is enlivened to grant the appropriate remedy. Illustrative of this evaluation process are the decisions in Baltic Shipping Company v Dillon ‘Mikhail Lermontov’ (1991) 22 NSWLR 1 (see 20.2C) and Provident Capital Ltd v Papa [2013] NSWCA 36 (see 20.3C), where the relevant principles were applied. In both cases the court looked at the totality of the circumstances before deciding to grant relief under the Contracts Review Act.

WHAT IS UNJUST? 20.2C Baltic Shipping Company v Dillon ‘Mikhail Lermontov’ (1991)

22 NSWLR 1 Court: Court of Appeal in New South Wales Facts: Mrs Dillon contracted with Baltic Shipping Co for a 14-day cruise. The cruise was cut short when the vessel, the Mikhail Lermontov, sank some nine days into the voyage after striking a shoal just off the coast of the South Island of New Zealand. Dillon suffered physical and significant emotional injuries as a result. Dillon consulted a solicitor in relation to her injuries, but terminated the retainer. She then signed a release form by which she agreed not to sue Baltic Shipping for damages in relation to any losses and injuries suffered as a result of the sinking of the Mikhail Lermontov. In return, Baltic Shipping paid her $4786 ‘in settlement of [her] claim’. Dillon subsequently claimed that the release was an unjust contract pursuant to the Contracts Review Act 1908 (NSW) and sought to have it declared void so that she could then pursue her claim against Baltic Shipping for damages for breach of contract. The trial judge ruled that the contract was an unjust contract and awarded Dillon damages in the sum of $51,396. Baltic Shipping then appealed to the Court of Appeal. [page 444] Issues: The principal issues before the court were whether the release was an unjust contract and, if so, what measure of damages Dillon was entitled to recover for breach of contract. Decision: The majority of the Court of Appeal (Gleeson CJ and Kirby P; Mahoney JA dissenting) dismissed Baltic Shipping’s appeal and confirmed the orders of the trial judge.

Extract: The extract from the judgment of Kirby P discusses the operation of the principles relating to unjust contracts in the Contracts Review Act in the context of the facts of this case.

Kirby P [On] the question [of] whether … the contract of release was ‘unjust’ within the meaning of the Act. … [I remind] myself that Samuels JA in Antonovic v Volker described ‘unjust’ like ‘unfair’ as a ‘slippery word of uncertain content’.2 The meaning of the Contracts Review Act was examined in this Court in West v AGC (Advances) Ltd. The majority … emphasised the radical nature of the Act. As McHugh JA said: … [it] is revolutionary legislation whose evident purpose is to overcome the common law’s failure to provide a comprehensive doctrinal framework to deal with ‘unjust’ contracts. Very likely its provisions signal the end of much of classical contract theory in New South Wales. Any contract or contractual provision, not excluded from the operation of the Act and which the court considers is unjust in the circumstances existing at the time when it was made, may be the subject of relief under the Act. Moreover, the provisions of s 9(2) do not exhaustively indicate the criteria as to what can be taken into account in determining whether a contract or any of its provisions is unjust. The provisions of s 9(2) of the Act are concerned for the most part with matters of procedural injustice. But the court is entitled to have regard to all the circumstances of the case, subject to s 9(4), and the public interest.3 McHugh JA drew attention to the fact that the use of the word ‘unjust’ imports concepts different from what would have been the case had the Act been framed in terms of ‘unfairness’ or ‘unreasonableness’. … He concluded: … under this Act, a contract will not be unjust as against a party unless the contract or one of its provisions is the product of unfair conduct on his part either in the terms which he has imposed or in

the means which he has employed to make the contract. In this respect it stands in marked contrast with the provisions of the Industrial Arbitration Act 1940, s 88F, which provides, inter alia, that the Industrial Commission may declare certain types of contract or arrangements void on the ground that they are ‘unfair’.4 In my minority opinion [in West] I cautioned against paring down the operation of the Act, in terms of its provisions, by reference to the preexisting law. There is always a [page 445] tendency in reformatory legislation of this kind to look at the operation of the statute with blinkers inherited from long-established rules, here, of contract law. That law is not entirely irrelevant to the application of the Act. The Act is written to provide relief from the general operation of that law. Moreover, by a reference to the need to ‘have regard to the public interest’ before determining that the contract impugned is ‘unjust’, the Court is plainly required to consider the relevance of the public interest that parties should generally be kept to agreements entered between them. Obviously, the Act contemplates that they should not be kept to agreements which are ‘unjust’ by reference to the criteria referred to in s 9(2) [of the Act] or any other matter properly emerging from a reflection on ‘all the circumstances of the case’. … With every respect to those of a different view, I consider that it is a mistake to read into the language of s 9 an obligation to show that the contract was unjust because it was produced by unfair conduct or unjust conduct on the part of one of the parties to it. This is not what the section says. It addresses attention to the resulting contract itself. It is true that in many cases a contract will not be ‘unjust’ without some element of unfairness or injustice on the part of one of the parties leading to the making of the contract. Hence the concentration on procedural questions in the check list of circumstances referred to in s 9(2). But that list is not, as the subsection makes it plain, exclusive. The duty of a court remains to have regard to ‘all the circumstances of the case’. It must consider the ‘public interest’, including in the observance of agreements duly entered. But in the end, the

focus of attention must be upon the contract. The court must decide whether ‘in the circumstances’ the contract is ‘unjust’. A contract may be ‘unjust’ because of peculiarities inherent in the circumstances of one of the parties of which the other party was quite ignorant. It may be ‘unjust’ although the other party has acted quite honourably and lawfully. This is not such a shocking notion. In the first place, there are countervailing considerations listed in s 9(2) to restrain a court from coming to that conclusion, for example, the availability of independent advice (par (h)). Furthermore, the section does not apply to all contracts. Thus, the Crown or public or local authority may not be granted relief under the Act (s 6(1)). Trade, business or professional contracts are generally excluded: see s 6(2) of the Act. Accordingly the principal operation of the Act is confined to what may loosely be called consumer contracts. By the terms of s 7(1) the court is called back to what ‘it considers is just to do’. This provision permits the court to fashion an order ‘for the purpose of avoiding as far as practicable an unjust consequence or result’. The legislation is remedial. It should be given a liberal interpretation. … I therefore turn to the arguments about whether the contract was, at the time it was made, ‘unjust in the circumstances’. I acknowledge that there are potent arguments which [Baltic Shipping] has advanced, which suggest a negative conclusion. Against the considerations which [Dillon] emphasised there are two which stand out. They do not involve giving any weight to the allegedly misleading or deceptive conduct on the part of the appellant (of which I am not convinced). Nor do they give weight to the suggested injustice of proceeding to negotiate directly with the respondent, although it was known that solicitors were retained. Any effect of that injustice was removed by the direct contact made after the release was received with the respondent’s then solicitor and the advice which she gave. [page 446] The two considerations which are crucial involve the special vulnerability of the respondent at the time the release was proffered to her and the serious inequality between her entitlements and what she recovered under the release. Both of these considerations were adequately within the particulars

relied upon by the respondent in support of her claim for relief under the Contracts Review Act. I do not need to reiterate the peculiar susceptibility of [Dillon]. [The trial judge] had an advantage in assessing this because he saw her in evidence. I consider that his Honour’s opinion in this regard is right. But so far as it is important, it is also invulnerable from review in this Court. The disproportion between the settlement virtually for the sum of luggage and goods lost and without due provision for the other entitlements to damage also produces a release which is unjust. It can be measured by contrasting the amount recovered under the release with that recovered by reference to [Dillon’s] entitlements at law. This is not to say that every case of a settlement by release will henceforth be susceptible to disturbance under the Contracts Review Act if later it is shown that a releasor accepted a bad bargain. Nor does it mean that any others of [Baltic Shipping’s] passengers who signed the release will necessarily be entitled (as [Dillon] is) to relief under the Contracts Review Act. It is necessary in each case to consider ‘all the circumstances’ and then to ask whether at the time it was made the contract was ‘unjust’. Inevitably, there is an element of subjectivity in the assessment of such injustice. It is impossible to reduce such a term to a simple verbal formula. Some guideposts only are provided by s 9(2) of the Act. Inequality of bargaining position respectively of [Baltic Shipping] and [Dillon] are specifically referred to. On that score, [Dillon’s] vulnerability to accepting an unjust contract was enlarged. The result is that, as between [Dillon] and [Baltic Shipping], the release which she signed … was ‘unjust’. She is therefore entitled to relief under the Contracts Review Act in respect of that release.

Comments 20.2.1 See Radan, Gooley, and Vickovich at 10.42, 20.6, 20.35, 20.43, and 20.47. This case is also relevant to discharge of a contract by performance (see Radan, Gooley, and Vickovich at 22.36 and 22.40); discharge by frustration (see Radan, Gooley, and Vickovich at 25.69–26.70); damage for breach of contract (see Radan, Gooley, and Vickovich at 29.55–29.57, 29.62, 29.81, 29.82,

29.83–29.85, and 29.128); and restitution (see Radan, Gooley, and Vickovich at 38.50, 38.52, 38.54, and 38.55). 20.2.2 In its appeal to the High Court in this case Baltic Shipping did not appeal the Court of Appeal’s finding that the release was an unjust contract. The appeal related solely to the measure of damages that Dillon was entitled to recover: Baltic Shipping Co v Dillon (1993) 176 CLR 344. 20.2.3 For a discussion of the Contracts Review Act, see T M Carlin, ‘The Contracts Review Act 1980 (NSW) — 20 Years On’ (2001) 23 Sydney Law Review 125.

[page 447] 20.3C

Provident Capital Ltd v Papa [2013] NSWCA 36

Court: New South Wales Court of Appeal Facts: Provident Capital Ltd made a number of ‘low doc’ loans to Mrs Papa. As security for the loans Mrs Papa mortgaged the premises in which she lived and conducted a business selling children’s clothes. The mortgage was given to secure an advance to her by Provident of $700,000, obtained mainly to assist her son in relation to equipment and working capital for a gymnasium business he acquired through his company. A subsequent advance of $125,000 was also applied to the gymnasium business. It was a requirement for the loans that Mrs Papa obtain independent legal advice regarding the loan and security documents. Mrs Papa obtained this advice from her solicitor. Subsequently, the son’s gymnasium business failed and Provident commenced proceedings for possession of Mrs Papa’s property. Mrs Papa claimed that the loan agreements were unjust within the meaning of s 7 of the Contracts Review Act. Mrs Papa also sued her solicitor for negligent advice. At first instance Mrs Papa’s claim was upheld and her liability to

Provident was reduced by the amounts that were applied to the gymnasium business. Provident appealed against this decision. Issue: The central issue in this case was whether or not particular agreements were unjust in the circumstances. In order to determine the issue a normative evaluation of the totality of relevant circumstances was made. Decision: It was held on appeal that the loan agreements were not unjust. However, Mrs Papa’s claim against her solicitor was upheld. Extract: The principal extract from Macfarlan JA examines the factors that were taken into account in determining whether a contract was unjust and whether relief should be granted under the Contracts Review Act.

Allsopp P [7] The broad evaluation of unjustness under the Contracts Review Act 1980 (NSW) ss 4, 7 and 9 involves the normative evaluation of the totality of relevant circumstances. Inevitably minds may differ as to conclusions about such questions. Also, it is often not fruitful to compare other cases with the particular circumstances at hand, lest one be deflected from an appropriate overall assessment by focus on particular aspects relevant to any such comparison. Central to the normative evaluation is the recognition that there is a need for the protection of some people in some circumstances, who are not able fully to protect their own interests against factors that may cause injustice. That vulnerability may come from one or more of many circumstances, such as lack of education or of intelligence, from gullibility, from the predation of fraud and greed, and also sometimes from loyalty and love. The characterization of a contract as unjust and the sheeting home to the other contracting party of the consequences of its unjustness may be a difficult evaluative exercise. At its heart, however, is the recognition of the inadequacy of one party to protect her or his interests in [page 448]

the circumstances. Here, there was no predation. There was no behaviour in which Provident Capital Ltd sought to take advantage of Mrs Papa. Her son may have sought to do so, but his exchanges with his mother can be seen as blandishments born of his own optimism. Mrs Papa had a solicitor whose advice was inadequate. It would, in my view, be unjust to visit the blandishments of the son and the inadequacy of fulfilment of retainer by the solicitor on the lender. That conclusion involves a consideration of all the matters referred to by Macfarlan JA, including the fact that Mrs Papa was a capable and intelligent woman, who was in no way misled by the lender in entering into the transaction. …

Macfarlan JA Factual circumstances Mrs Papa’s background [13] Mrs Papa, a Sicilian immigrant, was aged 61 at the time of Provident’s first advance to her. She came to Australia in 1952 and was married in 1966. Her second child, Peter Bortolin, was born in 1972. In 1973 Mrs Papa opened a small business in Five Dock, selling ladies’ and children’s clothing. She gave evidence that she and her husband had financial difficulties in 1975 which required the sale of their investment property and placed their home at risk. … [14] Mrs Papa subsequently sold the matrimonial home and purchased the property in Leichhardt which is the subject of these proceedings. Since that time she has lived in the property and conducted her business from it. … A mortgage given to secure an advance for the property’s purchase was discharged in 2001. Mrs Papa remarried in 1990 but her husband died in 2004. In 1990 Mrs Papa was appointed a Justice of the Peace by the Attorney General’s Department. [15] In 2005 Mrs Papa granted a mortgage over her Leichhardt property to secure an advance obtained by her from Sandhurst Trustees Ltd … to assist her son to purchase a property in Port Douglas. … The property was purchased in the name of Luxury Enterprises Pty Ltd. The gymnasium business

[16] In 2005, Luxury Enterprises became a 20% shareholder in Pyrmont Health Club Pty Ltd which conducted the Pyrmont Health and Fitness Club. Mr Bortolin gave evidence that whilst he was not a director of that company, he ‘regularly took part in discussions with the directors and other shareholders … concerning the management of that company and … was familiar with its day-to-day activities and financial circumstances’. … He said that he became aware in or about 2005/2006 that the company’s two directors had borrowed money from people they described as ‘loan sharks’ who were threatening to harm them if they failed to repay. To assist the directors, Mr Bortolin, through Luxury Enterprises, borrowed $50,000 from Hock-A-Car Pty Ltd, secured by caveats on the title to properties at Camperdown and Gosford owned by Luxury Enterprises. The loan was made in February 2006 for a period of three months, at an extraordinarily high interest rate of 8% per calendar month, with performance of Luxury Enterprises’ obligations being guaranteed by Mr Bortolin. Payments [page 449] totaling $47,000 were made to Hock-A-Car in the following months but the balance of principal and interest remained outstanding in early 2006. … [17] Mr Bortolin gave evidence that from about the end of 2005 the financial circumstances of the gymnasium business steadily worsened, with revenue falling far short of what was required to meet outgoings. … An administrator of the company was appointed on 5 June 2006. In November 2006 Luxury Enterprises entered into an agreement with the administrator to purchase the gymnasium business for $140,000. … Mr Bortolin needed further money to purchase new equipment for the gym, to provide working capital and to pay a security bond to the landlord of the premises. [18] With a view to obtaining those funds, Mr Bortolin spoke to Mr Charlie Hill of Community Mortgage Corporation Pty Ltd (CMC), a mortgage broker. Mr Bortolin said that he gave Mr Hill ‘details of my financial situation, the reasons why I needed the money and the background to the gymnasium business’. … Mr Hill’s response was to the effect that the ‘only way you can get this money is to use your mother’s property. You can’t support an application for that amount of money using your financials or

using the gym’. … Mr Hill’s son, Mr George Hilellis, who also worked for CMC, submitted an application for finance to the National Australia Bank on Mr Bortolin’s behalf. The application was conditionally approved but subsequently rejected due to a difficulty with the zoning of the Leichhardt property. Mr Hill then told Mr Bortolin that the ‘only lender that will do this loan is Provident Capital’. … [19] At about this time Mr Bortolin approached his mother, saying: Mum, I need some money for the gym and I want to use the deeds to your property to raise some money. It will be alright and it won’t be long before it’s all cleared. [20] He said: I did not at any stage tell my mother of the financial difficulties of the Pyrmont Health Club, the appointment of administrators to that company and the defaults that had occurred in that company’s obligations to its lessor and other parties. I did not inform my mother of my guarantee obligations under the Hock-A-Car loan which at that stage was still ongoing or the defaults that had occurred in the obligations to [Hock-A-Car]. I did not provide my mother with any financial information concerning the gymnasium either during its conduct by the Pyrmont Health Club or the intended operation of the club by Luxury Enterprises. [21] Mrs Papa’s evidence was to similar effect. … The application for finance [22] On 1 February 2007 CMC sent Provident an ‘Application for Light and Easy Residential Mortgage Finance’ signed by Mrs Papa and seeking a loan of $700,000 for ‘Refinance $180,000 + 520,000 for Business use’, to be secured over Mrs Papa’s Leichhardt property. The application listed Mrs Papa’s assets as the Leichhardt property and a car, and her sole liability [page 450]

as the debt to Sandhurst Trustees. It made no reference to her income but contained the following acknowledgment: I am/we are of the opinion that I am/we are able to repay the loan in accordance with its terms and can do so without hardship. [23] Accompanying the application was a loan statement from Sandhurst Trustees for the previous six months, showing an absence of default in respect of the loan by that company, and a copy of the conditional approval letter from the National Australia Bank. CMC’s covering facsimile referred to the $520,000 component of the loan as ‘to be used to further invest in their business’. In handwriting on the facsimile, probably placed there by an employee of Provident after receipt of further information from CMC, the $520,000 was divided between $320,000 for the purchase of gym equipment, $120,000 for payment of a six months’ rental bond and $80,000 for working capital. [24] On 6 February 2007, Mrs Papa faxed CMC a signed ‘Self-Certified Income Declaration’ confirming her ability to repay the loan in accordance with its terms and ‘without hardship’. On the same day CMC, for reasons that are not apparent, submitted to Provident a further application for the same advance. The application purported to be signed by Mrs Papa but the primary judge held that this was not in fact the case. … Unlike the first application, this application was not on a form for a ‘Low Doc Loan’. The form of application said that copies of the applicant’s tax returns for the previous two years were required but these were not in fact supplied. [25] Provident thereafter obtained a valuation of the Leichhardt property (at a figure of $1.1 million) and obtained clear responses on credit and business name checks on Mrs Papa and her clothing business. On 16 February 2007 Provident sent Mrs Papa a Letter of Offer for an advance of $700,000 with an interest rate (assuming no default) of 10.99% per annum. The purpose of the advance was described … as: Refinance mortgage with Sandhurst Trustees and provide working capital to assist with purchase of equipment for borrowers [sic] gymnasium business. The letter stated that the transaction had been referred to Provident by CMC as ‘your broker’ who ‘is your agent’. … It also stated that the

borrower would need to complete ‘an appropriate declaration about having received legal advice’. … [26] On 1 March 2007 Mrs Papa met with Mr Caramanlis and in his presence signed the loan, mortgage and associated documents. These included a declaration that the advance was ‘to be applied wholly or predominantly for business or investment purposes (or for both purposes)’ …, a declaration by Mrs Papa that she had ‘received independent legal advice regarding the loan and security documents’, a direct debit authority signed by Mrs Papa authorising Provident to debit funds from the bank account of Pyrmont Health and Fitness Club and a loan agreement. … [27] On 8 March 2007, Mr Caramanlis sent a letter to Mrs Papa setting out details of the loan and security documents and stating: [page 451] 1.16 Purpose of Loan There are two reasons for you taking out this loan. The first is to refinance the mortgage you have with Sandhurst Trustees. The second reason is to provide money to your son Peter Bortolin to assist him with the purchase of equipment for his gymnasium business. You confirm our instructions that the loan is to be used predominantly for business or investment purposes. … We confirm your instructions that you understand the loan and that you are taking out the refinance to help your son Peter Bortolin with the money to use in his gymnasium business in Pyrmont. We note that all legal documentation was executed by you as a result of your own free will and that no pressure was placed upon you to execute the loan documents. [28] On 5 April 2007 Provident executed the loan and security documents and made the advance to Mrs Papa. … The funds were applied in discharging the Sandhurst Trustees’ debt and to the gymnasium business. …

The second advance [38] On 8 August 2007 Mrs Papa sent a letter to Provident authorising her son to discuss account matters with it on her behalf. [39] On 5 November 2007 the direct debit by Provident of an interest charge failed but the missed instalment was nevertheless received by Provident on 26 November 2007. An attempt to debit an interest charge on 5 March 2008 also failed but the position was rectified on 12 March 2008. [40] On 30 November 2007 Provident informed Mr Bortolin, presumably following a request from him, of the fee that it would charge for early repayment of the advance to Mrs Papa. At about that time Mr Bortolin instructed Mr Caramanlis to act for him on the sale of Luxury Enterprises’ East Gosford and Camperdown properties and on 17 December 2007, Perpetual Limited, the mortgagee of the East Gosford and Camperdown properties, issued a default notice to Luxury Enterprises regarding defaults in monthly repayments due from September to December 2007. [41] In late January 2008 Mr Bortolin approached CMC about a further borrowing but was told to contact Provident directly. By email of 23 January 2008, Provident informed Mr Bortolin that it would be prepared to advance a further $125,000 to Mrs Papa, subject to a revaluation of the Leichhardt property and Mrs Papa’s written confirmation that she sought the further advance. [42] Mr Bortolin gave evidence of a discussion with his mother at about this time: I again approached my mother and said to her words to the effect: ‘Mum, I need some more money for the gym’. She said words to the effect: ‘Why have I got to keep signing these documents?’ I said: ‘Don’t worry Mum, it will be fine.’ [43] Mrs Papa gave the following evidence: From time to time after Peter had told me he had invested in the Gym I would in conversation say to him ‘How are things going at the Gym’ or words to that effect.

[page 452] He would always reply with word[s] to the effect ‘It’s going well. It’s sweet’. I spoke to him in similar terms at about the time of the first advance. Before the first advance I said to him ‘Are you sure you can pay this loan’ and he said to me ‘Yes. The gym is going well’ or words to that effect. Some time later Peter came to me and said ‘Mum I need to use more money for the gym. I need more money so I need to use the deeds again’. He did not at this time tell me how much he needed. I didn’t ask questions as I thought he knew what he was doing. [44] On 5 February 2008 Provident sent Mrs Papa a Letter of Offer relating to the additional advance of $125,000, the purpose simply being described as ‘[i]ncrease to existing loan facility’. Mrs Papa signed a copy of the letter to indicate her acceptance of the offer. The offer was expressed to be subject to Mrs Papa signing a ‘self-certified income declaration’ and ‘an appropriate declaration about having received legal advice’. [45] On 18 February 2008 Daniels Lawyers received a letter addressed to Hock-A-Car from Perpetual’s solicitors referring to Perpetual’s service in December 2007 of a default notice on Luxury Enterprises. … Hock-A-Car, for whom Daniels Lawyers had acted in relation to the $50,000 loan … lodged caveats in relation to the Gosford and Camperdown properties. [46] On 3 March 2008 Mr Caramanlis received a letter from Perpetual’s solicitors indicating that it had commenced proceedings for possession of the Gosford and Camperdown properties. [47] On 6 March 2008 Mr Caramanlis met with Mrs Papa for her to sign the loan and security documents, including the declarations concerning income and legal advice and a loan agreement (the Second Loan Agreement). Mr Caramanlis gave evidence that Mrs Papa told him that the further advance was to ‘go towards the gym’ and that she now had an interest in the business. He said that she signed the documents after he indicated that they were similar to those signed on 1 March 2007. On the same date, Mr Caramanlis sent Mrs Papa a letter confirming that ‘the

advice given to you previously both in conference and by letter dated 8 March 2007 regarding the original loan of $700,000 still remains valid’. [48] On 4 April 2008 Mr Caramanlis sent a letter to Perpetual’s solicitors seeking confirmation that Perpetual would not apply for default judgment in its possession proceedings without giving Luxury Enterprises seven days’ notice. [49] Provident made the further advance to Mrs Papa on 5 April 2008 (the Second Advance). [50] On 27 August 2008 Provident notified Mrs Papa that she had defaulted on the loan of $700,000 dated 5 April 2007 and on 3 October 2008 Provident commenced the present proceedings for possession. …

The Contracts Review Act Whether CMC was Provident’s agent [96] It is relevant at the outset to determine whether the primary judge was correct in imputing to Provident such knowledge as CMC had. [page 453] [97] In Tonto Home Loans Australia Pty Ltd v Tavares5 ‘mortgage originators’, performing roles not unlike that of CMC in the present case, were found not to be agents of the lenders. Allsop P (with the concurrence of Bathurst CJ and Campbell JA) said (at [177]): [177] … Agency is a consensual relationship, generally (if not always) bearing a fiduciary character, in which by its terms A acts on behalf of (and in the interest of) P and with a necessary degree of control requisite for the purpose of the role. Central is the concept of identity or representation of the principal … It is sufficient to recognise that the essential characteristic [of agency] is that one party (A) acts on the other’s (P’s) behalf. [98] Notwithstanding that ‘S Loans’ (one of the mortgage originators in that case) was obliged to endeavour to introduce borrowers to Tonto Home

Loans Australia Pty Ltd (Tonto HL) and to provide it with information about them, the court held that ‘[t]aken as a whole, the introduction deed and the other agreed arrangements did not provide for an arrangement under which S Loans would act on behalf, and in the interests of Tonto HL …’ such as to render it Tonto HL’s agent (at [191]). [99] I do not consider that there are any material differences between the arrangement in that case and those in the present case that serve to distinguish the decision. It follows that I disagree with the primary judge’s conclusion that CMC was Provident’s agent. I note that in reaching that conclusion her Honour did not have the guidance of Tonto Home Loans as that decision postdated her Honour’s judgment. [100] The decision in Tonto Home Loans does not mean that, when assessing Provident’s position in the present case, knowledge of CMC that was not conveyed by CMC to Provident must be disregarded. The following further reasoning in Tonto Home Loans is relevant in this regard: [255] That S Loans was not in law the agent of Tonto HL does not mean that for the purpose of evaluating the operation of the [Contracts Review Act], the position of Streetwise [S Loans], how it came to take its place in the overall enterprises of the lending programmes and the objective perceptible risk of fraud arising from its position should not be considered. … [265] … Looking at these events as brought about primarily by the fraud of Streetwise, a fair assessment is that the business structure put in place by the lenders [and] how it operated was significantly responsible for the preying upon these people by Streetwise. That is not to ignore the basis upon which the trial and appeal proceeded, that ‘Lo Doc Lending’ per se was not unjust. Nor is it to introduce an enterprise concept of agency; rather it is to recognise that a subcontracted lending structure of the kind here, in which persons such as Streetwise are ‘chased’ to become the introductory agents, should have guidelines enforced with real vigour to deal with the obvious objective risks of fraud and deception. No one criticised these guidelines. Their operation was loose, and affected by the attitude found by his Honour. It is only fair and just to recognise the significant responsibility of the lenders in these circumstances.

[page 454] [101] The facts referred to in these observations differ from those in the present case but the thrust of Allsop P’s observations is still relevant: if by interposing mortgage originators a lender has established a business structure that distances the lender from communications with a prospective borrower who is misled or taken advantage of, it may be relevant for the purpose of considering unjustness under the Contracts Review Act to have regard to a mortgage originator’s knowledge which it has not passed on to the lender. … Asset lending [107] Of prime importance to the primary judge’s reasoning were her Honour’s conclusions that Provident failed to make any inquiries about the serviceability of the advances to Mrs Papa, was indifferent to her ability to fulfil her obligations under the loan agreements, and that Provident’s principal concern was whether there was adequate security available in the event of default. … In these circumstances, it is convenient to refer to the most important of the decisions touching on the issue of asset lending which is, in effect, what the primary judge found Provident to have undertaken. [108] In Elkofairi v Permanent Trustee Co Ltd6 the appellant and her husband gave a mortgage over their jointly owned property to a financier in part to fund the husband’s business activities. The appellant was in a special position of disadvantage but this was unknown to the financier. This court found that the transaction was unjust under the Contracts Review Act in light of two significant features of the transaction. The first was that the loan was a substantial one, the security for which was the appellant’s only asset, and the second was that the respondent knew that the appellant had no income or other assets and that repayment of interest was intended to be made by Mr Elkofairi. The absence in that case of any verification of Mr Elkofairi’s income indicated that the financier was content to lend on the value of the security alone. That was not a case, like the present, where the financier required the borrower to obtain independent legal advice and to receive the borrower’s assurance that that had occurred.

[109] In Perpetual Trustee Co Ltd v Khoshaba7 the financier advanced money to pensioners whose daughter applied the funds to a pyramid investment scheme which collapsed. Spigelman CJ (with whom Handley AJA relevantly agreed) concluded as follows: [82] I have set out above in the extract from his Honour’s findings on the [Lender’s] Guidelines issue each of the respects in which the Appellant failed to observe its own Guidelines. Of these failures the most significant, in my opinion, is the fact that the section of the standard form application about the purpose of the loan was left blank. This indicates that, as in Elkofairi above at [79], the Appellant ‘was content to lend on the value of the security’. In my opinion, that approach is entitled to significant weight in the determination of unjustness. (I note that nothing like this occurred in West where the purpose of the loan was known.) … [page 455] [92] The conflicting considerations are finely balanced. Had the Appellant or its representatives made any inquiries about the purpose of the loan I would have allowed the appeal. I do not mean to suggest that the Appellant had to determine that the proposed investment was reasonable and capable of servicing the loan. It is the indifference, suggesting that the Appellant was content to proceed on the basis of enforcing the security, which I find determinative. [110] Basten JA’s judgment included the following: [128] To engage in pure asset lending, namely to lend money without regard to the ability of the borrower to repay by instalments under the contract, in the knowledge that adequate security is available in the event of default, is to engage in a potentially fruitless enterprise, simply because there is no risk of loss. At least where the security is the sole residence of the borrower, there is a public

interest in treating such contracts as unjust, at least in circumstances where the borrowers can be said to have demonstrated an inability reasonably to protect their own interests, for the purposes of, for example, s 9(2)(e) or (f). That does not mean that the Act will permit intervention merely where the borrower has been foolish, gullible or greedy. Something more is required.8 [111] In Kowalczuk v Accom Finance Pty Ltd,9 a fraudster induced the appellant to mortgage his properties to provide funds for the fraudster to invest. Having said that it ‘can be accepted that pure asset lending … is in at least some circumstances “unjust” within the meaning of the Contracts Review Act’, Campbell JA (with whom Hodgson and McColl JJA agreed), concluded: [99] I would accept that in some circumstances knowledge of a high degree of risk that there might be a default in payment of interest or principal so that a mortgagee sale would result, could be unjust lending, even though it could not be said that the lender knows that there will be default. However I do not accept that a lender is always bound to carry out a detailed investigation of the practicality of an intending borrower actually being able to carry through the plan the borrower says he or she has for repayment of the loan. In the present case, Kowalczuk stated to Accom that he proposed to pay the Berowra loan out through bank refinance, and the Haberfield loan through refinancing with FirstLoan Australia (the same brokers through whom Kowalczuk was able successfully to refinance the Berowra loan) and there was no occasion for Accom to doubt that he would be able to do so. Thus, even if Mr Conti is right in saying that there can be pure asset lending if the lender knew that there was a high risk that the intended means of repayment might fail, in the present case Accom did not have knowledge of that type. [112] In Fast Fix Loans Pty Ltd v Samardzic10 the respondents mortgaged their property to secure a loan to enable their son’s company to purchase a development property at Forster. The primary judge found that the financier was aware that the company was in a precarious

[page 456] financial position and that there was a real likelihood that, as a consequence, there would be default in relation to the loan which the parents’ property secured. The judgment of Allsop P (with whom Bathurst CJ and Campbell JA agreed) included the following: [43] The complaint about ‘asset lending’ tended to raise a debate over semantics. ‘Asset lending’ is not a label or a legal frame of reference. It is a convenient expression, used in cases such as Perpetual Trustee Co Ltd v Khoshaba11 and Spina to describe a form of lending where the lender has little, if any, regard for the capacity of the borrower to repay and rests satisfied with the security to protect itself. As Campbell JA made clear in Kowalczuk, the conclusion of ‘unjust’ for the [purposes of the] Act, ss 7 and 9 depends on all the circumstances and not on labels. There is no reason why considerations such as those here cannot lead to the conclusion that a contract of guarantee is unjust if entered into by a lender who is uncaring of a guarantor’s capacity to repay where there is a real and significant possibility of default by the borrower and the guarantor takes no benefit under the borrowing. This is particularly so in all the other circumstances of this case — most particularly the recognition by the appellant of the only two likely sources of repayment, one (successful refinancing) having a real risk to it. The appellant lent at a significant interest rate, reflecting the underlying commercial risk, appreciating the position the parents had been placed in, without any basis to consider that the parents appreciated the commercial risk or that they could afford to take that risk. … [50] … Here, the relevant circumstances giving rise to the conclusion of unjustness and the granting of relief included the misapprehension by the parents that their obligations would cease after 3 months, the fact that the parents lacked the capacity to understand the deed of loan and mortgage and did not appreciate the significance of the interest rate even with the benefit of limited

legal advice, that Milan (albeit not the appellant) was exerting considerable pressure upon the parents to enter the agreements immediately, that the appellant failed to make inquiries as to the financial circumstances of the parents in circumstances where the appellant appreciated the significant risk of the transaction, being one which it was not prepared to take at the significant rate of interest without the parents’ ‘clean’ security. [113] It is apparent from these authorities that it can be relevant in the determination of whether a contract is unjust, and whether relief should be granted against a financier, under the Contracts Review Act that the financier has shown no interest in the borrower’s ability to service the loan. However the significance of that fact must be assessed in the context of all the circumstances surrounding the loan. In my opinion, of particular significance will be the financier’s knowledge of the borrower’s circumstances, the purpose of the loan and whether the borrower has obtained independent legal advice. Public interest does not necessarily require so-called asset lending to be proscribed, or even deterred. It may advance the interests of the parties to many transactions, and facilitate commerce generally, for financiers to be able to lend on a ‘low doc’ basis without requiring the expenditure of time and effort in [page 457] ascertaining and verifying the ability of borrowers to service loans. In any event, that exercise will often be difficult. For example if Provident had sought to undertake it in the present case, it would have had to make a difficult business judgment about the viability and prospects of the gymnasium business, a topic about which even well-informed minds could undoubtedly have differed. Financiers should not be required to make such assessments if they do not wish to do so. If, instead, a financier is satisfied that a borrower is able to make the decision for him or herself or has received appropriate advice, the public interest reflected in the Contracts Review Act will ordinarily have been satisfied.

Comment 20.3.1 See Radan, Gooley, and Vickovich at 20.8 and 20.47.

1.

See s 6(2), where it is stated that ‘[a] person may not be granted relief under the Act in relation to a contract so far as the contract was entered into in the course of or for the purpose of a trade, business or profession carried on by the person or proposed to be carried on by the person, other than a farming undertaking (including, but not limited to, an agricultural, pastoral, horticultural, orcharding or viticultural undertaking) carried on by the person or proposed to be carried on by the person wholly or principally in New South Wales’. For an application of this provisions, see Bank of Western Australia Ltd v Primanzon [2010] NSWSC 862, where it was held that relief under the Contracts Review Act was not available to two part-time commercial property investors because the particular loans advanced to them were entered into in the course of a trade, business, or profession that was carried on by them. This decision can be compared with the decision in Byrne v Cope Street Pty Ltd [2009] NSWSC 947, where it was held that relief under the Act did apply to a person who had purchased two properties solely for investment purposes. This was because the particular investment was seen as a one-off investment and not part of a broader property investment business.

2. 3.

Antonovic v Volker (1986) 7 NSWLR 151 at 157. West v AGC (Advances) Ltd (1986) 5 NSWLR 610 at 621.

4. 5.

West v AGC (Advances) Ltd (1986) 5 NSWLR 610 at 622. [2011] NSWCA 389; (2011) 15 BPR 29,699.

6. 7.

[2002] NSWCA 413; (2002) 11 BPR 20,841. [2006] NSWCA 41; (2006) 14 BPR 26,639.

8. 9.

See Esanda Finance Corporation Ltd v Tong (1997) 41 NSWLR 482 at 491 (Handley JA) cited with approval in Elkofairi (above) at [77] by Beazley JA. [2008] NSWCA 343; (2008) 77 NSWLR 205.

10. 11.

[2011] NSWCA 260; (2011) 15 BPR 29,445. [2006] NSWCA 41; (2006) 14 BPR 26,639.

[page 458]

21 UNFAIR CONTRACTS

INTRODUCTION 21.1 This chapter deals with the regulation of unfair contracts. Such regulation of standard form consumer contracts represents particular challenges for the classic common law principles of contract law. While these principles work reasonably well where both parties to the contract are engaged in commercial activity, they do not function as well where one of the parties is a consumer. It has been the legislature that has assumed responsibility for addressing the problems posed by standard form consumer contracts. Past examples of this can be seen in the provisions of the Trade Practices Act 1974 (Cth) and the Contracts Review Act 1980 (NSW). Most recently there is the introduction of what is referred to as the Australian Consumer Law, which constitutes a single national consumer law that applies as a law of the Commonwealth and of each state and territory. The Australian Consumer Law was implemented principally through amendments to the Commonwealth’s Trade Practices Act 1974 and Trade Practices Regulations 1974, as well as appropriate complementary legislation in each of the states and territories. The unfair contract terms provisions of the Australian Consumer Law became operative nationally and in some state jurisdictions on 1 July 2010, while the remainder of the Australian Consumer Law commenced across all of Australia became operative on 1 January 2011. The provisions of the Australian Consumer Law are found in Sch 2 of the Competition and Consumer Act 2010 (Cth), which is headed ‘The Australian Consumer Law’.

The principal new provisions in relation to contract law introduced by the Australian Consumer Law are those relating to unfair contract terms. Broadly speaking, the unfair contract terms provisions apply in respect of standard form contracts between a business and a consumer. In such contracts an unfair term will be void. The provisions do not apply to contracts between a business and another business. In relation to cases governed by the Competition and Consumer Act 2010, the unfair contract terms provisions are in Ch 2, Pt 2-3 (ss 23–28) of the Australian Consumer Law. This chapter focuses upon the recommendations behind the current legislative provisions relating to unfair contractual terms. This legislation, principally embodied in the Australian Consumer Law, was largely derived from the Review of Australia’s Consumer Policy Framework, No 45, undertaken by the Productivity Commission in 2008 (see 21.2E). Unfair contracts are also dealt with in other situations, for instance in the Industrial Relations Act 1996 (NSW). Pursuant to s 106 of that Act a court may make an order declaring any ‘contract’ whereby a person performs work in any industry wholly or partly void or varying such contract if [page 459] the Industrial Relations Commission finds that the contract is an unfair contract. As will be seen, ‘contract’ is defined broadly in s 105 of the Industrial Relations Act. However, it has been accepted that s 106 is not confined to traditional work agreements, but is broad enough to include leases and franchise agreements. The essential ingredient that is needed to ground jurisdiction is that the contract must enable a person to perform work in an industry. For example, a franchisee who operates an ice-cream franchise at a retail shopping centre pursuant to a franchise agreement may well be able to invoke s 106 if the franchise agreement is unfair. The impact of the provisions of the Industrial Relations Act 1996 (NSW) were examined in Fish v Solution 6 Holdings Ltd (2006) 225 CLR 180 (see 21.3C), where the court held that the particular agreement in question was not a contract pursuant to which work was done in an industry. This meant that s 106 had no application. In Brown v Rezitis (1971) 127 CLR 157 (see

21.4C), a case dealing with a statutory predecessor to s 106, the court examined the issue of who could apply for an order under the Industrial Relations Act 1996 (NSW), as well as the criteria that needed to be established before an order could be made.

UNFAIR CONTRACTS 21.2E

Productivity Commission, Review of Australia’s Consumer Policy Framework, No 45

Source: Productivity Commission, Review of Australia’s Consumer Policy Framework, No 45, 30 April 2008, s 7, pp 139–69. Extract: The following extract from the Review of Australia’s Consumer Policy Framework, No 45 highlights the relevant evidence and submissions before and findings of the Productivity Commission in relation to unfair practices and in particular unfair terms.

7

Unfair practices and conduct

7.1

Introduction

Measures against unfair conduct and practices are a key element of generic consumer law. These measures adopt a dual approach. For example, under the Trade Practices Act (TPA): there is a prohibition of unconscionable conduct generally (part IVA); and Division 1 of Part V prohibits various broad kinds of unfair practices, notably misleading or deceptive conduct (s 52), and false and misleading representations (s 53). In addition, the TPA proscribes some specific practices that are considered deceptive or unfair (including referral selling, bait advertising, and pyramid selling). There are similar, but not identical provisions in the State and Territory Fair Trading Acts.

This chapter is not a forensic economic or legal examination of all elements of these provisions, since the purpose of the inquiry is to lay out a framework for consumer policy in the future. Consequently, this chapter examines three broad issues, with most of the effort spent on the last: whether there is an advantage in having a general prohibition on unfair commercial practices; [page 460] the implications of variations in laws against unfair conduct between jurisdictions; and any significant or emerging gaps in the coverage of provisions against unfair practices and conduct and especially the role that might be played by a measure to deal with unfair contract terms.

7.2

A general provision relating to unfair practices?

The prohibition of unconscionability in the generic legislation represents a general prohibition of unfairness, but usually only for unfairness that crosses a high threshold of severity. Other Australian provisions relating to unfair conduct only deal with specific instances of unfair practices, such as deceptive conduct. As a result, there is no broad prohibition on unfair practices by business in Australia, unlike the USA, which bars unfair or deceptive acts and practices, or Europe, which applies an Unfair Commercial Practices Directive. … Conceptually, a broad provision against unfairness is attractive because it can avoid prescription of specific types of unfairness and, in theory, does not need to be continually adapted as new commercial expressions of unfairness are discovered. For example, the USA has used its general provisions to bar emerging threats, such as spyware and unauthorised telephone billing. However, in practice, the application of the US provisions — the most mature broad law against unfairness — has periodically raised major concerns, due to changing interpretations of unfairness. In the 1970s, for example, an excessively wide-reaching interpretation of unfairness was

accompanied by ‘rulemaking frenzy’ by the Federal Trade Commission, which culminated in its temporary closure by Congress. … While that frenzy has passed, the general provision has been subject to several phases in its reach since that time. … In any case, the statute does not stand by itself. It is accompanied by various specific laws dealing with unfair and deceptive practices. These include provisions requiring truth in lending and fair labelling, and laws against spam. Similarly, the European Union’s Unfair Commercial Practices Directive is supported by 31 specific proscribed practices. So, in fact, the differences between this general regime and current trade practices laws in Australia are not as great as might be thought, especially given the relatively broad range of instruments that are already included. The potential value of a general regime in deterring new forms of businesses misconduct (what Luke Nottage … refers to as ‘educative effects’) could arguably also be achieved by ensuring that statutes barring newly developed forms of unfair conduct are incorporated into trade practices law when the need arises. Moreover, in practice, a general fairness provision may not be as adaptable in dealing with new problems. For instance, despite its generic fairness statute, concerns about unfair contracts arise in the USA as much as here. … In that context, introducing a general provision against unfairness might be more conceptually neat than practically useful for consumers. Nevertheless, the Commission agrees with the ACCC … that it would be prudent for Australian policymakers to see how the European model develops, and only to consider the option of pursuing a general unfair practices provision at a later time if warranted by strong evidence in its favour. … … [page 461]

7.5

Unfair contract terms legislation

Key issues The TPA and the common law enshrine the concept of fairness in

contractual dealings in many ways, such as avoiding unconscionable or misleading behaviour by businesses. However, many consumer groups, State and Territory Governments and some businesses have said they are concerned about unfair contract terms more generally. … Unfair contract terms are those that disadvantage one party but that are not reasonably necessary to protect the legitimate interests of the other. Examples of such ‘unfair’ terms include reserving the right to vary the contract at any time for any reason, or removing liability for interruptions in supply, which may have the effect of inefficiently shifting risk from suppliers to consumers. … The biggest concerns arise for standard-form contracts — typically used in the supply of a broad range of services including air travel, telecommunications, energy, consumer credit, car hire, holiday packages, home improvements and software sales. Such non-negotiated contracts have advantages for consumers — in particular, in competitive markets, lower business costs will be passed on to consumers as lower prices. But, by their nature, these contract terms are offered on a ‘take-it-or-leave-it’ basis, are often complex and apparently mostly not read. The concern is that businesses sometimes use unfair terms against consumers and the public interest generally. The UK and the EU have augmented their consumer policy framework with provisions to address unfair contract terms and … the notion of unfairness is embedded in US law. Locally, the Victorian Government has enacted an unfair contracts provision at the State level and several industry codes embrace the notion of unfairness. Appendix D sets out the details. However, attempts by the Ministerial Council on Consumer Affairs (MCCA) to devise national, uniform legislation along the lines of the Victorian model have so far stalled, with the regulatory impact statement (RIS) not meeting the required standard. In particular, the submitted RIS only provided anecdotal evidence of detriment from the use of unfair terms. In considering the merits of addressing unfair terms in consumer contracts, a multi-layered set of questions arise. These begin with threshold issues of assessing the nature of the perceived problem (is it due to a market failure or some other problem?), its extent, and its impacts. … There are potential rationales for action

The Commission accepts that there is a rationale for addressing unfair contract terms. The strongest argument for doing so is ethically based — and is merely the extension of existing ethical principles about fairness in contracts, to cover substantive terms that appear to be manifestly unfair in most circumstances. There is a conventional economic rationale too, but it is more complicated and depends on the nature of risk appraisal by consumers and the difficulties that ‘good’ firms have in signalling that they will act in good faith with their customers compared with ‘bad’ firms. … [page 462] There are also counter-arguments against a blanket ban of apparently unfair terms based on understanding why these terms are so prolific across all types of contracts, including in competitive industries. … Such terms are certainly not specific to rogue traders. So why do businesses with strong incentives to please consumers choose to insert unfair terms into their contracts? One explanation is that ‘one-sided’ contracts can actually be beneficial to consumers as a whole by providing them — through the business — with a way of deterring problematic behaviour by small groups of consumers. In particular, just as some businesses behave in bad faith or otherwise inappropriately, so too do some consumers. For instance, they may not be careful in using their purchases, conceal damage they have done to a rented asset, or seek to extract themselves from contracts that require businesses to commit significant upfront resources. Crucially, unlike businesses, consumers do not generally have a brand name or reputation to lose from such conduct. It is hard for suppliers to foresee all the forms that such conduct might take, hence the need for disclaimers that deal with unspecified contingencies. As a result, what appear to be one-sided contracts may sometimes better protect the bulk of customers from the behaviour of the few, than balanced contracts. … In that case, they may not be so one-sided. The bulk of consumers know that their implicit contract will generally be honoured, and indeed, sometimes exceeded, while those whose behaviour threatens

the spirit of the contract know that the supplier has a capacity to act against them. A provision simply barring one-sided contracts may also threaten the continued availability of certain types of consumer products or services — for example, the capacity to return a rental vehicle to a convenient drop off without a vehicle inspection. So measures against unfair contract terms have to steer a middle course, by seeking to stem acts of bad faith or otherwise inappropriate behaviour by either party to a contract. A onesided contract term that is abused by a supplier would then be construed as an unfair practice, while its use to deter rare instances of bad faith by a consumer would not. In this case, while some contract terms may be unfair in all contexts,1 in others, bad faith is not intrinsic to the contract term, but is revealed by its inappropriate use. This is why an important consideration in deciding whether (and how) to act on unfair contracts is whether it is possible to strike out terms that are genuinely used unfairly (and inefficiently), while preserving the long-term benefits for the bulk of consumers that arise from suppliers being able to act against consumers who act in bad faith or otherwise inappropriately. Frank Zumbo … argues that these benefits are amply protected, as an unfair term is one that goes beyond what is reasonably necessary to protect a business’s legitimate interests. However, that will depend on how subtly courts and regulators can interpret ‘reasonably necessary’ and ‘legitimate’. There is evidence of exploitation of unfair terms, but it is incomplete There is persuasive evidence that notionally unfair terms are commonplace in Australian contracts not covered by the Victorian legislation. … However, the rationale for action [page 463] principally rests on the unreasonable use of unfair terms, not their existence. This is because, perceptions of their inherent unfairness aside, dormant unfair terms often do not cause detriment to consumers. … There would be other, less tangible, benefits from policy action

While the direct benefits for consumers from addressing unfair contract terms are unlikely to be as large as some have maintained, other factors suggest there would be additional gains from implementing a measure. The existing unconscionability provisions of generic consumer law — which could, in principle, tackle unfair contracts — are very costly, slow and uncertain in their application. … Actions often take years to progress and cost hundreds of thousands of dollars and sometimes millions for single cases. They set a hurdle for unconscionability that is high and their application to the use of unfair terms, while evolving, is still not clear. The NSW Contracts Review Act 1980, which bars ‘unjust’ contracts, is more amenable to use than provisions against unconscionability … but still suffers significant limitations as an effective tool against the use of unfair terms. … Simplification and consolidation of the existing unconscionability provisions, as suggested by Frank Zumbo might resolve some of these difficulties. But such amended provisions are still likely to be unwieldy for dealing with even modest numbers of unfairly used terms. In contrast, measures targeting unfair contract terms are more likely to be economical, timely and provide greater clarity about the threshold and principles for action. Secondly, a national approach to unfair contracts would reduce the risk that individual jurisdictions would adopt their own (varying) provisions. In doing so, it would more generally support the goal of a single national generic consumer law. Consumer policy also has an increasingly global dimension with the expansion of sales made directly through the Internet. This, and moves for more convergence in consumer policy internationally, reinforces the case for a unified national approach on this issue. There are costs from policy action Whatever their immediate benefits, barring unfair contract terms is likely to have some adverse knock-on impacts for consumers through higher prices (or lower quality goods and services). These impacts arise through three pathways. First, an unfair contracts provision would entail enforcement costs for regulators and impose compliance burdens on businesses through rewriting contracts and dealing with the regulator. Businesses will usually

pass these on to consumers. However, these costs appear unlikely to be large, especially given the learning that has taken place in the UK and Victoria, and the fact that compliance costs would be avoided on those national contracts already changed due to the Victorian legislation. Second, barring specific terms alters the ‘complex balance of the contractual bargain’ … thus affecting profits and placing upward pressure on prices. For instance, a reduced capacity for businesses to impose some contingent charges on consumers, such as certain termination fees, would lead to recovery through higher upfront charges. [page 464] Third, as noted previously, prohibition could sometimes have unintended impacts by reducing (reputable) suppliers’ discretion to act against consumers behaving in bad faith. As well as adding to the above cost and price effects, this might affect the availability or nature of products and services. It may still be appropriate to bar the offending contract terms and, indeed, price rises associated with stripping unfair terms from contracts send a useful signal to consumers about the relative attractiveness of competing suppliers. … Nevertheless, the implication is that the net benefits to consumers from action are not as high as might be thought by looking at the direct benefits. Quite apart from these price effects, regulatory errors may arise, especially given that unfairness is difficult to define correctly without understanding the full context of the contract and the particular transaction involved. These uncertainties were raised in the Commission’s consultations in the UK about the British statute, as well as by several Australian participants. For example, some banks were concerned about how a new law would deal with unilateral changes in interest rates, which are essential to their business. … In fact, it is very unlikely that the unilateral right to increase interest rates would be at risk, but in other contractual contexts, the uncertainty may be higher. While firms could test what they saw as

inappropriate decisions by the regulator in court … the high costs of legal action may deter them from doing so. Such concerns may be alleviated if there are some practical restrictions on the scope of any policy response. This could include confining the ambit of any law, careful regulatory processes based on consulting with businesses, and adoption of a layered enforcement approach. For example, in the UK, the regulator has considered only the ‘key’ unfair contract terms when policing the provision for small business, reflecting the proportionately greater compliance costs and the small reach of their contracts. … Notably, business has not identified major costs associated with the introduction of unfair contract laws in Europe, the UK and Victoria. Overall, the qualitative nature of the benefits makes it hard to determine ex ante whether a national measure would pass a cost-benefit test. This is especially so given that some of the hotspots of concern about unfair contracts — telecommunications and financial services — are already covered by codes or statutes. Moreover, the unconscionability provisions in the generic consumer law can at least deal with the most egregious exploitation of contracts. Accordingly, the question of net benefits appears to hinge on whether remedies for the residual misuse of terms and the gains from a consistent national approach are worth the costs. One option, in this context, would be to do nothing now on the grounds of uncertainty, and to collect more evidence. For example, the ACCC suggested consideration of the impacts of unfair contract laws in jurisdictions where they already exist … while Chris Field … suggested a more ambitious research agenda to gather more evidence. However, it is not clear, given the nature of the issues … that such approaches would unearth much beyond the evidence that the Commission has already gathered from its Australian and international consultations and from various existing studies. [page 465] What are the options? In the presence of uncertainty of this kind, several alternative policy options could reduce the risks of inappropriate intervention:

a highly targeted, risk-management approach that quarantined policy action to hotspots through inclusion in industry-specific regulation, codes of practice, or ombudsman arrangements (as in the unjust contracts law already in the Uniform Consumer Credit Code) …; light-handed regulatory approaches, such as better disclosure of terms likely to be a source of a problem … and mandatory cooling off-periods so consumers can reflect on terms before being committed …; adoption of a policy that deals with unfair terms across the whole economy, but that builds, explicitly or implicitly, some kind of appraisal of the community benefit into any particular application of the law. This would shift the evidential burden to a point where it can be more easily gauged. If this can be achieved, it would meet the usual ‘onus of proof’ requirement that regulatory action should only take place where net benefits are likely. … The first alternative provides a degree of protection to consumers. However, it risks cementing in place the existing hotchpotch of solutions to unfair contract terms across various industries and jurisdictions. It also raises the question of where the hotspot list would stop. The European experience … suggests that many industries outside those presently covered by specific laws/codes in relation to unfair terms have experienced significant issues with unfair contracts. Accordingly, codes might be required for many more industries, risking another layer of regulatory variations, with uncertain and varying outcomes for business and consumers, depending on the nature of the transaction. Moreover, increasingly, transactions are crossing the boundaries of industries. This is particularly evident in the convergence of telecommunications services, content and electronic devices (which can also encompass various credit arrangements). These boundary issues could create additional confusion about which code should apply to an apparently unfair term. The light-handed approaches are similarly unlikely to represent a satisfactory solution. They are premised on consumer ignorance of the terms, when that is usually not the basis for concern. For most low-cost standard-form contracts, consumers trust suppliers and do not expect to face problems. Disclosing the terms, or allowing consumers the time to find them, would rarely make a difference. Also cooling-off periods are not

feasible in many cases (such as renting a car or taking a flight without significant notice). The third approach has significant advantages over the other two options. It targets the source of the problem more effectively and has full coverage of unfair terms whatever the industry, yet still addresses the risks of regulatory error. It would be more likely to be accepted by all jurisdictions — thus assisting in the introduction of a single generic consumer law. Its national and broad approach would reduce the possibility that new industry-specific arrangements, such as the national regime contemplated for energy, would adopt prescriptive arrangements for aspects of unfair conduct (such as in relation to unfair marketing) that [page 466] could be adequately dealt with by a generic unfair contracts provision. Existing industry-specific arrangements for unfair contracts may eventually also become obsolete. How would such a broad national approach work? The approach could work in several ways. In the draft report, the Commission recommended an ex post model that would void unfair terms after they had been used by business to the detriment of consumers. … The discussion that follows draws on the feedback from participants about this particular model — and has prompted the Commission to modify its approach in some key areas. However, in the Commission’s view, regardless of the exact design of the model, it would need to meet a number of broad criteria. … Providing clarity about what constitutes unfairness Any workable law must define unfairness. The provisions against unfair contracts in the United Kingdom, the European Union more generally and Victoria adopt a common definition. The essential aspect of this is that a term is unfair if ‘contrary to the requirements of good faith, it causes a

significant imbalance in the parties’ rights and obligations arising under the contract.’ Most aspects of this definition are unproblematic. However, in considering the first court proceeding involving the Victorian legislation,2 Justice Morris observed that the role of the expression ‘contrary to the requirements of good faith’ was less straightforward than the definition’s other elements. If taken literally, the expression could be seen as a redundant provision (mere ‘surplusage’ in his words).3 Nevertheless, on the basis of case law, he argued that the expression provides guidance about when an imbalance is ‘significant’. Its precise role has been most clearly set out by Justice Morris in the most recent application of the Victorian law:4 The phrase ‘contrary to the requirement of good faith’ performs an adjectival role, so that it assists in the assessment of whether a contractual term causes a ‘significant imbalance’ in the parties’ rights and obligations, to the detriment of the consumer. It does not amount to a separate element which has to be proved before the term may be regarded as unfair. What has to be proved is the ‘significant imbalance’. Frank Zumbo … suggests that the term is now also clarified in NSW contract law. Given its usefulness in guiding the application of the law, there are good grounds for retaining the principle of ‘good faith’ in any definition of unfairness. Accordingly, the Commission considers that the use of the Victorian definition should not cause any problems, though other definitions of unfair terms may be equally apt. [page 467] Achieving benefits for the public generally The application of any law regarding unfair contract terms should be designed so that the benefits for unfairly treated consumers are not offset by any incidental costs to consumers generally. In effect, this is nothing more than the requirement to consider the overall public interest in applying the

law. This is consistent with the design of competition policy, which also has as its ultimate goal the achievement of overall benefits, not more competition for its own sake. (This is evident, for example, in the criteria for declaration of access in part IIIA of the TPA.) Among other matters, a regulator (and any court) might be expected to take into account: the extent of consumer detriment (realised or likely); the degree to which the contract term reduced transactions costs in its current (and proposed) forms; any effects (adverse or favourable) on risk allocation and prices; and whether voiding (or changing) terms for groups of affected consumers could encourage inappropriate behaviour by some consumers to the ultimate detriment of consumers as a whole. In other words, the regulator would need to take account of ‘all the circumstances of the contract’ and evidence of detriment. Given the recent case law outlined above, these requirements are already embodied in the Victorian legislation, but without much guidance as to their scope. In the draft report, the Commission sought to give effect to this public benefit goal through an explicit test in any dispute relating to alleged unfair contracts. Several inquiry participants questioned the merit of this test. Luke Nottage … commented that such an explicit test has no precedent in consumer law in Australia and a range of other countries. At most, he argued that it could be expressed as a ‘good practice guideline’ or that the onus of proof be reversed, with a business subject to the law having to show that striking out an apparently offending term was not in the public interest. The ACCC also recommended the removal of an explicit public benefit test, noting that: Courts are not experienced in applying public benefit tests. Including such a test in the proposed UCT provision may therefore lead to uncertainty regarding how it will be interpreted by the courts. … It also observed that, in any case, an explicit test would represent a ‘belts and braces’ approach to regulation, since meeting the other criteria

developed by the Commission for applying an unfair contract law … would almost certainly guarantee that the public benefit test had been met. … In the light of these participants’ comments, an implicit, rather than an explicit, consideration of the public benefit is likely to be appropriate. Nevertheless, it may be useful to make clear in an explanatory memorandum to a new Act on unfair contracts that gauging unfairness ‘in all the circumstances’ would include consideration of the broader impacts of any action on other consumers (including higher prices or restricted choice). [page 468] Application to non-negotiated contracts alone The Victorian unfair contracts provision covers negotiated as well as standard-form contracts. Conversely, the UK unfair contracts law explicitly excludes negotiated contracts from its scope. There are several grounds for such exclusion. Negotiated contracts, by their nature, require parties to explicitly consider and tailor the terms and conditions. Parties can seek to eliminate any terms seen as unfair in such contracts. Indeed, even apparent ‘standard-form’ contracts can be negotiated contracts if parties routinely strike out or alter existing terms that they do not believe to be appropriate. … Negotiation also typically occurs for more costly products and often will involve intermediaries because they have professional competence in interpreting the terms and conditions. In that context, parties to negotiated contracts, or their agents, are usually sufficiently sophisticated to ensure acceptable contract outcomes and can reasonably be expected to have their ‘eyes wide open’. The application of an unfair contracts law in this situation would undermine parties’ diligence in considering the full terms of the contract. Accordingly, it would only be appropriate for a court or tribunal to void negotiated terms in highly special circumstances. The Victorian Government … argued that their Act (section 32X) already allows a court or tribunal to take into account whether parties negotiated a contract when

determining unfairness. But this gives little guidance about the degree to which the standard of fairness would be tempered for negotiated contracts. And, as noted by the Victorian Government, the existing unconscionability provisions of the TPA already have the scope to address particularly egregious terms in such contracts. That, and the fact that most of the concerns relate to standard-form contracts (a point acknowledged by the Victorian Government) … suggests that inclusion of negotiated contracts would involve risks that exceeded the likely benefits. Exclusion of price terms The Commission considers that the application of the new law should explicitly exclude terms dealing with (‘non-contingent’ or upfront) standard contract prices. This exclusion is a feature of the Consumer Contracts Code in communications in Australia … and of unfair contract terms legislation generally in the UK. In contrast, the Victorian legislation would potentially allow action against an ‘unfair’ price. The argument for exclusion rests on the fact that prices are clearly visible to consumers and, unlike many other terms, cannot legitimately be seen as surprises veiled by a complex contract. Unless there are major barriers to effective competition, consumers can elect to avoid contracts with unfair prices. And where there are such barriers, competition policy is the more appropriate vehicle for achieving efficient prices rather than the discretionary use of unfair contracts law to impose de facto price controls. While the Victorian Government … argues that prices would not be regulated in this way, it is not clear that their Act effectively precludes this. [page 469] Charges that are less transparent should still be potentially subject to regulatory action under the new provision. For example, this could include charges triggered by various contingent events after activation of the contract — ‘contingent prices’. Accordingly, regulation would extend to such matters as unreasonable cancellation charges, but not to prices deemed as unfairly high.

Guidance for consumers and business It would be relatively easy for regulators to provide guidance to consumers and business about indicative lists of terms that would usually fail a fairness test. … This would help prevent unnecessary claims by consumers and encourage pre-emptive action by businesses to ensure their contracts did not contain unfair terms. The draft report also raised the use of ‘safe harbour’ or ‘pre-commitment’ arrangements as another way of promoting certainty for business, reducing the costs of regulatory change, and encouraging early action on unfair terms. Under these arrangements, the regulator could agree to codes put forward voluntarily by business for standard-form contracts on an industry basis (for example, those that might be put forward by industry associations or negotiated by the regulator with them). These ‘safe harbour’ contracts would be exempt from actions under any new regulation, thereby providing certainty to business. The only recourse for regulatory action when a business used a safe harbour contract would be when circumstances other than the terms themselves resulted in unconscionability (for example, duress). The regulator would then have to pursue that matter under the existing unconscionability provisions of s 51AA and 51AB, which have high hurdles for action. Some parties supported such safe harbour arrangements for the certainty they would provide and for the potential to give recognition to already developed codes. … Some provided more provisional support, seeing a need for further development. … Others generally opposed a safe harbour option. … Using the regulator as a readily available arbiter could also undermine suppliers’ capacity and responsibility to exercise their own judgments in these areas. These concerns would be reduced were a safe harbour arrangement quarantined to broad industry groups through model codes (for example, telecommunications services, gyms and rental car services). Nevertheless, there would be practical administrative difficulties in deciding whether a particular industry code had sufficiently broad business coverage (for example, would a code developed just for gyms in Melbourne qualify?).

Overall, the regulatory resource costs identified by the ACCC may well present an obstacle to efficient safe harbour provisions. Even so … it would be sensible for the regulator to take account of existing codes developed by industries to ensure fair contract terms, since they may provide lessons for the development of guidelines and would provide at least interim protection for consumers. … Over time, the appropriateness of such codes could be re-assessed in the light of the generic approach to unfair contracts. … [page 470] Implementation would have to be nuanced Sensible implementation of policy would seek to accommodate firms’ cycles of contract document changes, accordingly reducing compliance burdens, an approach supported by the ACCC. … The ACCC … also made several other practical recommendations, which should be implemented as part of the transition to enforcement of a new law: There should be a transition period — of say a year — after introduction of the law before it is enforced by regulators, so that businesses have time to adjust their contracts and the regulator can develop appropriate guidelines. There is a precedent for such delayed implementation, with the ACIF (2005b) Consumer Contracts Code requiring compliance within six months of the registration of the code. A grandfathering clause should be included in a new unfair contract terms law, which would exempt period contracts from legal action for the remaining duration of the contract. Where contracts have long durations or no fixed date of cessation, their grandfathering status would only persist for a reasonable period. This would allow a smooth transition to new contracts compatible with the law. The capacity for effective representative actions A practical concern with the application of unfair contract terms law is to ensure that consumers (or regulators on behalf of them) are able to mount effective representative actions to recoup their collective losses. … The

Commission has made several proposals to improve the scope for effective representative actions in consumer law generally. … The wording of any unfair contracts legislation should ensure that regulators or private parties could readily use such general provisions against unfair terms. This would allow a court to provide redress for a group of consumers who had experienced generally similar detriment from unfair terms. For example, a unilateral change to a frequent purchasers’ scheme that rendered credits valueless could pave the way for a class action on behalf of all the relevant creditors, without having to go into the details of each creditor. Coordination across jurisdictions For as long as there are multiple enforcers of generic consumer law, specific attention would need to be paid to consistency in enforcement approaches and prevention of jurisdictional overlaps for what would be a new provision in that law. Regulators would need to develop protocols to establish clear lines of responsibility for enforcement, with, for example, the ACCC dealing with matters relating to corporations that have operations across several jurisdictions. Furthermore, while guidelines to business and consumers about what constitute unfair terms would be highly desirable … there is a danger that such grey law may differ between jurisdictions, leading to added compliance burdens and greater uncertainty for business and inequality for consumers. Therefore, it will be important to ensure that any quasiregulation in this area — charters, guidelines and codes — are also uniform and consistently interpreted by regulators. … [page 471]

Recommendation 7.1 A provision should be incorporated in the new national generic consumer law that addresses unfair contract terms. The Commission’s preferred approach would have the following features: a term is established as ‘unfair’ when, contrary to the requirements of

good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract; there would need to be material detriment to consumers (individually or as a class); it would relate only to standard-form, non-negotiated contracts; it would exclude the upfront price of the good or service; and it would require all of the circumstances of the contract to be considered, taking into account the broader interests of consumers, as well as the particular consumers affected. Where these criteria are met, the unfair term would be voided only for the contracts of those consumers or class of consumers subject to detriment, with suppliers also potentially liable to damages for that detriment. The drafting of any new provision should ensure the potential for private (and regulator-led) representative actions for damages by a class of consumers detrimentally affected by unfair contract terms. Transitional arrangements should be put in place after enactment, which would give businesses the time to modify their contracts. The operation and effects of the new provision should be reviewed within five years of its introduction.

Comment 21.2.1 See Australian Consumer Law referred to in Radan, Gooley, and Vickovich at 21.5–21.29.

[page 472]

UNFAIR CONTRACTUAL TERMS IN EMPLOYMENT CONTRACTS 21.3C

Fish v Solution 6 Holdings Ltd (2006) 225 CLR 180

Court: High Court of Australia Facts: Fish was the controller of Nisha Nominees Pty Ltd, a company that owned Fishtech and Partners. In 2000 Nisha Nominees sold Fishtech and Partners to Solution 6 Holdings Limited for shares in Solution 6 Holdings at an issue price of $9.75 per share. The share purchase agreement also provided that Fish would work for Solution 6 Holdings’ subsidiary, Solution 6 Pty Ltd, as executive manager. When the share purchase agreement was executed, Solution 6 shares traded at $13.30, but at the time of completion the share price had dropped to around $3. In 2001 Fish’s employment was terminated and he and Nisha Nominees applied to the Industrial Relations Commission for orders declaring the share purchase agreement to have operated in an unfair, harsh, and unconscionable manner and contrary to the public interest, and seeking orders varying that agreement to provide Fish with the difference between the current price of the Solution 6 shares and the issue price of $9.75. The Solution 6 companies (and two of its directors) successfully applied to the Court of Appeal for an order prohibiting the Industrial Relations Commission from taking steps to exercise its powers regarding the share purchase agreement. Mr Fish and Nisha Nominees appealed to the High Court. Issue: The main issue before the High Court was whether the Court of Appeal was right to hold that the share purchase agreement was not a contract of a kind in respect of which the Industrial Relations Commission could exercise its powers under the Industrial Relations Act 1996 (NSW). Decision: The High Court, by a 5-2 majority, upheld the Court of Appeal’s decision and dismissed the appeal. According to the majority (Gleeson CJ, Gummow, Hayne, Callinan, and Crennan JJ) the agreement in question was not a contract whereby Fish performed work in an industry. Extract: The extract focuses upon the proper construction of s 106 of the Industrial Relations Act.

Gleeson CJ, Gummow, Hayne, Callinan, and Crennan JJ The Act is concerned with matters industrial. The power given to the commission by s 106(1) to declare wholly or partly void or to vary certain contracts should be understood as hinged about the reference to performance of work in any industry. The first inquiry required by s 106(1) is whether a person ‘performs work in any industry’. What may be declared wholly or partly void or varied is any ‘contract’ whereby a person performs that work. [page 473] Because ‘contract’ is given the extended definition that has been noted earlier, it must be understood as extending to any arrangement or related condition or collateral arrangement of the requisite kind, namely, a contract or arrangement whereby a person performs work in any industry. But what must be identified is the set of arrangements (leaving aside, for the moment, whether those arrangements are or may be contractual or otherwise) according to which (that is, ‘whereby’) a person performs the relevant work. What may be declared void or varied is any part of those arrangements: the arrangements in accordance with which a person performs work. It is to invite error to begin by identifying what contracts or arrangements are related one to another. It invites error because it suggests that it is appropriate then to ask whether any of that interlocking set of arrangements made provision for the performance of work in an industry, and to treat any and every aspect of the interlocking arrangements that have been identified as amenable to the powers given to the commission under s 106. And that is the way in which much of the argument advanced on behalf of those parties who were applicants in the commission proceeded. … This court first considered questions about the operation of s 88F of the 1940 Act (as amended by the 1966 Act) in Brown v Rezitis. That case concerned the ambit of the commission’s power under s 88F to order payment of money, and it was held that the power was not limited to making an order for payment of money by one of the parties to the relevant

contract. The power was held to extend to such orders as can reasonably be thought to have a real connection with the making, variation or avoidance of that contract. As Barwick CJ pointed out, one of the purposes of s 88F was to ‘deal with subterfuges, subterfuges which will take the worker out of the relationship of master and servant and therefore out of the operation of an industrial award designed, among other things, for the protection of workers in industry’. Because there may be persons involved in the subterfuge who were not parties to the contract (but who derived benefit from its making or its execution) no narrow view was to be taken of the power to make an order for payment of money. … The description of a contract as ‘one which leads directly to a person working in any industry’ is not without its difficulty. What is meant, in this context, by ‘directly’? As Lord Diplock, giving the advice of the Privy Council in Caltex Oil (Aust) Pty Ltd v Feenan, pointed out, this, and other glosses on the section, must not be permitted to divert argument away from the words of the statute in an attempt to ‘construe’ the words in which judges express their reasons for reaching a conclusion in a particular case. To divert attention in that way is wrong. And even the gloss on the word ‘whereby’ offered in Caltex Oil (in consequence of which or in fulfilment of which), like the gloss offered earlier in these reasons (according to which), must not be misunderstood as necessarily solving every difficulty that may be presented in seeking to apply the statutory language. …

A construction of the unfair contract provisions The competing contentions about the construction of s 106 of the Act turned upon three intersecting elements of the provisions of that section and the definition of the term ‘contract’ used in s 106. First, what is the significance of the reference, in the definition of [page 474] ‘contract’, in s 105, to an ‘arrangement’? Secondly, what is the significance of the reference, in that definition, to ‘any related condition or collateral arrangement’? And, thirdly, what is meant by ‘any contract whereby a person performs work in any industry’?

These three questions must be answered paying due regard to the breadth of the definition, given in the Act, to ‘industry’. ‘Industry’ is defined in s 7 of the Act as including ‘any trade, manufacture, business, project or occupation in which persons work’. But recognising that this definition is very wide, the three questions identified earlier must be answered. The juxtaposition of reference to ‘contract’ and ‘arrangement’ in the definition of ‘contract’ requires the conclusion that the defined term includes more than obligations enforceable at law. Yet that is a conclusion that does not appear to sit easily with the commission’s powers being to avoid or vary a contract. How is an ‘arrangement’ that is not legally binding to be avoided or varied? What is meant by reference, in the definition of ‘contract’, to ‘any related condition or collateral arrangement’? Why does that reference not require the identification of every contractual obligation and every non-contractual arrangement that is related one to another? Why is the whole of that interlocking web of obligations and arrangements not then subject to the commission’s powers under s 106 so long as any of those obligations or arrangements meets the criterion ‘whereby a person performs work in any industry’? The answers to these questions are to be found in two considerations. The first is to recognise that when s 106 speaks of ‘any contract whereby a person performs work in any industry’, the expanded meaning given to the term ‘contract’ must be read into s 106. When that is done, it is apparent that the ‘contract’, no matter whether it is a legally enforceable contract, an unenforceable arrangement, a related condition, or a collateral arrangement, must meet the description ‘whereby a person performs work in any industry’. The second consideration was mentioned earlier in these reasons and is not unrelated to the first. Performance of work in an industry is the hinge about which s 106 turns. It is the arrangements (contractual and non-contractual) whereby a person performs work in an industry that the commission may avoid or vary. That is, it is the arrangements (contractual and noncontractual) according to which a person performs the work (or in consequence of which or in fulfilment of which a person performs that work) which may be avoided or varied. And although the notion of

‘avoiding’ an arrangement that is not enforceable may be awkward, determining that some new arrangement will obtain for the future (thus ‘varying’ the arrangement) presents no such awkward juxtaposition of ideas. Further, to focus attention upon the arrangements whereby a person performs work in an industry, no matter whether the arrangement is found in the contract the parties have made or only in some related condition or collateral arrangement, sufficiently meets the need, identified by Barwick CJ in Brown, to recognise that these provisions of the Act have, as one important purpose, dealing with subterfuges which take workers outside the operation of industrial instruments intended to protect workers in an industry. At the same time, to read s 106 as hinged about performance of work in any industry and empowering the commission to deal only with such of the arrangements [page 475] between parties as can be described as a contract whereby a person performs work in any industry confines the jurisdiction of the commission to declare a contract void or to vary it within bounds that leave intact the jurisdiction of the Supreme Court over other kinds of contractual obligations.

Comments 21.3.1 See Radan, Gooley, and Vickovich at 21.34–21.38, 21.40–21.41, and 21.47. 21.3.2 See also Old UGC Inc v Industrial Relations Commission of NSW (2006) 225 CLR 274 and Batterham v QSR Ltd (2006) 225 CLR 237. These cases are referred to in Radan, Gooley, and Vickovich at 21.36, 21.37, 21.40, 21.41, and 21.47. 21.3.3 See also Caterpillar of Australia Pty Ltd v Industrial Court of NSW (2009) 78 NSWLR 43.

21.4C

Brown v Rezitis (1971) 127 CLR 157

Court: High Court of Australia Facts: John and Elizabeth Rezitis entered into a contract for the performance of cartage work with Imisons Metal Sand Filling Supplies Pty Ltd in 1968. Representations made to John and Elizabeth Rezitis as to the availability of work and the amount of money to be paid turned out to be false. In July 1969 the New South Wales Industrial Commission made findings that the contract was void pursuant to s 88F of the Industrial Arbitration Act 1940 (NSW) in that it was unfair, harsh, and unconscionable, set a level of payment below what an employee doing the work would have received, and was designed to avoid the provisions of an award made pursuant to the Act. The Commission then awarded compensation to John and Elizabeth Rezitis. The compensation order made Imisons as well as other persons connected to the company jointly and severally liable. These others included Brown, who was the manager of the company, shareholders in the company, the company secretary/accountant, and the business agent responsible for arranging the contract between Imisons and John and Elizabeth Rezitis. In making Brown and others liable for the compensation, the Commission relied on s 88F(2) of the Act, which stipulated that the Commission ‘may make an order or award as to payment of money in connection with any contract, arrangement, condition or collateral arrangement declared void [pursuant to s 88F(1)] … as may appear to the commission to be just in the circumstances of the case’. Brown and the others claimed that the Commission did not have the power to make orders against anyone other than a party to the contract — in this case Imisons. Issue: The issue before the court was whether s 88F(2) empowered the Commission to make compensation orders against a person other than a party to the contract. [page 476]

Decision: The High Court (Barwick CJ, McTiernan, Menzies, Windeyer, and Owen JJ) unanimously held that s 88F(2) did authorise the Commission to make compensation orders against a person who was not a party to the relevant contract, provided such a person had a real connection with the contract. However, on the facts of this case such an order could not be made against Brown and the others referred to in the Commission’s order. Extract: The extract from the leading judgment of Barwick CJ discusses the scope of the power to make orders pursuant to s 88F(2).

Barwick CJ The principal submission made by [Brown] is that the only persons who can be made parties to a proceeding under s 88F are the persons who are the contracting parties to the contract, arrangement, condition or collateral arrangement (contract or arrangement) which the Commission is asked to vary or to declare void and that therefore sub-s (2), being a provision to enable the Commission to make orders consequential upon the variation or avoidance of the contract or arrangement must be limited in its operation to those same parties. Hence it is submitted that the power to make an order for the payment of money is limited to the making of an order for payment of money by one of the parties to the contract or arrangement which has been varied or declared to be void. An alternative submission was that the same conclusion could be reached by applying the expression in the sub-section ‘in connection with any contract, arrangement, condition or collateral arrangement’. It was said that these words require that the money the subject of an order for payment must be money which had been paid or was payable in connection with the contract or arrangement varied or avoided. Therefore, so it was said, the order under sub-s (2) must be confined to money which had been paid or was payable by one of the parties to the other party or parties to the contract or arrangement. In my opinion, even if the proceedings for the variation or avoidance of the contract or arrangement must be initiated by one of the parties to

the contract or arrangement, the parties to the proceedings are not necessarily limited to those parties. It must be borne in mind that one of the purposes of the section is to deal with subterfuges, subterfuges which will take the worker out of the relationship of master and servant and therefore out of the operation of an industrial award designed, amongst other things, for the protection of workers in industry. There may be persons involved in the subterfuge who are not parties to the contract or arrangement but who are in reality the actors deriving benefit from the making or the execution of the contract or arrangement. Also the power given to the Commission includes a power to declare the contractual arrangements void as from their making, not merely void as between the parties, but absolutely void. If there are other persons whose rights are known to depend on the continuance of the contract as a valid instrument according to its terms, then natural justice may in the circumstances require the Commission to afford such persons an opportunity to be heard. Again the avoidance of the contract or arrangement may be a step in uncovering the real [page 477] transaction benefiting at the expense of the worker parties other than those in whose name the contract or arrangement was apparently made. The five grounds on which the Commission may vary or avoid contractual arrangements are not homogeneous. Only two of them refer to the avoidance of the award for the underpayment of a worker in industry. Consequently the nature of the orders which may be made under sub-s (2) will of necessity cover a wide field. But underlying sub-s (2) is I think a broad concept of a restitution of the parties to a situation which existed before the making of the contractual arrangement as well as in an appropriate case to make remedial provision for what has taken place or been done under the contract in the meantime. This, it seems to me, cannot of necessity and in all cases and with relation to an arrangement varied or avoided on each of the grounds in sub-s (1) be confined to an order for payment of money by one of the parties. In some cases, as I have said, there will be persons who are not the parties to the contract but who have in fact

participated in its making and there may be persons who have received money indirectly from one of the parties to the contract or who may be holding money derived therefrom for one of the parties. Consequently, I am of opinion that the power to order the payment of money is not limited to the making of an order for the payment of money by one of the parties to the contract or arrangement varied or avoided. But though there is a generality in the language employed in the sub-section the power to make an order for the payment of money is not, in my opinion, unlimited particularly as to the persons against whom such an order may be made. The problem is to ascertain the limitation by construction of the section. It seems to me that the expression ‘in connection with’ the contract or arrangement varied or avoided provides the necessary limitation as to the nature of the orders for payment of money which can be made and as to the person against whom they may be made. The draftsmanship of the section is inadequate: but I think the expressed intention as to this limitation can be derived from the sub-section read as a whole. Whilst it can be said that the expression ‘in connection with’ is of wide import, it does emphasize the need for a close connection between the order made and the contract or arrangement varied or avoided. In my opinion, the power to make an order for the payment of money is at best no more than a power to make such an order as can reasonably be thought to have a real connection with the making, variation or avoidance of the contract or arrangement which has been varied or avoided. It may in truth be limited to a power to make an order for payment of money which has in fact a real connection with the making, variation or avoidance of the contract or arrangement. However, in either case it will, of course, include power to make an order for payment of money which has been paid or which was payable under the contract arrangements themselves. But, in my opinion, the power will not be limited to the making of such orders. It will extend to ordering the payment of money where the order on the larger view of the jurisdiction given by the sub-section could be considered to be appropriate to effect wholly or partially the restitution of the parties to their former position upon the variation or avoidance of the contract or arrangement. In my opinion, the limitation of the power to order the payment of money to such orders either as are or as may be considered in the circumstances to be connected with the making, performance, variation

or avoidance of the contract or arrangement sufficiently limits the power and leaves room [page 478] for supervision of the Commission by a Court having power to issue prerogative writs so as to confine the Commission within the granted power. Consequently I am unable to accept the submission made by [Brown] that an order made by the Commission for the payment of money by any person other than a party to the contract or arrangement varied or avoided is necessarily beyond the power of the Commission. Whether or not it is so depends upon all the circumstances and the terms of the order itself.

Comments 21.4.1 See Radan, Gooley, and Vickovich at 21.35, 21.49, and 21.50. 21.4.2 The provisions of s 88F of the Industrial Arbitration Act 1940 (NSW) have since been repealed and in substance re-enacted in s 106 of the Industrial Relations Act 1996 (NSW). The successor provision to s 88F(2) is s 106(5), which stipulates: In making an order under this section, the Commission may make such order as to the payment of money in connection with any contract declared wholly or partly void, or varied, as the Commission considers just in the circumstances of the case.

1.

For example, a term that permitted clearly disproportionate penalties for a technical breach of contract.

2. 3.

Director of Consumer Affairs Victoria v AAPT Limited VCAT 2006. Others have also noted the ambiguity of good faith in Australian law when referring to contractual obligations (Harper 2004, McDougall 2006, Douglas 2006), with Justice McDougall commenting that

the concept ‘is uncertain and ambulatory’. 4.

Free v Jetstar Airways Pty Ltd, Civil Claims [2007] VCAT 1405.

[page 479]

Part V: Discharge

[page 481]

22 DISCHARGE BY PERFORMANCE

INTRODUCTION 22.1 This chapter deals with the discharge of a contract through performance by or on behalf of the contracting parties. Relevant to this issue is the question of what conduct constitutes the appropriate level of performance that is needed to discharge the contract and the timing of performance of contractual obligations. Where both parties have performed their respective contractual obligations, the contract is discharged by performance. However, this principle is based upon the notion that there needs to be exact performance of contractual obligations in order for there to be a discharge of the contract and it gives rise to the question of whether something less than exact performance can nevertheless lead to discharge. In the early decision of Cutter v Powell (1795) 101 ER 573 (see 22.2C) the court found that on the particular facts the contract between the parties required exact performance of all obligations. In other words, the obligations were seen as entire and indivisible and it followed that there could be no payment for work done pursuant to the contract unless exact performance of all obligations had occurred. Clearly the requirement of exactness of performance could lead to unfairness. Since the decision in Cutter v Powell courts have to a large degree ameliorated the requirement for exactness of performance and despite the absence of complete performance, have allowed recovery in some situations. In such cases performance that is less than exact can still discharge the

obligations of the party in default and the party’s rights to the stipulated return performance will remain intact. The circumstances where courts have allowed conduct less than complete and exact are as follows: Where the contract is regarded as a divisible one and where a party completes a discreet part of it, the contract may nevertheless be regarded as discharged notwithstanding that the entire contract has not been performed. Illustrative of this position is the decision in GEC Marconi Systems v BHP Information Technology Pty Ltd [2003] FCA 50. This would be particularly so where the doctrine of waiver applies. Where a party’s further performance is obstructed by the other contracting party, the innocent party may be able to bring a restitutionary claim against the party who obstructed performance. These claims are discussed in Chapter 38. Where the breach in performance is regarded as trivial in the context of the overall contract, the contract may nevertheless be regarded as discharged. Where the doctrine of part performance applies, the contract may nevertheless be regarded as discharged. This doctrine was illustrated in Hoenig v Isaacs [1952] 2 All ER 176 (see 22.3C), where it was held that a contract could still be discharged in circumstances [page 482] where although complete performance had not taken place, substantial performance had, and that this was enough to have an effective discharge of contractual obligations. The principles necessary to demonstrate substantial performance were also examined and applied in Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184 (see 22.4C).

THE REQUIREMENT FOR EXACT PERFORMANCE 22.2C

Cutter v Powell (1795) 101 ER 573

Court: Court of King’s Bench Facts: Cutter agreed to work for wages as second mate on a merchant ship named the Governor Parry, which was to sail from Kingston in Jamaica to Liverpool in England in 1793. In return Powell agreed that: 10 days after the ship ‘Governor Parry’, myself master, arrives at Liverpool, I promise to pay to Mr T Cutter the sum of 30 guineas, provided he proceeds, continues and does his duty as second mate in the said ship from hence to the Port of Liverpool. Kingston, July 31, 1793. Cutter went on board the ship on 31 July 1793 and sailed in her when she left Kingston on 2 August 1793. Cutter carried out his duties as second mate on the ship until his death on 20 September 1793. The ship arrived at Liverpool on 9 October 1793. Powell refused to pay any of the amount to Cutter’s widow, who sued for recovery of a proportionate amount of the wages on a quantum meruit for work and labour done by Cutter. Powell argued that no money was payable as the contract was an entire and indivisible one, which only required Powell to pay the sum of 30 guineas if Cutter continued to perform his duty during the entire voyage. Issue: The issue before the court was whether a claim could be made for part of Cutter’s wages on the basis that he had performed part of his obligations under the contract. Decision: The court (Lord Kenyon Ch J, Ashhurst, Grose, and Lawrence JJ) unanimously dismissed the widow’s claim on the basis that the contract was an entire contract and had to be performed before there was any entitlement to payment of the contract price. Extract: The extracts from the judgments of Lord Kenyon Ch J and Ashhurst J apply the principle that states that there can be no quantum meruit claim for partial performance of an entire contract.

Lord Kenyon Ch J

[324] I should be extremely sorry that in the decision of this case we should determine against what has been the received opinion in the mercantile world of contracts of this kind, because it is of great importance that the laws by which the contracts of so numerous and so useful a body of men as the sailors are supposed to be guided should not be overturned. [page 483] Whether these kinds of notes are much in use among the seamen, we are not sufficiently informed; and the instances now stated to us from Liverpool are too recent to form anything like usage. But it seems to me at present that the decision of this case may proceed on the particular words of this contract and the precise facts here stated, without touching marine contracts in general. That where the parties have come to an express contract none can be implied has prevailed so long as to be reduced to an axiom in the law. Here [Powell] expressly promised to pay [Cutter] thirty guineas, provided he proceeded, continued and did his duty as second mate in the ship from Jamaica to Liverpool; and the accompanying circumstances disclosed in the case are that the common rate of wages is four pounds per month, when the party is paid in the proportion to the time he serves: and that this voyage is generally performed in two months. Therefore if there had been no contract between the parties, all that [Cutter] could have recovered on quantum meruit for the voyage would have been eight pounds; whereas here [Powell] contracted to pay thirty guineas provided the mate continued to do his duty as mate during the whole voyage, in which case [Cutter] would have received nearly four times as much as if he were paid for the number of months he served. He stipulated to receive the larger sum if the whole duty were performed, and nothing unless the whole of that duty were performed. It was a kind of insurance. On this particular contract my opinion is formed at present; at the same time I must say that if we were assured that these notes are in universal use, and that the commercial world have received and acted upon them in a different sense, I should give up my own opinion.

Ashhurst J

[325] This is a written contract, and it speaks for itself. And as it is entire, and [Powell’s] promise depends on a condition precedent to be performed by the other party, the condition must be performed before the other party is entitled to receive anything under it. It has been argued however that the [widow] may now recover on a quantum meruit: but she has no right to desert the agreement; for wherever there is an express contract the parties must be guided by it; and one party cannot relinquish or abide by it as it may suit his advantage. Here [Cutter] was by the terms of his contract to perform a given duty before he could call upon [Powell] to pay him anything; it was a condition precedent, without performing which [Powell] is not liable. And that seems to me to conclude the question: [Cutter] did not perform the contract on his part; he was not indeed to blame for not doing it; but still as this was a condition precedent, and as he did not perform it, his [widow] is not entitled to recover.

Comments 22.2.1 See Radan, Gooley, and Vickovich at 22.35, 22.36, and 22.41. 22.2.2 In respect of the strictness with which courts have applied the exactness of performance rule, see Arcos Ltd v EA Ronaasen & Sons [1933] AC 470, referred to in Radan, Gooley, and Vickovich at 22.30.

[page 484]

SUBSTANTIAL PERFORMANCE AND DISCHARGE OF CONTRACTUAL OBLIGATIONS 22.3C

Hoenig v Isaacs [1952] 2 All ER 176

Court: Court of Appeal in England Facts: Isaacs, an interior decorator and furniture designer, agreed to

decorate and furnish Hoenig’s flat for a sum of £750. The terms of payment were ‘net cash as the work proceeds, and balance on completion’. Hoenig made two payments of £150. Subsequently Isaacs advised that the work had been carried out in compliance with the contract and requested that Hoenig pay the balance due, namely, £450. In response to this demand Hoenig alleged that there had been bad workmanship and faulty design associated with Isaacs’ work. However, despite this Hoenig sent a further payment to Isaacs in the amount of £100, but refused to pay the balance outstanding of £350. Subsequently Isaacs brought proceedings to recover the balance of £350. In those proceedings Hoenig alleged that Isaacs had failed to perform his contract and alternatively that the work was done negligently, unskilfully, and in an unworkmanlike manner. The Official Referee who determined the case found that some rectification work was needed. Hoenig argued that this was an entire contract which had not been performed and, therefore, Isaacs could not recover any money. The Official Referee held that there had been a substantial compliance with the contract and that Hoenig was liable for £350 less the cost of remedying the defects, which he assessed at £55 18s 2d. Accordingly judgment was given to Isaacs in the amount of £294 1s 10d. Hoenig appealed against this decision. Issue: The issue before the Court of Appeal was whether in a contract for work and labour for a lump sum payable on completion, a party could repudiate liability under the contract on the ground that the work, though finished or done, is in some respects not in accordance with the contract. Another way of looking at this issue is whether entire performance was a condition precedent to payment. Decision: The Court of Appeal (Somervell, Denning, and Romer LJJ) unanimously held that as substantial performance of the contract had taken place, the Official Referee’s award in favour of Isaacs was upheld and Hoenig’s appeal was dismissed. Extract: The extracts from the judgments of Denning LJ and Romer LJ apply the principle of substantial performance to the facts of this case.

Denning LJ This case raises the familiar question: Was entire performance a condition precedent to payment? That depends on the true construction of the contract. … The question of law that was debated before us was whether [Isaacs] was entitled in this action to sue for the £350 balance of the contract price as he had done. [Hoenig] said that he [page 485] was only entitled to sue on a quantum meruit. [Hoenig] was anxious to insist on a quantum meruit, because he said that the contract price was unreasonably high. He wished, therefore, to reject that price altogether and simply to pay a reasonable price for all the work that was done. This would obviously mean an inquiry into the value of every item, including all the many items which were in compliance with the contract as well as the three which fell short of it. That is what [Hoenig] wanted. [Isaacs] resisted this course and refused to claim on a quantum meruit. He said that he was entitled to the balance of £350 less a deduction for the defects. In determining this issue the first question is whether, on the true construction of the contract, entire performance was a condition precedent to payment. It was a lump sum contract, but that does not mean that entire performance was a condition precedent to payment. When a contract provides for a specific sum to be paid on completion of specified work, the courts lean against a construction of the contract which would deprive the contractor of any payment at all simply because there are some defects or omissions. The promise to complete the work is, therefore, construed as a term of the contract, but not as a condition. It is not every breach of that term which absolves the employer from his promise to pay the price, but only a breach which goes to the root of the contract, such as an abandonment of the work when it is only half done. Unless the breach does go to the root of the matter, the employer cannot resist payment of the price. He must pay it and bring a cross-claim for the defects and omissions, or, alternatively, set them up in diminution of the price. The measure is the

amount which the work is worth less by reason of the defects and omissions, and is usually calculated by the cost of making them good.1 It is, of course, always open to the parties by express words to make entire performance a condition precedent. … In the present case the contract provided for ‘net cash, as the work proceeds; and balance on completion’. If the balance could be regarded as retention money, then it might well be that the contractor ought to have done all the work correctly, without defects or omissions, in order to be entitled to the balance. But I do not think the balance should be regarded as retention money. Retention money is usually only ten per cent, or fifteen per cent, whereas this balance was more than fifty per cent. I think this contract should be regarded as an ordinary lump sum contract. It was substantially performed. The contractor is entitled, therefore, to the contract price, less a deduction for the defects. Even if entire performance was a condition precedent, nevertheless the result would be the same, because I think the condition was waived. It is always open to a party to waive a condition which is inserted for his benefit. What amounts to a waiver depends on the circumstances. …

Romer LJ I agree that this appeal fails. [Hoenig], by instalments, paid £400 of the agreed price and kept the furniture, but, when sued for the balance, refused to pay any more and said, indeed, and argued before us that he was not in law liable to pay anything under the [page 486] contract at all because of certain defects in the furniture. The ground on which he based this claim was that the contract was an entire contract, that [Isaacs] could not sue for any part of the purchase price unless and until he had wholly performed his obligations thereunder, and that this was a condition precedent which had never been fulfilled. Inasmuch as the learned official referee who tried the case found that, notwithstanding the most searching investigation by [Hoenig] into every possible source of complaint, a sum of £55 18s 2d only was required to put right such defects in the work as he (the referee) found to have been established, [Hoenig’s]

contention would appear on the face of it to be somewhat harsh, and it is to be observed that the contention could have been similarly used had the remedial expenditure amounted to no more than a £5 note. [Hoenig]’s only attack on [Isaacs’] performance of his obligations was in relation to certain articles of furniture which [Isaacs] supplied and which [Hoenig] says were faulty and defective in various important respects. The finding of the learned official referee on this was: that the furniture supplied constituted a substantial compliance with the contract so far as the supply of furniture was concerned. That is a finding of fact, and whether or not another mind might have taken a different view it appears to me impossible to say that there was no sufficient evidence on which the finding could be based. This, then, being a lump sum contract for the supply of furniture (and the carrying out of certain minor work) which was substantially complied with by [Isaacs], the question is whether the official referee was wrong in law in applying the principle of H Dakin & Co Ltd v Lee2 and rejecting [Hoenig’s] submission that [Isaacs] had failed to perform a condition on the fulfilment of which his right to sue depended. In my judgment, he was quite right in applying the H Dakin & Co Ltd v Lee principle to the facts of the present case. I can see no reason why that principle should be approached with wariness and applied with caution. In certain cases it is right that the rigid rule for which [Hoenig] contends should be applied, for example, if a man tells a contractor to build a ten foot wall for him in his garden and agrees to pay £x for it, it would not be right that he should be held liable for any part of the contract price if the contractor builds the wall to two feet and then renounces further performance of the contract, or builds the wall of a totally different material from that which was ordered, or builds it at the wrong end of the garden. The work contracted for has not been done and the corresponding obligation to pay consequently never arises. But when a man fully performs his contract in the sense that he supplies all that he agreed to supply but what he supplies is subject to defects of so minor a character that he can be said to have substantially performed his promise, it is, in my judgment, far more equitable to apply the H Dakin & Co Ltd v Lee principle than to deprive him wholly of his contractual rights and relegate him to such remedy (if any) as he may have on a quantum meruit, nor, in

my judgment, are we compelled to a contrary view (having regard to the nature and terms of the agreement and the official referee’s finding) by any of the cases in the books. [page 487] The position is, I think, in some respects analogous to a case where a man agrees to sell land and, before completion, finds that he is unable to make title to a small part of it which is of no great significance in relation to the whole. In such a case the vendor can substantially perform what he has agreed to do but cannot perform it wholly, and the Court of Chancery has never hesitated to grant specific performance at his instance against the purchaser subject to a proper and reasonable deduction being made in the purchase price. It would not, however, make such an order if it resulted in the purchaser getting something substantially less than or different from what he had bargained for.

Comments 22.3.1 See Radan, Gooley, and Vickovich at 22.33, 22.40, 22.46, and 22.47. 22.3.2 The decision in Hoenig v Isaacs was applied in Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184 at [94] and following. Cordon is extracted below at 22.4C and referred to in Radan, Gooley, and Vickovich at 22.45. 22.3.3 See also A Beck, ‘The Doctrine of Substantial Performance: Conditions and Conditions Precedent’ (1975) 38 Modern Law Review 413.

22.4C

Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184

Court: New South Wales Court of Appeal Facts: This case concerned a construction dispute. Cordon was a property developer and commercial builder. The second and third appellants (the guarantors) were directors of Cordon. At the relevant time Lesdor Properties Pty Ltd was the registered proprietor of premises at Miranda (the property). By deed (the Agreement), Cordon and Lesdor entered into a joint venture agreement to develop the property. Pursuant to a clause of the Agreement, the guarantors agreed to indemnify Lesdor against any loss suffered by it as a result of default by Cordon under the terms of the Agreement. Disputes arose between the parties resulting in Lesdor terminating the Agreement. Cordon asserted that this amounted to repudiation by Lesdor and brought the proceedings seeking damages for the losses that it claimed to have suffered as a result. Lesdor denied that it had wrongfully repudiated the Agreement, saying it was entitled to terminate by virtue of Cordon’s default. Lesdor cross-claimed against Cordon and the guarantors, seeking damages it claimed to have suffered as a result of such default. The trial judge found against Cordon and the appeal was dismissed. Issue: One of the questions to be determined was whether the doctrine of substantial performance had operation in circumstances where the contract appeared to be an [page 488] entire contract. In the context of the case the question arose whether entire performance was a condition precedent to payment. Decision: The Court of Appeal agreed that there was no room for the operation of the doctrine of substantial performance in the circumstances. Extract: The extract from Bathurst CJ (with whom Macfarlan and Meagher JJA agreed) illustrates that in some circumstances the entire contract doctrine will apply and, if so, the doctrine of substantial

performance will not operate to allow payment before full performance takes place.

Bathurst CJ The findings of the primary judge [64] The primary judge expressed the view that it was difficult to see how the concept of substantial performance was of any relevance in circumstances where the issue, as he perceived it, was whether on the proper construction of the relevant provisions of the Agreement Cordon brought the works the subject of the Deed to completion in accordance with approved Plans and Specifications (see at [162]). [65] He accepted that there was some authority which suggested that the doctrine of substantial performance could have application to an ‘entire contract’, that is one under which full and complete performance by one party of its obligations is necessary before that party is entitled to receive the agreed consideration: Tan Hung Nguyen v Luxury Design Homes Pty Ltd.3 He recognised that, where the doctrine was available, a party who completes performance of its obligations under the contract but does so in a defective way may be entitled to payment of the contractual consideration unless the defects are so extensive as to mean that in truth it did not perform its obligations at all. [66] However, the primary judge concluded that the difficulty was that Cordon’s performance of its obligation to bring the works to completion was not a condition of its entitlement to receive the contractual consideration (see at [168]). He stated that it was a condition precedent to the obligation of Lesdor to sign and deliver the Strata Plan. He said to apply the doctrine of substantial performance in those circumstances would effectively involve rewriting the contract. [67] Further, the primary judge held that to the extent it was necessary to do so, he would have found that the contract was not substantially performed. In this regard he pointed first to what he described as five significant instances of departure from the plans and specifications. Each of these items were identified as defects in the report of Lesdor’s consultant,

Mr Childs, dated 14 October 2005. The first of those related to the alignment of the existing commercial building. The primary judge stated that the approved plans called for the frontage to be realigned with the intent to provide pedestrian access along a colonnade running parallel to [page 489] The Kingsway and leading to Wandella Road. This colonnade was to be tiled so that it linked by stairs to a plaza ‘in front of the new commercial building’ (see pars [125]–[126]). He noted that it was common ground that this work was not completed (at [128]). He rejected Cordon’s submission that the departure from the plans could be excused because they could not be carried into effect. He held that even if the existing commercial building could not have been refurbished in the way required by the plans, Cordon was not entitled to depart from them without the prior consent of Lesdor, which had not been obtained (at [132]). … [93] The principal issue in the present case, in my opinion, is whether the contract is to be construed as an entire contract; that is, one where complete performance is a condition precedent to payment or counter-performance.4 If the contract is an entire contract in that sense, then strict performance of the contractual obligation, in this case completion of the Building Works, is a necessary pre-condition to receiving the contractual consideration.5 [94] In the case of contracts which at least on their face appear to be entire contracts, particularly lump sum building contracts, courts have been reluctant to construe complete performance of the works as an essential pre-condition for payment. Rather, in circumstances where there has been substantial performance, they have treated a failure to complete as a breach of a non-essential term of the contract not disentitling the builder to contractual payment for the work done but, rather, giving the proprietor a right of setoff or claim for damages for the cost of completing the work or rectifying any defects. The position was summarised by Denning LJ in Hoenig v Isaacs: the first question is whether, on the true construction of the contract, entire performance was a condition precedent to payment.

It was a lump sum contract, but that does not mean that entire performance was a condition precedent to payment. When a contract provides for a specific sum to be paid on completion of specified work, the courts lean against a construction of the contract which would deprive the contractor of any payment at all simply because there are some defects or omissions. The promise to complete the work is, therefore, construed as a term of the contract, but not as a condition. It is not every breach of that term which absolves the employer from his promise to pay the price, but only a breach which goes to the root of the contract, such as an abandonment of the work when it is only half done. Unless the breach does go to the root of the matter, the employer cannot resist payment of the price. He must pay it and bring a cross-claim for the defects and omissions, or, alternatively, set them up in diminution of the price. The measure is the amount which the work is worth less by reason of the defects and omissions, and is usually calculated by the cost of making them good. [Citation of authorities omitted.] It is, of course, always open to the parties by express words to make entire performance a condition precedent. [page 490] [95] However, as was pointed out by Denning LJ in the passage in Hoenig v Isaacs to which I have referred above, the question is always one of construction of the relevant agreement. In the present case as I have indicated, the obligation to hand over the Strata Plan only arose on completion of the work. In those circumstances, in my opinion, there is no room for the operation of any doctrine of substantial performance.

Comment 22.4.1 See Radan, Gooley, and Vickovich at 22.45.

1.

Mondel v Steel (1841) 151 ER 1288; H Dakin & Co Ltd v Lee [1916] 1 KB 566.

2. 3.

[1916] 1 KB 566. [2004] NSWCA 178.

4.

GEC Marconi Systems Pty Limited v BHP Information Technology Pty Limited (2003) 128 FCR 1 at [703]; ACN 002 804 702 (formerly Brooks Building) v McDonald [[2009] NSWSC 610] at [100]. TriContinental Corporation Ltd v HDFI Ltd [(1990) 21 NSWLR 689] at 705, 718; Highmist Pty Limited v Tricare Limited supra at [40]–[41].

5.

[page 491]

23 DISCHARGE BY AGREEMENT

INTRODUCTION 23.1 This chapter is concerned with the main ways in which a contract may be discharged by agreement between the parties. The position is that parties to a contract may discharge that contract by agreement either made subsequently or pursuant to a term of the original contract. Either way, the original contract is discharged, with future obligations and rights being brought to an end. In Crawford Fitting Co v Sydney Valve & Fitting Pty Ltd (1998) 14 NSWLR 438 (see 23.2C) the main issue involved whether a commercial agreement expressed to be for an indefinite period may be terminated and, if so, what principles are applicable in determining the reasonableness of a period of notice that is required to be given. In reaching its decision in that case the court held that not only is it a question of construction of the contract, but it also involves consideration of the subject matter of the agreement, the circumstances in which it was made, and the provisions to which the parties have or have not agreed. In some situations a contract may expressly provide that a nominated event must occur before termination can be effective. In other words, the contract may be construed as introducing either a condition precedent to a party’s performance of the contract or it may be seen as introducing a condition precedent to the existence of the contract itself. Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 (see 23.3C) is an illustration of the former situation and of the relevant principles that apply.

Executed contracts may also be discharged by the parties agreeing to enter into a subsequent agreement. Where the subsequent agreement does not take the form of a deed, the party that has not completely performed its obligations must provide consideration in order for the subsequent agreement to be binding and to have the effect of discharging the previous agreement. This is often referred to as accord and satisfaction. McDermott v Black (1940) 63 CLR 161 (see 23.4C) is an illustration of the working of the doctrine of accord and satisfaction in this context. Finally, a contract may be discharged if the parties to the contract have agreed to abandon the contract. It is certainly the case that in assessing the likelihood of abandonment, courts need to assess, among other things, the length of the term of the agreement and the formalities of the agreement. Fazio v Fazio [2012] WASC 72 (see 23.5C) is an illustration of the application of the relevant principles dealing with discharge of a contract by abandonment. [page 492]

DISCHARGE OF A CONTRACT PURSUANT TO AN EXPRESS OR IMPLIED TERM OF THE ORIGINAL CONTRACT 23.2C

Crawford Fitting Co v Sydney Valve & Fitting Pty Ltd (1988) 14 NSWLR 438

Court: Court of Appeal in New South Wales Facts: Crawford Fitting Co was a manufacturer of high-quality specialised fittings, valves, and associated products. In 1969 Crawford appointed Sydney Valve & Fitting Pty Ltd as the exclusive distributor of its products in New South Wales. In 1971 Crawford appointed Victoria Fittings & Valves Pty Ltd as exclusive distributor of Crawford products in Victoria. Both Sydney Valve and Victoria Fittings could not deal in any other products. In 1984 Crawford gave both Sydney

Valve and Victoria Fittings six months’ notice of termination of the agreements. The trial judge, Rogers J, held that the notice of termination given by Crawford was insufficient and held that a reasonable period of notice should have been two years. Crawford appealed against this decision. Issue: The issue before the Court of Appeal was whether factors such as the expenditure of the distributor affect the reasonableness of a period of notice in terminating a contract. Decision: The majority of the Court of Appeal (Priestley and McHugh JJA; Clarke JA dissenting) held in favour of Crawford, ruling that in this case a period of notice of six months was sufficient. Extract: The extract from McHugh JA examines the principles relating to what was reasonable notice for termination of a commercial contract.

McHugh JA The principal question in this appeal is one of considerable commercial importance: in determining the reasonableness of a period of notice terminating a distributorship agreement, is it ever relevant to take into account expenditure or effort of the distributor which has created opportunities for consequential earnings in the future? [Crawford], who are manufacturers, contended that the reasonableness of the period of notice which determines a distributorship agreement depends only on whether the period is sufficient to enable the distributor to wind down its distributorship and deploy its resources in another business. They did not deny that, in determining the validity of a notice, it is proper in some cases to have regard to the efforts of and expenditure by a distributor in creating earning opportunities in the future. But they contended that this is because these cases fall into a legal category separate from that concerned with the reasonableness of a period of notice. [Crawford] submitted that the reasonableness of a period of notice is not to be confused with the reasonableness of the duration of an agreement itself. They argued that, when an agreement contains no express term concerning its duration and is

not determinable at will, there is an implied term that it will continue for a reasonable period. In such a case, [page 493] the fact that one party has expended money or effort in contemplation of future earnings is a vital factor in determining whether that party has had sufficient opportunity to obtain his reward and whether the other party may reasonably terminate the agreement. But according to the argument for [Crawford], such a case must be distinguished from the case where the question is whether the period of notice is reasonable. In many cases the distinction between the two categories has no practical effect. But where, as in the present case, the agreements have continued for many years and the distributors have already derived a large income from their efforts, the distinction is crucial. …

The principles applicable When the question arises whether a commercial agreement for an indefinite period may be terminated, the answer depends upon whether the agreement contains an implied term to that effect. The existence of the term is a matter of construction. But the question of construction does not depend only upon a textual examination of the words or writings of the parties. It also involves consideration of the subject matter of the agreement, the circumstances in which it was made, and the provisions to which the parties have or have not agreed. In Llanelly Railway and Dock Co v London and North Western Railway Co, Lord Selborne declared that: … an agreement de futuro, extending over a tract of time which, on the face of the instrument, is indefinite and unlimited, must (in general) throw upon anyone alleging that it is not perpetual, the burden of proving that allegation, either from the nature of the subject, or from some rule of law applicable thereto.1 … Although even in the second half of this century the law has been stated to

be in accordance with the speech of Lord Selborne in Llanelly, the weight of twentieth century authority makes it difficult to hold that there is any presumption of perpetuity in the case of commercial agreements. In Martin-Baker Aircraft Co Ltd v Canadian Flight Equipment Ltd, McNair J said that there is no presumption of permanency in the case of an indefinite commercial agreement but that if there is it is in favour of termination and not perpetuity.2 … To the same effect is the judgment of Lockhart J in State Bank of New South Wales v Commonwealth Savings Bank of Australia.3 However, it is not easy to reconcile these statements with the principle that there is a general presumption against adding to a contract a term which the parties have not expressed.4 In principle, the better view would seem to be that, although there is presumption against implying a term that an agreement is terminable, ordinarily the nature of a commercial agreement will lead to the conclusion that the parties must have intended [page 494] it to be terminable on notice. This was the effect of the approach of the courts in [a number of cases].5 Whether a contract is terminable on reasonable notice instead of at will also depends upon the existence of an implied term. That question is determined by the circumstances existing at the date of the contract. However, the reasonableness of the period of notice depends upon the circumstances existing when the notice is given. When a contract is terminable on reasonable notice, the period of notice must be sufficiently long to enable the recipient to deploy his labour and equipment in alternative employment, to carry out his commitments, to bring current negotiations to fruition and to wind up the association in a businesslike manner.6 But in [W K Witt (WA) Pty Ltd v Metters Ltd] Hale J denied that it is relevant to the reasonableness of the period of notice that the recipient needs time to recoup any expenditure incurred.7 [Crawford] asserted that the decision in W K Witt (WA) Pty Ltd v Metters Ltd and the decision of the Judicial Committee in Australian Blue Metal Ltd

v Hughes supported their claim that the reasonableness of a notice period does not take account of the expenditure outlaid by the recipient of the notice or his efforts in creating the conditions which will enable profits to be earned in the future. [Crawford] contended that these matters are only relevant in determining whether the agreement has existed for a reasonable period. In W K Witt (WA) Pty Ltd an agent expended time and money in developing overseas markets and securing orders. After the relationship of the parties had been in existence for almost two and a half years, the manufacturer gave less than four months notice of termination. The agent claimed that it should have twelve months notice because another year was needed to recoup its expenditure. Hale J said that an implied term requiring reasonable notice of termination should be capable of implementation in a reasonably practicable manner and that the task would be difficult and virtually impossible if the manufacturer needed to form an opinion ‘based on the profit which the plaintiff might be expected to make in the future’.8 He rejected the agent’s contention. In Australian Blue Metal Ltd v Hughes, the parties entered into a written agreement which gave the ‘right to mine for magnesite’ in return for a royalty. The Judicial Committee held that the agreement was terminable at will with a period of grace to remove any mineral already mined. However, Lord Devlin, in tendering the advice of the Judicial Committee, [page 495] said that it would not have made any difference to the result of the appeal if the agreement was terminable only on reasonable notice. He said: … The implication of reasonable notice is intended to serve only the common purpose of the parties. Whether there need be any notice at all, and, if so, the common purpose for which it is required, are matters to be determined as at the date of the contract; thereasonable time for the fulfilment of the purpose is a matter to be determined as at the date of the notice. The common purpose is frequently derived from the desire that both parties may be expected

to have to cushion themselves against sudden change, giving themselves time to make alternative arrangements of a sort similar to those which are being terminated.9 Lord Devlin said that there was no evidence from which it could be inferred that a factor operating in the minds of the parties at the time when the contract was made was that it should not be terminated abruptly just ‘when their operations were moving out of an unprofitable phase into a profitable one’. He also said that there was insufficient evidence of any heavy initial expenditure which could only be recouped in time. Accordingly, Lord Devlin said that the Judicial Committee could not ‘infer as the common purpose of any requirement of reasonable notice anything more than the ordinary purpose — time on the one hand for the appellants to deploy their labour and equipment profitably elsewhere and, on the other hand, for the respondents to find another licensee’.10 Although the Judicial Committee’s references to the common purpose being in existence at the time of the contract and to the lack of evidence of any heavy ‘initial’ expenditure are consistent with [Crawford’s] contentions in this case, they do not really assist it. The notice in Australian Blue Metal Ltd v Hughes was given within ten weeks of entering into the agreement. The reference to initial heavy expenditure, therefore, does not have the significance which in another context it might have had. Moreover, the common purposes, which give rise to a requirement of reasonable notice, are not necessarily the same for a distributorship agreement, for example, as they are for the type of agreement considered in Australian Blue Metal Ltd v Hughes. It will often be a common purpose of a distributorship agreement that the relationship of the parties will continue for long enough after the giving of a notice of termination to enable the distributor to recoup any extraordinary expenditure or effort. Otherwise a distributor would have no incentive to make or outlay additional effort or expenditure for the mutual benefit of the parties. Inability to reap the benefits of ordinary expenditure or effort incurred during the course of the agreement may be regarded as a business risk which a distributor takes when he enters into an agreement terminable at any time. If the nature of the business produces a lapse of time between effort or expenditure and earning, a certain amount of such effort or expenditure will go unrewarded whatever period of notice is given.

But extraordinary effort or expenditure by the distributor incurred with the actual or tacit authority of his principal is in a different category. An appropriate period of notice can give the [page 496] distributor the opportunity to exploit any extraordinary effort or expenditure. In principle, therefore, it is difficult to see why extraordinary effort and expenditure is not relevant to the reasonableness of the notice period even though the agreement has been in existence for more than a reasonable period. … In this class of case, no question of notice arises until the contract has existed for a reasonable period. … However, the relevance of expenditure of money or effort cannot be confined to cases where the expenditure of effort occurs in the initial stages of the contract. If, during the contract, a party, acting within the scope of the agreement, engages in extraordinary expenditure or effort, that factor must be taken into account in determining the reasonableness of any notice given. The weight to be given to the factor will vary from case to case and the particular circumstances. In so far as W K Witt (WA) Pty Ltd v Metters Ltd suggests the contrary, in my opinion it is erroneous. On the other hand, recurrent expenditure or effort not being of an extraordinary nature would not seem relevant to the reasonableness of the notice period. The expenditure of money or effort is simply part of the ordinary cost of doing business. Once the business has existed for a reasonable period, the inability to profit from such work or expenditure is part of the business risk the agent or distributor takes in entering into an agreement which is terminable at any time. Further, the prospect of obtaining profits in the future is not a relevant factor to be taken into account except so far as it is consequential upon the incurring of extraordinary expenditure or effort within the scope of the agreement. The chief purpose of a notice for a reasonable period, therefore, is to enable the parties to bring to an end in an orderly way a relationship which, ex hypothesi, has existed for a reasonable period so that they will have a

reasonable opportunity to enter into alternative arrangements and to wind up matters which arise out of their relationship. Matters to be wound up will include carrying out existing commitments, bringing current negotiations to fruition, and, where appropriate, obtaining the fruits of any extraordinary expenditure or effort carried out within the scope of the agreement. The line between ordinary recurrent expenditure and effort and extraordinary expenditure and effort will not always be easy to draw. But in general it will be determined by what the parties would reasonably have contemplated was extraordinary effort or expenditure.

Was the notice reasonable? In the present case, [Crawford] claimed that the agreement had existed for a reasonable period. But they did not dispute that the agreement was terminable only for cause or by giving reasonable notice. However, they contended that the distributors had failed to prove that six months was not a reasonable period of notice. … I think that … the Sydney and Melbourne distributors have failed to prove, the onus being on them, that six months was not a reasonable period of notice. … The proper conclusion from the evidence is that the business of each distributor was one where much time and effort was required to establish it and where much time and [page 497] effort was frequently required to obtain new customers. By hard work the distributors had built up successful and substantial businesses. However, their efforts and expenditure were no greater than was expected or demanded when they entered into the agreements. … Although the matter is near the borderline, I have come to the conclusion that on the evidence the distributors have failed to prove that the notice given by Crawford was unreasonable.

Comment 23.2.1 See Radan, Gooley, and Vickovich at 23.11.

DISCHARGE OF A CONTRACT WHERE THE CONTRACT EXPRESSLY PROVIDES THAT A NOMINATED EVENT MUST OCCUR, BUT THAT EVENT DOES NOT OCCUR 23.3C

Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537

Court: High Court of Australia Facts: A contract for sale of land at Cronulla was made in April 1978 between Coolangatta Investments, as vendor, and Mr and Mrs Perri, as purchasers. Clause 6 of the special conditions of the contract provided that ‘[t]his Contract is entered into subject to Purchasers completing a sale of their property No 9 Korokan Road, Lilli Pilli’. The contract did not fix a time for the completion of the sale of the property, nor did it contain any promise that the sale would occur. The Perris made no arrangements to sell their property until March 1979. In August 1978 Coolangatta Investments gave notice requiring the completion of the contract and upon expiry of the notice issued a notice terminating the contract. The Perris challenged the validity of this notice and asked the court to order specific performance of the contract. Issue: The issue before the High Court was whether Coolangatta Investments was entitled to terminate the contract. Decision: The majority of the High Court (Gibbs CJ, Stephen, Wilson, and Brennan JJ; Mason J dissenting) held that Coolangatta Investments had validly terminated the contract. Extract: The extracts from the judgments of Gibbs CJ discuss the

principles relating to conditions precedent and subsequent in the context of the facts of this case.

[page 498]

Gibbs CJ In my opinion special condition 6 made the completion of the sale of the property at Lilli Pilli a condition precedent to the performance of certain of the obligations of the parties under the contract, including the obligation of [Coolangatta Investments] to complete the sale. 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 … 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 condition in the present case was not a condition precedent to the formation of a binding contract. It is clear that a binding contract came into existence immediately upon signature, and that the parties to it were from that moment subject to certain obligations. For example, the [Perris] became liable to pay a deposit. Further, there was implied a promise by the [Perris] that they would do all that was reasonable to find a buyer for the Lilli Pilli property and to complete a sale to him. … The fact that a promise of this kind is implied is quite inconsistent with the notion that no binding contract has come into existence. In Aberfoyle Plantations Ltd v Cheng,11 where a contract of sale was expressed to be conditional on the vendor obtaining a renewal of certain leases, it appears from the judgment of Lord Jenkins that it was thought that the condition was one on whose fulfilment the formation of a binding contract of sale depended. If that view of the condition was correct, it can only be because of particular provisions peculiar to the contract there considered. However, the correctness of what Lord Jenkins said on this point was doubted in Property and Bloodstock Ltd v Emerton,12 and I

respectfully share those doubts. It seems to me that the condition was one on which the performance of the relevant obligations under the contract depended rather than a condition precedent to the formation of a binding contract. On the other hand in Maynard v Goode the contract of sale contained the words ‘and providing that the transfer of purchaser’s block goes through in reasonable time’. Knox and Isaacs JJ held that this was a condition subsequent.13 Higgins and Rich JJ, with, I think, more accuracy, said that the completion of the transfer was not a condition precedent to the operation of the agreement.14 If it was right to say that the condition was a condition subsequent, that may have been because the contract provided for possession being given on a date which might arrive before the condition had been performed.15 However, as Isaacs J pointed out, in one sense the stipulation might be a condition precedent to the performance of a particular [page 499] term of the contract, while in another sense it was a condition subsequent in relation to the whole contract, since the failure of the stipulation would have entitled the vendor to retire from the transaction altogether.16 There are other authorities which illustrate the difficulty of attaching a label to conditions of this kind. In Zieme v Gregory17 and Tait v Bonnice18 conditions making the contract conditional upon the purchaser obtaining a loan were held to be conditions subsequent, whereas in Scott v Rania19 a similar condition was held to be a condition precedent to the formation of a binding contract. The latter case accepted the view taken in Aberfoyle Plantations Ltd v Cheng that no binding contract came into existence until the condition was fulfilled. That view must, as I have indicated, depend on particular terms of the contract; on the other hand, the description of the condition as a condition subsequent may be a mere matter of terminology, and may reflect an unwillingness to describe a condition as a condition precedent unless the formation of a binding contract depends on its fulfilment. Nevertheless, it probably does not matter in the present case whether the condition is described as ‘precedent’ or ‘subsequent’, provided that it is understood that its non-fulfilment did not prevent a binding contract from coming into existence but did have the

effect that [Coolangatta Investments] was under no obligation to complete the sale unless the condition was fulfilled or waived. Special condition 6 did not fix any time within which the sale of the property at Lilli Pilli was to be completed, nor did it fix a date for completion of the sale. In Aberfoyle Plantations Ltd v Cheng it was said that in such a case the condition must be fulfilled within a reasonable time.20 This statement is clearly correct; it is entirely consistent with the principle that ‘an implication of a reasonable time when none is expressly limited is, in general, to be made unless there are indications to the contrary’.21 The condition was, in my opinion, one for the benefit of the [Perris], who were therefore entitled to waive it, but since there was no waiver before proceedings were commenced that question need not be further considered. Although by September 1978 a reasonable time had elapsed, the condition had not then been fulfilled. The question then arises whether [Coolangatta Investments] was entitled to terminate the contract without first giving to [the Perris] a notice requiring them to fulfil the condition, or to perform the contract, within a reasonable time. Aberfoyle Plantations Ltd v Cheng is authority that no notice is necessary when the contract, expressly or by implication, fixes a date by which the condition is to be fulfilled. Their Lordships laid down the rule applicable to such a case as follows: ‘Where a conditional contract of sale fixes (whether specifically or by [page 500] reference to the date fixed for completion) the date by which the condition is to be fulfilled, then the date so fixed must be strictly adhered to, and the time allowed is not to be extended by reference to equitable principles’.22 Their Lordships did not explain why equitable principles are inapplicable. The explanation given by Professor Treitel … is that the equitable principle that time is not of the essence of the contract does not apply, because ‘until the condition is performed the whole existence of the contract remains in doubt’.23 However, their Lordships went on to say that if they had accepted counsel’s argument that the vendor was entitled to a

reasonable time to fulfil the condition, they would have been disposed to agree that time, not being originally of the essence of the contract, could not be made so by service of a notice when the vendor had not been guilty of any delay or default such as had to be shown in order to entitle the purchaser to serve such a notice.24 Those observations, as Cooke J said in Hunt v Wilson, ‘certainly tend towards the view that, if no time is fixed for completion and a condition is to be satisfied within a reasonable time, the equitable requirements as to notice apply’.25 Again, however, their Lordships did not explain why the equitable principles might apply in the one case but not in the other. In Maynard v Goode, Higgins J said that he strongly thought ‘that a right to put an end to the contract or to refuse to perform it would not arise thereunder automatically without some warning notice from the vendor, fixing a reasonable limit of time for completion’.26 Isaacs J may have been of a similar opinion.27 These remarks were obiter, because in that case it was held that the condition was performed within a reasonable time. In Gange v Sullivan a contract for sale contained a provision that the contract was subject to the purchaser obtaining a certain development approval of the local council and that, in the event of the council not granting such approval by 31 May 1965, the contract was to be at an end. By 31 May 1965 the council’s approval had not been given and the purchaser had not waived the condition. It was held that the contract did not automatically come to an end. Taylor, Menzies and Owen JJ said: Whilst the effect of a condition must in every case depend upon the language in which it is expressed and a decision upon the meaning of one condition cannot determine the meaning of a different condition, the authorities cited do show a disposition on the part of the courts to treat non-fulfilment of a condition such as that here under consideration as rendering a contract voidable rather than void in order to forestall a party to a contract from gaining some advantage from his own conduct in securing, or contributing to, the non-fulfilment of a condition bringing the contract to an end. Accordingly … we are prepared to treat non-fulfilment of the condition as rendering the contract voidable rather than void.28

[page 501] Barwick CJ was of a similar opinion.29 The authority principally relied on by the court was Suttor v Gundowda Pty Ltd,30 a case of condition subsequent. It was not suggested in either of those cases that it was necessary to give any notice to complete. The non-fulfilment of the condition gave the party not in default a right to avoid the contract, but if that party did not exercise the right the other party might enforce the contract against him. In Suttor v Gundowda Pty Ltd the attempt to cancel the contract was made too late, since the condition had been fulfilled in the meantime.31 It appears to have been assumed that no notice to complete need be given before the right to avoid the contract was exercised. In both cases however a time for fulfilment of the condition was expressly fixed by the contract. Suttor v Gundowda Pty Ltd and Gange v Sullivan are consistent with Aberfoyle Plantations Ltd v Cheng, and support the view that where a conditional contract fixes the date by which the condition is to be fulfilled the contract may be terminated if the condition has not been fulfilled when that date arrives, and that it is unnecessary to give any prior notice to the other party. The question is whether a similar conclusion should be reached when no time for fulfilment of the condition is fixed by the contract, and it accordingly must be performed within a reasonable time. There is little authority on the question, and it must be approached from the standpoint of principle. The condition with which we are concerned is not one which it was entirely in the power of the [Perris] to fulfil. Although they might use their best endeavours to find a buyer and complete a sale, it still remained necessary for them to find someone prepared to buy. Although, in fact, the [Perris] did not make reasonable efforts to satisfy the condition, it is impossible to say that they must have effected a sale within a reasonable time if they had made all reasonable endeavours to do so. It seems inappropriate that one party to a contract should be able to give a notice requiring the other to complete a sale, when that other party has not promised to do so (his promise only being to do all that was reasonable) and when it is not necessarily within his power to do so. The doctrines of equity enable a party to a contract to obtain specific performance, notwithstanding his failure to carry out his obligations within a stipulated

time, when that time is not of the essence of the contract. The party not in default has a correspond--ing power to limit a particular time within which the other contracting party is to perform his obligations. These principles have recently been discussed by this court in Louinder v Leis.32 They apply, in my opinion, only where the party to whom a notice may be given is under a contractual obligation to act. In the present case no doubt the [Perris] might have been given a notice requiring them to make reasonable efforts to sell, but they could not have been required to make a sale, for that was beyond their power. Moreover, a notice can only be given when the party to whom it is addressed is either in breach of contract, or guilty of unreasonable delay. A purchaser might have made all reasonable efforts but yet have been unable to complete a sale, and in that situation the vendor would not be able to give a notice to complete, and would, if the [Perris’] argument is correct, be bound indefinitely to a contract that might never result in [page 502] a sale. For these reasons I consider that when the time has elapsed for performance of a condition which is not a promissory condition, but a condition precedent to the obligation to complete a contract of sale, either party, if not in default, can elect to treat the contract as at an end if the condition has not been fulfilled or waived, and that it is not necessary first to give a notice calling on the party in default to complete the contract or fulfil the condition. What I have said is, of course, subject to any sufficient indication of a contrary intention in the words of the contract itself. The conclusion that I have reached is supported by the judgment of Lord Keith in Boland (T) and Co Ltd v Dundas’s Trustees,33 with whose reasoning I respectfully agree. It accords also with the judgment of Cross J (as he then was) in Re Longlands Farm,34 a decision whose authority on this point is weakened by the fact that a notice to complete had in fact been given. … In the present case the learned trial judge was plainly correct in holding that a reasonable time for the fulfilment of special con--dition 6 had expired by September 1978. In the view that I have formed, it was then open to [Coolangatta Investments] to avoid the contract without first giving any

notice limiting a reasonable time for completion. By instituting the proceedings, before the condition had been either fulfilled or waived, [Coolangatta Investments] sufficiently evidenced its election to avoid the contract.

[page 503]

Comment 23.3.1 See Radan, Gooley, and Vickovich at 23.13, 23.14, and 23.16.

DISCHARGE OF A CONTRACT BY RELEASE 23.4C

McDermott v Black (1940) 63 CLR 161

Court: High Court of Australia Facts: Black claimed to have been induced to enter into a contract to buy 4000 shares by a number of fraudulent misrepresentations made by the vendor, McDermott, in relation to the business of the company, including its revenue. McDermott was the managing director of the said company. Prior to the date of completion of the contract, Black complained of the misrepresentations. However, in a subsequent letter he conditionally withdrew all allegations imputing anything improper to McDermott on the basis that McDermott grant him an extension of time to complete the contract. This extension of time was granted by McDermott. However, when Black did not complete the contract by the specified date, McDermott terminated the contract. Black commenced proceedings for damages, claiming misrepresentation by McDermott and Swann, his accomplice, allegations that he had previously withdrawn. Issue: The issue before the court was whether the withdrawal of

Black’s allegations extinguished his cause of action and, if not, whether it affected his ability to rely on McDermott’s misrepresentation. Decision: The majority of the High Court of Australia (Rich, Starke, Dixon, and McTiernan JJ; Latham CJ dissenting) held in favour of McDermott. The court held that the withdrawal of the allegations in consideration of an extension of time for completion was not too vague as to constitute a contract of accord and satisfaction. The withdrawal of the allegations amounted to a promise not to sue or to a release of any cause of action in respect of them and was therefore a defence to an action in deceit based upon the misrepresentations. Extract: The extracts from the judgment of Dixon J set out the principles of accord and satisfaction that underpinned the decision to allow McDermott’s appeal.

Dixon J The question for our consideration, may be divided under two legal heads. First, did Black’s agreement to withdraw the allegations of improper conduct operate to extinguish his cause of action in deceit? And secondly, if not, did it nevertheless disable him from relying in an action of deceit upon the specific misrepresentations to which his withdrawal related? That is to say, conceding that if he had been able to establish other fraudulent misrepresentations afterwards discovered, he might have maintained an action of deceit founded upon them, yet could he revive the allegations he had withdrawn and rely also on them? [page 504] An agreement not to sue upon particular allegations might give a defendant a good equitable plea, but at common law it would be necessary for him to show that it amounted to an accord and satisfaction discharging the cause of action or else that it gave rise to an estoppel. The essence of accord and satisfaction is the acceptance by the plaintiff of

something in place of his cause of action. What he takes is a matter depending on his own consent or agreement. It may be a promise or contract or it may be the act or thing promised. But, whatever it is, until it is provided and accepted the cause of action remains alive and unimpaired. The accord is the agreement or consent to accept the satisfaction. Until the satisfaction is given the accord remains executory and cannot bar the claim. The distinction between an accord executory and an accord and satisfaction remains as valid and as important as ever. An accord executory neither extinguishes the old cause of action nor affords a new one. The decision of the Court of Appeal in British Russian Gazette &c Ltd and Talbot v Associated Newspapers Ltd,35 though doubtless some of the reasons display less zeal for principle than for reform, does not appear to me to be inconsistent with the received doctrine that no new cause of action is given by an accord executory. In that case, the agreement constituting the accord was made as a compromise of three several causes of action vested in three persons respectively. It was made by one of them purporting to act not only on his own behalf but also as agent for the other two. In fact he had no authority to do so, and he was held liable for damages for breach of warranty of authority. This result might perhaps be supported, even if the agreement were an accord executory, on the ground that, at all events, the opposite party had acted to some extent on his representation of authority, but the intention of the parties appears to have been that the agreement of compromise should itself have been accepted as in satisfaction of the causes of action, so amounting to an accord and satisfaction. The case, therefore, provides no more than a late illustration of the doctrine, finally established perhaps by Flockton v Hall,36 that of accord and satisfaction there are two cases, one where the making of the agreement itself is what is stipulated for, and the other, where it is the doing of the things promised by the agreement. The distinction depends on what exactly is agreed to be taken in place of the existing cause of action or claim. An executory promise or series of promises given in consideration of the abandonment of the claim may be accepted in substitution or satisfaction of the existing liability. Or, on the other hand, promises may be given by the party liable that he will satisfy the claim by doing an act, making over a thing or paying an ascertained sum of money and the other party may agree to accept, not the promise, but the act, thing or money in satisfaction of his claim. If the agreement is to accept the promise in satisfaction, the discharge of the

liability is immediate; if the performance, then there is no discharge unless and until the promise is performed. In the present case, an extension of time to the 5th August 1937 is the thing promised. From the nature of the concession, the extension consisted not so much in allowing time to elapse as in the waiver de praesenti of insistence on [Black’s] observing the time named in the contract and of the consequences of non-observance, whatever they might be. What [Black] sought was a concession in the nature of a variation of the contractual terms fixing [page 505] the time for completion. There is little difficulty, therefore, in regarding [McDermott’s] agreement to postpone, and not the actual lapse of time, as the thing looked for by [Black]. The point of difficulty in the present case appears to me to lie elsewhere. The difficulty is to be sure of an intention on the part of [Black] to discharge [McDermott] from any liability, that is, an intention to take the agreement to extend the time in replacement or satisfaction of any existing right or claim against [McDermott] or, at all events, of the right or claim put in suit by the present action. The ‘withdrawal of all allegations imputing anything improper to’ [McDermott] conditionally upon the latter’s agreeing to three-weeks’ further time for payment of the balance of purchase money clearly amounts to an election to affirm the contract. It does, I think, imply a promise not to revive the allegations. But it must be acknowledged that, standing alone, it would not be easy to spell out of it an intention to treat the extension as satisfying a claim. The correspondence, however, not only adverts expressly to misrepresentations, but on that ground Black threatened to sue to recover the bonds. An action for deceit is but the legal description of the remedy for misrepresentation which the respondent Black appears to have contemplated. Accordingly should it not be taken as a possible liability, among others, to which the withdrawal should be understood as putting an end? On the whole I think that this question should receive an affirmative answer. The untechnical and inexact expression, ‘withdraw allegations’, no doubt causes some difficulty. But it must be borne in mind

that the purpose was to settle or compromise a very definite dispute. On the one side, the appellant McDermott, if time was of the essence as in such a contract it may have been, was in a position to rescind and forfeit the deposited bonds. On the other side the respondent Black had formulated a claim to disaffirm the contract and recover his bonds and he had threatened to issue a writ unless he was satisfied of the truth of the representations, the falsity of which, if made, had never been denied. It was at this stage that his solicitor suggested an amicable settlement based upon the withdrawal of his client’s allegations. In these circumstances, it would be natural for the appellant McDermott to suppose that the proposal was that the contract should be completed on the footing that Black waived all claims based on the alleged misrepresentations. It would be futile for Black to withdraw allegations which he was to be at liberty to revive. The purpose of the withdrawal was not that of social amenity but to complete and close a business transaction. Fias recantatis amicus opprobriis is but an idle sentiment which could have no place in the moratory tactics of Mr Black, and would be unheard by Mr McDermott. The question propounded was whether the contract should be carried into effect and time be allowed to Black for that purpose or whether the latter should persist in his claim that it should be avoided and his bonds returned. The withdrawal of the allegations of improper conduct meant, in my opinion, that he would make no claim based upon misrepresentation but would accept the promise of further time instead. Estoppel can, I think, be put aside. But I think that, consistently with principle, the agreement to withdraw in consideration of a grant of time can be regarded as an accord and satisfaction. I am prepared to hold that on this ground the respondent Black’s cause of action is answered, founded, as it is, on the three misrepresentations withdrawn. But I am of opinion that in any case a good equitable plea is sustained by the agreement, that is, if the legal defence were not enough. The sufficiency of the facts to provide an answer in equity is determined by somewhat different considerations. [page 506] At law, ‘the only case in which a covenant or promise not to sue is held to

be pleadable as a bar, or to operate as a suspension, and by consequence a release or extinguishment of the right of action, is where the covenant or promise not to sue is general, not to sue at any time. In such cases, in order to avoid circuity of action, the covenants may be pleaded in bar as a release … for the reason assigned, that the damages to be recovered in an action for suing contrary to the covenant would be equal to the debt … or sum to be recovered in the action agreed to be forborne’.37

[page 507]

Comment 23.4.1 See Radan, Gooley, and Vickovich at 5.13, 23.41–23.44, 23.48, and 23.65.

DISCHARGE OF A CONTRACT BY ABANDONMENT 23.5C

Fazio v Fazio [2012] WASCA 72

Court: Western Australian Supreme Court of Appeal Facts: This case concerned an appeal from a judgment in which the trial judge dismissed a claim by a son in the Fazio family partnership. The appellant and his wife commenced proceedings after the appellant’s father, the senior member of the family, had passed away. The appellant and his wife contended that the appellant remained a partner of the partnership until it was dissolved upon the death of the appellant’s father in 2007. The first to third respondents (the other partners) denied this. The appellant and his wife also contended that the appellant’s brother had never been admitted to the partnership. The principal issues in the case at trial were whether the

appellant’s brother had been admitted to the partnership and whether an agreement had subsequently been made under which the appellant had agreed, for consideration, to retire from the partnership and to relinquish his interest in it with effect from that earlier time. There were also estoppel claims, including a claim that the father’s estate, the mother, and the brother held one-third of the non-partnership family assets on trust for the appellant. The trial judge found that the appellant’s brother had been made a partner of the partnership. He also held that by an agreement made in mid-1984, the appellant had retired from the partnership and relinquished his interest in it, the consideration for which involved the appellant and his wife being given, for no payment, a property. The second, but not the first, finding came under challenge in the appeal. The estoppel claims were dismissed and the dismissal of one of the estoppel claims was also under challenge. The appeal was dismissed. Issue: A question arose as to whether there had been abandonment of a partnership by one partner. The applicable principles relating to abandonment were examined. Decision: The Court of Appeal held that the partnership had been dissolved in consequence of abandonment. Extract: The extract from Murphy JA illustrates the requisite tests required to be satisfied before abandonment can be concluded.

[page 508]

Murphy JA [59] A partnership may be ‘dissolved’ in the sense of terminated or determined — as opposed to ‘dissolved’ in the other sense in which it is sometimes used to connote the winding-up of the business — in a variety of ways.38 Dissolution in the sense of termination can include, for example, subject to any agreement to the contrary, dissolution by the death or bankruptcy of a partner (s 44 of the Partnership Act), or where the

partnership was for a fixed term or a single venture and the fixed period has expired or the single venture has terminated (s 43(a) and (b)). [60] A partnership may also be determined by curial decree in a variety of specified circumstances, including where an order is made on a ‘just and equitable’ ground: s 46. [61] A partnership is also dissolved by the happening of an event which makes it unlawful to carry on the business: s 45. [62] A partnership (whether for a fixed term or at will) may be determined by mutual agreement.39 [63] The statute provides that in the case of a partnership for a fixed term, a partner may not retire except, in effect, by the consent or agreement of the other partners: s 36. The statute also provides that for a partnership where no fixed term is agreed, a partner may, unilaterally, determine the partnership by giving written notice to the other partners: s 37(1). Such written notice does not have to be given under seal, even where the original partnership agreement was constituted by a deed: s 37(2). Unless the partners otherwise agree, the partnership is dissolved on the date specified in the notice or, if no date is specified, as from the date of the communication of the notice: subs (c) and the concluding words of s 43. (Note also the overlap between s 37 and s 43 generally, which is discussed in relation to the broadly equivalent English provisions (s 26 and s 32) in Lindley and Banks on Partnership, and where the learned authors observe, in effect, that both sections (and not just s 43), will take effect subject to any agreement between the partners to the contrary.)40 [64] A retirement of a partner, mutually agreed or unilaterally effective, has the consequence of dissolving the partnership. [65] Where a partner retires by mutual agreement on terms that the remaining partners will continue in partnership and take on the assets and liabilities of the old firm, without a break in the continuity of the business, the dissolution of the firm effected by the retirement of the partner is in the nature of what is often called a ‘technical dissolution’, or a ‘notional dissolution’ and the ‘continuing’ partners are, in point of law, operating a new partnership. As McPherson JA observed, however, in Rushton v Rushton [9], the reference to a ‘technical’ or ‘notional’ dissolution is somewhat of a misnomer, because it is not the dissolution itself, but the

winding-up which is notional. Where there is a binding agreement involving a ‘technical [page 509] dissolution’ of the former partnership, with consideration being given for the retiring partner’s chose in action, the former partner’s chose in action is extinguished by accord and satisfaction. [66] Dixon J in McDermott v Black41 said at 183–185: The essence of accord and satisfaction is the acceptance by the plaintiff of something in place of his cause of action. What he takes is a matter depending on his own consent or agreement. It may be a promise or contract or it may be the act or thing promised. But, whatever it is, until it is provided and accepted the cause of action remains alive and unimpaired. The accord is the agreement or consent to accept the satisfaction. Until the satisfaction is given the accord remains executory and cannot bar the claim. The distinction between an accord executory and an accord and satisfaction remains as valid and as important as ever. An accord executory neither extinguishes the old cause of action nor affords a new one. … The distinction depends on what exactly is agreed to be taken in place of the existing cause of action or claim. An executory promise or series of promises given in consideration of the abandonment of the claim may be accepted in substitution or satisfaction of the existing liability. Or, on the other hand, promises may be given by the party liable that he will satisfy the claim by doing an act, making over a thing or paying an ascertained sum of money and the other party may agree to accept, not the promise, but the act, thing or money in satisfaction of his claim. If the agreement is to accept the promise in satisfaction, the discharge of the liability is immediate; if the performance, then there is no discharge unless and until the promise is performed. [67] There may also be accord and conditional satisfaction.42

[68] Where there is a retirement by agreement, the agreement may be formal (eg, as reflected in the formal instrument in Commissioner of State Taxation v Cyril Henschke Pty Ltd), or informal, including partly or wholly oral, or partly or wholly inferred. Sobell v Boston43 appears to be an example of an oral agreement, which had been executed (see Goff J, as his Lordship then was) where, although it is not clear, the court arguably inferred or implied a term of the agreement as to how the retiring partner’s interest was agreed to be dealt with.44 Insofar as the term was inferred or implied, it appears to have been aided by the circumstance that the agreement had been executed, and was not merely executory.45 [page 510] [69] As to inferred or at least partly inferred agreements respecting dissolution on the departure of a partner, see, for example, Jorgensen v Boyce,46 Palmer v Moore,47 and in the court below.48 [70] In the cases of Palmer v Moore, Cutts v Holland and Lukin v Lovrinov, the inferred agreement in question has been described as an ‘abandonment’.49 [71] Some caution, however, may be required in using the word ‘abandonment’ with respect to an inferred agreement for dissolution, as the word may connote two different types of agreement. One is in the usual sense of abandonment, or abrogation, as an inferred agreement for the discharge of the contract involving the mutual release of future, unperformed obligations.50 Such an abandonment of the executory obligations and promises of the partnership agreement does not effect, in itself, a release of the outgoing partner’s interest, and the outgoing partner may enforce such existing rights as he or she has consistent with the terms, ascertained and properly construed, of the agreement for retirement and subject to any statutory or equitable constraints on relief. In that case, the plaintiff and the defendant became partners in about 1979 and carried on a business of house cladding and window fitting. In 1984, they purchased an area of land as tenants in common in equal shares, upon which they constructed, and operated, a ski lodge. It was a term of their agreement that

both partners would contribute towards the day-to-day management and control of the ski lodge business. They did so up to and including the 1993 ski season. However, prior to the commencement of the 1994 season, their relationship deteriorated and the plaintiff decided to embark on a new business in Sydney. In May 1994, the parties had an acrimonious meeting, following which they went their separate ways. The judge, in the circumstances of that case, inferred an abandonment or abrogation of the contract with respect to future performance, but not an abandonment of the plaintiff’s interest. [72] The second type of agreement involves not just the mutual release of future performance, but also an agreed release of the outgoing partner’s existing equitable chose in action represented by his or her interest in the partnership — see, eg, Jorgensen v Boyce; Palmer v Moore. In the latter case, at (297), the Privy Council referred to the relevant abandonment in terms of the outgoing partner having ‘totally abandoned his interest in favour of his co-adventurers’ (emphasis added). [73] Where the outgoing partner’s chose in action is ‘released’ in favour of the ‘continuing partners’, pursuant to an agreement, the effect is to enlarge the interests of the ‘continuing [page 511] partners’ in the assets to be applied by them in the conduct of the business of the new partnership.51 [74] The abandonment of a contract, in the sense of the mutual release of future obligations, being an inferred agreement, does not depend upon the subjective intention of the parties, but upon whether their conduct (both acts and omissions) viewed objectively manifests an intention to discharge the contract.52 The length of the term of the agreement is a matter of some relevance in assessing the likelihood of abandonment.53 It seems to me that the formalities of a particular agreement may also be a relevant factor. It may, depending on all the circumstances, be more difficult to infer an agreement of abandonment where the parties have, in setting up their

contractual relationship, expressed in detail in a formal instrument, the terms of their relationship, including the terms as to termination. [75] Similarly, whether there is an abandonment involving an agreement for release will depend upon the inference to be drawn from the conduct of the parties, viewed objectively.

[page 512]

Comment 23.5.1 See Radan, Gooley, and Vickovich at 4.98 and 23.4.

1.

Llanelly Railway and Dock Co v London and North Western Railway Co (1875) LR 7 HL 550 at 567.

2. 3.

Martin-Baker Aircraft Co Ltd v Canadian Flight Equipment Ltd [1955] 2 QB 556 at 577. (1985) 60 ALR 73 at 101.

4. 5.

Luxor (Eastbourne) Ltd v Cooper [1941] AC 108 at 137. Winter Garden Theatre (London) Ltd v Millenium Productions Ltd [1948] AC 173; Martin-Baker Aircraft Co Ltd v Canadian Flight Equipment Ltd [1955] 2 QB 556; Re Spenborough Urban District Council’s Agreement [1968] Ch 139; Decro-Wall International SA v Practitioners in Marketing Ltd [1971] 2 All ER 216.

6.

7.

Winter Garden Theatre (London) Ltd v Millenium Productions Ltd [1948] AC 173 at 200–1; Australian Blue Metal Ltd v Hughes [1963] AC 74 at 99; W K Witt (WA) Pty Ltd v Metters Ltd [1967] WAR 10 at 24–5. W K Witt (WA) Pty Ltd v Metters Ltd [1967] WAR 10 at 23.

8. 9.

W K Witt (WA) Pty Ltd v Metters Ltd [1967] WAR 10 at 23. Australian Blue Metal Ltd v Hughes [1963] AC 74 at 99.

10. 11.

Australian Blue Metal Ltd v Hughes [1963] AC 74 at 99. [1960] AC 115.

12. 13.

[1968] 1 Ch 94 at 116. (1926) 37 CLR 529 at 536, 538.

14. 15.

(1926) 37 CLR 529 at 541, 544. (1926) 37 CLR 529 at 536.

16. 17.

(1926) 37 CLR 529 at 540. [1963] VR 214.

18.

[1975] VR 102.

19.

[1966] NZLR 527.

20. 21.

[1960] AC 115 at 124. Reid v Moreland Timber Co Pty Ltd (1946) 73 CLR 1 at 13.

22. 23.

Aberfoyle Plantations Ltd v Cheng [1960] AC 115 at 125. Treitel, The Law of Contract, 4th ed, at 570.

24. 25.

Aberfoyle Plantations Ltd v Cheng [1960] AC 115 at 128. Hunt v Wilson [1978] 2 NZLR 261 at 271.

26. 27.

Maynard v Goode (1926) 37 CLR 529 at 542. Maynard v Goode (1926) 37 CLR 529 at 539–40.

28. 29.

Gange v Sullivan (1966) 116 CLR 418 at 441. Gange v Sullivan (1966) 116 CLR 418 at 429.

30. 31.

(1950) 81 CLR 418. Suttor v Gundowda Pty Ltd (1950) 81 CLR 418 at 442.

32. 33.

(1982) 149 CLR 509. [1975] SLT 80.

34. 35.

[1968] 3 All ER 552. [1933] 2 KB 616.

36. 37.

(1849) 14 QB 480 [117 ER 150]; 16 QB 1039 [117 ER 1179]. Ford v Beech (1848) 116 ER 693 at 700.

38. 39.

As to dissolution in the sense of termination, see, eg, Lindley and Banks on Partnership (19th ed, 2010) at [24-01]; Geraghty v Minter [1979] HCA 42; (1979) 142 CLR at 177, 180–1, 181–2, 190–2. Maslen v Perpetual Executor Trustees (112); Lindley and Banks on Partnership at [24-04].

40. 41.

See also Moss v Elphick [1910] 1 KB 846. [1940] HCA 4; (1940) 63 CLR 161.

42.

Scott v English [1947] VicLawRp 67; [1947] VLR 445 at 453; Osborn v McDermott [1998] 3 VR 1; Scaffidi v Perpetual Trustees Victoria Ltd [2011] WASCA 159 at [27]–[33]. (1975) 1 WLR 1587.

43. 44. 45.

Truong v Lam [2009] WASCA 217 at [27]. On the implications of terms in executed contracts, see the authorities collected in Lewison K and Hughes B, The Interpretation of Contracts in Australia (2012) at [6.19].

46. 47.

(1896) 22 VLR 408. [1900] AC 293.

48.

Moore v Morgan (1900) 21 LR (NSW) Eq 158; Fitzgerald v Masters [1956] HCA 53; (1956) 95 CLR 420 at 431, 439–40; Cutts v Holland [1965] TAS SR 69 at 71–2; Thompson v De Lissa (unreported, NSWSC, Powell J, 16 February 1990) at 52; Lukin v Lovrinov (unreported, SASC, Perry J, 9 April 1998) at 22. See also in this regard Ryder v Frohlich [2004] NSWCA 472 at [135]–[152]; Walker v Melham [2007] NSWSC 264 at [28].

49. 50. 51.

DTR Nominees Pty Ltd v Mona Homes Proprietary Ltd [1978] HCA 12; (1978) 138 CLR 423 at 434; see also Carter J W, Carter’s Breach of Contract (2011) at [12]–[18] and the cases there cited. Commissioner of State Taxation v Cyril Henschke Pty Ltd at [28]–[29].

52.

Summers v Commonwealth [1918] HCA 33; (1918) 25 CLR 144 at 151–2; Wallera Pty Ltd v CGM

53.

Investments Pty Ltd [2003] FCAFC 279 at [2], [40], [57]; DTR Nominees Pty Ltd v Mona Homes Pty Ltd Marminta Pty Ltd v French [2003] QCA 541 at [21]–[22]. Wallera Pty Ltd v CGM Investments Pty Ltd at [50] (Kiefel J (as her Honour then was), Ryan & Gyles JJ agreeing).

[page 513]

24 DISCHARGE BY BREACH

INTRODUCTION 24.1 This chapter deals with the ways in which a contract will be discharged in consequence of a breach of contract by one of the parties. Breach in these circumstances can be actual or anticipatory. Actual breach occurs where a party does not perform their obligations in accordance with the contract. Anticipatory breach occurs where one party indicates an unwillingness or inability to perform their contractual obligations in advance of when those obligations are due to be performed. Breach of contract, whether actual or anticipatory, may give the innocent party a right to terminate if, as a matter of construction, the breach was of a condition or an essential term or of an intermediate term that justified termination. If, however, the breach was of a non-essential term such as a warranty, or a non-essential intermediate term, the innocent party may only have a right in damages and not a right to terminate. In cases where there is a breach of a condition or essential term by one party, the innocent party may terminate the contract. In such situations there is a need to identify whether there has been a breach of a condition or an essential term. This was the issue that was before the court in Associated Newspapers Ltd v Bancks (1951) 83 CLR 322 (see 24.2C), where the court had to apply the test of essentiality in order to classify the term as one capable of conferring the right to terminate contractual obligations. However, not all cases of breach of a contractual term will lead to the right

to terminate and thereby discharge the contract. In cases where a term is not regarded as a condition, but is more correctly classified as an intermediate term, a question arises whether breach of this term will nevertheless justify termination. This issue was relevant in Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 (see 24.3C) and Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115 (see 24.4C). If a party purports to terminate a contract for breach of a term that does not justify termination, that action will be regarded as repudiatory conduct. In some situations there may be breach of a time stipulation by a contracting party. In such cases the question is whether the contract can be terminated. This issue often gives rise to the need to consider whether the time stipulation was an essential obligation and whether any procedure exists to make such a time stipulation an essential obligation. In regard to the latter it is sometimes the case that parties have attempted to issue notices to complete to the other party to a contract, thereby purporting to convert a non-essential time stipulation into an [page 514] essential term. The principles relevant to this issue were examined in Louinder v Leis (1982) 149 CLR 509 (see 24.5C). Contracts sometimes contain terms conferring on parties the right to terminate. Such a term is often referenced to the occurrence or nonoccurrence of a particular event. This issue was examined in Sargent v ASL Developments Ltd (1974) 131 CLR 634 (see 24.6C). Further, and aligned to this issue, are situations where notwithstanding the existence of a right to terminate pursuant to the contract, a party may elect not to terminate in the circumstances. As indicated above, a breach of contract can occur notwithstanding that time for performance of contractual obligations has not fallen due. This is known as anticipatory breach. The principles relevant to such breach were examined in Foran v Wight (1989) 168 CLR 385 (see 24.7C). Not all cases of breach of essential obligations will enable the innocent party to terminate the contract. Parties may have a prima facie right to

terminate a contract, but nonetheless are precluded from doing so because of one or more of the following reasons: the innocent party is in breach of contract themselves or is not ready, willing, and able to perform their contractual obligations; the innocent party has elected not to terminate the contract, but rather has acquiesced in its continuation; the innocent party has not acted in good faith; or the equitable doctrine of relief against forfeiture precludes the innocent party from terminating the contract. Principles relevant to the courts’ exercise of their jurisdiction to relieve against forfeiture are set out in Tanwar Enterprises Pty Ltd v Cauchi (2003) 217 CLR 315 (see 24.8C).

CONDITIONS AND WARRANTIES 24.2C

Associated Newspapers Ltd v Bancks (1951) 83 CLR 322

Court: High Court of Australia Facts: In 1949 the cartoonist Bancks entered into an agreement with Associated Newspapers that he would work exclusively for them for a 10-year period in exchange for a salary. Part of his duties was to prepare a weekly full-page drawing of a cartoon series called ‘Us Fellers’ starring the popular character Ginger Meggs. Associated Newspapers agreed that ‘Us Fellers’ would be printed on the front page of the comic section of the weekly Sunday Sun & Guardian newspaper. This arrangement was adhered to by both parties until January 1951 when, due to a shortage of newsprint, the newspaper company decided it would print the comic section by a rotogravure process in which newsprint was not used. The effect of this was that the comic section became an insert in a regular colour magazine section of the weekly newspaper. Because of the printing process, readers were required to reverse fold the insert in order to turn the ninth page of the magazine into the front page of the comic section.

In three particular editions in February 1951 ‘Us Fellers’ appeared on page three of the comic section. Bancks protested [page 515] that placing the comic section in the magazine was in breach of the agreement. The company replied that folding the magazine would put the cartoon on the front page of the comic section as agreed. Bancks terminated the contract on 26 February 1951 and the newspaper company sought an injunction to restrain Bancks from breaching the contract. Issue: The issue before the High Court was whether Bancks had a right to terminate the contract that existed on 26 February 1951 and, if so, whether it was effectively exercised. This depended largely on whether the term to place ‘Us Fellers’ on the front page of the comic section was a condition or warranty and whether it had been breached. Decision: The High Court (Dixon, Williams, Webb, Fullagar, and Kitto JJ) unanimously held that there was a breach of condition by Associated Newspapers, for which termination of the contract by Bancks was justified. Extract: The extract below from the joint judgment of the High Court approves and applies the ‘essentiality test’ from Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632 as the means by which conditions and warranties are to be distinguished.

Dixon, Williams, Webb, Fullagar, and Kitto JJ The first question is whether the company’s undertaking to present [Bancks’] 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 [Bancks] 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 [Bancks] 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, 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,1 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.2 In Bentsen v Taylor, Sons & Co (No 2)3 Bowen LJ, discussing the distinction between a condition and a warranty, points out that in order to decide this question one of the first [page 516] things you would look to is, to what extent the truth of what is promised would be likely to affect the substance and foundation of the adventure which the contract is intended to carry out. Perhaps the test is better formulated by C B Morison: 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.4 … [T]his form is expressly supported by such cases at law as Flight v Booth,5 and Bannerman v White6 and, im--plicitly, by such cases as Hoare v Rennie7 and Bowes v Shand.8 The test was succinctly stated by Jordan CJ in Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd.9 The decision was

reversed on appeal,10 but his Honour’s statement of the law is not affected. He said: 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.11 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.12 At least it is clear that the obligation of [Bancks] to supply a weekly fullpage drawing of ‘Us Fellers’ and [the company’s] undertaking to present the drawing each week on the front page of the comic section are concurrent and correlative promises. And it would not seem open to doubt that the obligation of [Bancks] is a condition. He was not an ordinary employee of [the company]. 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 company] 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 [Bancks’] obligation and [the company’s] undertaking. [The company] would not have employed [Bancks] unless it had been assured that [he] would perform his promise, and [Bancks] would not have made the promise unless he was assured that his work [page 517] would be published in a particular manner. Obviously it was of prime

importance to [Bancks] 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. In Herbert Clayton and Jack Waller Ltd v Oliver, Viscount Dunedin said: I think each contract as it arises must be considered by itself in order to see what are the promises which each party is bound to perform. Considered from that point of view I think that in this case the appellants contracted not only to pay the respondent a salary, but to give him the opportunity of appearing before the public in a part which answered to the stipulated description.13 In Tolnay v Criterion Film Production Ltd, Goddard J … said: All persons who have to make a living by attracting the public to their works, be they artists in the sense of painters or be they literary men who write books or who perform in other branches of the arts, such as pianists and musicians, must live by getting known to the public. An unknown author we all know has a great struggle in the same way as an unknown musician or actor has a great struggle. Mr Williams in this case is already known in this country, and Mr Tolnay, I think, is not known as an author in this country. One way in which they can expect remuneration and expect employment is by getting their name before the public.14 A failure to give an actor a proper part is a breach of contract which goes to its root and justifies the actor in treating the contract as rescinded.15 … In the present case the undertaking of [the company] that each weekly full-page drawing would be presented on the front page of the comic section formed a condition a substantial failure in the performance of which would enable [Bancks] to treat the contract as at an end. [The company] committed three successive breaches of this condition and thereupon [Bancks] was certainly entitled to treat the contract as discharged. Such a failure of [the company] to perform the condition went

to the root of the contract and gave [Bancks] as the injured party the right immediately to treat the contract as at an end (Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd). He exercised this right by his letter of 26th February. [Bancks] had not to prove, as in the case of a breach or breaches of nonessential terms of a contract, that the conduct of [the company] was such as to amount to a refusal to be bound by the contract. But when the circumstances are considered they would appear to constitute such conduct. [The company] made the original change without consulting [Bancks]. It maintained that it was entitled to do so despite his protests. On 26th February there had been three publications in breach of the contract and several more were intended. [page 518] [The] promise [of the CEO of the company] to see what he could do was vague, and it was accompanied by an intimation that if anything was done it would be done as a matter of grace and not of right. This evidence all points and points only to a refusal by [the company] to perform cl 5 of the contract and satisfies the test laid down by Lord Selborne.

Comment 24.2.1 See Radan, Gooley, and Vickovich at 24.30.

INTERMEDIATE TERMS 24.3C

Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26

Court: Court of Appeal in England

Facts: The Hongkong Fir Shipping Co chartered one of its ships for a two-year period to Kawasaki. The charterparty agreement provided that the ship was to be made available to the charterers at Liverpool since it was ‘in every way fitted for ordinary cargo service’, and that the owners were to maintain the vessel ‘in a thoroughly efficient state in hull and machinery during service’. After delivery the ship sailed to Virginia to load coal and then on to Osaka. The trip lasted about eight-and-a-half weeks, but then a further five weeks was taken up with repairs. The vessel was berthed at Osaka for another 15 weeks to render it seaworthy after considerable mechanical breakdowns and corrosion. The charterers repudiated the contract for the long delays, alleging the ship was not seaworthy, and claimed damages for breach of contract. The ship owners took legal action for wrongful repudiation of the agreement by the charterers. Issue: The Court of Appeal had to determine whether the term in the charterparty agreement relating to the ship’s seaworthiness was a condition, breach of which entitled the charterers to terminate. Decision: The Court of Appeal (Sellers, Upjohn, and Diplock LJJ) unanimously held that the breach by the ship owners did not justify termination by the charterers, with the consequence that the repudiation by the charterers was wrongful. Sellers LJ held that the breach by the ship owners was not such as to make performance of the contract different from that intended, while Upjohn LJ considered the breach did not go to the root of the contract. Both construed the term as a warranty. Diplock LJ, although coming to the same result, categorised the term as an intermediate term and held that the breach of it was not sufficiently serious to give rise to a right to terminate the contract. Extract: The extract from the judgment of Diplock LJ illustrates his position on intermediate terms and is useful for its classification of terms generally.

[page 519]

Diplock LJ Every synallagmatic contract contains in it the seeds of the problem: in what event will a party be relieved of his undertaking to do that which he has agreed to do but has not yet done? The contract may itself expressly define some of these events, as in the cancellation clause in a charterparty, but, human prescience being limited, it seldom does so exhaustively and often fails to do so at all. In some classes of contracts, such as sale of goods, marine insurance, contracts of affreightment evidenced by bills of lading and those between parties to bills of exchange, Parliament has defined by statute some of the events not provided for expressly in individual contracts of that class; but, where an event occurs the occurrence of which neither the parties nor Parliament have expressly stated will discharge one of the parties from further performance of his undertakings, it is for the court to determine whether the event has this effect or not. The test whether an event has this effect or not has been stated in a number of metaphors all of which I think amount to the same thing: does the occurrence of the event deprive the party who has further undertakings still to perform of substantially the whole benefit which it was the intention of the parties as expressed in the contract that he should obtain as the consideration for performing those undertakings? This test is applicable whether or not the event occurs as a result of the default of one of the parties to the contract, but the consequences of the event are different in the two cases. Where the event occurs as a result of the default of one party, the party in default cannot rely on it as relieving himself of the performance of any further undertakings on his part and the innocent party, although entitled to, need not treat the event as relieving him of the performance of his own undertakings. This is only a specific application of the fundamental legal and moral rule that a man should not be allowed to take advantage of his own wrong. Where the event occurs as a result of the default of neither party, each is relieved of the further performance of his own undertakings, and their rights in respect of undertakings previously performed are now regulated by [legislation as to frustrated contracts]. . … It was early recognised that contractual undertakings were of two different kinds: those collateral to the main purpose of the parties as

expressed in the contract, and those which were mutually dependent so that the non-performance of an undertaking of this class was an event which excused the other party from the performance of his corresponding undertakings. In the nomenclature of the eighteenth and early nineteenth centuries, undertakings of the latter class were called ‘conditions precedent’, and a plaintiff under the rules of pleading had to aver specially in his declaration his performance or readiness and willingness to perform all those contractual undertakings on his part which constituted conditions precedent to the defendant’s undertaking for non-performance of which the action was brought. The fact that the emphasis in the earlier cases was on the breach by one party to the contract of his contractual undertakings, for this was the commonest circumstance in which the question arose, tended to obscure the fact that it was really the event resulting from the breach which relieved the other party of further performance of his obligation; but the principle was applied early in the nineteenth century and without analysis to cases where the [page 520] event relied on was one brought about by a party to a contract before the time for performance of his undertakings arose, but which would make it impossible to perform those obligations when the time to do so did arrive. … 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 on has this consequence is the same whether the event is the result of the other party’s breach of contract or not, as Devlin J pointed out in Universal Cargo Carriers Corp v Citati.16 (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. Lawyers tend to speak of this classification as if it were comprehensive, partly for the historical reasons which I have already mentioned, and partly because Parliament itself adopted it in the Sale of Goods Act 1893, as respects a number of implied terms in contracts for the sale of goods and has in that Act used the expressions ‘condition’ and ‘warranty’ in that meaning. But it is by no means true of contractual undertakings in general at common law. 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 intended that he should obtain from the contract; and such a stipulation, unless the parties have agreed that breach of it shall entitle the non-defaulting 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 on 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

[page 521] 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 owners’ 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 [counsel for the charterers’] 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 1893, and a different breach of which may have only the same effect as that ascribed to a breach of ‘warranty’ under that Act. … What the judge had to do in the present case as in any other case where one party to a contract relies on a breach by the other party as giving him a right to elect to rescind the contract, was to look at the events which had occurred as a result of the breach at the time at which [Kawasaki] purported to rescind the charterparty, and to decide whether the occurrence of those events deprived [Kawasaki] of substantially the whole benefit which it was the intention of the parties as expressed in the charterparty that [Kawasaki] should obtain from the further performance of their own contractual undertakings. … The question which the judge had to ask himself was, as he rightly decided, whether or not, at the date when [Kawasaki] purported to rescind the contract, namely June 6, 1957, or when [Hongkong Fir] purported to accept

such rescission, namely Aug 8, 1957, the delay which had already occurred as a result of the incompetence of the engine-room staff, and the delay which was likely to occur in repairing the engines of the vessel and the conduct of [Hongkong Fir] by that date in taking steps to remedy these two matters, were, when taken together, such as to deprive [Kawasaki] of substantially the whole benefit which it was the intention of the parties they should obtain from further use of the vessel under the charterparty. In my view, in his judgment — on which I would not seek to improve — the learned judge took into account and gave due weight to all the relevant considerations and arrived at the right answer for the right reasons.

Comments 24.3.1 See Radan, Gooley, and Vickovich at 24.34–24.35, 24.64, 24.67, and 24.76. 24.3.2 For a discussion of this case in the context of an analysis of intermediate terms, see J W Carter, G J Tolhurst and E Peden, ‘Developing the Intermediate Term Concept’ [page 522] (2006) 22 Journal of Contract Law 268 and D Nolan, ‘Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd, The Hongkong Fir (1961)’, in C Mitchell and P Mitchell (eds), Landmark Cases in the Law of Contract, Hart Publishing, Oxford, 2008, pp 269–97. 24.4C Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd

(2007) 233 CLR 115 Court: High Court of Australia Facts: Koompahtoo was the owner of a large area of land near Morisset, south of Newcastle. In 1997 it entered into a joint venture

agreement with Sanpine, a property development company, to develop the land upon rezoning. The agreement did not expressly set out the circumstances in which either party could unilaterally terminate the agreement. The development generated considerable controversy within the local Aboriginal community, attracted criticism over environmental issues, and suffered from lack of capital. Despite considerable expense and delay, rezoning was not secured by the time an administrator was appointed to take over Koompahtoo in February 2003. The administrator sought information from Sanpine about the financial position of the joint venture, including details about joint venture loans that were secured by the land. After Sanpine failed to provide all the requested details, the administrator claimed there had been serious breaches by Sanpine of its joint venture obligations, including unexplained expenses, banking irregularities, and improper documentation and records. In December 2003 the administrator terminated the joint venture agreement on the basis of the alleged breaches. Sanpine sought a declaration that the termination was invalid. Issue: The issue before the High Court was whether Sanpine’s actions amounted to a breach of contract such as to justify the termination of the contract by Koompahtoo’s administrator. Decision: The High Court (Gleeson CJ, Gummow, Kirby, Heydon, and Crennan JJ) held in favour of Koompahtoo’s administrator. It held that Sanpine’s actions amounted to serious breaches of an intermediate term of the contract, in that they deprived Koompahtoo’s representatives on the joint venture management committee of the capacity to make informed decisions about the project that was the very subject of the contract. It rejected Sanpine’s argument that Koompahtoo had waived its rights to object to the breaches or was estopped from doing so. Extract: The extracts from the joint judgment of the High Court majority outline the circumstances that are required to be satisfied to ground a right to terminate a contract. The extract from the concurring judgment of Kirby J departs from the joint judgment insofar as it argues against the incorporation of intermediate terms into Australian law.

[page 523]

Gleeson CJ, Gummow, Heydon, and Crennan JJ In its letter of termination, Koompahtoo claimed that the conduct of Sanpine amounted to repudiatory breach of contract. The term repudiation is used in different senses. First, it 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 may be 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. (In this case, we are not concerned with the issues that arise where the alleged repudiation takes the form of asserting an erroneous interpretation of the contract. Nor are we concerned with questions of inability as distinct from unwillingness). Secondly, it may refer to any breach of contract which justifies termination by the other party. It will be necessary to return to the matter of classifying such breaches. Campbell J [the judge at first instance] said this was the sense in which he would use the word ‘repudiation’ in his reasons. There may be cases where a failure to perform, even if not a breach of an essential term … manifests unwillingness or inability to perform in such circumstances that the other party is entitled to conclude that the contract will not be performed substantially according to its requirements.17 This overlapping between renunciation and failure of performance may appear conceptually untidy, but unwillingness or inability to perform a contract often is manifested most clearly by the conduct of a party when the time for performance arrives. In contractual renunciation, actions may speak louder than words. In the past, some judges have used ‘repudiation’ to mean termination, applying it, not to the conduct of the party in default, but to the conduct of the party relying upon such default.18 It would be better if this were avoided.

Leaving to one side remedies of injunction to restrain breaches of contract, or specific performance to enforce contractual obligations, the ordinary remedy for breach of contract is an award of damages. 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 [administrator] say[s] 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. 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. [page 524] 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 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 the 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 … 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 [page 525] 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.19 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 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. 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 non-essential 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 ‘warranty’.20 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 events to which the breach gives rise’. 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. … 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. 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 [page 526] Finance (Australia) Ltd,21 Mason ACJ, Wilson, Brennan and Dawson JJ referred to Hongkong Fir with evident approval and said that the concept of the intermediate and innominate term brings 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. 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 circumstances. 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. 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. 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.22 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. 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,23 ‘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. … The approach of Campbell J was correct. The focus of attention should be the contract, and the nature and seriousness of the breaches. There being, at this stage, no concern with waiver, estoppel, variation or forbearance, the intention that is relevant is the common intention of the parties, at the time of the contract, as to the importance of

the relevant terms and as to the consequences of failure to comply with those terms. This is a question of construction of the contract to be decided in the light of its commercial purpose [page 527] and the business relationship it established. The contract established a joint venture for a land development project of considerable size and complexity, to be carried out over a number of years. Koompahtoo brought to the joint venture its land. Sanpine brought its management and financial expertise. Sanpine’s obligations as to dealing with joint venture funds (which were borrowed on the security of Koompahtoo’s land) and maintaining proper books and accounts were of importance, not only to working out the ultimate result of the joint venture when the land had been developed and sold, but also to enabling the parties (and a person such as the administrator) to know material facts, and to make decisions and judgments informed by that knowledge. The inability of Sanpine to inform the administrator, or even the trial judge, of the true financial position of the joint venture, and to produce informative joint venture accounts, exemplifies the point. It was not within the contemplation of the contract that it should have been necessary for Koompahtoo, at any time, to have engaged in extensive legal process in order to find out what had become of the money borrowed on the security of its land, or to assess the financial state of the joint venture. … Even if one were to accept that all of the contractual obligations with which Sanpine failed to comply were inessential in that, on the true construction of the contract, not every breach would justify termination and that the obligations were intermediate terms in the sense earlier discussed, nevertheless … the breaches of Sanpine were in a number of respects gross, and their consequences were serious. Once again, the experience of the administrator following his appointment, and the unsuccessful attempts at the hearing before Campbell J to explain the use of all the funds borrowed on the security of Koompahtoo’s land, demonstrate that the breaches … went to the root of the contract. As a matter of construction of the contract, it ought to be accepted that breaches of that

order deprived Koompahtoo of a substantial part of the benefit for which it contracted. Such breaches justified termination. On that ground, we would uphold the decision of the primary judge.

Kirby J Essential and non-essential terms: Professor Jane Swanton, writing in 1981, commented that a point had then been reached in the evolution of the English law of contracts where it might have been expected that the common law would have abandoned the distinction between conditions and warranties.24 It is, after all, a distinction often difficult to draw in practice. It occasions litigation. It is often circular, in the sense that ‘conditions’ or ‘essential terms’ are, in the usual case, judged to be such because the drastic consequences that flow from their breach are considered to warrant termination in all of the circumstances. When this conclusion is reached it is the drastic consequences that emerge as the important criterion for relief. The description of the character of the term that is breached is no more than a consequential label. The categories thus represent a classic instance of consequential or circular reasoning. Notwithstanding these difficulties, the law has persisted with the distinction. It has become well entrenched. I am prepared to accept that it is useful to maintain the rule that some [page 528] contractual terms, limited in number, are so critical to particular contracts that their breach will give rise to an automatic right to terminate. I accept that such terms can be identified and characterised a priori as ‘essential’. I would not disagree that whether or not a term is to be so characterised is a question to be determined with reference to the actual content of the contract, viewed in the context of the entire commercial relationship between the parties. With respect, however, I have reservations that the reasoning of Jordan CJ in Tramways Advertising supplies the relevant test. This is so

notwithstanding its adoption in other cases.25 In DTR Nominees Pty Ltd v Mona Homes Pty Ltd, Murphy J remarked: This ‘test’ is so vague that I would not describe it as a test. It diverts attention from the real question which is whether the nonperformance means substantial failure to perform the contractual obligations. The inquiry into the motivation for entry into the contract is not the real point. Numerous purchasers may enter into similar contracts with widely different motives. What does it matter if [the ‘innocent’ party] would have entered the contract even if the terms were as [the party alleged to be in breach] claimed them to be? 26

As a matter of logic and principle, there is much force in this criticism. It is difficult to see how reference to the ‘common intention’ of the parties at the time of contract formation advances the decision in a case such as the present. It is an artificial criterion in that it demands the drawing of inferences as to the parties’ reactions to contingencies that in fact might (and usually would) never have been anticipated. It also affords scope for the importation of subjective considerations in a manner inconsistent with the modern general approach to the formation of contracts. In my view, it is preferable to place the ‘test’ on a different footing and to inquire into the objective significance of breach of the term in question for the parties in all the circumstances. I would favour that approach. If it is adopted, it is difficult to see what purpose purporting to conduct a retrospective investigation of the ‘common intention’ of the parties serves. The court creates an objective postulate. It applies it to the facts. There is then no need to resort to the fiction that Tramways Advertising introduces. The actual consequences of a default that has occurred in fact ought not to be taken into account in determining whether or not the term of the contract that is breached is ‘essential’ in character. If the position were otherwise, the purpose of maintaining a separate a priori class of ‘essential’ terms would be defeated. It would be impossible to distinguish between an ‘essential’ term and a ‘non-essential’ term in respect of which serious breach could be said to ‘go to the root’ of the contract. Intermediate or innominate terms: The persistence of the law with the distinction between essential and non-essential terms necessarily gave rise

to serious risks of practical injustice. It was this realisation that led to the invention of so-called ‘intermediate’ or ‘innominate’ terms. It was Diplock LJ who inserted this new class of contractual terms somewhere between [page 529] ‘conditions’ and ‘warranties’. He did so in Hongkong Fir.27 The concept … became entrenched in a number of decisions of English courts and judges that followed. At the time of these developments, it was, for the most part, normal for Australian courts to follow English decisions affecting basic doctrines of the common law without serious question. Thus, the ‘intermediate’ or ‘innominate’ term entered into the discourse of this Court without any real consideration of its conceptual soundness or practical usefulness. However, despite occasional approval of taxonomies that incorporated the classification, this Court has not until this appeal given it unequivocal endorsement in a decision for which such recognition comprised part of the ratio decidendi of the case. It might have been ‘assumed’ to be correct; but that was the way of earlier times. In the present case, the joint reasons defend the so-called ‘intermediate’ term derived from Hongkong Fir. Moreover, it is made explicit that the conclusion in the joint reasons depends upon the reception of that concept into law. The joint reasons suggest that an ‘intermediate’ term will have been breached where default in respect of a non-essential term is so significant as to go ‘to the root of the contract’, a very imprecise and apparently selfjustifying notion. Whether a breach goes ‘to the root of the contract’ is said to depend upon ‘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’ as well as whether or not damages would provide appropriate relief in the circumstances. Of paramount importance is the ‘construction of the contract’ itself. Respectfully, I disagree with this approach. If the classification of a contractual term as ‘intermediate’ is nothing more than a function of ex

post facto evaluation of the seriousness of the breach in all of the circumstances then the label itself is meaningless. It is not assigned on the basis of characteristics internal to, or inherent in, a particular term, as the joint reasons themselves acknowledge. Rather, it is imposed retrospectively, in consequence of the application of the judicial process. Effectively there is no basis, and certainly no clear or predictable basis, for separating ‘intermediate’ terms from the general corpus of ‘non-essential’ terms or ‘warranties’ prior to adjudication in a court. This throws into sharp relief the extreme vagueness of the Hongkong Fir ‘intermediate’ term. Its imprecision occasions difficulties and confusion for parties and those advising them. It has the potential to encourage a proliferation of detailed but disputable evidence in trial courts and consideration of such evidence in intermediate courts. It renders uncertain the distinctions between the several categories said to provide a legal justification for the very significant step of terminating an otherwise valid contract. Several additional factors militate against the incorporation of the so-called ‘intermediate’ term into Australian law. It is a comparatively recent invention, finding little or no reflection in the common law that preceded Hongkong Fir. It is inconsistent with the approach of Australian legislation dealing with breach of contract in particular contexts.28 [page 530] It is not reflected in the general codifications of contractual remedies law adopted in some common law countries. It is inconsistent with approaches suggested on the part of law reform bodies in England and Australia. It finds no reflection in the relevant parts of the United States Restatement of the law. Nor is it adopted in the Uniform Commercial Code of the United States. There is nothing like it in the United Nations Convention on Contracts for the International Sale of Goods 1980. Nor does it appear in the UNIDROIT Principles of International Commercial Contracts 2004. Even where recognising a classification analogous to ‘essential’ terms, none of these codifications encumbers itself with an artificial additional subdivision of the broad class of ‘non-essential’ terms that remains. It is true that Mr Edwin Peel, the present author of Professor Treitel’s The

Law of Contract, expresses a preference for the retention of the ‘intermediate term’ classification in the context of English law, citing what he describes as its ‘practical’ usefulness.29 I am as sensitive as the next judge to the common triumph of pragmatism over principle in the history of the common law. However, for reasons explained above I have considerable doubts as to the suggested justification in this case. The text does not refer to Australian case law on the subject. In any case, Mr Peel acknowledges that there is authority for, and ‘considerable force in’, the ‘alternative view that there are only two categories: conditions and other terms’.30 This represents the classification that I would favour. It is more traditional. It has the weight of history on its side. It recognises the seriousness of providing a further classification with the potential to authorise the termination of a valid contract. It reduces the temptations of consequentialist reasoning essentially designed to fulfil the conclusion already contemplated or arrived at. And it avoids the difficulty of differentiating ‘intermediate’ or ‘innominate’ terms from essential ‘conditions’ and ‘other’ terms. I acknowledge that, in a sense, whether there are two or three species of contractual terms might well be in large part a ‘terminological problem’.31 However, getting the classification right has significant implications for countless contracting parties and legal practitioners, as well as for trial judges. I also recognise that this is an area of law in which it is difficult to establish rigid standards for the determination of future cases. Thus, Bryson JA noted in the Court of Appeal: Whether or not there has been a repudiation [in the broad sense] is a conclusion based on the application to the facts of each case of a standard which has not been, and I think cannot be formulated precisely or exhaustively. As with other legal standards, repudiation calls for judicial decision on whether conduct has passed a boundary although the precise location of the boundary is not clear.32 [page 531] However, the central point is that the performance of legal tasks is not assisted when misleading, imprecise and self-fulfilling labels are invoked in an attempt to rationalise results in individual cases after the event. Such

labels comprise a source of needless complication and disputation. If what is required is an evaluation of whether the circumstances of a particular breach are of such an objectively serious nature as to vindicate unilateral termination, then this Court should formulate the relevant principles to say so. Continued reference to the vague and artificial concept of ‘intermediate terms’ inhibits this exercise and obscures clear thinking in the performance of the legal task in cases such as the present. In earlier times this Court felt itself obliged to follow judicial developments of legal doctrine affecting the common law of contracts, as expressed in the higher English courts. Substantially, this was because of the then legal tradition and training and because Australian courts, including this Court, were subject to appeals to the Judicial Committee of the Privy Council. Now we answer to a more testing standard of rigour, persuasiveness and conceptual coherence. We are governed not only by our own past decisional authority but also by our consideration of relevant legal principle and applicable legal policy. An alternative formulation: It follows that I would endorse the argument advanced in the ninth Australian edition of Cheshire and Fifoot: It is difficult to see the necessity for introducing [an ‘intermediate’] category of terms as a means of legitimising termination by reference to the extent of loss actually caused by a breach. Unless otherwise agreed, a breach that substantially deprives the other party of the benefit of a contract should entitle that party to terminate it. No matter whether the term in question is essential, intermediate, or inessential. The identification of a third kind of term distinct from, and intervening between, essential terms (conditions) and inessential terms (warranties) further proliferates an already over-elaborate terminology, and is an obvious invitation to circularity of reasoning. Many judgments acknowledge, even if only indirectly, that loss of substantial benefit may be sufficient as such to justify termination by the injured party.33 Of the two taxonomies set out in the reasons of Campbell J, I prefer that proposed by Dr Seddon and Associate Professor Ellinghaus in the Australian edition of Cheshire and Fifoot. I regard it as a correct statement of the common law of Australia. Thus, a right to terminate arises in respect

of: (1) breach of an essential term; (2) breach of a non-essential term causing substantial loss of benefit; or (3) repudiation (in the sense of ‘renunciation’). The common thread uniting the three categories is conduct inconsistent with the fundamental postulate of the contractual agreement. This scheme of classification affords the requisite ‘flexibility’ to ensure just outcomes in individual cases — a proper concern upon which the joint reasons rightly place emphasis. However, it avoids the need to invent socalled ‘intermediate terms’. It also simplifies the determination of the consequences of breach of a contractual term, removing needless steps [page 532] from the process of reasoning. Under taxonomies incorporating the ‘intermediate term’, a finding that a term has been breached requires a determination of whether that term is essential or non-essential. If it is the latter, the court must then inquire as to whether it is of an ‘intermediate’ character. If the answer to this question is in the affirmative, the court must make a further determination of whether the breach was of ‘sufficient seriousness’ to warrant termination. The latter two steps are interrelated. However, when the ‘intermediate’ term is excluded, the process of reasoning is simplified and clarified. Either the term breached is essential or it is non-essential. It cannot somehow be somewhere in between. If it is the former, termination will be justified. If it is the latter, the court can turn its attention directly to the objective indicia of ‘substantial loss of benefit’ without feeling a need to affix the ‘intermediate’ label on the contractual terms ex post facto.

Comments 24.4.1 See Radan, Gooley, and Vickovich at 24.10–24.11, 24.13, 24.20, 24.34, 24.36, 24.37, 24.72, and 24.76. 24.4.2 For discussions of this case see J W Carter, ‘Intermediate Terms Arrive in Australia and Singapore’ (2008) 24 Journal of Contract Law 226 and B Hobson, ‘A Case Note on Koompahtoo Local Aboriginal

Land Council v Sanpine Pty Limited’ (2008) 10 University of Notre Dame Law Review 139.

TIME STIPULATIONS AND NOTICES TO COMPLETE 24.5C

Louinder v Leis (1982) 149 CLR 509

Court: High Court of Australia Facts: By a contract dated 1 November 1979 Louinder agreed to sell a boarding house at Stanmore in Sydney to Leis for $79,500. Prior to exchange of contracts Leis discovered that a sewer line ran under the building, making it difficult to borrow money on the security of the land. The contract did not fix a time for completion, nor did it make time of the essence. Pursuant to cl 4 of the contract Leis was required to tender a transfer to Louinder within 28 days from the delivery of Louinder’s statement of title. The statement of title was delivered on 2 November 1979. At the date of the contract the property was subject to a $30,000 mortgage under which interest was payable quarterly. Leis wanted to acquire the property as an investment and he asked Louinder if he would stay on and look after it. Louinder agreed. Although Leis needed finance to complete the purchase, Louinder refused to agree to Leis taking over the existing mortgage. In late November 1979 Louinder requested a deferment of settlement for three months. Within a few days of this request Leis telephoned Louinder to advise that this was in order, only to be informed by Louinder that he had changed his mind and that he wanted to settle within a week. [page 533] On 8 February 1980 Louinder served a notice to complete on Leis, in which completion of the contract was required no later than 21 days from the date of service of the notice. As at that date Leis had not

tendered to Louinder a transfer for execution. As completion did not occur within the time stipulated by the notice to complete, Louinder served a notice of termination dated 4 March 1980. Leis denied that the contract was validly terminated and sought an order of specific performance. Louinder cross-claimed, seeking a declaration that the contract was validly terminated. Issue: The central issue before the High Court was whether Louinder’s notice to complete was valid. This raised the broader question of when a party to a contract for the sale of land is entitled to serve a notice to complete. Decision: The High Court (Gibbs CJ, Stephen, Mason, Wilson, and Brennan JJ) unanimously held in favour of Leis and that Louinder had no basis for serving the notice to complete on 8 February 1980. Extract: The extracts from the judgments of Mason J and Brennan J outline the relevant principles relating to the nature of time stipulations and notices to complete.

Mason J The principal issue in the appeal is: in what circumstance is a party to a contract for the sale of land entitled to give notice to complete making time the essence of the contract? [Louinder’s] prospects of success in the appeal depended very largely, if not entirely, on his obtaining leave to amend his notice of appeal. His failure on that issue almost inevitably means that he must fail on the appeal itself. But as the question sought to be raised is of particular importance in New South Wales, where it has been common practice to enter into contracts which do not fix a date for completion, we should deal with it. At the outset we need to keep in mind (a) the difference between a contract which does not fix a time for completion and one which does, though not making time of the essence; and (b) the difference between breach of an obligation to complete the contract on a stipulated date or within a reasonable time, as the case may be, and a breach of some other obligation imposed by the contract, for example cl 4 of the instant contract. The entitlement to give notice having the effect of making time of the essence varies in these situations.

A discussion of the topic necessarily demands some mention of the difference in attitude of the common law and equity to time stipulations in contracts. The date for completion is a term of the contract, breach of which would at common law entitle the innocent party to determine the contract and recover damages. If, however, the parties did not make time of the essence of the contract, equity would order specific performance, unless to do so would be unjust, and would prevent the innocent party from enforcing his common law rights.34 By reason of the approach taken by equity a practice developed whereby an innocent party, after default by the other party, gave notice requiring completion of the contract within a reasonable specified time, thereby seeking to establish, if the notice was not complied with, [page 534] that there had been such delay as to disentitle the party at fault from specific performance and to justify rescission of the contract. This practice, in its application to an open contract, was indorsed in Green v Sevin.35 The contract in Green v Sevin was an open contract. Under such a contract, Fry J pointed out, the purchaser was entitled to a reasonable time for performing his contract. His Lordship denied that one party had a right to limit the time for the doing of an act, independently of delay on the part of the other party, saying: 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. Fry J accepted that one party cannot remake the contract by unilaterally making time of the essence when consensually it is not so and went on to say: There must have been such improper conduct on the part of the other as to justify the rescission of the contract sub modo, that is, if a reasonable notice be not complied with.36

There is, I think, nothing in the judgment or in the earlier authorities which it examines to support the view that his Lordship was asserting that in the case of a contract fixing a date for completion unreasonable delay justifying rescission, rather than mere delay in completing on the stipulated date, was an essential qualification of the innocent party’s right to give a notice. Until Smith v Hamilton37 there seems to have been no judicial authority for the proposition that an innocent party could not give a notice to complete a contract specifying a date for completion, time not being of the essence, unless the other party was guilty of unreasonable delay, as distinct from mere failure to complete on the date fixed. Certainly some of the text writers suggested that the principle stated in Green v Sevin applied to contracts of this kind but these suggestions lacked judicial support. However, in relation to contracts fixing a date for completion, time not being of the essence, there was authority for the proposition that ‘even when time was not originally of the essence of the contract it may be made so by a later notice, either before or after the day named in the contract, requiring completion by a particular day, if the time allowed is reasonable …’. So said Talbot J speaking for himself and Humphreys J in Bernard v Williams.38 … But this approach has not been adopted in the later cases, the correct view being that stated by Fry J that one party cannot remake the contract by unilaterally making time of the essence in the absence of delay or default by the other party. In Smith v Hamilton the principle stated by Fry J in Green v Sevin was applied to a contract which fixed a date for completion, time not being of the essence. Harman J held that the effect of the contract was that completion was to take place on the date stipulated ‘or within a reasonable [page 535] time thereafter’39 and that the innocent party could not by notice ‘make time of the essence’ or rescind after the date fixed for completion and before a reasonable time had elapsed, the other party having indicated that her delay was temporary only. Harman J40 quoted the comment in the judgment of the Privy Council in Jamshed Khodaram Irani v Burjorji

Dhunjibha, where Lord Haldane, with reference to time stipulations in contracts, said: But equity would not assist where there had been undue delay on the part of one party to the contract and the other had given him reasonable notice that he must complete within a definite time.41 … Smith v Hamilton … seems not to have been confirmed by judicial decision until Falconer v Wilson42 although it was mentioned without disapproval by Hardie A-JA in Morgan v Beeby43 where the contract evidently did not fix a time for completion, but did fix a time for delivery of the transfer, the purchaser being out of time. Smith v Hamilton was likewise accepted in New Zealand.44 In Falconer v Wilson Mahoney J rejected the view that to enable a party to give notice it was necessary that (a) the recipient had been guilty of such default as would have entitled the first party to rescind at common law and (b) the recipient had been guilty of unreasonable delay or default. His Honour held that (b) alone was necessary to justify the giving of a notice. His Honour’s acceptance of Smith v Hamilton shows that he was not saying that any breach of any term of a contract would justify the giving of notice. He said: A term in a contract may be such that from the inception of the contract a breach of it would not give rise to a right of rescission; or it may be such that, although initially an essential term, the parties, by allowing the stipulated time to pass or otherwise, have reduced the term to one, a breach of which will not warrant rescission. … In my opinion, in each of these cases, a party may, by giving a proper notice making time of the essence, bring into being a right of rescission.45 In each case it would be the default involved in non-compliance with requirement of a reasonable notice that justifies the rescission, though the default existing at the time the notice was given was insufficient to justify it. A more liberal approach was taken by Barwick CJ and Jacobs J in their joint judgment in Neeta (Epping) Pty Ltd v Phillips, when they said:

In cases where the contract contains a stipulation as to time but that stipulation is not an essential term then before a notice can be given fixing a time for performance, not only [page 536] must one party be in breach or guilty of unreasonable delay, but also the party giving the notice must himself be free of default by way of breach or antecedent relevant delay. Only then may a notice be given fixing a day a reasonable time ahead for performance and making that time of the essence of the contract.46 The reference to ‘breach’ or ‘unreasonable delay’ is explained by the circumstance that the passage is directed to stipulations as to time generally, viz those which stipulate a date and those which call for performance within a reasonable time. The reference to ‘breach’ applies to the former, ‘unreasonable delay’ to the latter, and to the former where there has been a waiver of the breach or the innocent party is disentitled to rely on it. Their Honours pointed out that in relation to the giving of notice three questions arise: (1) Was the other party ‘in breach of any term of the contract or guilty of unreasonable delay’?; (2) Was the innocent party in ‘breach of any term of the contract or guilty of any antecedent relevant delay’?; (3) Was the time fixed reasonable in all the circumstances? What did their Honours intend by their expression ‘in breach of any term of the contract’? Did they have in mind ‘a mere breach of contract’ or ‘a serious breach of contract’? Since Neeta (Epping) this question has been much debated. To me it seems that their Honours meant what they said and that they had in mind a breach of contract, whether serious or slight. This is the view which Wootten J in Winchcombe Carson Trustee Co Ltd v Ball-Rand Pty Ltd took of the remarks made in Neeta (Epping). His Honour followed the view expressed by Barwick CJ and Jacobs J and declined to follow Smith v Hamilton, distinguishing Green v Sevin on the ground that it related to an open contract. After an illuminating review of the authorities his Honour concluded that Smith v Hamilton did not correctly state the law and that the principle expressed in Neeta (Epping) provided a more

‘certain framework for the conduct of conveyancing business than the law as stated’47 in [some] text books. In my view Barwick CJ and Jacobs J were right. … The non-essential stipulation as to time is a term of the contract enforceable by an action for damages and it is the breach of this term that justifies the giving of the notice. By virtue of s 13 of the Conveyancing Act 1919 (NSW) stipulations in contracts as to time which would not have been 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’. There has been an element of uncertainty affecting the operation of s 13 arising from the longstanding controversy as to the true principle underlying equity’s attitude to time stipulations. In Seton v Slade48 Lord Eldon offered two alternative explanations. The first is that equity construes the contract differently by treating the time stipulation as formal only so that it is satisfied by compliance within a reasonable time. The second is that equity exercises a jurisdiction similar to relief against forfeitures and penalties, construing the contract as it would be construed at common law, but restraining the parties from an unconscionable [page 537] exercise of their legal rights. The true position is that equity and common law differed not so much in the construction of the contract as in the consequences which they assigned to a breach of it. As Lord Cairns LJ said in Tilley v Thomas ‘The legal construction of the contract … is, and must be, in equity the same as in a Court of law’.49 … To the same effect are the speeches of Lord Atkinson and Lord Parker of Waddington in Stickney v Keeble,50 Lord Parker pointing out ‘that it was only for the purposes of granting specific performance that equity in this class of case interfered with the remedy at law’.51 Equity departed from the common law in insisting that a breach of a stipulation as to time only entitled the innocent party to rescind where time was of the essence of the contract. It was otherwise at common law.

Consequently equity would intervene in appropriate cases to prevent the innocent party from enforcing his common law right to rescind and to assert her own rule. It follows that in such cases the operation of s 13 converts the character of a time stipulation from essential to nonessential; it does not otherwise alter its terms or its construction. Thus the time stipulation is not read as if it called for performance by the stipulated date or ‘within a reasonable time’ or ‘within a reasonable time thereafter’. In this respect I agree with the recent decision of the House of Lords in Raineri v Miles52 and that of the New South Wales Court of Appeal in McNally v Waitzer.53 I reject the view of Harman J in Smith v Hamilton and the earlier comment of Maugham J in In re Sandwell Park Colliery Co; Field v The Company that ‘a clause fixing the date for completion is equivalent to a clause stating that completion shall be on that date or within a reasonable time thereafter’54 … It has been suggested … that Maugham J’s comment reflects the thinking embedded in the speech of Lord Parmoor in Stickney v Keeble.55 Indeed, the transfer of the principle in Green v Sevin to contracts fixing a non-essential date for completion is more readily understood if the difference between the attitude of equity and common law was more marked than I have suggested, equity treating the stipulation as if it provided for completion on the date mentioned or within a reasonable time thereafter. In that event failure to complete on the date mentioned would not be a breach of contract; no breach would arise until the expiry of a reasonable time. Lord Diplock and Lord Simon of Glaisdale in United Scientific Holdings Ltd v Burnley Borough Council examined the legislative ancestors and relatives of s 13 and the observations of Lord Parker of Waddington in Stickney v Keeble. Referring to the approach of the Court of Chancery Lord Diplock said: Once the time had elapsed that was specified for the performance of an act in a stipulation as to time which was not of the essence of the contract, the party entitled to [page 538]

performance could give to the other party notice calling for performance within a specified period: and provided that the period was considered by the court to be reasonable, the notice had the effect of making it of the essence of the contract that performance should take place within that period.56 Lord Simon expressed the matter rather differently. He said: In equity, and now in the fused system, performance had or has, in the absence of time being made of the essence, to be within a reasonable time. What is reasonable time is a question of fact to be determined in the light of all the circumstances. After the lapse of a reasonable time the promisee could and can give notice fixing a time for performance. This must itself be reasonable, notwithstanding that ex hypothesi a reasonable time for performance has already elapsed in the view of the promisee. The notice operates as evidence that the promisee considers that a reasonable time for performance has elapsed by the date of the notice and as evidence of the date by which the promisee now considers it reasonable for the contractual obligation to be performed.57 Earlier his Lordship indicated that breach of a non-essential term gives rise to a right to damages.58 For reasons already given I regard Lord Diplock’s statement as correct. It accords with Neeta (Epping) and Raineri v Miles. Accordingly, delay beyond the stipulated date will give rise to a liability in damages. But because equity treats the time stipulation as non-essential, mere breach of it does not justify rescission by the innocent party and will not bar specific performance at the suit of the party in default. 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 non-compliance 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. If the Smith v Hamilton view were to prevail and unreasonable delay were

required to precede the giving of a notice one is then driven to ask ‘What is the point of insisting on the giving of a notice which itself is required to fix a reasonable time for performance?’ The consequence would be to defer the innocent party’s right to rescind until such time as the other party has delayed for two periods, each one of which constitutes an unreasonable delay. This solution to the problem unnecessarily protects the party at fault at the expense of the innocent party. The Neeta (Epping) solution is more just; it enables one party to initiate the action once the other party is in breach. And it provides a little more certainty in determining when a notice may be given. [page 539] This solution is not unfair to the party who is guilty of a mere breach of contract. He is entitled to a notice which fixes a reasonable time in all the circumstances and those circumstances will include the fact that he has not been guilty of a serious breach of contract or of unreasonable or gross delay. There is nothing in all this to deny the correctness of the Green v Sevin principle in its application to open contracts. There the existence of unreasonable delay, this being the relevant breach of contract, is an essential qualification for the giving of a notice. In this case because the notice itself must allow a reasonable time for completion, the party at fault, having been guilty of unreasonable delay, is entitled to a further period, being a reasonable time for completion. Because the initial period of delay is no more than a breach of a non-essential time stipulation, without more it cannot found an inference of repudiation. One question which the joint judgment in Neeta (Epping) leaves unresolved is whether a notice to complete the contract can be given when the relevant breach of contract justifying the giving of a notice is not a breach of an obligation to complete but a breach of another term of the contract. In principle breach of a non-essential term justifies the giving of a notice fixing a reasonable time for the performance of that term. Generally speaking it does not entitle the innocent party to give notice fixing a time for completion of the contract. There are of course exceptions to this rule. Sometimes a contract will contain a condition which requires to be

performed on or before the date for completion. Unreasonable delay or default in complying with the condition may then amount to delay or default in completion justifying the giving of a notice to complete. At other times the delay or default in complying with a particular provision may be so inordinate as to justify the innocent party in fixing a reasonable time for completion, as, for example, when non-compliance with the particular provision has the practical effect of making it impossible to complete within the time stipulated or contemplated by the contract. It was such a situation that Barwick CJ and Jacobs J had in mind in Neeta (Epping) when, speaking of the purchaser’s failure to send to the vendor a transfer within twenty-eight days of the giving of particulars of title, they said: Not only was this a breach but it involved a long delay which cannot be explained by the course of events at the office of the Commissioner of Stamp Duties. If it stood alone it would entitle the vendor to give a notice to complete.59 … Thus, the general rule that a breach of a non-essential term entitles the innocent party to give a notice having the effect of making time of the essence in respect of that term is qualified so as to permit the giving of a notice having the effect of making time of the essence of the contract in respect of completion when the breach of the particular stipulation amounts to a breach of the obligation to complete or has the practical effect of making it impossible to complete the contract within the time stipulated or contemplated by the contract. [page 540] One final point should be mentioned. In Carr v J A Berriman Pty Ltd Fullagar J (with whose judgment all the other members of the Court concurred) said: If either (a) time is not originally of the essence, or (b) time being originally of the essence, the right to rescind for non-performance on the day is lost by election, the promisee can, generally speaking, only rescind after he has given a notice requiring performance

within a specified reasonable time and after non-compliance with that notice.60 This passage was referred to with evident approval by Gibbs J (with whom Jacobs J agreed) in Balog v Crestani.61 Mahoney JA in his judgment in Perri v Coolangatta Investments Pty Ltd62 expressed the view that the proposition enunciated by Fullagar J is not one of universal application for the reason that rescission for breach of a non-essential term is only justified when the breach amounts to a repudiation of the contract or a fundamental breach. It is apparent from the language used by Fullagar J that he was not intending to express a proposition of universal application. Certainly, as Mahoney JA recognized, what his Honour said applies to the completion of a contract for the sale of land. And there is no reason to think that it does not apply to provisions in a contract for the sale of land that are to be fulfilled within a reasonable time when those provisions constitute an essential step in the process of completion of the contract. In the event the appeal fails. There was no foundation for the vendors giving a notice to complete on 8 February 1980 as the contract did not fix a time for completion. The existence of unreasonable delay on the part of the purchaser was an essential qualification for the giving of a notice. The findings of fact made by the primary judge negated the existence of such delay.

Brennan J The majority of cases relating to notices to complete relate to contracts which fix a day for completion. The principles which they define are not easily translated to apply to contracts where no day is fixed, for the common law rule affecting the right to rescind — the right in the exercise of which equity might intervene — differs according to whether or not the contract stipulates a day for completion. At law, a stipulated day for completion of a contract for the sale of land is of the essence of the contract, and a failure to complete on or before the stipulated day is a breach of condition which entitles the innocent party to rescind. But equity, taking a different view of a time stipulation, would interfere with the legal remedy for the purpose of granting specific performance.63 It interferes only when it is possible without injustice to the

parties to decree specific performance despite a plaintiff’s delay in completion and it is only where that is possible that [page 541] the rules of law are statutorily assimilated to the rules of equity.64 When, on the passing of the day fixed by the contract for completion, the legal right to rescind arises, generally speaking the promisee can exercise his legal right to rescind for breach only after he has given a notice requiring performance within a specified reasonable time and after non-compliance with that notice.65 The effect of such notices was said by Griffith CJ in Canning v Temby ‘not to confer an offensive right or complete a cause of action, but to confer a defensive right in equity as well as at law to take advantage of the other party’s default’.66 A notice to complete is thus a step in securing the lifting of the equitable restraint upon the legal right to rescind. A notice to complete is sometimes said to make time of the essence. That is a convenient description of its effect, though it may be misunderstood. A valid notice makes time of the essence in that a consequence of non-completion within the time specified by the notice is to enable rescission by the promisee to be given effect in equity as well as in law, equity taking the day specified in the notice to be the essential time for completion. Lord Diplock said in United Scientific Holdings Ltd v Burnley Borough Council: Once the time had elapsed that was specified for the performance of an act in a stipulation as to time which was not of the essence of the contract, the party entitled to performance could give to the other party notice calling for performance within a specified period: and provided that the period was considered by the court to be reasonable, the notice had the effect of making it of the essence of the contract that performance should take place within that period.67 But a notice to complete does not make the time fixed by the contract of the essence; it makes the time fixed by the notice of the essence.68 A notice to complete does not alter the time fixed for performance by the

contract. It affects the exercise of a legal right to rescind and then only if the case is ‘appropriate for the granting of equitable remedies by way of relief against the loss by a party of his contractual rights by reason of a failure on his part to perform the contract in precise accordance with its provisions as to time’.69 Once the case ceases to be appropriate for the granting of equitable remedies, the parties are left to their remedies and liabilities at law, as Romilly MR said in Parkin v Thorold: ‘… if the party receiving such notice does not complete within the time so specified, equity will not enforce a specific performance of the contract, but leave the parties to their remedies and their liabilities at law.’70 Apart from any evidentiary effect which a notice to complete may have, its operation affects only the relief, if any, which equity may afford to a party guilty of delay. [page 542] When the contract in hand does not fix a day for completion and a reasonable time is expressed or implied, time is not of the essence at law,71 and no day is contractually fixed when a legal right to rescind will arise. It is difficult to see how a notice to complete can shorten the time for completion so as to make the day fixed by the notice of the essence of the contract. Even if equity should be able to hold that time is of the essence in a contract which does not fix a day for completion, a notice might affect only the equitable remedy; it could not affect the contractual time for completion. The subject matter of the contract in Macbryde v Weekes72 was such as to induce Romilly MR to hold that time was of the essence though no day for completion was fixed by the contract. There had been some delay on the part of the vendor, and the purchaser gave a notice specifying a day for completion. The Master of the Rolls held that the vendor’s failure to comply with the notice disentitled him to the assistance of the Court for the specific performance of the contract,73 but his Lordship said in the course of his judgment, after referring to the subject matter of the contract: In such a case, it is incumbent upon the vendor to use his utmost diligence to complete his part of the contract, although no time is

specified in the contract; and in equity, the purchaser is at liberty to fix a time for the completion of the contract, by giving reasonable notice for that purpose. No doubt this would have no operation at law; the difference being very marked between law and equity, so far as regards this question; law only considering time as of the essence of the contract, when it is expressly specified, whatever may be the condition of the parties and the property, but equity considering time essential in those cases only, in which injury would be inflicted upon one party by disregarding it.74 … Here, there was no delay prior to the giving of the notice. And as there was no such delay thereafter as entitled [Louinder] to rescind, the appeal should be dismissed with costs.

[page 543]

Comments 24.5.1 See Radan, Gooley, and Vickovich at 24.51. 24.5.2 For a comprehensive analysis of all the principles relating to notices to complete, see P Butt, The Standard Contract for the Sale of Land in New South Wales, 2nd ed, LBC Information Services, Sydney, 1998, pp 636–72.

TERMINATION PURSUANT TO A CONTRACTUAL RIGHT TO TERMINATE 24.6C

Sargent v ASL Developments Ltd (1974) 131 CLR 634

Court: High Court of Australia Facts: Mrs V Sargent, Mr and Mrs C Sargent, and Mr and Mrs K

Turnbull (the vendors) each owned separate parcels of land, which in late 1969 they contracted to sell to ASL Developments Ltd. Clause 16 in each of the three contracts stipulated: Should it be established prior to completion that at the date of this agreement the property was affected by any town and country planning scheme or interim development … otherwise than as stated in the Fourth Schedule hereto or was affected by any Residential District Proclamation … or by any existing proposals or realignment, widening or siting of a road … otherwise than as disclosed in the said Fourth Schedule either party shall be entitled to rescind this Agreement by notice in writing to the other. The Fourth Schedule to the contracts stated: The property is affected as shown in the copy certificate under Section 342AS of the Local Government Act 1919 annexed hereto. Opposite the Fourth Schedule in the margin were the words ‘Delete if not applicable’. No certificates were annexed to the contracts. At the time the contracts were entered into all three lots were zoned as ‘rural and non-urban’ or ‘non-urban’ under the local planning scheme. The Turnbulls were deemed to have known of this because their solicitor was aware of the zoning, having obtained a zoning certificate from the local council to that effect. The other two vendors had actual knowledge of the zoning of the land. However, it was not until mid-1972 that the vendors, having obtained legal advice, became aware that the contracts gave them a right to terminate on account of the lands being affected by the local planning scheme. In accordance with the contracts the vendors received various payments due to them under their respective contracts. Subsequently, each of the vendors sought to terminate their respective contracts on the basis of the fact that the land was affected by local planning schemes.

[page 544] ASL then brought proceedings in the Supreme Court of New South Wales for the specific performance of the contracts. The trial judge ordered specific performance of the contracts, ruling that the vendors, although having a right pursuant to cl 16 to terminate the contracts on the ground that the properties were affected by a town planning scheme otherwise than as stated in the Fourth Schedule, had waived their rights to terminate by affirming their respective contracts. The vendors appealed to the High Court. Issues: The issues before the High Court were whether cl 16 gave a right to terminate in the circumstances of the case and whether the conduct of the vendors amounted to waiver of such a right, thereby precluding them from exercising that right. Decision: The High Court of Australia (McTiernan ACJ, Stephen and Mason JJ) unanimously dismissed the vendors’ appeals. The court held that cl 16 did give a right of termination, but that the vendors had affirmed the contracts. Consequently there was no reason for the court to refuse ordering specific performance in favour of ASL. Extract: The extracts from the judgments of Stephen J and Mason J discuss the principles relevant to the two issues before the court in the context of the facts of the case.

Stephen J Two quite distinct questions arise [in this case]. The first concerns the interpretation and effect of [cl 16]. The second question only arises if, as I consider to be the case, that clause operated adversely to [ASL] by affording to the vendors a right of rescission because of the failure to have any certificate annexed to the contracts; this question is whether or not the vendors by their conduct thereafter lost their right to rescind. The first question is exclusively a matter of construction. … I consider cl 16 to be applicable, whenever a rescission notice purports to have been given under it, so long as in any proceedings in

which its validity is brought into question, the rescinding party can then satisfy the court that at date of contract the land was relevantly affected in a manner not disclosed in the schedule. I turn now to the second main question raised by these appeals: whether the vendors, having had conferred upon them a right of rescission as a result of the absence from the Fourth Schedule of any statement that the lands were affected by a planning scheme, lost that right at some time before seeking to exercise it some 32 months after the right first arose. It is not by mere delay that it is said that the right of rescission was lost but rather by conduct evincing an intention to keep the contracts on foot at a time when the alternative, but inconsistent, right of rescission had become available. The vendors having two inconsistent rights were, it is said, bound to elect as between them and having elected to treat the contracts as subsisting they were thereafter bound by their election and thus forfeited their right of rescission. The doctrine of election as between two inconsistent legal rights is well established, but certain of its features are not without their obscurities. The doctrine only applies if the rights [page 545] 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. … [T]he 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. 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 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. … 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. … 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. 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. 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’.75 In Elder’s Trustee & Executor Co Ltd v Commonwealth Homes & Investment Co Ltd 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.76 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. …

[page 546] In the present appeals I conclude that … all that need be established in order for the doctrine of election to apply is knowledge by the vendors of the facts giving rise to inconsistent legal rights; the [vendors] are to be taken to know of their rights of rescission conferred by cl 16 and, of course, of their right to enforce the contracts according to their terms. If they then knew of the relevant facts giving rise to the rights of rescission, that is, the existence of a planning scheme affecting the lands sold, that is enough to invoke the doctrine. Their own interpretation or understanding of the nature or extent of their contractual rights will be irrelevant, so that it matters not at all whether they were aware of the existence of cl 16 or of its effect. … It is enough that they knew of facts which have brought cl 16, as so interpreted, into operation. The words or conduct ordinarily required to constitute an election must be unequivocal in the sense that it is consistent only with the exercise of one of the two sets of rights and inconsistent with the exercise of the other; thus for a lessor to continue to receive rent under a lease will be consistent only with his rights as lessor and inconsistent with the exercise of a right to determine the lease. However, less unequivocal conduct, only providing some evidence of an election, may suffice if coupled with actual knowledge of the right of election. There need be no expressed intention to elect, nor will an express disclaimer of such an intention be of any avail in preserving one right if in fact there be an exercise of another inconsistent right. For an election there need be no actual, subjective intention to elect, an election is the effect which the law attributes to conduct justifiable only if such an election had been made. … If the foregoing principles be applied to the present appeals they readily provide an answer in the case of Mrs Sargent’s contract and that in which Mr and Mrs C T Sargent were vendors. In these two cases the vendors knew at the date of contract that the lands they were selling were affected by a planning scheme, being zoned as ‘rural and non-urban’ or ‘non-urban’. This is enough to satisfy the requirement that an elector should have knowledge of the facts giving rise to his legal rights. The right of rescission conferred by cl 16 arose, inter alia, should the property be ‘affected by any town and country planning scheme’ made under Pt XIIA of

the Local Government Act 1919 as amended and the planning scheme of which these vendors were aware was in fact such a scheme. Their two inconsistent rights were either to insist on continued performance by the purchaser of its obligations under the contracts of sale or instead to rely upon the right of rescission under cl 16. Their conduct which amounted to an election in favour of the former right consisted of the receipt over a period of some 32 months of quarterly interest payments under the contracts, their demand for and receipt of certain payments of moneys in recoupment of increases in rates paid to the vendors, and which it had been agreed under the contracts that the purchaser should bear, and their involvement in the steps taken by the purchaser to have the lands brought under the provisions of the Real Property Act. These constitute unequivocal acts affirming the contracts and it follows that these vendors, having thereby made their election, could not thereafter rely upon the right to rescind conferred by cl 16. … [page 547] The position of the third appeal is different only because there was in the case of the Turnbulls no evidence that either of them had at any material time any knowledge of the matters referred to in cl 16; they otherwise are in the same position as are the three Sargents save that they received no reimbursement of rate moneys, and their receipt of moneys under the contract was of instalments of the purchase price rather than of interest. While the Turnbulls had no knowledge of the applicable town planning provisions their solicitor did; before the date of contract he had applied for and had received an appropriate certificate for annexure to the contract, although in fact it did not come to be so annexed. The question is, then, whether this knowledge on the part of their solicitor will operate so as to attract to the acts of affirmation the irrevocability of an election. The answer to this question may, I think, be approached in either of two ways and with the same result. Election as between inconsistent contractual rights does not call for any conscious choice as between two acts of rights, it being enough that there should be inten--tional and unequivocal

conduct together with knowledge of the facts giving rise to the legal rights. There need not, therefore, be a consciously ‘choosing mind’, as there must, in fraud, be a ‘wicked mind’. Now where, as in this case, a vendor employs a solicitor to attend to the carrying out of the legal aspects of a sale he necessarily authorizes that solicitor to attend to all the usual aspects of conveyancing practice; that authority will here extend to the obtaining of the necessary planning certificate and the solicitor’s knowledge, gained from that certificate, may properly be imputed to his clients since it was acquired both for the purpose of that transaction and in the course of it. Again, where a vendor so arranges matters that his solicitor undertakes on his behalf the carrying out of a conveyancing transaction as a whole he thereby not only authorizes his solicitor to perform all necessary steps but also places the solicitor in the position of acquiring at first-hand knowledge of relevant facts, at the same time depriving himself of the opportunity of acquiring such first-hand knowledge. If any such steps taken by the solicitor happen to constitute acts of affirmation of the continued existence of the contract they will be binding upon the client. If they be unequivocal and are performed at a time when the solicitor has himself acquired knowledge of facts giving rise to a right to rescind the contract, the client will, without the need to attribute to him the knowledge of his solicitor, be bound by those acts of affirmation as on an election; the duly authorized conduct of the solicitor, who has acquired the relevant knowledge, will, without either conduct or knowledge on the client’s part, constitute an effective election not to rescind the contract. On the findings of fact of the learned trial judge it is not clear whether the payments of instalments of purchase price made by the purchaser were received by the Turnbulls’ solicitor, who by the terms of the contract was expressly authorized to receive them, or by the Turnbulls personally. But, whichever was the case, one or other of the foregoing approaches to the matter will result in an irrevocable election affecting them. It is clear that the Turnbulls’ solicitor, then having knowledge of the zoning of the land, received from the purchaser’s solicitor a form of application to bring the land under the Real Property Act for his perusal and, if approved of by him, for completion and execution by the Turnbulls. This [page 548]

form he later returned to the purchaser’s solicitor duly completed and executed. This too was conduct consistent only with the contract then remaining on foot and it is conduct which the Turnbulls, by their execution of the application, can be seen to have authorized. It constitutes, in my view, a further act of election binding upon the Turnbulls.

Mason J Any discussion of the principles governing the circumstances in which a party’s words or conduct may preclude him from exercising a legal right which he possesses is beset with difficulties. They have their origin in the differences to be found in the various doctrines (election, waiver and estoppel) which may come into operation and in the differing concepts which each doctrine has at times been thought to embrace. As Lord Wright observed in Ross T Smyth & Co Ltd v T D Bailey, Son & Co, ‘“waiver” is a vague term used in many senses’.77 It may signify the legal grounds on which a person is precluded from asserting one legal right when he is entitled to alternative rights inconsistent with each other. The loss of the right in such a case is, as Lord Diplock said in Kammins Ballrooms Co Ltd v Zenith Investments (Torquay) Ltd ‘better categorized as “election” rather than as “waiver”’.78 Or it may mean the legal grounds on which a person is precluded from raising a particular defence to a claim against him. … Likewise with ‘estoppel’. It may signify common law estoppel by representation or that kind of estoppel which Jordan CJ in Franklin v Manufacturers Mutual Insurance Ltd described as ‘estoppel based merely on one’s own acts’,79 or the species of quasi-estoppel referred to by Lord Diplock in Kammins Ballrooms Co Ltd v Zenith Investments (Torquay) Ltd.80 It will make for greater certainty, therefore, if the present cases are regarded as cases of election. A person is said to have a right of election when events occur which enable him to exercise alternative and inconsistent rights, ie when he has the right to determine an estate or terminate a contract for breach of covenant or contract and the alternative right to insist on the continuation of the estate or the performance of the contract. It matters not

whether the right to terminate the contract is conferred by the contract or arises at common law for fundamental breach — in each instance the alternative right to insist on performance creates a right of election. Essential to the making of an election is communication to the party affected by words or conduct of the choice thereby made and it is accepted that once an election is made it cannot be retracted. No doubt this rule has been adopted in the interests of certainty and because it has been thought to be fair as between the parties that the person affected is entitled to know where he stands and that the person electing should not have the opportunity of changing his election and subjecting his adversary to different obligations. [page 549] A person confronted with a choice between the exercise of alternative and inconsistent rights is not bound to elect at once. He may keep the question open, so long as he does not affirm the contract or continuance of the estate and so long as the delay does not cause prejudice to the other side. An election takes place when the conduct of the party is such that it would be justifiable only if an election had been made one way or the other. So, words or conduct which do not constitute the exercise of a right conferred by or under a contract and merely involve a recognition of the contract may not amount to an election to affirm the contract. The central problem in these cases lies in ascertaining what in the eye of the law are the elements essential to the making of a binding election, in particular whether knowledge of the existence of the alternative right is a prerequisite in the party against whom election is alleged. The question is complicated because in some instances election may take place as a matter of conscious choice with knowledge of the existence of the alternative right and in other cases it may occur when the law attributes the character of an election to the conduct of a party. … If a party to a contract, aware of a breach going to the root of the contract, or of other circumstances entitling him to terminate the contract, though unaware of the existence of the right to terminate the contract,

exercises rights under the contract, he must be held to have made a binding election to affirm. Such conduct is justifiable only on the footing that an election has been made to affirm the contract; the conduct is adverse to the other party and may therefore be considered unequivocal in its effect. The justification for imputing to the affirming party a binding election in these circumstances, though he be unaware of his alternative right, is that, having a knowledge of the facts sufficient to alert him to the possibility of the existence of his alternative right, he has acted adversely to the other party and that, by so doing, he has induced the other party to believe that performance of the contract is insisted upon. It is with these considerations in mind that the law attributes to the party the making of a choice, though he be ignorant of his alternative right. For reasons stated earlier the affirming party cannot be permitted to change his position once he has elected.

Comment 24.6.1 See Radan, Gooley, and Vickovich at 24.61, 24.62, 24.105, 24.112, 35.25, and 35.29.

ANTICIPATORY BREACH 24.7C

Foran v Wight (1989) 168 CLR 385

Court: High Court of Australia Facts: On 24 December 1982 Mr and Mrs Wight contracted to sell land to Mr and Mrs Foran, who paid a deposit of 10 per cent upon entry into the contract. A term of the contract required the Wights to register a right of way in relation to the land prior to [page 550]

completion. The contractual completion date of 22 June 1983 was time of the essence. On 20 June 1983 the Wights advised the Forans that they had not yet registered the right of way and would not be in a position to complete the contract on the due date. In the light of the Wights’ stated inability to complete on the due date, the Forans abandoned their efforts to secure the necessary finance for completion. On 22 June 1983 the Forans did not attempt to perform their obligation under the contract of tendering the balance of the purchase price. On 24 June 1983 the Forans purported to terminate the contract. The Wights denied the validity of the termination notice on the ground that the Forans would not have been able to raise the necessary finance to complete the purchase on 22 June 1983. After having the right of way registered on 22 July 1983 the Wights unsuccessfully sought to enforce completion of the contract by the Forans. The Wights then purported to terminate the contract. The Wights subsequently sold the property to other purchasers. The dispute between the parties was as to whether the Forans had validly terminated the contract and were therefore entitled to a refund of the deposit. If the termination was invalid, the Wights were entitled to forfeit the deposit on account of the Forans’ failure to complete the purchase of the property. Issue: The issue before the High Court was whether the termination of the contract by the Forans was valid. Decision: The majority of the High Court (Brennan, Deane, Dawson, and Gaudron JJ; Mason CJ dissenting) held that the Forans had validly terminated the contract and ordered restitution in their favour of the deposit amount. Extract: The extracts from all the judgments of the High Court discuss the right to terminate and the requirement that the party terminating be ready, willing, and able to perform the contract.

Mason CJ (dissenting) This appeal raises an important question of principle. It concerns the entitlement of purchasers under a contract for the sale of land to terminate

the contract and recover their deposit following a statement by the vendors shortly prior to completion that they would be unable to complete on the date fixed for completion, completion on that date being an essential term of the contract, in circumstances in which the purchasers did not treat that repudiation as an anticipatory breach but terminated the contract after the time fixed for completion in consequence of the vendors’ failure to complete on the appointed day. … [T]he purchasers did not terminate for anticipatory breach. … [I]f the purchasers wished to terminate for anticipatory breach they should have done so ‘while the period specified by the contract for performance is unexpired’.81 … It follows that the purchasers terminated for actual breach, that is, for the vendors’ failure to complete on the day fixed for completion. It matters not that the actual breach occurred shortly after the anticipatory [page 551] breach and that the notice was given only four days after 20 June. The fact is that the purchasers allowed the time for performance to pass without electing to terminate and of necessity they relied on the actual breach, that breach being the natural consequence of the antecedent anticipatory breach. A failure by the innocent party to treat an anticipatory breach of an essential term as a repudiation and to terminate the contract has the effect of leaving the contract on foot, in which event it remains in force for the benefit of both parties, just as it would if the anticipatory breach had never occurred, subject to a qualification. … The qualification is that, if the repudiating party by his refusal to perform or other conduct intimates to the innocent party that he need not perform an obligation which is a condition precedent to the performance by the repudiating party of his obligation, and does not retract that intimation in time to give the innocent party an opportunity to perform his obligation, that party may be excused from actual performance of the condition precedent. The repudiating party then waives complete performance of the condition precedent and his conditional promise becomes unconditional. The term ‘waiver’ is generally used where one party by words or conduct relieves the other party from

timely fulfilment of a condition or performance of a promise, time being of the essence of the contract.82 The precise nature and extent of this qualification is critical to the outcome of the present case. In a contract for the sale of land, the vendor’s obligation to deliver a good title and the purchaser’s obligation to pay the purchase money are concurrent and mutually dependent obligations in the sense that they are ‘simultaneous acts to be performed interchangeably’.83 Generally speaking, a party in breach of such an obligation cannot terminate for the other party’s breach. But a party may be excused or absolved from performance of his concurrent obligation by conduct on the part of the other party amounting to a waiver or dispensation with performance. A repudiation by that party of his concurrent obligation may constitute such a waiver or dispensation. In that event the party excused or absolved from performance may terminate the contract and sue for damages. … The prevailing rules and forms of common law pleading in the eighteenth and nineteenth centuries, which necessarily reflected the principles of substantive law as applied by the courts, demonstrated that the courts treated readiness and willingness as being material to the existence of the plaintiff’s cause of action. The plaintiff was required to aver in his declaration the material elements in his cause of action. These elements included satisfaction or performance of all conditions precedent. Thus the plaintiff was required to aver performance of any condition precedent to, or concurrent with, performance of the defendant’s promise. Just as the plaintiff was required to plead and prove readiness and willingness in a suit for specific performance, so at common law he had to plead and prove that he was ready and willing in an action for damages for breach of contract. It followed that proof that the plaintiff was ready and willing to perform his obligation on which performance [page 552] of the defendant’s promise was expressed to be conditioned was regarded as being essential to the plaintiff’s cause of action. … As Stephen, Mason and Jacobs JJ observed in DTR Nominees:

A party in order to be entitled to rescind for anticipatory breach must at the time of rescission himself be willing to perform the contract on its proper interpretation. Otherwise he is not an innocent party, the common description of a party entitled to rescind for anticipatory breach.84 … [I]n relation to termination for actual breach, the principle is that established by the earlier decisions — the plaintiff is required to show that he was ready and willing to perform the contract if it had not been repudiated by the plaintiff. In other words, the requirement is that the plaintiff be ready and willing to perform except to the extent that the defendant dispensed with his performance. In the case of an anticipatory renunciation accepted by the plaintiff, the requirement of readiness and willingness extends only up to the time of acceptance because then the earlier repudiation results in an early termination of the contract. Accordingly, in the case of actual breach the requirement of readiness and willingness is more stringent; it continues through to the time for performance. That is because the termination of the contract does not antedate the time for performance. Subject to this difference and to the possibility of a difference in the onus of proof, the principle to be applied in the case of actual breach is consistent with that to be applied in the case of termination for anticipatory breach. The difference in the onus of proof arises because in the case of termination for anticipatory breach the plaintiff will generally be able to show at the time of termination that he would have been able to perform at the time for performance by demonstrating that he was not then disabled or incapacitated from such performance. As Dixon CJ noted in Rawson v Hobbs, one ‘must be very careful to see that nothing but a substantial incapacity or definitive resolve or decision against doing in the future what the contract requires is counted as an absence of readiness and willingness’.85 However, in the present case, the anticipatory breach of the vendors was not accepted. The case is one of termination for actual breach. The time for determining whether or not the purchasers would have been ready and willing to perform the contract had it not been for the dispensing conduct of the vendors is therefore the time for performance. The purchasers have not discharged the onus of showing that at that time they would have been so ready and willing. It follows that the purchasers are unable to justify their

termination by reference to the ordinary principles of contract law. It is necessary now to turn to the doctrine of estoppel in order to ascertain whether the application of that doctrine enables the purchaser to succeed. … So far as the present case is concerned, on the primary judge’s findings, the vendors through their solicitor represented to the purchasers through their solicitor that they could not and would not complete the contract on the date fixed for completion. The representation [page 553] was not retracted and continued until the time stipulated for completion. The representation fell into two parts: first, a representation as to a future fact — that they would not complete; secondly, a representation as to an existing fact — that they could not complete, due to nonregistration of the right of way. By expressing the representations in this way, I run some risk of expressing inadequately the vendors’ attitude as it was stated by their solicitor in the critical conversation. From the terms of that conversation, it seems that the vendors wished to proceed with the contract, but with a later date for completion substituted for 22 June. However, what is important, and perhaps critical, judged from the perspective of applying the doctrine of estoppel is that the vendors impliedly intimated that it would be pointless or futile for the purchasers to tender performance of the contract. It is that intimation upon which an application of the doctrine of estoppel stands or falls. Whether that intimation amounts to a representation of future fact or existing fact is a fine question, but as will appear, it is not a question which I need to determine. Not every anticipatory repudiation of a contract amounts to a representation to the other party that it would be pointless for him to complete the contract. … My conclusion adverse to the purchasers on the issue of readiness and willingness denies that the purchasers sustained a relevant detriment in consequence of their reliance upon the representation.

Brennan J 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.86 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 nonperformance 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. Lord Mansfield said in Jones v Barkley: The defendant pleads that the plaintiff did not actually execute an assignment and release; and the question is, whether there was a sufficient performance. Take it on the reason of the thing. The party must show he was ready; but, if the other stops him on the ground of an intention not to perform his part, it is not necessary for the first to go farther, and do a nugatory act.87 [page 554] This passage was cited with approval by Dixon CJ in Peter Turnbull.88 In that case, Dixon CJ pointed out that acting upon an intimation that tender of performance will be nugatory is equivalent to being prevented from performing one’s obligation. He said: Now long before the doctrine of anticipatory breach of contract was developed it was always the law that, if a contracting party prevented the fulfilment by the opposite party to the contract of a

condition precedent therein expressed or implied, it was equal to performance thereof. But a plaintiff may be dispensed from performing a condition by the defendant expressly or impliedly intimating that it is useless for him to perform it and requesting him not to do so. If the plaintiff acts upon the intimation it is just as effectual as actual prevention.89 In Laird v Pim purchasers, who had been let into possession before completion, refused to pay the purchase price. The vendor, suing in assumpsit for the price, pleaded that he was ready, willing and able to complete had not the purchasers discharged him from so doing in that the purchasers ‘did not regard their … promise’.90 It was held on demurrer that the vendor was entitled to succeed. Parke B said: Upon the facts alleged in this declaration, the plaintiff is substantially in the same situation, for the purpose of recovering the money, as if all had been done on his part which he engaged to do. It does not follow that he shall recover the whole purchase-money, but he is in the same situation for the purpose of recovering damages for the non-payment of the price, as if all had been done by him.91 In Cort v Ambergate, etc Railway Co, Lord Campbell CJ … said: There being an executory contract, whereby the plaintiff agreed to sell and the defendant to buy, on arrival, certain goods, to be delivered at Belfast at a certain price, payable on delivery, it was held that a refusal by the defendant before the arrival of the cargo to perform the contract was not of itself necessarily a breach of it, but that such refusal, unretracted down to and inclusive of the time when the defendant was bound to receive the cargo, was evidence of a continuing refusal and a waiver of the condition precedent of delivery, so as to render the defendant liable for the breach of contract.92 This passage, cited with approval … in Peter Turnbull, illustrates the governing principle which Kitto J stated thus: The principle, which applies whenever the promise of one party, A, is subject to a condition to be fulfilled by the other party, B, may, I

think, be stated as follows. If, although B is ready and willing to perform the contract in all respects on his part, A absolutely refuses to carry out the contract, and persists in the refusal until a time arrives at which performance of his [page 555] promise would have been due if the condition had been fulfilled by B, A is liable to B in damages for breach of his promise although the condition remains unfulfilled.93 A’s refusal to perform is an intimation to B that a tender of performance by B will be nugatory. (I shall hereafter follow the terminology of ‘A’ and ‘B’ — ‘A’ to refer to a party who has declared that he will not perform his obligation under a contract containing mutually dependent and concurrent conditions; ‘B’ to refer to the party to whom the intimation is given and who in reliance thereon omits to tender performance of his obligation.) Where A refuses to complete and thereby intimates to B that he need not trouble to fulfil a concurrent condition on which A’s obligation to complete is dependent, B may be entitled to sue for A’s actual breach though B elected not to terminate the contract before the time for completion arrived. Kitto J said in Peter Turnbull: What does it matter for the purposes of that action that the refusal was not treated as ending the contract and as founding an action for anticipatory breach? The damages claimed are not for loss of the contract by premature termination, but for loss of the benefit which performance of the contract in accordance with its terms by both parties would by now have produced to B but for the fault of A. It is a cause of action which the facts I have assumed make out, unless the non-fulfilment of the condition is an answer to it; and as to that the inescapable fact is that A’s refusal was a continuing intimation that the condition need not be observed, and it did not become any the less an intimation to that effect because B chose not to determine the contract before its time. The intimation having continued until the time came when A would certainly have been in default if the

condition had been fulfilled, the law, as I understand it, treats A’s obligation as absolute, and holds B entitled to damages for not having got what A promised he should have in the event of the condition being fulfilled. (Emphasis added.)94 Following Peter Turnbull, this court held in Mahoney v Lindsay95 that a purchaser is not in breach of his obligation to complete on the day fixed for completion if he abstains from tendering the price on that day because of an intimation by a vendor that it is useless to do so since the vendor does not intend then to perform his part of the contract. The reference by Dixon CJ in Peter Turnbull to one party’s ‘requesting’ of the other party not to perform a condition suggests that the dispensing of the other party from his obligation is effected by acceptance of the request. A consensual variation of the contract may be the inference to be drawn in some cases but, more frequently, the facts will show no more than that the party to whom the intimation is given abstains from tendering performance in reliance on the intimation that he need not trouble to perform and that it will be useless for him to do so. It would be inequitable for A, having induced B to abstain from tendering performance, to assert that B’s failure to tender performance when the time for completion arrives is a breach of contract by B or constitutes a failure to fulfil a condition on which A’s obligation depends. The basis on which a party is dispensed from tendering performance is [page 556] that an equity is raised against the party giving the intimation which is satisfied by treating him as though he had prevented the innocent party from tendering performance.96 Such an equity enures for the benefit of the party who has acted on the intimation, but it does not impair the contractual obligation of the party giving the intimation. A purchaser who is thus dispensed from his obligation to pay the price at the time stipulated for completion is not thereby discharged from his obligation to pay the price at some later time. A stipulation for completion on a fixed day creates both a substantive and a temporal obligation; an

obligation to complete and an obligation to do so on the fixed day. A purchaser who acts on an intimation from the vendor that the vendor will complete but not on the fixed day is dispensed from his temporal obligation, so that his omission to tender the price on that day is no breach; but, unless the contract is terminated, his obligation to pay the price remains after the day fixed for completion is past. When a promisor’s intimation of non-performance relates only to the temporal aspect of the promise and the promisee either cannot rescind or elects not to rescind on account of that intimation, the promisee is not forever released from the substantive obligation; he is dispensed from performance only until the promisor gives him reasonable notice that the promisor has performed or is ready, willing and able to perform his obligation. (If it were otherwise, it would be pointless for a party who has once been in default in the timeous performance of his obligation under a contract which continues to bind both parties to give to the other a notice to complete.) When no time is fixed for performance of mutually dependent and concurrent obligations and B abstains from tendering performance in reliance on A’s intimation that he will not perform the contract, B must give A a notice to perform before A will commit an actual breach — as distinct from an anticipatory breach — of the contract.97 (I leave aside cases of delay so gross as to amount to repudiation.98) But it is otherwise when the time for performance is fixed by the contract. In such a case, A’s temporal obligation is breached by non-performance at the stipulated time. I would hold, in accordance with Peter Turnbull and Mahoney v Lindsay, that an intimation of non-performance of an essential term of a contract amounts to repudiation and dispenses a party who acts upon it from performance of his dependent obligation though he does not rescind the contract. … The proposition that, if repudiation by anticipatory breach is not accepted, the contract subsists is undoubted; but it does not follow that an intimation by one party that tender of performance by the other will be nugatory cannot, if acted on, dispense the other from his obligation of performance under the contract by raising an equitable estoppel. It may be that Lord Ackner [in Fercometal SARL v Mediterranean Shipping Co SA] acknowledges some role for estoppel in this context for he said: It is always open to [B], who has refused to accept [A’s] repudiation

of the contract, and thereby kept the contract alive, to contend that in relation to a particular right or obligation under the contract, [A] is estopped from contending that he, [A], is entitled to exercise [page 557] that right or that he, [B], has remained bound by that obligation. If [A] represents to [B] that he no longer intends to exercise that right or requires that obligation to be fulfilled by [B] and [B] acts upon that representation, then clearly [A] cannot be heard thereafter to say that he is entitled to exercise that right or that [B] is in breach of contract by not fulfilling that obligation.99 In my view, an equity created by estoppel arising from an intimation by A that he does not intend to perform which conveys to B that performance by him would be nugatory absolves B ‘from tendering further performance unless and until A gives reasonable notice that he is once again able and willing to perform’.

Ready and willing to perform The governing principle, stated by Kitto J in Peter Turnbull, holds that the party giving the intimation (A) is liable in damages for actual breach subject to the qualification that ‘B is ready and willing to perform the contract in all respects on his part’. If this be a valid qualification upon B’s right to a remedy for A’s actual failure to perform his obligation when the time for performance arrives, then, in a case where B is not ready and willing, A’s failure to perform cannot be a breach of contract. If A’s failure to perform where B is not ready and willing were a breach of contract, the qualification would raise logical and practical difficulties. Logically, it would be difficult to see why, given A’s breach, B would not be entitled to the remedy to which a party not in breach is entitled under the general law of contract. Practically, if A were in breach of an essential term but B did not have the right to rescind, there would be no means by which either party might unilaterally terminate the contract. In that event, if B, who had not repudiated the contract, had parted with money or property pursuant to the

contract, he would be left to bear the loss: B could not rescind for A’s breach while A could point to no breach by B to support rescission. The contract would continue to subsist unless and until termination by express agreement or ultimate abandonment.100 In truth, the qualification of B’s readiness and willingness relates to the character of A’s failure to perform his contractual obligation: is A’s failure a breach or not? We are concerned here not with an anticipatory breach by A but with what B asserts to be A’s actual breach. Where there are mutually dependent and concurrent obligations, an intimation by one party that he does not intend to perform or that he will be unable to perform when the time for performance arrives does not necessarily mean that that party is the only party at fault. The other party may be the party at fault or both may be at fault. The other party may have announced that he does not intend to perform or that he will be unable to perform when the time for performance arrives and that announcement itself constitutes an anticipatory breach which justifies the giving of notice of rescission by the first party. Or the other party may already be disposed not to perform but he makes no announcement of his disposition (and thus avoids committing a breach) or he may already be unable to perform when the time for performance arrives and that disposition or incapacity would prevent the fulfilment of the [page 558] condition on which the first party’s obligation depends.101 The qualification of readiness and willingness ensures that the party who gives an intimation of non-completion is not visited with liability for actual breach of contract merely because he had given an intimation of non-performance when the intimation amounts to notice of rescission for the other party’s repudiation or when he would not have been obliged to perform in any event. There are two situations in which the qualification applies: rescission of an executory contract before the time for performance arrives and dispensation from performance of an obligation on which an obligation of the opposite party depends. A party to an executory contract is entitled to rescind not only if the other

party announces his intention not to perform his essential obligations but also if the other party is incapable of performing his essential obligations under the contract.102 It is not necessary to consider whether such an incapacity is a breach.103 It is sufficient to identify such incapacity as a repudiation which entitles the opposite party to rescind. By giving notice of rescission on the ground of anticipatory breach of an essential term or on the ground of incapacity, the first party may procure his release from his executory obligations provided that, until he gives notice, he was ready and willing to perform them. Moreover, he can justify rescission by reference to an announced repudiation or incapacity which he discovers after rescinding provided the repudiation occurred before or the incapacity existed when the notice to rescind was given. … Where a party claims to be entitled to rescind an executory contract on account of the other party’s repudiation (whether by way of anticipatory breach or incapacity), the first party must show not only the other’s repudiation but his own readiness and willingness up to the time of rescission to perform his essential obligations under the contract.104 Readiness or willingness imports capacity to perform as well as disposition to perform. Since a party’s right to rescind an executory contract for the other party’s repudiation is limited to cases where the first party is ready and willing to perform, neither party is treated as without fault where both would be at fault were the contract to continue until the time for performance arrives. … I would state the relevant principles thus: if an executory contract creates obligations which are mutually dependent and concurrent and, before the time for performance of the obligations arrives, one party, A, gives the other party, B, an intimation that it will be useless for B to tender performance and B abstains from performing his obligation in reliance on A’s intimation, B is dispensed from performing his obligation and A’s obligation is absolute provided that B had not repudiated the contract and he was ready and willing to perform his obligation up to the time when the intimation was given. It is immaterial that A’s intimation amounts to a repudiation of the contract unless B terminates the contract by accepting the repudiation. If, at the time when the intimation was given, B was substantially incapable of future performance of his obligation or had already definitively resolved or decided not to

[page 559] perform it, B was not ready and willing. If B was not then ready and willing, A’s failure to perform his obligation when the time for performance arrives is no breach of contract. … The true question [in this case] is whether, when the vendors intimated on 20 June that they could not complete on 22 June, the purchasers were already ‘substantially incapable’ of raising the needed finance to tender on 22 June. … The facts support the inferences that the purchasers acted on the vendors’ solicitor’s intimation and were, up to the time when the intimation was given, ready and willing to complete. In those circumstances, the vendors’ failure to complete on 22 June was a breach of contract which entitled the purchasers to rescind. The purchasers were content with the declarations made by the trial judge that the contract was validly rescinded and that they were entitled to a return of the deposit.

Deane J The question arises [in this case] whether, notwithstanding the failure of the purchasers to tender performance or to be ready and able to complete on the stipulated date, the vendors’ repudiation of the contract by anticipatory breach was translated into repudiation by actual breach. In my view, it was. In the ordinary case of a contract for sale of land, the contractual obligations of the parties to complete the sale are concurrent and conditional in the sense that the vendor is not obliged to convey the land and the purchaser is not obliged to pay the purchase price otherwise than upon concurrent performance by the other party. Neither vendor nor purchaser will be guilty of breach of contract if he fails to complete within the time or upon the day fixed by the contract unless the other party tenders performance of his concurrent obligations. The position is, however, different if one party has unambiguously informed the other party that he will not perform his obligations within the time made of the essence of the contract. In such a case, the refusal to perform constitutes an intimation to the other party that the tender of performance of his concurrent obligations will be nugatory and futile. If the refusal continues

until after the time allowed for performance, the refusing party’s failure to complete within the stipulated time will constitute an actual breach of the contract notwithstanding that the other party has acted on the information and refrained from going through the motions of tendering performance. In Peter Turnbull & Co Pty Ltd v Mundus Trading Co (Australasia) Pty Ltd, Dixon CJ explained that position by saying that, in such a case, the innocent party, who ‘acts upon’ the express or implied intimation that ‘it is useless … to perform’ is ‘dispensed from’ performance.105 Kitto J explained that what was meant ‘by saying that fulfilment of the condition has been dispensed with is that [the refusing party’s] conditional obligation is to be treated, for the purposes of an action for non-performance, as if it had been made absolute by a fulfilment of the condition’.106 Elsewhere in his judgment, Kitto J stated that he was ‘supposing … a case … where in all the circumstances the refusal necessarily conveys to [the other party] that he need not [page 560] trouble to fulfil a condition …’.107 Both Dixon CJ and Kitto J referred, with approval, to Lord Campbell CJ’s statement in Cort v Ambergate etc Railway Co108 which identified the applicable doctrine as ‘waiver’. The line between the somewhat arbitrary doctrine of waiver and the doctrine of estoppel by conduct has always been a vague one and the former doctrine is being increasingly enveloped and rationalised by the latter. At least in cases such as Peter Turnbull & Co where the focus is upon action by one party ‘upon’ what was conveyed to that party by the other party, the applicable primary doctrine should be seen in a modern context as that of estoppel. The present is such a case. In the present case, the unequivocal and unqualified advice that the vendors would not complete the contract until after the stipulated date was in response to a request by the purchasers’ solicitors to the vendors’ solicitors to nominate a time for completion on that day. To adapt words used by Kitto J in Peter Turnbull & Co, that advice necessarily conveyed to the purchasers that it would be pointless for them to trouble to fulfil the condition of performance of their concurrent obligations within the time

which the contract made of the essence: it was ‘a continuing intimation that the condition need not be observed, and it did not become any the less an intimation to that effect because [the purchasers] chose not to determine the contract before its time’. The purchasers acted on the faith of that intimation that performance within the stipulated time would be futile and was unnecessary. They ceased their efforts to arrange finance with the consequence that they were neither ready nor able to complete the purchase within the time allowed by the contract. In these circumstances, the law will not allow the vendors to depart from the state of affairs upon the basis of which they had, by their conduct, induced the purchasers to act. The doctrine of estoppel by conduct … is applicable to preclude the vendors from asserting that the purchasers’ failure to tender performance or to have the purchase price ready and available on the stipulated day either constituted a failure to discharge a contractual obligation upon the performance of which the vendors’ own obligations remained conditioned or placed the purchasers themselves in breach of contract. In that regard, it is unnecessary to decide whether the vendors’ representation related to a present or future state of affairs or whether the purchasers are seeking to use estoppel as a sword rather than a shield. In Waltons Stores (Interstate) Ltd v Maher,109 I explained in detail the reasons which led me to conclude that the assumed state of affairs under an estoppel by conduct can provide the factual foundation of a cause of action and that estoppel by conduct (in its emanation commonly described as ‘promissory estoppel’) may preclude departure from a represented or assumed future ‘state of affairs’ in at least certain categories of case. A case such as the present which involves a representation between parties in a pre-existing contractual relationship that one party is dispensed from strict performance of the contract clearly falls within one such category of case. In any event, I am now prepared to take the step which I refrained from taking in Waltons Stores110 and to accept that the doctrine of estoppel by conduct extends, as a matter of general [page 561] principle, to a representation or induced ‘assumption of fact or law, present

or future’.111 Once it is recognised that promissory estoppel is properly to be seen as no more than an emanation of the general doctrine of estoppel by conduct, there remains no valid reason in principle why that general doctrine should not apply to a representation of future fact. Nor is there any valid reason that general doctrine should be inapplicable to a case where the representation relates to the state of the law. In that regard, the distinction between a representation of fact and a representation of law is, in the context of the principles constituting the doctrine of estoppel by conduct, essentially illusory unless one subscribes — and I do not — to the view that law has no factual existence at all. In the area of estoppel by conduct, the essential distinction which must be observed if the doctrine is to be kept confined within what is justified by the notions of good conscience which inspire it is not the distinction between present and future fact or between fact and law. It is the distinction between a representation of fact and a representation of opinion. A representation can found an estoppel by conduct only to the extent that it is clear. It can, however, be reduced to what is clear by discarding so much of its content as is equivocal or ambiguous. That being so, a representation of future fact and a representation of law will often, upon analysis, involve no more, for the purposes of the doctrine of estoppel by conduct, than a representation of present opinion. In a case where that is so, any estoppel founded upon the representation will ordinarily be of no use to the representee since it will extend no further than precluding a denial that the represented opinion was truly held.112 In Thompson v Palmer, Dixon J identified the object and operation of estoppel by conduct as being ‘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’. His Honour went on to stress that the party who has induced the assumption is not bound to adhere to it ‘unless, as a result of adopting it as the basis of action or inaction, the other party will have placed himself in a position of material disadvantage if departure from the assumption be permitted’.113 In the present case, the learned trial judge found that the purchasers had not proved on the balance of probabilities that, were it not for the vendors’ intimation that it was unnecessary that they do so, they would have been able to arrange the balance of the purchase price in order to be ready and able to complete within the

stipulated time. On the appeal, the purchasers sought to impugn that finding. However, it is unnecessary to pursue that question. It is clear from the evidence that there was, at the least, a real chance that, if they had not been induced to cease their efforts to arrange finance by the vendors’ intimation, the purchasers would have been able to obtain the balance of less than $10,000 of the purchase price ($75,000) which was not already covered by the deposit ($7,500), the arranged loan ($56,000) and the money available in Mrs Foran’s bank account (at least $1,783). In these circumstances, the purchasers would be placed in a position of significant and unjust material disadvantage if the vendors were permitted to depart from that intimation in that they would have been induced to lose the [page 562] benefit of a real chance that they would have actually tendered performance within the time fixed by the contract and thereby avoided any need to establish what might have happened but for the vendors’ intimation. The detriment of the loss of that real chance which would be sustained by the purchasers if the vendors were permitted to assert that the purchasers remained obliged to tender performance or to become ready and willing to perform within the stipulated time is adequate to sustain the estoppel upon which the purchasers rely to establish their right to rescind. The operation of that estoppel is, as has been said, to preclude departure by the vendors from their intimation that it was unnecessary that the purchasers tender performance or be ready and able to perform on the day fixed for completion. As has been seen, one of the effects of that estoppel is that, as between the parties, the condition of concurrent performance by the purchasers can be disregarded with the result that the vendors’ refusal to complete the sale on or before that day constituted a repudiation of the contract by breach of an essential term. Another is that the purchasers were effectively relieved of any obligation to be ready and able to perform on the day fixed for completion. That being so, it was not a prerequisite of the purchasers’ right to rescind that they establish on the balance of probabilities that they would in fact have been ready and able to perform or have tendered performance in the hypothetical situation which would have existed in the event that the vendors’ intimation had not been given. …

[T]he purchasers were entitled to rescind the contract. This they did. Upon rescission, the purchasers were entitled to obtain restitution of the deposit which they had paid. Their claim for the return of the deposit was not founded on the rescinded contract. Nor did it represent a claim for damages for the vendors’ breach of its terms. It was a claim founded in the equitable notions of fair dealing and good conscience which require restitution of a benefit received as, or as part of, the quid pro quo for a consideration which has failed.

Dawson J Repudiation by way of anticipatory breach by a party to a contract does not put an end to the contract unless the other party accepts the repudiation and rescinds the contract. Although he may do so, the other party does not have to accept the repudiation. He may continue to treat the contract as on foot and hold the party guilty of repudiation to the performance of his obligations. If those obligations remain unperformed when the time for performance arrives, the anticipatory breach will be converted into an actual breach. If the other party keeps the contract alive, he does so not only for his own benefit but also for the benefit of the party guilty of repudiation. The latter may, upon giving reasonable notice, withdraw his repudiation and complete the contract and, subject to a qualification with which I shall deal, the other party remains bound by the contract, enabling the repudiating party to take advantage of any breach by the other party or any supervening event which would discharge him from liability. If the other party elects to rescind, the rescission is, of course, not ab initio. He is entitled to maintain an action for damages for the anticipatory breach, the damages being calculated by reference to the loss which he would suffer by the breach becoming actual, subject to any opportunity to mitigate his loss in the meantime. … [page 563] The reason it is said that the purchasers [in this case] were not entitled to rely upon the vendors’ representation is that they, the purchasers, were not ready and willing to perform their obligations because

they did not then have the finance to enable them to do so. Of course, the date for settlement had not arrived at the time the vendors repudiated the contract and, as will appear, it is necessary to consider the purchasers’ obligation at that time with that fact in mind. But I shall return to that aspect of the matter shortly. First it is necessary to settle the question whether the purchasers were under any obligation to prove, as plaintiffs, that, notwithstanding the vendors’ repudiation, they were ready and willing to perform their obligations under the contract. Of course, readiness and willingness implies not only disposition, but also capacity.114 In any action for breach of contract, the readiness and willingness of the plaintiff to perform those mutual obligations remaining to be performed on his part under the contract is a condition precedent to his right to recover. Under the old rules a plaintiff was required to plead that he was ready and willing but under the present rules that fact is implied with the effect that he is not required to prove it unless the defendant puts it in issue. In that event, the burden of proving readiness and willingness rests upon the plaintiff. … But what if the breach is anticipatory rather than actual? The authorities have given conflicting answers to this question, but it is now clear that in cases of repudiation as well as actual breach, readiness and willingness on the part of the plaintiff is part of his cause of action. The position was clearly stated in DTR Nominees Pty Ltd v Mona Homes Pty Ltd: A party in order to be entitled to rescind for anticipatory breach must at the time of rescission himself be willing to perform the contract on its proper interpretation. Otherwise he is not an innocent party, the common description of a party entitled to rescind for anticipatory breach.115 Nevertheless there are those who have held a contrary view. In Bowes v Chaleyer, Starke J said: ‘No doubt, if a party repudiates a contract and the repudiation is accepted and acted upon by the other party, then the latter is relieved from proving readiness and willingness on his part to perform the contract’.116 … Treating the situation as one giving rise to an estoppel, it can be seen that the vendors, by indicating their inability to settle and their intention of

not doing so, represented to the purchasers that they did not require them to tender the purchase price and would not hold them in breach of contract for not doing so. The purchasers in reliance upon that representation did not tender the balance of the purchase price and would, upon the date fixed for settlement, have been in breach of contract if the vendors had not been estopped from denying the truth of their representation. Thus, in relying upon the vendors’ representation the purchasers placed themselves at risk of non-performance — in a position of detriment — unless the vendors were kept to their word. The vendors were estopped. [page 564]

Gaudron J A party to a contract which has been repudiated may either terminate the obligations under the contract or affirm the contract. A party is taken to have affirmed the contract if he or she does an act which is consistent only with its continued existence. However, there may be situations in which delay by the party having the right to repudiate will give rise to an assumption on the part of the other party that the contract has been affirmed and in which departure from that assumption will cause detriment so that, by operation of estoppel, the former is treated as having affirmed the contract. … In the present case the purchasers did not rescind upon receipt of the communication that the vendors were unable to settle on the stipulated day made essential for settlement by the contract. Even if it be accepted that this amounted to an election to affirm the contract, the obligations affirmed were the obligations brought into existence by the contract, namely, to settle on the day made essential by the contract. Nothing that the purchasers did following receipt of the communication amounted to a waiver of that essentiality. The consequence was that, once the day made essential had passed, the contract could no longer be performed according to its essential term and there was no consensus, as in the case of mutual waiver, to support a variation of that term. The conclusion to be drawn from that situation is that the contractual obligations had come to an end, and the notice of rescission operated to put the matter beyond dispute such

as might arise in the event that no action were taken and it were to be asserted that that inaction amounted to waiver of essentiality. That being so, I agree that the deposit was recoverable as money paid for a consideration that wholly failed.

Comments 24.7.1 See Radan, Gooley, and Vickovich at 22.17, 24.6, 24.80–24.82, 24.94, 24.97, 29.6, and 29.81. 24.7.2 For a discussion of this case see J W Carter, ‘Foran v Wight’ (1990) 3 Journal of Contract Law 70.

RELIEF AGAINST FORFEITURE 24.8C

Tanwar Enterprises Pty Ltd v Cauchi (2003) 217 CLR 315

Court: High Court of Australia Facts: Separate contracts for the purchase of three adjoining parcels of land for $4.5m were entered into by Tanwar in October 1999. Tanwar paid $450,000 by way of total deposit on the contracts. Each contract specified the completion date as 28 February 2000, although this was not expressed as being of the essence. The completion dates were later amended to August of that year. As Tanwar was not in a position to complete by that [page 565] time, Cauchi and others (the vendors) served termination notices on 20 August 2000, but after protracted negotiations between the parties a deed was entered into in early June 2001 nominating the new and essential completion date of 25 June 2001. The deed made it clear that failure to complete by the agreed time would result in

forfeiture of deposit. On the completion date Tanwar’s incoming mortgagees informed the parties that they would not be able to proceed with settlement until the following day. On 26 June Tanwar gave notice to Cauchi that it was in a position to complete. Cauchi responded by issuing notices of termination on the same day. Tanwar sought declarations that the terminations were invalid and orders for relief against forfeiture and specific performance. Issues: The issues before the High Court were whether Cauchi had validly terminated the contracts of sale and whether Tanwar as purchaser was entitled to relief. Decision: The High Court (Gleeson CJ, McHugh, Gummow, Hayne, Heydon, Kirby, and Callinan JJ) unanimously rejected Tanwar’s appeal. The court held that the vendors were entitled to exercise their contractual rights to terminate since they had not contributed to Tanwar’s breach. Also, relief on the ground of accident was not available to Tanwar because the possibility of breach was reasonably within its contemplation. Extract: The extracts from the joint judgment of Gleeson CJ, McHugh, Gummow, Hayne, and Heydon JJ focus on what is required to establish unconscientious reliance on essential time stipulations, thereby precluding relief against forfeiture.

Gleeson CJ, McHugh, Gummow, Hayne, and Heydon JJ In submissions, extensive reference was made to the decision in Legione.117 That case made it plain that the principles identified as promissory or equitable estoppel may operate to preclude the enforcement of contractual rights and so may estop a party from treating the contract in question as terminated for failure to meet an essential time stipulation. The division of opinion within the Court turned upon the question whether a particular telephone conversation was sufficient to found the necessary estoppel; in particular, whether the conversation contained a representation of the necessary clarity to the effect that observance of the time stipulation was not insisted upon. The majority (Mason, Brennan and Deane JJ) held that the terms of the conversation did not meet the necessary standard. The

facts of the present appeal supply no foundation for an estoppel against reliance by [Cauchi] upon the essential time stipulation in the 2001 Deeds. In Legione,118 the Court also received written submissions upon a further question. This was identified as being whether the purchasers should be relieved against ‘the forfeiture’ brought about by the notice of rescission. Pursuant to the contract, the purchasers had been entitled to go into possession on payment of the deposit. They had done so and had built a house on the land before the due date for completion which was nearly twelve months after the date of the contract. [page 566] The ‘forfeiture point’ had not been pursued to any degree at the trial in Legione and the order made by this Court was that the case be remitted to the Supreme Court of Victoria for the determination of that issue.119 The conclusion reached by Mason and Deane JJ had been that the Supreme Court had the necessary jurisdiction to relieve against forfeiture and that there was a serious question to be tried in the exercise of that jurisdiction.120 Gibbs CJ and Murphy J concurred in the order giving effect to that conclusion.121 Brennan J dissented. Subsequently, in the joint judgment of five members of the Court in Ciavarella v Balmer, it was held that there was no evidence to found any estoppel against termination of the contract for sale of land. An application to amend the notice of appeal in this Court so as to claim relief against forfeiture was refused. The Court described as follows the circumstances which had led to the order of remittal in Legione: [T]he material in evidence strongly indicated unconscionable conduct on the part of the vendor in seeking to insist on the rescission of the contract in circumstances where the statement of the vendor’s solicitors had helped lull the purchaser into a belief that the vendor would accept completion provided it took place within a few days and where the consequence of rescission was that the vendor would reap the benefit of the very valuable improvements which the purchaser had effected to the property.122

In the present appeal, there is nothing to suggest that [Cauchi] lulled Tanwar into any relevant false sense of security. To the contrary, the terms of the 2001 Deeds strikingly demonstrated an attitude by [Cauchi] which would keep Tanwar on edge. What then remains to support any case of unconscientious reliance by the vendors upon their legal right to terminate? It is convenient at this stage to consider the decision in Stern.123

Stern The dispute concerned an instalment contract made in 1969 under which the last instalment would be paid in 1983. Time was made of the essence, after various vicissitudes, by notice given in 1979. Completion did not take place when specified and, in response to an action for an order for possession, the purchasers cross-claimed for specific performance and relief against forfeiture of their estate and interest in the land. By majority (Deane, Dawson and Gaudron JJ), the Court upheld the order of the New South Wales Court of Appeal.124 This ordered relief against forfeiture and specific performance on terms including an inquiry as to the balance of the purchase money still owing and the interest to be payable thereon. Deane and Dawson JJ said that ‘the contract as it was carried into effect was essentially an arrangement whereby the appellants undertook to finance the respondents’ purchase upon [page 567] the security of the land’ so that ‘there was a close and obvious parallel between it and a purchase with the aid of a mortgage’.125 The contracts between Tanwar and [Cauchi] do not share that characteristic. Gaudron J, the third member of the majority in Stern, doubted whether the instalment contract there in question was in substance part of a security transaction.126 Her Honour decided the appeal on a wider footing. This was that a decree of specific performance would secure all that the vendors had bargained for, whereas to deny that remedy would prejudice the purchasers. A house had been built on the land, the land had increased in

value and the balance unpaid was a relatively insignificant amount.127 These circumstances, to which the vendors had not contributed, made it unconscionable for the vendors to insist on their contractual rights. On the other hand, Mason CJ (in the minority as to the outcome) stressed that this was not a case like Legione where the conduct of the vendors had led to, caused, or contributed to, the breach of contract by the purchasers.128 At bottom, the case put by Tanwar depends upon acceptance of the view of the equity jurisdiction taken by Gaudron J at the expense of that preferred by Mason CJ. The view of Mason CJ should be accepted.

Mason CJ and Stern In Legione, Mason and Deane JJ instanced ‘fraud, mistake, accident, [and] surprise’ as elements which may make it inequitable to insist on termination of a contract for failure to observe its strict terms.129 Subsequently, in Stern,130 Mason CJ took Legione and Ciavarella as establishing that the court will not readily relieve against loss of a contract for sale validly rescinded by the vendor for breach of an essential condition; and, in particular, equity was not authorised ‘to reshape contractual relations into a form the court thinks more reasonable or fair where subsequent events have rendered one side’s situation more favourable’.131 That latter proposition is at odds with the approach by Gaudron J in Stern, to which reference has been made earlier in these reasons … but, nevertheless, it should be accepted as an accurate statement of the law. The result, as indicated above, is that Tanwar’s case on the appeal is significantly weakened. Mason CJ dissented as to the outcome in Stern, but this was to a significant degree because of the view he took of the nature of the particular contract in question and the denial of an analogy drawn, particularly by Deane and Dawson JJ,132 to a mortgage transaction. To the extent that what Mason CJ said in Stern represented a development (or, perhaps, a contraction) of what had been put in the earlier cases, then it is to be preferred. [page 568]

In Stern,133 Mason CJ also stated that equity intervenes only where the vendor has, by the vendor’s conduct, caused or contributed to a circumstance rendering it unconscionable for the vendor to insist upon its legal rights. That helps explain why mere supervening events and changes in the relevant circumstances are insufficient. But it should be noted that cases falling within the heads of mistake or accident will not necessarily be the result of activity by the vendor. In addition, his Honour spoke in Stern134 of the circumstances being ‘exceptional’ to attract equitable intervention. That also emphasised the insufficiency of subsequent events which are adverse to the interests of one side. However, the term ‘exceptional’ is apt to be misunderstood, and it will be necessary to return to it later in these reasons under the heading ‘The present appeal’.

Subsidiary questions? In Legione, Mason and Deane JJ had concluded their analysis of what they saw as the relevant principles by saying as follows: In the ultimate analysis the result in a given case will depend upon the resolution of subsidiary questions which inevitably arise. The more important of these are: (1) Did the conduct of the vendor contribute to the purchaser’s breach? (2) Was the purchaser’s breach (a) trivial or slight, and (b) inadvertent and not wilful? (3) What damage or other adverse consequences did the vendor suffer by reason of the purchaser’s breach? (4) What is the magnitude of the purchaser’s loss and the vendor’s gain if the forfeiture is to stand? (5) Is specific performance with or without compensation an adequate safeguard for the vendor?135 Tanwar relies upon those five ‘subsidiary questions’. It accepts that the first question should be answered unfavourably because the conduct of [Cauchi] did not contribute to Tanwar’s breach. However, Tanwar says that its breach was trivial or slight, or inadvertent, that [Cauchi] … suffered but nominal damage and no adverse consequences, that specific performance would be an adequate safeguard for [Cauchi’s] interests … and that [Cauchi] stood to gain the advantages flowing from the expenditure by Tanwar in obtaining the development approvals, together with the increase

in value of the land which apparently occurred between the date of the contracts and the termination. With respect to the third, fourth and fifth ‘subsidiary questions’ posed in Legione by Mason and Deane JJ, [Cauchi] respond that Tanwar entered into arrangements with the proposed second mortgagees dependent upon the arrival of funds from Singapore on the last day when settlement was required under the 2001 Deeds, and that notions of trivial or inadvertent breach must be considered in that light. With respect to the alleged increase in value, [Cauchi], correctly, emphasise that the first of the comparative dates is not 19 October 1999, but 5 June 2001, the date of the 2001 Deeds. This postdated the obtaining of the development approvals on 18 February 2000. In any event, there had been no valuation evidence to found any specific finding respecting increase in value due to those consents or to other market forces. No such finding had been made. However, it was accepted that the benefit of the approvals [page 569] would, with termination, accrue to [Cauchi]. But that was an inevitable outcome bargained for when the 2001 Deeds had been negotiated.

The ‘interest’ of Tanwar [Cauchi] also challenge the doctrinal basis for treating as determinative of Tanwar’s appeal these five ‘subsidiary questions’. The vendors are correct in doing so. What was said by Mason and Deane JJ in Legione respecting the ‘subsidiary questions’ must be treated with care. That to which the questions are said to be ‘subsidiary’ is the basic issue presented earlier in their joint judgment. This is expressed as: … the respondent’s submission that she is entitled to relief against the forfeiture of her interest in the land upon terms that she pay to the appellants the amount of $30,188.24 that was tendered to them on 15 August 1979 and not accepted, being the balance of the purchase moneys under the contract.136 (Emphasis added.)

But what, if any, was the interest in the land enjoyed by Tanwar as purchaser? If there was such an interest, did it attract the exercise of the jurisdiction to relieve against forfeiture? What is the relationship between, on the one hand, the attitude of equity respecting forfeiture, and, on the other hand, the attitude of equity respecting the observance of express time stipulations? Without answers to these questions, the significance for this appeal of the basic issue expressed in Legione, and thus the relevance of the five ‘subsidiary questions’, cannot be assessed. But the answers are to be supplied only by a patient examination of several fundamentals, the understanding of which by equity courts has changed across time. One commences by identifying the ‘interest’ of a purchaser in the land the subject of an uncompleted contract. In Lysaght v Edwards,137 Sir George Jessel MR described the position of the vendor at the moment of entry into a contract of sale as ‘something between’ a bare trustee for the purchaser and a mortgagee who in equity is entitled to possession of the land and a charge upon it for the purchase money; in particular, the vendor had the right in equity to say to the purchaser ‘[e]ither pay me the purchase-money, or lose the estate’. This way of looking at the relationship in equity between vendor and purchaser before completion appeared also in the works of eminent writers of the period in which the Master of the Rolls spoke.138 Later, Kitto J139 and Brennan J140 preferred to treat what was said in Lysaght as indicating that ‘to an extent’ the purchaser acquired the beneficial ownership upon entry into the contract. [page 570] This analogical reasoning in turn suggested (i) the purchaser had before completion an equitable estate in the land which would be protected against loss consequent upon termination of the contract by the principles developed in equity for relief against forfeiture and (ii) in the same way as failure to redeem a mortgage upon the covenanted date for repayment did not destroy the equity of redemption without the proper exercise of a power of sale141 or a foreclosure suit in equity,142 failure to complete the contract

on the due date did not bar the intervention of equity to order specific performance. But what, on this way of looking at the matter, was the significance of a contractual stipulation specifying a date for completion as essential? The treatment by the English equity judges of this subject developed in the course of the nineteenth century, as Justice Lindgren has detailed in his extrajudicial writing on the subject.143 While Lord Thurlow would have pushed the mortgage analogy to the extreme that a time stipulation in equity could never be essential unless there was something in the nature of the subject matter of the contract, such as its fluctuating or depreciating value,144 to give it that quality, his view was doubted by Lord Eldon in Seton v Slade145 and rejected by Sir Lloyd Kenyon MR in Mackreth v Marlar.146 If the express contractual stipulation fixing time as an essential matter was not to be disregarded, how did that attitude stand with the analogy drawn from the relief against forfeiture cases? The answer given by Pomeroy,147 with reference to [Dagenham],148 was that equity would relieve the purchaser from the operation of an essential time stipulation, ‘and from the forfeiture’, if the provision was inserted as a penalty to secure completion of the contract at the purchaser’s risk of loss of the equitable interest in the land under the executory contract. That reasoning, together with the authority of Dagenham, was relied upon in the majority judgments in Legione.149 What the Court of Appeal in Chancery decided in Dagenham, and on what facts and grounds, is not fully apparent from the abbreviated report.150 But it must be remembered that in Dagenham there had been forfeiture of a payment of half the purchase price, so that it was not surprising that the forfeiture was treated as penal.151 It should be added that, in Dagenham, as in Stern and other instalment contract cases, there would have existed an equitable lien securing for the purchaser the payments so made.152 [page 571] It has been held in this Court that the lien may be enforceable even though there may be a good defence to a claim to specific performance of the

contract.153 It is the payment and retention of the moneys, not the availability of specific performance, which is critical.154 But there remains the question, unnecessary to decide here, whether the lien of the purchaser necessarily is lost upon termination of the contract for breach by the purchaser of an essential time stipulation.155 At all events, the analogies drawn over a century ago in Lysaght156 with the trust and the mortgage are no longer accepted. Jacobs J observed in Chang v Registrar of Titles that: [w]here there are rights outstanding on both sides, the description of the vendor as a trustee tends to conceal the essentially contractual relationship which, rather than the relationship of trustee and beneficiary, governs the rights and duties of the respective parties.157 Subsequently, in Kern Corporation Ltd v Walter Reid Trading Pty Ltd, Deane J said: [I]t is both inaccurate and misleading to speak of the unpaid vendor under an uncompleted contract as a trustee for the purchaser.158 In Stern, Gaudron J points out,159 consistently with authority in this Court,160 that the ‘interest’ of the purchaser is commensurate with the availability of specific performance. That availability is the very question in issue where there has been a termination by the vendor for failure to complete as required by the essential stipulation. Reliance upon the ‘interest’ therefore does not assist; it is bedevilled by circularity. … The five ‘subsidiary questions’ stated by Mason and Deane JJ in Legione,161 and set out above, reflect the treatment by Lord Wilberforce in Shiloh Spinners Ltd v Harding (a lease case) of the ‘appropriate’ considerations guiding the exercise of equity’s jurisdiction to relieve against forfeiture for breach of covenants added by way of security for the production of a stated result. His Lordship said: The word ‘appropriate’ involves consideration of the conduct of the applicant for relief, in particular whether his default was wilful, of the gravity of the breaches, and of the disparity

[page 572] between the value of the property of which forfeiture is claimed as compared with the damage caused by the breach.162 However, the end sought to be protected, on the analysis by Mason and Deane JJ in Legione, was the interest of the purchaser in the land. That ‘interest’, being for its existence dependent upon the administration of the very remedy in issue, does not suffice. … It is sufficient for present purposes to observe that, where the issue, as in Tanwar’s appeal, concerns alleged unconscientious reliance by vendors upon their contractual right to terminate, it does not assist to found the equity of the purchaser upon the protection of rights to injunctive relief acquired under a contract the termination of which has taken place. Whilst the contracts here were on foot, breach thereof by [Cauchi] would have been restrained. But there was no relevant breach of contract by [Cauchi], and the contracts were terminated in exercise of a contractual right to do so.

The present appeal What Lord Wilberforce in Shiloh Spinners called ‘the special heads of fraud, accident, mistake or surprise’163 identify in a broad sense the circumstances making it inequitable for [Cauchi] to rely upon their termination of Tanwar’s contracts as an answer to its claim for specific performance. No doubt the decided cases in which the operation of these ‘special heads’ is considered do not disclose exhaustively the circumstances which merit this equitable intervention. But, at least where accident and mistake are not involved, it will be necessary to point to the conduct of the vendor as having in some significant respect caused or contributed to the breach of the essential time stipulation. Tanwar’s situation falls beyond that pale. The statement by Mason CJ in Stern164 respecting the insignificance of subsequent events for which the vendors were in no way responsible is fatal to the main thrust of Tanwar’s case. It should be made clear that what is said above does not support any proposition that the circumstances must be ‘exceptional’ before equity

intervenes. In their joint judgment in Stern,165 Deane and Dawson JJ, with reference to what had been said by Mason and Deane JJ in Legione, said, in a passage which puts the point of present significance: Mason and Deane JJ were not saying that there must be unconscionable conduct of an exceptional kind before a case for relief can be made out. Rather, what was being said was that a court will be reluctant to interfere with the contractual rights of parties who have chosen to make time of the essence of the contract. The circumstances must be such as to make it plain that it is necessary to intervene to avoid injustice or, what is the same thing, to relieve against unconscionable — or, more accurately, unconscientious — conduct.166 [page 573] Thus, it remains for Tanwar to show that it is against conscience for [Cauchi] to set up the termination of the contracts. In the present appeal, as already has been indicated, there was no representation by [Cauchi] which could found any estoppel. Nor has Tanwar asserted that there was any mistake in any relevant sense. In Ciavarella,167 the order for remittal made in Legione was seen to have been made on the footing that there were already in the evidence indications that the vendors in Legione had helped to lull the purchasers into the belief that they would accept completion provided it occurred within a few days. To relieve in those circumstances would be an exercise of the jurisdiction with respect to ‘surprise’. That, as remarked earlier in these reasons, cannot be asserted in the present case. The second matter which Mason and Deane JJ emphasised in Legione was the possibility that a case might be made out in the Supreme Court that the vendors were seeking to reap the benefits of the very valuable improvements to the property which the purchasers had effected whilst in possession under the contract.168 It is not clear from their Honours’ remarks whether the reaping of the benefit of the improvements as a consequence of termination of itself would be sufficient to deny insistence

by the vendors upon their rescission. It is not readily apparent how that circumstance alone could be sufficient. The contract in Legione had permitted the purchasers to enter into possession and any improvements they then made were at risk of the operation of the contractual provisions for termination.

Accident In its extremity, Tanwar then founds upon the jurisdiction to relieve against the consequences of ‘accident’. In Legione,169 Mason and Deane JJ referred to authorities disputing the treatment of cases of relief against penalties and forfeitures as instances of relief against accident. The jurisdiction with respect to accident was recognised at a time before the development of any settled body of equitable principles. The point is well made by Professors Keeton and Sheridan: ‘Accident’ was a vague term which covered many situations, in their nature unforeseen, and it could, in particular situations, shade off into fraud. The law of mistake, particularly in relation to contracts and conveyances, is included under this head, and it led in turn to the development of the equitable rules governing the rectification of contracts and other instruments, and the rescission of documents of all kinds.170 What then remains as the subject matter of accident in modern equity? In Baird v BCE Holdings Pty Ltd,171 Young J referred to various writings on the subject which distinguish mistake as supposing an operation of the will of the agent in producing the event, albeit [page 574] by reason of erroneous impressions on the mind. Spence, writing in 1846, said that the kinds of accidents or cases of extremity which might be relieved against were only to be ascertained from an examination of the cases.172 He instanced forfeiture and penalties. Other instances include the accidental diminution of assets in the hands of an executor, lost

evidence and the defective execution of powers of appointment,173 all far from the present case. However, the learned writers on the subject emphasise and put to one side those situations where the event which has come to pass is one for which an express exculpatory provision might have been made, but was not sought or was not agreed to, and where to relieve against its consequences after it has occurred would deprive the other party to the contract of an essential right.174 In particular, equity will not relieve where ‘the possibility of the accident may fairly be considered to have been within the contemplation of the contracting parties’.175 Story wrote: And this leads us naturally to the consideration of those cases of accident in which no relief will be granted by Courts of Equity. In the first place, in matters of positive contract and obligation created by the party (for it is different in obligations or duties created by law), it is no ground for the interference of equity that the party has been prevented from fulfilling them by accident, or that he has been in no default, or that he has been prevented by accident from deriving the full benefit of the contract on his own side. … The reason is, that he might have provided for such contingencies by his contract if he had so chosen; and the law will presume an intentional general liability where he has made no exception. (Footnotes omitted.)176 It is here that the circumstances leading up to, and the terms of, the 2001 Deeds are of critical importance. [Cauchi] withdrew the earlier notices of termination in return for the assumption by Tanwar of obligations to complete couched in unqualified terms. The obligation in the 2001 Deeds to settle by the stipulated time was not made subject to the availability of Tanwar’s finance on that day. That there might be a failure by a third party to provide the finance was reasonably within the contemplation of Tanwar. The failure by Tanwar to avail itself of the advantages it obtained by negotiating the 2001 Deeds and by keeping the contracts on foot had the effect of exposing Tanwar again to the exercise by [Cauchi] of their rights to terminate the contracts.177 Equity does not intervene to prevent the effective exercise of those rights. The claim by Tanwar for relief against the

consequences of the failure in the timely provision of the second mortgage does not succeed.

[page 575]

Comment 24.8.1 See Radan, Gooley, and Vickovich at 24.120, 24.124, 24.126, 24.129, 24.130, and 24.133.

1.

(1854) 9 Ex 709 at 716.

2. 3.

Bettini v Gye (1876) 1 QBD 183 at 188. (1893) 2 QB 274 at 280–1.

4. 5.

C B Morison, Principles of Rescission of Contracts (1916) at p 86. (1834) 131 ER 1160.

6. 7.

(1861) 142 ER 685. (1859) 157 ER 1083.

8. 9.

(1877) 2 App Cas 455. (1938) 38 SR (NSW) 632.

10. 11.

Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286. Flight v Booth (1834) 131 ER 1160 at 1162, 1163; Bettini v Gye (1876) 1 QBD 183 at 188; Bentsen v Taylor, Sons & Co (No 2) (1893) 2 QB 274 at 281; Fullers’ Theatres Ltd v Musgrove (1923) 31 CLR 524 at 537, 538; Bowes v Chaleyer (1923) 32 CLR 159; Clifton v Coffey (1924) 34 CLR 434 at 438, 440.

12. 13.

Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) at 641, 642. Herbert Clayton and Jack Waller Ltd v Oliver [1930] AC 209 at 221.

14. 15.

Tolnay v Criterion Film Production Ltd [1936] 2 All ER 1625 at 1626, 1627. White v Australia & New Zealand Theatres Ltd (1943) 67 CLR 266.

16. 17.

[1957] 2 QB 401 at 434. Eg, Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286 at 304–5; Associated Newspapers Ltd v Bancks (1951) 83 CLR 322.

18. 19.

Eg, Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286 at 305. Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632 at 641–2.

20. 21.

Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 at 69–70. (1987) 162 CLR 549 at 562.

22. 23.

Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 at 561–2. [1971] 2 All ER 216 at 232.

24.

J Swanton, ‘Discharge of Contracts for Breach’ (1981) 13 Melbourne University Law Review 69 at 70.

25.

Associated Newspapers Ltd v Bancks (1951) 83 CLR 322 at 337; DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 at 430–1; Shevill v Builders Licensing Board (1982) 149 CLR 620 at 627, 636; Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 at 556. DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 at 436.

26. 27. 28.

Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 at 71–2. Sale of Goods Act 1923 (NSW) s 34(2); Goods Act 1958 (Vic) s 38(2); Sale of Goods Act 1895 (SA) s 31(2); Sale of Goods Act 1896 (Qld) s 33(2); Sale of Goods Act 1895 (WA) s 31(2); Sale of Goods Act 1896 (Tas) s 36(2); Sale of Goods Act (NT) s 34(2); Sale of Goods Act 1954 (ACT) s 35(2).

29. 30.

E Peel, Treitel, The Law of Contract, 12th ed, Thomson, Sweet & Maxwell, London, 2007, p 889. E Peel, Treitel, The Law of Contract, 12th ed, Thomson, Sweet & Maxwell, London, 2007, p 889.

31. 32.

E Peel, Treitel, The Law of Contract, 12th ed, Thomson, Sweet & Maxwell, London, 2007, p 888. [2006] NSWCA 291 at [183].

33. 34.

N C Seddon and M P Ellinghaus, Cheshire and Fifoot’s Law of Contract, 9th Aust ed, LexisNexis Butterworths, 2008, p 1032 (citations omitted). Canning v Temby (1905) 3 CLR 419 at 426.

35. 36.

(1879) 13 Ch D 589. Green v Sevin (1879) 13 Ch D 589 at 599.

37. 38.

[1951] Ch 174. (1928) 139 LT 22 at 25.

39. 40.

Smith v Hamilton [1951] Ch 174 at 183. Smith v Hamilton [1951] Ch 174 at 179–80.

41. 42.

Jamshed Khodaram Irani v Burjorji Dhunjibha (1915) 32 TLR 156 at 157. [1973] 2 NSWLR 131.

43. 44.

[1968] 2 NSWR 609 at 628. For example, in Thomas v Monaghan [1975] 1 NZLR 1 at 4–5.

45. 46.

Falconer v Wilson [1973] 2 NSWLR 131 at 139. Neeta (Epping) Pty Ltd v Phillips (1974) 131 CLR 286 at 299.

47. 48.

Winchcombe Carson Trustee Co Ltd v Ball-Rand Pty Ltd [1974] 1 NSWLR 477 at 481. (1802) 32 ER 108.

49. 50.

Tilley v Thomas (1867) LR 3 Ch App 61 at 67. [1915] AC 386 at 402, 417.

51. 52.

Stickney v Keeble [1915] AC 386 at 416. [1981] AC 1050.

53. 54.

[1981] 1 NSWLR 294. In re Sandwell Park Colliery Co; Field v The Company [1929] 1 Ch 277 at 282.

55. 56.

Stickney v Keeble [1915] AC 386 at 426. United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904 at 928.

57. 58.

United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904 at 946. United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904 at 945.

59.

Neeta (Epping) Pty Ltd v Phillips (1974) 131 CLR 286 at 300.

60.

Carr v J A Berriman Pty Ltd (1953) 89 CLR 327 at 348–9.

61. 62.

(1975) 132 CLR 289 at 296. Supreme Court of NSW (Court of Appeal), unreported, 5 August 1981.

63. 64.

Stickney v Keeble [1915] AC 386 at 416. Conveyancing Act 1919 (NSW) s 13; Holland v Wiltshire (1954) 90 CLR 409 at 418, 419.

65. 66.

Carr v J A Berriman Pty Ltd (1953) 89 CLR 327 at 348–9. Canning v Temby (1905) 3 CLR 419 at 426.

67. 68.

United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904 at 928. Neeta (Epping) Pty Ltd v Phillips (1974) 131 CLR 286 at 299.

69. 70.

Holland v Wiltshire (1954) 90 CLR 409 at 418. Parkin v Thorold (1852) 51 ER 698 at 703.

71. 72.

Canning v Temby (1905) 3 CLR 419 at 425. (1856) 52 ER 1214.

73. 74.

Macbryde v Weekes (1856) 52 ER 1214 at 1219. Macbryde v Weekes (1856) 52 ER 1214 at 1216.

75. 76.

Bennett v L & W Whitehead Ltd [1926] 2 KB 380 at 410. Elder’s Trustee & Executor Co Ltd v Commonwealth Homes & Investment Co Ltd (1941) 65 CLR 603 at 617.

77. 78.

Ross T Smyth & Co Ltd v T D Bailey, Son & Co [1940] 3 All ER 60 at 70. Kammins Ballrooms Co Ltd v Zenith Investments (Torquay) Ltd [1971] AC 850 at 883.

79. 80.

Franklin v Manufacturers Mutual Insurance Ltd (1935) 35 SR (NSW) 76 at 83. [1971] AC 850 at 883–4.

81. 82.

Peter Turnbull & Co Pty Ltd v Mundus Trading Co (Australasia) Pty Ltd (1954) 90 CLR 235 at 250–1. Peter Turnbull & Co Pty Ltd v Mundus Trading Co (Australasia) Pty Ltd (1954) 90 CLR 235 at 247, 251.

83. 84.

Palmer v Lark [1945] Ch 182 at 184–5; Michael Realty Pty Ltd v Carr [1977] 1 NSWLR 553 at 571. DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 at 433.

85. 86.

Rawson v Hobbs (1961) 107 CLR 466 at 481. Palmer v Lark [1945] Ch 182 at 184–5.

87. 88.

Jones v Barkley (1781) 99 ER 434 at 440. Peter Turnbull & Co Pty Ltd v Mundus Trading Co (Australasia) Pty Ltd (1954) 90 CLR 235 at 247.

89. 90.

Peter Turnbull & Co Pty Ltd v Mundus Trading Co (Australasia) Pty Ltd (1954) 90 CLR 235 at 246–7. Laird v Pim (1841) 151 ER 852 at 856.

91. 92.

Laird v Pim (1841) 151 ER 852 at 857. Cort v Ambergate, etc Railway Co (1851) 117 ER 1229 at 1237.

93. 94.

Peter Turnbull & Co Pty Ltd v Mundus Trading Co (Australasia) Pty Ltd (1954) 90 CLR 235 at 250. Peter Turnbull & Co Pty Ltd v Mundus Trading Co (Australasia) Pty Ltd (1954) 90 CLR 235 at 251.

95. 96.

(1980) 33 ALR 601. Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387.

97.

Carr v J A Berriman Pty Ltd (1953) 89 CLR 327 at 348–9.

98.

Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623 at 641–6, 657–9.

99. Fercometal SARL v Mediterranean Shipping Co SA [1989] 1 AC 788 at 805–6. 100. Summers v Commonwealth (1918) 25 CLR 144 at 151–2. 101. Stickney v Keeble [1915] AC 386 at 403. 102. Universal Cargo Carriers Corp v Citati [1957] 2 QB 401 at 445. 103. Rawson v Hobbs (1961) 107 CLR 466 at 481–2, 491. 104. Rawson v Hobbs (1961) 107 CLR 466 at 480–1. 105. Peter Turnbull & Co Pty Ltd v Mundus Trading Co (Australasia) Pty Ltd (1954) 90 CLR 235 at 246–7. 106. Peter Turnbull & Co Pty Ltd v Mundus Trading Co (Australasia) Pty Ltd (1954) 90 CLR 235 at 252. 107. Peter Turnbull & Co Pty Ltd v Mundus Trading Co (Australasia) Pty Ltd (1954) 90 CLR 235 at 251. 108. (1851) 117 ER 1229 at 1237. 109. (1988) 164 CLR 387 at 444–52. 110. Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 at 452. 111. Moorgate Mercantile Co Ltd v Twitchings [1976] QB 225 at 242. 112. Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 at 451. 113. Thompson v Palmer (1933) 49 CLR 507 at 547. 114. De Medina v Norman (1842) 152 ER 347 at 350. 115. DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 at 433. 116. Bowes v Chaleyer (1923) 32 CLR 159 at 198. 117. Legione v Hateley (1983) 152 CLR 406. 118. Legione v Hateley (1983) 152 CLR 406 at 411. 119. Legione v Hateley (1983) 152 CLR 406 at 459. 120. Legione v Hateley (1983) 152 CLR 406 at 450. 121. Legione v Hateley (1983) 152 CLR 406 at 429–30. 122. Ciavarella v Balmer (1983) 153 CLR 438 at 453. 123. Stern v McArthur (1988) 165 CLR 489. 124. McArthur v Stern (1986) 5 NSWLR 538 at 558. 125. Stern v McArthur (1988) 165 CLR 489 at 528. 126. Stern v McArthur (1988) 165 CLR 489 at 540; cf Union Eagle Ltd v Golden Achievement Ltd [1997] AC 514 at 522. 127. Stern v McArthur (1988) 165 CLR 489 at 540–1. 128. Stern v McArthur (1988) 165 CLR 489 at 503–44. 129. Legione v Hateley (1983) 152 CLR 406 at 447–8. 130. Stern v McArthur (1988) 165 CLR 489 at 502–3. 131. Stern v McArthur (1988) 165 CLR 489 at 503. 132. Stern v McArthur (1988) 165 CLR 489 at 528. 133. Stern v McArthur (1988) 165 CLR 489 at 502–3. 134. Stern v McArthur (1988) 165 CLR 489. 135. Legione v Hateley (1983) 152 CLR 406 at 449. 136. Legione v Hateley (1983) 152 CLR 406 at 440.

137. (1876) 2 Ch D 499 at 506. 138. F W Maitland, Equity, 2nd ed, Cambridge University Press, Cambridge, 1936, pp 314–15; J N Pomeroy, A Treatise on the Specific Performance of Contracts, Banks & Brothers, New York, 1879, §§315, 322, 389; T C Williams and J M Lightwood, A Treatise on the Law of Vendor and Purchaser of Real Estate and Chattels Real, 4th ed, Sweet & Maxwell Limited, London, 1936, vol 1, pp 59–60. 139. Haque v Haque [No 2] (1965) 114 CLR 98 at 124. 140. KLDE Pty Ltd v Commissioner of Stamp Duties (Q) (1984) 155 CLR 288 at 301. 141. Latec Investments Ltd v Hotel Terrigal Pty Ltd (in liq) (1965) 113 CLR 265 at 274–5. 142. F W Maitland, Equity, 2nd ed, Cambridge University Press, Cambridge, 1936, pp 182–3. 143. K E Lindgren, Time in Performance of Contracts, 2nd ed, Butterworths, Sydney, 1982, [210]–[222]. 144. H G Hanbury, Modern Equity, 8th ed, Stevens, London 1962, pp 85–6. 145. (1802) 32 ER 108. 146. (1786) 29 ER 1156. 147. J N Pomeroy, A Treatise on the Specific Performance of Contracts, Banks & Brothers, New York, 1789, §391. 148. In re Dagenham (Thames) Dock Co; Ex parte Hulse (1873) LR 8 Ch App 1022. 149. Legione v Hateley (1983) 152 CLR 406 at 426, 441. 150. See C Harpum, ‘Relief Against Forfeiture and the Purchaser of Land’ [1984] 43 Cambridge Law Journal 134 at 147–8. 151. A Lang, ‘Forfeiture of Interests in Land’ (1984) 100 Law Quarterly Review 427 at 434–5. 152. Hewell v Court (1983) 149 CLR 639 at 663–4. 153. Hewell v Court (1983) 149 CLR 639 at 650, 664. 154. Rose v Watson (1864) 33 LJ Ch (NS) 385 at 389–90. 155. C Harpum, ‘Relief Against Forfeiture and the Purchaser of Land’ [1984] 43 Cambridge Law Journal 134 at 139. 156. Lysaght v Edwards (1876) 2 Ch D 499 at 506. 157. Chang v Registrar Titles (1976) 137 CLR 177 at 190. 158. Kern Corporation Ltd v Walter Reid Trading Pty Ltd (1987) 163 CLR 164 at 192. 159. Stern v McArthur (1988) 165 CLR 489 at 537. 160. Brown v Heffer (1967) 116 CLR 344 at 349; Legione v Hateley (1983) 152 CLR 406 at 456–7; Bahr v Nicolay [No 2] (1988) 164 CLR 604 at 612, 645–6. See also the warning by Stamp LJ in Berkeley v Poullett [1977] 1 EGLR 86 at 93 against error caused by putting ‘the cart before the horse’, to which Austin J referred in Chief Commissioner of Stamp Duties (NSW) v Paliflex Pty Ltd (1999) 47 NSWLR 382 at 390. 161. Legione v Hateley (1983) 152 CLR 406 at 449. 162. Shiloh Spinners Ltd v Harding [1973] AC 691 at 723–4. 163. Shiloh Spinners Ltd v Harding [1973] AC 691 at 723. 164. Stern v McArthur (1988) 165 CLR 489 at 502–3. 165. Stern v McArthur (1988) 165 CLR 489 at 526. 166. Legione v Hateley (1983) 152 CLR 406 at 449. 167. Ciavarella v Balmer (1983) 153 CLR 438 at 453. 168. Legione v Hateley (1983) 152 CLR 406 at 449; Ciavarella v Balmer (1983) 153 CLR 438 at 453.

169. Legione v Hateley (1983) 152 CLR 406 at 444. 170. G W Keeton and L A Sheridan, Equity, 3rd ed, Barry Rose Books, Chichester (1987), p 38. 171. (1996) 40 NSWLR 374 at 385–6. 172. G Spence, The Equitable Jurisdiction of the Court of the Chancery, Lea and Blanchard, Philadelphia, 1846, vol 1, p 628. 173. J McGhee (ed), Snell’s Equity, 30th ed, Sweet & Maxwell, 2000, pp 603–6. 174. G T Bispham, The Principles of Equity, 6th ed, Banks Law Publishing Company, New York, 1905, §§175, 176; E Merwin, The Principles of Equity and Equity Pleading, Bowen-Merrill, Indianapolis, 1895, §419. 175. H A Smith, An Analysis of Smith’s Principles of Equity, Stevens, London, 1909. 176. J Story, Commentaries on Equity Jurisprudence, 13th ed, Little Brown & Co, Boston, 1886, vol 1, §101. 177. See Cameron v UBS AG (2000) 2 VR 108 at 115–16.

[page 576]

25 DISCHARGE BY FRUSTRATION

INTRODUCTION 25.1 This chapter deals with some of the ways in which a contract will be discharged through frustration. Generally speaking, frustration occurs when an event that occurs after the formation of the contract results in a situation that renders the contract impossible to perform or makes performance fundamentally or radically different from the situation contemplated by the contract on its true construction in the light of the surrounding circumstances. In such cases there may be no knowledge or fault on the part of either party in relation to the supervening event. If the contract is terminated for frustration, future obligations that would ordinarily have been required to have been carried out do not need to be performed. In such situations the contract is terminated in future. It should be noted, however, that frustration of a contract will have consequences both at common law and pursuant to statute. In cases where supervening events occur after the making of the contract but before the contract is discharged, consideration needs to be given as to whether the supervening event results in the contract being frustrated. This requires an analysis of the elements of frustration. In Codelfa Construction Pty Ltd v State Rail Authority (1982) 149 CLR 337 (see 25.2C) the principles necessary to constitute a frustrating event were analysed. Similar analysis and application was made by the Victorian Court of Appeal in oOh! Media Roadside Pty Ltd v Diamond Wheels Pty Ltd (2011) 32 VR 255 (see 25.3C).

Over time courts have been faced with the effects of specific supervening events on contractual performance and have developed general principles with respect to those events. In Taylor v Caldwell (1863) 122 ER 309 (see 25.4C) the court found that the contract had been frustrated in circumstances where the subject matter of the contract had been destroyed or substantially altered before completion of the contract without fault of either party. In Krell v Henry [1903] 2 KB 740 (see 25.5C) the court found that where the basis of the contract was the happening of a future specific event, the non-occurrence of that event frustrated the contract. At common law, the contract ends the moment that the frustrating event takes place. As a general rule the parties are released and discharged from all future obligations that arose under the contract that has now been frustrated. Termination after frustration occurs automatically. The impact of frustration at common law was examined in Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 (see 25.6C) in the context of a total failure of consideration. The common law rules on frustration can result in hardship and injustice. This has led to legislation such as the Frustrated Contracts Act 1978 (NSW) being passed in order to redress some of the injustices. [page 577]

COURT ORDERS LEADING TO FRUSTRATION 25.2C

Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337

Court: High Court of Australia Facts: The State Rail Authority (SRA) accepted Codelfa’s tender in relation to excavation work required for the construction of the Eastern Suburbs Railway in Sydney. Construction of the railway was authorised by statute, which included a provision granting the SRA immunity from prosecution for nuisance. The parties agreed that Codelfa was to complete its work within 130 weeks from

commencement. It was expressly agreed that Codelfa would bear all necessary costs for the work at an agreed price regardless of the difficulties it might encounter. In order to complete on time, Codelfa calculated it would need to work three eight-hour shifts per day for six days per week, with certain work on Sundays as well. However, local residents obtained an injunction against Codelfa, which mistakenly assumed it was protected by SRA’s statutory immunity. This meant that work could not proceed between 10 pm and 6 am on the six days or at all on Sundays. The SRA refused Codelfa’s claim for additional costs and the dispute proceeded to arbitration. Issues: An issue before the High Court was whether the injunctions issued by the Supreme Court frustrated the contract between Codelfa and the SRA. The court also had to consider Codelfa’s claim that there was an implied term that the SRA would grant a reasonable extension of time and indemnify Codelfa against additional costs occasioned by the grant of the injunctions. Decision: In a majority decision the High Court (Stephen, Mason, Aickin, and Wilson JJ; Brennan J dissenting) held that the injunctions fundamentally or radically changed the circumstances of the contract, such that the contract was frustrated. The court unanimously held that there was no implied term as claimed by Codelfa. Extract: The extracts from the judgments of Mason J and Aickin J discuss the principles of frustration in this context.

Mason J [M]y conclusion is that, if Codelfa is entitled to any relief in respect of the changed circumstances, that relief is more appropriately founded on the doctrine of frustration than on the implication of a term. … [In Davis Contractors Ltd v Fareham Urban District Council] Lord Reid said that the task of the court is to determine ‘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’, ‘whether the

contract which they did make is … wide enough to apply to the new situation: [page 578] if it is not, then it is at an end’.1 Later he described frustration as ‘the termination of the contract by operation of law on the emergence of a fundamentally different situation’.2 Lord Radcliffe said: … frustration occurs whenever the law recognizes 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. … It was not this that I promised to do.3 His Lordship, noting that special importance attaches to an unexpected event, observed ‘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’. It is implicit, if not explicit … in the speeches of Lord Reid and Lord Radcliffe in Davis Contractors, that to express a preference for this view of frustration as against the theory of the implied condition and other suggested bases is not to cast doubt on the authority of earlier decisions. This is of critical importance because the earlier cases provide many illustrations of the proposition that a contract will be frustrated when the parties enter into it on the common assumption that some particular thing or state of affairs essential to its performance will continue to exist or be available, neither party undertaking responsibility in that regard, and that common assumption proves to be mistaken. … Two objections may be urged to the width of the proposition I have stated. The first is that the common assumption must be found in the contract itself. The answer to this objection is that, granted that the assumption needs to be contractual, in the case of frustration, as with the

implication of a term, it is legitimate to look to extrinsic evidence in the form of relevant surrounding circumstances to assist us in the interpretation of the contract, unless its language is so plain that recourse to surrounding circumstances would amount to no more than an attempt to contradict or vary the terms of the contract. Cases such as Krell v Henry4 demonstrate the point. There the contract was for the hire of a flat for two particular days, the unexpressed common assumption being that the flat was hired for the purpose of viewing the Coronation processions. The Court of Appeal held that the taking place of the processions was the foundation of the contract and that the rent was not recoverable on the processions being cancelled due to the King’s illness. The correctness of that decision was questioned by Lord Finlay LC in Larrinaga and Co Ltd v Societe Franco-Americaine des Phosphates de Medulla, Paris,5 on the ground that the parties may have contracted in the expectation that a particular event would happen, each taking his chance, but not making the happening of the event the basis of the contract. In Maritime National Fish Ltd v Ocean Trawlers Ltd, Lord Wright referred to Lord Finlay’s comment, remarking [page 579] that Krell v Henry was an authority not ‘to be extended’.6 This comment is not so much a criticism of the reception of the extrinsic evidence in that case as an adverse reflection on its capacity to negate the possibility that each party was taking his chance on the outcome. Krell v Henry was strongly criticized by Latham CJ in Scanlan’s [New Neon Ltd v Tooheys Ltd],7 but much of his Honour’s criticism appears to be founded on the outmoded view, rejected by McTiernan and Williams JJ, that it was not legitimate to take extrinsic evidence into account. Even so, his Honour was disposed to concede8 that Krell v Henry could be more readily understood as a contract which was subject to a condition or as a conditional contract. It is not without significance that the parol evidence rule has never been applied so as to exclude evidence of a condition, nonfulfilment of which goes to the existence or validity of the contract. In any event McTiernan and Williams JJ took a more favourable view of Krell v Henry, demonstrating that it was consistent with the later cases and that the

views expressed by Vaughan Williams LJ in that case conformed to the doctrine of frustration as it was subsequently elaborated.9 Of course, we need to read the judgments in Scanlan’s in the light of the more recent statements as to the theoretical basis of the doctrine. However, in my view they do not affect the point now under discussion, except to reinforce the reception of extrinsic evidence of relevant surrounding circumstances. So, Lord Radcliffe in Davis Contractors10 quoted with approval the remarks of Lord Wright in Denny, Mott & Dickson [Ltd v James B Fraser & Co Ltd]: The data for decision are, on the one hand, the terms and construction of the contract, read in the light of the then existing circumstances, and on the other hand the events which have occurred.11 And, as we have seen, Lord Reid was of the same opinion. The second objection is that the proposition does not sufficiently acknowledge the fact that the event which generally, if not universally, works a frustration, is an event which supervenes after the making of the contract, viz a change in the law which makes it impossible for the parties to execute the contract. It is not surprising that the cases commonly throw up situations of supervening impossibility caused by a change in the law — they are the more common instances of the unforeseen or unexpected occurrence. But in principle there is no reason why a mutual assumption arising from a mistaken view that an activity is immune from injunctive relief should not attract the principle of frustration. No doubt it is more difficult in such a case to show that the grant of injunctive relief was not foreseen or could not reasonably have been foreseen, but if that can be shown then the doctrine of frustration should apply. The injunction is a supervening event though it does not stem from any alteration in the law. [page 580] An unusual element in the present case is that the parties appear to have received, accepted and acted on erroneous legal advice that the contract work could not be impeded by the grant of an injunction to restrain noise or other nuisance, advice which was based on an erroneous interpretation

of s 11 of the City and Suburban Electric Railways Act 1915 (NSW). One might have expected the parties and their advisers to have had reservations about the correctness of the advice and to have given consideration to the possibility that, despite the advice, an injunction might be granted. However, the findings do not reflect the existence of any reservations; indeed, they record Codelfa’s acceptance of the representations made by [State Rail]. Codelfa is a wholly owned subsidiary of an Italian company and this may explain Codelfa’s willingness to accept and act on the representation made by [State Rail]. The doctrine of frustration is closely related to the concept of mutual mistake. However, in general, relief on the ground of mutual mistake is confined to mistakes of fact, not of law. If the common contractual assumption is of present fact it is a case of mutual mistake; if the assumption is of future fact it is a case of frustration,12 the distinction being that in one case the contract is void ab initio and in the other it is binding until the assumption is falsified. Here the mistake is not one of present fact; it is either a mistake as to future fact or a mistake of law. Even if it be a mistake of law, this is not, I think, fatal to the application of the doctrine of frustration. The unsatisfactory distinction between a mistake of fact and one of law has not so far been carried over into frustration and I see no reason to further complicate the doctrine by invoking this distinction. The critical issue then is whether the situation resulting from the grant of the injunction is fundamentally different from the situation contemplated by the contract on its true construction in the light of the surrounding circumstances. … The answer must, I think, be in the affirmative. … [T]he contract work could not be carried out as contemplated by the contract once the injunctions were granted, the effect of which was to prohibit the continuous three shift a day operation six days a week. Performance by means of a two shift operation, necessitated by the injunctions, was fundamentally different from that contemplated by the contract.

Aickin J The manner in which the doctrine of frustration is generally expressed has undergone some change, though it has not been suggested that its content has changed. When it was first developed it was usual to

express it as arising from an implied term.13 … The doctrine is now generally expressed as depending on changes in the significance of the obligations undertaken and the surrounding circumstances in which the contract was made. This development was explained by the House of Lords in Davis Contractors Ltd v Fareham Urban District Council. … It is convenient to quote part of what Lord Radcliffe said: Lord Loreburn [in F A Tamplin Steamship v Anglo-Mexican Petroleum Products] ascribes the dissolution to an implied term of the contract that was actually made. This approach [page 581] 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 criticized as obscuring the true action of the court which consists in applying an objective rule of the law of contract to the contractual obligations that the parties have imposed upon themselves. So long as each theory produces the same result as the other, as normally it does, it matters little which theory is avowed. … But it may still be of some importance to recall that, if the matter is to be approached by way of implied term, the solution of any particular case is not to be found by inquiring what the parties themselves would have agreed on had they been, as they were not, forewarned. It is not merely that no one can answer that hypothetical question: it is also that the decision must be given ‘irrespective of the individuals concerned, their temperaments and failings, their interest and circumstances’. … The legal effect of frustration ‘does not depend on their intention or their opinions, or even knowledge, as to the event’.14 On the contrary, it seems that when the event occurs ‘the meaning of the contract must be taken to be, not what the parties did intend (for they had neither thought nor intention regarding it), but that which

the parties, as fair and reasonable men, would presumably have agreed upon if, having such possibility in view, they had made express provision as to their several rights and liabilities in the event of its occurrence’.15 [F]rustration occurs whenever the law recognizes 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. There is, however, no uncertainty as to the materials upon which the court must proceed. ‘The data for decision are, on the one hand, the terms and construction of the contract, read in the light of the then existing circumstances, and on the other hand the events which have occurred’.16 In the nature of things there is often no room for any elaborate inquiry. 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.17 In his judgment in Brisbane City Council v Group Products Pty Ltd,18 Stephen J (with whom Murphy J agreed) considered the question of frustration and reviewed many of the cases in a manner with which I respectfully agree. … [page 582] Since the judgment of Stephen J was delivered there have been two further decisions of the House of Lords which I should mention. The first was National Carriers Ltd v Panalpina (Northern) Ltd. The primary question in

that case was whether the doctrine of frustration could be applied to a lease. A majority of their Lordships decided that it could, but ‘hardly ever’. Lord Hailsham LC discusses the doctrine generally. … He sets out the five theories of frustration which have been propounded and indicates a preference for the formulation by Lord Radcliffe in Davis Contractors which I have quoted above.19 Lord Wilberforce said of the doctrine of frustration: Various theories have been expressed as to its justification in law: as a device by which the rules as to absolute contracts are reconciled with a special exception which justice demands, as an implied term, as a matter of construction of the contract, as related to removal of the foundation of the contract, as a total failure of consideration. It is not necessary to attempt selection of any one of these as the true basis: my own view would be that they shade into one another and that a choice between them is a choice of what is most appropriate to the particular contract under consideration. One could see, in relation to the present contract, that it could provisionally be said to be appropriate to refer to an implied term, in view of the grant of the right of way, or to removal of the foundation of the contract — viz. use as a warehouse. In any event, the doctrine can now be stated generally as part of the law of contract; as all judicially evolved doctrines it is, and ought to be, flexible and capable of new applications.20 Lord Simon of Glaisdale said: 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.21 The most recent decision is Pioneer Shipping Ltd v BTP Tioxide Ltd. Lord Diplock said that there were two questions and that:

[T]he other was the question of frustration which … is never a pure question of fact but does in the ultimate analysis involve a conclusion of law as to whether the frustrating event or series of events has made performance of the contract a thing radically different from that which was undertaken by the contract; however closely that conclusion of law may seem to follow from a commercial arbitrator’s findings as to mercantile usage and the understanding of mercantile men about the significance of the commercial differences between what was promised and what in the changed circumstances would now fall to be performed.22 [page 583] Lord Roskill said that the decision in National Carriers showed that the House of Lords had approved the ‘now classic statement of the doctrine by Lord Radcliffe’ in Davis Contractors which he set out and added: It should therefore be unnecessary in future cases, where issues of frustration of contracts arise, to search back among the many earlier decisions in this branch of the law when the doctrine was in its comparative infancy. The question in these cases is not whether one case resembles another, but whether applying Lord Radcliffe’s enunciation of the doctrine, the facts of the particular case under consideration do or do not justify the invocation of the doctrine, always remembering that the doctrine is not lightly to be invoked to relieve contracting parties of the normal consequences of imprudent commercial bargains.23 Lord Fraser of Tullybelton, Lord Russell of Killowen and Lord Keith of Kinkel each agreed with both Lord Diplock and Lord Roskill. Thus for the United Kingdom the problem of formulating the proper test for the application of the doctrine of frustration has been laid at rest. There is one further comment to be made on the judgment of Stephen J in the Brisbane City Council case. He quoted from Lord Radcliffe the following passage: ‘… 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’ and, after further comment, said: ‘His Lordship’s emphasis upon change in obligation is, I think, to be understood in the context of the factual situation under discussion in Davis Contractors’.24 I do not take his Honour to use the expression ‘change in obligation’ in a sense different from that in which Lord Radcliffe used the expression ‘change in the significance of the obligation’. It was, in my opinion, that formulation which led his Lordship to say: 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.25 That formulation necessarily involves questions of degree. We are of course not bound by the decisions of the House of Lords but the decisions in Davis Contractors, National Carriers and Pioneer Shipping provide valuable guidance on the present topic. The fact that their Lordships have now firmly adopted a basis for the application of the doctrine of frustration which departs from that adopted in earlier decisions of the House of Lords and from the manner in which the doctrine was expressed in this Court by Latham CJ in Scanlan’s New Neon Ltd v Tooheys Ltd presents no reason why we should not now apply the doctrine adopted by their Lordships in those cases if we think that it is right. For my own part I would with respect adopt the reasons of the House of Lords in those three cases as being preferable to the other bases which have been suggested from time to time. Their test has the advantage of being flexible and capable of application to a wide range of [page 584] circumstances and lacks the degree of unreality involved in the implied term theory. I would, like Stephen J in the Brisbane City Council case, prefer to express my conclusion in the present case on the basis of Lord Radcliffe’s formulation.

Having applied that test I am satisfied that the contract between [State Rail] and [Codelfa] was frustrated by the grant of the injunction prohibiting work on the tunnels between the hours of 10 pm and 6 am.

Comments 25.2.1 See Radan, Gooley, and Vickovich at 25.24–25.27, 25.41, 25.45, and 25.64. 25.2.2 On the issue of implied terms in this case, see the extract of this case at 11.2C. 25.3C

oOh! Media Roadside Pty Ltd v Diamond Wheels Pty Ltd (2011) 32 VR 255

Court: Court of Appeal in Victoria Facts: oOh! Media Roadside had a licence from Diamond Wheels to use an exterior of a building located at the intersection of two streets in Melbourne. The licence allowed oOh! Media to place advertising and promotional material on the exterior and roof of the building. Some time after the licence agreement was entered into, the construction of an office tower across the road from the building resulted in significant obstruction of visibility by passersby in relation to advertising placed on the licensed building. This meant a drop of about 85 per cent in revenue to oOh! Media. oOh! Media purported to terminate the agreement pursuant to a particular clause of the licence agreement. Diamond Wheels rejected this termination and treated it as a repudiation of the contract and sued to recover damages. oOh! Media claimed it had the right to terminate or, in the alternative, that the construction of the office tower frustrated the licence agreement. Issues: The issues before the Court were whether oOh! Media had a right to terminate the contract and, if not, whether the construction of the office tower frustrated the licence agreement.

Decision: The Court of Appeal in Victoria (Nettle, Redlich, and Weinberg JJA) unanimously held that oOh! Media did not have a contractual right to terminate the licence agreement and, further, that the agreement was not frustrated. The effect of these rulings was that Diamond Wheels was entitled to an award of damages for breach of the licence agreement. Extract: The extract from the judgment of Nettle JA, which was agreed with by the other two judges, discusses the test for frustration and, in particular, the element of foreseeability.

[page 585]

Nettle JA (i) Test for frustration … [I]n some cases it has been said to be enough to engage the doctrine of frustration that events have given rise to a ‘fundamental commercial difference’ between contemplated and actual performance26 or to a ‘fundamentally different situation’ arising 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’.27 In a similar vein, other judges and commentators have expressed the view that frustration is a ‘flexible doctrine’, unconstricted by ‘arbitrary formula’28 which is ‘apt to vindicate justice wherever owing to relevant supervening circumstances the enforcement of any contractual arrangement in its literal terms would produce injustice’29 and ‘to give effect to the demands of justice, to achieve what is reasonable and fair and as an expedient to escape from injustice’.30 One difficulty with general conceptions of that kind is that they do not provide much guidance as to the degree or extent an event must overturn expectations, or affect the foundation upon which 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 Stephen J noted in Brisbane City Council [v Group Projects Pty Ltd], they ‘provide little more than single instances of solutions to these questions’.31 A more structured approach, however, is evident in the observations of Dillon LJ in Notcutt v Universal Equipment Ltd Co (London) that: I do not for my part see that these reference[s] to justice or injustice introduces 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. I approach the facts of this case on the footing that the test to be satisfied is that explained by Lord Reid and Lord Radcliffe in [Davis Contractors Ltd v Fareham Urban District Council32].33 Still more precisely, in Codelfa [Construction Pty Ltd v State Rail Authority (NSW)] Mason J identified the close relationship between the doctrine of frustration and the concepts of [page 586] common contractual assumption and mutual mistake. As his Honour explained: if parties enter into a contract on the basis of a common contractual assumption as to a future fact, it is a case for frustration; and, if they 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 thus 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.34 To that must be added, Mason J said, 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 that event supervenes after the contract has been made. … Consistently with Codelfa, I take the law to be that a contract is not frustrated unless a supervening event: a) confounds a mistaken common assumption that some particular thing or state of affairs essential to the performance of the contract will continue to exist or be available, neither party undertaking responsibility in that regard; and b) in so doing has the effect that, without default of either party, a contractual obligation becomes 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. …

(ii) Forseeability of obstruction … As Lord Wright said in Maritime National Fish Ltd v Ocean Trawlers Ltd,35 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 is particularly high. Consequently, as later cases demonstrate, it is important to be precise about the nature and 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 The Sea Angel,36 Rix LJ gave as an example … a case where the possibility of an industrial strike was foreseen, and actually [page 587] 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 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. Hence, as the position is summarised in Chitty on Contracts: 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 … ‘one which the parties could reasonably be thought to have foreseen as a real possibility’.37

[page 588]

Comment 25.3.1 See Radan, Gooley, and Vickovich at 25.20–25.21, 25.23, 25.27–25.28, 25.41, and 25.53.

DESTRUCTION OF THE SUBJECT MATTER OF THE CONTRACT LEADING TO FRUSTRATION 25.4C

Taylor v Caldwell (1863) 122 ER 309

Court: Queen’s Bench Division

Facts: Caldwell, the owner of the Surrey Gardens and Music Hall, contracted to rent the hall and gardens to Taylor for five days for the purpose of giving a series of concerts. According to the contract, Taylor was to advertise the event and was entitled to the gate receipts. It was a term of the contract that payment of £100 would be made for each day that the hall was used. After the contract was made and six days before the first concert the hall was destroyed by fire through no fault of either party. Taylor sued Caldwell for damages for breach of contract. Issue: The issue before the court was whether the destruction of the hall by fire frustrated the contract. If so, Caldwell would have been discharged from his obligation to provide the music hall and gardens on the agreed dates and therefore not be in breach of contract. Decision: Blackburn J held that the contract was frustrated. Accordingly, Caldwell was not liable to Taylor for damages for breach of contract. Extract: The extract from the judgment of Blackburn J is a classic statement of frustration where the subject matter of the contract ceases to exist after the date of the contract.

Blackburn J There seems no doubt that where there is a positive contract to do a thing, not in itself unlawful, the contractor must perform it or pay damages for not doing it, although in consequence of unforeseen accidents, the performance of his contract has become unexpectedly burdensome or even impossible. … But this rule is only applicable when the contract is positive and absolute, and not subject to any condition either express or implied: and there are authorities which, as we think, establish the principle that where, from the nature of the contract, it appears that the parties must from the beginning have known that it could not be fulfilled unless when the time for the fulfilment of the contract arrived some particular specified thing continued to exist, so that, when entering into the contract, they must have contemplated such continuing existence as the foundation of what was to be done; there, in the absence of any express or implied warranty that the

thing shall exist, the contract is not to be construed as a positive contract, but as subject to an implied condition that the [page 589] parties shall be excused in case, before breach, performance becomes impossible from the perishing of the thing without default of the contractor. There seems little doubt that this implication tends to further the great object of making the legal construction such as to fulfil the intention of those who entered into the contract. For in the course of affairs men in making such contracts in general would, if it were brought to their minds, say that there should be such a condition. … It may, we think, be safely asserted to be now English law, that in all contracts of loan of chattels or bailments if the performance of the promise of the borrower or bailee to return the things lent or bailed, becomes impossible because it has perished, this impossibility (if not arising from the fault of the borrower or bailee from some risk which he has taken upon himself) excuses the borrower or bailee from the performance of his promise to redeliver the chattel. The great case of Coggs v Bernard38 is now the leading case on the law of bailments, and Lord Holt, in that case, referred so much to the Civil Law that it might perhaps be thought that this principle was there derived direct from the civilians, and was not generally applicable in English law except in the case of bailments; but the case of Williams v Lloyd39 … shews that the same law had been already adopted by the English law as early as The Book of Assizes. 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. In none of these cases is the promise in words other than positive, nor is there any express stipulation that the destruction of the person or thing shall excuse the performance; but that excuse is by law implied, because

from the nature of the contract it is apparent that the parties contracted on the basis of the continued existence of the particular person or chattel. In the present case, looking at the whole contract, we find that the parties contracted on the basis of the continued existence of the Music Hall at the time when the concerts were to be given; that being essential to their performance. We think, therefore, that the Music Hall having ceased to exist, without fault of either party, both parties are excused, [Taylor] from taking the gardens and paying the money, [Caldwell] from performing their promise to give the use of the Hall and Gardens and other things. Consequently the rule must be absolute to enter the verdict for [Caldwell].

[page 590]

Comments 25.4.1 See Radan, Gooley, and Vickovich at 25.2, 25.3, 25.31–25.33, 25.42, and 25.51. 25.4.2 For a discussion of the place of this case in the development of the law on frustration, see G H Treitel, Frustration and Force Majeure, Sweet & Maxwell, London, 1994, pp 35–47.

FAILURE OF A CONDITION OF THE CONTRACT LEADING TO FRUSTRATION 25.5C

Krell v Henry [1903] 2 KB 740

Court: Court of Appeal in England Facts: Krell sued to recover £50, being the balance said to be due under a contract by which Henry was to have the use of Krell’s apartment on two specific days. The contract required the payment

of a £25 deposit and also payment of an additional £50 two days before Henry was to be given possession. Henry had intended to use the flat to view the coronation of Edward VII and both parties understood that this was the purpose of the contract. Due to the King’s illness the coronation procession was postponed and Henry refused to pay the £50. Issue: The issue before the Court of Appeal was whether the contract was discharged by the cancellation of the coronation procession. This involved an analysis of whether the principle of Taylor v Caldwell extended to this contract, as there was a failure of a noncontractual term that was in fact the purpose of the contract. Decision: The Court of Appeal (Vaughan Williams, Romer, and Sterling LLJ) unanimously held that there was a necessary inference from the circumstances, recognised by both parties, that the procession and the location of the room was the foundation of the contract. The cancellation of the procession discharged the parties, as it was no longer possible to achieve the substantial purpose of the contract. Extract: The extracts from the judgment of Vaughan Williams LJ discuss the frustration of a contract in circumstances where the subject matter of the contract has been destroyed.

Vaughan Williams LJ I do not think that the principle [in Taylor v Caldwell40] is limited to cases in which the event causing the impossibility of performance is the destruction or non-existence of some thing which is the subject-matter of the contract or of some condition or state of things expressly specified as a condition of it. I think that you first have to ascertain, not necessarily [page 591] from the terms of the contract, but, if required, from necessary inferences, drawn from surrounding circumstances recognised by both contracting

parties, what is the substance of the contract, and then to ask the question whether that substantial contract needs for its foundation the assumption of the existence of a particular state of things. If it does, this will limit the operation of the general words, and in such case, if the contract becomes impossible of performance by reason of the non-existence of the state of things assumed by both contracting parties as the foundation of the contract, there will be no breach of the contract thus limited. … [I]n the present case, where the rooms were offered and taken, by reason of their peculiar suitability from the position of the rooms for a view of the coronation procession, surely the view of the coronation procession was the foundation of the contract. … Each case must be judged by its own circumstances. In each case, one must ask oneself, first, what, having regard to all the circumstances, was the foundation of the contract? Secondly, was the performance of the contract prevented? Thirdly, was the event which prevented the performance of the contract of such a character that it cannot reasonably be said to have been in the contemplation of the parties at the date of the contract? If all these questions are answered in the affirmative (as I think they should be in this case), I think both parties are discharged from further performance of the contract. I think that the coronation procession was the foundation of this contract, and that the non-happening of it prevented the performance of the contract; and secondly, I think that the non-happening of the procession, to use the words of Sir James Hannen in Bailey v De Crespigny, was an event ‘of such a character that it cannot reasonably be supposed to have been in the contemplation of the contracting parties when the contract was made, and that they are not to be held bound by general words which, though large enough to include, were not used with reference to the possibility of the particular contingency which afterwards happened.’41 The test seems to be whether the event which causes the impossibility was or might have been anticipated and guarded against. It seems difficult to say, in a case where both parties anticipate the happening of an event, which anticipation is the foundation of the contract, that either party must be taken to have anticipated, and ought to have guarded against, the event which prevented the performance of the contract. In both Jackson v Union Marine Insurance Co42 and Nickoll v Ashton43 the parties might have anticipated as a possibility that perils of the sea might delay the ship and frustrate the commercial venture: in the former case the carriage of the goods to effect which the charterparty was

entered into; in the latter case the sale of the goods which were to be shipped on the steamship which was delayed. But the Court held in the former case that the basis of the contract was that the ship would arrive in time to carry out the contemplated commercial venture, and in the latter that the steamship would arrive in time for the loading of the goods the subject of the sale. … I myself am clearly of the opinion that in this case, where we have to ask ourselves whether the object of the contract was frustrated by the nonhappening of the coronation and its procession on the days proclaimed, parol evidence is admissible to shew that the subject of [page 592] the contract was rooms to view the coronation procession, and was so to the knowledge of both parties. When once this is established, I see no difficulty whatever in the case. It is not essential to the application of the principle of Taylor v Caldwell that the direct subject of the contract should perish or fail to be in existence at the date of performance of the contract. It is sufficient if a state of things or condition expressed on the contract and essential to its performance perishes or fails to be in existence at the time. In the present case the condition which fails prevents the achievement of that which was, in the contemplation of both parties, the foundation of the contract, is not expressly mentioned either as a condition of the contract or the purpose of it; but I think for reasons which I have given that the principle of Taylor v Caldwell ought to be applied.

Comments 25.5.1 See Radan, Gooley, and Vickovich at 25.39, 25.41, and 25.42. 25.5.2 For a discussion of this case and others arising as a result of the coronation of King Edward VII, see G H Treitel, Frustration and Force Majeure, Sweet & Maxwell, London, 1994, pp 286–96.

THE EFFECT OF FRUSTRATION AT COMMON LAW 25.6C Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour

Ltd [1943] AC 32 Court: House of Lords Facts: Fairbairn Lawson Combe Barbour Ltd, a British manufacturing company, and Fibrosa Spolka Akcyjna, a Polish company, entered into a contract for the manufacture and delivery in Poland of a custom-made machine. Fibrosa paid Fairbairn £1000 as part of the initial payment. A few months later World War II commenced. The outbreak of the war made it illegal for the British company to supply goods to a country occupied by a declared enemy of Britain — in this case Germany. Fibrosa sued to recover the deposit. Issue: The issue before the House of Lords was whether, notwithstanding the frustration of the contract, Fibrosa was able to recover a payment made pursuant to the contract before the contract was frustrated. Decision: The House of Lords (Viscount Simon LC, and Lords Atkin, Russell of Killowen, Macmillan, Wright, Roche, and Porter) unanimously held that Fibrosa was entitled to recover the prefrustrating event contractual payment. Extract: The extract from the speech of Viscount Simon LC discusses the common law principles relating to the recovery of contractual payments made before the contract is frustrated.

[page 593]

Lord Simon VC If we are to approach this problem anew, it must be premised that the first matter to be considered is always the terms of the particular contract. If, for example, the contract is ‘divisible’ in the sense that a sum is to be paid

over in respect of completion of a defined portion of the work, it may well be that the sum is not returnable if completion of the whole work is frustrated. If the contract itself on its true construction stipulates for a particular result which is to follow in regard to money already paid, should frustration afterwards occur, this governs the matter. … [I]f the parties were assumed to have discussed the point when entering into the contract, they could not be supposed to have agreed on a simple formula which would be fair in all circumstances, and all that could be said is that, in the absence of such agreement, the law must decide. The question now to be determined is whether, in the absence of a term in the contract dealing with the matter, the rule which is commonly called the rule in Chandler v Webster44 should be affirmed. … The locus classicus for the view which has hitherto prevailed is to be found in the judgment of Sir Richard Collins MR in Chandler v Webster. … When his judgment is studied, however, one cannot but be impressed by the circumstance that he regarded the proposition that money in such cases could not be recovered back as flowing from the decision in Taylor v Caldwell.45 Taylor v Caldwell, however, was not a case in which any question arose whether money could be recovered back, for there had been no payment in advance, and there is nothing in the judgment of Blackburn J, which, at any rate in terms, affirms the general proposition that ‘the loss lies where it falls’. The application by Collins MR of Taylor v Caldwell to the actual problem with which he had to deal in Chandler v Webster deserves close examination. He said: The plaintiff contends that he is entitled to recover the money which he has paid on the ground that there has been a total failure of consideration. He says that the condition on which he paid the money was that the procession should take place, and that, as it did not take place, there has been a total failure of consideration. That contention does no doubt raise a question of some difficulty, and one which has perplexed the courts to a considerable extent in several cases. The principle on which it has been dealt with is that which was applied in Taylor v Caldwell — namely, that, where, from causes outside the volition of the parties, something which was the basis of, or essential to the fulfilment of, the contract has become impossible, so that, from the time when the fact of that impossibility

has been ascertained, the contract can no further be performed by either party, it remains a perfectly good contract up to that point, and everything previously done in pursuance of it must be treated as rightly done, but the parties are both discharged from further performance of it. If the effect were that the contract were wiped out altogether, no doubt the result would be that the money paid under it would have to be repaid as on a failure of consideration. But that is not the effect of the doctrine; it only releases the parties from further performance of the contract. Therefore, the doctrine of failure of consideration does not apply.46 [page 594] It appears to me that the reasoning in this crucial passage is open to two criticisms: (a) The claim of a party, who has paid money under a contract, to get the money back, on the ground that the consideration for which he paid it has totally failed, is not based upon any provision contained in the contract, but arises because, in the circumstances which have happened, the law gives a remedy in quasi-contract to the party who has not got that for which he bargained. It is a claim to recover money to which the defendant has no further right because in the circumstances which have happened, the money must be regarded as received to the plaintiff’s use. It is true that the effect of frustration is that, while the contract can no further be performed, ‘it remains a perfectly good contract up to that point, and everything previously done in pursuance of it must be treated as rightly done’, but it by no means follows that the situation existing at the moment of frustration is one which leaves the party that has paid money and has not received the stipulated consideration without any remedy. To claim the return of money paid on the ground of total failure of consideration is not to vary the terms of the contract in any way. The claim arises not because the right to be repaid is one of the stipulated conditions of the contract, but because, in the circumstances which have happened, the law gives the remedy. It is the failure to distinguish between (1) the action of assumpsit for money had and received in a case where the consideration has wholly failed, and (2) an action on the contract itself, which explains the mistake which I think has

been made in applying English law to this subject-matter. Thus, in Blakeley v Muller & Co, Lord Alverstone CJ said, I agree that Taylor v Caldwell applies, but the consequence of that decision is that neither party here could have sued on the contract in respect of anything which was to be done under it after the procession had been abandoned.47 That is true enough, but it does not follow that because the plaintiff cannot sue ‘on the contract’ he cannot sue dehors the contract for the recovery of a payment in respect of which consideration has failed. In the same case Wills J relied on Appleby v Myers, where a contract was made for the erection by A of machinery upon the premises of B, to be paid for upon completion. There was no prepayment, and in the course of the work the premises were destroyed by fire. It was held that both parties were excused from further performance, and that no liability accrued on either side, but the liability referred to was a liability under the contract, and the judge seems to have thought that no action to recover money in such circumstances as the present could be conceived of unless there was a term of the contract, express or implied, which so provided. Once it is realised that the action to recover money for a consideration that has wholly failed rests, not upon a contractual bargain between the parties, but, as Lord Sumner said in Sinclair v Brougham, ‘upon a notional or imputed promise to repay’,48 or (if it is preferred to omit reference to a fictitious promise) upon an obligation to repay arising from the circumstances, the difficulty in the way of holding that a pre-payment made under a contract which has been frustrated can be recovered back appears to me to disappear. [page 595] (b) There is, no doubt, a distinction between cases in which a contract is ‘wiped out altogether’, eg, because it is void as being illegal from the start, or as being due to fraud which the innocent party has elected to treat as avoiding the contract, and cases in which intervening impossibility ‘only releases the parties from further performance of the contract’. Does the distinction between these two classes of case, however, justify the deduction

of Collins MR, that ‘the doctrine of failure of consideration does not apply’ where the contract remains a perfectly good contract up to the date of frustration? This conclusion seems to be derived from the view that, if the contract remains good and valid up to the moment of frustration, money which has already been paid under it cannot be regarded as having been paid for a consideration which has wholly failed. The party who has paid the money has had the advantage, whatever it may be worth, of the promise of the other party. That is true, but it is necessary to draw a distinction. In English law, an enforceable contract may be formed by an exchange of a promise for a promise, or by the exchange of a promise for an act — I am excluding contracts under seal — and thus, in the law relating to the formation of contract, the promise to do a thing may often be the consideration, but when one is considering the law of failure of consideration and of the quasi-contractual right to recover money on that ground, it is, generally speaking not the promise which is referred to as the consideration, but the performance of the promise. The money was paid to secure performance and, if performance fails the inducement which brought about the payment is not fulfilled. If this were not so, there could never be any recovery of money, for failure of consideration, by the payer of the money in return for a promise of future performance, yet there are endless examples which show that money can be recovered, as for a complete failure of consideration, in cases where the promise was given but could not be fulfilled … In this connection the decision in Rugg v Minett49 is instructive. There the plaintiff had bought at auction a number of casks of oil. The contents of each cask were to be made up after the auction by the seller to the prescribed quantity so that the property in a cask did not pass to the plaintiff until this had been done. The plaintiff paid in advance a sum of money on account of his purchases generally, but a fire occurred after some of the casks had been filled up, while the others had not. The plaintiff’s action was to recover the money he had paid as money received by the defendants to the use of the plaintiff. The Court of King’s Bench ruled that this cause of action succeeded in respect of the casks which at the time of the fire had not been filled up to the prescribed quantity. A simple illustration of the same result is an agreement to buy a horse, the price to be paid down, but the horse not to be delivered and the property

not to pass until the horse has been shod. If the horse dies before the shoeing, the price can unquestionably be recovered as for a total failure of consideration, notwithstanding that the promise to deliver was given. This is the case of a contract de certo corpore where the certum corpus perishes after the contract is made, but, as Vaughan Williams LJ’s judgment, in Krell v Henry explained, the same doctrine applies ‘to cases where the event which renders the contract incapable of performance is the cessation or non-existence of an express condition or state of things, going to the root [page 596] of the contract, and essential to its performance’.50 I can see no valid reason why the right to recover prepaid money should not equally arise on frustration arising from supervening circumstances as it arises on frustration from destruction of a particular subject-matter. The conclusion is that the rule in Chandler v Webster is wrong, and that [Fibrosa] can recover their £1,000. While this result obviates the harshness with which the previous view in some instances treated the party who had made a prepayment, it cannot be regarded as dealing fairly between the parties in all cases, and must sometimes have the result of leaving the recipient who has to return the money at a grave disadvantage. He may have incurred expenses in connexion with the partial carrying out of the contract which are equivalent, or more than equivalent, to the money which he prudently stipulated should be prepaid, but which he now has to return for reasons which are no fault of his. He may have to repay the money, though he has executed almost the whole of the contractual work, which will be left on his hands. These results follow from the fact that the English common law does not undertake to apportion a prepaid sum in such circumstances … It must be for the legislature to decide whether provision should be made for an equitable apportionment of prepaid moneys which have to be returned by the recipient in view of the frustration of the contract in respect of which they were paid.

[page 597]

Comment 25.6.1 See Radan, Gooley, and Vickovich at 25.30, 25.61, 25.69–25.72, and 25.78.

1.

Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 at 720–1.

2. 3.

Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 at 723. Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 at 729.

4. 5.

[1903] 2 KB 740. (1922) 29 Com Cas 1 at 7.

6. 7.

Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] AC 524 at 528–9. (1943) 67 CLR 169 at 188–94.

8. 9.

Scanlan’s New Neon Ltd v Tooheys Ltd (1943) 67 CLR 169 at 193. Scanlan’s New Neon Ltd v Tooheys Ltd (1943) 67 CLR 169 at 210–16, 220–5.

10. 11.

Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 at 729. Denny, Mott & Dickson Ltd v James B Fraser & Co Ltd [1944] AC 265 at 274–5.

12. 13.

Bell v Lever Bros Ltd [1932] AC 161 at 225–6. F A Tamplin Steamship Co Ltd v Anglo-Mexican Petroleum Products Co Ltd [1916] 2 AC 397 at 403–4.

14. 15.

Hirji Mulji v Cheong Yue Steamship Co Ltd [1926] AC 497 at 509. Dahl v Nelson (1881) 6 App Cas 38 at 59.

16. 17.

Denny, Mott & Dickson Ltd v James B Fraser & Co Ltd [1944] AC 265 at 274–5. Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 at 728–9.

18. 19.

(1979) 145 CLR 143 at 160–3. National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675 at 687–9.

20. 21.

National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675 at 693. National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675 at 700.

22. 23.

Pioneer Shipping Ltd v BTP Tioxide Ltd [1982] AC 724 at 738. Pioneer Shipping Ltd v BTP Tioxide Ltd [1982] AC 724 at 751–2.

24. 25.

Brisbane City Council v Group Products Pty Ltd (1979) 145 CLR 143 at 161. Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 at 729.

26. 27.

Albert D Goan & Co v Interprofessionelle des Oleagineux Alimentaires [1960] 2 QB318 at 347. Ocean Tramp Tankers Corporation v V/O Sovfracht (The Eugenia) [1964] 2 QB 226 at 238.

28.

Cricklewood Property and Investment Trust Ltd v Leighton’s Investment Trust Ltd [1945] AC 221 at 241.

29.

Edwinton Commercial Corporation v Tsavliris Russ (Worldwide Salvage & TowageLtd (The ‘Sea Angel’) [2007] 2 Lloyd’s Rep 517 at 532.

30. 31.

J Lauritzen AS v Wijsmuller BV (The Super Servant Two) [1990] 1 Lloyd’s Rep 1 at 8. Brisbane City Council v Group Projects Pty Ltd (1979) 145 CLR 143 at 162.

32. 33.

[1956] AC 696. Notcutt v Universal Equipment Ltd Co (London) [1986] 1 WLR 641 at 647.

34. 35.

Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 at 357. [1935] AC 524 at 529.

36. 37.

Edwinton Commercial Corporation v Tsavliris Russ (Worldwide Salvage & TowageLtd (The ‘Sea Angel’) [2007] 2 Lloyd’s Rep 517. Chitty on Contracts, 30th ed (2008), at [23-060].

38. 39.

(1703) 92 ER 107. (1628) 82 ER 95.

40. 41.

(1863) 122 ER 309. Bailey v De Crespigny (1869) LR 4 QB 180 at 185.

42. 43.

(1873) LR 8 CP 572. [1901] 2 KB 126.

44. 45.

[1904] 1 KB 493. (1863) 122 ER 309.

46. 47.

Chandler v Webster [1904] 1 KB 493 at 499. Blakeley v Muller & Co [1903] 2 KB 760n at 761n.

48. 49.

Sinclair v Brougham [1914] AC 398 at 452. (1814) 103 ER 985.

50.

Krell v Henry [1903] 2 KB 740 at 748.

[page 599]

Part VI: Illegality

[page 601]

26 STATUTORY ILLEGALITY

INTRODUCTION 26.1 This chapter deals with illegality of contracts pursuant to statute. The validity and enforceability of contracts are sometimes affected by statutory provisions, which may make the particular contract illegal and void or unenforceable. It is therefore important to assess the impact of particular statutes on contracts. This assessment will often involve addressing whether a particular statute prohibits the formation of a contract or whether it regulates contractual performance. The rationale that underpins the law on illegality is based on general principles of policy expressed in the Latin maxim ex turpi causa non oritur actio, meaning an action arises not from a base cause. This maxim gives rise to two important principles in relation to contractual obligations: first, the court will not enforce a contract that is expressly or impliedly forbidden by statute or that is entered into with the intention of committing an illegal act; and second, the court will not assist a claimant to recover a benefit from the person’s own wrongdoing. In this chapter emphasis is placed upon common law principles of illegality that have the effect of rendering the formation of the contract void or its performance unenforceable. When dealing with the impact of a statute upon a contract, questions of construction of that statute arise. Although principles developed from case authorities in this area tend to be focused on the particular effect of statutes

in question, nevertheless a number of principles have developed from those cases. Illustrative is the decision in Re Mahmoud and Ispahani [1921] 2 KB 716 (see 26.2C), where the court had to examine the effect of a particular statute on a contract involving the sale of linseed oil. In that case, notwithstanding that the statute appeared to expressly prohibit the making of the contract, the parties entered into a contract in breach of that express statutory provision. In those circumstances the court had to determine whether the contract was expressly prohibited by the statute and, if so, the effect of that prohibition on the particular contract. Further important illustrations of the principles that apply where a statute impliedly appears to prohibit the making or performance of a particular contract occurred in Yango Pastoral Company Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410 (see 26.3C), St John Shipping Corporation v Joseph Rank Ltd [1957] 1 QB 267 (see 26.4C), Anderson Ltd v Daniel [1924] 1 KB 138 (see 26.5C), and Gnych v Polish Club Ltd (2015) 255 CLR 414 (see 26.6C). Each of these cases involved considerations of the specific statutory prohibitions, the public policy purpose and intent behind the regulation, and the impact of the regulation upon the contract. [page 602]

EXPRESS STATUTORY ILLEGALITY 26.2C

Re Mahmoud and Ispahani [1921] 2 KB 716

Court: Court of Appeal in England Facts: An order made under the Defence of the Realm Regulations in June 1919 prevented the sale of linseed oil without a licence. Moreover, it was a condition of the seller’s licence that linseed oil not be sold to anyone who did not hold an authority from the Food Controller. Mahmoud sold oil to Ispahani, who did not have the necessary authority from the Food Controller. Ispahani refused to accept the goods and argued that because the statute prohibited the contract, the court could not enforce it.

Issue: The issue before the Court of Appeal was whether the contract was expressly prohibited by statute. Decision: The Court of Appeal (Bankes, Scrutton, and Atkin LLJ) unanimously held that the contract was expressly prohibited by the statute. Extract: The extracts from the judgments of Bankes LJ and Scrutton LJ detail the principles of express statutory illegality in the context of the facts of this case.

Bankes LJ In this case [Mahmoud] sold to [Ispahani] 150 tons of linseed oil on August 27, 1919. At that time there was in force the Order of June 19, 1919, made under the Defence of the Realm Regulations. [Ispahani] refused to take delivery of the oil, and [Mahmoud] then made a claim against him for damages for his refusal to take delivery under the contract. The dispute went to arbitration, and [Ispahani] set up that the contract of sale and purchase was an illegal contract and was therefore unenforceable. The arbitrator has stated his award in the form of a special case, the only question raised by the case being whether or not [Ispahani’s] contention is good in law. … The first question is, What is the true construction of the Order of June 19, 1919? Clause 1 provides: ‘Until further notice a person shall not either on his own behalf or on behalf of any other person buy or sell or otherwise deal in … any of the articles specified in the schedule hereto’ — which included linseed oil — ‘whether situated within or without the United Kingdom, except under and in accordance with the terms of a licence issued by or under the authority of the Food Controller’. The language of the clause is clear. It makes it illegal, on the part both of the buyer and of the seller, to enter into a contract prohibited by the clause. … It is not material to consider for the purpose of deciding this case, whether or not [Mahmoud] has been guilty of an offence under the Order. … I think clause 1 makes such a contract as this illegal. … The Order is a clear and unequivocal declaration by the Legislature in the public interest that this particular kind of contract shall not be entered into. [Mahmoud] had a

licence; [Ispahani] had no licence. [Mahmoud] contends that, as he had a licence, [Ispahani] cannot be heard to say that in the circumstances he had not a licence. [page 603] I cannot assent to that proposition. I do not think there is any authority for it, and as the language of the Order clearly prohibits the making of this contract, it is open to a party, however shabby it may appear to be, to say that the Legislature has prohibited this contract, and therefore it is a case in which the Court will not lend its aid to the enforcement of the contract. … Counsel for [Mahmoud] have … cited a class of cases which say that where a contract may be performed either in a lawful way or in an unlawful way, and if a party in the performance of his part of the contract, without the knowledge of the other party, elects to perform it in an unlawful way, he cannot be heard to allege his own wrong. I quite accept that proposition, and it is not in the least in conflict with the one to which I have been referring, because in a case of the kind suggested the contract is not ab initio illegal. Where there is a contract for the sale of goods which may be used either for a lawful or for an unlawful purpose, and the vendor at the time of the sale knows that they are going to be used for the unlawful purpose, the rule applicable is the same as that where the contract is ab initio unlawful. Langton v Hughes1 is an illustration of that class of case. There a chemist sold drugs to a brewer knowing that they were going to be used by the brewer in making beer, which was prohibited by statute. I do not agree with what I understand to be the view of Rowlatt J, because it does not seem to me that this contract was one which could have been performed in a lawful manner. It is beside the question to say that it might have been performed in a lawful manner if the defendant had had a licence. The question which we have to consider is whether, as [Ispahani] had not a licence at the time when the contract was made, the contract is one which can be regarded as a lawful contract. I have already said that in my opinion it cannot.

Scrutton LJ

For public purposes and for public reasons an Order was made by the Food Controller under the Defence of the Realm Regulations, which in my view absolutely prohibited contracts being made for the sale or purchase of certain articles. The Order of June 19, 1919, provided: ‘Until further notice a person shall not … sell … any’ (linseed oil) ‘except under and in accordance with the terms of licence issued by or under the authority of the Food Controller’. … It appears to me … clear that the Order prohibits the sale of any one of the specified articles within the United Kingdom to a person who has no licence to buy it. … As I understand, two reasons are given why in this case the Court should enforce this contract. First of all, it is said that the Court will not listen to a person who says, ‘Protect me from my own illegality’. In my view the Court is bound, once it knows that the contract is illegal, to take the objection and to refuse to enforce the contract, whether its knowledge comes from the statement of the party who was guilty of the illegality, or whether its knowledge comes from outside sources. The Court does not sit to enforce illegal contracts. There is no question of estoppel; it is for the protection of the public that the Court refuses to enforce such a contract. [page 604] The other point is that, where a contract can be performed lawfully or unlawfully, and the defendant without the knowledge of the plaintiff elects to perform it unlawfully, he cannot plead its illegality. That in my view does not apply to a case where the contract sought to be enforced is altogether prohibited, and in this case to contract with a person who had no licence was altogether prohibited. It was not that [Mahmoud] might lawfully contract with [Ispahani] and chance his getting the licence before [Mahmoud] delivered the goods. The contract was absolutely prohibited; and in my view, if an act is prohibited by statute for the public benefit, the Court must enforce the prohibition, even though the person breaking the law relies upon his own illegality.

Comment

26.2.1 See Radan, Gooley, and Vickovich at 26.21–26.22.

IMPLIED STATUTORY ILLEGALITY 26.3C

Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410

Court: High Court of Australia Facts: Yango Pastoral Co borrowed $132,600 from First Chicago Australia Ltd on the security of a mortgage over property. It later defaulted on the loan. Pursuant to s 8 of the Banking Act 1959 (Cth), a body corporate could not carry on any banking business in Australia unless it was in possession of an authority for that purpose. First Chicago did not have the requisite authority to carry on banking business in accordance with the Act. In proceedings brought by First Chicago, Yango Pastoral Co argued that First Chicago’s commercial activities were tantamount to those of a bank, with the result that the loan was illegal and unenforceable. Issue: The issue before the High Court was whether the statutory requirements of s 8 of the Banking Act prohibited the making or performance of the loan contract. Decision: The High Court (Gibbs ACJ, Mason, Jacobs, Murphy, and Aickin JJ) unanimously held that the Act did not invalidate the contract. Extract: The extracts from the judgments of Gibbs ACJ and Mason J discuss the principles of statutory illegality and apply them to the facts of the case.

Gibbs ACJ [Yango Pastoral Co’s] case was that the mortgage (including the

guarantee) was rendered illegal and void by the provisions of s 8 of the Banking Act 1959. … [page 605] Section 8 of the Act reads as follows: Subject to this Act, a body corporate shall not carry on any banking business in Australia unless the body corporate is in possession of an authority under the next succeeding section to carry on banking business. Penalty: Ten thousand dollars for each day during which the contravention continues. There are four main ways in which the enforceability of a contract may be affected by a statutory provision which renders particular conduct unlawful: (1) the contract may be to do something which the statute forbids; (2) the contract may be one which the statute expressly or impliedly prohibits; (3) the contract, although lawful on its face, may be made in order to effect a purpose which the statute renders unlawful; or (4) the contract, although lawful according to its own terms, may be performed in a manner which the statute prohibits. In the present case we are not concerned with the first of these possible situations. Clearly s 8 does not render it unlawful to borrow or lend money or to give and take a mortgage, supported by guarantees, to secure its repayment. The contract sued upon was therefore not to do anything which s 8 forbids. The principal question in the case is whether s 8, on its proper construction, prohibited the making or performance of the contract. As will be seen, if that question is answered in the negative, it will not be possible to say that the contract cannot be enforced on the ground that it was made in order to effect an unlawful purpose or was performed in an unlawful manner. It is often said that a contract expressly or impliedly prohibited by statute is void and unenforceable. That statement is true as a general rule, but for complete accuracy it needs qualification, because it is possible for a statute

in terms to prohibit a contract and yet to provide, expressly or impliedly, that the contract will be valid and enforceable. However, cases are likely to be rare in which a statute prohibits a contract but nevertheless reveals an intention that it shall be valid and enforceable, and in most cases it is sufficient to say, as has been said in many cases of authority, that the test is whether the contract is prohibited by the statute. Where a statute imposes a penalty upon the making or performance of a contract, it is a question of construction whether the statute intends to prohibit the contract in this sense, that is, to render it void and unenforceable, or whether it intends only that the penalty for which it provides shall be inflicted if the contract is made or performed. The question whether a statute, on its proper construction, intends to vitiate a contract made in breach of its provisions, is one which must be determined in accordance with the ordinary principles that govern the construction of statutes. ‘The determining factor is the true effect and meaning of the statute’.2 ‘One must have regard to the language used and to the scope and purpose of the statute’.3 One consideration that has been regarded as important in a great many cases … is whether the object of the statute — or one of its objects — is the protection of the public. An antithesis is commonly suggested between an [page 606] intention to protect the public, and an intention simply to secure the revenue, and it is said that when the former intention appears the contract must be taken to be prohibited, whereas if the intention is only to protect the revenue the statute will not be construed as imposing a prohibition on contracts. The question whether the statute was passed for the protection of the public is one test of whether it was intended to vitiate a contract made in breach of its provisions, but I am with respect in full agreement with the views expressed in St John Shipping Corporation v Joseph Rank Ltd … that it is not the only test. It would be contrary to reason and principle to allow one circumstance to override all other considerations in the interpretation of a statute. As Devlin J said in St John Shipping Corporation v Joseph Rank Ltd: ‘The fundamental question is whether the statute means to prohibit the

contract. The statute is to be construed in the ordinary way: one must have regard to all relevant considerations and no single consideration, however important, is conclusive’.4 … There is no doubt that Pt II of the Banking Act, in which s 8 appears, was enacted partly at least for the protection of depositors, or that one object of s 8 is the protection of the public. Section 8 of course does not expressly prohibit the making or performance of contracts, but the argument advanced on behalf of [Yango Pastoral Co] was that the prohibition which it imposes on an unauthorized body corporate from carrying on any banking business extends to all activities which go to make up the business of banking, except such as are merely collateral or peripheral. It was said that a contract to lend money on mortgage supported by guarantee is central to the business of banking and that such a contract, when made by a body corporate unlawfully carrying on the business of banking, and in the course of that business, is prohibited by s 8 on its proper construction. However, the receipt of money on deposit is equally central to the business of banking, and if the argument put on behalf of [Yango Pastoral Co] is correct, s 8 would invalidate not only those contracts by which a body corporate carrying on an unauthorized banking business agreed to lend money, but also all contracts pursuant to which it agreed to receive money from depositors. The result of accepting this argument might be that persons who had deposited money with such a body corporate would be unable to seek the assistance of the courts to recover it. Moreover, if a body corporate were unable to recover money that it had lent, it would be disabled from performing its own obligations, including those owed to its depositors. In those circumstances ‘the avoidance of the contract would cause grave inconvenience and injury to innocent members of the public without furthering the object of the statute’.5 Another relevant consideration is the fact that the penalty which s 8 imposes is a pecuniary sum for each day during which the contravention continues. It is immaterial whether, on any day, the body corporate makes one contract, or one hundred; the penalty is the same. This is an indication that the Parliament did not intend to prohibit each contract made in the course of the business, but only to penalize the carrying on of the business without authority.6

[page 607] The language of s 8 indicates that it is directed, not at the making or performance of particular contracts, but at the carrying on of any banking business. In the course of carrying on such a business a body corporate may make and perform contracts, many, if not all, of which might be made equally by a bank or by a company which is not carrying on banking business. A contract to lend money on mortgage is one example: a contract of employment is another. Although all of the contracts made by a body corporate in the course of carrying on a banking business are ex hypothesi things which it does in carrying on the business, that is, in doing what is unlawful, it is impossible to accept that the legislature intended to invalidate all such contracts with the result that contracts to pay its employees, or those who provided it with services, would be void. [Yango Pastoral Co] recognized this by making the submission to which I have already referred, that the effect of the section is that only those contracts are invalidated which are in their nature central to the business of banking. I have already said that even if that argument were accepted the effect of the section would still be gravely inconvenient. However, there is not the slightest indication in the Act that the Parliament intended that the validity of contracts made by a body corporate carrying on business in breach of s 8 should depend on whether or not they were central to the business of banking. Such a test would in any event be vague and unsatisfactory. There have been many cases in which a statute which imposes a penalty on an unlicensed or unqualified person for acting in a particular capacity has been held to prohibit by implication all contracts express or implied made by such a person to act in that capacity. In those cases the unsuccessful plaintiff did the very thing which the statute forbad him to do unless he was authorized, for example, he acted as a broker,7 drew and prepared a conveyance8, did electrical work;9 or acted as a real estate agent.10 Those cases are clearly distinguishable from the present, where in making and performing the contract the parties have not done or contracted to do anything which the Act expressly forbids. … Having regard to the language of s 8, and to the matters to which I have referred, I conclude that s 8, on its proper construction, does not vitiate contracts made by a body corporate in the course of carrying on a

banking business in breach of the section. This conclusion also disposes of the question whether the contract in the present case was unlawfully performed by [First Chicago] and is for that reason unenforceable. Of course s 8 does not proscribe any particular mode of performance for contracts of this kind. It could only be said that the contract was performed in violation of s 8 if that section forbids a body corporate which is carrying on a banking business in contravention of the section to perform such a contract if made in the course of its unauthorized banking business. The reasons that I have given for holding that s 8 does not prohibit the making of contracts of this kind lead also to the conclusion that it does not prohibit their performance. As was pointed out in St John Shipping Corporation v Joseph Rank Ltd, the test is the same whether the contract itself, or the manner of its performance, is said to be illegal. The performance of a contract [page 608] may turn it into the sort of contract that is prohibited by the statute, and the test is whether the contract, as made or as performed, is a contract that is prohibited by the statute. Further, it cannot be said that the contract was performed for any illegal purpose. There is of course no suggestion that the money was borrowed for an illegal purpose, and the fact that the contract was made in the course of the unlawful banking business does not mean that the contract was made in order that the unlawful purpose of carrying on a banking business without authority could be achieved or carried out. Once it is held that neither the making nor the performance of the contract was unlawful, the fact that the contract was made and performed in the course of the conduct of an unlawful business provides no ground for denying relief to [First Chicago]. The illegality then is something merely casual or adventitious. The principle applicable is that stated in Wetherell v Jones, by Lord Tenterden CJ: Where a contract which a plaintiff seeks to enforce is expressly, or by implication, forbidden by the statute or common law, no court will lend its assistance to give it effect; and there are numerous cases

in the books where an action on the contract has failed, because either the consideration for the promise or the act to be done was illegal, as being against the express provisions of the law, or contrary to justice, morality and sound policy. But where the consideration and the matter to be performed are both legal, we are not aware that a plaintiff has ever been precluded from recovering by an infringement of the law, not contemplated by the contract, in the performance of something to be done on his part.11 The crucial question is whether s 8 prohibited the making or performance of the contract, and if it did not the fact that the respondent infringed s 8 does not affect his rights under the contract. The contract was not ‘nullified for disobedience to a statute’, within the rule of public policy discussed by Lord Wright in Vita Food Products Inc v Unus Shipping Co Ltd12 because the disobedience in the present case was not in the performance of the contract but was something quite collateral.

Mason J The provisions of the Act, though indirectly providing some safeguard to depositors, are principally designed to ensure that the Government and its agencies are equipped with accurate and detailed information as to the financial position of the banks as important financial institutions in the community and with supervisory powers and powers to determine matters relevant to financial policy in the interests of regulating the Australian economy. The Act is not a statute whose primary object is to define and regulate the relationship which exists between banker and customer or to regulate the rights and liabilities of banker and customer inter se. The Act in regulating the carrying on of banking business in Australia does so, not only as a means of protecting the customers of, or the depositors with, banks, the provisions of Div 2 of Pt III having this object in view, but as an element in regulating the Australian economy. [page 609] Viewed in this light the prohibition contained in s 8 may not be solely

directed to the exclusion from the conduct of banking business of bodies corporate which lack the requisite financial strength and stability to carry on banking business. It may also be directed to the exclusion from the field of banking of foreign banks of which only three currently possess authorities under s 9. Whether those authorities are unconditional we do not know. As the interpretation of s 8 may involve constitutional considerations to which reference has not been made in argument, it is better that I say no more about its interpretation in this respect save that there is no warrant for concluding that the prohibition which it contains is exclusively directed to the protection of customers of, or depositors with, banks. The principle that a contract, the making of which is expressly or impliedly prohibited by statute, is illegal and void is one of long standing but it has always been recognized that the principle is necessarily subject to any contrary intention manifested by the statute. It is perhaps more accurate to say that the question whether a contract prohibited by statute is void is, like the associated question whether the statute prohibits the contract, a question of statutory construction and that the principle to which I have referred does no more than enunciate the ordinary rule which will be applied when the statute itself is silent upon the question. Primarily, then, it is a matter of construing the statute and in construing the statute the court will have regard not only to its language, which may or may not touch upon the question, but also to the scope and purpose of the statute from which inferences may be drawn as to the legislative intention regarding the extent and the effect of the prohibition which the statute contains. The first question is: Does s 8 expressly prohibit the making of a contract of loan? The question must, I think, be answered in the negative. The section makes no reference to contracts or transactions. Consequently, if it contains a prohibition against the making of contracts of loan, that prohibition must be ascertained or identified by a process of implication. … The prohibition against the making of contracts, if there be one, can only arise by way of necessary inference, there being no reference at all in the provisions of the section to contracts as such. The next question is whether by implication, that is by way of necessary inference, such a prohibition can be discovered in the section. [Yango Pastoral Co] in support of their argument again rely on the admissions of

fact, the contention that the lending of money on mortgage is central to banking business and the circumstance that the lending by a bank of money on mortgage in its banking business itself amounts to the carrying on of that business. They then point to cases in which implied prohibitions against the making of contracts of particular kinds have been discovered in some statutes. … Where, as here, a statute imposes a penalty for contravention of an express prohibition against carrying on a business without a licence or an authority and the business is carried on by entry into contracts, the question is whether the statute intends merely to penalize the person who contravenes the prohibition or whether it intends to go further and prohibit contracts the making of which constitute the carrying on of the business. In deciding this question the court will take into account the scope and purpose of the statute and the [page 610] consequences of the suggested implication with a view to ascertaining whether it would conduce to, or frustrate, the object of the statute. … The prohibition contained in s 8 against carrying on any banking business without an authority is an integral element in the statutory regulation of banking business. As I have said, the object of that regulation is not only to protect depositors with authorized banks but to equip the Government, through its agencies, with current and detailed information as to banking operations in Australia and to arm the Government and its agencies with supervisory powers and powers to determine matters relevant to financial policy in the interests of regulating the Australian economy. In this context there is little to be said for the view that the statute intends to prohibit contracts made by unauthorized banks in the course of carrying on banking business. To do so would be to prejudice depositors, not to protect them. The implication of such a prohibition would deny to innocent depositors the right to recover moneys deposited unlawfully with persons carrying on banking business because ex hypothesi the prohibited contract would be illegal and void. To place [Yango Pastoral Co’s]

interpretation upon the statute would confer an extraordinary advantage on the wrongdoer in enabling it to resist repayment of moneys deposited with it. In this respect the advantage given to the wrongdoer might conceivably go some distance towards outweighing the punishment imposed upon it by way of penalty under s 8. It is not rational to suppose that the Parliament intended to inflict such dire consequences on innocent depositors. Nor is it rational to suppose that the Parliament intended to advantage innocent borrowers whilst penalizing innocent depositors. Even less is it to be supposed that the Parliament intended to invalidate the wide range of commercial and other securities which are brought into existence in the course of carrying on a banking business and thereby to inflict loss on the many persons acquiring such securities. I therefore conclude that the purpose of the Act is adequately served by the imposition of the very heavy penalty which is prescribed for a contravention of s 8 and that it does not prohibit and thereby invalidate contracts and transactions entered into in the course of carrying on banking business in breach of the section. However, it is suggested that this conclusion does not dispose of the issues in the present case. Here the party seeking to enforce the contract is not the innocent party but the party in breach of a statutory prohibition, the contract being made in the course of the carrying on of a business which in the circumstances was prohibited, though the contract was not itself prohibited. The question therefore remains whether the court will allow [First Chicago] to enforce the contract. The suggestion is that the court will not do so and that its refusal so to do is dictated by the principle ex turpi causa non oritur actio or by the more specific rule that the court will not enforce the contract at the suit of a party who has entered into a contract with the object of committing an illegal act. … The weighing of considerations of public policy in this case and the decision in favour of enforcing the contract is influenced by the form of the particular legislation. In this case the Act, as I have mentioned, is to a large extent directed to aiding the Government in executing [page 611]

its fiscal policy rather than regulating the relationship between banker and customer per se, a feature which lends support for the view that the provision of a large recurrent penalty for offences against s 8 is Parliament’s determination of the consequences of breach of the section and as the only legal consequences thereof. There is much to be said for the view that once a statutory penalty has been provided for an offence the rule of the common law in determining the legal consequences of commission of the offence is thereby diminished. … The main considerations from which the principle ex turpi causa arose can be seen in the reluctance of the courts to be instrumental in offering an inducement to crime or removing a restraint to crime. However, in the present case, Parliament has provided a penalty which is a measure of the deterrent which it intends to operate in respect of compliance with s 8. In this case it is not for the court to hold that further consequences should flow. …

Comment 26.3.1 See Radan, Gooley, and Vickovich at 26.5, 26.6, 26.8, 26.19, 26.20, 26.22, 26.25, and 26.31–26.40. 26.4C St John Shipping Corporation v Joseph Rank Ltd [1957] 1 QB

267 Court: Queen’s Bench Division Facts: Section 44 of the Merchant Shipping (Safety and Load Line Conventions) Act 1932 imposed a penalty on any ship owner who loaded a boat so heavily that it fell beneath a specified loadline. St John Shipping Corporation had a ship which was overloaded and the captain of the ship was fined. Joseph Rank Ltd, the indorsee of bills of lading in respect of about 35 per cent of the cargo, paid part of the freight charges, but refused to pay the balance because of the overloading, and argued that the contract was illegal and therefore unenforceable.

Issue: The issue before the court was whether the infringement of the statute rendered the contract illegal. Decision: Devlin J found in favour of St John Shipping Corporation, which he held was entitled to the balance of the freight charges. The contract itself was not rendered illegal, as that was not what the Act intended to prohibit. Extract: The extract from the judgment of Devlin J discusses the principles of implied statutory illegality in the context of the facts of this case.

Devlin J In 1932 Parliament enacted the Merchant Shipping (Safety and Loadline Conventions) Act, 1932, which, inter alia, by sections 44 and 57, made it an offence to load a ship so that [page 612] her load line was submerged. The temptation to overload a freighter and so to submerge her marks is, of course, that the more she carries the more she will earn for the same expenditure on the voyage. So Parliament, when prescribing a fine as the punishment for an offence against section 44 related it to the earning capacity of the ship. … When the master of [St John’s] ship St John was prosecuted … under the Act and … found to have overloaded his ship by more than 11 inches, he was fined the maximum of £1,200. … [Joseph Rank’s] case in law is that since [St John] performed the contract of carriage, evidenced by the bill of lading, in such a way as to infringe the Act, they committed an illegality which prevents them from enforcing the contract at all; [Joseph Rank Ltd] say they were not obliged to pay any freight, and so cannot be sued for the unpaid balance. … [Counsel for Joseph Rank] Mr Wilmers puts his case under three main heads. In the first place he submits that, notwithstanding that the

contract of carriage between the parties was legal when made, [St John] have performed it in an illegal manner by carrying the goods in a ship which was overloaded in violation of the statute. He submits as a general proposition that a person who performs a legal contract in an illegal manner cannot sue on it, and he relies on a line of authorities of which Anderson Ltd v Daniel is probably the best known. He referred particularly to the formulation of the principle by Atkin LJ in the following passage: The question of illegality in a contract generally arises in connection with its formation, but it may also arise, as it does here, in connection with its performance. In the former case, where the parties have agreed to something which is prohibited by Act of Parliament, it is indisputable that the contract is unenforceable by either party. And I think that it is equally unenforceable by the offending party where the illegality arises from the fact that the mode of performance adopted by the party performing it is in violation of some statute, even though the contract as agreed upon between the parties was capable of being performed in a perfectly legal manner.13 As an alternative to this general proposition and as a modification of it, Mr Wilmers submits that a plaintiff cannot recover if, in the course of carrying out a legal contract made with a person of a class which it is the policy of a particular statute to protect, he commits a violation of that statute. Secondly, he relies on the well-known principle … that a plaintiff cannot recover money if in order to establish his claim to it, he has to disclose that he committed an illegal act. [St John], he submits, cannot obtain their freight unless they prove that they carried the goods safely to their destination, and they cannot prove that without disclosing that they carried them illegally in an overloaded ship. Thirdly, he relies on the principle that a person cannot enforce rights which result to him from his own crime. He submits that the criminal offence committed in this case secured to [St John] a larger freight than they would have earned if they had kept within the law. A part of the freight claimed in this case is therefore a benefit resulting from the crime and in such circumstances [St John] cannot recover any part of it.

[page 613] I am satisfied that Mr Wilmers’ chief argument is based on a misconception of the principle applied in Anderson Ltd v Daniel which I have already cited. In order to expose that misconception, I must state briefly how that principle fits in with other principles relating to illegal contracts. There are two general principles. The first is that a contract which is entered into with the object of committing an illegal act is unenforceable. The application of this principle depends on proof of the intent, at the time the contract was made, to break the law; if the intent is mutual the contract is not enforceable at all, and, if unilateral, it is unenforceable at the suit of the party who is proved to have it. This principle is not involved here. Whether or not the overloading was deliberate when it was done, there is no proof that it was contemplated when the contract of carriage was made. The second principle is that the court will not enforce a contract which is expressly or impliedly prohibited by statute. If the contract is of this class it does not matter what the intent of the parties is; if the statute prohibits the contract, it is unenforceable whether the parties meant to break the law or not. A significant distinction between the two classes is this. In the former class one has only to look and see what acts the statute prohibits; it does not matter whether or not it prohibits a contract; if a contract is deliberately made to do a prohibited act, that contract will be unenforceable. In the latter class, one has to consider not what acts the statute prohibits, but what contracts it prohibits; but one is not concerned at all with the intent of the parties; if the parties enter into a prohibited contract, that contract is unenforceable. The principle enunciated by Atkin LJ and cited above is an offshoot of the second principle that a prohibited contract will not be enforced. If the prohibited contract is an express one, it falls directly within the principle. It must likewise fall within it if the contract is implied. If, for example, an unlicensed broker sues for work and labour, it does not matter that no express contract is alleged and that the claim is based solely on the performance of the contract, that is to say, the work and labour done; it is as much unenforceable as an express contract made to fit the work done. The same reasoning must be applied to a contract which, though legal in form, is performed unlawfully. Jenkins LJ in his illuminating

judgment in B and B Viennese Fashions v Losane,14 has shown how illogical it would be if the law were otherwise. In that case the regulations required that the seller of utility goods should furnish to the buyer an invoice containing certain particulars. The plaintiff made a contract of sale for nonutility goods, to which the regulations did not apply; but he purported to perform it by delivering to the buyer without objection utility garments to which the regulations did apply; and he did not furnish the invoice. If the court enforced his claim for the price of the garments, it would have, in effect, been enforcing a contract for the supply of utility garments without furnishing an invoice, which, had it originally been made in that form, would have been prohibited. Whether it is the terms of the contract or the performance of it that is called in question, the test is just the same: is the contract, as made or as performed, a contract that is prohibited by the statute? Mr Wilmers’s proposition ignores this test. On a superficial reading of Anderson Ltd v Daniel and the cases that followed and preceded it, judges may appear to be saying that it does not [page 614] matter that the contract is itself legal, if something illegal is done under it. But that is an unconsidered interpretation of the cases. When fully considered, it is plain that they do not proceed upon the basis that in the course of performing a legal contract an illegality was committed; but on the narrower basis that the way in which the contract was performed turned it into the sort of contract that was prohibited by the statute. All the cases which Mr Wilmers cited in support of his submission show, I think, that this is the true basis. … One of the tests commonly used, and frequently mentioned in the later cases, in order to ascertain the true meaning of the statute is to inquire whether or not the object of the statute was to protect the public or a class of persons, that is, to protect the public from claims for services by unqualified persons or to protect licensed persons from competition. Mr Wilmers (while saying that, if necessary, he would submit that the Act of

1932 was passed, inter alia, to protect those who had property at sea) was unable to explain the relevance of this consideration to his view of the law. If in considering the effect of the statute the only inquiry that you have to make is whether an act is illegal, it cannot matter for whose benefit the statute was passed; the fact that the statute makes the act illegal is of itself enough. But if you are considering whether a contract not expressly prohibited by the Act is impliedly prohibited, such considerations are relevant in order to determine the scope of the statute. This, then, is the principle which I think is to be derived from the class of cases which Mr Wilmers cited. … [In Wetherell v Jones], [t]he plaintiff sued for the price of spirits sold and delivered. A statute … provided that no spirits should be sent out of stock without a permit. The court held that the permit obtained by the plaintiff was irregular because of his own fault and that he was therefore guilty of a violation of the law, but that the statute did not prohibit the contract. Lord Tenterden CJ stated the law as follows: Where a contract which a plaintiff seeks to enforce is expressly, or by implication, forbidden by the statute or common law, no court will lend its assistance to give it effect: and there are numerous cases in the books where an action on the contract has failed, because either the consideration for the promise or the act to be done was illegal, as being against the express provisions of the law, or contrary to justice, morality, and sound policy. But where the consideration and the matter to be performed are both legal, we are not aware that a plaintiff has ever been precluded from recovering by an infringement of the law, not contemplated by the contract, in the performance of something to be done on his part.15 The last sentence in this judgment is a clear and decisive statement of the law; it is directly contrary to the contention which Mr Wilmers advances, which I therefore reject both on principle and on authority. … So Mr Wilmers’s wider proposition fails. [Counsel for St John] Mr Roskill is right in his submission that the determining factor is the true effect and meaning of the statute, and I turn therefore to consider Mr Wilmers’s alternative proposition that the contract evidenced by the bill of

lading is one that is made illegal by the Act of 1932. I have already indicated the [page 615] basis of this argument, namely, that the statute being one which according to its preamble is passed to give effect to a convention ‘for promoting the safety of life and property at sea’, it is therefore passed for the benefit of cargo owners among others. That this is an important consideration is certainly established by the authorities. But … it is one only of the tests. The fundamental question is whether the statute means to prohibit the contract. The statute is to be construed in the ordinary way; one must have regard to all relevant considerations and no single consideration, however important, is conclusive. Two questions are involved. The first — and the one which hitherto has usually settled the matter — is: does the statute mean to prohibit contracts at all? But if this be answered in the affirmative, then one must ask: does this contract belong to the class which the statute intends to prohibit? For example, a person is forbidden by statute from using an unlicensed vehicle on the highway. If one asks oneself whether there is in such an enactment an implied prohibition of all contracts for the use of unlicensed vehicles, the answer may well be that there is, and that contracts of hire would be unenforceable. But if one asks oneself whether there is an implied prohibition of contracts for the carriage of goods by unlicensed vehicles or for the repairing of unlicensed vehicles or for the garaging of unlicensed vehicles, the answer may well be different. The answer might be that collateral contracts of this sort are not within the ambit of the statute. The relevant section of the Act of 1932, section 44, provides that the ship ‘shall not be so loaded as to submerge’ the appropriate loadline. It may be that a contract for the loading of the ship which necessarily has this effect would be unenforceable. It might be, for example, that the contract for bunkering at Port Everglades which had the effect of submerging the loadline, if governed by English law, would have been unenforceable. But an implied prohibition of contracts of loading does not necessarily extend to contracts for the carriage of goods by improperly loaded vessels. Of course,

if the parties knowingly agree to ship goods by an overloaded vessel, such a contract would be illegal; but its illegality does not depend on whether it is impliedly prohibited by the statute, since it falls within the first of the two general heads of illegality I noted above where there is an intent to break the law. The way to test the question whether a particular class of contract is prohibited by the statute is to test it in relation to a contract made in ignorance of its effect. In my judgment contracts for the carriage of goods are not within the ambit of this statute at all. A court should not hold that any contract or class of contracts is prohibited by statute unless there is a clear implication … that the statute so intended. If a contract has as its whole object the doing of the very act which the statute prohibits, it can be argued that you can hardly make sense of a statute which forbids an act and yet permits to be made a contract to do it; that is a clear implication. But unless you get a clear implication of that sort, I think that a court ought to be very slow to hold that a statute intends to interfere with the rights and remedies given by the ordinary law of contract. Caution in this respect is, I think, especially necessary in these times when so much of commercial life is governed by regulations of one sort or another, which may easily be broken without wicked intent. Persons who deliberately set out to break the law cannot expect to be aided in [page 616] a court of justice, but it is a different matter when the law is unwittingly broken. To nullify a bargain in such circumstances frequently means that in a case — perhaps of such triviality that no authority would have felt it worthwhile to prosecute — a seller, because he cannot enforce his civil rights, may forfeit a sum vastly in excess of any penalty that a criminal court would impose; and the sum forfeited will not go into the public purse but into the pockets of someone who is lucky enough to pick up the windfall or astute enough to have contrived to get it. It is questionable how far this contributes to public morality. In Vita Food Products Inc v Unus Shipping Co Lord Wright said: ‘Nor must it be forgotten that the rule by which contracts not expressly forbidden by statute or declared to be void are in

proper cases nullified for disobedience to a statute is a rule of public policy only, and public policy understood in a wider sense may at times be better served by refusing to nullify a bargain save on serious and sufficient grounds’.16 It may be questionable also whether public policy is well served by driving from the seat of judgment everyone who has been guilty of a minor transgression. Commercial men who have unwittingly offended against one of a multiplicity of regulations may nevertheless feel that they have not thereby forfeited all right to justice, and may go elsewhere for it if courts of law will not give it to them. In the last resort they will, if necessary, set up their own machinery for dealing with their own disputes in the way that those whom the law puts beyond the pale, such as gamblers, have done. I have said enough … to show how important it is that the courts should be slow to imply the statutory prohibition of contracts, and should do so only when the implication is quite clear. … I think also that it is proper, in determining the scope of the statute, to have regard to the consequences I have already described and to the inconveniences and injury to maritime business which would follow from upholding [Joseph Rank’s] contention in this case. In the light of all these considerations I should not be prepared to treat this statute as nullifying contracts for the carriage of goods unless I found myself clearly compelled by authority to do so. I can find no such authority in the cases which Mr Wilmers has cited, nor even any analogous cases in which the law has been stretched as far. Of course, the construction of each Act depends upon its own terms, but I can find no authority in which any Act has been given anything like so wide an effect as Mr Wilmers wants the Act of 1932 to be given. In the statutes to which the principle has been applied, what was prohibited was a contract which had at its centre — indeed often filling the whole space within its circumference — the prohibited act; contracts for the sale of prohibited goods, contracts for the sale of goods without accompanying documents when the statute specifically said there must be accompanying documents; contracts for work and labour done by persons who were prohibited from doing the whole of the work and labour for which they demanded recompense. It is going a long way further to say that contracts which depend for their performance upon the use of an instrument which has been treated in a forbidden way should also be forbidden. …

I turn now to Mr Wilmers’s second point. He submitted that [St John] could not succeed in a claim for freight without disclosing that they had committed an illegality in the course of the voyage; or, put another way, that part of the consideration for the payment of [page 617] freight was the safe carriage of the goods, and therefore they must show that they carried the goods safely. In the passage I have quoted from the judgment in Wetherell v Jones, Tenterden CJ carefully distinguished between an infringement of the law in the performance of the contract and a case where ‘the consideration and the matter to be performed’ were illegal. There is a distinction there — of the sort I have just been considering — between a contract which has as its object the doing of the very act forbidden by the statute, and a contract whose performance involves an illegality only incidentally. It may be, therefore, that the second point is the first point looked at from another angle. However that may be, there is no doubt that if [St John] cannot succeed in [its] claim for freight without showing that they carried the goods in an overloaded ship, they must fail. But, in my judgment, [St John] need show no more in order to recover their freight than that they delivered to [Joseph Rank] the goods they received in the same good order and condition as that in which they received them. Indeed, they are entitled to recover their freight without deduction (but subject to counterclaim) if the goods they delivered were substantially the same as when loaded. … On Mr Wilmers’s third point I take the law from the dictum in Beresford v Royal Insurance Co Ltd that was adopted and applied by Lord Atkin: ‘no system of jurisprudence can with reason include amongst the rights which it enforces rights directly resulting to the person asserting them from the crime of that person’.17 I observe in the first place that in the Court of Appeal in the same case Lord Wright doubted whether this principle applied to all statutory offences.18 His doubt was referred to by Denning LJ in Marles v Philip Trant & Sons.19 … The distinction is much to the point here. The Act of 1932 imposes a penalty which is itself designed to deprive the offender of the benefits of his crime. It would be a curious thing

if the operation could be performed twice — once by the criminal law and then again by the civil. It would be curious, too, if in a case in which the magistrates had thought fit to impose only a nominal fine, their decision could, in effect, be overridden in a civil action. But the question whether the rule applies to statutory offences is an important one which I do not wish to decide in the present case. The dicta of Lord Wright and Denning LJ suggest that there are cases where its application would be morally unjustifiable; but it is not clear that they go as far as saying that the application would not be justified in law. I prefer, therefore, to deal with Mr Wilmers’s submission in another way. The rights which cannot be enforced must be those ‘directly resulting’ from the crime. That means, I think, that for a right to money or to property to be unenforceable the property or money must be identifiable as something to which, but for the crime, the plaintiff would have had no right or title. That cannot be said in this case. … The fact is that in this type of case no claim or part of a claim for freight can be clearly identified as being the excess illegally earned.

[page 618]

Comment 26.4.1 See Radan, Gooley, and Vickovich at 26.4, 26.5, 26.24, 26.39, and 26.40. 26.5C

Anderson Ltd v Daniel [1924] 1 KB 138

Court: Court of Appeal in England Facts: Section 1(1) of the Fertilisers and Feeding Stuffs Act 1906 (UK) stipulated the following: Every person who sells for use as a fertiliser of the soil any article which has been subjected to an artificial process in the

United Kingdom, or which has been imported from abroad, shall give to the purchaser an invoice stating the name of the article and what are the respective percentages (if any) of nitrogen, soluble phosphates, insoluble phosphates, and potash contained in the article, and the invoice shall have effect as a warranty by the seller that the actual percentages do not differ from those stated in the invoice beyond the prescribed limits of error. Section 6(1) of the Act stipulated that a breach of s 1(1) meant that the seller ‘shall, without prejudice to any civil liability, be liable on summary conviction’ to a fine. A seller sold artificial fertiliser without providing the relevant invoice. When the seller sued the buyer for the contract price, the buyer argued that the contract was illegal and therefore unenforceable by the seller. Issue: The issue before the Court of Appeal was whether the legislation rendered the contract illegal and unenforceable. Decision: The Court of Appeal (Bankes, Scrutton, and Atkin LJJ) unanimously held that the contract was unenforceable by the seller because of the breach of the Act. Extract: The extract from the judgment of Bankes LJ sets out the reasoning behind the court’s decision in this case.

Bankes LJ It is said that this is one of those statutes which do not by imposing a penalty render the contract illegal in the event of a breach of the statutory provisions, but mean the enforcement of the penalty to be the only remedy for the breach. Upon that point I should like to refer to what … Buckley J, said in … Victorian Daylesford Syndicate v Dott: The next question is whether the Act is so expressed that the contract is prohibited so as to be rendered illegal. There is no question that a contract which is prohibited, whether expressly or by implication, by a statute is illegal and cannot be enforced. I have to see whether the contract is in this case prohibited expressly or by

implication. For this purpose statutes may be grouped under two heads, those in which a penalty is imposed [page 619] against doing an act for the purposes only of the protection of the revenue, and those in which a penalty is imposed upon an act not merely for revenue purposes, but also for the protection of the public. That distinction will be found commented on in numerous cases. … Parke B in [Cope v Rowlands] says the question to determine is whether the Act is ‘meant merely to secure a revenue to the city, and for that purpose to render the person acting as a broker liable to a penalty if he does not pay it? or whether one of its objects be the protection of the public, and the prevention of improper persons acting as brokers?’20 If I arrive at the conclusion that one of the objects is the protection of the public, then the act is impliedly prohibited by the statute and is illegal.21 In my opinion that language applies directly to this case. Here the penalty is imposed wholly for the protection of the public, and the purchaser is entitled to take the objection that as the vendors have failed to give the required invoice the contract of sale is illegal and they cannot sue for the price. But [Counsel for the seller] has contended that a contract cannot be avoided for illegality except where it was illegal ab initio; and although no doubt a contract for the sale of a fertiliser, which expressly stipulated that no invoice of the statutory kind should be given or required, would be illegal ab initio, it is otherwise where, as here, the contract is silent on the subject of the invoice. It was said that in such a case the contract is perfectly legal when made, and cannot be avoided by a subsequent omission to do some act which the statute requires to be done. I do not think it is necessary to show that the contract was illegal ab initio in order to avoid it, it is enough to show that the vendors failed to perform it in the only way in which the statute allows it to be performed. In reference to that matter I will refer to … Bonnard v Dott, where it was held that a moneylender who had not registered himself as such under the Moneylenders Act, 1900,

which prohibits unregistered persons from making any money-lending agreement, though compellable to surrender any securities given to him by a borrower, could not recover back the amount that he had advanced. Collins MR said: ‘Any person who is in fact a money-lender must comply with the terms of the Act as to registration in order to take advantage of any contract’.22 So here I say that a vendor of fertilisers must comply with the provisions as to invoice in order to take advantage of the contract of sale. From that point of view it is unnecessary to consider whether the contract was illegal ab initio. The last point taken for the [seller] … was that under the circumstances the [seller] had a reasonable excuse for failing to give the invoice, and that consequently there was no offence in their failure to do so. I cannot accept that view. It seems to me quite plain that the prohibitive expense or the physical impossibility of analysis of the fertiliser sold is no excuse for the absence of an invoice.

[page 620]

Comment 26.5.1 See Radan, Gooley, and Vickovich at 26.26, 26.45, 26.46, and 26.47. 26.6C

Gnych v Polish Club Ltd (2015) 255 CLR 414

Court: High Court of Australia Facts: This case concerned the effect of a statutory provision on a sublease of part of licensed premises in New South Wales. Section 92(1)(c) of the Liquor Act 2007 (NSW) mandated that a licensee of such premises could not ‘lease or sublease any part of the licensed premises on which liquor is ordinarily sold or supplied for consumption on the premises, or on which approved gaming

machines are ordinarily kept, used or operated’. Further, in terms of s 92(1)(d) of the Act a licensee could not ‘lease or sublease any other part of the licensed premises except with the approval of the [Independent Liquor and Gaming] Authority’. The Polish Club had leased part of its licensed premises to Gnych. Section 92(1)(c) of the Act did not apply, as liquor was not sold or supplied on that part of the premises leased to Gnych, nor were gaming machines kept, used, or operated on that part of the premises. However, as the lease had not been approved by the Independent Liquor and Gaming Authority, there was a contravention of s 91(1)(d) of the Act. Issue: The issue in the appeal to the High Court was whether, as the Polish Club contended, it’s contravention of s 91(1)(d) rendered the sublease void and unenforceable. Decision: The High Court, in reversing the decision of the Supreme Court of New South Wales, unanimously dismissed the Polish Club’s claim and held that the particular contravention of the statute did not render the sub-lease agreement void and unenforceable. In coming to the conclusion that the breach by Gnych did not serve to undermine the purpose or policy behind the Act, French CJ, Kiefel, Keane, and Nettle JJ observed that the granting of a sublease was not contrary to the purposes of the Act, as s 92(1)(d) of the Act in fact contemplated that subleases could be granted. Furthermore, their Honours pointed to the complaint provisions under the Act and the powers of the Authority as further reasons why the sublease was not void or unenforceable. Extract: The extracts from the judgement of French CJ, Kiefel, Keane, and Nettle JJ highlight the general principles in relation to the effect of statutory illegality and the application of those principles to the Act. The extracts from the judgement of Gageler J (who agreed with the orders proposed in the joint reasons) emphasise that situations of statutory illegality cannot be analysed by the simple adoption of a rigid mode of analysis.

[page 621]

French CJ, Kiefel, Keane, and Nettle JJ Illegality: General principles In Equuscorp Pty Ltd v Haxton,23 French CJ, Crennan and Kiefel JJ explained that an agreement may be unenforceable for statutory illegality in three categories of case, where: (i)

the making of the agreement or the doing of an act essential to its formation is expressly prohibited absolutely or conditionally by the statute; (ii) the making of the agreement is impliedly prohibited by statute A particular case of an implied prohibition arises where the agreement is to do an act the doing of which is prohibited by the statute; (iii) the agreement is not expressly or impliedly prohibited by a statute but is treated by the courts as unenforceable because it is a ‘contract associated with or in the furtherance of illegal purposes’. In the third category of case, the court acts to uphold the policy of the law, which may make the agreement unenforceable. That policy does not impose the sanction of unenforceability on every agreement associated with or made in furtherance of illegal purposes. The court must discern from the scope and purpose of the relevant statute ‘whether the legislative purpose will be fulfilled without regarding the contract or the trust as void and unenforceable’. (footnotes omitted) There was some vacillation on the part of the appellants as to whether their argument included an invitation to the Court to deal with the present case as a case in the first or third category. In the end, little turns on this point because the consequence of illegality is a matter of statutory construction whatever category of illegality is involved. In this regard, in Australian Competition and Consumer Commission v

Baxter Healthcare Pty Ltd,24 Gleeson CJ, Gummow, Hayne, Heydon and Crennan JJ cited with approval the observation by Mason J in Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd25 that: the question whether a contract prohibited by statute is void is, like the associated question whether the statute prohibits the contract, a question of statutory construction. Their Honours went on to state26 that whether a statute which: contains a unilateral prohibition on entry into a contract … is void … depends upon the mischief which the statute is designed to prevent, its language, scope and purpose, the consequences for the innocent party, and any other relevant considerations. Ultimately, the question is one of statutory construction. [page 622] That statement was, in turn, cited with approval by Gummow ACJ, Kirby, Hayne, Crennan and Kiefel JJ in Master Education Services Pty Ltd v Ketchell.27 Accordingly, the scope of the prohibition in s 92(1)(d) of the Liquor Act and the consequences of a contravention of the prohibition are to be determined by the language of s 92(1)(d) of the Liquor Act construed in the context of the Liquor Act as a whole.28 … As a matter of legislative construction, the likelihood of adverse consequences for the ‘innocent party’ to a bargain has been recognised as a consideration which tends against the attribution of an intention to avoid the bargain to the legislature.29 That consideration is consistent with the general disinclination on the part of the courts to allow a party to a contract to take advantage of its own wrongdoing.30 There may be cases where the legislation which creates the illegality is sufficiently clear as to overcome that disinclination; but it is hardly surprising that the courts are not astute to ascribe such an intention to the legislature where it is not made manifest by the statutory language.31 And in the present case, this unattractive aspect of the Club’s argument is compounded by the

circumstance that, as its counsel acknowledged, the Club was obliged to take steps to seek the approval of the Authority for the grant of the lease and did not do so.32 The breach of s 92(1)(d) on which the Club sought to rely was a breach by the Club which gave rise to an offence that was complete at the moment when the Club allowed the appellants into exclusive possession. The subsequent observance by both parties of the terms of the lease was not prohibited and did not give rise to any continuing offence. his understanding of the limited scope of the prohibition in s 92(1)(d) is confirmed by a consideration of the consequences of a breach of the provision.

Consequences of a breach of s 92(1)(d) of the Liquor Act It is not the case that the only way in which legal effect can be given to s 92(1)(d) is by the sterilisation of leases granted in contravention of the prohibition. Section 92(1) imposes a penalty upon breach. In Yango,33 Mason J said: There is much to be said for the view that once a statutory penalty has been provided for an offence the rule of the common law in determining the legal consequences of commission of the offence is thereby diminished. [page 623] This observation was cited with approval by Brennan CJ, Dawson and Toohey JJ in Byrne v Australian Airlines Ltd34 in the course of their Honour’ expression of support for the proposition that a statute which prohibits the doing of an act under a penalty does not necessarily sterilise a legal relationship associated with that act. In this case, the imposition of a penalty upon the Club by reason of its grant is not the only consequence of the Club’s contravention of s 92(1)(d). The crucial step in the reasoning of the Court of Appeal in relation to the consequence of the Club’s breach of s 92(1)(d) was explained in the following passage:35

Notwithstanding that a breach of s 92(1)(d) gives rise to an offence on the part of the licensee (in this case the Club) and notwithstanding that the prohibition contained in that provision can be overcome by the obtaining of approval from the Authority, nevertheless … any sanction short of the prohibited lease being rendered unenforceable and void would frustrate the implementation of the legislative purpose inherent in the statutory prohibition. In this respect it is noteworthy that the prohibition only applies to a lease or sublease which, by definition as it were, entitles the lessee or sublessee to exclusive possession and, therefore, the right to exclude the licensee (or its manager) from the leased or subleased premises. That cannot serve the purpose or policy of the statute and, in particular, the overarching responsibility of the licensee to personally supervise and manage the conduct of the business of the licensed premises. The Court of Appeal erred in its conclusion that the policy or purposes of the Act could not be served by any sanction short of holding the lease void. There are two separate but related flaws in the analysis reflected in the passage cited. First, s 92(1)(d) expressly postulates a lease of part of a licensed premises. Given that the right of exclusive possession is the hallmark of a lease,36 s 92(1)(d) necessarily contemplates the vesting of exclusive possession of part of a licensed premises in a person other than the licensee. Accordingly, the vesting of exclusive possession of part of licensed premises in a person other than a licensee cannot be said to be contrary to the purpose and policy of the statute: the statute contemplates that precisely that state of affairs may be brought about by a grant by the licensee. True it is that a grant may lawfully be made only with the approval of the Authority, but the circumstance that s 92(1)(d) acknowledges that a person other than the licensee may enjoy exclusive possession is inconsistent with the Court of Appeal’s understanding of the purpose and policy of the Act in this respect. The second flaw in this aspect of the reasoning of the Court of Appeal lies in the failure to recognise the important role assigned by the Liquor Act to the Authority in relation to the supervision and management of licensed premises. That role is inconsistent with the view that the regime established by the Liquor Act for the control of licensed premises

[page 624] requires that a contravention by a licensee of s 92(1)(d) automatically renders the lease which is granted void and unenforceable. … The offence created by s 92(1)(d) was committed by the Club when the Club granted the appellants possession of the restaurant area. That offence was committed at that time, once and for all, because the approval of the Authority to the lease had not then been obtained. The continuation of the lease was not a continuing offence. One consequence of the contravention was that the Club was liable to a fine; but that was not the only consequence. The Club’s breach of the Act also meant that the Authority was empowered to cancel the Club’s licence should it decide to do so. It might do so, but it might not. Whether the licence should be cancelled is a matter for the Authority. The Authority might decide that the licence should be permitted to stand if it does not regard the current arrangements between the parties as unacceptable insofar as the public interest in the due observance of the standards required by the Liquor Act is concerned. If the Authority were to make such a determination, there would be no reason connected with the licence why the lease should not continue.

Gageler J This appeal was argued on the assumption that an agreement unenforceable for statutory illegality is an agreement the making, or some step in the making, of which was expressly prohibited by statute, was impliedly prohibited by statute, or was otherwise associated with or in furtherance of a purpose made illegal by statute. Mr and Mrs Gnych suggested that their case might be analysed by reference to the first or perhaps the third of those categories; the Club suggested that it might also be analysed by reference to the second. Useful as that tripartite classification might sometimes be,37 it is not a comprehensive description of agreements unenforceable for statutory

illegality. To shoehorn a given agreement into one of its categories is to adopt an incomplete mode of analysis. An agreement which is prohibited by statute is not necessarily an agreement which is unenforceable for statutory illegality, and may itself be an agreement which is associated with or in furtherance of a purpose made illegal by statute. There is some utility in laying out in broad terms the analytical framework within which the enforceability or unenforceability of such an agreement is determined. Making an agreement in breach of an express or implied statutory prohibition can have either of two differently sourced consequences for the legal enforcement of the agreement which has come to exist in fact. One is a statutory consequence, the nature and extent of which turns entirely on the construction of the statute imposing the prohibition or of some other statute. The other is a common law (or equitable) consequence, limited to withholding (or imposing conditions on) the grant of a remedy to enforce the agreement at the suit of one or more parties, the application of which turns on considerations of public policy. The distinction [page 625] between those differently sourced consequences, although fundamental, has not always been recognised in the case law. The nature and extent of any statutory consequence of breach of a statutory prohibition on making, or on some step in making, an agreement is a question of statutory construction which is distinct from the question of statutory construction which determines the scope of that prohibition (if the prohibition is express) or the existence and scope of that prohibition (if the prohibition is implied). A statutory consequence of making an agreement in breach of an express statutory prohibition is sometimes set out in exhaustive terms in the statutory text. Almost inevitably in the case of an implied prohibition, and sometimes in the case of an express prohibition, the statutory consequence is left in whole or in part to statutory implication. Judicial determination of a statutory consequence left to statutory

implication has become more sophisticated as statutory regulation has become more sophisticated and more pervasive. What was once a strong presumption of statutory interpretation that a purported agreement made in breach of a statutory prohibition ‘is not only illegal, but void because illegal, unless the statute indicates a contrary intention’38 has, since Yango Pastoral Company Pty Ltd v First Chicago Australia Ltd,39 given way to an acceptance that ‘[t]he question whether a statute, on its proper construction, intends to vitiate a contract made in breach of its provisions, is one which must be determined in accordance with the ordinary principles that govern the construction of statutes’.40 An implied statutory consequence determined in accordance with the ordinary principles of statutory construction — if a statutory consequence is implied at all — need not always go so far as to render an agreement made in breach of an express or implied statutory prohibition ‘void’ or ‘vitiated’ or ‘nullified’ or ‘invalid’, in the sense of being ‘devoid of legal consequences’.41 There is no reason why an implied statutory consequence cannot stop short of rendering an agreement made in breach of a particular statutory prohibition wholly unenforceable by all parties in all circumstances. An implied statutory consequence might be limited, for example, to rendering an agreement unenforceable by a contravening party in the occurrence or non-occurrence of particular events. The contemporary position is therefore that:42 There is no universal rule that can be applied to the construction of statutes in order to determine whether the effect of a failure to comply with a provision of a particular statute is to render a category of contracts (or an individual contract) to which that provision applied invalid or unenforceable. Each statute has to be considered as a whole and as a separate entity. [page 626] The considerations which bear on determination of an implied statutory consequence of making an agreement in breach of a statutory prohibition are similar to, and can overlap with, the considerations which bear on

determination of the implied statutory consequence of doing an act in breach of a condition which regulates the exercise of a statutory power.43 Here, as there, cases decided in other statutory contexts can assist in illustrating considerations which have proved to be significant, but reference to the outcomes of those cases can at best provide analogical guidance. Here, as there, the legislative intention to be discerned in a particular statutory context ‘often reflects a contestable judgment’.44

[page 627]

Comment 26.6.1 See Radan, Gooley, and Vickovich at 26.14 and 26.58–26.60.

1.

(1813) 105 ER 222.

2. 3.

St John Shipping Corporation v Joseph Rank Ltd [1957] 1 QB 267 at 286. Archbolds (Freightage) Ltd v S Spanglett Ltd [1961] 1 QB 374 at 390.

4. 5.

St John Shipping Corporation v Joseph Rank Ltd [1957] 1 QB 267 at 287. Archbolds (Freightage) Ltd v S Spanglett Ltd [1961] 1 QB 374 at 390; Dalgety and New Zealand Loan Ltd v V C Imeson Pty Ltd [1963] SR (NSW) 998 at 1004.

6. 7.

Smith v Mawhood (1845) 153 ER 552 at 557; Victorian Daylesford Syndicate Ltd v Dott [1905] 2 Ch 624 at 630. Cope v Rowlands (1836) 150 ER 707.

8. 9.

Taylor v Crowland Gas and Coke Co (1854) 156 ER 455. Kocotis v D’Angelo (1957) 13 DLR (2d) 69.

10. 11.

Commercial Life Assurance Co v Drever [1948] 2 DLR 241. [1832] 110 ER 82 at 84.

12. 13.

[1939] AC 277 at 293. Anderson Ltd v Daniel [1924] 1 KB 138 at 149.

14. 15.

[1952] 1 All ER 909 at 913. Wetherell v Jones (1832) 110 ER 82 at 84.

16. 17.

Vita Food Products Inc v Unus Shipping Co [1939] AC 277 at 293. Beresford v Royal Insurance Co Ltd [1938] AC 586 at 596.

18.

Beresford v Royal Insurance Co Ltd [1937] 2 KB 197 at 200.

19.

[1964] 1 QB 29 at 37.

20. 21.

Cope v Rowlands (1836) 150 ER 707 at 710. Victorian Daylesford Syndicate v Dott [1905] 2 Ch 624 at 629.

22. 23.

Bonnard v Dott [1906] 1 Ch 740 at 746. (2012) 246 CLR 498 at 513.

24. 25.

(2007) 232 CLR 1 at 29. (1978) 139 CLR 410 at 423.

26. 27.

(2007) 232 CLR 1 at 29. (2008) 236 CLR 101 at 107.

28. 29.

Australian Broadcasting Corporation v Redmore Pty Ltd (1989) 166 CLR 454 at 457, 462. Australian Competition and Consumer Commission v Baxter Healthcare Pty Ltd (2007) 232 CLR 1 at 29.

30.

New Zealand Shipping Co v Société des Ateliers et Chantiers de France [1919] AC 1 at 8, 9; Cheall v Association of Professional Executive Clerical and Computer Staff [1983] 2 AC 180 at 188–9; Alghussein Establishment v Eton College [1988] 1 WLR 587 at 595; [1991] 1 All ER 267 at 274. Orr v Ford (1989) 167 CLR 316 at 323, 326–7, 333–4.

31. 32.

33.

Mackay v Dick (1881) 6 App Cas 251 at 263; Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 at 605–6; Commonwealth Bank of Australia v Barker (2014) 312 ALR 356 at 365. (1978) 139 CLR 410 at 429.

34. 35.

(1995) 185 CLR 410 at 428. Polish Club Ltd v Gnych (2014) 86 NSWLR 650 at 670.

36. 37.

Radaich v Smith (1959) 101 CLR 209 at 222. Eg Miller v Miller (2011) 242 CLR 446 at 458; Equuscorp Pty Ltd v Haxton (2012) 246 CLR 498 at 513.

38.

Bassin v Standen (1945) 46 SR (NSW) 16 at 18, endorsed in Bradshaw v Gilbert’s (Australasian) Agency (Vic) Pty Ltd (1952) 86 CLR 209 at 218–9. (1978) 139 CLR 410.

39. 40. 41.

Yango Pastoral Company Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410 at 413; accord at 423, 436; contra at 430. Brooks v Burns Philp Trustee Co Ltd (1969) 121 CLR 432 at 458–9.

42. 43.

Tonkin v Cooma-Monaro Shire Council (2006) 145 LGERA 48 at 59. Eg Australian Broadcasting Corporation v Redmore Pty Ltd (1989) 166 CLR 454 at 457–9.

44.

Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at 389.

[page 628]

27 COMMON LAW ILLEGALITY

INTRODUCTION 27.1 This chapter deals with contracts that are illegal and therefore void at common law as they are found to be contrary to public policy. Examples include contracts that were made with the intention to act unlawfully, contracts that are prejudicial to the administration of justice, contracts that purport to oust the jurisdiction of the courts, contracts that promote conflicts between a person’s public duty and their private interests, contracts that involve sexually immoral activities, contracts involving trading with an alien enemy, and contracts that are tantamount to being unreasonable restraints of trade. Contracts that are illegal at common law as well as contracts that, although not illegal, are ones in which the parties intend to use the subject matter for an illegal purpose, are void at common law. The courts will not enforce contracts of this type and any money paid pursuant to those contracts cannot be recovered. Further, subject to the operation of the doctrine of severance, collateral transactions are also void ab initio. The policy behind the need for the doctrine of illegality was reiterated in the Law Commission (UK) Consultation Paper No 189, The Illegality Defence, A Consultative Report, 2009 (see 27.2E). That paper also looked at the policy rationales that underpin the application of the illegality defence, with emphasis being placed on the following six rationales: furthering the purpose of the rule which the claimants illegal behavior has infringed; the need for the law to be consistent; the need to prevent the claimant profiting from his or

her own wrong; to act as a deterrent; to maintain the integrity of the legal system; and punishment. The chapter also refers to a number of situations where contracts have been challenged on the basis that they are illegal and void at common law. In Wilkinson v Osborne (1915) 21 CLR 89 (see 27.3C), the court was faced with a particular contract that was said to be contrary to public policy. In A v Hayden (1984) 156 CLR 532 (see 27.4C) principles applicable to contracts which were prejudicial to the administration of justice were applied. In certain contracts parties often make provision for personal restraints to be imposed. This often occurs in contracts for the sale of business where covenants are inserted and which purport to have the effect of restraining a vendor who has sold their business from operating a similar business for a period of time in or around the same geographical area as the business which was sold. Such clauses are designed to preserve goodwill that has been purchased by the purchaser. Variants of such restraint clauses appear in employment contracts where one party seeks to restrain former employees who move to alternate accommodation. The rationale [page 629] behind such clauses is said to lie in the need to protect confidential information, including client details and methods of production. Restraints of trade provisions, however, are not always enforceable. In fact, if they are unreasonable they will be void. The principles that apply in such situations were referred to in Nordenfelt v The Maxim Nordenfelt Guns & Ammunition Company Ltd [1894] AC 535 (see 27.5C). In the context of restraints of trade in employment contracts, similar principles as outlined in Lindner v Murdock’s Garage (1950) 83 CLR 628 (see 27.6C) apply. With respect to restraints of trade in exclusive dealing commercial contracts, the decision in Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288 (see 27.7C) is applicable. The issue of whether a postemployment restraint of trade is enforceable against an employee in circumstances where the employer has repudiated the contract of employment is discussed in Richmond v Moore Stephens Adelaide Pty Ltd [2015] SASCFC 147 (see 27.8C).

Finally, consideration should be given to the impact of the Restraints of Trade Act 1976 (NSW) in relation to restraints of trade, as well as to Pt IV of the Competition and Consumer Act 2010 (Cth).

THE ILLEGALITY DEFENCE 27.2E The Law Commission (UK) Consultation Paper No 189, The

Illegality Defence, A Consultative Report Source: The Law Commission (UK) Consultation Paper No 189, The Illegality Defence, A Consultative Report, 2009 at [2.1]–[2.35]. Extract: The extract from the Law Commission Consultation Paper emphasises the English position as to why a doctrine of illegality is needed.

Why do we need any doctrine of legality [2.1] The normal business of the courts is to decide cases according to the law, and in doing so to provide a just resolution to the dispute between the parties. The illegality defence operates to prevent the courts from providing the claimant with the rights or remedies to which he or she would otherwise be entitled. In this Part we examine the basis on which the illegality defence does this and consider whether it can be justified. As we shall see, there is always a difficult balancing exercise to be performed between awarding the claimant his or her usual rights, and seeking to uphold the rationales that underlie the defence. [2.2] One of the initial questions that we considered … was whether there was any need to maintain a doctrine of illegality at all. That is, should we simply recommend the abolition of the illegality defence? The reasoning adopted in the case law has made it quite clear that the defence is not aimed at achieving a just result between the parties. The classic statement frequently cited in support of the illegality defence is that of Lord Mansfield in Holman v Johnson:

The objection, that a contract is immoral or illegal as between plaintiff and defendant, sounds at all times very ill in the mouth of the defendant. It is not for his sake, however, [page 630] that the objection is ever allowed; but it is founded in general principles of policy, which the defendant has the advantage of, contrary to the real justice, as between him and the plaintiff.1 [2.3] If this is the case, we consider that it is important to examine what are the ‘general principles of policy’ on which the illegality doctrine is based. … [2.4] We look at the policies that we consider underpin the application of the illegality defence in some detail below. We believe that these policies should be at the forefront of any consideration as to how the law should develop in the future. It is important to point out that they are not mutually exclusive, but rather overlap with each other to a greater or lesser degree. … However together … they [operate] to justify the illegality defence.

The policy rationales [2.5] Many different rationales have been put forward in the relevant academic literature and case law in order to justify the operation of the illegality doctrine. Here we consider what might be regarded as the six main ones: (1) furthering the purpose of the rule which the claimant’s illegal behaviour has infringed; (2) consistency; (3) the need to prevent the claimant profiting from his or her own wrong; (4) deterrence; (5) maintaining the integrity of the legal system; and (6) punishment. 1.

Furthering the purpose of the rule which the claimant’s illegal behaviour has infringed

[2.6] One of the main policies that is said to underlie the illegality defence is that disallowing the claim will further the purpose of the rule which the claimant has infringed. Suppose, for example, it were an offence for the claimant to sell a gun to the defendant. If the defendant failed to pay, then refusing to allow the claimant to sue may further the aim of prohibiting gun

sales. This is a rationale which is frequently considered in contract cases where the claimant has breached a statutory provision either in making or performing the contract. An early example is given by Cope v Rowlands where the court held that an otherwise valid brokerage contract made by a person who had failed to comply with a statutory requirement to obtain a licence from the City of London was unenforceable. Parke B said: The question for us now to determine is, whether the enactment of the statute is … meant to secure a revenue to the city, and for that purpose to render the person acting as a broker liable to a penalty if he does not pay it? Or whether one of its objects be the protection of the public, and the prevention of improper persons acting as brokers? … [T]he legislature had in view, as one object, the benefit and security of the public in those important transactions which are negotiated by brokers. The clause, therefore, which imposes a penalty, must be taken … to imply a prohibition of all unadmitted persons to act as brokers, and consequently to prohibit, by necessary inference, all contracts which such persons make for compensation to themselves for so acting.2 [page 631] [2.7] This question, we consider, is not only relevant in the contract cases dealing with ‘statutory illegality’, but whenever the court is looking at the illegality defence. That is, an important function that underlies the defence is to support the law that the claimant has infringed. In some cases, to allow the civil claim would defeat the object of that law. Many examples could be given from all contexts of the illegality doctrine. In the context of a claim for unjust enrichment, the Court of Appeal’s decision in Awwad v Geraghty shows that a quantum meruit claim for work performed under an unenforceable contract will not be awarded where granting it would undermine the rule that rendered the contract illegal. In this case a solicitor sued for her fees payable under a conditional fee agreement which the court held to be contrary to public policy and therefore unenforceable. The quantum meruit claim was similarly denied. Lord Justice Shiemann explained:

What public policy seeks to prevent is a solicitor continuing to act for a client under a conditional normal fee arrangement. This is what [the claimant) did. That is what she wishes to be paid for. Public policy decrees that she should not be paid.3 [2.8] In a trusts context, this rationale would also seem to play an important role in the courts’ decisions. For example, the court has refused to recognise a trust that had been created in order to evade a statutory prohibition against the use of property belonging to a Member of Parliament in contracts entered into with the Government.4 Finally, this policy can be seen at work in several of the tort cases. For example, it explains those cases in which the illegality doctrine has prevented the claimant from recovering damages for the fact that he or she has been imprisoned5 or had to pay a fine or damages to another party.6 In both cases the award of damages would undermine the penalty imposed by the rule which the claimant infringed. [2.9] In all the cases referred to above, to allow the claim would have undermined the purpose of the rule that the claimant had infringed. However, in other cases, the court has reached the opposite conclusion.7 Indeed in some cases, the court has found that to allow the illegality defence to prevail would actually undermine the purpose of the rule that had been infringed. Such was the decision of the European Court of Justice in Courage Ltd v Crehan. The tenant of a pub let by a brewery under terms which included a beer tie agreement sought damages suffered as a result of being a party to the beer tie. He argued that the beer tie was contrary to article 81 (previously article 85) of the European Community Treaty, therefore unenforceable, and that he was entitled to be compensated for losses that he had suffered as a result of being party to the agreement. The brewery defended the claim on the basis of illegality. However, the European Court pointed out that in such a case as this, allowing the [page 632] claim would actually promote the principle of competition, the purpose behind article 81, rather than frustrate it. The Court said:

The existence of such a right [to claim damages for loss caused to him by a contract liable to restrict competition] strengthens the working of the Community competition rules and discourages agreements or practices, which are frequently covert, which are liable to restrict or distort competition. From that point of view, actions for damages before the national courts can make a significant contribution to the maintenance of effective competition in the Community.8 … [2.12] We accept that this policy will not be easy to apply in all cases. Ascertaining the purpose of any particular invalidating rule is not always straightforward. Then deciding whether allowing the claim in the factual circumstances before the court would undermine that purpose may not be clear-cut. This is not the only rationale that is relevant and its operation may conflict with others. In these cases the courts will have to determine which takes precedence. However, despite these difficulties we do believe that this is an important policy which underlies the illegality defence and justifies its operation in many cases. 2.

Consistency

[2.13] A similar policy to the one which we have just considered, but perhaps more broadly applicable, is that the law should be seen to be internally consistent. We can see this policy at work already in some of the cases. For example, it is clear that a claim in unjust enrichment will not be allowed where it would have the same effect as a claim for contractual enforcement that the law has refused. To allow such a claim would stultify the law. … [2.14] While the English cases have not relied directly on the principle of consistency to explain the basis of the illegality defence, it has been endorsed by the Canadian Supreme Court for tort cases in Hall v Hebert. Here Madam Chief Justice McLachlin said: I conclude that there is a need in the law of tort for a principle which permits judges to deny recovery to a plaintiff on the ground that to do so would undermine the integrity of the justice system. The power is a limited one. Its use is justified where allowing the plaintiff’s claim would introduce inconsistency into the fabric of the

law, either by permitting the plaintiff to profit from an illegal or wrongful act, or to evade a penalty prescribed by criminal law.9 [2.15] In [Consultation Paper] 160 we suggested that the policy of consistency was needed to explain some of the tort cases for which there seems to be no other underlying rationale. We asked consultees whether they agreed. Consistency was seen to have a number of benefits by those who commented on this aspect of CP 160. For many, the rationale absorbed or provided an umbrella for the rationales that we go on to discuss next. Others felt that it added nothing new to the policies that we already clearly have in the English case law. One judge commented that ‘the attractiveness of the formulation is mainly based on its lack of [page 633] detailed content’. Another respondent pointed out that ‘it is not really difficult, when judges want to ignore a technical illegality, to embrace all sorts of apparent inconsistencies’. While there was therefore a large degree of agreement that the illegality defence helped to maintain internal consistency in the law, this was not seen to be the overriding rationale. 3.

The need to prevent the claimant profiting from his or her own wrong

[2.16] There is undoubtedly a principle running through English law that a person should not be able to profit from his or her own wrongdoing. Statutory effect is given to this principle by the broad powers for criminal confiscation and civil recovery set out in the Proceeds of Crime Act 2002. … [2.17] However, the principle can also be seen at play in the civil case law. For example in Beresford v Royal Insurance Company Ltd, Lord Atkin referred to ‘the absolute rule … that the Courts will not recognise a benefit accruing to a criminal from his crime’.10 While this rule has an application over a wider area than illegal transactions, it is a maxim to which the courts frequently refer in the type of case that we are considering. [2.18] We believe that this principle has an important role to play in many illegality cases. However, its confines should be noted. The policy can only

be invoked where the claimant is indeed a wrongdoer, and not in every case where some element of illegality is involved. Also, it is not clear to what extent it will be relevant in tort claims, where the claimant is often seeking compensation or an indemnity, rather than any element of ‘profit’; or in unjust enrichment claims, where the claimant is seeking restitution. 4.

Deterrence

[2.19] Deterrence is the explanation for the illegality defence that is most frequently cited by the courts. For example, in Taylor v Bhail, the Court of Appeal refused a claim for the cost of work carried out by a builder who had falsely inflated his estimate in order to enable his customer to defraud his insurers. Lord Millett, then a Court of Appeal judge, said: It is time that a clear message was sent to the commercial community. Let it be clearly understood if a builder or a garage or other supplier agrees to provide a false estimate for work in order to enable its customer to obtain payment from his insurer to which he is not entitled, then it will be unable to recover payment from its customer.11 [2.20] It has also been forcefully pointed out that in some cases, particularly those involving the breach of a minor technical statutory provision, the potential unenforceability of a contract may provide a far more serious deterrent than the criminal law. This is largely because the risk of discovery and the threat of prosecution for breach of the provision are slight, but also because the amount at stake in any civil claim could far exceed that payable under the fine imposed by the criminal law. [page 634] [2.21] However, some judges have doubted how effectively the illegality defence can uphold any deterrent effect.12 This is largely for two reasons. First, many of those entering into transactions involving illegality are unaware of the law. Secondly, even if they are, it could be argued that a rule which acts as a deterrent for one party to a transaction may act as an

inducement to the other, should he or she be aware that the illegality defence may result in an unmerited windfall. [2.22] When we asked respondents to CP 160 whether they felt that deterrence was a legitimate rationale behind the illegality doctrine, we received a mixed response. Just over half believed that it was. One provided a realistic example: a man thinking of lending his BMW for a cigarettesmuggling operation may think twice once realising that he could well not have the right to sue if it were lost or damaged. Respondents also suggested that the assertion that the civil law has no deterrent effect is empirically untested; and that to allow a civil claim can have a counter-deterrent effect, by reducing the deterrent effect of the criminal law. However, others thought that deterrence should be left to the criminal law and was not an appropriate policy for the civil law to be pursuing. [2.23] We believe that deterrence is an important policy behind the illegality doctrine, although it is also clear that its relevance will vary from case to case. For example, it seems more likely to have a bearing on the type of situation envisaged by Lord Millett, where two parties knowingly enter into a transaction designed to defraud another, than in, say, many of the tort situations. When the defendant is the primary instigator of the illegality, the doctrine may even be seen as a benefit, because it enables him or her to escape legal obligations. However provided that it is appropriate on the facts, we agree with the many judicial statements that a policy based on deterrence justifies the application of the illegality doctrine. 5.

Maintaining the integrity of the legal system

[2.24] Frequent reference is made, particularly in the older case law, to the argument that the proper role of the court is not to provide an arena in which wrongdoers may fight over their spoils.13 It is suggested there that one aim of the illegality defence is to ensure that the legal system is not abused by being asked to intervene in disputes where the parties have been involved in particularly serious wrongdoing. In the consultation papers we adopted the language used by these cases and referred to this rationale as being the need to uphold the ‘dignity of the court’. Respondents commented that the policy might perhaps be better expressed in updated language — such as the need to uphold the ‘integrity’ of the courts and ‘maintain public confidence’ in the legal system. When we asked

respondents in CP 160 whether they believed that this was a legitimate aim, we received an evenly divided response. Half who responded thought that this was a good rationale. The other half argued that it was ‘pompous’ and ‘outdated’. [page 635] [2.25] The fact that the court will take notice of illegality of its own initiative, regardless of whether or not either party has pleaded it, lends support to the idea that the courts themselves regard the illegality doctrine as having an important function in the way in which they conduct their work. As Mr Justice Colman explained in Birkett v Acorn Business Machines Ltd: The principle behind the court’s intervention of its own motion in such a case is to ensure that its process is not being abused.14 [2.26] However, it is also clear that the courts will not simply wash their hands of a case as soon as an issue of illegality is raised by one of the parties. This point was forcefully made in the recent judgment of the Privy Council in Townsend v Persistence Holdings Ltd.15 The claimants sought to exercise their right to terminate an agreement for the sale of land in the British Virgin Islands on the basis that the defendant had failed to satisfy one of the conditions of the sale contract. In argument before the Court of Appeal of the Eastern Caribbean, counsel for the claimants accepted that the agreement had been structured in such a way that the defendant could defraud the revenue of stamp duty owed. At this point the Court of Appeal abruptly stopped the trial, declaring that it refused to entertain any further hearing of the appeal, and entered judgment for the defendant. On appeal, the Privy Council criticised such an approach. Lord Neuberger said that if the transaction were dishonestly structured, the question whether or not that disentitled the claimant from seeking relief was one which plainly called for argument. It would be simply a denial of justice to dismiss the appeal on a point which had not been argued, particularly in relation to illegality, where the law is not straightforward. [2.27] In conclusion, we consider that this rationale does have merit.

Indeed it might be regarded as the background to the general test for the application of the illegality defence created by the courts in the late 1980s and early 1990s based on the ‘public conscience’. In a series of cases16 the courts rejected the technical and inflexible rules that provide when the illegality defence applies. Instead they adopted a general principle that the courts would only refuse to assist the claimant where it would be an ‘affront to the public conscience if by affording him the relief sought the court was seen to be indirectly assisting or encouraging the plaintiff in his criminal act’17 — the so-called ‘public conscience’ test. While the use of this test has been rejected by the House of Lords in Tinsley v Milligan,18 the policy that lies behind it has not been questioned. [page 636] 6.

Punishment

[2.28] Whether or not punishment can be a legitimate policy underpinning the illegality defence provoked some disagreement amongst the respondents to our two [previous Consultation Papers]. The large majority thought that punishment was the preserve of the criminal law, and should not be invoked by the civil courts. Certainly it is clear that if punishment were to be regarded as a true rationale, then the rules would need to be carefully applied in order to ensure that any penal effect they produce is proportionate to the unlawful behaviour involved. A minority thought that punishment should not be the sole ground for denying a claim, but suggested that the court should be able to take into account the extent to which it disapproves of the conduct or considers it worthy of punishment. [2.29] While we agree with the majority that punishment should not be regarded as an aim underlying the illegality doctrine, the claimant might well regard the successful application of the defence as having exactly this effect. We also agree, therefore, with those respondents who thought that the court should take into account the degree of impropriety of the claimant’s actions and the amount which the claimant stands to lose in deciding whether the defence should succeed. 7.

Other policies?

[2.30] In CP 160 we discussed various other policies that might be regarded as justifying the illegality doctrine. We pointed out that these might simply be alternative ways of looking at those main policies that we have already discussed, and they gained little support from respondents. We noted that several recent cases, particularly in relation to claims brought in tort, have justified the application of the illegality doctrine on the basis that the courts must not ‘appear to condone’ the illegal conduct or ‘encourage or assist’ the claimant in it. At first glance this seems to be no more than an alternative wording of the deterrence rationale. However, it does seem that importance is placed on the ‘appearance’ of the court’s behaviour. This has aspects of the ‘integrity’ and ‘consistency’ arguments, and it is not clear that it adds anything further. [2.31] In addition, it has been argued that the illegality defence, particularly as it applies in tort claims, may be justified by the concept of ‘responsibility’. That is, everyone should be treated as being responsible for his or her own acts. So, if a person committed an unlawful act and suffered because of it, then he or she should not be awarded compensation for it. This concept found little support amongst respondents, many of whom felt that the issue of responsibility was better dealt with by the defences of voluntary assumption of risk and contributory negligence.

The statutory regimes for confiscation and civil recovery [2.32] We explained above that an important principle underlying the illegality defence is that a person should not be able to benefit from his or her own wrong. Parliament has enshrined this principle in legislation by providing that in defined circumstances benefits obtained as a result of criminal conduct may be confiscated by the State. … [page 637] [2.33] The doctrine of illegality must be viewed against this backdrop of legislation for State confiscation and recovery. We have considered at length whether these regimes supersede the need for an illegality defence. In some cases, at least, where the parties are disputing the ownership of property following a transaction tainted by illegality, the State may step in

and confiscate the property to itself. However, in many cases the confiscatory or recovery legislation will not be relevant. This may be because there has been no successful criminal prosecution and the case does not meet the criteria in place for civil recovery proceedings. In other cases the amount or property claimed does not represent the proceeds of crime, so the confiscatory regimes are simply not applicable. Yet the legislation is relevant in that it does indicate that it is Parliament’s belief that in some cases people should be obliged to forfeit what would otherwise belong to them because of their involvement in unlawful behaviour. We do not believe, however, that the statutory provisions for State forfeiture displace the need for an illegality defence in the civil law. They were enacted against the background of such a defence being available, and there is no suggestion that they were intended to replace it.

Conclusion on the policy rationales [2.34] In our view there are several overlapping policy factors that underlie the illegality defence. Not all will be relevant in every case, but together they show that in some circumstances the claimant’s usual rights and remedies should be denied and that the illegality defence is needed. We strongly believe that the courts’ decisions should be closely focused on these rationales; and, further, that the claimant’s claim should only be denied because of his or her involvement in illegality where that denial can be fully justified by the operation of one or several of them. As we noted at the start of this Part, the illegality doctrine is not aimed at achieving a just result between the parties. Where the defence is successfully raised, the defendant may well end up with a windfall gain, won at the expense of the claimant. Achieving a just result must in illegality cases be weighed against the need to apply the policies that we have considered. In some cases these policies may be found to have overriding importance. Even here we believe that the courts should be concerned that the result is proportionate to the illegality involved. [2.35] We provisionally recommend that the illegality defence should be allowed where its application can be firmly justified by the policies that underlie its existence. These include: (a) furthering the purpose of the rule which the illegal conduct has infringed; (b) consistency; (c) that the

claimant should not profit from his or her own wrong; (d) deterrence; and (e) maintaining the integrity of the legal system.

Comment 27.2.1 See Radan, Gooley, and Vickovich at 27.7.

[page 638]

CONTRACTS CONTRARY TO PUBLIC POLICY 27.3C

Wilkinson v Osborne (1915) 21 CLR 89

Court: High Court of Australia Facts: The proceedings were brought to recover a commission agreed to be paid by Wilkinson to Osborne for services to be rendered by Osborne in connection with a proposed contract for the sale of land by private persons to the government pursuant to the Closer Settlement (Amendment) Act 1907 (NSW). The Act stated that when an Advisory Board reported that any land was suitable for acquisition for closer settlement, the Governor could, subject to the Act, purchase it from the owner. Such a purchase was subject to approval by resolutions of both Houses of the New South Wales Parliament. The owners of a large property had offered it to the government at a price of £30,000. They engaged Wilkinson as their agent to carry on the negotiations on their behalf. Wilkinson was to be paid £1000 in commission. The Advisory Board recommended the purchase. However, there were fears that the sale would fall through. Wilkinson, in fear of losing his commission, approached Osborne and Jones, who were members of the New South Wales Legislative Assembly and who carried on the business of land agents, and asked them to intervene to finalise the purchase of the land as quickly as possible. Wilkinson agreed to pay Osborne and Jones a fee of £250.

The services to be provided by Osborne and Jones involved them exerting political influence or pressure upon the government to hasten the government’s acceptance of the proposal. The purchase by the government was completed and Osborne and Jones sued Wilkinson for the promised fee of £250. Issue: The issue before the High Court was whether the contract for the fee was contrary to public policy and therefore illegal at common law. Decision: The High Court of Australia (Griffith CJ, Isaacs and Gavan Duffy JJ) unanimously found that the contract was contrary to public policy and therefore illegal at common law, with the result that Wilkinson did not have to pay the fee. Extract: The extracts from the judgment of Isaacs J discuss the meaning of public policy and how it was contravened on the facts of this case.

Isaacs J What is the test of ‘public policy’ which a Judge is entitled and bound to apply to an agreement, the validity of which is impeached on that ground? It is not easy to collect or to reconcile all the observations on the subject of ‘public policy’. But the judgement of Lord Halsbury LC in Janson v Driefontein Consolidated Mines Ltd19 makes it clear that a Court has not a roving commission to declare contracts bad as being against public policy according to its own conception of what is expedient for or would be beneficial or conducive to the welfare of the State. A Court, says the Lord Chancellor, cannot [page 639] invent a new head of public policy, and he enumerates some instances of undoubtedly unlawful things. …

In my opinion, the ‘public policy’ which a Court is entitled to apply as a test of validity to a contract is in relation to some definite and governing principle which the community as a whole has already adopted either formally by law or tacitly by its general course of corporate life, and which the Courts of the country can therefore recognise and enforce. The Court is not a legislator: it cannot initiate the principle; it can only state or formulate it if it already exists. The rule of law as to contracts against public policy is constant — namely, that every bargain contrary to such a social governing principle is regarded as prejudicial to the State, or, in other words, contrary to ‘public policy’ or, as it is sometimes called, ‘policy of the law’, and the State by its tribunals refuses to enforce it. But, as was said by the Judicial Committee in Evanturel v Evanturel, ‘the determination of what is contrary to the so-called “policy of the law” necessarily varies from time to time. Many transactions are upheld now by our own Courts which a former generation would have avoided as contrary to the supposed policy of the law. The rule remains, but its application varies with the principles which for the time being guide public policy’.20 … But the point to bear in mind is that the principle which is to be the standard of legality must at the time be one which is of general recognition in the community as one essential to its corporate welfare. Some are not the subject of actual law — such as sexual morality and the promotion of marriage. Others are recognized as fundamental principles of the common law — as the protection of the public revenue, the administration of justice, the freedom and inherent duty of the Legislature and Executive. Others, again, arise by statute directly or indirectly, for whatever a Statute enacts is beyond all question, to that extent, the policy of the country. Whatever tends to defeat an enactment is necessarily against public policy. I apprehend, therefore, the duty of this Court is confined to inquiring whether there is at the present moment any governing principle existing in New South Wales, whether as a recognized essential part of the corporate life of the community or as part of the common or Statute law of the State, which is infringed by the bargain between [Wilkinson] and [Osborne and Jones] by reason of its express terms or the tendency of its operation. The Courts must, to quote Lord Watson’s words in the Nordenfelt case,

‘ascertain, with as near an approach to accuracy as circumstances permit, what is the rule of policy for the then present time. When that rule has been ascertained, it becomes their duty to refuse to give effect to a private contract which violates the rule and would, if judicially enforced, prove injurious to the community’.21 The Courts refuse to give effect to such a bargain, not for the sake of the defendant, not to protect any interest of his — indeed, they do not fail to notice that his failure to abide by his [page 640] agreement sometimes adds dishonesty to illegality — but they refuse to enforce the bargain for the sake of the community, who would be prejudiced if such a bargain were countenanced. The existence and nature of the principle or rule here rests upon the effect of the law of the State Constitution read by the light of the doctrine of responsible government, and the further specific effect of the closer settlement legislation. … [T]he duty of a member of the Legislature is unquestionable. As Lord Lyndhurst said in Egerton v Brownlow: ‘In the framing of laws it is his duty to act according to the deliberate result of his judgment and conscience, uninfluenced, as far as possible, by other considerations, and least of all by those of a pecuniary nature’.22 … And so I put this case primarily on that principle, that it is one in which the bargain raises a conflict between interest and the duty of considering whether the purchase should be finally approved, and is therefore against public policy.

[page 641]

Comment

27.3.1 See Radan, Gooley, and Vickovich at 27.9 and 27.29.

CONTRACTS PREJUDICIAL TO THE ADMINISTRATION OF JUSTICE 27.4C

A v Hayden (1984) 156 CLR 532

Court: High Court of Australia Facts: The plaintiffs were Commonwealth employees who in 1983 took part in a training day organised by the Australian Secret Intelligence Service (ASIS). As part of the exercise, the employees were to rescue one of the participants who was playing the role of a hostage in a hotel room in Melbourne. In doing so, they broke a hotel room door. The manager of the hotel went to investigate, as he was not warned of the exercise, and the employees left the building. The Victorian Chief of Police, believing that criminal activity had been committed, requested the names of the employees so they could be charged. The employees sought injunctions restraining the Commonwealth from disclosing their names on the basis of a term in their employment contract that in relation to their work for ASIS, their identities would be kept confidential and not disclosed to any other persons. In interlocutory proceedings, Dawson J in the High Court ordered that the names of the employees not be disclosed by the Commonwealth Government pending resolution of the questions as to whether the confidentiality clause in their contracts was enforceable or not. The Victorian legislature then passed the Criminal Proceedings Act 1984, which empowered courts dealing with matters relating to Australia’s security to sit as closed courts. The Judiciary Amendment Act 1984 (Cth) gave binding effect to the orders of the Victorian legislation in relation to the events in the Melbourne hotel in 1983. The Commonwealth applied to have the injunctions dissolved. As the intervening legislation had removed

any national security grounds for maintaining the injunctions, the only basis upon which the injunctions could be continued would be if the confidentiality clauses were enforceable. Dawson J refused to dissolve the injunctions and the case went to the Full Court of the High Court for determination. Issue: The issue before the High Court was whether the crimes committed by the employees constituted a breach of law such that their identities should be revealed, notwithstanding the confidentiality terms of their contracts. Put another way, the issue was whether the confidentiality clauses constituted an agreement prejudicing the administration of justice by concealing from Victorian police authorities the names of persons who had committed criminal offences. Decision: The majority of the High Court (Mason, Murphy, Wilson, Brennan, Deane, and Dawson JJ; Gibbs CJ dissenting) held that the confidentiality clauses were unenforceable and ordered that the injunctions be dissolved. [page 642] Extract: The extract from the judgment of Deane J discusses, in the context of the facts of the case, the circumstances where a contract prejudicial to the administration of justice is illegal at common law.

Deane J These five cases illustrate the abiding wisdom of the biblical injunction against putting one’s ‘trust in men in power’.23 The [employees] have been described without dissent as ‘upright, decent men serving their country’. The two rocks upon which they founder are, however, propositions of law which are not to be moved to meet the exigencies of hard cases. Shortly and relevantly stated, those propositions are: (i) that neither the Crown nor the executive has any common law right or power to dispense with the observance of the law or to authorize illegality and (ii)

that the courts of this country will not enforce the terms of a promise not to disclose information in circumstances where such enforcement would obstruct the due administration of the criminal law. … [T]he [Commonwealth’s] argument based on public policy must prevail. The relevant proposition of law was shortly stated at the commencement of this judgment. It is that the courts of this country will not lend their aid to enforce a promise not to disclose information where the circumstances are such that enforcement or insistence upon observance of the promise would obstruct the due administration of the criminal law of Australia, whether Commonwealth or State. The rationale of that proposition is that, apart from the exceptional case (such as that of a professional legal adviser) where the overall administration of the law itself requires that confidentiality be maintained, it would be contrary to public policy for the courts to enforce a right on the part of one person to insist that another fail or refuse to disclose relevant information to assist those entrusted with the ordinary administration of the criminal law in the proper investigation and prosecution of criminal activity: the enforcement by the courts of such a private right to insist that another fail or refuse to disclose relevant information would involve the courts in the obstruction of the due administration of the criminal law which is a mainstay both of the rule of law which they exist to serve and of the very existence of effective private rights. For the purposes of that proposition, the investigation of actual or reasonably apprehended criminal activity by a regular law enforcement agency of the Commonwealth or of a State is part of the administration of the criminal law. Whether enforcement or observance of a term of a particular promise of confidentiality would obstruct that administration is a question which must be determined in the context of the circumstances of the particular case. Plainly enough, the enforcement of such a promise by an order forbidding a threatened voluntary disclosure to the Commissioner of a State Police Force of the identity of the participants in joint activity which involved actual or reasonably apprehended offences against the criminal law of that State would involve obstruction of the due administration of that criminal law. [page 643]

In stating the relevant proposition in terms of unenforceability by the courts, I have avoided the question whether a general contractual promise which, properly construed, requires the maintenance of confidentiality notwithstanding that the administration of the criminal law will be obstructed thereby is wholly or partially ‘illegal’, ‘void’ or ‘invalid’. That question raises problems of terminology and substance, including the nature and effect of any distinctions between ‘illegal’, ‘void’, ‘invalid’ and ‘unenforceable’ and the identification of the precise principles governing the residual enforceability (if any) of such a general contractual promise to the extent that the maintenance of confidentiality would not adversely affect the due administration of the criminal law. At one end of the scale is the case where the direct and immediate operation of the contractual promise to preserve confidentiality is to obstruct the due investigation of crime by concealing information about criminal activity and where it would seem clear enough that the promise itself is tainted with illegality and is void. At the other end of the scale is the case where a general promise of confidentiality is innocently given and where it is only in remote and unforeseen circumstances that an adverse effect upon the due administration of the criminal law would result from its observance: in such a case, there is much to be said for the view that the result is superseding unenforceability merely to the extent that observance of the promise would have such an adverse affect. Those questions have not, however, been investigated in argument in the present actions and they are best left to another day. I have also refrained from seeking to determine whether there is some more general principle of which the particular proposition is an emanation and, if there is, to identify and define its outer limits. The statement of the proposition by reference to whether enforcement or insistence upon observance of a promise of confidentiality would obstruct the due administration of the criminal law suffices for present purposes since it is clear that the enforcement of the promise of confidentiality in the instant cases by an order restraining the [Commonwealth] from disclosing the [employees’] identities to the Chief Commissioner would, in the circumstances as disclosed by the stated cases, involve obstruction of the due administration of the criminal law of Victoria. It was submitted on behalf of the [employees] that there should be weighed against any considerations of public interest favouring disclosure of their identity to the Chief Commissioner of Police a variety of countervailing

considerations of public interest, including considerations going to national security, which militate against such disclosure. If this Court were required to determine the overall balance of competing considerations of public interest, there would be much force in that submission since the considerations favouring preservation of the confidentiality of the identity of the [employees], though varying from case to case, are substantial and counsel for the [employees] have convincingly demonstrated the inadequacies of the Commonwealth-Victorian legislative scheme which offers no effective protection against disclosure of the identity of [an employee] charged with an offence unless and until the court … before which he is charged is persuaded, in the exercise of a largely unconfined statutory discretion, to order that justice be administered in secret. … In the present actions however, the Court is not concerned to perform the type of balancing exercise which may be involved in deciding whether disclosure or production of documents should be ordered or evidence should be compelled or received.24 While general [page 644] considerations of public policy, such as considerations of national security, may prevail over a prima facie entitlement to discovery, production or disclosure in the actual course of the administration of justice by the courts, they provide neither foundation nor justification for the making by a court of a positive order which would obstruct the due administration of the criminal law at the suit of one who is asserting some contractual or other private right. The proposition that the courts of this country will not lend their aid to enforce a promise not to disclose information where the circumstances are such that enforcement or insistence upon observance of the promise would obstruct the due administration of the criminal law which it is a function of the courts to advance is not a provisional one which is subject to being overruled by some perceived balancing of other considerations of public interest. In some cases, of course, a balancing process may be involved in determining whether the enforcement of a promise to maintain confidentiality has the overall effect of advancing, rather than obstructing or adversely affecting, the due administration of the criminal law. The obvious example is where the promise to maintain

confidentiality is that of a professional legal adviser and relates to communications which are properly the subject of legal professional privilege.25 Once it appears, however, that enforcement or insistence upon observance of such a promise would obstruct the due administration of the criminal law, the principle which precludes enforcement by the courts is operative without any further weighing process being necessary or other considerations of public interest being relevant. Indeed, the position of the ordinary individual under the law would be such as to make non-disclosure the only safe course if he were unable to ascertain whether he was under an enforceable obligation to observe a promise to maintain confidentiality unless and until it was known whether it would ultimately be held that other considerations, such as matters of national security of which he might well be completely unaware, outweighed the obstruction of the due administration of the criminal law which enforcement or observance of the promise would involve. While one would expect the considerations of public interest upon which the [employees] rely to weigh heavily with the [Commonwealth] on the question whether the identity of all or any of the [employees] should be disclosed by the Commonwealth to the Commissioner of Police, they are simply not in point in so far as the five actions in this Court are concerned.

[page 645]

Comments 27.4.1 See Radan, Gooley, and Vickovich at 27.14 and 27.16. 27.4.2 In Commonwealth of Australia v Sanofi [2017] FCA 382, after citing passages from A v Hayden and other relevant cases, Nicholas J said that they supported the following propositions: First, there are some contracts that are void because their purpose and effect is to interfere adversely with the administration of justice. Examples are where a witness is promised money in exchange for giving false testimony or where a contract has the purpose and effect of concealing

the existence of a serious criminal offence or the identity of the perpetrator. These contracts are void at common law on the basis that they have a tendency to interfere with the proper working of the machinery of justice. Secondly, there are other contracts that are not void but which may be unenforceable to the extent that they have a tendency to interfere adversely with the proper administration of justice. In these cases it is the effect of the enforcement of the contract which is most important. An employment contract in which the employee agrees not to disclose to third parties his or her employer’s private affairs is not enforceable by the employer to prevent the employee from disclosing to the authorities the commission of a serious criminal offence. In that case the contract must give way to the strong public interest in the enforcement of the criminal law. Thirdly, it may be necessary for the Court to weigh competing public policy considerations when determining whether or not to decline to enforce a contract on the ground that it has a tendency to interfere adversely with the administration of justice. This is because the contract may be beneficial to the administration of justice in some respects but adverse to it in others. There is a public interest in upholding contractual bargains and in encouraging the settlement of legal proceedings. But these considerations may need to be weighed against other considerations relevant to the proper administration of justice. Fourthly, a court is required to exercise extreme caution and reserve before finding a contract void as against public policy and may only do so when the contract in question is ‘incontestably and on any view inimical to the public interest’: Monkland v Jack Barclay [1951] 2 KB 252 at 265. The ‘public interest’ in this context refers to some definite and recognizable public interest that transcends the private interests of the parties to a particular dispute.

Fifthly, a party cannot prevent a witness giving evidence in legal proceedings. Subject to any valid objection to evidence, the opposite party is entitled to call the witness and adduce evidence from him or her. The opposite party is also entitled to interview the witness if he or she agrees to such an interview. However, as Beazley JA observed in Richards v Kardin at (2005) 64 NSWLR 204 at 225: ‘That does not mean … that the right of a party to call evidence in court operates so as to permit or require a potential witness to breach an obligation [page 646] of confidence other than in the giving of evidence. Put simply, it does not mean that in the pre-trial phase, a party wishing to call a witness bound by an obligation of confidence, can require the witness to provide information that will breach the obligation of confidence’.

CONTRACTS IN RESTRAINT OF TRADE GENERALLY 27.5C

Nordenfelt v The Maxim Nordenfelt Guns & Ammunition Company Ltd [1894] AC 535

Court: House of Lords Facts: Nordenfelt was a manufacturer of guns and ammunition, who sold his business to a company. That company, with Nordenfelt’s consent, sold the business to Maxim Nordenfelt Guns & Ammunition. Nordenfelt agreed not to engage in the manufacture of guns, gun mountings or carriages, gunpowder, explosives, or ammunition by way of competition with Maxim for a period of 25 years. Nordenfelt later entered into an agreement with another gun manufacturer and

Maxim sought an injunction to enforce the restraint of trade agreement. Issue: The issue before the House of Lords was whether the restraint of trade was enforceable against Nordenfelt. Decision: The House of Lords (Lords Herschell LC, Watson, Ashbourne, Macnaghten, and Morris) unanimously held that the restraint clause was reasonable and therefore enforceable against Nordenfelt. Extract: The extract from the celebrated speech of Lord Macnaghten sets out the common law principles on when restraints of trade are enforceable.

Lord Macnaghten In the age of Queen Elizabeth [I (1558–1603)] all restraints of trade, whatever they were, general or partial, were thought to be contrary to public policy, and therefore void. In time, however, it was found that a rule so rigid and far-reaching must seriously interfere with transactions of every-day occurrence. Traders could hardly venture to let their shops out of their own hands; the purchaser of a business was at the mercy of the seller; every apprentice was a possible rival. So the rule was relaxed. It was relaxed as far as the exigencies of trade for the time being required, gradually and not without difficulty, until it came to be recognised that all partial restraints might be good, though it was thought that general restraints, that is, restraints extending throughout the kingdom, must be bad. Why was the relaxation supposed to be thus limited? Simply because nobody imagined in those days that a general restraint could be reasonable, not because there was any interest or essential distinction between the two cases. ‘Where the restraint is general’, says Lord Macclesfield in Mitchel v Reynolds, [page 647] ‘not to exercise a trade throughout the kingdom’, the restraint ‘must be void, being of no benefit to either party, and only oppressive, as shall be

shewn by and by’.26 Later on he gives his reason. ‘What does it signify’ he says, ‘to a tradesman in London what another does at Newcastle; and surely it would be unreasonable to fix a certain loss on one side without any benefit to the other’. ‘Any deed,’ says Best LCJ in Homer v Ashford, ‘by which a person binds himself not to employ his talents, his industry, or his capital, in any useful undertaking in the kingdom, would be void, because no good reason could be imagined for any person’s imposing such a restraint on himself’.27 The true view at the present time I think, is this: The public have an interest in every person’s carrying on his trade freely: so has the individual. All interference with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy, and therefore void. That is the general rule. But there are exceptions: restraints of trade and interference with individual liberty of action may be justified by the special circumstances of a particular case. It is a sufficient justification, and indeed it is the only justification, if the restriction is reasonable — reasonable, that is, in reference to the interests of the parties concerned and reasonable in reference to the interests of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public. That, I think, is the fair result of all the authorities. … To a certain extent, different considerations must apply in cases of apprenticeship and cases of that sort, on the one hand, and cases of the sale of a business or dissolution of partnership on the other. A man is bound an apprentice because he wishes to learn a trade and to practice it. A man may sell because he is getting too old for the strain and worry of business, or because he wishes to retire from business altogether. Then there is obviously more freedom of contract between buyer and seller than between master and servant or between an employer and a person seeking employment. When the question is how far interference with the liberty of an individual in a particular trade offends against the interest of the public, there is not much difficulty in measuring the offence and coming to a judgement of the question. The difficulty is much greater when the question of public policy is considered at large and without direct reference to the interests of the individual under restraint. It is a principle of law and of public policy that

trading should be encouraged and that trade should be free; but a fetter is placed on trade and trading is discouraged if a man who has built up a valuable business is not to be permitted to dispose of the fruits of his labours to the best advantage. It has been said that if the restraint be general ‘the whole of the public is restrained’ — a phrase not, I think, particularly accurate, or perhaps particularly intelligible. It has been said that when a person is debarred from carrying on his trade within a certain limit of space he will carry it on elsewhere, and thus the public outside the area of restriction will gain an advantage which may be set off, as it were, against the disadvantage resulting to the public within the limited area. That is, perhaps, [page 648] a just observation in a case of apprenticeship and cases of that sort; but it is, I think, rather a fanciful way of looking at the matter in the case of a sale of goodwill. Applied to that sort of case, it seems to me to be just one of those unrealities which tend to confuse this question. What has the public to hope in the way of future service from a man who sells his business meaning to trade no more? … Now, in the present case it was hardly disputed that the restraint was reasonable, having regard to the interests of the parties at the time when the transaction was entered into. It enabled Mr Nordenfelt to obtain the full value of what he had to sell; without it the purchasers could not have been protected in the possession of what they wished to buy. Was it reasonable in the interests of the public? It can hardly be injurious to the public, that is, the British public, that a person is prevented from carrying on a trade in weapons of war abroad. But apart from that special feature in the present case, how can the public be injured by the transfer of a business from one hand to another? If a business is profitable there will be no lack of persons ready to carry it on. In this particular case the purchasers brought in fresh capital, and had at least the opportunity of retaining Mr Nordenfelt’s services. But then it was said there is another way in which the public may be injured. Mr Nordenfelt has ‘committed industrial suicide’, and as he can no longer earn his living at the trade which he has made

peculiarly his own, he may be brought to want and become a burden to the public. … [T]his seems to me to be very far-fetched. Mr Nordenfelt received over £200,000 for what he sold. He may have got rid of the money. I do not know how that is. But even so, I would answer the argument in the words of Tindal CJ: ‘If … the contract is a reasonable one at the time it is entered into, we are not bound to look out for improbable and extravagant contingencies in order to make it void’.28 … [F]or the reasons I have given, I think the only true test in all cases, whether of partial or general restraint, is the test proposed by Tindal CJ: What is reasonable restraint with reference to the particular case? I think that the restraint in the present case is reasonable in every point of view.

[page 649]

Comment 27.5.1 See Radan, Gooley, and Vickovich at 27.37–27.40, 27.43, 27.48, 27.62–27.63, and 27.81.

RESTRAINTS OF TRADE IN EMPLOYMENT CONTRACTS 27.6C

Lindner v Murdock’s Garage (1950) 83 CLR 628

Court: High Court of Australia Facts: In 1946 Lindner, a motor mechanic, entered into a contract of employment with Murdock’s Garage. Murdock’s Garage had two engineering businesses at Crystal Brook and Wirrabara in South Australia, about 30 miles apart. The employment was not for a fixed period, but was determinable by either party on giving 21 days’ notice or paying or forfeiting 21 days’ wages. Lindner worked at the Crystal Brook business from August 1946 until 4 February 1950. He

was then employed in a similar business several hundred yards away from the Crystal Brook business of Murdock’s Garage. However, Lindner’s contract with Murdock’s Garage had a restraint of trade clause precluding Lindner from working in the same sort of business within one year of the termination of his employment with Murdock’s Garage. Furthermore, a schedule to this contract provided that it applied to the two sales territory areas of Murdock’s two businesses, the shortest distance between each being 10 miles. Murdock’s Garage sought an injunction against Lindner to restrain him from working in any similar business within five miles of the Crystal Brook business. Issue: The issue before the High Court was whether the restraint of trade clause was enforceable. Decision: A bare majority of the High Court (McTiernan, Webb, and Kitto JJ; Latham CJ and Fullagar J dissenting) found in favour of Lindner on the ground that the restraint was unreasonable and therefore unenforceable. Extract: The extract from the judgment of McTiernan J discusses and applies the principle that a restraint of trade is void unless reasonable in the context of the facts of this case.

McTiernan J The geographical area encompassed by the restraint against carrying on or working in a rival business is indicated by the expression ‘the same area’ which occurs in the contract. These words receive no other elucidation than that given by the statement which appears in the schedule to the agreement that it applies to the ‘sales territory for motor cars, trucks, tractors etc of Murdock’s Garage — Crystal Brook and Wirrabara’. This ‘territory’ is to be ascertained by reference to two agreements, each of which is called a ‘Direct Dealer’s Sales Agreement’. Under one of these [Murdock’s Garage] was given by a company the right to sell its motor vehicles in a ‘territory’ which is specified, and to sell spare parts ‘without territorial [page 650]

limitation’; and, under the other agreement [Murdock’s Garage] was given by the same company the right to sell motor vehicles in another ‘territory’. Consensus as to geographical area depends upon [Lindner] having covenanted with reference to those agreements. It is by no means clear that he knew in what localities [Murdock’s Garage] enjoyed these franchises to sell the company’s vehicles and spare parts. … The agreement was in restraint of trade and was for that reason prima facie illegal. The onus was on [Murdock’s Garage] to prove circumstances showing that the restriction on [Lindner’s] freedom to work was reasonable. It was argued for [Lindner] that the restriction was not reasonable in reference to his interests and was not necessary for the protection of [Murdock’s Garage’s] interests. I agree with this argument. … At the time this agreement was made it was notorious that there was a shortage of workmen with mechanical skill and knowledge and there was a shortage of homes for workmen. [Lindner] and his wife and children lived at Crystal Brook. They moved there shortly after he entered into the [Murdock’s Garage’s] service. He entered into its employment in consequence of replying to an advertisement issued by [Murdock’s Garage]. [Lindner] then lived in another locality. It must have been obvious at the time [Murdock’s Garage] exacted the covenants from him that it would be necessary for him to move from there to Crystal Brook in order to work for [Murdock’s Garage]. By reason of the notorious labour shortage and the economic situation it was detrimental to the interests of the public to restrain [Lindner] from working at his trade for a period of twelve months after the termination of the employment. [Lindner] was not employed for a fixed term. In view of the shortage of homes, it was not reasonable in reference to [Lindner’s] interests to impose upon him a restraint which, whenever the employment was terminated, would force him to move his home beyond the geographical area of the restraint in order to earn his livelihood at his accustomed trade. Lord Haldane noticed in Mason [v Provident Clothing & Supply Co Ltd29] that both Lord Watson and Lord Macnaghten said in the Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd,30 that ‘the standard of public policy must be the standard of the day’. In Attwood v Lamont,31

Younger LJ said that the branch of the law with which the Court was dealing has at all times been susceptible to influence from current views of public policy. There has been no development of public policy in Australia since that case which would incline the Court to regard with less jealousy covenants made by a workman in restraint of his freedom to work at his trade or to engage in employment. There is not full scope for freedom of contract when an individual worker is making a contract of service with an employer. In the Nordenfelt Case, Mason’s Case and Attwood v Lamont the worker was regarded as having the lesser bargaining power. In the first case, Lord Macnaghten said ‘there is obviously more freedom of contract between buyer [page 651] and seller than between master and servant or between an employer and a person seeking employment’.32 In the second case, Lord Shaw of Dunfermline related this view to the matter of the difference between the validity of a seller’s and a worker’s restraint on his economic freedom. His Lordship said ‘And in my opinion there is much greater room for allowing, as between buyer and seller, a larger scope for freedom of contract and a correspondingly large restraint in freedom of trade, than there is for allowing a restraint of the opportunity for labour in a contract between master and servant or an employer and an applicant for work’.33 The tests propounded in those cases for determining the validity of a workman’s restrictive covenant were moulded under the influence of that view. Current opinion on the relations between employer and employees has not moved away from that view. … A workman’s covenant in restraint of employment is not valid unless it is reasonable. It is a question for the Court whether it is reasonable. … The principles which support a covenant which the Court would regard as reasonable and enforceable were stated by Erle CJ in Mumford v Gething. They are in this passage: I entirely dissent from the notion thrown out by the defendant’s counsel that agreements of this sort are to be discouraged as being

contrary to public policy. On the contrary, I think that contracts in partial restraint of trade are beneficial to the public, as well as to the immediate parties; for, if the law discouraged such agreements as these, employers would be extremely scrupulous as to engaging servants in a confidential (the italics are mine) capacity, seeing that they would incur the risk of their taking advantage of the knowledge they acquired of their customers and their mode of conducting business, and then transferring their services to a rival trader. It appears to me to be highly important that persons like this defendant should be able to enter into contracts of this sort, which will afford some security to their employers that the knowledge acquired in their service will not be used to their prejudice.34 The agreement imposing the restraint, which is in question in the present case, was made about four days after [Lindner] entered into [Murdock’s Garage’s] employment. [Murdock’s Garage] thereby agreed to employ him and he agreed to serve [Murdock’s Garage] at a rate of remuneration ‘to be fixed between them from time to time but commencing at £7 per week of 48 hours’. It is important to notice that the agreement does not mention the specific capacity in which [Murdock’s Garage] agreed to employ [Lindner]. The agreement refers to him as ‘the workman’. Another important fact is that the agreement does not fix any period of employment. It was a term of the agreement that either party could terminate the employment on giving twenty-one days’ notice or paying or forfeiting twenty-one days’ wages in lieu of notice. The restraint upon employment would operate even though [Lindner] served only for the minimum period for which [Murdock’s Garage] was bound by the contract to employ him. If [Murdock’s Garage] exercised [its] right to dismiss [Lindner], with three weeks’ wages, within a week from his entering the service or [Lindner] [page 652] exercised his right to leave after three weeks, then, according to the terms of the restrictive provision which is in question, he was prevented for a period of twelve months from working whether as a mechanic, a labourer or at any other job in any motor garage in Crystal Brook and the district around it or

in Wirrabara, which is thirty miles away, and the district around that town. [Murdock’s Garage] exacted a covenant imposing a restraint which would operate for twelve months in that area even if [Murdock’s Garage] exercised its right of dismissal or [Lindner] his right to retire before he was long enough in the employment to be acquainted with any of [Murdock’s Garage’s] customers or trade secrets. [Murdock’s Garage] was not bound by the agreement to keep [Lindner] in any particular position in its workshop or to employ him in Crystal Brook rather than Wirrabara. If [Lindner] were disposed, in order to protect his own interests, to give notice of the termination of the employment, the restraint was likely to deter him from exercising his contractual right to give such notice. It could operate in terrorem. … In Mason’s Case, Lord Shaw in speaking of a restraint, the burden of which bore no proper relation to the period of employment, said that it was ‘a thing under the guise of a contract which is not protection for the employer, but a means of coercing and punishing the workman and putting him under a tyrannous and, therefore, a legally indefensible restraint’. ‘No workman’, his Lordship added, ‘could have the freedom to dispose of his own labour, or risk a movement towards his own advancement, under what might turn out to be the cruel operation of such a clause’.35 It is against the policy of the common law to enforce a restraint on the liberty of a man to earn his living or exercise his trade except in cases where there are special circumstances to justify it. The onus of proving the circumstances rests upon the party alleging this. It is a question of law for the Court whether the circumstances do or do not justify the restraint. [Murdock’s Garage] adduced evidence about the nature of [Lindner’s] employment and its business in order to justify the restraint which it asked the Court to enforce. In Herbert Morris Ltd v Saxelby Lord Parker said, ‘For a restraint to be reasonable in the interests of the parties it must afford no more than adequate protection to the party in whose favour it is imposed’.36 A covenant in restraint of employment will not satisfy this test if it is imposed on the workman only to protect the employer against competition. In Herbert Morris Ltd v Saxelby Lord Parker said ‘Wherever such covenants have been upheld it has been on the ground, not that the servant or apprentice would, by reason of his employment or training, obtain the skill and knowledge necessary to equip him as a possible competitor in the trade,

but that he might obtain such personal knowledge of and influence over the customers of his employer, or such an acquaintance with his employer’s trade secrets as would enable him, if competition were allowed, to take advantage of his employer’s trade connection or utilize information confidentially obtained’.37 [page 653] The danger against which [Murdock’s Garage] desired to be protected was the enticing away of customers or the divulging or use of any trade secret. [Murdock’s Garage] was entitled to take a covenant imposing a reasonable restraint on [Lindner’s] liberty to work in a business similar to that of [Murdock’s Garage] for the purpose of protecting itself against that danger. Such a restraint would not be permissible if the Court were unable to conclude that, by employing [Lindner], Murdock’s Garage] had reasonable grounds for apprehending that [Murdock’s Garage] exposed its business to such danger. In fact, [Lindner] was given the position of ‘leading hand’ in [Murdock’s Garage’s] workshop in Crystal Brook. The contract of service did not secure him against regression or removal to another position in either of [Murdock’s Garage’s] garages. While he was in the position of ‘leading hand’ his duties were to attend to the repair of motor cars brought to the workshop by [Murdock’s Garage’s] customers, and to estimate the time which these jobs would take. The workshop was managed by the partners not by [Lindner]. He worked under their supervision. [Lindner’s] duties were confined to the workshop. Customers who came to the garage to have any repairs done to their vehicles first spoke to a member of the firm: if it were necessary for the customer to go to the workshop, a member of the firm took him there. The customer’s instructions were in this way given to [Lindner]. There is little or no evidence that he came into contact with any customer in the course of his employment in any other way. The evidence does not show that [Lindner] might gain any personal influence with any customers in the course of his employment. It shows only that he would meet customers. The evidence fails to show that through his

acquaintance with them [Lindner] might be able to entice them from [Murdock’s Garage] to a rival business. The evidence is vague as to what were the trade secrets which [Murdock’s Garage] desired to protect by imposing the restriction on [Lindner’s] right to work when he left the employment. If it had secret processes of manufacture or confidential documents the agreement expressly prevents [Lindner] from using or divulging them. There is no proof that [Lindner] has done or threatened either of these things. The protection which [Murdock’s Garage] claims against the employment of [Lindner] in the rival garage will not be given by enforcing the restraint on employment unless it is shown what are the interests of [Murdock’s Garage] that are to be protected, and against what it is entitled to have them protected.38 The makers’ instructions for servicing cars are not secret processes of [Murdock’s Garage]. It is not shown that the matter contained in the documents in [Murdock’s Garage’s] office was of such a kind that it was possible for [Lindner] ‘to carry it away in his head’.39 [Lindner] may be putting to use in the workshop of [Murdock’s Garage’s] rival in Crystal Brook the skill and knowledge (the subjective knowledge) acquired in [Murdock’s Garage’s] workshop. [Murdock’s Garage] is not entitled to be protected from all competition per se. An employer must be prepared to face the competition of a former employee if it comes. [page 654] The onus was on [Murdock’s Garage] to prove that it was reasonable for its protection that the restraint should apply to so wide an area as the two ‘sales territories’ combined. In cross-examination, the senior partner admitted that the firm would be given ‘a good deal of protection’ by an injunction enforcing the restraint within a radius of five miles from the garage in Crystal Brook. He further said ‘I think it would give us sufficient protection to be fair’. These admissions tend to prove that the covenant taken from [Lindner] encompassed an area that was wider than was reasonably necessary for [Murdock’s Garage’s] protection. Upon the whole

of the evidence, I think it must be held that the area was unreasonably wide. For this reason also, the covenant was void. It cannot be saved by carving out of the area to which the parties agreed the restraint should apply, a smaller area within which it would be reasonable for [Murdock’s Garage] to be protected.40

[page 655]

Comment 27.6.1 See Radan, Gooley, and Vickovich at 27.55, 27.57, 27.79, 27.84, 27.91, and 27.103.

RESTRAINTS OF TRADE IN EXCLUSIVE DEALING CONTRACTS 27.7C Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co

Pty Ltd (1973) 133 CLR 288 Court: High Court of Australia Facts: In 1964 an agreement between Amoco and Rocca Bros was executed whereby Rocca Bros would build a service station on the land and Amoco would lend plant and equipment. As part of the arrangement Rocca Bros would grant a lease to Amoco for 15 years. Amoco would then sub-let it to Rocca Bros. The sub-lease contained covenants by Rocca Bros that it would buy a minimum amount of petrol each month from Amoco, not buy petrol from anyone else, and except in special circumstances only sell Amoco’s products at the garage. Following a dispute between the parties, Amoco sought an injunction to restrain Rocca Bros from buying petrol elsewhere. Issue: The issue before the High Court was whether the restraints of

trade were reasonable. Decision: A bare majority of the High Court (McTiernan, Walsh, and Gibbs JJ; Menzies and Stephen JJ dissenting) held that the restraints of trade against Rocca Bros were unreasonable and therefore unenforceable against Rocca Bros. Extract: The extracts from the judgment of Gibbs J set out the reasons why the restraints in this case were unreasonable.

Gibbs J The … question raised for decision is whether the covenants contained in the underlease, or any of them, are an unreasonable restraint of trade and unenforceable. The test to be applied in determining the validity of a restraint of trade was stated by Lord Macnaghten in Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd … Lord Macnaghten said: All interference with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy, and therefore void. That is the general rule. But there are exceptions: restraints of trade and interference with individual liberty of action may be justified by the special circumstances of a particular case. It is a sufficient justification, and indeed it is the only justification, if the restriction is reasonable — reasonable, that is, in reference to the interests of the parties concerned and reasonable in reference to the interests of the public, so framed and so guarded as to afford [page 656] adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public.41 The requirement that the restriction be reasonable in the interests of the parties has been explained as meaning that the restraint ‘must afford no

more than adequate protection to the party in whose favour it is imposed’,42 or in other words, ‘does the restriction exceed what is reasonably necessary for the protection of the covenantee?’43 The test thus stated suggests that it is not material to consider the effect of the contract on the covenantor. It is established that the Court is not entitled to inquire into the adequacy of the consideration for a restraint, that is, the Court may not weigh whether the consideration is equal in value to that which the covenantor gives up or loses by the restraint.44 Nevertheless the fundamental rule remains that the restraint must be reasonable in the interests of the contracting parties, and it would not be in the interest of a covenantor to subject himself to any restraint unless he received some advantage by so doing. In my opinion it is permissible, in asking whether a restraint is reasonable in the interests of the parties, to consider, as part of the circumstances of the case against which the question of reasonableness is to be decided, the quantum of consideration received by the covenantor and the effect of the agreement on the position of the covenantor.45 Analogous to the rule that the court is not entitled to concern itself with the adequacy of the consideration is the further principle … that where the parties to a contract have been in a position to bargain on an equal footing they should be treated as the best judges of what is reasonable in their own interests.46 Lord Pearce, in Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd gave cogent reasons for the proposition which he there stated that ‘Undue interference, though imposed on the ground of promoting freedom of trade, may in the result hamper and restrict the honest trader and, on a wider view, injure trade more than it helps it’.47 Nevertheless these statements, authoritative as they are, cannot mean that where the parties have been in an equal position of bargaining the question of reasonableness is entirely for the parties to decide. If that were so, the rule stated in Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd … would be given quite a limited application, and the many cases in which agreements entered into between parties contracting on an equal footing have been held to operate unreasonably in restraint of trade could only be explained on the ground that the restraint was unreasonable in the interests of the public — a ground which in most of those cases was not in fact given for the decision. The truth is, I think, that, as Dixon J pointed out

in Peters American Delicacy Co Ltd v Patricia’s Chocolates and Candies Pty Ltd, there are two principles of policy that work in opposition — the policy of securing ample freedom of [page 657] contract and enforcing contractual obligations, and that of preserving freedom of trade from unreasonable contractual restriction. As Dixon J went on to say: The opposition has been resolved by the adoption of a clear rule making it necessary to justify all contracts in restraint of trade as reasonable in the interests of both the parties and by applying the test of reasonableness according to the situation the parties occupy and so recognizing the different considerations which affect employer and employee and independent traders or business men, particularly vendor and purchaser of the goodwill of a business.48 The fact that the parties have bargained from a position of equality is therefore one of the circumstances to be considered in determining whether the covenants were reasonable, but it does not save from invalidity a covenant found to be unreasonable or contrary to the public interest. In Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd, Lord Hodson said: It has been authoritatively said that the onus of establishing that an agreement is reasonable as between the parties is upon the person who puts forward the agreement, while the onus of establishing that it is contrary to the public interest, being reasonable between the parties, is on the person so alleging.49 However, the question of reasonableness is a question of law for the decision of the judge.50 … It has been held that the validity of a restraint must be decided as at the date of the agreement imposing it.51 It was conceded by the parties in the present case that the question whether the restraint was reasonable

should be decided in the light of the circumstances as at June 1964. I am not entirely satisfied that this concession was correct. There would, in my opinion, be much to be said for the view that the relevant date for the purposes of the inquiry as to the validity of the underlease — the instrument sought to be enforced — was 19 May 1966, notwithstanding that the underlease was executed pursuant to the agreement made in 1964. The provisions of cl 3(i) (requiring the purchase of the specified minimum number of gallons of petrol and oil) had been struck out of the agreement made in 1964 but they formed part of the underlease executed in 1966. It would be somewhat anomalous to consider whether that requirement, made in the light of the knowledge available in 1966, was reasonable by reference only to the circumstances existing in 1964. Moreover, I should add that although it appears to be settled that the validity of the restraint must be decided as at the date of the agreement, it would seem to me that facts that have occurred since that date would not necessarily be irrelevant; such facts might throw light on the circumstances [page 658] existing at the relevant date and might, for example, absolve the Court from the necessity of speculating as to the value of the consideration agreed to be furnished by the covenantee when, at the date of the litigation, it might be possible to quantify that consideration exactly. However, these matters, which might in other cases be of vital importance, are not crucial in the present case. There is no doubt that Amoco had commercial interests which it was reasonable to protect by making agreements with the owners of service stations under which those owners would agree, in exchange for certain benefits offered by Amoco, to take their supplies exclusively from Amoco. For Amoco to trade successfully it was necessary for it to obtain secure outlets for the sale of its petrol over a period of time. Agreements of the kind mentioned — solus agreements, as they are sometimes called — would serve Amoco’s interests by enabling it to maintain or increase the volume of its sales and to effect the distribution of its products in an efficient and economical way. Indeed, the sale of petrol through one-brand service

stations was the normal way in which most of the oil companies in Australia conducted their business and Amoco could not have entered the field of trade unless it had been able to ensure that a sufficient number of service stations would sell only its brand of products. It is not suggested by Rocca that agreements of this kind were in themselves unreasonable, but rather that the restraints in the present case exceeded what was reasonably necessary for the protection of Amoco’s admitted interests. … There are certain other circumstances that must be considered in deciding upon the reasonableness of the restraints. Amoco and Rocca negotiated on an equal footing — Rocca was not under pressure to agree to Amoco’s suggestions. It was in Rocca’s interests to enter into an agreement with some oil company ensuring supplies for the service station. An arrangement effected by means of a lease and an underlease is not an uncommon way for an oil company to obtain a tie over a service station and, generally speaking, the terms of the underlease were not unusual. Some difficulty may have been created in the selection of an appropriate term for the tie by the fact that the area in which the service station was established was not fully developed and the volume of business which the service station was likely to attract was to some extent in doubt. In deciding upon the reasonableness of the restraint it is not possible to regard the length of the tie apart from the provisions of the covenants — all must be considered together. … After full consideration of all the circumstances, I have reached the conclusion that it has not been shown that a tie for fifteen years on the terms of the underlease was reasonably necessary to protect the interests of Amoco. On the one hand, the great changes that might occur in the space of fifteen years could render the covenants intolerably burdensome on Rocca and the effect of inflation during that period might well greatly reduce the value of the fixed rebate which formed an important part of the consideration receivable by Rocca. On the other hand, there is nothing whatever to show that a tie for fifteen years was necessary to ensure for Amoco the stable outlet and economical system of distribution at which it was entitled to aim. Further, it was not shown that Amoco’s outlay — even taking it as $18,955 — could not be recouped with profit in a shorter period.

[page 659]

Comments 27.7.1 See Radan, Gooley, and Vickovich at 27.51, 27.54, 27.55, 27.58, 27.62, and 27.97. 27.7.2 An appeal by Amoco from the High Court’s decision to the Privy Council was dismissed: Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 331.

ENFORCEMENT OF A POST-EMPLOYMENT RESTRAINT OF TRADE FOLLOWING REPUDIATION BY THE EMPLOYER 27.8C Richmond v Moore Stephens Adelaide Pty Ltd [2015] SASCFC

147 Court: Full Court of the Supreme Court of South Australia Facts: The appellant, Richmond, and his company, WKYA Consulting Pty Ltd, entered into related agreements with the respondent, Moore Stephens Adelaide Pty Ltd, for the sale of WKYA’s accountancy practice and for WKYA to provide professional accounting services by three professional staff to Moore Stephens. Each of the agreements contained a restraint clause. The purchase price of the business was $1.4 million plus GST if the level of achieved fees over the first three years was greater than $1.4 million. If the average annual achieved fees fell below $1.4 million, the sale price was to be reduced at least dollar for dollar under a complex formula. If the average annual achieved fees exceeded $1.4 million, the purchase price was to be $1.4 million and the appellant’s company was entitled to a bonus on a dollar for dollar basis. The agreements prescribed a mechanism for the parties to nominate and negotiate to agree the level of achieved

fees at the end of the second and third years. The agreements each contained restraint clauses whereby WKYA and the appellant agreed not to solicit or deal with clients of the acquired business or with whom they had dealings on behalf of Moore Stephens respectively and not to solicit employees of the acquired business. Disputes arose concerning the quantum of achieved fees. Moore Stephens contended that they had been fixed by default and this justified its ceasing to pay interest on the balance of the purchase price. WKYA and Richmond contended that this was a default resulting in their electing to accelerate payment of the balance of the purchase price and Moore Stephens’ failure to pay it justified their termination of the agreements. Moore Stephens sued Richmond to enforce the restraint clauses. Richmond contended that Moore Stephens had defaulted in the payment of interest, resulting in an acceleration of payment of the balance of the purchase price, and that Moore Stephens’ breaches or repudiation justified termination of the agreements, in which event the restraint clauses ceased to be operative. Richmond contended that in any event the restraint clauses were void for uncertainty or as being in restraint of trade. The trial Judge had held that the restraint clauses were enforceable and granted an injunction restraining Richmond from soliciting or dealing with named clients with whom he allegedly had dealings on behalf of the business and from soliciting employees. [page 660] Issue: One issue on appeal was whether the restraint clauses survived termination of the agreements if effected by WKYA and Richmond for breach or repudiation. Decision: The appeal was allowed for the limited purpose of modifying the terms of the final injunctions. Relevantly, the court held that there was no rule of law that contractual terms cannot be enforced by a party whose breach or repudiation has led the other party to terminate the contract. It is a matter of contractual intention

as to which contractual terms survive such a termination. On such an interpretation it was held that the restraint clauses survived termination of the agreements by Moore Stephens. Extract: The extracts from the judgment of Blue J (with whom Kourakis CJ and Stanley J agreed) set out the relevant legal principles relating to survival of contractual terms after purported termination.

Blue J Legal principles [193] The general rule is that termination of a contract discharges both parties from the obligation to further perform duties otherwise required to be performed.52 The general rule applies regardless of whether the termination is due to default by one party — and regardless of whose default led to the termination — or without fault by either party (such as under an express right to terminate upon notice). Termination is to be contrasted with rescission for matters vitiating formation of the contract which operates retrospectively to discharge with effect from the time of formation all duties required to be performed. Termination only has prospective operation. [194] In McDonald v Dennys Lascelles,53 Starke J said: The rescission of the contract, however, did not operate to extinguish it ab initio, but in futuro, so as to discharge obligations under it unperformed. Dixon J54 (with whom Rich and McTiernan JJ agreed) said: When a party to a simple contract upon a breach by the other contracting party of a condition of the contract elects to treat the contract as no longer binding upon him, the contract is not rescinded as from the beginning. Both parties are discharged from the further performance of the contract, but rights are not divested or discharged which have already been unconditionally acquired. Rights and obligations which arise from partial execution of the contract and causes of action which had accrued from its breach

alike continue unaffected. When a contract is rescinded because of matters which affect its formation, as in the case of fraud, the parties are to be rehabilitated and restored, so far as [page 661] may be, to the position they occupied before the contract was made. But when a contract which is not void or voidable at law or liable to be set aside in equity is dissolved at the election of one party because the other has not observed an essential condition or has committed a breach going to its root, the contract is determined so far as it is executory only, and the party in default is liable for damages for its breach. [195] The general rule is the subject of at least three corollaries or qualifications. First, rights that at termination have accrued unconditionally to a party and obligations that at termination have become unconditionally required to be performed by a party, including rights to payment of a debt or damages, are not divested or discharged and can be enforced notwithstanding termination.55 Secondly, when termination is due to default by one party — termination for breach of an essential term or a sufficiently serious breach of an intermediate term or repudiation — the innocent party is entitled to damages for the net value of further performance of the contract: usually called ‘loss of bargain damages’.56 Thirdly, obligations required to be performed in future survive termination if on its proper construction such obligations are intended to survive termination of the contract, ie performance is not contingent on its subsistence or future events dependent on its subsistence or future obligations discharged by its termination. [196] There is a relationship between the third qualification and the dependent or independent nature of obligations required to be performed during subsistence of the contract. Some obligations to be performed by one party are dependent (or ‘conditional’) upon performance by the other party of another obligation under the contract; some obligations are interdependent (or ‘mutual’, ‘reciprocal’ or ‘concurrent’); and some obligations are independent.57 Whether an obligation is dependent,

interdependent or independent is to be determined as a matter of construction of the contract. If an obligation of one party is dependent on performance of another obligation by the other party, if the first obligation is sought to be enforced after termination but the performance of the second obligation is discharged by the termination, ordinarily the first obligation will not survive termination. Conversely, if an obligation of one party is independent of performance of another obligation by the other party, if the first obligation is sought to be enforced after termination but the performance of the second obligation is discharged by the termination, ordinarily the survival of the first obligation will be independent of survival of the other obligation. [197] The general rule and the corollaries and qualifications identified above can be expressed as a single rule: termination of a contract discharges those obligations of a party that are not contingent upon its subsistence or future events dependent on its subsistence or future [page 662] obligations discharged by its termination. Whether an obligation is or is not contingent in this sense is to be determined as a matter of construction of the contract. [198] In Westralian Farmers Ltd v Commonwealth Agricultural Service Engineers Ltd (In Liq),58 Dixon and Evatt JJ said: When a contract comes to an end by reason of the occurrence of an event upon which the parties have by an express provision made it terminate, the question whether an inchoate liability arising thereunder does or does not become enforceable must in the end be governed by the intention of the parties. It is a rule of law that when a simple contract is discharged by the election of one party to treat himself as no longer bound after the other has committed a breach of the contract, rights and obligations which have already arisen from the partial execution of the contract shall remain unaffected. No doubt it is open to the parties to provide in advance for such an event and by a stipulation to the contrary to produce some other

effect. When the parties themselves have provided for the determination of the contract on a given contingency, the consequences flow altogether from their contractual stipulation and are governed by their intention, either actual or imputed. In the present case, however, all the agreement expressly says is that in any of the specified events it shall immediately terminate and be at an end. In applying such a compendious provision to a continuing relationship of the complicated character which the agreement establishes some guidance may be found in the nature of the agreement and of the obligations to which it gives rise. But primarily it remits the inquiry to a general consideration of what is involved in the sudden termination of an executory agreement under which liabilities are accruing from day to day. We are concerned only with a liability to pay a liquidated demand. In general the termination of an executory agreement out of the performance of which pecuniary demands may arise imports that, just as on the one side no further acts of performance can be required, so, on the other side, no liability can be brought into existence if it depends upon a further act of performance. If the title to rights consists of vestitive facts which would result from the further execution of the contract but which have not been brought about before the agreement terminates, the rights cannot arise. But if all the facts have occurred which entitle one party to such a right as a debt, a distinct chose in action which for many purposes is conceived as possessing proprietary characteristics, the fact that the right to payment is future or is contingent upon some event, not involving further performance of the contract, does not prevent it maturing into an immediately enforceable obligation. [199] There are types of obligations in respect of which ordinarily the nature of the contractual provision itself naturally leads to a construction of the contract that the obligation is not contingent and survives termination of the contract including termination by the party subject to the obligation on the ground of breach or repudiation by the other party. These types of obligations include those relating to dispute resolution procedures, choice of law, exclusion of liability and agreed damages. In other cases, it is necessary to construe the contractual provision from first principles.

[page 663] [200] In General Billposting Company Limited v Atkinson,59 Atkinson was employed as manager by a billposting company under a contract subject to termination on 12 months’ notice by either party. It was a term of the contract that Atkinson not, while employed or within two years after its termination, carry on a similar business within a certain radius without the company’s permission. He was wrongfully dismissed without notice and was awarded damages for breach of contract. The assignee of the billposting company sued Atkinson for an injunction and damages for breach of the restraint clause. Atkinson contended that the covenants to employ subject to 12 months’ notice and not to engage in another business were interdependent. The assignee contended that the covenants were independent. [201] The House of Lords held that the covenants were interdependent. Lord Robertson60 said: It seems to me that the covenant not to set up business is not only germane to but ancillary to the contract of service, and that once the contract of service is rescinded the other falls with it. Lord Collins (with whom the Earl of Halsbury agreed) referred to Boone v Eyre,61 Campbell v Jones62 and Pordage v Cole63 being cases on interdependent covenants and held that the two covenants were interdependent. Lord Collins64 went on to say: But I think this case may be, and in fact has been, decided on broader lines than those laid down in the notes to Pordage v Cole as to mutual and independent covenants. I think the true test applicable to the facts of this case is ‘… whether the acts and conduct of the party evince an intention no longer to be bound by the contract’. I think the Court of Appeal had ample ground for drawing this inference from the conduct of the appellants here in dismissing the respondent in deliberate disregard of the terms of the contract, and that the latter was thereupon justified in rescinding the contract and treating himself as absolved from the further performance of it on his part.

[202] In Measures v Measures Brothers Ltd,65 Measures entered into a contract with the company to hold office as a director for seven years and, at his option, a further seven years for £1,000 plus 5 percent of net profits under certain conditions (clause 1). It was a term of the contract that while he held office and within seven years thereafter Measures not be concerned in a competing business (clause 5). After six years, the company went into receivership and then liquidation and Measures ceased to hold office as a director. The company sued Measures for an injunction by way of specific performance of the restraint clause. [203] Cozens-Hardy MR held that equitable relief should be refused because the company was not willing or able to perform its part of the bargain but expressed the tentative opinion [page 664] that clauses 1 and 5 were interdependent. Buckley LJ dissented, holding that clauses 1 and 5 were independent and the company did not breach clause 1 when Measures ceased to hold office as a director due to a supervening event being the liquidation. Kennedy LJ held that clauses 1 and 5 were interdependent and in addition agreed with Cozens-Hardy MR as to withholding equitable relief. Kennedy LJ66 said: It is plain that the continuance of the director in his office was the essential consideration for the defendant’s covenant. … Covenants are to be construed as dependent or independent according to the intention of the parties and the good sense of the case. Judged by this test, the supposition that the true intent and meaning of this agreement was that the defendant should be bound to the observance of clause 5, although the company failed to a substantial extent to give him the sole consideration for his obligation, appears to me to be an impossible supposition. The judgments of Lord Robertson and Lord Collins in General Billposting Co v Atkinson, as it seems to me, negative the correctness of the contention in such a case as the present. [204] In Kaufmann v McGillicuddy,67 Kaufmann, Ford and Blitz carried on

business in partnership as dentists. They employed McGillicuddy as a dentist. It was a term of the contract that McGillicuddy be employed for eight years. It was a term that after termination of the agreement McGillicuddy not practise as a dentist for five years within a 20 mile radius. After being assaulted by Kaufmann, McGillicuddy gave notice and left the partnership. Shortly thereafter, the partnership was dissolved and Blitz employed McGillicuddy as a dentist. Kaufmann and Ford sued McGillicuddy for an injunction to restrain him from practising in breach of the restraint clause. The dissolution of the partnership was held to be in breach of the contract entitling McGillicuddy to terminate it (if he had not already been entitled to do so due to the assault). [205] The High Court decided the case on the ground that the obligation of McGillicuddy was dependent upon the obligation of the three partners to continue to employ him. Barton J68 referred to the decision of the House of Lords in General Billposting Company Limited v Atkinson and said: There is a necessity in such case for clear, and not merely doubtful, construction to show the stipulations to be separate contracts, and that the one is to survive after the other has been brought to an end; otherwise the inference in such a case as the present is very strong that they depend on each other in the sense that each is the consideration for the other, or part thereof, so that the dissolution which puts an end to the service also puts an end to the restriction. It cannot be said that the employing firm would have agreed to employ the respondent without the restriction, or that he would have consented to the restriction without having as part of his consideration an employment which suited him in salary, duration and otherwise. [page 665] [206] Barton J69 referred to the decision of the Court of Appeal in Measures v Measures Brothers Ltd and said: The decision thus went upon the question of mutual obligations which were considerations moving from the respective parties. In

the present case the agreement gave the respondent three employers, and the dissolution, if he had still been bound, would have left him with only two. Such a withdrawal, without his consent, of the advantages under the contract could not be but a breach. After the dissolution the partnership the remaining partners could no longer give him the consideration they agreed to give him by performance of their part of the bargain and by readiness and ability to perform it in the future. Hence the appellants are not entitled to the injunction they ask, which, as pointed out by the Master of the Rolls, endorsing what Joyce J had said below, amounted to specific performance … the cases of General Billposting Co. Ltd v Atkinson and Measures Brothers Ltd v Measures show that the maintenance by injunction (as by specific performance) of such a restrictive clause as that in question is hopeless in face of a breach of the stipulations by the appellants which are the respondent’s consideration for agreeing to the restriction, and which the contracting partnership could no longer perform on its part, since it had been dissolved. Gavan Duffy and Rich JJ70 said: The defendant contends that the plaintiffs cannot enforce the stipulations which they are seeking to enforce and at the same time treat the contract as at an end: General Billposting Co Ltd v Atkinson; Measures Brothers Ltd v Measures. … We consider that this contention is correct unless the words ‘termination of this agreement’ contained in the stipulation which the plaintiffs are endeavouring to enforce can be read as equivalent to ‘termination of service under this agreement,’ and the stipulation itself treated as an independent contract which binds the defendant as soon as he actually ceases to perform his duties under the agreement of service even if his discontinuance is justified because the contract of service has been rescinded. We need not ask what would be the consideration for such a contract, for we think that this is not the true meaning of the stipulation. In our opinion the whole agreement must be read as one contract containing a number of reciprocal stipulations, and the plaintiffs cannot ask for what is in effect

specific performance of one part of the contract while claiming to be exempt from the performance of the duties under another part. [207] In Geraghty v Minter,71 the Minters entered into a contract with the Geraghtys to carry on partnership at a Mermaid Beach office as insurance loss adjusters sharing profits and losses in the ratio 60:40. Clause 3 entitled either party to terminate the partnership on 14 days’ notice. Clause 17 entitled a party to terminate without notice for breach. By clause 21, the Geraghtys agreed not to carry on an insurance loss adjustment business within three years after termination of the partnership within 20 miles of the Mermaid Beach office. The Minters terminated the partnership on 14 days’ notice and sued the Geraghtys for an injunction to prevent their continuing to conduct an insurance loss adjustment business [page 666] within the time and area prescribed by clause 21. The High Court (Mason J dissenting) held that clause 21 was valid. [208] Barwick CJ72 said: If the clause were unreasonable in any of the circumstances in which according to its terms properly construed it could operate, it could not be supported in my opinion, by ignoring or treating as outside the contemplation of the parties an occasion or event which fairly fell within the terms of the clause because it was an unlikely possibility. … On the footing that the majority partner as the covenantee was entitled to protect the whole goodwill, cl. 21 is not, in my opinion, an unreasonable protection of that goodwill. It is limited in time and space. Gibbs J73 (with whom Aickin J agreed) said: Considerable reliance was placed by the appellants on the provisions of cl. 17. It was pointed out that, under that clause, the partnership might be determined because of some improper, indeed criminal, act of the respondents, and it was said that it was unreasonable that, in those circumstances, the appellants, being the innocent party, and

exercising the right to determine the partnership because of the respondents’ default, should be prevented from carrying on a similar business of their own. It should, however, be observed that cl. 17 does not materially alter the situation already brought about by cl. 3. Under that clause, the partnership may be determined by a party who has defaulted in his obligations as well as by a party whose conduct has been entirely above reproach. The only change effected by the inclusion of cl. 17 is that when one party is in default the others may determine the partnership immediately upon notice, rather than on fourteen days’ notice. The answer to the appellants’ arguments that the respondents may be in default under the deed and yet enforce the restraint lies in the principles of equity. He who comes to equity must do equity, and parties who seek equitable relief by injunction to enforce a covenant in restraint of trade ‘cannot obtain such relief unless they allege and prove that they have performed their part of the bargain hitherto and are ready and able also to perform their part in the future’: Measures Brothers Ltd v Measures, cited in Kaufman v. McGillicuddy. Stephen J reached a similar conclusion for similar reasons. [209] In Photo Production Ltd v Securicor Transport Ltd,74 the House of Lords reaffirmed the primacy of the parties’ intention, determined as a matter of construction of the contract, in determining whether a contractual provision is intended to survive termination for breach or repudiation by the party in whose favour the provision operates. [210] Mr Richmond contends that General Billposting Company Limited v Atkinson is authority for the proposition that it is a rule of law that a party who has repudiated a contract leading to its termination by the innocent party can never enforce a restraint clause expressed to operate after termination and this was endorsed by the High Court in Kaufman v McGillicuddy. [page 667] Mr Richmond’s contention should be rejected because the question

whether the restraint clause survives must depend on the proper construction of the contract. This was the approach adopted by the Court of Appeal in Measures v Measures Brothers Ltd which was cited with approval by the High Court in Kaufman v McGillicuddy and by Gibbs J, with whom Aickin J agreed, and Stephen J in Geraghty v Minter. To the extent that Lord Collins’ judgment in General Billposting Company Limited v Atkinson might be read as suggesting that there is a rule of law regardless of the parties’ intention as manifested in the contract that restraint clauses cannot survive termination for repudiation by the party in whose favour they operate, this might be explained by the fact that in 1909 the common law had not yet been clarified that termination for repudiation does not operate by way of rescission ab initio.75

[page 668]

Comments 27.8.1 See Radan, Gooley, and Vickovich at 24.2 and 27.82. 27.8.2 The approach of the South Australian Full Court in this case was not followed in Crowe Horwath (Aust) Pty Ltd v Loone [2017] VSC 163 at [152], where McDonald J held that current High Court authority supports the proposition that ‘an employee’s postemployment restraint of trade obligations do not survive the termination of the employment contract effected by the employee accepting the employer’s repudiation of the contract’.

1.

Holman v Johnson (1775) 98 ER 1120 at 1121.

2. 3.

Cope v Rowlands (1836) 150 ER 707 at 710–11. Awwad v Geraghty [2001] QB 570 at 596.

4. 5.

Curtis v Perry (1802) 31 ERR 1285. Worrall v British Railways Board (unreported, 29 April 1999).

6. 7.

Askey v Golden Wine Co Ltd [1948] 2 All ER 5. For example, in Archbolds (Freightage) Ltd v S Spanglett Ltd [1961] 1 QB 374, the Court of Appeal

found that the object of the relevant legislation, the Road and Rail Traffic Act 1933, was to ensure an orderly and comprehensive transport service by the use of licensing arrangements, and not to render contracts for the transport of goods illegal. 8. 9.

Case C-453/99; [2001] ECR 1-6314. Hall v Hebert [1993] 2 SCR 159 at 179.

10. 11.

Beresford v Royal Insurance Company Ltd [1938] AC 586 at 599. Taylor v Bhail [1996] CLC 377 at 383–4.

12. 13.

For example, Tribe v Tribe [1996] Ch 107 at 133–4. See, for example, Everet v Williams (1725) reported at (1893) 9 Law Quarterly Review 197; Parkinson v College of Ambulance Ltd and Harrison [1925] 2 KB 1 at 13 and Tappenden v Randall (1801) 126 ER 1388 at 1390.

14. 15.

Birkett v Acorn Business Machines Ltd [1999] 2 All ER (Comm) 429. [2008] UKPC 15.

16.

17.

This test was considered by Hutchison J in Thackwell v Barclays Bank plc [1986] 1All ER 676; and adopted by the Court of Appeal in Saunders v Edwards [1987] 1 WLR 1116; Euro-Diam Ltd v Bathurst [1990] 1 QB 1; Howard v Shirlstar Container Transport Ltd [1990] 1 WLR 1292; and by the majority of the Court of Appeal in Tinsley v Milligan [1992] Ch 310. Thackwell v Barclays Bank plc [1986] 1 All ER 676 at 687.

18. 19.

[1994] 1 AC 340. [1902] AC 484.

20. 21.

Evanturel v Evanturel (1874) LR 6 PC 1 at 29. Nordenfelt v Maxim Nordenfelt Guns and Ammunition Company Limited [1894] AC 535 at 554.

22. 23.

Egerton v Brownlow (1853) 10 ER 359 at 423. Psalms 146:3; Jerusalem Bible, at 927.

24. 25.

Cf Sankey v Whitlam (1978) 142 CLR 1 at 38–9, 56 ff, 95–6. Weld-Blundell v Stephens (1919) 1 KB 520 at 544–5, 547; Grant v Downs (1976)135 CLR 674 at 688; Baker v Campbell (1983) 153 CLR 52 at 114–15.

26. 27.

Mitchel v Reynolds (1711) 24 ER 347 at 348. Homer v Ashford (1825) 130 ER 537 at 539.

28. 29.

Rannie v Irvine (1894) 135 ER 393 at 396. [1913] AC 724 at 733.

30. 31.

[1894] AC 535. (1920) 3 KB 571 at 581.

32. 33.

Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Limited [1894] AC 535 at 566. Mason v Provident Clothing & Supply Co Ltd [1913] AC 724 at 738.

34. 35.

Mumford v Gething (1859) 141 ER 834 at 840. Mason v Provident Clothing & Supply Co Ltd [1913] AC 724 at 741.

36. 37.

Herbert Morris Ltd v Saxelby [1916] 1 AC 688 at 707. Herbert Morris Ltd v Saxelby [1916] 1 AC 688 at 709.

38. 39.

Herbert Morris Ltd v Saxelby [1916] 1 AC 688 at 701. Compare Herbert Morris Ltd v Saxelby [1916] 1 AC 688 at 703, 712.

40.

Mason v Provident Clothing & Supply Co Ltd [1913] AC 724 at 745.

41. 42.

Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Limited [1894] AC 535 at 565. Herbert Morris Ltd v Saxelby [1916] 1 AC 688 at 707.

43. 44.

McEllistrim v Ballymacelligott Co-operative Agricultural and Dairy Society Ltd [1919] AC 548 at 563. Herbert Morris Ltd v Saxelby [1916] 1 AC 688 at 707.

45. 46.

Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269 at 300, 323. Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269 at 300, 305–6, 320, 323–4.

47. 48.

Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269 at 323. Peters American Delicacy Co Ltd v Patricia’s Chocolates and Candies Pty Ltd (1947) 77 CLR 574 at 590.

49. 50.

Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269 at 319. Lindner v Murdock’s Garage (1950) 83 CLR 628 at 653.

51. 52.

Lindner v Murdock’s Garage (1950) 83 CLR 628 at 653. McDonald v Dennys Lascelles (1933) 48 CLR 457 at 469–70, 476–7; Holland v Wilsthire (1954) 90 CLR 409 at 416.

53. 54.

(1933) 48 CLR 457 at 469–70. McDonald v Dennys Lascelles (1933) 48 CLR 457 at 476–7.

55.

McDonald v Dennys Lascelles (1933) 48 CLR 457 at 476–7; Westralian Farmers Ltd v Commonwealth Agricultural Service Engineers Ltd (1936) 54 CLR 361 at 379–80; Ogle v Comboyuro Investments Pty Ltd (1976) 136 CLR 444 at 451. McDonald v Dennys Lascelles (1933) 48 CLR 457 at 476–7; Ogle v Comboyuro Investments Pty Ltd (1976) 136 CLR 444 at 458–9.

56. 57.

58.

Pordage v Cole (1669) 85 ER 449; Boone v Eyre (1779) 1 H Bl 273; Campbell v Jones (1796) 6 TR 570; Paynter v James (1867) LR 2 CP 348 at 357; Automatic Fire Sprinklers Pty Ltd v Watson (1946) 72 CLR 435 at 452–3, 461, 463–7. (1936) 54 CLR 361 at 379–80 (citations omitted).

59. 60.

[1909] AC 118. General Billposting Company Limited v Atkinson [1909] AC 118 at 121.

61. 62.

(1779) 1 H Bl 273. (1796) 6 TR 570.

63. 64.

(1669) 85 ER 449. General Billposting Company Limited v Atkinson [1909] AC 118 at 122.

65. 66.

[1910] 2 Ch 248. Measures v Measures Brothers Ltd [1910] 2 Ch 248 at 261, 262.

67. 68.

(1914) 19 CLR 1. Kaufmann v McGillicuddy (1914) 19 CLR 1 at 10.

69. 70.

Kaufmann v McGillicuddy (1914) 19 CLR 1 at 11–12. Kaufmann v McGillicuddy (1914) 19 CLR 1 at 13–14.

71. 72.

(1979) 142 CLR 177. Geraghty v Minter (1979) 142 CLR 177 at 180, 182.

73. 74.

Geraghty v Minter (1979) 142 CLR 177 at 187 (citations omitted). [1980] AC 827.

75.

See Rock Refrigeration Ltd v Jones & Anor [1997] 1 All ER 1 at 15.

[page 669]

28 EFFECT OF ILLEGALITY

INTRODUCTION 28.1 This chapter is concerned with the effects of a contract being declared illegal pursuant to statute or void on public policy grounds at common law. Where a contract is void, it is unenforceable. In the context of statutory illegality, a statute may seek to regulate merely the manner of contractual performance, in which case the contract may still be enforceable. In each case the statute or ground of public policy needs to be examined. It has been suggested that the effect of illegality on a contract can be threefold. First, if at the time of making the contract there is an intent to perform it in an unlawful way, the contract, although it remains alive, is unenforceable at the suit of the party having that intent. If the intent is held in common between the parties, it is not enforceable at all. Second, illegality prevents a plaintiff from recovering under a contract if, in order to prove their rights under it, they have to rely on their own illegal act. The third effect of illegality is to void the contract ab initio, which arises if the making of the contract is expressly or impliedly prohibited by statute or is otherwise contrary to public policy. Where a contract is found to be unlawful or to have an unlawful purpose, courts apply various principles. These principles were referred to and applied in Nelson v Nelson (1995) 184 CLR 538 (see 28.2C) and Fitzgerald v FJ Leonhardt Pty Ltd (1997) 189 CLR 215 (see 28.3C). Illegality of a contract can also have an impact on tortious claims. This issue

was discussed in Bowmakers Ltd v Barnet Instruments Ltd [1945] 1 KB 65 (see 28.4C) and Singh v Ali [1960] AC 167 (see 28.5C). In those cases the court examined whether tortious claims could be maintained notwithstanding that particular contracts were found to be illegal. A contract that contains provisions that are void at common law or statute, but not illegal, may still be enforced if the offending parts of those contracts can be severed. In such cases the remainder of the contract is enforceable after severance. There are two main forms of severance: first, the removal from the contract of an objectionable provision with the effect that the rest of the contract is valid and enforceable; and second, the reading down of a contractual provision, rather than severing it. The latter is often applied where the objectionable provision is unreasonably wide. The test for severance is twofold: first, whether the severance is available as a matter of construction of the particular contract; and second, whether the nature of the illegality prevents severance from occurring. The principles applicable to the construction test for severance were applied in Thomas Brown and Sons Ltd v Fazal Deen (1962) 108 CLR 391 (see 28.6C). [page 670]

THE ENFORCEABILITY OF CONTRACTS THAT ARE UNLAWFUL OR HAVE AN UNLAWFUL PURPOSE 28.2C

Nelson v Nelson (1995) 184 CLR 538

Court: High Court of Australia Facts: Mrs Nelson, as an ‘eligible person’ under the Defence Service Homes Act 1918 (Cth), was eligible for a subsidised loan from the Defence Service Home Corporation. She had two children, Peter and Elizabeth. In 1987 Peter and Elizabeth purchased a property at Petersham. The deposit and the balance of purchase price were provided by Mrs Nelson. The purpose of the transaction was to enable Mrs Nelson to later purchase another house with the benefit

of a subsidised loan from the Corporation. Mrs Nelson would not have been eligible for the subsidised loan if she already owned another house. In 1989 Mrs Nelson, with the assistance of a subsidised loan, purchased a house in Paddington. At the time Mrs Nelson declared that she did not own or have any interest in any other property. In 1990 Peter and Elizabeth sold the Petersham property, with the proceeds of sale being placed into a solicitors’ trust account. In 1991 Mrs Nelson and Peter commenced proceedings in which they sought a declaration that the solicitors held the balance of the proceeds of sale of the Petersham property on trust for Mrs Nelson. By way of cross-claim, Elizabeth sought a declaration that she had a one-half interest in the proceeds of sale. Issues: The issues before the High Court were whether Elizabeth was entitled to one-half of the sale proceeds of the Petersham property and whether Mrs Nelson was entitled to any benefit in the proceeds of sale in the light of her unlawful conduct that led to the purchase of the Paddington property. Decision: The High Court (Deane, Gummow, Dawson, Toohey, and McHugh JJ) unanimously held that Elizabeth was not entitled to any interest in the proceeds of sale of the Petersham property on the basis that she and her brother held the Petersham property on trust for Mrs Nelson. The basis for this conclusion was that Elizabeth and Peter, when obtaining title to the property, held it on resulting trust for their mother because she had provided the money for the purchase. This meant that neither Elizabeth nor Peter acquired any equitable interest in the Petersham property nor in the proceeds of its sale. However, a bare majority of the court (Deane, McHugh, and Gummow JJ) held that Mrs Nelson was entitled to the proceeds of sale, subject to being denied the benefit that she obtained by her unlawful conduct. The minority (Dawson and Toohey JJ) held that Mrs Nelson was entitled to the proceeds of the trust unconditionally, on the basis that the question of any illegal conduct by her was a separate issue to be taken up by the Defence Service Homes Corporation, if it so chose to do. Extract: The extracts from the two majority judgments discuss the

consequences of Mrs Nelson’s illegal conduct and the basis upon which it affected her entitlement to the sale proceeds of the Petersham property.

[page 671]

Deane and Gummow JJ The claim of illegality in the present case presents two distinctive features. First, the rights which Mrs Nelson asserts and the remedies she seeks are equitable. Secondly, the source of the alleged illegal purpose is in statute. This is not a case where, independently of statute, the creation or performance of a trust or the observance of any condition imposed by the terms of the trust is said to offend a head of public policy. Nor is it a case of a contract to create an express trust where it is contended that the constitution of the trust by the conveyance of the legal title from the settlor to the trustee would be illegal. Rather, the question is whether a joint owner of the legal title to land is able to resist, by reason of illegality, the assertion of a beneficial title arising as a resulting trust. The accounting by [Elizabeth] to … Mrs Nelson, of the proceeds of sale as Mrs Nelson’s beneficial entitlement on its face does not involve the doing of any illegal act. Nevertheless, a source of ‘illegality’ may be public policy as to acts associated with or in furtherance of illegal purposes. In turn, this may involve consideration of the purposes a statute seeks to serve. Accordingly, there is a large and miscellaneous class of trusts which are held invalid on the ground that their enforcement would be against public policy, even though enforcement would not involve any criminal act by the trustee; likewise, provisions contained in an express trust may be illegal on the same grounds even though the trust itself does not fail for illegality. [Elizabeth], the joint holder of the legal title, submits that (i) a court of equity will never enforce an equitable proprietary interest at the suit of a

party to an illegality, rather, it will let the loss lie where it falls; (ii) further, the claimant must fail if the making good of the claimant’s case necessarily involves disclosure of the illegal purpose; (iii) in this case rebuttal of the presumption of advancement requires disclosure of an unlawful purpose, thus precluding the setting up by Mrs Nelson of the resulting trust in her favour; and (iv) the only relevant recognised exception to the operation of these principles applies where the claimant has not carried the illegal purpose into effect, whereas in the present case the purpose was carried into effect with the purchase of the [Paddington] property. As we will endeavour to explain, these submissions should not be accepted. Counsel for [Mrs Nelson and Peter] contends that the Act … did not expressly or impliedly prohibit the transaction the subject of the present action, namely the purchase by Mrs Nelson of the [Petersham] property in the names of her children. Still less did it expressly or impliedly prohibit the enforcement by Mrs Nelson of what she maintains is the trust in her favour over the proceeds of sale. Therefore, it is submitted, the issue of illegality must depend upon a refusal to enforce the resulting trust on a ground of public policy derived from the statute. [Mrs Nelson and Peter] deny there is such a policy which operates in this way. In a case where principles of illegality operate, the result is to impugn the plaintiff’s rights, legal and equitable. It is true that, on occasion, the courts, in refusing to order reconveyance to the plaintiff of property transferred to further a purpose forbidden by statute, have said that the plaintiff lacks clean hands. An example is Groves v Groves where land had been [page 672] so conveyed to give a property qualification to the transferee; but Alexander CB also said that the illegal object of the conveyance required refusal to interfere ‘consistently with law and equity’.1 In some cases the doctrine as to parties in pari delicto has been treated as the common law ‘counterpart’ to the equity maxim, so that the two concepts are interchangeable.2 However, in cases of illegality, it is not merely a question, as is involved with the operation of the maxim that he who comes to equity must come

with clean hands, of denying the plaintiff equitable remedies, for example, specific performance of a contract, whilst leaving the plaintiff to the remedy at law, for example, damages for breach of contract. The distinction between the operation of the equity maxim, as a discretionary defence to a claim to equitable relief, and the notion of illegality has been drawn by Professor Pettit. Writing as contributor to the title ‘Equity’ in Halsbury and with citation of much authority, he says: Where the transaction is itself unlawful it is not necessary to have recourse to this principle. In equity, just as at law, no suit lies in general in respect of an illegal transaction, but this is on the ground of its illegality, not by reason of the plaintiff’s demerits.3 … Difficult questions may arise in relating the alleged illegality in the constitution or performance of the trust to what, upon its true construction, is the operation of the statute in question. Authorities in contract law such as Vita Food Products, Inc v Unus Shipping Co Ltd4 and Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd5 suggest the drawing of a distinction between (i) an express statutory provision against the making of a contract or creation or implication of a trust by fastening upon some act which is essential to its formation, whether or not the prohibition be absolute or subject to some qualification such as the issue of a licence; (ii) an express statutory prohibition, not of the formation of a contract or creation or implication of a trust, but of the doing of a particular act; an agreement that the act be done is treated as impliedly prohibited by the statute and illegal; and (iii) contracts and trusts not directly contrary to the provisions of the statute by reason of any express or implied prohibition in the statute but which are ‘associated with or in furtherance of illegal purposes’. The phrase is that of Jacobs J in Yango.6 Examples in the third category include cases where the mode of performance adopted by the party carrying out the contract contravenes statute, although the contract was capable of performance without such contravention.7 In this last class of case, the courts act not in response to a direct legislative prohibition but, as it is said, from ‘the policy of the law’. The finding of such policy involves consideration of the scope and purpose of the particular statute. The formulation of the appropriate public

[page 673] policy in this class of case may more readily accommodate equitable doctrines and remedies and restitutionary money claims than is possible where the making of the contract offends an express or implied statutory prohibition.8 … A fundamental principle of the common law has been said to be that a court will not lend its aid to a plaintiff who founds a course of action upon an immoral or illegal act, particularly where both parties are equally in fault. These propositions are generally treated as following from the judgment of Lord Mansfield in Holman v Johnson.9 One issue which underlies various submissions in the present case is the extent to which those propositions, with the qualifications to them which have developed in the law of contract, apply to a plaintiff who comes to equity seeking to enforce a resulting trust. It should be noted that Holman v Johnson was a case in which the making and performance of the contract in question appears not to have been directly contrary to the provisions of statute. The allegation was that the contract was associated with or in furtherance of illegal purposes in the sense of the phrase later used by Jacobs J in Yango. The case came before the King’s Bench in banc on a rule to show cause why a new trial should not be granted. The rule was discharged. The buyer was sued for the price of tea under a contract made in France for sale and delivery in that country. The buyer’s defence was that the tea was to be smuggled into England without payment of duty and that the seller had been aware of this. It was held that there had been no contravention of the relevant English revenue laws. The seller had no concern in the smuggling scheme and the circumstance that the seller had knowledge of the illegal purpose of the defendant in buying the tea from him did not render the contract sufficiently associated with or in furtherance of that illegal purpose. What has largely gone unnoticed in the later decisions is that Lord Mansfield held that the facts of Holman v Johnson did not fall within the principles as to illegality which he propounded, so that recovery in fact was allowed to the seller. … [W]e accept the submission for [Mrs Nelson and Peter] that the crucial step is to identify the relevant public policy … of the Act. … [C]ounsel for [Mrs Nelson and Peter] points to [the penalty

provisions of the Act] in support of the proposition that the purpose of the Act is sufficiently served by such penalties and that the denial of the resulting trust would cause prejudice to a person in the position of Mrs Nelson without furthering the objects of the legislation. Reference is made to the statement in Archbolds (Freightage) Ltd v S Spanglett Ltd10 … that the purpose of a statute may sufficiently be served by the penalties prescribed for the offender. It then is submitted that the imposition of the additional sanction, the inability of [Mrs Nelson] to enjoy the proceeds of what otherwise is her beneficial ownership of the [Petersham] property, would not be an appropriate adjunct to the scheme for which the Act provides. [page 674] That submission should be accepted. Further, the relevant provisions of the legislation … show its purpose to be the provision of public moneys to facilitate the purchase of housing by eligible persons, but on the footing that the eligible person not own another dwelling. The means by which that purpose has been effected have changed from secured loan to interest subsidy in respect of an advance by the Bank. But it has consistently been the scheme of the legislation that, if the public moneys are misapplied, they are made recoverable by the [Defence Service Homes] Corporation or the Commonwealth. However … the interest of the Corporation or the Commonwealth in the dwelling or proceeds of sale thereof is co-extensive with the funds provided by it; if they be restored then effect may be given to a trust in respect of the balance of the equitable interest in the dwelling or the proceeds of sale thereof. A question in the present case thus arises as to whether the trust in respect of the proceeds of sale which Mrs Nelson asserts in her favour is tainted by illegality because of its association with or furtherance of a purpose which is contrary to the policy of the law as indicated by the scheme of the Act. If that be so, the question then is whether the consequence is that (i) no relief is available to Mrs Nelson, or (ii) relief may be granted but upon terms apt to make good the concern of the Commonwealth which was denied by the grant of the subsidy in respect of [the Paddington property] whilst, as she

always intended, Mrs Nelson was beneficial owner of the [Petersham] property. In our view, the answer to the first question is in the affirmative. The findings in the Supreme Court show that the title to [the Petersham property] was taken in the name of the children, with the intention that Mrs Nelson be the beneficial owner so as to put her in an advantageous position later to obtain, if she so wished, financial assistance under the Act by concealing the true state of affairs. It may have been that a change of heart upon which she had acted before she sought to enforce the resulting trust may have meant that the trust was never more than incipiently illegal. But that issue does not arise. The purpose was implemented with the obtaining of the subsidy for the [Paddington] purchase. Mrs Nelson still holds this property. The litigation concerns ownership of the fund from the later sale of the [Petersham] property. Given this state of affairs, the question remains as to what are the limitations upon the relief obtainable by Mrs Nelson. In our view, as the price of obtaining the relief she seeks for the recognition and enforcement of a resulting trust in respect of the whole of the balance of the proceeds of sale of the [Petersham] property, Mrs Nelson must be prepared to do equity according to the requirements of good conscience. That may involve consideration of more than the interests of the parties to the litigation. Here, good conscience calls for the taking by Mrs Nelson of steps sufficient to satisfy the demands of the underlying policy of the Act. This requires denial to Mrs Nelson of the benefit in respect of the purchase of the [Paddington] property which she has obtained by her unlawful conduct. This would appear to us to be a sum representing the present value of the difference, over the term of the loan agreement dated 30 August 1989, for the advance by the Bank to Mrs Nelson of $25,000, between the subsidised interest rate and that rate which, upon its usual terms, the Bank would have charged Mrs Nelson on an advance of $25,000 over the same period and for the same purpose. [page 675]

That sum should be in the same amount as that which the Commonwealth might properly specify in a notice given to Mrs Nelson under s 29 of the Act. If Mrs Nelson were to tender to the Commonwealth that amount which the Commonwealth might properly have specified in a notice given under s 29 of the Act, it is to be presumed that the Commonwealth would accept it. In particular, it is to be presumed that the amount would not be written off by the Commonwealth under para (a) of s 30(1) and that there would be no waiver under para (b) of the right of the Commonwealth to recover the amount of the subsidy. … There should be a declaration to the effect that, if on or before 9 January 1996 Mrs Nelson has paid to the Commonwealth an amount equal to the benefit sum received in respect of the purchase by her of the [Paddington] property, the [solicitors] hold the whole of the balance of the proceeds of sale of the [Petersham property], together with any interest earned thereon, upon trust for [Mrs Nelson]. This should be accompanied by an order that any moneys so held by the [solicitors] be paid to [Mrs Nelson]. The making by Mrs Nelson of this payment to the Commonwealth should have the effect of discharging any liability to the Commonwealth under s 29 of the Act. There should be a further declaration to the effect that, if the benefit sum has been ascertained but shall not have been paid by Mrs Nelson as provided in the first declaration, the [solicitors] hold the balance of the proceeds of sale of the [Petersham] property, as to the benefit sum, upon trust for [Elizabeth], and as to the remainder (including interest earned upon the whole of the said balance) upon trust for [Mrs Nelson]. Such a trust of the benefit sum would do no more than reflect the unavailability of equity to obtain for [Mrs Nelson] the actual fruits of her unlawful conduct. There should also be orders that the moneys so held by the [solicitors] be paid respectively to [Elizabeth] and [Mrs Nelson].

McHugh J The courts, including courts exercising equitable jurisdiction, will not enforce an unlawful agreement or trust and, frequently will not enforce an agreement or trust that has been entered into for an unlawful purpose.

But these propositions do not lead to the conclusion that a person who participated in the making or execution of such an agreement or trust never has a curial remedy. A court that finds that an agreement is unlawful or has an unlawful purpose has merely set the stage for a further inquiry: are the circumstances surrounding the agreement such that the court should deny a relevant remedy to the party seeking the assistance of the court? … In Tinsley v Milligan,11 all members of the House of Lords accepted that in the nineteenth century there was a ‘wide principle’ that a court exercising equitable jurisdiction would not assist a claimant to recover property that had been transferred to another person for an unlawful purpose. … [page 676] In Tinsley, however, the House of Lords was divided as to whether the ‘wide principle’ still represented the law. In Tinsley, the House held that the defendant was entitled to resist an ejectment action and obtain a declaration of part ownership in respect of property that had been purchased in the plaintiff’s name to enable the defendant to claim social security benefits to which she was not entitled. The House held that, because the defendant did not need to plead or disclose her unlawful purpose in order to establish her case, she was entitled to equitable relief. Central to this question was whether the much criticised decision of the Court of Appeal in Bowmakers Ltd v Barnet Instruments Ltd, a case at law, applied in equity. In Bowmakers, the plaintiff recovered damages for the conversion of machine tools that were subject to hire-purchase agreements made in breach of the Defence Regulations. The Court of Appeal held that, despite the illegality of the agreements, the plaintiff could succeed in its claim because it could do so without founding its cause of action on the illegal agreements or pleading their illegality. Du Parcq LJ giving the judgment of the court said: In our opinion, a man’s right to possess his own chattels will as a general rule be enforced against one who, without any claim of right, is detaining them, or has converted them to his own use, even

though it may appear either from the pleadings, or in the course of the trial, that the chattels in question came into the defendant’s possession by reason of an illegal contract between himself and the plaintiff, provided that the plaintiff does not seek, and is not forced, either to found his claim on the illegal contract or to plead its illegality in order to support his claim.12 In Tinsley, the majority of the House held that this principle also applied in equity … Lord Browne-Wilkinson said that, with the fusion of law and equity, the same principles of illegality applied in law and equity and that, as a result, the Bowmakers rule was applicable to the circumstances of the case.13 This meant that the defendant succeeded in her counter-claim because the transfer of the property into the name of the plaintiff gave rise to a resulting trust in favour of the defendant and the plaintiff could not prove that the defendant had intended to transfer her beneficial interest in the property to the plaintiff. The defendant was therefore able to enforce the trust in equity because she did not have to plead or rely on the illegal purpose that motivated the conveyance. … I think that the majority speeches in the House of Lords in Tinsley were correct in denying the existence of the ‘wide principle’. … [T]he majority of the House of Lords in Tinsley were correct in rejecting the ‘wide principle’ as governing cases of illegality in equity. But that said, I do not think that this Court should adopt the majority’s rule that a claimant cannot obtain relief in any court if that person must plead or rely on illegal conduct (the Bowmakers rule). [page 677] A doctrine of illegality that depends upon the state of the pleadings or the need to rely on a transaction that has an unlawful purpose is neither satisfactory nor soundly based in legal policy. … The Bowmakers rule has no regard to the legal and equitable rights of the parties, the merits of the case, the effect of the transaction in undermining the policy of the relevant legislation or the question whether the sanctions imposed by the legislation sufficiently protect the purpose of the legislation.

Regard is had only to the procedural issue; and it is that issue and not the policy of the legislation or the merits of the parties which determines the outcome. Basing the grant of legal remedies on an essentially procedural criterion which has nothing to do with the equitable positions of the parties or the policy of the legislation is unsatisfactory, particularly when implementing a doctrine that is founded on public policy. In Tinsley, Lord Goff recognised the perverse nature of the rule adopted by the minority in that case in words that apply equally to the Bowmakers rule adopted by the majority judges. Lord Goff said: It is important to observe that … the principle is not a principle of justice; it is a principle of policy, whose application is indiscrimi-nate and so can lead to unfair consequences as between the parties to litigation.14 … In so far as the Bowmakers rule is a deterrent, it is also an incentive to illegality because it encourages those to whom property is conveyed to encourage transferors to carry out their unlawful purpose. Furthermore, even if this random process of assigning losses and gains without regard to the substantive equities of a dispute is a disincentive to those who might enter illegal transactions, it does not follow that the Bowmakers rule is the most efficient rule to protect the community against the making of trusts and agreements for unlawful purposes. There are other rules that could achieve the same goals of legal policy through a less extreme and a more just process. A final criticism of the Bowmakers rule adopted by the majority in Tinsley is that it may often defeat the intention of the legislature. Parliament almost invariably provides mechanisms for dealing with breaches of its laws. Those mechanisms sometimes include a provision that makes unlawful and unenforceable an agreement that defeats or evades the operation of the relevant law. If a particular enactment does not contain such a provision, the prima facie conclusion to be drawn is that parliament regarded the sanctions and remedies contained in the enactment as sufficient to deter illegal conduct and saw no need to take the drastic step of making unenforceable an agreement or trust that defeats the purpose of the enactment.

The doctrine of illegality expounded in Holman [v Johnson15] was formulated in a society that was vastly different from that which exists today. It was a society that was much less regulated. With the rapid expansion of regulation, it is undeniable that the legal environment in which the doctrine of illegality operates has changed. The underlying policy of Holman is still valid today — the courts must not condone or assist a breach of statute, [page 678] nor must they help to frustrate the operation of a statute. As Mason J put it in Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd, the courts must not ‘be instrumental in offering an inducement to crime or removing a restraint to crime’.16 However, the Holman rule, stated in the bald dictum: ‘No court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act’17 is too extreme and inflexible to represent sound legal policy in the late twentieth century even when account is taken of the recognised exceptions to this dictum. One of the most significant reasons for adopting a less rigid approach to illegality than the bald dictum in Holman or, for that matter, the Bowmakers rule adopted in Tinsley is that statutory illegality can arise in a number of different ways. First, the statute may directly prohibit the contract or trust. Second, while the statute may not prohibit making the contract or trust, it may prohibit the doing of some particular act that is essential for carrying it out. Third, the statute may not expressly prohibit the contract or trust but the contract or trust may be associated with or made in furtherance of a purpose of frustrating the operation of the statute. Fourth, the statute may make unlawful the manner in which an otherwise lawful contract or trust is carried out. It would be surprising if sound legal policy required each of these forms of illegality to be treated in the same way. There is, for example, a vast difference between the performance of a contract for carriage of goods by ship that is overloaded in breach of the law and the making of a contract for the carriage of goods where the making of the contract is specifically prohibited. … Accordingly, in my opinion, even if a case does not come within one

of the four exceptions to the Holman dictum to which I have referred, courts should not refuse to enforce legal or equitable rights simply because they arose out of or were associated with an unlawful purpose unless: (a) the statute discloses an intention that those rights should be unenforceable in all circumstances; or (b)(i) the sanction of refusing to enforce those rights is not disproportionate to the seriousness of the unlawful conduct; (ii) the imposition of the sanction is necessary, having regard to the terms of the statute, to protect its objects or policies; and (iii) the statute does not disclose an intention that the sanctions and remedies contained in the statute are to be the only legal consequences of a breach of the statute or the frustration of its policies. … I agree with the orders proposed by Deane and Gummow JJ.

[page 679]

Comments 28.2.1 See Radan, Gooley, and Vickovich at 26.7, 26.10, 26.11, 26.48, 26.49, 26.53, 26.54, 28.6, 28.7, 28.9, and 28.11. 28.2.2 For a discussion of this case and comparison with the House of Lords’ decision in Tinsley, see R Gamble, ‘Contrasting Approaches to Statutory Illegality’ (1996) 24 Australian Business Law Review 397. 28.3C

Fitzgerald v FJ Leonhardt Pty Ltd (1997) 189 CLR 215

Court: High Court of Australia Facts: F J Leonhardt Pty Ltd, a driller, was engaged by Fitzgerald, the owner of land being subdivided, to drill a number of bores on his land to obtain water. Section 56 of the Water Act 1992 (NT) prohibited the drilling of bores without a permit issued by the Controller of Water Resources pursuant to s 57 of the Act. Fitzgerald did not have a permit issued pursuant to s 57. The Act also required

any driller of bores to hold a driller’s licence. Leonhardt had a driller’s licence. Finally, the Act did not contain any express prohibition of the making of a contract in the absence of the relevant permit or engaging an unlicensed driller. Leonhardt drilled several bores on Fitzgerald’s land pursuant to the contract. A dispute then arose as to how much Leonhardt was owed for his work. Fitzgerald argued that the contract was illegal and unenforceable because of the absence of the permit required by s 56 of the Act. He argued that Leonhardt had breached s 56 of the Act by not obtaining a permit pursuant to s 57 of the Act. Issue: The issue before the High Court was whether the absence of a permit to drill the bores rendered the contract unenforceable by Leonhardt. Decision: The High Court of Australia (Dawson, Toohey, McHugh, Gummow, and Kirby JJ) unanimously held that the contract was enforceable. Extract: Extracts from the joint judgment of McHugh and Gummow JJ and the judgment of Kirby J discuss the reasons why a failure to meet the requirements of the Water Act 1992 (NT) did not mean that the contract was unenforceable.

McHugh and Gummow JJ The owner contends that, in performing the contract, the driller contravened the prohibition in s 56 of the Act upon unauthorised construction and drilling of bores. In our view, there was no such contravention by the driller in the performance of its contract. This is because s 56 is directed not to a party in the position of the driller. Rather, it is directed to an owner, occupier or lessee causing, suffering or permitting the work in question. In this case, Mr Leonhardt at all relevant times held a drilling licence issued under [the Act]. [page 680]

The driller was his company. It was for the owner to obtain the necessary construction permit under [the Act]. … This is not a case where the statute contained an express prohibition against the making of the contract in question. The Act did prohibit the owner doing or suffering particular acts without the authority of a permit granted by the Controller under s 57(1). An agreement that the owner engage in such activity may have been treated as impliedly prohibited by the Act and as illegal. However, that is not the owner’s case. The contract as framed did not call for the commission of any illegality. Nor did the statute prohibit some particular act that was essential for carrying out the contract. Performance of the work would have answered the requirements of the contract if the owner had obtained licences under s 57. In Archbolds (Freightage) Ltd v S Spanglett Ltd, Devlin LJ said: It is a familiar principle of law that if a contract can be performed in one of two ways, that is, legally or illegally, it is not an illegal contract, though it may be unenforceable at the suit of a party who chooses to perform it illegally. That statement of the law is meaningful if the contract is one which is by its terms open to two modes of performance; otherwise it is meaningless.18 In the present case, it was possible for the contract to be performed without contravening the Act. In so far as the contract was performed in contravention of the legislation, the contravention was the consequence of failure by the owner to observe requirements imposed upon him. There was no failure by the driller to observe requirements placed upon it by the Act. … The action by the driller to recover moneys owing to it by the owner was not an action by a party to a contract who had chosen to perform it illegally. The penalty imposed by s 56(1) was directed at a party in the position of the owner rather than the driller. Further, it has not been suggested that the driller acted otherwise than in good faith or that the driller had aided and abetted the owner in any offence committed by him, within the meaning of the principles considered in Giorgianni v The Queen19 and Yorke v Lucas.20 The question then becomes whether, as a matter of public policy, the court

should decline to enforce the contract because of its association with the illegal activity of the owner in, if not causing, then at least suffering or permitting the construction and drilling of bores, within the meaning of s 56(1), without the grant to the owner of permits pursuant to s 57. The refusal of the courts in such a case to regard the contract as enforceable stems not from express or implied legislative prohibition but from the policy of the law, commonly called public policy.21 Regard is to be had primarily to the scope and purpose of the statute to [page 681] consider whether the legislative purpose will be fulfilled without regarding the contract as void and unenforceable.22 Section 56 prescribes a penalty. In such a case, the role of the common law in determining the legal consequences of commission of the offence may thereby be diminished because the purpose of the statute is sufficiently served by the penalty.23 Here, the imposition of an additional sanction, namely inability of the driller to recover moneys otherwise owing by the owner, would be an inappropriate adjunct to the scheme for which the Act provides. The contrary decision would cause prejudice to an innocent party without furthering the objects of the legislation. … Here, the driller had complied with licensing requirements imposed by [the Act] for the conduct of its business. This is not the case of an unlicensed driller seeking to recover for work done in contravention of the prohibition imposed by [the Act] upon drilling or constructing bores without the grant of a drilling licence. The claim which is made by the driller is insufficiently associated with breach of the requirements of [the Act] by the owner, the party resisting the claim. Put another way, the interest of the Territory in controlling, by the statutory licensing system, the right of owners to take water under s 14 [of the Act] may be maintained without imposing a sanction upon the party in the position of the driller which would deny it payment for the work performed and would leave the other party with the benefit of that work free of charge. The imposition of such a sanction upon the driller by failing to keep the owner to his bargain

would be disproportionate to the seriousness of the breaches of s 56 and would be unnecessary to protect the objects or policies of the Act.24 In Nelson v Nelson,25 McHugh J referred to the dictum of Lord Mansfield in Holman v Johnson26 that no court would lend its aid to a plaintiff founding the cause of action upon an immoral or illegal act. … McHugh J identified authorities subsequent to Holman v Johnson which were to be seen as providing four exceptions or qualifications whereby relief was granted despite the presence of illegality. Three of these, those concerned with ignorance or mistake on the part of the claimant; the character of the statutory scheme as one for the benefit of a class of which the claimant is a member; and fraud, oppression or undue influence by the defendant, have been treated as instances of a broader principle. This is said to be that, notwithstanding the illegality, relief may still be available to the plaintiff if the plaintiff not be in equal fault with the defendant, that is to say not in pari delicto. However, in the light of the approach taken in Nelson v Nelson to comparable questions arising with respect to trusts, the issues of contract law in this case should not be approached by considering any general in pari delicto doctrine. [page 682] The preferable course, in cases of contract alike to those involving trusts, is as follows. A case may come within one of the accepted exceptions or qualifications to Holman v Johnson. As indicated above, these are set forth, with examples from authority, in the following passage from the judgment of McHugh J in Nelson v Nelson: First, the courts will not refuse relief where the claimant was ignorant or mistaken as to the factual circumstances which render an agreement or arrangement illegal. Second, the courts will not refuse relief where the statutory scheme rendering a contract or arrangement illegal was enacted for the benefit of a class of which the claimant is a member. Third, the courts will not refuse relief where an illegal agreement was induced by the defendant’s fraud, oppression or undue influence. Fourth, the courts will not refuse relief where the illegal purpose has not been carried into effect.27

Even if the case does not come within one of those exceptions, the courts should not refuse to enforce contractual rights arising under a contract, merely because the contract is associated with or in furtherance of an illegal purpose, where the contract was not made in breach of a statutory prohibition upon its formation or upon the doing of a particular act essential to the performance of the contract or otherwise making unlawful the manner in which the contract is performed. Rather, the policy of the law should accord with the principles set out by McHugh J in Nelson v Nelson. His Honour said: Accordingly, in my opinion, even if a case does not come within one of the four exceptions to the Holman dictum to which I have referred, courts should not refuse to enforce legal or equitable rights simply because they arose out of or were associated with an unlawful purpose unless: (a) the statute discloses an intention that those rights should be unenforceable in all circumstances; or (b)(i) the sanction of refusing to enforce those rights is not disproportionate to the seriousness of the unlawful conduct; (ii) the imposition of the sanction is necessary, having regard to the terms of the statute, to protect its objects or policies; and (iii) the statute does not disclose an intention that the sanctions and remedies contained in the statute are to be the only legal consequences of a breach of the statute or the frustration of its policies.28 As we have indicated, if the present case be approached in that way, the result is that the defence of illegality correctly failed and there was no bar to the full recovery by the driller of the amount claimed.

Kirby J If the criteria [set out in the judgment of McHugh and Gummow JJ above] mentioned by McHugh J in Nelson are applied … the Act did not disclose an intention that [Leonhardt’s] rights should be unenforceable in all circumstances. To refuse to enforce those rights would be disproportionate to the seriousness of the unlawful conduct in question. This is, in part, because the duty to obtain the necessary permit rested on [Fitzgerald]. According to the

[page 683] then administration of the Act, both [Fitzgerald] and [Leonhardt] (and the authorities) thought they had done all that was required. It would be disproportionate to [Leonhardt’s] unlawful conduct to deprive it almost entirely of recovery under the contract, although there was nothing illegal in the contract itself and the performance by [Leonhardt] would have been lawful if [Fitzgerald] had secured the requisite permits. Against the background of the mistaken understanding about the meaning and operation of the Act, the imposition of such a sanction is not necessary to protect the objects or policies of the Act. Other sanctions exist to uphold those ends. The Act being silent on contracts, it is a preferable construction of its terms that, at least in circumstances such as the present, the parties should be able to enforce their legal rights in courts of law and should not be deprived of those rights under the rubric of unenforceability for public policy reasons any more than on the basis of the application to the contract of the suggested construction of the Act. The position would be quite different if what had been involved had been a specific agreement between the parties deliberately to breach the Act (eg by the use of unlicensed and neglectful drillers or the deliberate refusal to obtain any permit) or to perform the contract in a way clearly damaging to the scarce resource of ground water in the Territory. In such a case, even if the Act did not expressly or impliedly render the contract illegal and void, whether as formed or performed, there would be a strong argument to support the proposition that, on public policy grounds, the court might refuse relief. To grant relief, in such circumstances, could affront the ‘public conscience’.29 In such a case, to involve a court in the enforcement of the rights of the parties could be to involve it in upholding a seriously antisocial act which was illegal or at least gravely reprehensible. But that is not this case. On the contrary, were the Court to withhold relief to [Leonhardt], it would result in a windfall gain to [Fitzgerald] which was unmerited and itself would be an affront to the public conscience. [Fitzgerald], a property developer, would have gained three successful water bores for a pittance. [Leonhardt] would have been denied recovery precisely on the basis of the failure of [Fitzgerald] (whose duty it was) to obtain in advance the requisite permits. I do not accept that the rule of public policy,

invoked by [Fitzgerald], is as inflexible and harsh as to produce such an offensive result.30

[page 684]

Comment 28.3.1 See Radan, Gooley, and Vickovich at 26.15, 26.50, 28.8, and 28.11.

ILLEGALITY AND CLAIMS BASED IN TORT LAW 28.4C

Bowmakers Ltd v Barnet Instruments Ltd [1945] 1 KB 65

Court: Court of Appeal in England Facts: Smith sold certain machine tools to Bowmakers. In 1944 Bowmakers hired the machine tools to Barnet Instruments under three separate hire-purchase agreements. All three agreements breached certain wartime regulations issued by the British Ministry of Supply. Barnet Instruments made payments and then sold all but one machine to another person. Barnet Instruments refused to make any further payments under the hire-purchase agreements and refused to return the one machine to Bowmakers. Bowmakers sued Barnet Instruments for damages for conversion of the machines. Issue: The issue before the Court of Appeal was whether the infringement of the wartime regulations rendered the hire-purchase agreements illegal, thereby precluding Bowmakers from making a tortious claim against Barnet Instruments. Decision: The Court of Appeal (Scott and du Parcq LJJ, and Uthwatt J) unanimously found in Bowmakers’ favour. Extract: The extract from the judgment of du Parcq LJ sets out the

basis upon which property that has passed under a contract can be recovered in a tortious claim, notwithstanding the illegality of the contract.

Du Parcq LJ (delivering the judgment of the court) In this case [Bowmakers] have obtained a judgment against [Barnet Instruments] for damages for conversion of certain machine tools, the property of [Bowmakers]. But for the defence of illegality which has been raised, there is no answer to [Bowmakers’] claim. It is said, however, that the claim is one which the court, having regard to the circumstances, ought not to enforce. … It is right to add that neither [Bowmakers] nor [Barnet Instruments] had any knowledge of the order, so that, if they erred, their error was involuntary, but this, [Barnet Instruments] say, is immaterial. [Barnet Instruments] obtained possession of the machinery as the result of a bargain to procure the commission of a criminal offence, and hence, it was said, they and [Bowmakers], however venial their offence, had been engaged in nothing less than a criminal conspiracy. [Bowmakers] therefore, should be driven from the judgment seat, with the result, fortunate or unfortunate according to the point of view, that [Barnet Instruments] [page 685] would escape from the transaction without loss, and without even suffering the reproaches of an uneasy conscience. … Neither Smith or [Bowmakers] had the authority of … a licence to dispose of the machine tool in question. [Bowmakers] had, therefore, infringed the order, if not by buying from Smith, certainly by themselves hiring out the chattel to [Barnet Instruments]. The result of this illegality, it was contended, must have the same satisfactory consequences for the defendants as the offence committed in respect of the new machines. … The question, then, is whether in the circumstances [Bowmakers] are without a remedy. So far as their claim in conversion is concerned, they are

not relying on the hiring agreements at all. On the contrary, they are willing to admit for this purpose that they cannot rely on them. They simply say that the machines were their property, and this, we think, cannot be denied. We understood [Counsel for Barnet Instruments] to concede that the property had passed from Smith to [Bowmakers], and still remained in [Bowmakers’ possession] at the date of the conversion. At any rate, we have no doubt that this is the legal result of the transaction and we find support for this view in the dicta of Parke B in Scarfe v Morgan.31 Why then should not [Bowmakers] have what is their own? No question of [Barnet Instruments’] rights arises. They do not, and cannot, pretend to have had any legal right to possession of the goods at the date of the conversion. Their counsel has to rely, not on any alleged right of theirs, but on the requirements of public policy. He was entitled, and bound, to do so, although, as Lord Mansfield long ago observed: The objection, that a contract is immoral or illegal as between plaintiff and defendant, sounds at all times very ill in the mouth of the defendant. … No court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act.32 This principle, long firmly established, has probably even been extended since Lord Mansfield’s day. [Counsel for Barnet Instruments] is, we think, right in his submission that, if the sale by Smith to [Bowmakers] was illegal, then the first and second hiring agreements were tainted with the illegality, since they were brought into being to make that illegal sale possible, but … [Bowmakers] are not now relying on these agreements or on the third hiring agreement. Prima facie, a man is entitled to his own property, and it is not a general principle of our law … that when one man’s goods have got into another’s possession in consequence of some unlawful dealings between them, the true owner can never be allowed to recover those goods by an action. The necessity of such a principle to the interests and advancement of public policy is certainly not obvious. The suggestion that it exists is not, in our opinion, supported by authority. It would, indeed, be astonishing if (to take one instance) a person in the position of the defendant in Pearce v Brooks,33 supposing that she had converted the plaintiff’s brougham to her own use,

were to be permitted, in the supposed interests of public policy, to keep it or the proceeds of its [page 686] sale for her own benefit. The principle which is, in truth, followed by the courts is that stated by Lord Mansfield, that no claim founded on an illegal contract will be enforced, and for this purpose the words ‘illegal contract’ must now be understood in the wide sense which we have already indicated and no technical meaning must be ascribed to the words ‘founded on an illegal contract’. The form of the pleadings is by no means conclusive. More modern illustrations of the principle on which the courts act are Scott v Brown, Doering, McNab & Co and Alexander v Rayson,34 but as Lindley LJ said in the former of the cases just cited: Any rights which [a plaintiff] may have irrespective of his illegal contract will, of course, be recognized and enforced.35 In our opinion, a man’s right to possess his own chattels will as a general rule be enforced against one who, without any claim of right, is detaining them, or has converted them to his own use, even though it may appear either from the pleadings, or in the course of the trial, that the chattels in question came into the defendant’s possession by reason of an illegal contract between himself and the plaintiff, provided that the plaintiff does not seek, and is not forced, either to found his claim on the illegal contract or to plead its illegality in order to support his claim. … It must not be supposed that the general rule which we have stated is subject to no exception. Indeed, there is one obvious exception, namely, that class of cases in which the goods claimed are of such a kind that it is unlawful to deal in them at all, as for example, obscene books. No doubt, there are others. … We are satisfied that no rule of law, and no considerations of public policy, compel the court to dismiss [Bowmakers’] claim in the case before us, and to do so would be, in our opinion, a manifest injustice.

[page 687]

Comments 28.4.1 See Radan, Gooley, and Vickovich at 28.17–28.18. 28.4.2 For an analysis of the principle in this case, see A Stewart, ‘Contractual Illegality and the Recognition of Proprietary Interests’ (1988) 1 Journal of Contract Law 134. 28.5C

Singh v Ali [1960] AC 167

Court: Judicial Committee of the Privy Council Facts: Ali was a lorry driver who was unable to obtain a relevant haulage permit. He arranged with Singh, who was able to obtain a haulage permit, to buy a lorry. Singh agreed to register the lorry in his name and be the ostensible owner, but the lorry would in reality be owned by Ali, who would use it to carry goods for a reward. The parties then executed a document of sale of the lorry from Singh to Ali. This arrangement was in breach of Malayan Government regulations. There was a dispute and Singh repossessed the lorry from Ali. Ali sued for its return. Issue: The issue before the Privy Council was whether Ali was entitled to recovery of the vehicle in the circumstances where the contract between the parties was illegal. Decision: The Privy Council (Lords Cohen, Denning, and Jenkins) upheld Ali’s right to recovery of the vehicle. Extract: The extract from the judgment of the court, delivered by Lord Denning, considers the rights of the parties in this case in circumstances where the contract between them was illegal pursuant to statute.

Lord Denning

The regulations in question … fell into two groups: (i) The regulations which required vehicles to be registered with the Registrar of Motor Vehicles … [and] that no person should ‘sell, exchange, part with the possession of, purchase, acquire or take possession of any motor vehicle without a permit in writing from the Registrar’. … (ii) The regulations which controlled the use of vehicles for the carriage of goods. Under these regulations it was provided that no person should ‘use a goods vehicle or cause suffer or permit a goods vehicle to be used for the carriage of goods’ unless it was an authorised vehicle, that is to say, unless there was a haulage permit authorising it to be so used. These regulations said that a vehicle ‘shall not be deemed to be an authorised vehicle unless it is used by the holder of a permit in accordance with the conditions of such permit’. … It is not, perhaps, strictly accurate to say that the action was laid in trespass. It was an action for a declaration coupled with a claim in detinue. In order to get a declaration, it was [page 688] essential for [Ali] to show that he was the owner of the lorry and that it was an authorised vehicle. In order to succeed in detinue, it was essential for [Ali] to show that he had the right to immediate possession of the lorry at the time of commencing the action, arising out of an absolute or special property in it. And in detinue their Lordships think he succeeded. Although the transaction between [Ali] and [Singh] was illegal, nevertheless it was fully executed and carried out: and on that account it was effective to pass the property in the lorry to [Ali]. There are many cases which show that, when two persons agree together in a conspiracy to effect a fraudulent or illegal purpose — and one of them transfers property to the other in pursuance of the conspiracy — then, so soon as the contract is executed and the fraudulent or illegal purpose is achieved, the property (be it absolute or special) which has been transferred by the one to the other remains vested in the transferee, notwithstanding its illegal origin.36 The reason is because the transferor, having fully achieved his unworthy end, cannot be allowed to turn round and repudiate the means by which he did it — he cannot

throw over the transfer. And the transferee, having got the property, can assert his title to it against all the world, not because he has any merit of his own, but because there is no one who can assert a better title to it. The court does not confiscate the property because of the illegality — it has no power to do so — so it says, in the words of Lord Eldon: ‘Let the estate lie, where it falls’.37 This principle was applied by the Court of Appeal recently in Bowmakers Ltd v Barnet Instruments Ltd.38 The parties to the fraud are, of course, liable to be punished for the part they played in the illegal transaction, but nevertheless the property passes to the transferee. Their Lordships do not overlook the fact that [Singh] remained registered as the owner of the lorry and that no permission was given for the sale: but this did not prevent the property in it passing to [Ali]. The registration book is not … a document of title. The title passed by the sale and delivery of the lorry to [Ali]. The absence of registration would, no doubt, put [Ali] in difficulty if he had to prove his title, but it would not invalidate it.39 In this case, on the facts pleaded and the findings of the trial judge, [Ali] had a clear cause of action. He had actual possession of the lorry at the moment when [Singh] seized it. Despite the illegality of the contract, the property had passed to him by the sale and delivery of the lorry: compare Bowmakers Ltd v Barnet Instruments Ltd referred to above. When he commenced this action, he had the right to immediate possession. Their Lordships think that, in these circumstances, he had a claim in detinue. But he had also … a clear claim in trespass. Trespass was not in terms pleaded, but the facts were pleaded. And, on the facts [Ali] was entitled to rely on his possession. The Court of Appeal did not actually direct amendment of the pleadings, but it is clear from their judgment that, had they been asked to do so, they could have done so. Their Lordships think that, on the facts pleaded, they were fully justified in reversing the decision of the trial judge. [page 689] [Ali] would have been entitled to an order for the return of the vehicle or its value. As it had not been returned, he was clearly entitled to its value. That is the order made by the Court of Appeal, and their Lordships agree with it.

Their Lordships would only add this: if the law were not to allow [Ali] to recover in this case, it would leave [Singh] in possession of both the lorry and the money he received for it. Their Lordships are glad to have been able to reach the conclusion that, on the facts of the present case, this is not the law.

Comment 28.5.1 See Radan, Gooley, and Vickovich at 28.19.

ILLEGALITY AND THE DOCTRINE OF SEVERANCE 28.6C

Thomas Brown and Sons Ltd v Fazal Deen (1962) 108 CLR 391

Court: High Court of Australia Facts: In 1943 Fazal Deen entered into a contract of bailment with Thomas Brown & Sons Ltd by which Thomas Brown undertook to take due care of a safe and a quantity of gold and gems, and to redeliver all these goods to Deen on demand. The National Security (Exchange Control) Regulations provided that anyone who had gold in their possession or control was required to deliver it to the Commonwealth Bank within one month of it coming into their possession. This was not done. In 1959 Deen demanded the return of the goods and Thomas Brown refused or failed to comply with that demand. In 1960 Deen brought an action in detinue seeking recovery of the goods and, in the alternative, claiming damages for breach of the bailment contract. The trial judge found in Deen’s favour on the claim in detinue. Thomas Brown appealed to the High Court of Australia. Issue: The issue before the court was whether the contravention of the Regulations rendered the bailment contract illegal.

Decision: In a joint judgment the High Court (Kitto, Windeyer, and Owen JJ) allowed the appeal in part, holding that the contravention of the Regulations meant that the contract was illegal with respect to the gold. However, the terms of the contract relating to gold could be severed from the contract, with the result that Deen had no claim in relation to the gold, but could recover in relation to the gems and safe. Extract: The extract from the court’s joint judgment discusses the principle of severance in the context of illegal contracts.

[page 690]

Kitto, Windeyer, and Owen JJ It is necessary … to consider whether the agreement under which the gold, the gems and the safe were entrusted to the company’s custody contravened the National Security (Exchange Control) Regulations in any respect and, if so, what was the effect of such a contravention on [Deen’s] right to maintain the action. … The terms of the bailment required the company to hold the gold, along with the gems and the safe, in safe custody until such time as [Deen] required them to be redelivered to him and, while apart from the provisions of the regulations he could no doubt have demanded their return at any time, the purpose common to both parties was that the company should hold them for an indefinite period and not part with them except to [Deen]. So far as the gold was concerned, the performance of that agreement would, and in fact it did, contravene the regulations but it does not follow that the bailment of the gems and of the safe was tainted by illegality. If the terms of the bailment relating to the gold were severable from those relating to the gems and the safe the bailment of the latter chattels would be lawful. The test of severability was stated by Jordan CJ in McFarlane v Daniell ‘If the elimination of the invalid promises changes the extent only but not the kind of contract, the valid promises are severable’.40 Applying that test, it is clear that [Deen’s] rights of action in respect of the gems and the safe would not be answered by a defence of illegality based upon a breach of the National Security (Exchange

Control) Regulations since the contractual obligation upon the company as to the return of [Deen’s] property on demand applied to every part of the property deposited whether demanded together with the rest of it or separately. In the case of the gold, however, [Deen] could not succeed if he was obliged to rely upon the illegal transaction to establish his case. The learned trial judge considered that proof of the bailment was not an essential part of [Deen’s] case. He based his conclusion upon the well known passage in Bowmakers Ltd v Barnet Instruments Ltd, that ‘a man’s right to possess his own chattels will as a general rule be enforced against one who, without any claim of right, is detaining them, or has converted them to his own use, even though it may appear either from the pleadings, or in the course of the trial, that the chattels in question came into the defendant’s possession by reason of an illegal contract between himself and the plaintiff, provided that the plaintiff does not seek, and is not forced, either to found his claim on the illegal contract or to plead its illegality in order to support his claim’.41 With all respect, we are unable to agree with his Honour’s view. In Bowmakers Ltd v Barnet Instruments Ltd, the plaintiff claimed damages for conversion. The conversion by the defendant was admitted as was the fact that the goods converted were the plaintiff’s property. It is true that that property had come into the defendant’s possession under certain hiring agreements which were said to have been unlawfully made, but the case was not one in which the plaintiff was obliged to rely upon those agreements to prove his case. They were irrelevant. The facts in the present case are very different. As the learned trial judge found, the gold and the gems had disappeared from the company’s custody not later than April 1953. The tort of conversion was then complete, the Statute of Limitations began to run [page 691] and, when the present proceedings were commenced, that right of action had been barred by the lapse of time. The general rule is that ‘where there has once been a complete cause of action arising out of contract or tort, the statute begins to run, and subsequent circumstances which would but for the prior wrongful act or default have constituted a cause of action are disregarded’.42 Apart therefore from the contract of bailment, the failure by

the company to redeliver the gold, the gems and the safe following [Deen’s] demand for them in 1959 would not have given rise to a new cause of action so as to defeat the statute. But the cases cited above show that the general rule is subject to an exception which is correctly stated in Halsbury’s Laws of England, in these terms: ‘Where a bailee for safe custody has converted the goods, the bailor may demand their return and sue in detinue upon the bailee’s breach of duty to deliver, although his remedy in trover is barred by statute’.43 This is the course which [Deen] followed in the present case and it was a course which he was obliged to follow to avoid being met by a defence of the Statute of Limitations. It meant, however, that he was obliged to prove the contract of bailment and, to support his claim in detinue, to rely upon the failure of the company to comply with the obligation imposed by it to redeliver the goods upon the demand which he made in 1959. It follows from what has been said that [Deen’s] claim to recover the value of the gold cannot be supported44 and to this extent the appeal must succeed.

[page 692]

Comment 28.6.1 See Radan, Gooley, and Vickovich at 28.32.

1.

Groves v Groves (1829) 148 ER 1136 at 1141.

2. 3.

Byron v Clay (1989) 867 F 2d 1049 at 1052 (7th Cir); Dillon v Dean (1990) 551 NYS 2d 547 at 549; cf Tinsley v Milligan [1994] 1 AC 340 at 356–7. Halsbury’s Laws of England, 4th ed (Reissue), vol 16 (Reissue), para 751.

4. 5.

[1939] AC 277 at 293. (1978) 139 CLR 410 at 429–30, 432–3.

6. 7.

Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410 at 432. St John Shipping Corporation v Joseph Rank Ltd [1957] 1 QB 267 at 282.

8. 9.

Farrow Mortgage Services Pty Ltd (in liq) v Edgar (1993) 114 ALR 1 at 13. (1775) 98 ER 1120.

10. 11.

[1961] 1 QB 374 at 390. [1994] 1 AC 340.

12.

[1945] KB 65 at 71.

13. 14.

Tinsley v Milligan [1994] 1 AC 340 at 375–7. Tinsley v Milligan [1994] 1 AC 340 at 355.

15. 16.

(1775) 98 ER 1120. Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410 at 429.

17. 18.

Holman v Johnson (1775) 98 ER 1120 at 1121. Archbolds (Freightage) Ltd v S Spanglett Ltd [1961] 1 QB 374 at 391.

19. 20.

(1985) 156 CLR 473 at 487–8, 490–1, 506–7. (1985) 158 CLR 661 at 667–8, 676.

21.

Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410 at 429–30, 432–3; Nelson v Nelson (1995) 184 CLR 538 at 551–2, 593, 611. Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410 at 434.

22. 23. 24.

Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410 at 429, 433–4; Nelson v Nelson (1995) 184 CLR 538 at 570, 590–1, 614, 616. See Nelson v Nelson (1995) 184 CLR 538 at 623.

25. 26.

(1995) 184 CLR 538 at 604–5. (1775) 98 ER 1120.

27. 28.

Nelson v Nelson (1995) 184 CLR 538 at 604–5. Nelson v Nelson (1995) 184 CLR 538 at 613.

29. 30.

Tinsley v Milligan [1992] Ch 310 at 319–20; cf Nelson v Nelson (1995) 184 CLR 538 at 596, 612. Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410 at 428.

31. 32.

(1838) 150 ER 1430. Holman v Johnson (1775) 98 ER 1120 at 1121.

33. 34.

(1866) LR 1 Ex 213. [1936] 1 KB 169.

35. 36.

Scott v Brown, Doering, McNab & Co [1892] 2 QB 724 at 729. Scarfe v Morgan (1838) 150 ER 1430 at 1435.

37. 38.

Muckleston v Brown (1801) 31 ER 934 at 942. [1945] KB 65 at 70.

39. 40.

Bishopsgate Motor Finance Corporation Ltd v Transport Brakes Ltd [1949] 1 KB 322 at 338. McFarlane v Daniell (1938) 38 SR (NSW) 337 at 345, citing Putsman v Taylor (1927) 1 KB 637 at 640, 641.

41. 42.

Bowmakers Ltd v Barnet Instruments Ltd (1945) 1 KB 65 at 71. Wilkinson v Verity (1871) LR 6 CP 206 at 209; Betts v Receiver for the Metropolitan Police District [1932] 2 KB 595 at 605–6.

43. 44.

Halsbury’s Laws of England, 2nd ed, vol 33, par 78. ARPL Palaniappa Chettiar v PLAR Arunaalam Chettiar [1962] AC 294.

[page 693]

Part VII: Remedies Based on Contract

[page 695]

29 DAMAGES FOR BREACH OF CONTRACT

INTRODUCTION 29.1 This chapter is concerned with the common law remedy of damages for breach of contract, by which a plaintiff can recover compensation for loss caused as a result of a breach of contract by the defendant. In determining the level of compensation to be paid as damages, the basic proposition is that a plaintiff ‘is, so far as money can do it, to be placed in the same position … as if the contract had been performed’: Robinson v Harman (1848) 154 ER 363 at 365. However, for reasons outlined in Paper Reclaim Ltd v Aotearoa International Ltd [2006] 3 NZLR 188 (see 29.2C), the compensation principle does not include the recovery of exemplary (punitive) damages. In recovering damages the general rule is that damages are assessed at the date of breach. However, as detailed in Johnson v Perez (1988) 166 CLR 351 (see 29.3C), when the date of breach does not properly give effect to the compensation principle, a court will assess damages by reference to another date so as to properly compensate the plaintiff. Possible alternative dates include the date the contract is lost, the date that the plaintiff, acting reasonably, ventures into the marketplace, and the date of hearing: Johnson v Agnew [1980] AC 367 at 401. In assessing the quantum of damages, the following four interests may be reflected in the sum awarded by a court: the expectation interest; the reliance interest;

the restitution interest; and the indemnity interest. These labels ‘are simply manifestations of the central principle enunciated in Robinson v Harman rather than discrete and truly alternative measures which a party not in breach may elect to claim’: Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 82. The expectation interest is the interest most commonly reflected in an order for damages and which most clearly fits within the compensation principle sometimes referred to as loss of profit damages. It reflects compensation for the loss of the expectation or profit that the plaintiff was entitled to under the contract, but which he or she has been denied by the defendant’s breach of contract. Within the expectation interest are damages for the loss of a chance: Howe v Teefy (1927) 27 SR (NSW) 301 (see 29.4C). As a general rule expectation [page 696] damages do not include compensation for non-economic loss. However, as is outlined and discussed in Baltic Shipping Co v Dillon (1993) 176 CLR 344 (see 29.5C), in certain circumstances such losses may attract compensation under the so-called ‘peace of mind’ exception to the general rule. The reliance interest reflects compensation granted to a plaintiff in relation to expenditure reasonably incurred in reliance on the defendant’s promise and which is wasted because of the latter’s breach. The term ‘wasted expenditure damages’ is also often used to describe this type of loss. The principles surrounding the recovery of reliance interest damages are ventilated in the High Court decision in Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64 (see 29.6C). The indemnity interest refers to losses usually but not always in the form of expenditure of money incurred by a plaintiff as a result of the defendant’s breach. In cases involving the cost of remedying defective work in building or construction contracts, damages will in all but exceptional circumstances result in the plaintiff recovering the costs incurred in remedying the defective work done, as is illustrated in the High Court decision in Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272 (see 29.7C). Such damages

are sometimes referred to as ‘reinstatement costs’ or ‘costs of restoration’. In the exceptional case where the recovery of such costs is unreasonable, the plaintiff will recover an amount based upon the difference between the value of the property as a result of the breach and the value of the property had the work been done as stipulated in the contract: Ruxley Electronics & Constructions Ltd v Forsyth [1996] AC 344. Although the purpose of damages is to compensate the plaintiff for losses suffered as a result of the defendant’s breach of contract, an award of damages will not necessarily compensate a plaintiff for all of his or her losses. The principle in Robinson v Harman is qualified by other rules, the major ones being the rules relating to remoteness and mitigation. Even if loss is caused by the breach of contract, the rule on remoteness ‘marks out the limits of the heads of damage for which the plaintiff is entitled to receive compensation’: European Bank Ltd v Evans (2010) 240 CLR 432 at 438. The rule on remoteness for breach of contract was laid down in the seminal decision of Hadley v Baxendale (1854) 156 ER 145. Under the first limb of the rule in Hadley v Baxendale the plaintiff can recover damages for losses which arise from the breach of contract itself. Under the second limb of the rule damages are recoverable for losses that do not fall within the first limb, but which arise from special circumstances known to the defendant at the time the contract was entered into. The application of the rule in Hadley v Baxendale is illustrated in Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 (see 29.8C) and Stuart Pty Ltd v Condor Commercial Pty Ltd [2006] NSWCA 334 (see 29.9C). In Transfield Shipping Inc v Mercator Shipping Inc [2009] 1 AC 61 (see 29.10C) the House of Lords held that even if a loss fell within the first limb of Hadley v Baxendale, it is not recoverable if, as a matter of construction of the contract, the loss was not one for which the defendant agreed to accept responsibility. In effect this rule constitutes a preliminary screening of losses before the court has to consider whether they are affected by the rules of remoteness. References, with apparent approval, by a number of Australian cases to this decision indicate that it may reflect the law in Australia, although a detailed judicial examination of its standing by the High Court of Australia has not yet occurred. [page 697]

The principle of mitigation qualifies the compensation principle in Robinson v Harman by imposing an obligation upon a plaintiff to undertake steps within reasonable limits that will have the effect of avoiding or limiting the losses that are caused by the defendant’s breach of contract. The scope of this principle and its theoretical justification are discussed in The ‘Asia Star’ [2010] 2 Lloyd’s Rep 121 (see 29.11C).

EXEMPLARY DAMAGES AND BREACH OF CONTRACT 29.2C

Paper Reclaim Ltd v Aotearoa International Ltd [2006] 3 NZLR 188

Court: Court of Appeal in New Zealand Facts: Paper Reclaim and Aotearoa International were involved in the collecting, recycling, selling, and exporting of wastepaper. Their business arrangement was found to be governed by a joint venture agreement. After more than 20 years the working relationship between the parties broke down. Paper Reclaim was found to have breached the agreement in several respects, including an implied obligation that the agreement could only be terminated on giving reasonable notice. Aotearoa sued Paper Reclaim for damages for breach of contract. Issue: One of the issues before the Court of Appeal was whether Paper Reclaim’s breach was such as to render it liable to pay exemplary damages to Aotearoa. Decision: The Court of Appeal (Anderson P, Chambers and O’Regan JJ) unanimously held that Paper Reclaim was not liable for exemplary damages because such damages, as a matter of law, were not recoverable in a claim for damages for breach of contract. Extract: The extract from the court’s judgment sets out justifications for the rule against recovery of exemplary damages in breach of contract claims.

The Court Exemplary damages are not available for breach of contract in Australia.1 … The position is the same in the United Kingdom. The current position is summarised [by] Treitel as follows: As a general rule punitive damages cannot be awarded in a purely contractual action, since the object of such an action is not to punish the defendant but to compensate the claimant. Punitive damages are not available even though the breach was committed deliberately and with a view to profit. If the court is particularly outraged by the defendant’s conduct, it can sometimes achieve much the same result by awarding damages for injury to the claimant’s feelings. In theory such damages are meant to compensate the claimant for mental suffering, rather than to punish the defendant. But in practice the distinction is [page 698] often hard to draw and — from the defendant’s point of view — to perceive. However, where the claimant has a cause of action both in tort and for breach of contract, he may be able to recover punitive damages by framing the claim in tort. For example, a landlord who unlawfully evicts his tenant is guilty both of a breach of contract and of a trespass; and punitive damages have been awarded in such a case.2 … The question has also been examined in detail by the England and Wales Law Commission. In its 1997 report it recommended that exemplary damages should not be available for breach of contract.3 Its reasons for this recommendation were succinctly set out [as follows]: A range of reasons cumulatively lead to that recommendation. First, exemplary damages have never been awarded for breach of contract. Second, contract primarily involves pecuniary, rather than nonpecuniary, losses; in contrast, the torts for which exemplary

damages are most commonly awarded, and are likely to continue to be most commonly awarded, usually give rise to claims for nonpecuniary losses. Thirdly, the need for certainty is perceived to be greater in relation to contract than tort and, arguably, there is therefore less scope for the sort of discretion which the courts must have in determining the availability and quantum of exemplary damages. Fourthly, a contract is a private arrangement in which parties negotiate rights and duties, whereas the duties which obtain under the law of tort are imposed by law; it can accordingly be argued that the notion of state punishment is more readily applicable to the latter than to the former. Fifthly, the doctrine of efficient breach dictates that contracting parties should have available the option of breaking the contract and paying compensatory damages, if they are able to find a more remunerative use for the subject matter of the promise. To award exemplary damages would tend to discourage efficient breach.4 In Ireland the common law position is that exemplary damages are not available for breach of contract. … The [Irish Law Reform Commission has stated] that ‘an extension of exemplary damages to contract cases would be at odds with the traditional concept of contract law as having an exclusively private law character’.5 The United States presents a confused picture. The Restatement (Second) of Contracts (1981) says: Punitive damages are not recoverable for a breach of contract unless the conduct constituting the breach is also a tort for which punitive damages are recoverable.6 Notwithstanding that general rule, different state jurisdictions have recognised other circumstances in which exemplary damages may be awarded for a breach of contract. … [page 699] The Supreme Court of Canada has recently considered whether exemplary

damages should be available for breach of contract. In Whiten v Pilot Insurance Co,7 the court held that exemplary damages could be awarded in a breach of contract claim provided that the defendant’s conduct was such as to give rise to an ‘independent actionable wrong’. … That independent wrong need not be a claim in tort. In that regard, the court’s conclusion deviated from the position in the American Restatement. The Supreme Court’s position has been subject to some fairly trenchant criticism. For instance, Professor McCamus … said that the court had given ‘no explanation … for the proposition that although one single breach of duty suffices for punitive damages in the tort context, punitive damages in contract require two breaches of duty’. Indeed, he went on, ‘it appears that no coherent justification can be offered for the latter requirement’. Professor McCamus said that the decision failed to supply a convincing reason for making an extension of the scope of punitive damages in the contract context beyond cases of breach of contract that also constitute tortious wrongdoing.8 An even more damning review of the decision is Adjunct Professor Swan’s article [in which he] concludes that the Supreme Court’s judgment is ‘deeply disappointing’. He went on: The failures of the Court occur at many levels: the cause of action is misstated and misunderstood, and the full range of compensable heads of loss or damage, including costs, is completely ignored so that the jury verdict is justified on a basis — the ‘if and only if’ argument — that is flatly wrong. The analysis of punitive damages, while in many respects careful and properly cautious, fails to consider what is necessarily entailed by the whole enterprise of bringing considerations of punishment or deterrence into the civil law and, in particular, ignores the regulatory background to the insurance business. To an extraordinary extent, the Court seems oblivious to its own previous decisions. He [later] concludes: The casual assumption by the Court that punitive damages can be awarded for breach of contract is not only unnecessary to achieve

the goals of the law, but deeply inconsistent with the purpose and role of contracts.9 The clear trend of overseas authority is against the possibility that exemplary damages should be available in breach of contract cases. We are of the view that the position in New Zealand should conform with that trend. We are particularly influenced by the detailed reports undertaken by the law commissions in the United Kingdom and Ireland. … We find their reasoning compelling and adopt it. [page 700] It is easy for a court to hedge and say that exemplary damages should not be possible save ‘in very rare cases’ or ‘in exceptional circumstances’. But the downside of ‘leaving an out’ is that any plaintiff can blithely plead a claim for exemplary damages, asserting that his or her case is in the ‘exceptional’ category. The defendant will never be successful in having the claim struck out, as the court will not be able to assess at a strike-out stage whether the case factually comes within the exceptional category where exemplary damages might lie. A claim may go to trial unnecessarily, the plaintiff hoping that he or she may win. … The fact that the odds may be slim may not deter a plaintiff with stars in his eyes. Alternatively, defendants may feel compelled to offer something in order to get rid of the possibility that this case is found to be within the exceptional category. It is quite wrong to give plaintiffs a powerful weapon with which they can harass defendants and, perhaps, extract large settlements because the costs of defending even an unmeritorious claim may be huge.10 … There is certainly no need for exemplary damages to fill any hole in the range of compensatory damages in the contract field. Contractual remedies now available in appropriate cases include expectation damages, reliance damages, and damages for non-pecuniary loss, mental distress, disappointment and loss of amenity. … In addition, in appropriate cases, indemnity costs may be available for improper conduct in the course of litigation. And, of course, also within the court’s armoury are the nonmonetary remedies of injunction and specific performance. There is no reason in principle to add yet another remedy to the above list that would

give a contracting party a windfall profit over and above that which it had bargained for.

[page 701]

Comments 29.2.1 See Radan, Gooley, and Vickovich at 29.18–29.23. 29.2.2 For a discussion on the merits of awarding exemplary damages in exceptional cases, see R Cunningham, ‘Should Punitive Damages be Part of the Judicial Arsenal in Contract Cases?’ (2006) 26 Legal Studies 369.

THE DATE FOR ASSESSMENT OF DAMAGES 29.3C

Johnson v Perez (1988) 166 CLR 351

Court: High Court of Australia Facts: Perez sued his solicitors in negligence in relation to the solicitors’ failure to bring proceedings against his employers for damages for personal injury within the time permitted by limitations legislation. Both the trial judge and the Queensland Full Court assessed damages as at the date of the trial. The solicitors appealed to the High Court. Issue: The issue before the High Court was what the appropriate date for the assessment of damages against Perez’s solicitors was. Decision: The majority of the High Court of Australia (Mason CJ, Wilson, Dawson, Toohey, and Gaudron JJ; Brennan and Deane JJ dissenting) allowed the appeal and held that the date set by the lower court was inappropriate. Mason CJ, Wilson, Toohey, and

Gaudron JJ held that the appropriate date was the date when Perez’s claims against his employers would ordinarily have been heard. Dawson J held that the appropriate date was when Perez’s actions against his employers became statute barred, which was the date when the cause of action against his solicitors arose. Extract: The extract from Mason CJ’s judgment discusses the principles relating to the date of assessment of damages for breach of contract — the same principles applying to claims in the tort of negligence.

Mason CJ The guiding principle in the assessment of damages is compensatory. The object is to award the plaintiff an amount of money that will, as nearly as money can, put him in the same position as if he had not been injured by the defendant.11 … However, the time as at which damages are assessed can significantly affect the amount actually awarded. … When a court assesses damages, it converts the value of the injury into nominal terms; it fixes or liquidates that value. That conversion into monetary terms avoids the difficult task of inquiring into the value of goods and services over time and is necessary for the stability of economic legal relationships. The theory according to which damages are awarded by the [page 702] courts is that a plaintiff’s loss or injury can be adequately compensated by a lump or fixed sum of money which is not subsequently revised. The practice of awarding fixed sums of money worked well when money values and prices were stable. However, in recent times inflation and changing economic values have created complications. Inflation can be described as the general rise in the level of prices or, conversely, as the fall in the purchasing power of the currency. And quite apart from any general shift of prices, the economic value of particular items may rise or fall in relation to other goods. The date of assessment determines which party, the

plaintiff or the defendant, bears the risk of changing prices during the inevitable delay between the injury and the delivery of judgment. If an early date is used for assessment (the date of the injury for example) in an inflationary economy or where goods of the kind injured are appreciating, it is the plaintiff’s position which is eroded. If a later date such as the date of judgment is used, it is the defendant who is exposed. There is a general rule that damages for torts or breach of contract are assessed as at the date of breach or when the cause of action arises. But this rule is not universal; it must give way in particular cases to solutions best adapted to giving an injured plaintiff that amount in damages which will most fairly compensate him for the wrong he has suffered.12 … The general rule that damages are assessed as at the date of breach or when the cause of action arose has been applied more uniformly in contract than in tort and for good reason. But even in contract cases courts depart from the general rule whenever it is necessary to do so in the interests of justice. So, when a creditor seeks to enforce a debt payable in a foreign currency, ‘[t]he critical date is not so much the date when the cause of action arose but rather the date when the debt should have been paid’.13 … The two dates usually coincide but they may diverge and then the later date may be appropriate.14 Likewise with contracts for the sale of goods. Where there is a market in which the injured party can buy a replacement, the date of non-delivery is usually deemed the appropriate date. But where there is no such market, a later date may be appropriate. As Oliver J noted in Radford v De Froberville, the rationale behind this rule lies ‘in the inquiry — at what date could the plaintiff reasonably have been expected to mitigate the damages by seeking an alternative to performance of the contractual obligation?’15 … As I noted earlier, the choice of an early date for assessment leaves the injured party exposed to the deleterious effects of inflation. True it is that legal interest may be awarded from the date of breach, but this is often too low to remedy the effects of inflation and the loss of the use of the money. … However, the preference for an early date is motivated, as Oliver J … suggest[s], by concerns about mitigation. This requirement of mitigation can in turn be explained in part by notions of fairness to the party at fault. Once the injured party learns of the breach, he can minimize the loss

for which the other will be required to compensate by immediately purchasing a replacement.

[page 703]

Comment 29.3.1 See Radan, Gooley, and Vickovich at 29.34–29.42.

DAMAGES FOR LOSS OF A CHANCE 29.4C

Howe v Teefy (1927) 27 SR (NSW) 301

Court: Full Court of the Supreme Court in New South Wales Facts: Howe leased his racehorse, ‘Sankip’, to Teefy for a period of three years. Teefy was a trainer of horses. A few months after the lease was executed, Howe, without justification, took back the horse. Teefy sued Howe for damages for breach of contract. His action included claims for the loss of opportunity to win prizes with the horse, to win bets placed by himself on the horse, and to make profits from supplying information to other people. At trial the jury awarded Teefy £250 in damages. Howe appealed. Issue: The issue before the Full Court was whether Teefy was entitled to be compensated for the claimed losses of opportunity. Decision: The Full Court (Street CJ, Gordon and Campbell JJ) unanimously dismissed Howe’s appeal and confirmed the jury’s original assessment of damages. Extract: The extract from the judgment of Street CJ, delivering the judgment of the Full Court, discusses the relevant principles in

relation to recovery of damages for the loss of a chance and their application to the facts of this case.

Street CJ The sole object of the agreement was to give [Teefy] a chance of making money by training and racing the horse, and what is complained of is that it was taken from him and that he was deprived of that chance. Nor does the fact that his opportunities of making money depended upon contingencies, including the volition of other people, suffice to render the damages for the defendant’s breach of contract incapable of assessment. That was definitely decided by the Court of Appeal in Chaplin v Hicks.16 In that case the facts were that [Hicks] initiated a competition in a newspaper, by means of which twelve women were to be selected out of those who sent in their photographs for the purpose of competing, and were to be given theatrical engagements. A large number of women, including [Chaplin], sent in their photographs, and, as the result of the system of voting adopted, she became one of fifty left in from among whom [Hicks] was to make his selection of the twelve who were to receive the promised specified time, but the letter reached her too late to enable her to [page 704] do so. She was not one of those selected, and she brought an action to recover damages on the ground that by reason of [Hick’s] breach of contract she had lost the chance of selection for an engagement. The jury found that he did not take reasonable means to give her an opportunity of presenting herself for selection, and assessed the damages at £100. Fletcher Moulton LJ … said ‘Mr McCardie does not deny that there is a contract, nor that its terms are as [Chaplin] alleges them to be, nor that it is enforceable, but he contends that [Chaplin] can only recover nominal damages, say one shilling. To start with he puts it thus: where the expectation of the plaintiff depends on a contingency, only nominal damages are recoverable. Upon examination, this principle is obviously much too wide; everything that can happen in the future depends on a

contingency, and such a principle would deprive a plaintiff of anything beyond nominal damages for a breach of contract where the damages could not be assessed with mathematical accuracy …’.17 The presence of contingencies, then, even when the volition of a third person comes into the matter, does not render the damages incapable of assessment though it may make the calculation of the pecuniary loss sustained incapable of being carried out with certainty or precision. The question in every case is has there been any actual loss resulting from the breach of contract complained of. There may be cases where it would be impossible to say that an 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. In Chaplin v Hicks … Vaughan Williams LJ, speaking of the rule as to the measure of damages in the case of a breach of a contract for the delivery of goods, said: ‘Sometimes, however, there is no market for the particular class of goods; but no one has ever suggested that, because there is no market, there are no damages. In such a case the jury must do the best they can, and it may be that the amount of their verdict will really be a matter of guesswork. But the fact that damages cannot be assessed with certainty does not relieve the wrongdoer of the necessity of paying damages for his breach of contract,’18 and Fletcher Moulton LJ, said ‘I think that, where it is clear that there has been actual loss resulting from the breach of contract, which it is difficult to estimate in money, it is for the jury to do their best to estimate: it is not necessary that there should be an absolute measure of damages in each case. There are no doubt well settled rules as to the measure of damages in certain cases, but such accepted rules are only applicable where the breach is one that frequently occurs’.19 The test in every case is, as I say, whether the plaintiff was possessed of something which had a monetary value, and of which he was deprived by the defendant’s breach of contract. In Chaplin v Hicks it was held that the right which [Chaplin] had to belong to the limited class of competitors — the fifty from whom the final twelve were to be drawn — was something of value, and that it was for the jury to estimate the pecuniary value of the loss

[page 705] which she had sustained in being deprived of that right. ‘It is true’ said Vaughan Williams LJ ‘that no market can be said to exist. None of the fifty competitors could have gone into the market and sold her right; her right was a personal right and incapable of transfer. But a jury might well take the view that such a right, if it could have been transferred, would have been of such value that everyone would recognise that a good price could be obtained for it’.20 In the present case the question is whether [Teefy], by having the horse wrongfully taken out of his possession sustained any loss which had a monetary value and which he was entitled to have estimated by a jury. I think that it is clear that he was deprived of something which was of value. The injury which he sustained was the deprivation of his right under his agreement to train and race the horse, and make what profit he could out of doing so. Can it be said that that was a right which had no monetary value, and which no one would give money to possess? In Chaplin v Hicks [Chaplin] had paid nothing to become a competitor, but she recovered damages for the breach of contract complained of. In this case [Teefy] agreed to pay a substantial price under his contract for the right to the advantages to be got from training and racing the horse, and he was afterwards deprived of his right by the defendant’s breach of contract. How can it be said then that that right was incapable of estimation in money, and that the assessment of damages was not a matter for the jury? The calculation which they had to make was not how much he would probably have made in the shape of profit out of his use of the horse, but how much his chance of making that profit, by having the use of the horse, was worth in money. He was willing to pay for the right when he entered into the agreement, and, though the subsequent failure of the horse to win races was an element to be taken into consideration in calculating the value of the chance or right of which he was deprived, I do not think that it can be said that in being deprived of that right he did not suffer an injury which was capable of being calcu--lated in money. I think that he did, and I think that the jury’s award cannot be interfered with.

[page 706]

Comment 29.4.1 See Radan, Gooley, and Vickovich at 29.48–29.53.

THE RECOVERY OF DAMAGES FOR NON-ECONOMIC LOSS 29.5C

Baltic Shipping Co v Dillon (1993) 176 CLR 344

Court: High Court of Australia Facts: Mrs Dillon contracted with Baltic Shipping Co for a 14-day cruise. The cruise was cut short when the vessel, the Mikhail Lermontov, sank some nine days into the voyage after striking a shoal just off the coast of the South Island of New Zealand. Dillon suffered physical and emotional injuries as a result and sued Baltic for damages for breach of contract. Issue: The issues before the High Court were whether Dillon was entitled to recovery of the fare paid for the cruise and whether she was entitled to be compensated for her emotional injuries (noneconomic loss). Decision: The High Court of Australia (Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron, and McHugh JJ) unanimously held that Dillon was not entitled to recover, as damages or restitution, the amount of the ticket price for the cruise, but that she was entitled to recover damages for disappointment and anxiety occasioned by the breach of contract pursuant to an exception to the rule that noneconomic losses are generally not recoverable in contract. Extract: The extracts from the judgment of Mason CJ question the principle that damages for distress and anxiety should not generally

be recoverable in contract, while the extract from Brennan J’s judgment supports the general rule. Mason CJ also discusses the principles relating to recovery of money paid in advance under a contract where the contract breaker does not perform or fully perform his or her obligations.

Mason CJ Is the fare recoverable on the ground of total failure of consideration or otherwise? When, however, an innocent party seeks to recover money paid in advance under a contract in expectation of the entire performance by the contract-breaker of its obligations under the contract and the contractbreaker renders an incomplete performance, in general, the innocent party cannot recover unless there has been a total failure of consideration. If the incomplete performance results in the innocent party receiving and retaining any substantial part of the benefit expected under the contract, there will not be a total failure of consideration. [page 707] In the context of the recovery of money paid on the footing that there has been a total failure of consideration, it is the performance of the defendant’s promise, not the promise itself, which is the relevant consideration.21 In that context, the receipt and retention by the plaintiff of any part of the bargained-for benefit will preclude recovery, unless the contract otherwise provides or the circumstances give rise to a fresh contract. … A qualification to this general rule, more apparent than real, has been introduced in the case of contracts where a seller is bound to vest title to chattels or goods in a buyer and the buyer seeks to recover the price paid when it turns out that title has not been passed. Even if the buyer has had the use and enjoyment of chattels or goods purportedly supplied under the contract for a limited time, the use and enjoyment of the chattels or goods has been held not to amount to the receipt of part of the contractual

consideration. Where the buyer is entitled under the contract to good title and lawful possession but receives only unlawful possession, he or she does not receive any part of what he or she bargained for. And thus, it is held, there is a total failure of consideration.22 … An alternative basis for the recovery of money paid in advance pursuant to a contract in expectation of the receipt of the consideration to be provided by the defendant may arise when the defendant’s right to retain the payment is conditional upon performance of his or her obligations under the contract. This basis of recovery has a superficial, but not a close, resemblance to the concept of an entire contract. In this class of case the plaintiff may be entitled to recover so long as the payment remains conditional. … The question whether an advance payment, not being a deposit or earnest of performance, is absolute or conditional is one of construction. In determining that question it is material to ascertain whether the payee is required by the contract to perform work and incur expense before completing this performance of his or her obligations under the contract. If the payee is so required then, unless the contract manifests a contrary intention, it would be unreasonable to hold that the payee’s right to retain the payment is conditional upon performance of the contractual obligations.23 I have come to the conclusion in the present case that [Dillon] is not entitled to recover the cruise fare on either of the grounds just discussed. The consequence of [Dillon’s] enjoyment of the benefits provided under the contract during the first eight full days of the cruise is that the failure of consideration was partial, not total. I do not understand how, viewed from the perspective of failure of consideration, the enjoyment of those benefits was ‘entirely negated by the catastrophe which occurred upon departure from Picton,’24 to repeat the words of the primary judge. Nor is there any acceptable foundation for holding that the advance payment of the cruise fare created in [Baltic Shipping] no more than a right to retain the payment conditional [page 708]

upon its complete performance of its entire obligations under the contract. As the contract called for performance by [Baltic Shipping] of its contractual obligations from the very commencement of the voyage and continuously thereafter, the advance payment should be regarded as the provision of consideration for each and every substantial benefit expected under the contract. It would not be reasonable to treat [Baltic Shipping’s] right to retain the fare as conditional upon complete performance when [Baltic Shipping] is under a liability to provide substantial benefits to [Dillon] during the course of the voyage. After all, the return of [Dillon] to Sydney at the end of the voyage, though an important element in the performance of [Baltic Shipping’s] obligations, was but one of many elements. In order to illustrate the magnitude of the step which [Dillon] asks the Court to take, it is sufficient to pose two questions. … Would [Dillon] be entitled to a return of the fare if, owing to failure of the ship’s engines, the ship was unable to proceed on the last leg of the cruise to Sydney and it became necessary to airlift [Dillon] to Sydney? Would the fare be recoverable if, owing to a hurricane, the ship was compelled to omit a visit to one of the scheduled ports of call? The answer in each case must be a resounding negative. …

The claim for damages for disappointment and distress [I]n general, damages for injured feelings … could not be awarded in an action for breach of contract. So, in Hamlin v Great Northern Railway Company, where the plaintiff recovered pecuniary loss and nominal damages but was refused damages for distress arising from the defendant’s failure to carry him by train to Hull in breach of contract resulting in his being delayed for days and missing appointments with customers, Pollock CB said: [G]enerally in actions upon contracts no damages can be given which cannot be stated specifically, and … the plaintiff is entitled to recover whatever damages naturally result from the breach of contract, but not damages for the disappointment of mind occasioned by the breach of contract.25 (Emphasis added) … The general rule that damages for anxiety, disappointment and distress are not recoverable in actions for breach of contract is, in any event,

subject to exceptions. … The scope of the exceptions has been expanded by judicial decision in recent years, so much so that the authority of the general rule is now somewhat uncertain. The conceptual and policy foundations of the general rule are by no means clear. It seems to rest on the view that damages for breach of contract are in essence compensatory and that they are confined to the award of that sum of money which will put the injured party in the financial position the party would have been in had the breach of contract not taken place. On that approach, anxiety and injured feelings do not, generally speaking, form part of the plaintiff’s compensable loss which flows from a breach of contract. At bottom, this approach to the problem is based on a policy of excluding the recovery of compensation for injured feelings in cases of breach of contract or confining recovery to cases of a limited class or classes, viz, those where physical inconvenience is caused by the [page 709] breach of contract. This policy is based on an apprehension that the recovery of compensation for injured feelings will lead to inflated awards of damages in commercial contract cases, if not contract cases generally.26 Treitel suggests that this approach is sensible because ‘anxiety is an almost inevitable concomitant of expectations based on promises, so that a contracting party must be deemed to take the risk of it’.27 But one might ask why the injured party should be deemed to take the risk of damage of a particular kind when the fundamental principle on which damages are awarded at common law is that the injured party is to be restored to the position (not merely the financial position) in which the party would have been had the actionable wrong not taken place. Add to that the fact that anxiety and injured feelings are recognized as heads of compensable damage, at least outside the realm of the law of contract. Add as well the circumstance that the general rule has been undermined by the exceptions which have been engrafted upon it. We are then left with a rule which rests on flimsy policy foundations and conceptually is at odds with

the fundamental principle governing the recovery of damages, the more so now that the approaches in tort and contract are converging. It is convenient now to take stock of the exceptions to the general rule. … [One of the exceptions involves] cases in which the plaintiff has recovered damages for distress, vexation and frustration where the very object of the contract has been to provide pleasure, relaxation or freedom from molestation. … [Thus] plaintiffs have recovered damages for disappointment and distress caused by the breach of a contract to provide a stipulated holiday, entertainment or enjoyment, the object of the contract being to provide pleasure or relaxation.28 … In the present case, the contract, which was for what in essence was a ‘pleasure cruise’, must be characterized as a contract the object of which was to provide for enjoyment and relaxation. It follows that the respondent was entitled to an award of damages for disappointment and distress and physical inconvenience flowing from that breach of contract. Indeed, an award for disappointment and distress consequential upon physical inconvenience was justified on that account alone.

Brennan J There remains the question of the plaintiff’s entitlement to damages described as ‘compensation for disappointment and distress’. In Hamlin v Great Northern Railway Company … Pollock CB said that a plaintiff in an action for breach of contract ‘is entitled to recover whatever damages naturally result from the breach of contract, but not damages for the disappointment of mind occasioned by the breach of the contract’.29 Damage and disappointment of mind may be caused equally by the breach, but damages are not generally recoverable for disappointment of mind. … The distinction between damage naturally resulting and disappointment of mind is based not on causation, but on remoteness. [page 710] That distinction accords with the observation of Pollock CB in Hamlin v Great Northern Railway Company which confined the plaintiff’s

damages for breach of contract to ‘damages of a pecuniary kind as he may have really sustained as a direct consequence of the breach of contract’.30 Remoteness is governed by the rules in Hadley v Baxendale which prescribe the measure of damages in respect of breach of contract to include not only damage naturally resulting from the breach (‘i.e., according to the usual course of things’) but also damage which might ‘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’).31 Additional or special knowledge known to both parties may widen or contract the scope of liability for breach. … The relevant question is therefore whether ‘disappointment of mind’ is sufficiently likely to result from a particular breach ‘to make it proper to hold that the loss flowed naturally from the breach’. … In one sense, a promisee’s disappointment of mind flows naturally whenever a contractual promise is not fulfilled. … But where disappointment of mind is no more than a mental reaction to a breach of contract and damage flowing therefrom, the law has treated such a mental reaction as too remote. … In my opinion, there is a sound policy underlying this rule. The institution of contract, by which parties are empowered to create a charter of their rights and obligations inter se, can operate effectively only if the parties, at the time when they create their charter, can form some estimate of liability in the event of default in performance. But no approximate estimate of liability could be formed if the subjective mental reaction of an innocent party to a breach and resultant damage were added on as further damage without proof of pecuniary loss by the innocent party. If the mental reaction to breach and resultant damage were itself a head of damage, the liability of a party in breach would be at large and liable to fluctuation according to the personal situation of the innocent party. If a promisor were exposed to such an indefinite liability in the event of breach, the making of commercial contracts would be inhibited, the assignment of a contractual right would carry new risks for the party subject to the reciprocal obligation, and trade and commerce would be seriously impeded. This policy has no relevance to the measure of damages in tort. The rights infringed by a wrongdoer are not acquired by bargain but are imposed by

law in order to keep an innocent party secure from the consequences of proscribed acts or omissions. Unlike a party entering into a contract who negotiates to protect himself from a risk of injury, the wrongdoer’s victim has no opportunity to negotiate protection.32 The policy of the law would fail if the wrongdoer were to be exempt from liability for ‘resentment, disappointment and the loss of esteem’ suffered by the innocent party in consequence of the wrong done. [page 711] If I have correctly apprehended the policy underlying the contractual rule, it is clear that the Hamlin v Great Northern Railway Company principle has no application when (to adopt the words of Pollock CB) the ‘disappointment of mind’ is itself the ‘direct consequence of the breach of contract’. In such a case the disappointment is not merely a reaction to the breach and resultant damage but is itself the resultant damage. If a contract contains a promise, express or implied, that the promisor will not cause the promisee, or will protect the promisee from, disappointment of mind, it cannot be said that disappointment of mind resulting from breach of the promise is too remote. Such a promise is expressed or implied in many contracts the object of which is to provide a service or facility conducive to peace of mind, tranquillity of environment or ease of living and damages have been awarded accordingly. … To ascertain whether the obtaining of peace of mind is the object of a contract or, more accurately, an object of a contract, reference is made to its terms, express or implied, construed in the context of facts which the parties know or are taken to have known. Thus, if peaceful and comfortable accommodation is promised to holidaymakers and the accommodation tendered does not answer the description, there is a breach which directly causes the loss of the promised peacefulness and comfort and damages are recoverable accordingly.

Comments

29.5.1 See Radan, Gooley, and Vickovich at 29.54–29.63 and 29.81–29.85. 29.5.2 For a discussion of this case in the context of recovery of damages for mental distress, see E Macdonald, ‘Contractual Damages for Mental Distress’ (1994) 7 Journal of Contract Law 134. 29.5.3 In Canada the Supreme Court rejected the notion that damages for mental distress are exceptional in nature and asserted that they are awarded subject to satisfying the rules of remoteness. In Fidler v Sun Life Assurance Co of Canada (2006) 271 DLR (4th) 1 at 14–16, the court said: [D]amages for mental distress for breach of contract may, in appropriate cases, be awarded. … The measure of these damages is, of course, subject to remoteness principles. There is no reason … [not to award] damages for mental distress, where such damages were in the reasonable contemplation of the parties at the time the contract was made. This conclusion follows from the basic principle of compensatory contractual damages. … It does not follow, however, that all mental distress associated with a breach of contract is compensable. In normal commercial contracts, the likelihood of a breach of contract causing mental distress is not ordinarily within the reasonable contemplation of the parties. It is not unusual that a breach of contract will leave the wronged party feeling frustrated or angry. The law does not award damages for such incidental frustration. The matter is otherwise, however, when the parties enter into a contract, an object of which is to secure [page 712] a particular psychological benefit. In such a case, damages arising from such mental distress should in principle be recoverable where they are established on the evidence

and shown to have been within the reasonable contemplation of the parties at the time the contract was made. The basic principles of contract damages do not cease to operate merely because what is promised is an intangible, like mental security. … While the mental distress as a consequence of breach must reasonably be contemplated by the parties to attract damages, we see no basis for requiring it to be the dominant aspect or the ‘very essence’ of the bargain. … [T]he law of contract protects all significant parts of the bargain, not merely those that are ‘dominant’ or ‘essential’. … Principle suggests that as long as the promise in relation to state of mind is a part of the bargain in the reasonable contemplation of the contracting parties, mental distress damages arising from its breach are recoverable. This is to state neither more nor less than the rule in Hadley v Baxendale. We conclude that the ‘peace of mind’ class of cases should not be viewed as an exception to the general rule of the non-availability of damages for mental distress in contract law, but rather as an application of the reasonable contemplation or foreseeability principle that applies generally to determine the availability of damages for breach of contract.

DAMAGES FOR RELIANCE LOSS 29.6C

Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64

Court: High Court of Australia

Facts: The Australian Government contracted with Amann Aviation for the latter to provide aerial surveillance services of Australia’s northern coastline for a period of three years from 12 September 1987. Amann had approximately six months to prepare itself to assume its obligations on the set date. Considerable money was spent in acquiring and specially fitting out aircraft to undertake the aerial surveillance services. However, Amann was not completely ready on the appointed date. Therefore, on the first day of operations Amann was unable to fully comply with its contractual obligations. The Australian Government gave notice of termination of the contract on 12 September 1987. This termination was wrongful because it did not comply with the procedures for termination set out in cl 2.24 of the contract. The government’s wrongful termination was treated by Amann as repudiation of the contract and Amann sued for damages for breach of contract. In the main its claim was for the expenditure it had incurred in acquiring the necessary aircraft for the surveillance services, which was now wasted because of [page 713] the government’s breach of contract. A critical additional factor in this case was that if the contract had run its full term, Amann’s profits would have only been an amount that represented just under onesixth of the costs of acquiring the necessary aircraft for the aerial surveillance services. Although Amann had no contractual right to a renewal of the contract after three years, there was a reasonable expectation that it would be renewed, which would have resulted in substantial profits to Amann. Issue: The issue before the High Court was whether the damages payable to Amann were the entirety of its wasted expenditure or whether, as the Commonwealth government argued, such an amount should have been reduced to reflect the chance that the government would not, after the expiration of the initial contract, have renewed Amann’s contract for a further term. Decision: The four majority judges in the High Court (Mason,

Dawson, Brennan, and Gaudron JJ) found in favour of Amann and upheld the order of the Full Court of the Federal Court that the Commonwealth government pay Amann damages totalling $6,600,207. This sum was constituted by the following amounts: $4,364,192, being the difference between the sum paid for the aircraft and their agreed resale value after termination of contract; $854,943, being Amann’s pre-operational expenditure; $143,049, being termination payments made to Amann’s employees; $113,000, being the amount paid to the government as a security deposit; and $1,125,023, being interest payable on the previous four amounts. The three minority judges (Deane, Toohey, and McHugh JJ) held that the damages should be reduced to reflect the percentage chance that Amann’s contract would not have been renewed after three years. In their calculations of damages Deane and McHugh JJ said that there was a 20 per cent chance that the contract would not have been renewed. Toohey J held that there was a 50 per cent chance that the contract would not have been renewed. Extract: The extracts from the majority judgments of Mason CJ and Dawson J and of Wilson and Brennan JJ discuss in particular principles relating to the recovery of reliance loss and their application to the facts of the case.

Mason CJ and Dawson J The award of damages for breach of contract The general rule at common law, as stated by Parke B in Robinson v Harman,33 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’. … [page 714]

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. In the ordinary course of commercial dealings, a party supplying goods or rendering services will enter into a contract with a view to securing a profit, that is to say, that party will expect a certain margin of gain to be achieved in addition to the recouping of any expenses reasonably incurred by it in the discharge of its contractual obligations. It is for this reason that expectation damages are often described as damages for loss of profits. Damages recoverable as lost profits are constituted by the combination of expenses justifiably incurred by a plaintiff in the discharge of contractual obligations and any amount by which gross receipts would have exceeded those expenses. This second amount is the net profit. The expression ‘damages for loss of profits’ should not be understood as carrying with it the implication that no damages are recoverable either in the case of a contract in which no net profit would have been generated or in the case of a contract in which the amount of profit cannot be demonstrated. It would be an invitation to the repudiation of contractual obligations if the law were to deny to an innocent plaintiff the right to recoupment by an award of damages of expenditure justifiably incurred for the purpose of discharging contractual obligations simply on the ground that the contract breached would not have been or could not be shown to have been profitable. If the performance of a contract would have resulted in a plaintiff, while not making a profit, nevertheless recovering costs incurred in the course of performing contractual obligations, then that plaintiff is entitled to recover damages in an amount equal to those costs in accordance with Robinson v Harman, as those costs would have been recovered had the contract been fully performed. Similarly, where it is not possible for a plaintiff to demonstrate whether or to what extent the

performance of a contract would have resulted in a profit for the plaintiff, it will be open to a plaintiff to seek to recoup expenses incurred, damages in such a case being described as reliance damages or damages for wasted expenditure. A further example of the application of Robinson v Harman which will result in a plaintiff being entitled to claim damages for wasted expenditure is in a contract for services such as that between a solicitor and a client. Where a solicitor has breached his or her contractual duty of care, the measure of damages to which a client will be entitled will be such an amount as would put the client in the position he or she would have been in had the contract of retainer been performed without negligence. In cases where, had non-negligent advice been given, the client would not have entered into a subsequent transaction, for example a purchase of real property, then, in conformity with Robinson v Harman, the client will be entitled to recover as damages expenditure wasted on account of the negligent advice, less [page 715] anything subsequently recovered and given reasonable acts of mitigation.34 The amount of wasted expenditure will be the appropriate measure of damages in such a situation because, it having been established that the client would not have entered into the subsequent contract if proper advice had been given, it is not sensible to speak of loss of profits. … [T]he expressions ‘expectation damages’, ‘damages for loss of profits’, ‘reliance damages’ and ‘damages for wasted expenditure’ are simply manifestations of the central principle enunciated in Robinson v Harman rather than discrete and truly alternative measures of damages which a party not in breach may elect to claim. 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, Learned Hand CJ said:

[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.35 Learned Hand CJ went on to approve the statement made by Fuller and Perdue in their celebrated article, ‘The Reliance Interest in Contract Damages’: 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.36 … [A] plaintiff may choose to sue for damages based on his reliance interest ‘if he can prove his profit with reasonable certainty. He may also choose to do this in the case of a losing contract, one under which he would have had a loss rather than a profit’.37 … The settled rule, both here and in England, is that mere difficulty in estimating damages does not relieve a court from the responsibility of estimating them as best it can.38 … Where precise evidence is not available the court must do the best it can.39 And uncertainty as to the profits to be derived from a business by reason of contingencies is not a reason for a court refusing to assess damages. … [I]f 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 [page 716] 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. In Anglia Television Ltd v Reed, 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: 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.40 … Subsequently, in CCC Films Ltd v Impact Quadrant Films Ltd, Hutchison J said that ‘a plaintiff may always frame his claim in the alternative way if he chooses’.41 … 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. … [Thus,] in TC Industrial Plant Pty Ltd v Robert’s Queensland Pty Ltd42 … [this] Court did not accede to the submission that the plaintiff was bound to elect whether it would pursue its claim for expenditure uselessly incurred as a result of the defendants’ breaches of contract or, in the alternative, its claim to recover for the loss of profits it would have earned had the crusher been fit for the purpose. 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. [page 717] 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. 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 McRae43 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. It will still be open to a defendant, however, to argue that, notwithstanding the fact that it is impossible to assess what profits, if any, the plaintiff would have made had the contract been fully performed, the expenditure claimed by a plaintiff would nevertheless not have been recovered even if, to use the examples of

McRae and Anglia Television, the tanker had existed or the defendant actor, [Robert] Reed, had participated in the production of the film. In essence, such an argument is to the effect that, far from being impossible to predict what the result of the contract would have been, if fully performed, it is possible to demonstrate that performance of the contract would not even have resulted in the recovery by the plaintiff of reasonable expenses incurred.

Onus of proof Why the law appears to assume that a plaintiff would at least have recovered reasonable expenses incurred in the case both of contracts not resulting in a net profit and of contracts in which a plaintiff maintains that it is not possible to determine what position the plaintiff would have been in had the contract been fully performed, and why the law puts the burden of displacing this assumption on a defendant are questions to which we now turn. 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. … The placing of the onus of proof on a defendant in the manner described amounts to the erection of a presumption that a party would not enter into a contract in which its costs were not recoverable. … [S]uch a presumption is not irrebuttable but, until that presumption is rebutted, a plaintiff may rely on it to recover his or her reasonable expenses both in the case of a contract which would not have been profitable and in the case of a contract where the outcome of the contract, if it had been fully performed, cannot be demonstrated, [page 718]

whether at all or with any certainty. This last type of contract, of which McRae and Anglia Television have been cited as examples, is to be distinguished from a purely aleatory contract where … it would not be appropriate to apply the presumption we have described for the reason that inherent in the entry into such a contract is the contingency that not even the slightest expenditure will be recovered, let alone the securing of any net profit. In the case of aleatory contracts, damages are awarded for loss of a chance and the burden of establishing the existence and loss of this chance as a result of the defendant’s breach lies on a plaintiff although, as has already been observed, mere difficulty of estimation does not relieve a court or jury, in appropriate cases, of the task and responsibility of placing a value on the chance lost. … In the context of the discussion of onus of proof and the presumption relating to recovery of reasonable expenditure incurred which we have described, it is necessary to consider the decision of this Court in McRae. … 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. 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. 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 [page 719] 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.

The prospect of renewal of the contract and discharge of the onus 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. … Amann … [argues] in support of the contrary argument that damages for breach of contract may be assessed so as to include the prospect that the contract will be renewed even though the defendant is under no legal obligation to renew the contract. … [T]he firmly established rule [is] that, in an action for breach of contract, a defendant is not liable in damages for not doing that which he or she has not promised to do.44 … 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.45 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.46 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 [that, in an action for breach of contract, a defendant is not liable in damages for not doing that which he or she has not promised to do] established by Abrahams and Lavarack, [page 720] Amann is entitled to compensation which takes into account the value of

the loss of the prospect of securing a renewal of the contract. 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. 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. … The Commonwealth contended that The Mihalis Angelos47 is an instance of the rule. It was a case in which the plaintiff shipowners suffered no loss by reason of the defendant charterers’ repudiation of the charterparty because the charterers would have cancelled the contract shortly thereafter pursuant to an option in the charterparty to cancel in the event that the vessel was not ready to load in Haiphong by a stipulated date. It was found as a fact that the vessel would not have been ready to load by that date had she proceeded to Haiphong. The decision in The Mihalis Angelos is of no assistance on the aspect of the case now under consideration; it has more application to another argument, which we shall mention later, that Amann suffered no substantial loss because the original contract would have been terminated pursuant to cl.2.24 in any event. 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.48 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.49 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 [page 721] 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.50 If we make the assumption that the contract would have proceeded to completion, which is a necessary assumption for present purposes, it would be wrong … to conclude that the Commonwealth would have refused to renew the contract simply because that outcome would reduce the Commonwealth’s liability in damages to Amann in the light of the events as they have actually fallen out. In assessing damages, the Court is necessarily engaged in a hypothetical exercise, that is, ascertaining how the contract would have turned out had it not been brought to an end by Amann’s acceptance of the Commonwealth’s wrongful repudiation. On the assumption that the contract would have proceeded to completion, it would have been to the Commonwealth’s advantage to have agreed to a renewal, rather than to have negotiated a fresh contract with a third party who would have been in the position of starting from scratch and thus have sought and insisted upon large financial rewards in order to compensate for heavy initial expenditure of the kind incurred by Amann. Accordingly, there would have been a strong prospect of renewal. This being so, the value of the prospect of a renewal of the contract was a matter to be taken into account in determining whether Amann would or would not have recouped its expenditure. … [W]here the value of the legal obligation to the plaintiff depends upon the occurrence of an event extraneous to the contract, the probability of the occurrence is relevant to

the estimate.51 As we have said, there was a strong prospect of such an occurrence in this case. It follows that we consider that the Full Court was correct in taking into account the prospect of renewal of the contract as a factor relevant to the assessment of damages. The consequence of this conclusion, in view of the onus cast upon the Commonwealth as the party in breach, is that the Commonwealth must demonstrate that the value to Amann of the prospect of renewal of the contract when combined with those expenses that would have been recovered by way of gross receipts was less than the total expenses to be incurred by Amann in the performance of its contractual obligations. If the Commonwealth was able to demonstrate that this would have been the result, had the contract been fully performed, then, in conformity with Robinson v Harman, Amann would not be entitled to all of its expenditure incurred in reliance on the Commonwealth’s promise to perform and wasted as a result of the Commonwealth’s breach. The Commonwealth was unable, however, to demonstrate this and so discharge the onus. Accordingly, the presumption that Amann would not have entered into a contract in which it would not recover the value of its expenditure incurred remains undisturbed. We agree with the Full Court’s conclusion that Amann was entitled to recover as damages an amount commensurate with what it had expended in reliance upon the Commonwealth’s promise to perform its contractual obligations. [page 722]

Discount in the quantum of damages by reference to the prospect of termination of the contract pursuant to cl 2.24 The Commonwealth mounts another argument to the effect that no damages should be awarded and that, if damages are awarded, any damages should not be substantial. This argument is put on the footing that the Commonwealth would have validly terminated the contract in any event for breach pursuant to cl.2.24. The Commonwealth argues that the amount of damages awarded should have been discounted in accordance with the prospect of valid termination by the Commonwealth and that, in assessing this prospect, it should be presumed that the Commonwealth would have

acted so as to minimize its liability in conformity with The Mihalis Angelos. … [T]he prescription of the ‘show cause’ procedure, coupled with the references to ‘the satisfaction’ of the Secretary, indicate that the decisionmaking function of the Secretary under the clause called for something more on his part than a mere pursuit of what was to the advantage, or in the interests, of the Commonwealth. In other words, the Secretary was required to arrive at a decision after weighing in the balance the matters that led him to invoke the ‘show cause’ procedure, such case as Amann might wish to present in accordance with that procedure and such other matters as might bear upon the issue of cancellation. Accordingly, we are not persuaded that this Court should depart from the interpretation placed upon cl 2.24 by the Full Court of the Federal Court. [Although they agreed with the estimate of the Full Court of the Federal Court that there was a 20 per cent chance that the Commonwealth Government would have cancelled the contract, Mason CJ and Wilson J, at [97]–[98], also agreed with the Full Court ‘that the amount of damages to be awarded should not be discounted on account of an event which was unlikely to occur’.]

Brennan J The measure of damages for breach of contract [Brennan J first referred to the compensation principle in Robinson v Harman and then to the remoteness rules in Hadley v Baxendale.] A plaintiff (as I shall call the party not in breach) seeking damages from a defendant (as I shall call the party in breach) bears the onus of proving both the loss sustained by reason of the breach and the damages for the loss. … If a contract be profitable and is rescinded for breach, the profits lost and the costs actually and reasonably incurred in performance are proper subjects of compensation. If a contract be a loss contract, the costs actually and reasonably incurred in performance are the subject of compensation, but only to the extent that those losses would have been recovered had the contract been performed.

The situation of a plaintiff ‘if the contract had been performed’ is, of course, a hypothetical situation with which the plaintiff’s actual situation is compared. When a contract is [page 723] rescinded for breach by a defendant, the hypothesis postulates that the contract is still on foot. On that hypothesis, the benefits to which the plaintiff would have been entitled had the contract been performed (let the benefits have a value of $B) can be apportioned among three components: the amount expended by the plaintiff in performing or preparing to perform the contract prior to rescission ($x); the further amount which the plaintiff would have had to expend to perform the contract ($y); and the amount of profit or loss that would have eventuated had the contract been performed ($z). The cost of capital equipment properly to be apportioned to the contract must be taken into account whether by way of hiring charges, depreciation or amortization, else the profit component is falsely inflated or the loss component falsely reduced or eliminated, but care must be taken to ensure that, in an action to recover damages for costs and lost profits, there is no duplication of this item. … The components of the calculated profit considered in TC Industrial Plant [v Robert’s Queensland],52 show that the remuneration payable under a contract plus the value of all other benefits to which a plaintiff would have been entitled had the contract been performed equals the costs incurred and to be incurred in performing the contract plus the profit or minus the loss, as the case may be. An equation can therefore be stated: $B = $x [plus] $y [plus or minus] $z. In this case, the principal item of loss which [Amann] is seeking to recover is the net amount expended by it in preparing to perform the contract ($x), forgoing any profits which it submits it would have earned but which it is unable to quantify. The amount so expended (net of its remainder value) was wasted by the repudiation of the contract by [the Commonwealth]. It is a loss that falls comfortably within the rule in Hadley v Baxendale. The question is: what is the measure of damages for that loss? … If the value of those benefits [to which Amann would have been entitled

had the contract been performed] ($B) less the amount which Amann would have had to expend but is now dispensed from expending in performance of any of its unperformed obligations under the contract ($y) exceeds the expenditure incurred by Amann in preparing to perform the contract ($x), Amann is entitled to recover $x; if the net benefit ($B [minus] $y) is less than the expenditure incurred ($x), Amann is entitled to recover no more than the net benefit, for that is all that it would have recouped had the contract been performed. The measure of Amann’s damages thus depends on the value of the benefits which Amann would have been entitled to receive had the contract been performed ($B), $x and $y being agreed amounts. If $B cannot be quantified, the problem is this: does Amann fail because it has not proved that $B [minus] $y is sufficient to cover the $x it expended, or does the Commonwealth fail because it has not proved that $B [minus] $y is insufficient to cover the $x or has not proved the amount of the insufficiency?

A plaintiff’s contractual benefits: $B Where a contract rescinded for breach is conditional or contingent, the benefits to which a plaintiff would have been entitled had the contract been performed are affected by the [page 724] possibility that performance of the contract might have been dispensed with or abbreviated by non-fulfilment of the condition or the occurrence of the contingency. To apply the hypothesis that ‘the contract had been performed’ in such a case, it is necessary to find whether the condition would have been fulfilled or whether the contingency would have occurred or, if the fact cannot be found, to make some estimate of the possibility of non-fulfilment of the condition or the occurrence of the contingency. Where damages are assessed after the time for fulfilling the condition or for the occurrence of the contingency has arrived (if there be a stipulated time), the court may be able to determine with some precision the benefits to which the plaintiff would have been entitled had the contract been performed. … But, if no time be stipulated or if damages be assessed before

the stipulated time has arrived, some estimate must be made as to the possibility of non-fulfilment of the condition or of the occurrence of the contingency. The estimate must be taken into account in assessing a plaintiff’s damages. In this case, the manner in which account is to be taken of the possibility of early termination of the contract will have to be considered. It must always be assumed in assessing a plaintiff’s damages that the defendant would have committed no further breach of the contract. … In evaluating a plaintiff’s benefits under a contract, the court does not look solely at the express terms of the contract but evaluates the plaintiff’s rights to benefits of any kind, whether those benefits are expressed by the terms of the contract or are ascertainable by reference to circumstances extrinsic to those terms. Thus … an artist’s opportunity of gaining fame and reputation by performing a theatrical engagement must be evaluated in assessing damages when the engagement is wrongfully terminated.53 In cases of this kind, the contract is found to contain by implication a promise to give the plaintiff an opportunity to acquire the unexpressed benefit,54 and damages are awarded for breach of that promise. They are not awarded in respect of benefits which the plaintiff has no contractual right to receive.55 Unexpressed benefits are frequently of an intangible kind or are otherwise of uncertain value but difficulty in evaluating a contractual benefit is no barrier to recovery of damages where the defendant is bound to provide the benefit but has failed to do so.56 … When a commercial contract is breached, it would be erroneous to evaluate the benefits which a plaintiff would have been entitled to receive had the contract been performed by reference solely to the stipulated remuneration for performance if the plaintiff is entitled to acquire, by performance of the contract, other commercial advantages. … The other commercial advantages must be evaluated, and evaluation may require consideration of the nature of the plaintiff’s business, the opportunities available to the plaintiff to exploit the advantage and, if there be a market for a particular advantage, that market. [page 725]

Among the commercial advantages to which a plaintiff might be entitled as of right by performing a contract is an opportunity to obtain a profitable engagement under another contract, an opportunity not amounting to a right to a further engagement. Thus, in TC Industrial Plant, where the plaintiff sought damages for breach of warranty of fitness of a stone crushing machine and the plaintiff’s principal loss consisted in the cancellation of a contract with the Commonwealth for the supply of crushed aggregate to be produced by using the crusher, the plaintiff was held entitled to recover the profit which would have been earned under a probable extension of the supply contract had the plaintiff been able to perform the original supply contract. … In TC Industrial Plant, the second contract was almost certain to follow on successful performance of the first contract, but the underlying principle does not depend on the certainty of securing a second contract. Certainty is relevant to the value of the opportunity of obtaining a profitable engagement under a second contract, but the benefits to which a plaintiff is entitled under a contract may include an uncertain prospect of obtaining such an engagement provided the prospect is sufficiently substantial to stamp it as a real commercial advantage. The relevant principle is that when performance of a contract by a defendant (including the permitting of the plaintiff to perform his obligations under the contract) would have resulted in the plaintiff’s acquiring a particular commercial advantage but the advantage is lost by reason of the defendant’s breach, the loss of the advantage is compensable and its value is to be taken into account in assessing a plaintiff’s damages. If the advantage in question is a certain opportunity to secure a profitable second contract, the profits of the second contract can be recovered. Such an advantage is worth more than a merely preferential chance of securing such a contract but such a chance, like the chance in Chaplin v Hicks, has a value and the loss of the chance is a proper subject of compensatory damages. However, to attribute a value to such a chance the court might have to engage in a degree of speculation, speculating as to the likelihood that a profitable contract would be available, what the likely profits would be and the likelihood that the plaintiff would secure the contract against competition by others. The value of the plaintiff’s lost contractual benefits are then shrouded in uncertainty. In that event, who bears the onus of

proving that the net value of the benefits ($B [minus] $y) are or are not sufficient to cover the expenditure incurred by the plaintiff prior to the breach of the first contract or, when the contract is rescinded for breach, prior to rescission?

The doctrine of reliance damages: an alternative method of assessment Where a contract has been rescinded for breach, the amount which a plaintiff has reasonably expended in reliance on the defendant’s promise and which is wasted by reason of the defendant’s breach of his promise is a proper subject of damages for breach of contract.57 Damages assessed for wasted expenditure incurred in reliance on the defendant’s promise may be described as reliance damages to distinguish them from damages assessed for loss [page 726] of the benefits which the plaintiff expected from performance of the contract (expectation damages). A plaintiff who seeks to recover reliance damages must ordinarily prove that the net value of the benefits to which he would have been entitled if the contract had been performed ($B [minus] $y) would have exceeded the wasted expenditure incurred in reliance on the defendant’s promise ($x) and, to the extent that he fails to do so, his claim will fail. To discharge the onus of proof, however, the plaintiff may be able to raise and rely on an inference that a party would not incur expenditure in reliance on the other party’s promise without a reasonable expectation that, on performance of the contract, the expenditure would be recouped. That is an inference of varying strength according to the circumstances. Sometimes, the inference would be of sufficient strength to enable the plaintiff to discharge the onus; sometimes, the inference would be too weak. However, when a contract is rescinded for breach and that breach, by preventing the performance of the contract, has made it impossible for the plaintiff to prove that the net value of his contractual benefits ($B [minus] $y) exceeds the wasted expenditure incurred in reliance on the defendant’s

promise prior to rescission ($x), it is just to shift to the defendant the ultimate onus of proving that, had the contract been performed, the net value of the plaintiff’s benefits would not have covered the expenditure he had incurred before rescission. … The sufficient and necessary justification for shifting the onus to the party in breach in the assessment of damages for wasted expenditure incurred in reliance on the defendant’s promise before rescission for breach is that the breach of the contract itself makes it impossible to undertake an assessment on the ordinary basis.58 … A plaintiff’s inability to quantify his lost benefits is no justification by itself for casting on the defendant an onus to prove that the plaintiff would not have recouped reliance damages had the contract been performed. What justifies the reversal of the onus is the defendant’s repudiation or breach which denies, prevents or precludes the existence of circumstances which would have determined the value of the plaintiff’s contractual benefits. Thus, in McRae’s Case, where the breach assigned was that there was no oil tanker on Jourmaund Reef where the contract of sale warranted a tanker to be, the salvager purchasers who had wasted expenditure in reliance on the defendant’s promise recovered reliance damages. … In CCC Films Ltd v Impact Quadrant Films Ltd, Hutchison J acknowledged that McRae’s Case supports ‘the proposition … that it is only where the breach itself makes it impossible to assess whether there would have been any returns sufficient to recoup the expenditure that the defendant is debarred from relying, to defeat the plaintiff’s claim, on the normal rule that it is for the plaintiff to prove all ingredients of his claim for damages, including the fact that the expenditure he incurred would, had there been no breach, have been recouped’.59 The point of distinction between the method of assessment of expectation damages and the method of assessment of reliance damages is the reversal in the case of reliance damages [page 727] of the onus of proof of the net value of the plaintiff’s contractual benefits.

There can be no duplication of reliance damages and expectation damages. The compensable losses in reliance damages do not include possible lost profits but both cover expenditure reasonably incurred in preparing to perform and in performing the contract within the limits prescribed by Robinson v Harman. The measure of damages prescribed by Robinson v Harman governs each method of assessment. Where justification for reversing the onus exists, reliance damages may be recovered; absent that justification, the plaintiff must recover expectation damages, if any, by proof of the value of benefits and the cost of performance; that is, by proof that $B [minus] $y is greater than $x. These are alternative methods of assessing damages, but the plaintiff does not have an election as to the method. The plaintiff who seeks recovery of reliance damages must show that justification for reversing the onus of proof exists. Otherwise, he must endeavour to prove his damages on the ordinary basis. … Of course, when a plaintiff advances a prima facie case for an assessment of reliance damages, the defendant may destroy or diminish the plaintiff’s claim by proving that, had the contract been performed, the plaintiff’s benefits after payment of the further costs of performance ($B–$y) would not have been sufficient to cover the expenses reasonably incurred by the plaintiff prior to rescission in reliance on the contract. … [T]he assessment of damages for losses suffered by reason of a breach of contract is limited by Robinson v Harman, whichever method of assessment of damages be adopted.

The present case The breach consisted in the Commonwealth’s unjustified repudiation of the contract on 12 September 1987. At 12 September 1987, Amann had committed itself … to expend $5,281,521 in the purchase of special coastal surveillance aircraft which had a remainder value of only $917,329 when no longer required for coastal surveillance, and it had incurred other preliminary costs of $854,943. The reasonableness of Amann’s incurring this expenditure is not challenged. The Full Court of the Federal Court based its assessment of damages on the net expenditure thus incurred ($5,219,135) together with $143,049 paid to employees whose services were terminated consequent on the rescission of the contract and $113,000 paid

to the Commonwealth under a clause of the contract requiring a deposit to secure due performance. … Accordingly, that Court awarded $5,475,184 damages plus interest. Amann had looked to the contract to recoup the costs it had incurred and the question is whether the net benefits to which Amann was entitled under the contract would have been sufficient to recoup its losses as thus assessed. Amann sought to establish that the contract was profitable, that is to say, a contract under which Amann would have obtained benefits greater in value than the expenditure it had incurred and would incur in performing its obligations under the contract. If this were the fact, Amann’s entitlement to damages would exceed the expenditure it had incurred at 12 September in equipping itself to perform the contract. On the other hand, if the value of Amann’s benefits had the contract been performed (net of the further costs of performance) fallen short of $5,219,135, Amann must fail to the extent of the shortfall. [page 728] The total … to which Amann would have been entitled under the contract had it been fully performed was $17,107,462 together with a refund of the security deposit ($113,000) but, in order to perform the contract fully, Amann would have had to expend a further $15,801,899 to defray further capital expenditure, operating costs and borrowing costs. On these figures, the contract would not have yielded to Amann an amount sufficient to cover the costs it had incurred in equipping itself to perform the contract. The Commonwealth submits that, had the contract been fully performed, no more would have been available to Amann to cover the costs it had incurred on 12 September 1987 than the surplus of the total payable under the contract over the further expenditure Amann would have had to incur to perform the contract fully. The Commonwealth submits that Amann’s damages could not exceed the amount of that surplus ($1,418,563) supplemented by the $143,049 termination pay which Amann would not have paid if the contract had proceeded. On this argument, and on the hypothesis that the contract would have been fully performed, Amann’s damages could not exceed $1,561,612.

I see no answer to this submission if the premise on which it is based is accepted; that is, that the only benefit of value to which Amann was entitled by performing the contract consisted in the amounts payable to it by the Commonwealth under the contract. If that be the true position, Amann would have suffered a loss even if the contract had been fully performed and the Commonwealth cannot be held liable as insurer of Amann’s expenditure under a loss contract. … For its part, Amann submits that by performing the contract it would have acquired a substantial commercial advantage in tendering for the next coastal surveillance contract and that that advantage enhances the value of the first contract to it either directly, by adding the value of the commercial advantage to the stipulated remuneration and thus increasing the value of the total benefits to which it would have been entitled under the contract, or indirectly, by enhancing the value of the aircraft used in coastal surveillance at the end of the first contract period and thus reducing the costs attributable to performance of the first contract. Even if it cannot be demonstrated that the present contract would be profitable after taking that commercial advantage into account, it is submitted that reliance damages can be recovered and that the Commonwealth cannot discharge the onus of showing that the value of Amann’s net benefits would not cover the expenditure incurred. As to the prospect of an adverse exercise of the power to terminate the contract under cl 2.24, Amann submits that it was unlikely that the Secretary would have exercised the power and that its damages should not be reduced because of the contingency that the power might have been exercised. … It is convenient to consider these contentions under the following headings: (i) Was Amann contractually entitled to more than remuneration? A contract for coastal surveillance had been let by the Commonwealth from time to time and there was nothing to suggest that the Commonwealth had any intention of undertaking itself the task of coastal surveillance. … The commercial position was such that any successful tenderer who performed the contract for the stipulated period (three years) would be in a [page 729]

strong, if not unassailable, position to become the successful tenderer for a surveillance contract for the following period. … The Commonwealth’s promise to engage Amann to provide the service for three years carried with it the promise that Amann, by performing the contract, could work itself into a secure position as an equipped and established provider of the service and could thereby acquire a most substantial advantage in tendering for any succeeding contract. This was not an incidental benefit flowing merely from a trader’s reputation as a successful contractor; it was a benefit which was implicit in Amann’s right to perform the particular contract, having regard to the nature of the work, the capital and equipment required to perform it, the Commonwealth’s practice of letting tenders for the work and the limited competition among tenderers to do it. By repudiating the contract, the Commonwealth caused Amann to lose the commercial advantage it would have gained had the contract been performed. The loss of that advantage is compensable. … The commercial advantage which Amann lost is not to be mistaken for a right to renewal of its contract. Had there been a right to renewal, the loss of that right would have to be taken into account. … But the Commonwealth cannot be held liable for the loss of a benefit which it had not expressly or impliedly promised Amann. It had not promised renewal; it had promised that Amann should be the provider of the service for three years. It is the commercial advantage inherent in being the provider of the service for three years that is the benefit to be valued. (ii)

What was the commercial advantage worth to Amann?

The period and conditions offered by the Commonwealth to tenderers for any subsequent contract, the possibility of renewed competition, the risk of damage to aircraft during the currency of the first contract, the vicissitudes of industrial relations, not to mention the possibility of radical changes in government policy, are among the factors which make an attempt to ascertain the value of the advantage by reference to circumstances which exclude three years of contract performance a speculative exercise. That is not to say that the advantage was valueless in 1987. To the contrary, the value of the advantage would have been substantial, but it cannot be quantified with any degree of accuracy. It follows that it is impossible to say whether or not the value of all the benefits to which Amann would have been entitled had the contract been performed ($B) would have exceeded

the cost of performance by Amann ($x [plus] $y). Nor is it possible to say whether there would have been a sufficient net value of the benefits to which Amann would have been entitled (that is, $B [minus] $y) to cover any more than $1,561,612 of the expenditure which Amann had already incurred $x). The value of the commercial advantage that Amann would have acquired and could have exploited when the contract had been performed could be ascertained only at or near the end of the contract period and only in the light of the history of Amann’s performance of the contract. The course of events by reference to which the value of that commercial advantage could be determined was aborted by the Commonwealth’s repudiation of the contract. … Any uncertainty in the value of the advantage arising from the need to form such an estimate is not attributable to the Commonwealth’s repudiation, but the repudiation did preclude the occurrence of the events which would have permitted in due time a true assessment of the value of the commercial advantage lost by reason of the repudiation. Amann is [page 730] therefore entitled to an assessment of its damages as reliance damages and to cast upon the Commonwealth the onus of showing that, had the contract been performed, Amann would not have been entitled to benefits of sufficient net value to cover any part of the expenditure it had incurred prior to rescission or, alternatively, any part of that expenditure exceeding $1,561,612. (iii)

Would the power conferred by cl 2.24 have been exercised to terminate the contract?

The Commonwealth submits that there is a rule that, for the purpose of assessing damages, a party in default should be assumed not to act so as to increase its liability. In the present case, so the argument runs, that rule requires a finding that the Secretary would have terminated Amann’s contract under cl 2.24. The rule is said to be recognized by the judgments in The Mihalis Angelos. With respect, The Mihalis Angelos does not support the submission. Megaw LJ stated the relevant principle in this way:

In my view, where there is an anticipatory breach of contract, the breach is the repudiation once it has been accepted, and the other party is entitled to recover by way of damages the true value of the contractual rights which he has thereby lost, subject to his duty to mitigate. If the contractual rights which he has lost were capable by the terms of the contract of being rendered either less valuable or valueless in certain events, and if it can be shown that those events were, at the date of acceptance of the repudiation, predestined to happen, then in my view the damages which he can recover are not more than the true value, if any, of the rights which he has lost, having regard to those predestined events.60 Clearly enough, this principle applies when it is found as a fact that the relevant events ‘were, at the date of acceptance of the repudiation, predestined to happen’. There was no such finding in this case. … For substantially the same reasons as those stated by the Chief Justice and Dawson J, I would agree that the Commonwealth failed to show that, if the contract had not been repudiated on 12 September 1987, the contract would have been terminated thereafter under cl 2.24. I would add two further observations, one of which confirms me in that conclusion, the other stating the manner in which discounting for uncertainty may affect the assessment of expectation damages. The inference that I would draw from the events of 12 September 1987 is that the Commonwealth, faced on the one hand with the threat by Skywest [the previous contractor] to dispose of their aircraft if Amann’s contract were not terminated, and faced on the other with a relatively protracted procedure for termination under cl 2.24 which might have led ultimately to an arbitration, chose to repudiate Amann’s contract in order to preserve the service which Skywest could provide but which Skywest would not provide if Amann should be permitted to continue any longer. Had Skywest disposed of its aircraft, the Commonwealth would have had no alternative but to permit Amann to continue to provide the service. [page 731] In my view, the Commonwealth has failed to discharge that onus of

showing that the Secretary would have terminated Amann’s contract under cl 2.24. If the Commonwealth cannot establish that that contingency would have occurred, it cannot discharge the onus of proving that the net benefits to which Amann would have been entitled under the contract would not have covered the expenditure it had incurred in reliance on the contract prior to rescission. … Even if the Commonwealth be held to have proved that there was a 20% possibility that the contract would have been terminated under cl 2.24, that finding does not enable the Commonwealth to discharge its onus. The Commonwealth remains unable to prove either that $B [minus] $y is less than $x or that 80% of ($B [minus] $y) is less than $x. (iv)

Has the Commonwealth proved that Amann’s net benefits would not have covered its expenditure?

The Commonwealth’s principal argument was that it is impermissible to include in Amann’s damages any allowance for benefits to be obtained under a second contract, for a loss of those benefits would flow not from repudiation of the first contract but from a decision not to enter into the second contract. However, Amann’s situation is not to be assessed by attempting to quantify benefits under a second contract: it is right to say that the first contract confers no right to those benefits. But, for the reasons already given, the first contract did confer a right to acquire, by performance of the contract, a commercial advantage in tendering for a second contract and that advantage must be evaluated. The value of that advantage does reflect some expectation of profits to be earned under a second contract, and such an expectation, which would have value in the eyes of those engaged in the business of providing a surveillance service, is relevant to the evaluation of the tendering advantage to which Amann was contractually entitled. At all events, the Commonwealth has not shown that the advantage was valueless or was of insufficient value when added to the contractual remuneration to provide sufficient net benefits to cover the expenditure incurred by Amann prior to rescission. As the Commonwealth has failed to discharge its onus of proof, Amann is entitled to recover the expenditure incurred prior to rescission in preparing to perform and in performing the contract. That expenditure is the amount found by the Federal Court.

Comments 29.6.1 See Radan, Gooley, and Vickovich at 29.8, 29.12, and 29.66–29.79. 29.6.2 For discussion of this case, see G Ng, ‘The Onus of Proof in a Claim for Reliance Damages for Breach of Contract’ (2006) 22 Journal of Contract Law 139; D McLauchlan, ‘Reliance Damages for Breach of Contract’ [2007] New Zealand Law Review 417.

[page 732]

DAMAGES FOR INDEMNITY LOSS 29.7C

Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272

Court: High Court of Australia Facts: Bowen Investments (the landlord) leased commercial premises to Tabcorp Holdings (the tenant). Clause 2.13 of the lease stipulated that any alterations to the leased premises required the prior written approval of the landlord. The tenant commenced alterations to the foyer of the premises without the landlord’s consent. The landlord protested about what was being done, but the tenant, in what the trial judge in this case described as ‘contumelious disregard’ of the landlord’s rights, continued with the alterations to the foyer until they were completed. The landlord sued the tenant for damages for breach of contract. Issue: The issue before the High Court was whether damages in relation to the alteration was the costs of restoring the premises to the condition they would have been had cl 2.13 not been breached ($580,000), or the difference between the value of the premises with

the old foyer and the value of the premises with the new foyer (approximately $34,000). Decision: The High Court (French CJ, Gummow, Heydon, Crennan, and Kiefel JJ) in a joint judgment held that the landlord was entitled to recover the costs of restoring the foyer in the leased commercial premises, plus $800,000 for rent lost during the restoration period. Extract: The extract from the joint judgment of the court sets out the principles relating to the basis of assessing damages in cases of indemnity loss flowing from a breach of contract.

The Court 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.61 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’62 (emphasis added). In some circumstances putting the innocent party into ‘the same situation … as if the contract had been performed’ [page 733] 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 … 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’. In circumstances like the present, where the relevant covenant is in the form of cl 2.13, it is not the case that, in Oliver J’s words: the disappointment of the plaintiff’s hopes and expectations from the contract becomes a relevant consideration only so far as it is measurable either by some deterioration of the plaintiff’s financial situation or by some failure to obtain an amelioration of his financial situation.63 To reason otherwise is to undermine a fundamental postulate inherent in cl 2.13. Similar thinking underlies a statement made by Dixon CJ, Webb and Taylor JJ in Bellgrove v Eldridge. A builder who had built a house which, in breach of contract, contained defective concrete and mortar, contended that the measure of damages was limited to diminution in value and did not extend to costs of rectification. Their Honours said: 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 on her land which is substantially in accordance with the contract.64 (emphasis in original) So here, the Landlord was contractually entitled to the preservation of the

premises without alterations not consented to; its measure of damages is the loss sustained by the failure of the Tenant to perform that obligation; and that loss is the cost of restoring the premises to the condition in which they would have been if the obligation had not been breached. The Tenant relied heavily on findings by the trial judge that the Landlord had erected and leased the building for commercial purposes and that it was an investment property. The Tenant contended that the Landlord had never run a case that it valued the foyer for its aesthetic qualities as distinct from its having ‘pulling power’ as a ‘leasing tool’, and it relied on [page 734] the trial judge’s implicit finding, based on the resolution of conflicting expert evidence, that the old foyer was no more effective as a leasing tool than the new foyer. The answer to these submissions was put thus by Oliver J in Radford v De Froberville: Now, it may be that, viewed objectively, it is not to the plaintiff’s financial advantage to be supplied with the article or service which he has stipulated. It may be that another person might say that what the plaintiff has stipulated for will not serve his commercial interests so well as some other scheme or course of action. And that may be quite right. But that, surely, must be for the plaintiff to judge. Pacta sunt servanda. If he contracts for the supply of that which he thinks serves his interests — be they commercial, aesthetic or merely eccentric — then if that which is contracted for is not supplied by the other contracting party I do not see why, in principle, he should not be compensated by being provided with the cost of supplying it through someone else or in a different way, subject to the proviso, of course, that he is seeking compensation for a genuine loss and not merely using a technical breach to secure an uncovenanted profit. In Ruxley Electronics & Construction Ltd v Forsyth the latter half of the passage was quoted with approval by Lord Jauncey of Tullichettle,65 and the passage was referred to with approval by Lord Mustill.66 The Tenant stressed that in Bellgrove v Eldridge this Court pointed out that

there was a qualification to the rule it stated in regard to damages recoverable by a building owner for the breach of a building contract. ‘The qualification … is that, not only must the work undertaken be necessary to produce conformity, but that also, it must be a reasonable course to adopt’.67 The example which the Court gave of unreasonableness was the following: No one would doubt that where pursuant to a building contract calling for the erection of a house with cement rendered external walls of second-hand bricks, the builder has constructed the walls of new bricks of first quality the owner would not be entitled to the cost of demolishing the walls and re-erecting them in second-hand bricks.68 That tends to indicate that the test of ‘unreasonableness’ is only to be satisfied by fairly exceptional circumstances. The example given by the Court aligns closely with what Oliver J said in Radford v De Froberville, that is, that the diminution in value measure of damages will only apply where the innocent party is ‘merely using a technical breach to secure an uncovenanted profit’. It is also important to note that the ‘reasonableness’ exception was not found to exist in Bellgrove v Eldridge. Nothing in the reasoning in that case suggested that where the reasoning is applied to the present circumstances, the course which the Landlord proposed is unnecessary or unreasonable. As part of the same submission, the Tenant relied on Ruxley Electronics & Construction Ltd v Forsyth. The House of Lords there held in a building case that where the expenditure [page 735] necessary to rectify the defect in the building was out of all proportion to the benefit to be obtained the appropriate measure of damages was not the cost of reinstatement but the diminution in the value of the work occasioned by the breach, even if that would result in a nominal award. The House rejected a claim for £21,560 damages for reconstructing a swimming

pool that was 1 foot 6 inches too shallow. The House saw the following matters as indicating that the cost of reconstruction was not recoverable: The trial judge made the following findings which are relevant to this appeal: (1) the pool as constructed was perfectly safe to dive into; (2) there was no evidence that the shortfall in depth had decreased the value of the pool; (3) the only practicable method of achieving a pool of the required depth would be to demolish the existing pool and reconstruct a new one at a cost of £21,560; (4) he was not satisfied that the respondent intended to build a new pool at such a cost; (5) in addition such cost would be wholly disproportionate to the disadvantage of having a pool of a depth of only 6 feet as opposed to 7 feet 6 inches and it would therefore be unreasonable to carry out the works; and (6) that the respondent was entitled to damages for loss of amenity in the sum of £2,500.69 Their Lordships quoted and referred to various passages in Bellgrove v Eldridge and Radford v De Froberville without dissent. Although they reversed the Court of Appeal, in which the leading judgment, that of Staughton LJ, quoted various passages from Radford v De Froberville, they did not disagree with what those cases said as a matter of principle, and seemed to consider that their decision was consistent with the principles stated by Oliver J. The result at which their Lordships arrived is on one view inconsistent with those principles, but for present purposes it is sufficient to say that the facts of Ruxley Electronics & Construction Ltd v Forsyth, which their Lordships evidently saw as quite exceptional, are plainly distinguishable from those of the present appeal. Further, the Landlord correctly submitted that the Tenant’s submission misconstrued what this Court said in Bellgrove v Eldridge. The ‘qualification’ referred to in the passage quoted above that the ‘work undertaken be necessary to produce conformity’ meant, in that case, apt to conform with the plans and specifications which had not been conformed with. Applied to this case, the expression ‘necessary to produce conformity’ means ‘apt to bring about conformity between the foyer as it would become after the damages had been spent in rebuilding it and the foyer as it was at the start of the lease’. And the Landlord also correctly submitted that the requirement of reasonableness did not mean that any excess over the

amount recoverable on a diminution in value was unreasonable. The Tenant’s submissions rested on a loose principle of ‘reasonableness’ which would radically undercut the bargain which the innocent party had contracted for and make it very difficult to determine in any particular case on what basis damages would be assessed. That principle should not be accepted. If the benefit of the covenant in cl 2.13 were to be secured to the Landlord, it is necessary that reinstatement damages be paid, and it is not unreasonable for the Landlord to insist on their payment.

[page 736]

Comments 29.7.1 See Gooley, Radan, and Vickovich at 29.11 and 29.88–29.93. 29.7.2 For a note on this case, see A Papamatheos, ‘Reinstatement Damages for a Tenant’s Alteration of Premises’ (2009) 125 Law Quarterly Review 397. 29.7.3 In Stone v Chappel [2017] SASCFC 72 at [10]–[15], Kourakis CJ said the following in relation to the recovery of rectification costs: The rule that rectification costs will generally be awarded (the primary rule) reflects the importance attached by the common law to contract as an instrument of economic exchange. The premise of the law of contract is that everyone is free to contract as they see fit in their selfinterest. The law of contract authorises, subject to limited exceptions, the parties to voluntarily bind themselves to a special charter of rights and obligations to govern their economic relationship in addition to, or in derogation of, the general law. The common law of contract is a manifestation of the community consensus in free market economies that freedom of contract benefits the particular parties to the contract and the public by advancing

economic growth generally. The measure of damages which places the injured party back in the same position, as if the consideration for which he or she had stipulated was performed, is necessary to fulfil the underlying objective of the law of contract. The position of the common law is succinctly expressed in the Latin expression pacta sunt severanada: contracts are to be kept. That legal policy context serves to emphasise the exceptional course of departing from the primary rule. Awarding less than that which is necessary to secure the benefits of the contract to the injured party subverts the very concept of a contract by which parties determine and change their legal rights and obligations as between themselves. The premise of freedom of contract implies that the party who fails to deliver on his or her contractual promise benefited over and above the terms of the bargain. If the injured party is awarded something less than what is necessary to provide, in money terms, the stipulated benefit, the wrongdoer may be handed a windfall profit. … True it is that the cost of rectification after the event may be much more than the cost of providing the stipulated benefit at the time, but if wrongdoers were to think that, for that very reason, they will escape the full cost of providing the stipulated benefit, the efficacy of contractual instruments would be undermined. That deleterious effect extends beyond the consequences to the innocent party to the particular contract in question. In many circumstances a wrongdoer will have won the contract at the expense of another supplier in the market place who may well have stipulated a higher price precisely because he or she wished to ensure delivery of the contractual promise in full. Of course I am speaking generally and I do not suggest that in this case the respondents never intended to fulfil their contractual obligations. I acknowledge that in this case there is a countervailing

legal policy consideration. A rigid adherence to rectification damages will tend to increase [page 737] the transaction costs in building cases because when contracting builders may make provision for the risk of relatively higher awards of damages. The general observations I have made cannot be statements of a legal rule. They can only inform the application of the rule stated in Bellgrove [v Eldridge (1954) 90 CLR 613] and in particular the qualification to that rule. The ‘reasonable course’ qualification is necessarily open textured but it is important to observe that in Australia that qualification operates as an exception to the ordinary rule that rectification damages are awarded.

THE RULES OF REMOTENESS 29.8C

Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528

Court: Court of Appeal in England Facts: Newman Industries contracted to supply Victoria Laundry with a new boiler for use in Victoria Laundry’s laundry and dyeing business. The boiler was delivered to Victoria Laundry some 20 weeks late. Victoria Laundry sued for damages for breach of contract, claiming damages for the loss of profit they would have made had the boiler been delivered on time. Included in the claim was the loss of a large number of new customers and also the loss of highly lucrative contracts with the Ministry of Supply.

Issue: The issue before the Court of Appeal was whether the profits were too remote from the breach and therefore not recoverable. Decision: The Court of Appeal (Tucker, Asquith, and Singleton LJJ) unanimously held that Victoria Laundry was entitled, pursuant to a proper understanding of the rules of remoteness set out in Hadley v Baxendale, to recover losses resulting from not having the boiler for their existing business, but not in relation to the Ministry of Supply contracts because Newman Industries were unaware of them at the time of the contract. The court ordered a new trial. Extract: The extract from the judgment of the court delivered by Asquith LJ analyses the remoteness rules in Hadley v Baxendale and discusses them in the context of the facts of the case before the court.

Asquith LJ Seeing that the issue is as to the measure of recoverable damage and the application of the rules in Hadley v Baxendale,70 it is important to inquire what information [Newman Industries] possessed at the time when the contract was made, as to such matters as the [page 738] time at which, and the purpose for which, [Victoria Laundry] required the boiler. [Newman Industries] knew before, and at the time of the contract, that [Victoria Laundry] were laundrymen and dyers, and required the boiler for purposes of their business as such. They also knew that [Victoria Laundry] wanted the boiler for immediate use. … Evidence was led for [Victoria Laundry] establishing that if the boiler had been punctually delivered, then, during the 20 odd weeks between then and the time of actual delivery, (1) they could have taken on a very large number of new customers in the course of their laundry business, the demand for laundry services at the time being insatiable — they did in fact take on extra staff in the expectation of its delivery — and (2) that they could and would have

accepted a number of highly lucrative dyeing contracts for the Ministry of Supply. In the statement of claim … the loss of profits under the first of these heads was quantified at £16 a week and under the second at £262 a week. … The … learned judge … took the view that the loss of profit claimed was due to special circumstances and therefore recoverable, if at all, only under the second rule in Hadley v Baxendale and not recoverable in this case because such special circumstances were not at the time of the contract communicated to the defendants. … The authorities on recovery of loss of profits as a head of damage are not easy to reconcile. … First comes Hadley v Baxendale itself. Familiar though it is, we should first recall the memorable sentence in which the main principles laid down in this case are enshrined: 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 as either arising naturally, that is, according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it.71 The limb of this sentence prefaced by ‘either’ embodies the so-called ‘first’ rule; that prefaced by ‘or’ the ‘second’. … What propositions applicable to the present case emerge from the authorities as a whole, including those analysed above? We think they include the following: (1) It is well settled that the governing purpose of damages is to put the party whose rights have been violated in the same position, so far as money can do so, as if his rights had been observed. This purpose, if relentlessly pursued, would provide him with a complete indemnity for all loss de facto resulting from a particular breach, however improbable, however unpredictable. This, in contract at least, is recognised as too harsh a rule. (2) In cases of breach of contract the aggrieved party is only entitled to

recover such part of the loss actually resulting as was at the time of the contract reasonably foreseeable as liable to result from the breach. [page 739] (3) What was at that time reasonably so foreseeable depends on the knowledge then possessed by the parties or, at all events, by the party who later commits the breach. (4) For this purpose, knowledge ‘possessed’ is of two kinds; one imputed, the other actual. Everyone, as a reasonable person, is taken to know the ‘ordinary course of things’ and consequently what loss is liable to result from a breach of contract in that ordinary course. This is the subject matter of the ‘first rule’ in Hadley v Baxendale. But to this knowledge, which a contract-breaker is assumed to possess whether he actually possesses it or not, there may have to be added in a particular case knowledge which he actually possesses, of special circumstances outside the ‘ordinary course of things’, of such a kind that a breach in those special circumstances would be liable to cause more loss. Such a case attracts the operation of the ‘second rule’ so as to make additional loss also recoverable. (5) In order to make the contract-breaker liable under either rule it is not necessary that he should actually have asked himself what loss is liable to result from a breach. As has often been pointed out, parties at the time of contracting contemplate not the breach of the contract, but its performance. It suffices that, if he had considered the question, he would as a reasonable man have concluded that the loss in question was liable to result. … (6) Nor, finally, to make a particular loss recoverable, need it be proved that upon a given state of knowledge, the defendant could, as a reasonable man, foresee that a breach must necessarily result in that loss. It is enough if he could foresee it was likely so to result. It is indeed enough … if the loss (or some factor without which it would not have occurred) is a ‘serious possibility’ or ‘real danger’. For short, we have used the word ‘liable’ to result. Possibly the colloquialism ‘on the cards’ indicates the shade of meaning with some approach to

accuracy. If these, indeed, are the principles applicable, what is the effect of their application to the facts of this case? … [Newman Industries] were an engineering company supplying a boiler to a laundry. We reject the submission for [Newman Industries] that an engineering company knows no more than the plain man about boilers or the purposes to which they are commonly put by different classes of purchasers, including laundries. … Of the uses or purposes to which boilers are put, they would clearly know more than the uninstructed layman. Again, they knew they were supplying the boiler to a company carrying on the business of laundrymen and dyers, for use in that business. The obvious use of a boiler, in such a business, is surely to boil water for the purpose of washing or dyeing. … If the purpose then be to wash or dye, why does the company want to wash or dye, unless for purposes of business advantage, in which term we, for the purposes of the rest of this judgment, include maintenance or increase of profit, or reduction of loss? (We shall speak henceforward not of loss of profit, but of ‘loss of business’.) No commercial concern commonly purchases for the purposes of its business a very large and expensive structure like this … with any other motive, and no supplier, let alone an engineering company, which has promised delivery of such an article by a particular date, with knowledge that it was to be put into use immediately on delivery, can reasonably contend that it could not foresee that loss of business (in the sense indicated above) would be liable to result to the purchaser from a long [page 740] delay in the delivery thereof. The suggestion that, for all the supplier knew, the boiler might have been needed simply as a ‘standby’, to be used in a possibly distant future, is gratuitous. … Since we are differing from a carefully reasoned judgment, we think it due to the learned judge to indicate the grounds of our dissent. [The court then set out certain parts of the trial judge’s reasons.] The answer to this reasoning has largely been anticipated in what

has been said above, but we would wish to add: First, that the learned judge appears to infer that because certain ‘special circumstances’ were, in his view, not ‘drawn to the notice of’ the defendants and therefore, in his view, the operation of the ‘second rule’ was excluded, ergo nothing in respect of loss of business can be recovered under the ‘first rule’. This inference is … [not] justified. … Secondly, that while it is not wholly clear what were the ‘special circumstances’ on the non-communication of which the learned judge relied, it would seem that they were, or included, the following: (a) The ‘circumstance’ that delay in delivering the boiler was going to lead ‘necessarily’ to loss of profits. But the true criterion is surely not what was bound ‘necessarily’ to result, but what was likely or liable to do so, and we think that it was amply conveyed to [Newman Industries] by what was communicated to them (plus what was patent without express communication) that delay in delivery was likely to lead to ‘loss of business’; (b) the ‘circumstance’ that [Victoria Laundry] needed the boiler ‘to extend their business’. It was surely not necessary for [Newman Industries] to be specifically informed of this as a precondition of being liable for loss of business. … (c) The ‘circumstance’ that [Victoria Laundry] had the assured expectation of special contracts, which they could only fulfil by securing punctual delivery of the boiler. Here, no doubt, the learned judge had in mind the particular lucrative dyeing contracts to which the plaintiffs looked forward. … We agree that in order that [Victoria Laundry] should recover specifically and as such the profits expected on these contracts, [Newman Industries] would have had to know, at the time of their agreement with [Victoria Laundry], of the prospect and terms of such contracts. We also agree that they did not in fact know these things. It does not, however, follow that [Victoria Laundry] are precluded from recovering some general (and perhaps conjectural) sum for loss of business in respect of dyeing contracts to be reasonably expected, any more than in respect of laundering contracts to be reasonably expected.

Comments 29.8.1 See Radan, Gooley, and Vickovich at 29.112–29.121. 29.8.2 In Koufos v C Czarnikow Ltd [1969] 1 AC 350 at 389–90, Lord Reid objected to the expressions used by Asquith LJ such as ‘reasonably

foreseeable as liable to occur’, ‘serious possibility’, ‘real danger’, and the colloquialism ‘on the cards’, as being appropriate to describe the likelihood of loss occurring. For Lord Reid the expressions ‘likely’ or ‘not unlikely’ were appropriate. Lord Reid’s views have been accepted in Australia: see Radan, Gooley, and Vickovich at 29.128–29.129.

[page 741] 29.9C

Stuart Pty Ltd v Condor Commercial Insulation Pty Ltd [2006] NSWCA 334

Court: Court of Appeal in New South Wales Facts: Stuart entered into a contract with the Commonwealth of Australia to replace wool insulation in residential properties as part of the Sydney Aircraft Noise Insulation Program (SANIP). Of the 932 properties to be insulated, Stuart was allocated 71 pursuant to its contract with SANIP. Stuart subcontracted this work to Condor, with each property being the subject of a separate contract. Where relevant, each contract stipulated a requirement that all down-lights be boxed before being covered with insulation. In relation to a property at Marrickville, the contract did not identify any down-lights that needed to be boxed, despite the fact that there were five downlights. A few months after the contract was entered into the insulation ignited and a fire broke out and damaged that property. Following its quality assurance audit, SANIP terminated Stuart’s contract, partly because of Condor’s faulty workmanship. Stuart sued Condor for damages for breach of contract, claiming damages for its loss of profits resulting from the termination of its contract with SANIP. The trial judge found that the fire was the major reason that SANIP suspended the allocation of work to Stuart and that the faulty workmanship led to the termination of the contract.

Issue: The issue before the Court of Appeal was whether Stuart’s loss of profits was too remote. Decision: The Court of Appeal (Beazley, Ipp, and Tobias JJA) unanimously held that the loss of profits did not fall within the second limb of Hadley v Baxendale. Extract: The extract from the judgment of Beazley JA (Tobias JJ agreeing and Ipp JA generally agreeing) analyses the second limb of Hadley v Baxendale and applies it to the facts of the case.

Beazley JA [32] A party may recover damages for breach of contract: … such as may fairly and reasonably be considered either arising naturally, ie, 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.72 (Emphasis added.) [33] It is the second limb (bolded portion) of the rule with which this case is concerned. [34] In C Czarnikow Ltd v Koufos the House of Lords was concerned with the question whether a shipowner was liable for the charterers’ loss of profit, when, in breach of the charterparty, it had deviated from the proposed route whilst carrying a consignment of sugar, [page 742] resulting in the ship being delayed by some nine or ten days. During that period sugar prices had dropped. The shipowner knew that the charterers were sugar merchants and that there was a sugar market in Basrah, the port of destination. It had no actual knowledge, however, that the charterer intended to sell the sugar promptly after its arrival.

[35] Lord Reid, after considering the rule in Hadley v Baxendale, stated: I am satisfied that the court did not intend that every type of damage which was reasonably foreseeable by the parties when the contract was made should either be considered as arising naturally, i.e., in the usual course of things, or be supposed to have been in the contemplation of the parties … the decision makes it clear that a type of damage which was plainly foreseeable as a real possibility but which would only occur in a small minority of cases cannot … be supposed to have been in the contemplation of the parties: the parties are not supposed to contemplate as grounds for the recovery of damage any type of loss or damage which on the knowledge available to the defendant would appear to him as only likely to occur in a small minority of cases. In cases like Hadley v Baxendale or the present case it is not enough that in fact the plaintiff’s loss was directly caused by the defendant’s breach of contract. It clearly was so caused in both. The crucial question is whether, on the information available to the defendant when the contract was made, he should, or the reasonable man in his position would, have realised … that loss of that kind should have been within his contemplation.73 His Lordship pointed out that the liability to pay damages under contract was more restricted than was the liability in tort. … [36] Lord Reid also reviewed a number of other cases, including R & H Hall Ltd v WH Pim (Junior) & Co Ltd.74 His Lordship continued that Hall’s case established that damages were not too remote: [M]erely because, on the knowledge available to the defendant when the contract was made, the chance of the occurrence of the event which caused the damage would have appeared to him to be rather less than an even chance.75 His Lordship considered that it was ‘generally sufficient that [the event that caused the damage] would have appeared to the defendant as not unlikely to occur’ (emphasis added), noting that probabilities usually could not be assessed with any degree of mathematical accuracy. However, there is a difference between when a consequence of breach was within the

reasonable contemplation of the parties and when a consequence was reasonably foreseeable.76 As his Lordship pointed out, ‘a great many extremely unlikely results are reasonably foreseeable’.77 … [page 743] [43] In Alexander v Cambridge Credit Corporation Limited, McHugh JA … observed that the High Court appeared to have accepted Lord Reid’s speech in C Czarnikow v Koufos as correctly stating the law.78 … [44] McHugh JA pointed out that the actual decisions in Hadley v Baxendale and Victoria Laundry (Windsor) Ltd v Newman Industries Ltd79 arose out of the proposition that ‘the contemplation test’ limited the area of potential liability. In that regard, his Honour considered that an important matter in determining whether the loss or damage was too remote was: [T]he extent to which the parties may be taken to have contemplated the events giving rise to the loss or damage.80 [45] His Honour considered that it was not necessary for the parties to contemplate the degree or extent of the loss that was in fact suffered or the precise details of the events giving rise to the loss. It was sufficient, for the contract breaker to be liable, that the parties contemplated the kind or type of loss or damage that was suffered. Under that approach general loss of profits is a recoverable loss but loss of profits from a specially lucrative contract of which a defendant was unaware is not. McHugh JA pointed out that ‘the parties must contemplate both the general nature of the loss or damage and the general manner of its occurrence’.81 [46] It is apparent from his Honour’s consideration of the principles that apply in determining whether a loss is recoverable within the second limb of Hadley v Baxendale, that it is the assumed or deemed contemplation of the parties that is relevant. However, as his Honour pointed out, whilst it is unnecessary that the parties should have contemplated that the precise loss or damage would have occurred precisely in the way that it came about, it was necessary, in some general way, for the parties to contemplate both the type of damage suffered and the manner in which it occurred.82 …

[51] In Castle Constructions Pty Limited v Fekala Pty Limited, Mason P stated, in relation to the second limb in Hadley v Baxendale, that: [T]he law is conscious of the injustice of visiting the party in breach with the consequences of a loss that was not within that party’s reasonable contemplation when contracting.83 [52] The reason for this is because, were it otherwise, the defaulting party may have lost the opportunity to make an informed decision as to whether or not to have accepted the risk. … In my opinion, being in an informed position so as to decide whether to accept the risk would include having sufficient information to assess whether insurance cover for the risks concerned ought to be obtained. [page 744] [53] The same point was made in Robophone Facilities Ltd v Blank, where the question arose as to whether a penalty clause in a contract was a genuine pre-estimate of loss. In discussing that question, Diplock LJ said: … the plaintiff may be able to show that owing to special circumstances outside ‘the ordinary course of things’ a breach in those special circumstances would be liable to cause him a greater loss of which the stipulated sum does represent a genuine estimate. In the absence of any special clause in the contract, this enhanced loss due to the existence of such special circumstances would not be recoverable at common law from the defendant as damages for the breach under the so-called ‘second rule’ in Hadley v Baxendale unless knowledge of the special circumstances had been brought home to the defendant at the time of the contract in such a way as to give rise to the inference that the defendant impliedly undertook to bear any special loss referable to a breach in those special circumstances.84 (Emphasis added.) [54] His Lordship recognised that the rationale for a defendant’s liability under the ‘second rule’ in Hadley v Baxendale is an implied undertaking by the defendant to the plaintiff to bear such loss. Actual knowledge of the

special circumstances is relevant as one of the factors from which this undertaking can be implied. His Lordship also considered that in order to be liable under the second rule, the defendant should have acquired this knowledge from the plaintiff, or at least that he should know that the plaintiff knew that the defendant 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. His Lordship concluded that where both these factors are present, the defendant’s conduct in entering into the contract without disclaiming liability for the foreseeable enhanced loss gives rise to the implication that the defendant undertakes to bear such loss. … [88] In deciding whether [Stuart] has established an entitlement to damages under the second limb, the following matters require determination. The first is whether it could be said that the loss was within the reasonable contemplation of the parties. In this case, that question is, for the most part, although not solely, determined by having regard to the question whether [Condor] was aware of special circumstances such as to enable the court to conclude that it would have been in the reasonable contemplation of both parties that [Stuart] would lose the SANIP contract if [Condor] breached its contract with [Stuart]. … The second relates to the event that gave rise to the loss. …

Was the loss in the reasonable contemplation of the parties? [89] [Condor] submitted that it was apparent that the damages in this case were too remote when regard was had to the rationale that underlay the second limb in Hadley v Baxendale, namely, the circumstances in which a party would be fairly held to have accepted the risk of the loss that is claimed. It contended that the type of damage which occurred here, being the loss of [Stuart’s] contract with SANIP, was such as would occur only in a small minority of cases, and thus was not in the reasonable contemplation of the parties at the time that they [page 745] entered into the contract. Rather, the loss that the parties would reasonably

have in their contemplation as a result of failing to perform the work in a good and workmanlike manner would be the carrying out of, or possibly the cost of carrying out, rectification work. [90] In this case, there is no doubt that [Stuart] would have been liable to the homeowner for the loss caused by the fire and that loss would have been recoverable from the respondent under the first limb of Hadley v Baxendale notwithstanding the catastrophic result of the breach. But even if that loss was not recoverable under the first limb, it would have been recoverable under the second, because it would have been within the reasonable contemplation of the parties that damage might be caused to a property where faulty work had been performed and that rectification work would have to be done. It is irrelevant that the parties had not contemplated that the damage to the property as a result of the faulty workmanship was a fire or that such damage was greater than the parties had contemplated. It was sufficient that the parties contemplated the general nature of the loss — on this example, namely, damage to property. … [91] However, that is not the loss which is being claimed. [Stuart] claims damages for loss of its contract with SANIP, with whom [Condor] had no contractual arrangement. … That contract was terminated in the circumstances already discussed — namely, that after an initial suspension of work during which time SANIP undertook an audit of the work undertaken by [Stuart], all of which had been performed by [Condor], SANIP terminated [Stuart’s] contract for [Stuart’s] breach of contract, including a failure to properly supervise the work. The trial judge found that the fire was the principal reason that SANIP suspended the allocation of work to [Stuart] and that the laying of the insulation over the downlights was also one of the matters that led to the termination of contract. [92] The question as to whether damage or loss would reasonably have been in the contemplation of the parties is an evaluative process. In this case, I am of the opinion that it would reasonably have been in the contemplation of the parties that if [Condor] failed to perform the work in a good and workmanlike manner as required under its contract with [Stuart], [Stuart] would most likely have replaced [Condor] with another contractor. In that case, it may have suffered loss due to a delay in being able to find a new contractor. It may also have suffered loss because a new contractor may have quoted higher prices than those agreed between [Stuart] and [Condor]

so that [Stuart’s] profit margin on each house was thereby reduced. Such losses would likely to have been recoverable under the second limb of Hadley v Baxendale. In my opinion, however, the loss in fact claimed is not one the risk of which [Condor] is likely to have undertaken, even if it was aware of special circumstances relating to the contract. [93] As Diplock LJ explained in the passage set out above at [53], if the appellant is able to show ‘that owing to special circumstances outside “the ordinary course of things” a breach in those special circumstances would be liable to cause him a greater loss’ than the stipulated sum, or I would add, damages claimable under the first limb of Hadley v Baxendale, then that greater loss is recoverable within the second limb. [94] In this case the ‘special circumstance’ is [Stuart’s] contract with SANIP. [Condor] knew of that contract and knew that [Stuart] expected it to be profitable and that there were a large [page 746] number of houses upon which work was to be undertaken. Apart from that however, [Condor] did not know its terms. On the approach taken in Robophone, that may be sufficient for the Court to infer or presume that [Condor] undertook the risk, unless it could be established that there were other factors upon which any such inference could be rebutted. [95] In this case, there are two particular considerations that are relevant to the ‘rebuttal’ of any such inference. First, the supervision of the works was the responsibility of [Stuart]. … [Condor] did not undertake any contractual responsibility to supervise the work on behalf of [Stuart] and it was not paid for the supervision of the work. The only ‘supervision’ undertaken by Condor was that Mr Kirkness, as [Condor’s] project manager, was required to ensure that the work was properly performed. That was work undertaken for Condor, as I have already said. [96] Secondly, under its own contract with SANIP, [Stuart] remained responsible for the works. The loss claimed in this case is not a loss that arises directly as between [Stuart] and [Condor]. Rather, the loss relates to a contract between SANIP and [Stuart] allegedly caused by the breach of the

contract between [Stuart] and [Condor]. In circumstances where, under its contract with SANIP, [Stuart] remained responsible for all work carried out by subcontractors, I am of the opinion that it would not have been in the reasonable contemplation of [Condor] that poor workmanship on its part would result in the loss of [Stuart’s] entire contract with SANIP. I also doubt that it would have been in [Stuart’s] own reasonable contemplation. [97] Further, the contract amount for the individual contracts between [Stuart] and [Condor] was quite small and [Condor] had no contractual right to any ongoing relationship. Rather, each house was the subject of a separate contract, although at the time that this contract was entered into, [Condor] did have an expectation of being the beneficiary of the work allocated to [Stuart] by SANIP. However, in the absence of any contractual right to such work, and where each job involved a contract price of about $10,000, I consider that the contract price was so out of proportion to the risk of being liable for damages for the loss of [Stuart’s] contract with SANIP not to be within the reasonable contemplation of the parties.

Was the event that caused the loss one that was ‘not unlikely to occur’? [98] Although the test for the second limb in Hadley v Baxendale is usually expressed in terms which focuses upon loss of the kind that was suffered and asks whether such loss would have been within the reasonable contemplation of the parties at the time that they entered into the contract, Lord Reid in Czarnikow v Koufos also considered it relevant to have regard to the event that gave rise to the loss. If the event would have appeared to the respondent as not unlikely to occur, that would be sufficient to establish liability. [99] That is of particular significance in this case. [Condor’s] breach of contract was a failure to perform work in a good and workmanlike manner. That breach had an immediate catastrophic consequence — namely, a fire that destroyed a house. In the way in which the authorities permit reference to the ‘event’ that gave rise to the loss, the ‘event’ in this case, in my opinion, was the fire. [page 747]

[100] The trial judge did not make a finding as to whether the fire was something that appeared to the defendant as ‘not unlikely’ to occur. She did state that all witnesses agreed that it was bad building practice to put insulation directly over a down-light, as they could overheat, giving rise to a risk of fire. However, that comment was made in that part of her Honour’s judgment dealing with the cause of the fire, where she was considering the expert evidence alone. [101] An examination of the evidence of [Condor’s] witnesses, Mr Lambert and Mr Kirkness, reveals that neither had an understanding that a fire was ‘not unlikely’ to occur, although it appears both knew it was bad building practice to place insulation over down-lights. Mr Lambert knew that if there were down-lights, special treatment was needed. No more was established from his evidence than that. Mr Kirkness agreed that it was a well-known potential hazard that insulation shouldn’t come into contact with downlights. However, he denied that if the insulation was not kept away from the down-lights there was a risk of fire. … He explained that the down-light would fail because of overheating. [102] [Condor] contended that the fire which occurred in the house some months after the insulation work had been completed was an unusual catastrophic event and was not one of which it could be said was ‘not unlikely to occur’. Given the evidence to which I have just referred, this is correct and no other conclusion could have been reached on the evidence. Accordingly, this basis for the application of Hadley v Baxendale had not been made out. [103] Accordingly, I agree … that the cancellation of [Stuart’s] contract with the resultant loss of profits on such balance of the work as might have been allocated to [Stuart] by SANIP was a loss that would not have been in the reasonable contemplation of the parties and was too remote.

Comment 29.9.1 See Radan, Gooley, and Vickovich at 29.122–29.127. 29.10C Transfield Shipping Inc v Mercator Shipping Inc [2009] 1 AC

61 Court: House of Lords Facts: Transfield were charterers of the Achilleas, a commercial cargo vessel, and had agreed to redeliver it to its owners, Mercator, by 2 May 2004. On 21 April 2004 Mercator agreed to charter the vessel to new charterers for her next employment on terms that the new charterers could cancel the charterparty if the vessel was not available by 8 May 2004. By 5 May 2004 it had become obvious that the Achilleas would not be redelivered by 8 May, so Mercator negotiated an extension of the new charterparty’s cancelling date to 11 May 2004. However, by then hire rates had fallen dramatically and [page 748] they were forced to reduce the daily hire rate from $39,500 to $31,500 in exchange for the extension. Mercator claimed damages from Transfield for loss of the original terms of the new charterparty at the difference between the original rate and the reduced rate — almost $1,365,000. Transfield contended that they only had to pay damages at the market rate for the six days Mercator were deprived of the use of the vessel — only $158,301. Issue: The issue before the House of Lords was whether the rule of remoteness set out in Hadley v Baxendale warranted the recovery of the quantum of damages as claimed by Mercator. Decision: The House of Lords (Lords Hoffmann, Hope of Craighead, Rodger of Earlsferry, Walker of Gestingthorpe, and Baroness Hale of Richmond) unanimously ruled against Mercator, holding that its losses were confined to the sum of $158,301 and that the rest of the loss was too remote. Lord Rodger and Baroness Hale applied the conventional remoteness test in coming to their conclusion. On the other hand, Lord Hoffmann and Lord Hope came to the same conclusion, but on a different basis. They ruled that Transfield was

not liable for the loss because, as a matter of construction of the contract, the loss was not one for which they had agreed to accept responsibility. Lord Walker agreed with both lines of reasoning. Extract: The extract from the speech of Lord Hoffmann discusses the principle that even if a loss falls within the first limb of Hadley v Baxendale, it is not recoverable if, as a matter of construction of the contract, the loss is not one for which the defendant agreed to accept responsibility, and applies it to the facts of the case.

Lord Hoffmann The arbitrators, by a majority, found for [Mercator]. They said that the loss on the new fixture fell within the first rule in Hadley v Baxendale,85 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]’.86 … On appeal from the arbitrators, Christopher Clarke J87 and the Court of Appeal (Ward, Tuckey and Rix LJJ)88 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 [page 749] circumstances or general understanding in the relevant market shows that a party would not reasonably have been regarded as assuming responsibility for such losses? … [This] question of principle has been extensively discussed in the literature.

Recent articles … 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 … upon the interpretation of the contract as a whole, construed in its commercial setting. [Some consider] 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. … 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 is 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 Saw Mill Co Ltd v Nettleship: ‘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’.89 In their submissions to the House, [Mercator] said that the ‘starting point’ was that damages were designed to put the innocent party, so far as it is possible, in the position as if the contract had been performed.90 However, in Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd (sub nom South Australia Asset Management Corpn v York Montague Ltd), I said (with the concurrence of the other members of the House): I think that this was the wrong place to begin. Before one can

consider the principle on which one should calculate the damages to which a plaintiff is entitled as compensation for loss, it is necessary to decide for what kind of loss he is entitled to compensation. A correct description of the loss for which the valuer is liable must precede any consideration of the measure of damages.91 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 [page 750] responsibility. In the South Australia case the question was whether a valuer, who had (in breach of an implied term to exercise reasonable care and skill) negligently advised his client bank that property which it proposed to take as security for a loan was worth a good deal more than its actual market value, should be liable not only for losses attributable to the deficient security but also for further losses attributable to a fall in the property market. The House decided that he should not be liable for this kind of loss: In the case of an implied contractual duty, the nature and extent of the liability is defined by the term which the law implies. As in the case of any implied term, the process is one of construction of the agreement as a whole in its commercial setting. The contractual duty to provide a valuation and the known purpose of that valuation compel the conclusion that the contract includes a duty of care. The scope of the duty, in the sense of the consequences for which the valuer is responsible, is that which the law regards as best giving effect to the express obligations assumed by the valuer: neither cutting them down so that the lender obtains less than he was reasonably entitled to expect, nor extending them so as to impose on the valuer a liability greater than he could reasonably have thought he was undertaking.92 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’. The effect of the South Australia case was to exclude from liability the damages attributable to a fall in the property market notwithstanding that those losses were foreseeable in the sense of being ‘not unlikely’ (property values go down as well as up) and had been caused by the negligent valuation in the sense that, but for the valuation, the bank would not have lent at all and there was no evidence to show that it would have lost its money in some other way. It was excluded on the ground that it was outside the scope of the liability which the parties would reasonably have considered that the valuer was undertaking. That seems to me in accordance with the careful way in which Robert Goff J stated the principle in Satef-Huttenes Albertus SpA v Paloma Tercera Shipping Co SA (The Pegase), where the emphasis is upon what a reasonable person would have considered to be the extent of his responsibility: The test appears to be: have the facts in question come to the defendant’s knowledge in such circumstances that a reasonable person in the shoes of the defendant would, if he had considered the matter at the time of making the contract, have contemplated that, in the [page 751] event of a breach by him, such facts were to be taken into account when considering his responsibility for loss suffered by the plaintiff as a result of such breach.93 A similar approach was taken by the Court of Appeal in Mulvenna v Royal Bank of Scotland plc … This was an application to strike out a claim for damages for the loss of profits which the claimant said he would have made if the bank had complied with its agreement to provide him with funds for a property development. The Court of Appeal held that even on the

assumption that the bank knew of the purpose for which the funds were required and that it was foreseeable that he would suffer loss of profit if he did not receive them, the damages were not recoverable. Sir Anthony Evans said: The authorities to which we were referred … demonstrate that the concept of reasonable foreseeability is not a complete guide to the circumstances in which damages are recoverable as a matter of law. Even if the loss was reasonably foreseeable as a consequence of the breach of duty in question (or of contract, for the same principles apply), it may nevertheless be regarded as ‘too remote a consequence’ or as not a consequence at all, and the damages claim is disallowed. In effect, the chain of consequences is cut off as a matter of law, either because it is regarded as unreasonable to impose liability for that consequence of the breach,94 or because the scope of the duty is limited so as to exclude it,95 or because as a matter of commonsense the breach cannot be said to have caused the loss, although it may have provided the opportunity for it to occur.96 By way of explanation for why in such a case liability for lost profits is excluded, Professor Robertson offers what seem to me to be some plausible reasons: It may be considered unjust that the bank should be held liable for the loss of profits simply because the bank knew of the proposed development at the time the refinancing agreement was made. The imposition of such a burden on the bank may be considered unjust because it is inconsistent with commercial practice for a bank to accept such a risk in a transaction of this type, or because the quantum of the liability is disproportionate to the scale of the transaction or the benefit the bank stood to receive.97 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.98 That is generally an inclusive principle: if losses of that type are foreseeable, damages will include compensation for those losses, however large. But the South

Australia and Mulvenna cases shows that 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. [page 752] 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, 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 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.99 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 [Mercator] 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 [Mercator] 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 [as] being, as the saying goes, res inter alios acta. The findings of the majority arbitrators shows that they considered their decision to be contrary to what would have been the expectations of the parties, but dictated by the rules in Hadley v Baxendale as explained in The Heron II. But in my opinion these rules are not so inflexible; they are intended to give effect to the presumed intentions of the parties and not to contradict them. [Mercator] submit that the question of whether the damage is too remote is a question of fact on which the arbitrators have found in their favour. It is true that the question of whether the damage was foreseeable is a question of fact.100 But the question of whether a given type of loss is one for which a party assumed contractual responsibility involves the interpretation of the contract as a whole against its commercial background, and this, like all questions of interpretation, is a question of law. [page 753] [Mercator] say that the parties are entirely at liberty to insert an express term excluding consequential loss if they want to do so. Some standard forms of charter do. I suppose it can be said of many disputes over interpretation, especially over implied terms, that the parties could have used express words or at any rate expressed themselves more clearly than they have done. But … the implication of a term as a matter of construction of the contract as a whole in its commercial context and the implication of the limits of damages liability seem to me to involve the application of essentially the same techniques of interpretation. In both cases, the court is engaged in construing the agreement to reflect the liabilities which the parties may reasonably be expected to have assumed and paid for. It cannot decline this task on the ground that the parties could have spared it the

trouble by using clearer language. In my opinion, the findings of the arbitrators and the commercial background to the agreement are sufficient to make it clear that [Transfield] cannot reasonably be regarded as having assumed the risk of [Mercator’s] loss of profit on the following charter.

Comments 29.10.1 See Radan, Gooley, and Vickovich at 29.131–29.136. 29.10.2 For a critical analysis of this case, see E Peel, ‘Remoteness Revisited’ (2009) 125 Law Quarterly Review 6; B Coote, ‘Contract Assumption and Remoteness of Damage’ (2010) 26 Journal of Contract Law 211; G Yihan, ‘Contractual Remoteness in England and Singapore Compared: Orthodoxy Preferable?’ (2013) 30 Journal of Contract Law 233. For a discussion of the reception of this case in the common law world, see H Hunter, ‘Has The Archilleas Sunk?’ (2014) 31 Journal of Contract Law 120.

THE OBLIGATION TO MITIGATE 29.11C

The ‘Asia Star’ [2010] 2 Lloyd’s Rep 121

Court: Court of Appeal in Singapore Facts: The owner of the Asia Star was chartered to load palm oil bought from three Indonesian suppliers, which would later be sold to a Turkish company under a series of contracts. The owner contracted to deliver the vessel at the charterer’s nominated ports in Indonesia and Malaysia for loading. However, due to bad weather and a change in discharge schedule, the vessel did not reach the nominated loading ports on time. The charterer agreed to an extension of time. However, when the vessel finally arrived in Indonesia its cargo tanks were found to be unfit for transporting palm oil. No substitute vessel was found and the Asia Star departed without the cargo.

The charterer found a suitable replacement vessel, the Puma. However, negotiations to charter it collapsed because the charterer was unwilling to pay the higher freight fee demanded by the owner of the Puma, even though the fee demanded by the Puma’s [page 754] owner was less than the Asia Star’s freight rate. As a result the charterer incurred losses as a result of the cancellation of the charterparty of the Asia Star. Issue: The issue before the Court of Appeal was whether the charterer’s measure of damages for breach of contract by the owner of the Asia Star was diminished by its failure to act reasonably in relation to its obligation to mitigate. Decision: The Court of Appeal in Sinapore (Chan Sek Keong CJ, Andrew Phang Boon Leong and V K Rajah JJA) unanimously held that the charterer had acted unreasonably in not procuring the Puma as a replacement vessel. Extracts: The extracts from the joint judgment of the Court of Appeal discuss the elements of and the theoretical justifications for the principle of mitigation.

V K Rajah JA (delivering the opinion of the Court of Appeal) In a claim for damages for breach of contract, the failure of the aggrieved party to act reasonably to mitigate its loss is a standard defence which the defaulting party usually invokes to reduce the damages payable. It is important, however, to point out that the so-called ‘duty’ to mitigate is not strictly speaking a legal duty which the aggrieved party owes to the defaulting party, in that the latter cannot bring an action against the former for failing to mitigate its loss. The term ‘duty’ as employed repeatedly in the authorities is actually no more than a convenient term of reference for the legal requirement imposed on an aggrieved party to take prophylactic measures to minimise avoidable loss if it wishes to recover all of the loss

sustained as a result of the defaulting party’s breach of contract. A breach of the ‘duty’ to mitigate prima facie disentitles the aggrieved party from claiming that part of its loss which, in the court’s view, could have been avoided if reasonable mitigation measures had been taken. From this perspective, the ‘duty’ to mitigate may give rise to an indirect legal ‘liability’ in so far as a breach of this ‘duty’ operates as a legal bar, pro tanto, to recovery of damages … Subject to the clarification which we have just made, therefore, we will employ the terms ‘the duty to mitigate’ and ‘the principle of mitigation’ interchangeably in this judgment to denote this legal obligation. The basic rules relating to mitigation are well settled. First, the aggrieved party must take all reasonable steps to mitigate the loss consequent on the defaulting party’s breach, and cannot recover damages for any loss which it could have avoided but failed to avoid due to its own unreasonable action or inaction. Second, the aggrieved party who goes beyond what the law requires of it and avoids incurring any loss at all will not be entitled to recover any damages. In such a case, the aggrieved party’s efforts will in effect confer a gratuitous benefit on the defaulting party. Third, the aggrieved party may recover any expenses incurred in the course of taking reasonable steps to mitigate its loss. In short, the aggrieved party cannot recover avoidable or avoided loss; it may, however, recover expenses reasonably incurred in the course of taking mitigation measures. The evaluation of the aggrieved party’s conduct in mitigation ought to start from the date of the defaulting party’s breach, and the burden of proving that the aggrieved party has failed to fulfil its duty to mitigate falls on the defaulting party. This burden is ordinarily one which is not easily discharged. [page 755] The above-mentioned general rules have evolved over the last two centuries without any coherent overarching legal framework. No clear distinction has been drawn in applying these rules to the incapable, the unwilling and (in some cases even) the cynical defaulting party. Many of the early authorities that led to the crystallisation of these rules featured findings made by juries.

These findings were neither judicially explained nor capable of being justified by legal reasoning. One can therefore readily understand why Prof Michael G Bridge … described the principle of mitigation in a tone of despair as being ‘to a surprising degree theoretically undernourished and underwritten, and subject to hardly any critical examination in the leading texts’.101 In … Bridge’s article, various theoretical justifications which have been advanced in support of the principle of mitigation are examined. Of these various rationales (which include factual causation, remoteness of damage, contributory negligence, promises and expectations and self-help), what we shall call ‘the “economic efficiency” theory’ is the most attractive and most popular school of thought. This theory suggests that the duty to mitigate seeks to encourage economic efficiency by discouraging waste. It rests on the premise that no legal system should sanction economic waste by allowing an aggrieved party to accumulate loss arising from the defaulting party’s breach of contract when it was within the aggrieved party’s power to curb such loss. While this approach is prima facie attractive, it is, in our view, not entirely convincing for two reasons. First, it is simply not possible to explain certain aspects of the principle of mitigation by reference to the ‘economic efficiency’ theory alone. As … Bridge astutely pointed out, ‘adverse market movement, to the profit of some actors and to the correlative disadvantage of others, is not in itself [economically] wasteful’.102 If the principle of mitigation were justifiable solely by the importance of avoiding or minimising economic waste, then, in a case where the defaulting party’s breach of contract consists of a failure to supply or deliver goods, the aggrieved party ought not to be penalised for its lack of agility in entering a falling market to purchase replacement goods in order to mitigate its loss. The reality, however, is that, where the aggrieved party’s delay in entering a falling market in such a scenario is unreasonable, the principle of mitigation does operate to penalise the aggrieved party even though its delay has caused no loss in the literal sense of the word. The second reason why we are unconvinced by the ‘economic efficiency’ theory is that, if the law on mitigation were indeed solely underpinned by concerns about economic efficiency, then an aggrieved party whose attempts at mitigation generate even greater loss than the loss which would

have arisen had it done nothing at all should not be allowed to recover the additional loss. Yet, the prevailing legal position is that, subject to the reasonableness of the actions of the aggrieved party and the foreseeability of its additional loss, recovery of such additional loss is allowed. [page 756] Prof Bridge concluded, after analysing all the relevant authorities, that ‘[n]o single [factor] sufficiently explains the requirement of mitigation as a general rule’.103 Instead, it would be more accurate to see the principle of mitigation as the product of a complex amalgam of competing sensibilities — one that reflects ‘several impulses that mollify the strictness of contractual obligation and that are hard, perhaps impossible, to rationalise in their totality’.104 We agree. We should at the same time point out that the complexity involved in identifying a single theoretical justification for the principle of mitigation belies the singular practical focus of the central inquiry which lies at the heart of this principle — namely, the inquiry into whether or not the aggrieved party acted reasonably to mitigate its loss (‘the reasonableness inquiry’). Reasonableness forms the one identifiable foundation on which this inquiry — and, in turn, the principle of mitigation — rests. The central question which underpins the reasonableness inquiry is what a reasonable and prudent man in the trade would have done in the ordinary course of his business if he had been in the aggrieved party’s shoes. Naturally, any answer to the question ‘What would the reasonable businessman have done?’ can, will and may reflect a wide range of values and concerns, some of which may compete with and/or contradict others. For instance, while the principle of mitigation does not require an aggrieved party to nurse the defaulting party’s interests at the expense of its own interests, it has also long been said that the aggrieved party must act with both the defaulting party’s interests as well as its own interests in mind. The existence of the duty to mitigate may also appear to be an unfair obligation to impose on the aggrieved party as it is the innocent party in relation to a breach of contract (in that the defaulting party is to blame for the breach of contract). To minimise any potential unfairness to the

aggrieved party in this regard, the courts have sought to ensure that the standard of reasonableness required of the aggrieved party will not be too difficult to meet. For instance, the aggrieved party is not required to act in a way which exposes it to financial or moral hazard, such as taking steps which might jeopardise its commercial reputation or partaking in hazardous litigation against a third party to reduce its loss. The requisite standard of reasonableness is said to be an objective one; yet, it clearly also takes into account subjective circumstances such as the aggrieved party’s financial position (see below at [135]). The reasonableness inquiry, therefore, falls short of being purely objective. The many sub-rules, qualifications and nuances that have built up around the reasonableness inquiry may not infrequently appear to be confusing and unwieldy. Nevertheless, when one takes a step back to look at the object of this inquiry as a whole, it becomes clear that the inquiry amounts to nothing more than the common law’s attempt to reflect commercial and fact-sensitive fairness at the remedial stage of a legal inquiry into the extent of liability on the defaulting party’s part. The concept of reasonableness in the context of mitigation is a flexible one. In essence, it bars an aggrieved party from profiting or behaving unreasonably at the [page 757] expense of the defaulting party, and encapsulates complex interplaying notions of responsibility and fairness. As with any principle of law that encapsulates notions of fairness, the principle of mitigation confers on the courts considerable discretion in evaluating the facts of the case at hand in order to arrive at a commercially just determination. The principle embodies a fact-centric flexibility which, whilst remaining in harmony with sound business practice, stands in vivid contrast to the strictness with which rules in other areas of contract law are applied. Turning specifically to the situation where a contract for the carriage of goods by sea is breached due to the shipowner’s failure to provide the charterer with the promised vessel, the usual mitigation measures involve the charterer (which is the aggrieved party in this scenario) either engaging an alternative vessel to carry the same goods or obtaining substitute goods

at the intended place of delivery. The charterer need only act reasonably in deciding which of these alternative measures to adopt. It will usually, however, be bound to adopt the least costly option. Ordinarily speaking, if a substitute vessel is available on reasonable terms, the charterer ought to mitigate its loss by engaging that vessel. If the charterer cannot get a ship of the same size as that which it originally chartered, it is entitled to take the next best reasonable option that is available, which may include chartering a larger vessel if a failure to do so will cause greater loss to the defaulting party. In this regard, it should be noted … that the charterer must not act in ‘an imprudent or extravagant manner’. The reasonableness inquiry, therefore, is very much a factual one. For this reason, case precedents are of limited guidance as they are specific to their particular factual matrices. … [T]he court should adopt a generous approach in assessing the aggrieved party’s conduct in mitigation. … Lord Macmillan’s oft-cited observations in Banco de Portugal v Waterlow and Sons, Limited [are] as follows: Where the sufferer from a breach of contract finds himself in consequence of that breach placed in a position of embarrassment[,] the measures which he may be driven to adopt in order to extricate himself ought not to be weighed in nice scales at the instance of the party whose breach of contract has occasioned the difficulty. It is often easy after an emergency has passed to criticize the steps which have been taken to meet it, but such criticism does not come well from those who have themselves created the emergency. The law is satisfied if the party placed in a difficult situation by reason of the breach of a duty owed to him has acted reasonably in the adoption of remedial measures, and he will not be held [to be] disentitled to recover the cost of such measures merely because the party in breach can suggest that other measures less burdensome to him might have been taken.105 (Emphasis added.) … In a similar vein, the High Court in Jia Min Building Construction Pte Ltd v Ann Lee Pte Ltd noted that: Mitigation is neither an exact science nor a mathematical exercise. It

must be viewed through a commercial lens and measured by commercial common sense. The court will not audit every decision made in the turmoil of a difficult and fluid commercial situation.106 [page 758] While we certainly agree with the foregoing observations, we must also emphasise that they must be understood in their proper context. In Banco de Portugal, the aggrieved party had in fact taken some action to mitigate the situation which it found itself in, viz, it had withdrawn the entire series of compromised notes and had undertaken to exchange all such notes which were presented to it within a limited time. Lord Macmillan’s comments were made in response to the defaulting party’s invitation to the court to find that the aggrieved party should have taken some other action which would have reduced its loss even further. There were good reasons for Lord Macmillan to caution that the court should not adopt too stringent a standard in enforcing the duty to mitigate vis-à-vis an aggrieved party — the court is not, after all, the best-equipped arbiter of economic efficiency and the options available to the aggrieved party at the material time. Thus, in cases such as Banco de Portugal, the correct approach for the court to take would be to refrain from engaging in an exacting scrutiny of the aggrieved party’s every act and/or omission. In this regard, it is important to bear in mind that the question which the principle of mitigation requires the court to determine is whether the mitigation measures taken by the aggrieved party were reasonable, and not whether the aggrieved party took the best possible measures to reduce its loss. Having said that, we are of the view that Lord Macmillan’s observations apply less strongly in a case where the aggrieved party rejected a reasonable opportunity to reduce its own loss. In other words, while it may be a general principle of the law on mitigation that the court will not nicely weigh on sensitive scales the measures taken by an aggrieved party to mitigate its loss, this principle will ordinarily apply more strongly in cases where the question before the court is whether the aggrieved party engaged in unreasonable action as opposed to unreasonable inaction. Once the defaulting party establishes that the aggrieved party had reasonable options

before it, greater justification will usually be needed from the aggrieved party which, despite knowing that it must act reasonably to mitigate its loss, does nothing at all. After all, the duty to mitigate encapsulates a policy consideration of the law that, once a civil wrong has occurred, the aggrieved party should be encouraged to be self-reliant or proactive in attempting to reduce its loss, instead of pinning all its loss on the defaulting party. Doing nothing at all will only infrequently be the most efficient, the most reasonable or the least costly option available to an aggrieved party. In the final analysis, both Lord Macmillan’s comments in Banco de Portugal and the High Court’s remarks in Jia Min Building Construction merely suggest that the standard of reasonableness is to be applied in a practical and commonsensical way, with particular sympathy for the aggrieved party. These cautionary remarks do no more than colourfully reiterate what has already been factored into the subjective element inherent in the reasonableness inquiry. The … impecuniosity argument [that is, the argument that spending relatively significant sums in mitigation would constitute a major drain on the aggrieved party’s resources] is based on the principle … that ‘[an aggrieved party] will not be prejudiced by [its] financial inability to take steps in mitigation’ [emphasis in original].107 This principle appears to be a corollary of the eggshell-skull rule that the defaulting party must take the aggrieved [page 759] party as it finds the latter. If the position of the aggrieved party is aggravated because it lacks the means to mitigate the loss suffered, the defaulting party nevertheless remains answerable for the consequences flowing from its wrongful act. Applied in the context of a claim for damages for breach of contract, this rule entails that, so long as the aggrieved party acts reasonably to mitigate its loss, it will not be disbarred from pursuing its claim for the actual loss suffered simply because it was unable to take certain mitigation measures which it could otherwise have taken had it had the requisite financial resources.

Comments 29.11.1 See Radan, Gooley, and Vickovich at 29.138–29.165. 29.11.2 On the efficient breach theory noted in the judgment of the Court of Appeal in this case, see T Al-Tawil, ‘The Efficient Breach Theory: The False Assumptions and Reasons’ (2011) 28 Journal of Contract Law 150; T Al-Tawil, ‘The Efficient Breach Theory: The Transparency Objection’ (2011) 28 Journal of Contract Law 218.

1.

Butler v Fairclough (1917) 23 CLR 78; Gray v Motor Accident Commission (1998) 196 CLR 1 at 6–7; Hospitality Group Pty Limited v Australian Rugby Union Limited (2001) 110 FCR 157 at 191.

2. 3.

G Treitel, The Law of Contract, 11th ed, Thomson-Sweet & Maxwell, London, 2003, p 935. Aggravated, Exemplary and Restitutionary Damages, Law Com No 247, 1997, pp 105, 118–19.

4. 5.

Aggravated, Exemplary and Restitutionary Damages, Law Com No 247, 1997, p 118. Report on Aggravated, Exemplary and Restitutionary Damages, LRC 60-2000, at [1.54].

6. 7.

Restatement (Second) of Contracts, (1981), at [355]. (2002) 209 DLR (4th) 257.

8.

J D McCamus, ‘Prometheus Bound or Loose Cannon? Punitive Damages for Pure Breach of Contract in Canada’ (2004) 41 San Diego Law Review 1491 at 1504, 1519. J Swan, ‘Punitive Damages for Breach of Contract: A Remedy in Search of a Justification’ (2003–04) 29 Queen’s Law Journal 596 at 644, 646.

9. 10. 11.

J Swan, ‘Punitive Damages for Breach of Contract: A Remedy in Search of a Justification’ (2003–04) 29 Queen’s Law Journal 596 at 645. Todorovic v Waller (1981) 150 CLR 402 at 412.

12. 13.

Johnson v Agnew [1980] AC 367 at 400–1. Cummings v London Bullion Co Ltd [1952] 1 KB 327 at 336.

14. 15.

Philips v Ward [1956] 1 All ER 874 at 876. Radford v De Froberville [1978] 1 All ER 33 at 56.

16. 17.

[1911] 2 KB 786. Chaplin v Hicks [1911] 2 KB 786 at 793–4.

18. 19.

Chaplin v Hicks [1911] 2 KB 786 at 792. Chaplin v Hicks [1911] 2 KB 786 at 795.

20. 21.

Chaplin v Hicks [1911] 2 KB 786 at 793. Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd (1943) AC 32 at 48.

22. 23.

Rowland v Divall (1923) 2 KB 500; Butterworth v Kingsway Motors Ltd (1954) 2 All ER 694. Hyundai Shipbuilding and Heavy Industries Co Ltd v Pournaras (1978) 2 Lloyd’s Rep 502; Hyundai Heavy Industries Co Ltd v Papadopoulos [1980] 2 All ER 29.

24.

Dillon v Baltic Shipping Co, The ‘Mikhail Lermontov’ (1989) 21 NSWLR 614 at 668.

25. 26.

Hamlin v Great Northern Railway Company (1856) 156 ER 1261 at 1262. Hayes v Dodd (1990) 2 All ER 815 at 823.

27. 28.

G Treitel, The Law of Contract, 8th ed, Sweet & Maxwell, London, 1991, p 878. Jarvis v Swans Tours Ltd (1973) QB 233; Jackson v Horizon Holidays Ltd [1975] 3 All ER 92.

29. 30.

Hamlin v Great Northern Railway Company (1856) 156 ER 1261 at 1262. Hamlin v Great Northern Railway Company (1856) 156 ER 1261 at 1262.

31. 32.

Hadley v Baxendale (1854) 156 ER 145 at 151. C Czarnikow Ltd v Koufos [1969] 1 AC 350 at 386.

33. 34.

(1848) 154 ER 363 at 365. Hayes v Dodd (1990) 2 All ER 815 at 820.

35. 36.

L Albert and Son v Armstrong Rubber Co (1949) 178 F 2d 182 at 189. (1936) 46 Yale Law Journal 52 at 79.

37. 38.

Restatement of the Law: Contracts, 2nd ed (1981) at para 349. McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 at 411–12; Chaplin v Hicks [1911] 2 KB 786 at 792.

39. 40.

Biggin and Co Ltd v Permanite Ltd (1951) 1 KB 422 at 438. Anglia Television Ltd v Reed [1972] 1 QB 60 at 63–4.

41. 42.

CCC Films Ltd v Impact Quadrant Films Ltd (1985) QB 16 at 32. (1963) 37 ALJR 289.

43. 44.

McRae v Commonwealth Disposals Commission (1951) 84 CLR 377. Abrahams v Herbert Reiach Ltd (1922) 1 KB 477 at 482; Lavarack v Woods of Colchester Ltd (1967) 1 QB 278.

45. 46.

Hadley v Baxendale (1854) 156 ER 145 at 151. C Czarnikow Ltd v Koufos [1969] 1 AC 350 at 385, 421; The ‘Pegase’ (1981) 1 Lloyd’s Rep 175 at 182.

47. 48.

[1971] 1 QB 164. Fink v Fink (1946) 74 CLR 127 at 143; Chaplin v Hicks [1911] 2 KB 786 at 792–3.

49. 50.

TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130 at 154. Lavarack v Woods of Colchester Ltd (1967) 1 QB 278 at 295–6.

51. 52.

Lavarack v Woods of Colchester Ltd (1967) 1 QB 278 at 294. (1963) 37 ALJR 289 at 294.

53. 54.

Herbert Clayton and Jack Waller Ltd v Oliver [1930] AC 209. White v Australian and New Zealand Theatres Ltd (1943) 67 CLR 266 at 271, 273, 281; Withers v General Theatre Corporation (1933) 2 KB 536 at 554.

55. 56.

Abrahams v Herbert Reiach Ltd (1922) 1 KB 477 at 482. Chaplin v Hicks [1911] 2 KB 786 at 796, 799.

57. 58.

McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 at 412, 414. Holt v United Security Life Ins & Trust Co (1909) 72 Atlantic Reporter 301 at 305–6.

59. 60.

CCC Films Ltd v Impact Quadrant Films Ltd [1985] QB 16 at 38. The Mihalis Angelos [1971] 1 QB 164 at 209–10.

61.

Robinson v Harman (1848) 154 ER 363 at 365.

62. 63.

Radford v De Froberville [1978] 1 All ER 33 at 44. Radford v De Froberville [1978] 1 All ER 33 at 44.

64. 65.

Bellgrove v Eldridge (1954) 90 CLR 613 at 617. Ruxley Electronics and Construction Ltd v Forsyth [1996] AC 344 at 358.

66. 67.

Ruxley Electronics and Construction Ltd v Forsyth [1996] AC 344 at 360. Bellgrove v Eldridge (1954) 90 CLR 613 at 618.

68. 69.

Bellgrove v Eldridge (1954) 90 CLR 613 at 618. Ruxley Electronics and Construction Ltd v Forsyth [1996] AC 344 at 354–5.

70. 71.

(1854) 156 ER 145. Hadley v Baxendale (1854) 156 ER 145 at 151.

72. 73.

Hadley v Baxendale (1854) 156 ER 145 at 151. C Czarnikow Ltd v Koufos [1969] 1 AC 350 at 385.

74. 75.

[1928] All ER 763. C Czarnikow Ltd v Koufos [1969] 1 AC 350 at 388.

76. 77.

C Czarnikow Ltd v Koufos [1969] 1 AC 350 at 385. C Czarnikow Ltd v Koufos [1969] 1 AC 350 at 389.

78. 79.

Alexander v Cambridge Credit Corporation Limited (1987) 9 NSWLR 310 at 364. [1949] 2 KB 528.

80. 81.

Alexander v Cambridge Credit Corporation Limited (1987) 9 NSWLR 310 at 365. Alexander v Cambridge Credit Corporation Limited (1987) 9 NSWLR 310 at 366.

82. 83.

Alexander v Cambridge Credit Corporation Limited (1987) 9 NSWLR 310 at 367. Castle Constructions Pty Limited v Fekala Pty Limited [2006] NSWCA 133 at [39].

84. 85.

Robophone Facilities Ltd v Blank [1966] 3 All ER 128 at 143. (1854) 156 ER 145 at 151.

86. 87.

C Czarnikow Ltd v Koufos (The Heron II) [1969] 1 AC 350 at 382–3. [2007] 1 Lloyd’s Rep 19.

88. 89.

[2007] 2 Lloyd’s Rep 555. British Columbia Saw Mill Co Ltd v Nettleship (1868) LR 3 CP 499 at 508.

90. 91.

Robinson v Harman (1848) 154 ER 363 at 365. Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd (sub nom South Australia Asset Management Corpn v York Montague Ltd) [1997] AC 191 at 211.

92.

Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd (sub nom South Australia Asset Management Corpn v York Montague Ltd) [1997] AC 191 at 212. Satef-Huttenes Albertus SpA v Paloma Tercera Shipping Co SA (The Pegase) [1981] Lloyd’s Rep 175 at 183.

93. 94. 95.

The Pegase [1981] 1 Lloyd’s Rep 175. Banque Bruxelles SA v Eagle Star [1997] AC 191.

96. 97.

Mulvenna v Royal Bank of Scotland plc [2003] EWCA Civ 1112 at [33]. A Robertson, ‘The Basis of the Remoteness Rule in Contract’ (2008) 28 Legal Studies 172, p 183.

98.

Transworld Oil Ltd v North Bay Shipping Corpn (The Rio Claro) [1987] Lloyd’s Rep 173 at 175; Jackson v Royal Bank of Scotland plc [2005] 2 All ER 71.

99. Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 at 543. 100. Monarch Steamship Co Ltd v Karlshamns Oljefabriker (A/B) [1949] AC 196. 101. M G Bridge, ‘Mitigation of Damages in Contract and the Meaning of Avoidable Loss’ (1999) 105 Law Quarterly Review 398 at 399. 102. M G Bridge, ‘Mitigation of Damages in Contract and the Meaning of Avoidable Loss’ (1999) 105 Law Quarterly Review 398 at 405. 103. M G Bridge, ‘Mitigation of Damages in Contract and the Meaning of Avoidable Loss’ (1999) 105 Law Quarterly Review 398 at 410. 104. M G Bridge, ‘Mitigation of Damages in Contract and the Meaning of Avoidable Loss’ (1999) 105 Law Quarterly Review 398 at 407–8. 105. Banco de Portugal v Waterlow and Sons, Limited [1932] AC 452 at 506. 106. Jia Min Building Construction Pte Ltd v Ann Lee Pte Ltd [2004] 3 SLR(R) 288 at [73]. 107. H McGregor, McGregor on Damages, 18th ed, Thomson Reuters (Legal) Limited, 2009, at [7-088].

[page 760]

30 ACTIONS FOR A FIXED SUM AND DEBT

INTRODUCTION 30.1 This chapter examines the recovery by a plaintiff of monetary sums fixed by a contract. This topic falls into two parts: the first is the recovery of a sum known as liquidated damages; the second relates to actions for the recovery of a debt. In relation to the recovery of liquidated damages, the paradigm case is with the recovery of a sum of money agreed to by the parties at the time of contract as the compensation to be paid in the event of it being breached. Less frequently, such an agreement will stipulate the sum to be paid if the contract is terminated pursuant to a contractual right to terminate even if the contractual right can be exercised in the absence of a breach of contract: O’Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359. In either case such a clause is generally referred to as a ‘liquidated damages clause’ or an ‘agreed damages clause’. Such a clause will, however, not always be enforceable. If it is not enforceable, it is because it is a ‘penalty’. Relief against penalties is based upon ‘the underlying principle of equity that effect will not be given to a contractual provision which produces unconscientious results’: Killarney Investments Pty Ltd v Macedonian Community of WA (Inc) [2007] WASCA 180 at [90]. It has traditionally been accepted that the law on penalties does not apply to clauses in a contract relating to the payment of money on the occurrence of an event other than a breach of contract. However, in Andrews v Australia

and New Zealand Banking Group Ltd (2012) 245 CLR 205 at 236, it was held that the jurisdiction in relation to penalties applied in relation to such clauses. In this case the High Court was concerned with whether certain fees payable by a bank’s customers were capable of being classified as penalties, even though those fees did not require a breach of contract to occur before being payable. An example of such fees included over the limit and late payment fees charged by the bank in relation to credit card accounts. The High Court held that such fees could be classified as penalties. A liquidated damages clause is enforceable if the sum stipulated is a genuine pre-estimate of the damage suffered by the innocent party. However, if it is not, the clause is a penalty. The classic principles relating to whether or not a clause is a penalty are set out in the House of Lords decision in Dunlop Pneumatic Tyre Company Ltd v New Garage and Motor Ltd [1915] AC 79 (see 30.2C) and are discussed in the Australian case of Paciocco v Australia and New Zealand Banking Group Ltd (2016) 333 ALR 569 (see 30.3C) and the English case of Cavendish Square Holding BV v Makdessi; ParkingEye Ltd v Beavis [2016] AC 1172 (see 30.4C). In relation to actions for the recovery of a debt, such an action arises where the contract imposes an obligation to pay a sum of money and the right to payment of it has accrued to [page 761] the plaintiff. A common example of such an action is the recovery of the price a defendant has agreed to pay for goods or services that have been provided by the plaintiff. There are two basic requirements for a successful action in debt: the first is that there is an obligation to pay a certain or ascertainable sum of money; the second is that the plaintiff has performed the obligation to which the defendant’s obligation to pay is attached. A particular issue that arises in the case of the purchase of land under an instalment contract is whether a vendor is entitled to retain a deposit and recover unpaid instalments if a purchaser fails to complete the contract. This issue is discussed in McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 (see 30.5C). In relation to an action for the recovery of a debt, as discussed in White and Carter (Councils) Ltd v McGregor

[1962] AC 413 (see 30.6C), the principles of mitigation, with two possible qualifications, do not apply. The major advantage of actions for fixed sums and debts is the procedural simplicity that they enjoy as compared to the recovery of damages at common law. With respect to an enforceable liquidated damages clause, subject to the power of the court in an appropriate case to grant relief against forfeiture, the plaintiff does not have to prove any loss or damage in relation to the breach of contract, as the obligation cast upon the defendant is enforceable against the defendant upon the plaintiff’s termination of the contract for the defendant’s breach: Boucaut Pay Co Ltd v Commonwealth (1927) 40 CLR 98 at 106–7. Thus, the plaintiff recovers the sum stipulated, irrespective of whether the actual loss suffered is more or less than the sum stipulated in the clause. If the clause is classified as a penalty, it is unenforceable. However, this does not mean that the plaintiff is unable to be compensated for his or her loss. The plaintiff is able to recover damages according to the principles governing the assessment of damages at common law for breach of contract. With respect to an action for the recovery of a debt, unlike recovery of damages where the onus of proof is on the plaintiff, the onus of proof is on the defendant to prove that the debt has been paid: Young v Queensland Trustees (1954) 99 CLR 560 at 569–70.

THE PRINCIPLES RELATING TO PENALTIES 30.2C

Dunlop Pneumatic Tyre Company Ltd v New Garage and Motor Ltd [1915] AC 79

Court: House of Lords Facts: Dunlop contracted to sell tyres, covers, and tubes to New Garage, which in turn sold these items to the public. Pursuant to cl 2 of its contract with Dunlop, New Garage agreed not to sell the goods to the public below certain set prices. Clause 5 of the contract stipulated that New Garage would pay, as liquidated damages, £5 for each tyre, cover, or tube that was sold in breach of cl 2. New Garage breached cl 2 of the contract by selling tyres and tubes below the stipulated prices. Dunlop sought to enforce cl 5 of the contract.

Issue: The issue before the House of Lords was whether cl 5 was a penalty or a valid liquidated damages clause. [page 762] Decision: The House of Lords (Lords Dunedin, Atkinson, Parker of Waddington, and Parmoor) unanimously held that cl 5 was not a penalty. Extract: The extracts from the speech of Lord Dunedin set out what has become the classic statement on the law differentiating penalties from enforceable liquidated damages clauses.

Lord Dunedin My Lords, we had the benefit of a full and satisfactory argument, and a citation of the very numerous cases which have been decided on this branch of the law. … I do not think it advisable to attempt any detailed review of the various cases, but I shall content myself with stating succinctly the various propositions which I think are deducible from the decisions which rank as authoritative: 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 pre-estimate of damage.1 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.2

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 a penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach. … (b) It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid. 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 … is probably more interesting than material. [page 763] (c) There is a presumption (but no more) that it is a 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’.3 On the other hand: (d) It is no obstacle to the sum stipulated being a genuine preestimate 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.4

Turning now to the facts of the case, it is evident that the damage apprehended by [Dunlop] owing to the breaking of the agreement was an

indirect and not a direct damage. So long as they got their price from [New Garage] for each article sold, it could not matter to them directly what [New Garage] did with it. Indirectly it did. Accordingly, the agreement is headed ‘Price Maintenance Agreement’ and the way in which [Dunlop] would be damaged if prices were cut is clearly explained in evidence by Mr Baisley, and no successful attempt is made to controvert that evidence. But though damage as a whole from such a practice would be certain, yet damage from any one sale would be impossible to forecast. It is just, therefore, one of those cases where it seems quite reasonable for parties to contract that they should estimate that damage at a certain figure, and provided that figure is not extravagant there would seem no reason to suspect that it is not truly a bargain to assess damages, but rather a penalty to be held in terrorem.

[page 764]

Comments 30.2.1 See Radan, Gooley, and Vickovich at 30.14 and 30.25–30.27. 30.2.2 In Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205 at 216–17, the High Court in a unanimous joint judgment said: In general terms, a stipulation prima facie imposes a penalty on a party (the first party) if, as a matter of substance, it is collateral (or accessory) to a primary stipulation in favour of a second party and this collateral stipulation, upon the failure of the primary stipulation, imposes upon the first party an additional detriment, the penalty, to the benefit of the second party. In that sense, the collateral or accessory stipulation is described as being in the nature of a security for and in terrorem of the satisfaction of the primary stipulation. If compensation can be made to the second party for the prejudice suffered by failure of the primary stipulation, the collateral stipulation

and the penalty are enforced only to the extent of that compensation. The first party is relieved to that degree from liability to satisfy the collateral stipulation. … It should be noted that the primary stipulation may be the occurrence or non-occurrence of an event which need not be the payment of money. Further, the penalty imposed upon the first party upon failure of the primary stipulation need not be a requirement to pay to the second party a sum of money. For critical analyses of this High Court decision, see S Harder, ‘The Relevance of Breach to the Applicability of the Rule Against Penalties’ (2013) 30 Journal of Contract Law 52; J W Carter, W Courtney, E Peden, A Stewart and G J Tolhurst, ‘Contractual Penalties: Resurrecting the Equitable Jurisdiction’ (2013) 30 Journal of Contract Law 99. 30.2.3 In reference to Lord Dunedin’s comment (at p 86) that ‘the essence of liquidated damages is a genuine covenanted pre-estimate of damage’, Jackson J, in Alfred McAlpine Capital Projects Ltd v Tilebox Ltd [2005] EWHC 281 (TCC) at [48], said: Although many authorities use or echo the phrase ‘genuine pre-estimate’, the test does not turn upon the genuineness or honesty of the party or parties who made the preestimate. The test is primarily an objective one, even though the court has some regard to the thought processes of the parties at the time of contracting.

30.3C

Paciocco v Australia and New Zealand Banking Groups Ltd (2016) 333 ALR 569

Court: High Court of Australia Facts: Paciocco held two credit card accounts with the ANZ Bank, the terms of which required him to pay a minimum monthly repayment

amount. The Bank also required a late payment fee to be charged whenever the minimum monthly repayment and [page 765] any outstanding and immediately due amount were not paid within a specified time. A number of late payment fees were charged to Paciocco’s accounts, which he claimed were unenforceable as penalties. Paciocco and a company he controlled were also applicants in representative proceedings against the Bank, in which they alleged that the late payment fees and various other fees charged by the Bank were unenforceable as penalties. They also claimed that the Bank had acted unconscionably in contravention of the Australian Securities and Investments Commission Act 2001 (Cth) and the Fair Trading Act 1999 (Vic), that the late payment fees were void as unfair terms under those Acts, and that the contracts for the accounts were unjust transactions under the National Credit Code. Expert evidence was given as to the loss provision costs, regulatory capital costs, and collection costs potentially incurred by the Bank, and of the amounts reasonably needed to restore the Bank to the position it would have been in had the repayments been made on time. Paciocco and his company succeeded at first instance, but were overturned on appeal. They appealed to the High Court. Issues: The issues to be decided in the two appeals were whether the Bank’s late payment fees operated as penalties, whether the Bank had acted unconscionably in contravention of statute, and whether the credit card account contracts were unjust transactions and void for containing unfair terms. Decision: The High Court by majority (French CJ, Kiefel, Gageler, and Keane JJ; Nettle J dissenting) dismissed both appeals. It held that the late payment fees charged on the credit card accounts were not unenforceable as penalties, and that the imposition of late payment fees did not contravene statutory prohibitions against unconscionable conduct, unjust transactions, and unfair contract terms.

Extracts: The extracts below from the judgment of Kiefel J outline the rationale for holding that a sum to be paid on default is a penalty, rather than liquidated damages.

Kiefel J What is a penalty? In Dunlop,5 Lord Dunedin described the ‘essence’ of a penalty as ‘a payment of money stipulated as in terrorem of the offending party’.6 By way of comparison, the essence of liquidated damages is ‘a genuine covenanted pre-estimate of damage’ by the parties. Lord Dunedin’s speech in Dunlop has been described as containing a ‘potpourri of old learning and new’ and in the former respect to reflect ‘centuries of equity jurisprudence’. His Lordship’s description of the essence of a penalty would fall into this category. The contrasting concept of liquidated damages for breach of contract belongs to a later period. [page 766] It has been suggested7 that the reference to a penalty terrorising persons may not be especially helpful, for penalties may be readily agreed to ‘by parties who are not in the least terrorised by the prospect of having to pay them and yet are … entitled to claim the protection of the court’. The Late Payment Fee charged by the ANZ would not appear to have caused Mr Paciocco undue concern, as he would regularly pay the minimum Monthly Payment late and incur the fee, of which he was fully aware. However, the point to be made is that threats and punishment were regarded as the essential characteristics of a penalty. A sum stipulated to be paid on default, which amounted to a threat to the person obliged to pay it if the principal obligation was not performed, bore the character of a penalty, as did a sum stipulated to be paid which could not be accounted for other than as a punishment for default. The distinction drawn in Andrews,8 between the primary stipulation and the penalty which is collateral to it, directs attention to penal bonds, which

were largely used historically to bind persons to the performance of an obligation. Professor Simpson gives the example of a simple common money bond, where A loans B £100. B would execute a bond for a larger sum, which was normally twice the sum lent, thus binding himself to pay £200 on a fixed day. The bond would be subject to a condition of defeasance, which provides that if B pays £100 before the due date, the bond will be void. A similar method was employed for conveying property. The penal bond with conditional defeasance was the principal device for framing substantial contracts in the later medieval and early modern periods. It was adaptable to different transactions and provided certainty. It was the bond that created the debt; it did not just evidence the debt. Thus, it allowed for an action in debt to be brought upon the bond, rather than upon the covenant or agreement it secured. There were limited defences which could be raised in the action (namely, that the condition had been performed, the condition had been substantially performed or the condition was impossible to perform). But penal bonds could operate harshly because of the amount usually required to be paid on default and because any act of default meant the monies were payable. Nevertheless, the law enforced penal bonds strictly, because it regarded their function as compensatory. A creditor could legitimately contract for compensation for loss suffered through the debtor’s failure to pay on time. It was on this basis that the law distinguished between such transactions and transactions containing usurious terms (which were payment for the use of money and therefore illegal). It was also considered that a debtor could prevent paying a penalty by paying promptly. Equity also viewed the purpose of penal bonds as compensatory and this was the basis for its intervention. Equity looked to what condition the bond was security for and allowed the obligee compensation for the loss flowing from failure of the condition (usually limited to principal, interest and costs). The purpose of a bond was only to secure the interest of the obligee in the promise or undertaking to be performed. Where compensation was [page 767]

possible for default, the exaction of a penalty was deemed inequitable. The aim of the equity courts was to compensate in the event of default, not to punish. It follows that they would not tolerate individuals exacting punishment. This early understanding of what constituted a penalty finds expression today in the definition given by Mason and Deane JJ in Legione v Hateley:9 A penalty, as its name suggests, is in the nature of a punishment for non-observance of a contractual stipulation; it consists of the imposition of an additional or different liability upon breach of the contractual stipulation.10 … This definition was referred to with approval in Andrews11 and, more recently, by the United Kingdom Supreme Court in Cavendish Square Holding BV v Makdessi12 (albeit in a more qualified sense), where arguments that the penalty doctrine should be abolished or restricted were rejected. As Lord Neuberger of Abbotsbury and Lord Sumption13 observed, the innocent party may have interests in the enforcement of the primary obligation but can have no proper interest in simply punishing the defaulter. The consequence of compensation forming the basis of equitable intervention was that where compensation was not possible, or damages could not be assessed, relief could not be given by equity. Compensation might not be possible because the condition on which the bond was made was in respect of an interest not measurable in damages. As explained in Andrews,14 it is the availability of compensation which generated the ‘equity’ upon which the court intervened; without it, the parties were left to their legal rights and obligations. The primary factor in the decline of the conditional penal bond and the rise of the modern law of penalties has been said to be the practice of the Court of Chancery in relieving against forfeiture. By the time cases such as Dunlop came to be decided, the conditional penal bond may not have been much in use, although it was not wholly obsolete when Professor Simpson was writing and is not today. Examples referred to in Andrews are irrevocable letters of credit and ‘performance bonds’ which are used in the construction industry.

While Dunlop does not contain any such discussion of the origins and purposes of the penalty doctrine (as canvassed above), much of what is said in Dunlop is better understood by reference to them.

Relevant aspects of Dunlop The aspect of Dunlop which assumes particular importance in this case is the recognition that a sum stipulated for payment on default may be intended to protect an interest that is [page 768] different from, and greater than, an interest in compensation for loss caused directly by the breach of contract. This is most evident from the speech of Lord Atkinson. It has already been observed that equity recognised that there may be injury to interests for which compensation cannot be made and to which the doctrine of penalties cannot be applied to provide relief. That will usually be because of the nature of the interest protected by the provision for payment on default. In Ringrow Pty Ltd v BP Australia Pty Ltd15 it was said that Dunlop continues to express the law to be applied with respect to penalties in Australia. As the primary judge in these proceedings observed, the principles in Dunlop were not affected by the decision of this Court in Andrews. But this does not mean that those principles are confined, or that they are limited, to the ‘tests’ propounded by Lord Dunedin, or that what was said in Dunlop does not require further explication. In Ringrow the Court was concerned with an argument which focused upon Lord Dunedin’s speech in Dunlop and the ‘tests’ which were offered to assist in the determination of whether a sum stipulated to be paid on default is, or is not, a penalty. In comparison, in Andrews reference was made to Dunlop, not to Lord Dunedin’s ‘tests’, but rather to Lord Atkinson’s identification of the interests which were sought to be protected by the provision stipulating for payment of monies on breach and which accounted for that provision not being a penalty. It was said16 that ‘the critical issue, determined in favour of the appellant [Dunlop], was whether

the sum agreed was commensurate with the interest protected by the bargain.’ The fact that the decision in Dunlop itself, and Lord Atkinson’s reasons with respect to it, assume importance in this case does not deny the significance of the requirement stated by Lord Dunedin,17 that the sum stipulated be ‘extravagant and unconscionable’ before it can be characterised as a penalty. As explained below, it is these words that, by their extreme nature, identify the penal character of a penalty. The question which may be identified as arising from this aspect of the decision in Dunlop, which is appropriate to a case of this kind, is whether a provision for the payment of a sum of money on default is out of all proportion to the interests of the party which it is the purpose of the provision to protect. This interest may be of a business or financial nature.

The Dunlop ‘tests’ The distinction drawn by Lord Dunedin between liquidated damages and a penalty, whilst useful, should not be understood as a limiting rule. It does not mean that if no pre-estimate is made at the time a contract is entered into, as is the case here, a sum stipulated will be a penalty. Nor does it mean that a sum reflecting, or attempting to reflect, other kinds of loss or damage to a party’s interests beyond those directly caused by the breach will be a penalty. Indeed the provision in Dunlop, which was held not to be a penalty, was of this kind. [page 769] The question whether a sum to be paid on default is a penalty, as distinct from liquidated damages, was said by Lord Dunedin to be a question of construction, but his Lordship is not to be taken to suggest that it will be answered by the language of the contract alone. This is evident from the reference to the ‘inherent circumstances’ of the contract, which includes the position of the party whose interests are to be protected by the stipulation for the payment of the sum on default. Lord Dunedin offered18 four ‘tests’ to assist ‘this task of construction’. They

were couched in the language of their time and were intended as guidance only. Tests tend, over time, to encourage literal application. Especially is this so where the basal purpose of the larger principle, or policy, of the law is not stated. That policy has not changed over time. It is that a sum may not be stipulated for payment on default if it is stipulated as a threat over the person obliged to perform; it may not be stipulated where the purpose and effect of requiring payment is to punish the defaulting party. This latter prohibition has found expression in modern times, as is evident from the passage from Legione v Hateley referred to above and also from judgments in Cavendish.19 It may be inferred from this policy that a sum stipulated for payment on default is a penalty if it bears no relation to the possible damage to or interest of the innocent party. The first, and principal, ‘test’ stated by Lord Dunedin is that a sum stipulated will be a penalty if it is: extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach.20 If the ‘test’ is understood to convey that only loss in the nature of damages directly flowing from the breach is to be considered, then it is unduly restrictive, though no doubt it remains useful to many cases. The terms ‘extravagant’ and ‘unconscionable’ (and also ‘exorbitant’) had been used in Clydebank Engineering and Shipbuilding Co v Don Jose Ramos Yzquierdo y Castaneda, where the Earl of Halsbury LC21 said that the jurisdiction given to the court to interfere in an agreement between parties was with respect to an agreement which was ‘unconscionable and extravagant, and one which no Court ought to allow to be enforced.’ … [The terms] ‘extravagant’, ‘exorbitant’ and ‘unconscionable’ are ‘strong words’; despite the different expressions used, they all describe the plainly excessive nature of the stipulation in comparison with the interest sought to be protected by that stipulation. The second ‘test’ was said to be merely a corollary of the first, and concerns the case where the breach is constituted by a mere failure to pay a sum of money. The sum stipulated to

[page 770] be paid in the event of a breach will be a penalty if it is greater than the sum which ought to be paid. This reflects equity’s concerns about penal bonds and its view that the tender of principal together with interest thereon is sufficient compensation. This ‘test’ has a narrow range of operation and is confined to the simplest of cases. It does not take into account that damages for breach may now include interest by way of damages and opportunity costs.22 It says nothing about the damage to a party’s wider commercial interests, for example to its trading, which was the real issue in Dunlop. And it says nothing about the financial effects for which the ANZ contends. The third ‘test’ is stated as a presumption (‘(but no more)’) that a sum will be a penalty where it is a single sum made payable on the occurrence of one or more of several events, some of which may occasion serious, and others only inconsequential, damage. The presumption derives from what was said by Lord Watson in Lord Elphinstone v Monkland Iron and Coal Co:23 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, the presumption is that the parties intended the sum to be penal, and subject to modification.24 … The last ‘test’ stated by Lord Dunedin in Dunlop … identifies the case where the parties agree a figure although a forecast of loss, in reality, is almost impossible. Nevertheless, the sum agreed may not be a penalty, indeed it is likely that in circumstances such as these it is not. His Lordship25 said: 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 … What Lord Dunedin was pointing to is damage of a kind which is different from that for which liquidated damages could be assessed. It will be

different because the interests of the party which are intended to be protected by the provision in question extend beyond an interest in the recovery of compensation for loss caused by the obligation. This was the situation in Dunlop. … Australian and United Kingdom law are not alone in maintaining a standard to be applied to a requirement to pay money, or some other detriment, which is imposed in the event of default. In many other western legal systems something like the penalty doctrine exists. In Andrews, reference was made to s 343 of the German Civil Code, which provides that a ‘disproportionately high’ penalty may be reduced by a court after taking into account ‘every legitimate interest’ of the party for whose benefit the stipulated sum is made. Such interests are not limited to that party’s economic interests. In Cavendish, [page 771] Lord Hodge referred to provisions in other modern civil codes and international instruments which use tests such as whether the sum stipulated is ‘manifestly excessive’ or ‘substantially disproportionate’ in order to modify or restrict contractual penalties. …

The late payment fee: a penalty? The [Bank’s] interests in this case are not as diffuse as those considered in Dunlop, Clydebank and Cavendish. The [Bank] did not suggest that the injury to its interests was not capable of some kind of estimation in money’s worth. In the hearing before the primary judge it abandoned the claim, made in its defence, that the costs occasioned to it by late payments were impossible to calculate and argued instead that they were very difficult to calculate. On this appeal [Paciocco and his company] accepted that, being realistic, the law should allow a ‘measure of latitude’ where pre-estimation of loss is difficult. Certainly there needs to be some recognition of the difficulties attending any such exercise and that there may, in some cases, be differences in approach to the proper methodology to be employed. But it also needs to be borne in mind that this task is not one which calls for

precision. The conclusion to be reached, after all, is whether the sum is ‘out of all proportion’ to the interests said to be damaged in the event of default. It is important at this point to identify the [Bank’s] interests. The [Bank] had an interest in receiving timeous repayment of the credit that it extended to its customers, including [Paciocco and his company]. … [L]ate payment impacted the [Bank’s] interests in three relevant respects: through operational costs, loss provisioning and increases in regulatory capital costs. … As to the first category of costs … the [Bank] is required to estimate the impairments to its financial assets in order that its financial statements reflect a fair value of what is likely to be collected from what is outstanding. It is required to make provision in its accounts for what it may not recover, albeit that the potential loss is expressed as a current cost. The primary judge [accepted] that the reduction in the value of a customer’s loan, as recorded in the accounts, was an accepted category of loss. However, her Honour held that the difficulty was that a provision of this kind is merely an accounting entry. At the time it is made it cannot be known whether all the cardholders recorded will default. In the case of Mr Paciocco he did not fall into this category because in fact he did not default; he merely paid late. This reasoning is consistent with the primary judge’s overall approach, which was to limit the [Bank’s] ‘costs’ to actual damage incurred. However, this overlooks that the estimation is to be made at the time the Late Payment Fee is agreed upon; and it does not acknowledge that an effect upon the [Bank’s] interests may include the provision that it has to make concerning its overall position. As to the second category of costs, the [Bank] is also required to hold regulatory capital to cover unexpected losses, a buffer of a kind. An increase in the risk of default increases the amount of regulatory capital which is required to be held. … [T]he question is not what the [Bank] could recover in an action for breach of contract, but rather whether the costs to it and the effects upon its financial interests by default may be taken into account in assessing whether the Late Payment Fees are penalties. …

[page 772] It may be accepted that it is difficult to measure the loss to the [Bank] as a result of a late payment. Consistently with Clydebank, Dunlop, Ringrow and Andrews, the relevant question in this case is whether the Late Payment Fee is out of all proportion to the [Bank’s] interest in receiving timeous payment of the minimum Monthly Payment. Applying this test, [Paciocco and his company] did not establish that the Late Payment Fee was a penalty.

Comment 30.3.1 See Radan, Gooley, and Vickovich at 30.10, 30.14–30.20, 30.26, and 30.30. 30.4C

Cavendish Square Holding BV v Makdessi; ParkingEye Ltd v Beavis [2016] AC 1172

Court: Supreme Court of the United Kingdom Facts: The Supreme Court dealt with two separate cases involving penalties in this decision. One of them involved a dispute between ParkingEye Ltd and Beavis. ParkingEye provided management services to the owner of premises that were used as a car park. The car park displayed signs that contained terms, including that parking was free for two hours and that an £85 parking charge would apply to anyone who parked their car for longer than two hours. Beavis parked in the car park and overstayed the two-hour time limit by almost an hour. ParkingEye sent a standard first parking charge notice to Beavis, which demanded that he pay the £85 charge. Beavis ignored the demand. He was then sent a standard form reminder notice and warning letter. When Beavis failed to pay, ParkingEye issued proceedings in the county court to re-cover the £85 parking charge. Beavis argued that the parking charge was unenforceable at

common law because it was a penalty and, alternatively, that the charge was an unfair term in breach of consumer protection legislation. Beavis’s arguments were rejected at first instance and on appeal. Issue: The issue that had to be decided was whether the parking charge in the car parking contract was unenforceable as a penalty at common law or as an unfair term under regulations. Decision: The Supreme Court (Lords Neuberger P, Mance, Clarke, Sumption, Carnwath, Toulson, and Hodge SCJJ) held that the charge imposed on Beavis was neither a penalty nor an unfair term in contravention of regulations. ParkingEye had a legitimate interest that extended beyond the recovery of any loss. The £85 parking charge was a reasonable amount in the circumstances to secure efficient use of parking space for all users, to meet the costs of its scheme, and to make a profit. Extract: The extracts below from the judgment of Lords Neuberger and Sumption convey the court’s position with regard to the penalty rule.

[page 773]

Lord Neuberger and Lord Sumption The first point to be made is that the penalty rule is not only a longstanding principle of English law, but is common to almost all major systems of law, at any rate in the western world. It has existed in England since the sixteenth century and can be traced back to the same period in Scotland. … [I]t has been adopted with some variants in all common law jurisdictions, including those of the United States. A corresponding rule was derived from Roman law … which is to be found in the Civil Codes of France, Germany (for non-commercial contracts only), Switzerland, Belgium, and Italy. It is included in influential attempts to codify the law of contracts internationally, including the Unidroit Principles of International Commercial Contracts (2010), … and the UNCITRAL Uniform Rules on

Contract Clauses for an Agreed Sum Due upon Failure of Performance. In January 1978 the Committee of Ministers of the Council of Europe recommended a number of common principles relating to penal clauses, including that a stipulated sum payable on breach ‘may be reduced by the court when it is manifestly excessive’. It is true that statutory regulation, which hardly existed at the time that the penalty rule was developed, is now a significant feature of the law of contract. In England, the landmark legislation was the Unfair Contract Terms Act 1977. For most purposes, the Act was superseded by the Unfair Terms in Consumer Contracts Regulations 1994 … which was in turn replaced by the 1999 Regulations, both of which give effect to European directives. The 1999 Regulations contain an ‘indicative and non-exhaustive list of the terms which may be regarded as unfair’, including terms which have the object or effect of ‘requiring any consumer who fails to fulfil his obligation to pay a disproportionately high sum in compensation’. Nonetheless, statutory regulation is very far from covering the whole field. Penalty clauses are controlled by the 1999 Regulations, but the regulations apply only to consumer contracts and the control of unfair terms under regs 3 and 5 is limited to those which have not been individually negotiated. There are major areas, notably non-consumer contracts, which are not regulated by statute. Some of those who enter into such contracts, for example professionals and small businesses, may share many of the characteristics of consumers which are thought to make the latter worthy of legal protection. The English Law Commission considered penalty clauses in 1975 (Working Paper No 61, Penalty Clauses and Forfeiture of Monies Paid, April 1975), at a time when there was no relevant statutory regulation, and the Scottish Law Commission reported on them in May 1999 (Report No 171). Neither of these reports recommended abolition of the rule. On the contrary, both recommended legislation which would have expanded its scope. Further, although there are justified criticisms that can be made of the penalty rule, it is consistent with other well-established principles which have been developed by judges (albeit mostly in the Chancery courts) and which involve the court in declining to give full force to contractual provisions, such as relief from forfeiture, the equity of redemption, and refusal to grant specific performance. … Finally, the case for abolishing the

rule depends heavily on anomalies in the operation of the law as it has traditionally been understood. Many, though not all of these are better addressed (i) by a realistic [page 774] appraisal of the substance of contractual provisions operating upon breach, and (ii) by taking a more principled approach to the interests that may properly be protected by the terms of the parties’ agreement.

Should the penalty rule be extended? [It was suggested] that, as an alternative to confirming or abrogating the penalty rule, this court could extend it, so that it applied more generally. As he pointed out, this was the course taken by the High Court of Australia, and it would have the advantage of rendering the penalty rule less formalistic in its application, and, which may be putting the point in a different way, less capable of avoidance by ingenious drafting. This step has recently been taken in Australia. Until recently, the law in Australia was the same as it is in England.26 However, a radical departure from the previous understanding of the law occurred with the decision of the High Court of Australia in Andrews v Australia and New Zealand Banking Group Ltd.27 The background to this case was very similar to that in Office of Fair Trading v Abbey National plc.28 It concerned the application of the penalty rule to contractual bank charges payable when the bank bounced a cheque or allowed the customer to draw in excess of his available funds or agreed overdraft limit. These might in a loose sense be regarded as banking irregularities, but they did not involve any breach of contract on the part of the customer. On that ground Andrew Smith J had held in the Abbey National case that the charges were incapable of being penalties.29 … In Andrews, the High Court of Australia disagreed. They engaged in a detailed historical examination of the equitable origin of the rule and concluded that there subsisted, independently of the common law rule, an equitable jurisdiction to relieve against any sufficiently onerous provision which was conditional upon a failure to observe some other

provision, whether or not that failure was a breach of contract. At para 10, they defined a penalty as follows: In general terms, a stipulation prima facie imposes a penalty on a party (‘the first party’) if, as a matter of substance, it is collateral (or accessory) to a primary stipulation in favour of a second party and this collateral stipulation, upon the failure of the primary stipulation, imposes upon the first party an additional detriment, the penalty, to the benefit of the second party. In that sense, the collateral or accessory stipulation is described as being in the nature of a security for and in terrorem of the satisfaction of the primary stipulation. If compensation can be made to the second party for the prejudice suffered by failure of the primary stipulation, the collateral stipulation and the penalty are enforced only to the extent of that compensation. The first party is relieved to that degree from liability to satisfy the collateral stipulation. [page 775] Any decision of the High Court of Australia has strong persuasive force in this court. But we cannot accept that English law should take the same path, quite apart from its inconsistency with established and unchallenged House of Lords authority. In the first place, although the reasoning in Andrews was entirely historical, it is not in fact consistent with the equitable rule as it developed historically. The equitable jurisdiction to relieve from penalties arose wholly in the context of bonds defeasible in the event of the performance of a contractual obligation. It necessarily posited a breach of that obligation. Secondly, if there is a distinct and still subsisting equitable jurisdiction to relieve against penalties which is wider than the common law jurisdiction … it appears to have left no trace in the authorities since the fusion of law and equity in 1873. … Thirdly, the High Court’s redefinition of a penalty is, with respect, difficult to apply to the case to which it is supposedly directed, namely where there is no breach of contract. It treats as a potential penalty any clause which is ‘in the nature of a security for and in terrorem of the satisfaction of the primary stipulation’. By a ‘security’ it means a provision to secure ‘compensation … for the

prejudice suffered by the failure of the primary stipulation’. This analysis assumes that the ‘primary stipulation’ is some kind of promise, in which case its failure is necessarily a breach of that promise. If, for example, there is no duty not to draw cheques against insufficient funds, it is difficult to see where compensation comes into it, or how bank charges for bouncing a cheque or allowing the customer to overdraw can be regarded as securing a right of compensation. Finally, the High Court’s decision does not address the major legal and commercial implications of transforming a rule for controlling remedies for breach of contract into a jurisdiction to review the content of the substantive obligations which the parties have agreed. Modern contracts contain a very great variety of contingent obligations. Many of them are contingent on the way that the parties choose to perform the contract. There are provisions for termination upon insolvency, contractual payments due on the exercise of an option to terminate, breakfees chargeable on the early repayment of a loan or the closing out of futures contracts in the financial or commodity markets, provisions for variable payments dependent on the standard or speed of performance and ‘take or pay’ provisions in long-term oil and gas purchase contracts, to take only some of the more familiar types of clause. The potential assimilation of all of these to clauses imposing penal remedies for breach of contract would represent the expansion of the courts’ supervisory jurisdiction into a new territory of uncertain boundaries, which has hitherto been treated as wholly governed by mutual agreement. We would accept that the application of the penalty rule can still turn on questions of drafting, even where a realistic approach is taken to the substance of the transaction and not just its form. But we agree with what Hoffmann LJ said in Else30 …, namely that, while it is true that the question whether the penalty rule applies may sometimes turn on ‘somewhat formal distinction[s]’, this can be justified by the fact that the rule ‘being an inroad upon freedom of contract which is inflexible … ought not to be extended’, at least by judicial, as opposed to legislative, decision-making. … [page 776]

Parking charges and the penalty rule

ParkingEye concedes that the £85 is payable upon a breach of contract, and that it is not a pre-estimate of damages. As it was not the owner of the car park, ParkingEye could not recover damages, unless it was in possession, in which case it may be able to recover a small amount of damages for trespass. This is because it lost nothing by the unauthorised use resulting from Mr Beavis overstaying. On the contrary, at least if the £85 is payable, it gains by the unauthorised use, since its revenues are wholly derived from the charges for breach of the terms. The notice at the entrance describes ParkingEye as being engaged to provide a ‘traffic space maximisation scheme’, which is an exact description of its function. In the agreed Statement of Facts and Issues, the parties state that ‘the predominant purpose of the parking charge was to deter motorists from overstaying’, and that the landowner’s objectives include the following: a. b. c. d.

e.

The need to provide parking spaces for their commercial tenants’ prospective customers; The desirability of that parking being free so as to attract customers; The need to ensure a reasonable turnover of that parking so as to increase the potential number of such customers; The related need to prevent ‘misuse’ of the parking for purposes unconnected with the tenants’ business, for example by commuters going to work or shoppers going to offpark premises; and The desirability of running that parking scheme at no cost, or ideally some profit, to themselves.

Against this background, it can be seen that the £85 charge had two main objects. One was to manage the efficient use of parking space in the interests of the retail outlets, and of the users of those outlets who wish to find spaces in which to park their cars. This was to be achieved by deterring commuters or other long-stay motorists from occupying parking spaces for long periods or engaging in other inconsiderate parking practices, thereby reducing the space available to other members of the public, in particular the customers of the retail outlets. The other purpose was to provide an income stream to enable ParkingEye to meet the costs of operating the scheme and make a profit from its services, without which those services

would not be available. These two objectives appear to us to be perfectly reasonable in themselves. Subject to the penalty rule and the Regulations, the imposition of a charge to deter overstayers is a reasonable mode of achieving them. Indeed, once it is resolved to allow up to two hours free parking, it is difficult to see how else those objectives could be achieved. In our opinion, while the penalty rule is plainly engaged, the £85 charge is not a penalty. The reason is that although ParkingEye was not liable to suffer loss as a result of overstaying motorists, it had a legitimate interest in charging them which extended beyond the recovery of any loss. The scheme in operation here (and in many similar car parks) is that the landowner authorises ParkingEye to control access to the car park and to impose the agreed charges, with a view to managing the car park in the interests of the retail outlets, [page 777] their customers and the public at large. That is an interest of the landowners because (i) they receive a fee from ParkingEye for the right to operate the scheme, and (ii) they lease sites on the retail park to various retailers, for whom the availability of customer parking was a valuable facility. It is an interest of ParkingEye, because it sells its services as the managers of such schemes and meets the costs of doing so from charges for breach of the terms (and if the scheme was run directly by the landowners, the analysis would be no different). As we have pointed out, deterrence is not penal if there is a legitimate interest in influencing the conduct of the contracting party which is not satisfied by the mere right to recover damages for breach of contract. [Counsel for] the Consumers’ Association (interveners), submitted that because ParkingEye was the contracting party, its interest was the only one which could count. For the reason which we have given, ParkingEye had a sufficient interest even if that submission be correct. But in our opinion it is not correct. The penal character of this scheme cannot depend on whether the landowner operates it himself or employs a contractor like ParkingEye to operate it. The motorist would not know or care what, if any, interest the operator has in the land, or what relationship it has with the landowner if it has no interest. This conclusion

is reinforced when one bears in mind that the question whether a contractual provision is a penalty turns on the construction of the contract, which cannot normally turn on facts not recorded in the contract unless they are known, or could reasonably be known, to both parties. None of this means that ParkingEye could charge overstayers whatever it liked. It could not charge a sum which would be out of all proportion to its interest or that of the landowner for whom it is providing the service. But there is no reason to suppose that £85 is out of all proportion to its interests. The trial judge … found that the £85 charge was neither extravagant nor unconscionable having regard to the level of charges imposed by local authorities for overstaying in car parks on public land. The Court of Appeal agreed and so do we. It is higher than the penalty that a motorist would have had to pay for overstaying in an on-street parking space or a local authority car park. But a local authority would not necessarily allow two hours of free parking, and in any event the difference is not substantial. The charge is less than the maximum above which members of the BPA must justify their charges under their code of practice. The charge is prominently displayed in large letters at the entrance to the car park and at frequent intervals within it. The mere fact that many motorists regularly use the car park knowing of the charge is some evidence of its reasonableness. They are not constrained to use this car park as opposed to other parking facilities provided by local authorities, Network Rail, commercial car park contractors or other private landowners. They must regard the risk of having to pay £85 for overstaying as an acceptable price for the convenience of parking there. … While not necessarily conclusive, the fact that ParkingEye’s payment structure in its car parks (free for two hours and then a relatively substantial sum for overstaying) and the actual level of charge for overstaying (£85) are common in the UK provides support for the proposition that the charge in question is not a penalty. No other evidence was furnished by Mr Beavis to show that the charge was excessive. We conclude, in agreement with the courts below, that the charge imposed on Mr Beavis was not a penalty.

[page 778]

Comment 30.4.1 See Radan, Gooley, and Vickovich at 30.11–30.12 and 30.29.

ACTIONS FOR THE RECOVERY OF A DEBT AND INSTALMENT CONTRACT PAYMENTS 30.5C

McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457

Court: High Court of Australia Facts: In 1925 Johnson contracted to sell land to Besley under an instalment contract which was due to be completed in 1931. Prior to taking title to the land, Besley contracted to re-sell the land to Rye Grazing Co Pty Ltd, also under an instalment contract to be completed in 1931. This contract stipulated for the payment of a deposit, followed by three instalments, and finally the balance of purchase price on completion. McDonald and Holdsworth (hereafter ‘McDonald’) were guarantors of Rye Grazing’s obligations under the contract. Rye Grazing paid the deposit and the first two instalments as required. Besley then assigned the benefit of this contract to Dennys Lascelles Ltd. At that time Dennys Lascelles agreed to postpone payment of the third instalment in return for McDonald guaranteeing payment of the instalment on the new date. The third instalment was not paid on the date set out in the guarantee. In the meantime Besley defaulted in his obligations to Johnson. This resulted in both contracts for the sale of the land being terminated. Dennys Lascelles sued McDonald on the guarantee relating to the deferred third instalment. Issue: The principal issue before the High Court was whether instalments of the purchase price, other than the deposit, could be retained if paid, or recovered if not yet paid, once the contract had been terminated. Decision: The majority of the High Court (Rich, Starke, Dixon, and

McTiernan JJ; Evatt J dissenting) ruled that Dennys Lascelles was not entitled to enforce the guarantee for the deferred third instalment against McDonald. Extract: The extracts below deal with the question of whether fixed sums, other than the deposit, paid by purchasers pursuant to an instalment contract, are payable even though the contract has been terminated. Note that the word ‘rescission’ as used by the judges refers to termination of the contract.

Starke J The rescission of the contract … did not operate to extinguish it ab initio, but in futuro, so as to discharge obligations under it unperformed. … It is of no little importance in the present case to ascertain the consequences of the rescission. The precise terms of the contract often determine those consequences. But, apart from any special [page 779] stipulations of the contract, I apprehend that a purchaser who is not himself in default is discharged from further performance of the contract and is entitled to recover any money paid or property transferred by him thereunder; he is entitled to take proceedings in equity to assert his right and secure restitution, or to sue at law. … On the other hand, a vendor who is not himself in default is discharged from further performance of the contract, and is entitled to the return of his land the subject matter of the contract, or his interest therein, but is bound to restore any moneys paid or property transferred to him thereunder: the vendor cannot have the land and its value too. … A deposit paid as security for the completion of the contract stands perhaps in an exceptional position, because the intent of the parties is that, if the contract goes off by default of the purchaser, the vendor shall retain it. … On the other hand, stipulations providing for forfeiture of instalments of purchase money in case of default have been treated as in the nature of a penalty and relief given against them. … Relief against forfeiture is no doubt an equitable remedy. But, in the case of a

rescission of a contract of sale of land by a vendor, moneys paid under the contract by a purchaser in default that are not forfeited can be recovered at law. … [I]f it be not a legal remedy, still the equitable remedy is clear and well established. Consequently, after the rescission of the contract, about June 1931, an action or proceeding for the recovery of the instalment of £1,000, the payment of which had been extended to 24th January 1931, and of the balance of purchase money, could not have succeeded, for [Besley was] not entitled to both the land (or their interest therein) and the purchase money. [Dennys Lascelles as Besley’s assignee] stands in no better position. …

Dixon J The defence relied upon by [McDonald] is that the liability of [Rye Grazing] to pay the instalment of purchase money was discharged or determined upon the failure of the contract and that, as their guarantee was secondary or accessory to this principal liability, the obligation incurred under it was likewise discharged or determined. It is apparent from its statement that two questions arise upon this defence, which are separate. The first question raised by it is whether the collapse or failure of the second contract did entirely relieve [Rye Grazing] from paying the instalment of £1,000. If [Rye Grazing’s] obligation to pay the instalment was discharged, the second question arises, namely, whether thereupon [McDonald] ceased to be liable under their guarantee. Even if it arose apart from the second question, the first could not be answered satisfactorily without some examination of the nature of the liability incurred by a purchaser under an agreement to prepay before conveyance part of the purchase money and of the responsibility of the vendor to repay instalments so prepaid when the contract comes to an end and no conveyance is to be made. But, in addition, it will be found material to the second question to ascertain the principle upon which [Rye Grazing’s] liability is discharged; because it is evident that a surety might remain responsible for a debt which simply ceases to be recoverable by legal process from the principal debtor, while his responsibility would terminate if the principal obligation were annihilated upon grounds going to the just right to the enjoyment of the sum in question as between the parties to the primary contract. It thus appears necessary to consider with some degree

[page 780] of exactness what are the material rights and obligations of vendor and purchaser with respect to instalments. It must be borne in mind that the instalment in dispute was overdue when the contract came to an end. According to the terms of the contract, it was originally due and payable on 24th January 1930. Was it then recoverable as a sum certain in money? Convincing reasons for an affirmative answer have been given in Victoria and in New Zealand. Sir John Salmond has stated the principles determining this conclusion: As a general rule, on the failure or refusal of a purchaser to complete an executory contract for the purchase of land the vendor is not entitled to sue for the purchase money as a debt. He is entitled merely to sue for specific performance or for damages for the loss of his bargain. It is only when the contract has been completed by the execution and acceptance of a conveyance that unpaid purchase money may become a debt and can be recovered accordingly. This general rule is sufficiently illustrated and established by the case of Laird v Pim.31 The sale of land is in this respect similar to the sale of goods. In the case of goods sold and delivered, and of goods bargained and sold, the property in each case having passed to the buyer, the seller’s remedy is to sue for the price. But if under any executory contract the buyer wrongfully refuses to accept the goods the seller’s only remedy is an action for damages. The general rule, however, that in an executory contract for the sale of land the vendor cannot sue for the price is excluded whenever a contrary intention is shown by the express terms of the contract. And it seems established by authority that a contrary intention is sufficiently shown in all cases in which by the express terms of the contract the purchase money or any part thereof is made payable on a fixed day, not being the agreed day for the completion of the contract by conveyance. In all such cases the purchase money or such part thereof becomes, on the day so fixed for its payment, a debt immediately recoverable by the vendor irrespective of the question whether a conveyance has been executed and notwithstanding the fact that the purchaser may have repudiated his

contract. Notwithstanding such repudiation the vendor is not bound to sue for damages or specific performance, but may recover the agreed purchase money.32 In Reynolds v Fury,33 the Full Court of Victoria … decided that instalments of purchase money, which, by the conditions of a contract of sale of land are payable at fixed times before conveyance, become immediately recoverable as debts or liquidated demands, notwithstanding that the sale has not yet been completed by conveyance. From this it follows that after 24th January 1930, subject to the vendors’ agreement to forbear between a date about 18th March 1930, when the conditions stipulated for their forbearance were complied with, and 24th January 1931, the instalment might have been recovered from [Rye Grazing] as a liquidated demand. Did the subsequent discharge of the second contract relieve [Rye Grazing] of this liability? When a party to a simple contract, upon a breach by the other contracting party of a condition of the contract, elects to treat the contract as no longer binding upon him, the contract is not rescinded as from [page 781] the beginning. Both parties are discharged from the further performance of the contract, but rights are not divested or discharged which have already been unconditionally acquired. Rights and obligations which arise from the partial execution of the contract and causes of action which have accrued from its breach alike continue unaffected. When a contract is rescinded because of matters which affect its formation, as in the case of fraud, the parties are to be rehabilitated and restored, so far as may be, to the position they occupied before the contract was made. But when a contract, which is not void or voidable at law, or liable to be set aside in equity, is dissolved at the election of one party because the other has not observed an essential condition or has committed a breach going to its root, the contract is determined so far as it is executory only and the party in default is liable for damages for its breach. … It does not, however, necessarily follow from these principles that when, under an executory contract for the sale of property, the price or part of it is paid or payable in

advance, the seller may both retain what he has received, or recover overdue instalments, and at the same time treat himself as relieved from the obligation of transferring the property to the buyer. When a contract stipulates for payment of part of the purchase money in advance, the purchaser relying only on the vendor’s promise to give him a conveyance, the vendor is entitled to enforce payment before the time has arrived for conveying the land; yet his title to retain the money has been considered not to be absolute but conditional upon the subsequent completion of the contract. ‘The very idea of payment falls to the ground when both have treated the bargain as at an end; and from that moment the vendor holds the money advanced to the use of the purchaser’.34 In Laird v Pim, Parke B says: ‘It is clear he cannot have the land and its value too’;35 the case, however, was one in which conveyance and payment were contemporaneous conditions. … It is now beyond question that instalments already paid may be recovered by a defaulting purchaser when the vendor elects to discharge the contract. … Although the parties might by express agreement give the vendor an absolute right at law to retain the instalments in the event of the contract going off, yet in equity such a contract is considered to involve a forfeiture from which the purchaser is entitled to be relieved. … But, where there is no express agreement excluding the implication made at law, by which the instalments become repayable upon the discharge of the obligation to convey and the purchaser has a legal right to the return of the purchase money already paid which makes it needless to resort to equity and submit to equity as a condition of obtaining relief, the vendor appears to be unable to deduct from the amount of the instalments the amount of his loss occasioned by the purchaser’s abandonment of the contract. A vendor may, of course, counterclaim for damages in the action in which the purchaser seeks to recover the instalments. In the present case, the contract of resale contains no provision for the retention or forfeiture of the instalments. If, therefore, the instalment originally due on 24th January 1930 had been paid by [Rye Grazing] to [Besley], they would, in my opinion, have been entitled to recover it from [Besley]. The right so to recover it is legal and not equitable. It arises out of the nature of the contract itself. This would be so even

[page 782] if the second contract was rescinded by [Besley] upon [Rye Grazing’s] default. … It appears to me inevitably to follow from the principles upon which instalments paid are recoverable that an unpaid overdue instalment ceases to be payable by [Rye Grazing] when the contract is discharged. The fact that the contract was assigned does not increase or vary [Rye Grazing’s] liabilities under it, and, accordingly, I think that [Rye Grazing] ceased to be liable for the instalment guaranteed. The second question remains, namely, whether the cesser of [Rye Grazing’s] liability for the instalment of £1,000 operates to discharge [McDonald]. Their liability had, like that of [Rye Grazing], become immediately enforceable, and it is said that it could not be discharged by a subsequent failure of the obligation guaranteed. The consequences of the dissolution of the principal obligation are described in Pothier on Obligations, Evans’ translation (1806), vol I, p 235, as follows: It results from the definition of a surety’s engagement, as being accessory to a principal obligation, that the extinction of the principal obligation necessarily induces that of the surety; it being of the nature of an accessory obligation, that it cannot exist without its principal; therefore, wherever the principal is discharged, in whatever manner it may be, not only by actual payment or a compensation, but also by a release, the surety is discharged likewise; for the essence of the obligation being, that the surety is only obliged on behalf of a principal debtor, he therefore is no longer obliged, when there is no longer any principal debtor for whom he is obliged. … In the present case, not only is [Rye Grazing] relieved from personal liability to pay the instalments but [Besley’s] just title both to obtain and to retain the instalment altogether ceases. If there had been no assignment and if the instalment had been duly paid, it would have become [Besley’s] duty to repay it. It is, perhaps, uncertain whether, if the payment of the instalment had been duly made to [Dennys Lascelles], as assignee, the liability to repay it would have fallen upon it or upon [Besley], because it is not clear that the obligation to repay it does not arise out of contractual

implications by which [Dennys Lascelles as assignee] would not be bound, as distinguished from an independent duty springing simply from the receipt of the money and the subsequent discharge of the contract. But, when the money has not been reduced into possession, [Dennys Lascelles’] right [as assignee] to recover it is precisely that of [Besley, the vendor] and is affected by exactly the same considerations. [Dennys Lascelles], therefore, became disentitled to recover and enjoy the instalment. If [McDonald] were liable to pay the instalment, they would in equity be entitled to resort for indemnity to [Rye Grazing as the principal debtors], who, upon payment, would apparently be entitled to recover the instalment from either [Besley as vendor] or [Dennys Lascelles], the assignee of the contract. If they could recover from [Besley], the latter might or might not be able to resort to [Dennys Lascelles as assignee] according to the actual nature of the transaction between them. But, in any case, if the contract of guarantee is a secondary or accessory obligation for the performance of the principal obligation to pay the instalment, and contains no exceptional promise or condition, it follows that it was discharged.

[page 783]

Comments 30.5.1 See Radan, Gooley, and Vickovich at 30.44–30.49. 30.5.2 For an insightful analysis of Dixon J’s reasoning in this case, see J Gava, ‘A Study in Judging: Sir Owen Dixon and McDonald v Dennys Lascelles’ (2009) 32 Australian Bar Review 77.

ACTIONS IN DEBT AND THE DUTY TO MITIGATE 30.6C

White and Carter (Councils) Ltd v McGregor [1962] AC 413

Court: House of Lords

Facts: White and Carter was an advertising contractor who agreed to advertise McGregor’s garage business for three years by means of posters on bins in Clydebank. McGregor’s obligation was to pay regular payments during that period to meet White and Carter’s costs and expenses. However, if there was a default by McGregor, the full contract sum became immediately payable. On the day it was signed McGregor repudiated the contract. White and Carter did not accept the repudiation. White and Carter performed the contract and, in an action for a debt under the contract, sued McGregor for the full contract price. At both first instance and on appeal in Scotland, White and Carter were unsuccessful. They appealed to the House of Lords. Issue: The question to be determined by the House of Lords was whether, in pursuing an action to recover a debt, White and Carter had a duty to mitigate. Decision: The majority of the House of Lords (Lords Reid, Tucker, and Hodson; Lords Morton of Henryton and Keith of Avonholm dissenting) in allowing the appeal held that in suing to recover the debt that had arisen (as opposed to recovering damages for breach of contract), White and Carter had no obligation to mitigate and were thus entitled to recover the contract price. Whether White and Carter acted reasonably was deemed to be of no relevance. Lord Reid qualified his decision by noting that the right to recover the contract price may be precluded in cases where the performance of the contract required the cooperation of the repudiating party and in cases where reasons of public policy precluded such an action. In dissent, Lords Morton of Henryton and Keith of Avonholm ruled that White and Carter’s only action was for damages for breach of contract, although in other cases the innocent party may have the choice of seeking damages or an order for specific performance. Extract: The extracts below from the speech of Lord Reid explain the rule as to why White and Carter did not have to mitigate, as well as the possible qualifications to that rule.

[page 784]

Lord Reid The case for [McGregor] is that, as he repudiated the contract before anything had been done under it, [White and Carter] were not entitled to go on and carry out the contract and sue for the contract price: he maintains that in the circumstances [White and Carter’s] only remedy was damages, and that, as they do not sue for damages, this action was rightly dismissed. … The general rule cannot be in doubt. … If one party to a contract repudiates it in the sense of making it clear to the other party that he refuses or will refuse to carry out his part of the contract, the other party, the innocent party, has an option. He may accept that repudiation and sue for damages for breach of contract whether or not the time for performance has come; or he may if he chooses disregard or refuse to accept it and then the contract remains in full effect. … I need not refer to the numerous authorities. They are not disputed by [McGregor] but he points out that in all of them the party who refused to accept the repudiation had no active duties under the contract. The innocent party’s option is generally said to be to wait until the date of performance and then to claim damages estimated as at that date. There is no case in which it is said that he may, in face of the repudiation, go on and incur useless expense in performing the contract and then claim the contract price. The option, it is argued, is merely as to the date as at which damages are to be assessed. Developing this argument, [McGregor] points out that in most cases the innocent party cannot complete the contract himself without the other party doing, allowing or accepting something, and that it is purely fortuitous that [White and Carter] can do so in this case. In most cases by refusing co-operation the party in breach can compel the innocent party to restrict his claim to damages. Then it was said that even where the innocent party can complete the contract without such co-operation it is against the public interest that he should be allowed to do so. An example was developed in argument. A company might engage an expert to go abroad

and prepare an elaborate report and then repudiate the contract before anything was done. To allow such an expert then to waste thousands of pounds in preparing the report cannot be right if a much smaller sum of damages would give him full compensation for his loss. It would merely enable the expert to extort a settlement giving him far more than reasonable compensation. … It might be, but it never has been, the law that a person is only entitled to enforce his contractual rights in a reasonable way and that a court will not support an attempt to enforce them in an unreasonable way. One reason why that is not the law is no doubt because it was thought that it would create too much uncertainty to require the court to decide whether it is reasonable or equitable to allow a party to enforce his full rights under a contract. … The other ground would be that there is some general equitable principle or element of public policy which requires this limitation of the contractual rights of the innocent party. It may well be that, if it can be shown that a person has no legitimate interest, financial or [page 785] otherwise, in performing the contract rather than claiming damages, he ought not to be allowed to saddle the other party with an additional burden with no benefit to himself. If a party has no interest to enforce a stipulation he cannot in general enforce it: so it might be said that if a party has no interest to insist on a particular remedy he ought not to be allowed to insist on it. And, just as a party is not allowed to enforce a penalty, so he ought not to be allowed to penalise the other party by taking one course when another is equally advantageous to him. If I may revert to the example which I gave of a company engaging an expert to prepare an elaborate report and then repudiating before anything was done, it might be that the company could show that the expert had no substantial or legitimate interest in carrying out the work rather than accepting damages: I would think that the de minimis principle would apply in determining whether his interest was substantial and that he might have a legitimate interest other than an immediate financial interest. But if the expert had no such interest

then that might be regarded as a proper case for the exercise of the general equitable jurisdiction of the court. But that is not this case. Here [McGregor] did not set out to prove that [White and Carter] had no legitimate interest in completing the contract and claiming the contract price rather than claiming damages, there is nothing in the findings of fact to support such a case, and it seems improbable that any such case could have been proved. It is, in my judgment, impossible to say that [White and Carter] should be deprived of their right to claim the contract price merely because the benefit to them as against claiming damages and reletting their advertising space might be small in comparison with the loss to [McGregor]: that is the most that could be said in favour of [McGregor]. Parliament has on many occasions relieved parties from certain kinds of improvident or oppressive contracts, but the common law can only do that in very limited circumstances. Accordingly, I am unable to avoid the conclusion that this appeal must be allowed and the case remitted so that decree can be pronounced as craved in the initial writ.

Comments 30.6.1 See Radan, Gooley, and Vickovich at 30.51–30.63. 30.6.2 For a discussion of this case, see E Peden and J W Carter, ‘Agreed Damages Clauses — Back to the Future?’ (2006) 22 Journal of Contract Law 189; J W Carter and E Peden, ‘A Good Faith Perspective on Liquidated Damages’ (2007) 23 Journal of Contract Law 157.

1.

Clydebank Engineering and Shipbuilding Co v Don Jose Ramos Yzquierdo y Castaneda [1905] AC 6.

2. 3.

Public Works Commissioner v Hills [1906] AC 368; Webster v Bosanquet [1912] AC 394. Lord Elphinstone v Monkland Iron and Coal Co (1886) 11 App Cas 332 at 342.

4. 5.

Clydebank Engineering and Shipbuilding Co v Don Jose Ramos Yzquierdo y Castaneda [1905] AC 6 at 11; Webster v Bosanquet [1912] AC 394 at 398. Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79.

6. 7.

Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 at 86. C J Rossiter, Penalties and Forfeiture, Lawbook Co Ltd, Sydney, 1992, p 32.

8.

Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205 at 216–17.

9.

(1983) 152 CLR 406.

10. 11.

Legione v Hateley (1983) 152 CLR 406 at 445. Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205 at 216.

12. 13.

[2015] 3 WLR 1373 at 1392; [2016] 2 All ER 519. Cavendish Square Holding BV v Makdessi [2015] 3 WLR 1373 at 1392; [2016] 2 All ER 519 at 538.

14. 15.

Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205 at 217. Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656 at 663.

16. 17.

Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205 at 236. Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 at 87.

18. 19.

Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 at 87–8. Cavendish Square Holding BV v Makdessi [2015] 3 WLR 1373 at 1392, 1434, 1462; [2016] 2 All ER 519 at 538, 577–8, 605.

20. 21.

Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 at 87 (4(a)). Clydebank Engineering and Shipbuilding Co v Don Jose Ramos Yzquierdo y Castaneda [1905] AC 6 at 10.

22. 23.

Hungerfords v Walker (1989) 171 CLR 125. (1886) 11 App Cas 332.

24. 25.

Lord Elphinstone v Monkland Iron and Coal Co (1886) 11 App Cas 332 at 342. Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 at 87–8.

26.

27.

See IAC Leasing Ltd v Humphrey (1972) 126 CLR 131 at 143; O’Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359 at 390; Amev-Udc Finance Ltd v Austin (1986) 162 CLR 170 at 184; Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656 at 662. (2012) 247 CLR 205.

28. 29.

[2010] 1 AC 696. Office of Fair Trading v Abbey National plc [2008] EWHC 875 (Comm).

30. 31.

Else (1982) Ltd v Parkland Holdings Ltd [1994] 1 BCLC 130 at 145. (1841) 151 ER 852.

32. 33.

Ruddenklau v Charlesworth [1925] NZLR 161 at 164–5. [1921] VLR 14 at 17.

34. 35.

Palmer v Temple (1839) 112 ER 1304 at 1309. Laird v Pim (1841) 151 ER 852 at 854.

[page 786]

31 SPECIFIC PERFORMANCE

INTRODUCTION 31.1 This chapter deals with the doctrine of specific performance, being the principal remedy by which positive contractual obligations are enforced in equity. Specific performance in the ‘proper sense’ is used to compel the execution of a contract that requires some definite thing or act to be done in order to settle and define the rights of the contracting parties as they intended. Relief ‘analogous to specific performance’ is used to compel a contracting party to perform his or her obligations according to the terms of the contract. However, the principles applicable to specific performance in both of these senses are the same. Furthermore, simply because a contract has been breached does not mean that a plaintiff is entitled to an order for specific performance. Specific performance will be denied on jurisdictional grounds and may be refused on discretionary grounds. Where it is denied on jurisdictional grounds, there is no jurisdiction to even consider ordering specific performance, nor can the court award equitable damages in lieu of the order. However, if it is refused on discretionary grounds, a court has jurisdiction to order specific performance, but in the exercise of its discretion it can refuse to do so. It can also award equitable damages in addition to or in lieu of the order. Finally, the basis of a court’s decision to grant specific performance in all cases is that it would be unconscientious in the circumstances to restrict the plaintiff to common law damages. There are recognised jurisdictional factors precluding an order for specific performance. Thus, a court has no jurisdiction to order the specific

performance of a promise not supported by valuable consideration. Furthermore, if a plaintiff can be adequately compensated by an award of damages at common law, a court has no jurisdiction to order specific performance, but equitable relief will be available where damages are inadequate to meet the justice of the case in order to ‘do more perfect and complete justice’, as is illustrated in Beswick v Beswick [1968] AC 58 (see 31.2C). With contracts for the sale of personal property or chattels, an award of damages is usually considered to be an adequate remedy. However, contracts involving chattels that are rare or unique may be subject to specific performance because their rarity is an aspect of the inadequacy of damages, as is illustrated in Falcke v Gray (1859) 62 ER 250 (see 31.3C). The adequacy of damages as a threshold question for the jurisdictional basis of a specific performance application has been tested frequently with contracts that confer a benefit on a third party. A common example is where a party is obligated to pay a sum of money to a third party (such as in Beswick v Beswick). Because the quantum of damages in such cases is usually nominal, damages will usually be seen as an inadequate remedy for a plaintiff. [page 787] A variety of discretionary factors exist that enable a court to refuse to make an order for specific performance. Equity will generally not enforce a contract if this would compel the defendant to maintain a personal relationship with the plaintiff. Contracts for personal service such as employment and partnership agreements, are typical examples. However, in C H Giles & Co Ltd v Morris [1972] 1 All ER 960 (see 31.4C) a court was prepared to grant specific performance of a contract that contained an obligation to enter into a separate contract for personal services. Because non-compliance with an order for specific performance is generally punishable for contempt of court, contracts that imprecisely define the parties’ obligations are usually not remedied by such an order. Thus, contracts requiring the constant supervision of the courts will not attract equitable relief. This problem has arisen in the context of commercial leases in modern

shopping malls, as is illustrated in Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1998] AC 1 (see 31.5C). A further discretionary factor that can lead the court to deny an application for specific performance is that of laches or unreasonable delay, as is discussed in Lamshed v Lamshed (1963) 109 CLR 440 (see 31.6C). As a discretionary factor, courts can also take into account the behaviour of the plaintiff. Courts will generally refuse specific performance where the plaintiff is in breach or is not ready, willing, and able to perform the contract. However, this does not mean that the plaintiff must have been ready, willing, and able at all material times, but only at the time the relief is sought, as is discussed in Mehmet v Benson (1965) 113 CLR 295 (see 31.7C).

THE INADEQUACY OF DAMAGES AT COMMON LAW 31.2C

Beswick v Beswick [1968] AC 58

Court: House of Lords Facts: Peter Beswick, a coal merchant, entered into a contract to sell his business to his nephew, John Beswick. The business was to be transferred to John in exchange for, among other things, a weekly payment to Peter for the rest of his life and after his death the payment of an annuity to Peter’s wife, Ruth. When Peter died John made only one payment to Ruth. She took legal action as administratrix of Peter’s estate (she could not sue in her own name because of the privity of contract rule), claiming payment of arrears of the annuity and an order for specific performance of the continuing obligation to pay the annuity. Issue: The issue before the House of Lords was whether damages would be an inadequate remedy for a plaintiff in cases involving nonpayment of a contractual debt to a third party. If so, the decree of specific performance would be available to Ruth. Decision: The House of Lords (Lords Reid, Hodson, Guest, Pearce, and Upjohn) unanimously held that because damages were nominal in

this case, they were an inadequate remedy, and ordered specific performance of the contract. Extract: The extracts from the speeches of Lords Reid, Hodson, and Upjohn outline the court’s reasoning on the issue of specific performance as a valid alternative to nominal damages in such cases.

[page 788]

Lord Reid Applying what I have said to the circumstances of the present case, [Ruth] in her personal capacity has no right to sue, but she has a right as administratrix of her husband’s estate to require [John] to perform his obligation under the agreement. He has refused to do so and he maintains that [her] only right is to sue him for damages for breach of his contract. If that were so, I shall assume that he is right in maintaining that the administratrix could then recover only nominal damages because his breach of contract has caused no loss to the estate of her deceased husband. If that were the only remedy available the result would be grossly unjust. It would mean that [John] keeps the business which he bought and for which he has only paid a small part of the price which he agreed to pay. He would avoid paying the rest of the price, the annuity to [Ruth], by paying a mere 40s damages.

Lord Hodson [I]t was argued [at one time] 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,1 as (1) only nominal damages can be recovered; (2) in order to enforce a continuing obligation it may be necessary to bring a series of actions whereas specific performance avoids multiplicity of action. Again, it was said that the courts will not make an order which cannot be enforced. This argument also fell by the wayside for plainly the order can be enforced by the ordinary methods of execution. …

The peculiar feature of this case is that [Ruth] 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 authorities where the remedy of specific performance has been applied in such circumstances as these are numerous. … It is to be noticed that the learned counsel engaged in this and other cases never took the point now relied on that the personal representative of the contracting party could not enforce a contract such as this. As I understood the argument, for [John] it was contended that the personal representative could not obtain specific performance as the estate had nothing to gain, having suffered no loss. There is no authority which supports this proposition and I do not think that it has any validity.

Lord Upjohn I incline to the view that on the facts of this case damages are nominal for it appears that [Peter] died without any assets save and except the agreement which he hoped would [page 789] keep him and then his widow for their lives. At all events let me assume that damages are nominal. So it is said nominal damages are adequate and the remedy of specific performance ought not to be granted. That is, with all respect, wholly to misunderstand that principle. Equity will grant specific performance when damages are inadequate to meet the justice of the case. But in any event quantum of damages seldom affects the right to specific performance. If X contracts with Y to buy Blackacre or a rare chattel for a fancy price because the property or chattel has caught his fancy he is entitled to enforce his bargain and it matters not that he could not prove any damage.

In this case the court ought to grant a specific performance order all the more because damages are nominal. [John] has received all the property; justice demands that he pay the price and this can only be done in the circumstances by equitable relief. It is a fallacy to suppose that [Ruth] is thereby obtaining additional rights; [the administratrix] is entitled to compel [John] to carry out the terms of the agreement. … My Lords, in my opinion the Court of Appeal were clearly right to grant a decree of specific performance.

Comment 31.2.1 See Radan, Gooley, and Vickovich at 31.22, 31.21–31.22, and 31.39–31.40. 31.2.2 Similar sentiments to those expressed in this case are to be found in the decision of the High Court of Australia in Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460 at 478–9, 502–4. 31.2.3 With reference to the decisions in the House of Lords and the High Court in Utopia Financial Services Pty Ltd v Financial Ombudsman Service Ltd [2012] WASC 279 at [55], Le Miere J said: The remedy of specific performance is equitable and therefore discretionary. The remedy of specific performance is appropriate where damages is not an adequate remedy. There is no rule of law that specific performance will not be granted for an agreement for a money payment. In this case, the obligation of Utopia under the contract is to … [pay] money to the Rees who are not parties to the contract between Utopia and FOS. That does not prevent an order for specific performance. A contract for the benefit of a third party is enforceable at the behest of a party to the contract even though that party has not suffered personal loss as a result of the failure to perform the contract. A court may grant specific performance of a promise for the benefit of a third party. [In this case, e]ven if the court could award more than nominal

damages to FOS for Utopia’s breach of contract, an award of damages would not be adequate.

[page 790]

CONTRACTS FOR THE SALE OF PERSONALTY 31.3C

Falcke v Gray (1859) 62 ER 250

Court: High Court of Chancery Facts: Gray leased her fully-furnished house to Falcke, an art dealer, for a six-month term at an agreed rent together with an option to purchase two china jars that were part of the furniture. The combined value of the jars at the time the lease was entered into was agreed at £40, although neither Gray nor her agent had any knowledge or experience with such matters. Gray later decided to seek advice as to the real market value of the china jars from another dealer, Watson. He was so impressed with the jars that he offered to purchase them from Gray for £200. Upon being assured by Watson that she would be doing nothing wrong, Gray accepted Watson’s offer and he took the jars away. Falcke sought specific performance of the contract between himself and Gray and joined Watson as a defendant. Issues: The issues before the court were whether specific performance was available for chattels and, if it was, whether it was available where the chattels were in the lawful possession of a third party. Decision: Sir Richard Kindersley V-C held that a court will enforce specific performance of a contract to purchase chattels, but only where damages would be an inadequate remedy. Nevertheless, specific performance was refused because Falcke, although not

acting fraudulently, was not on equal footing with Gray, who was ignorant of the value and had agreed to a clearly inadequate price. Extract: The extract from Vice-Chancellor Kindersley’s judgment addresses the issue of granting specific performance in such circumstances.

Sir Richard Kindersley V-C The first ground of defence is that, this being a bill for the specific performance of a contract for the purchase of chattels, this Court will not interfere. But I am of opinion that the Court will not refuse to interfere simply because the contract relates to chattels, and that if there were no other objection the contract in this case is such a contract as the Court would specifically perform. What is the difference in the view of the Court between realty and personalty in respect to the question whether the Court will interfere or not? Upon what principle does the Court decree specific performance of any contract whatever? … A Court of law gives damages for the non-performance, but a Court of Equity says ‘that is not sufficient — justice is not satisfied by that remedy’; and, therefore, a Court of Equity will decree specific performance, because a mere compensation in damages is not a sufficient remedy and satisfaction for the loss of the performance of the contract. Now why should that principle apply less to chattels? If in a contract for chattels damages will be a sufficient compensation, the party is left to that remedy. Thus if a contract is for [page 791] the purchase of a certain quantity of coals, stock etc, this Court will not decree specific performance, because a person can go into the market and buy similar articles, and get damages for any difference in the price of the articles in a Court of law. But if damages would not be a sufficient compensation, the principle, on which a Court of Equity decrees specific

performance, is just as applicable to a contract for the sale and purchase of chattels, as to a contract for the sale and purchase of land. In the present case the contract is for the purchase of articles of unusual beauty, rarity and distinction, so that damages would not be an adequate compensation for non-performance; and I am of opinion that a contract for articles of such a descrip--tion is such a contract as this Court will enforce; and, in the absence of all other objection, I should have no hesitation in decreeing specific performance. The next ground of defence is that the contract in the present case is a hard bargain between [Falcke] and [Gray]; and it is insisted that the inadequacy in price is so great that on that ground the Court will not decree specific performance. Now the price put on these jars was £40; what was their actual value? Certainly to talk of their value is to talk of something which is very artificial and fluctuating, depending upon the taste and caprice of the community. But still the jars derive their value from their beauty, distinction and rarity, and those qualities give them a selling value. They have a value in the market. According to [Falcke’s] own statement their value would be £100, or if between persons not brokers £125; and it is the interest of [Falcke] to represent their value as low as possible. A better test of their value is what Mr Watson has given for them; and I think I may assume that £200 at least would be a fair price, though I cannot help thinking that their real value rather exceeded than fell short of that sum. But, taking £200 as the fair value, the price placed on the jars by [Gray’s agent] was only one-fifth of their selling value. That this was a hard bargain in the sense of its being for a very inadequate price there can be no doubt; and [Gray] insists that, on this ground, the Court will not enforce specific performance. … The general rule with regard to hard bargains is that the Court will not decree specific performance, because specific performance is in the discretion of the Court for the advancement of justice; such discretion, indeed, to be exercised, not according to caprice, but on strict principles of justice and equity. … [I]n some cases the Court has refused specific performance on the ground of the hardness of the bargain, where there has been not the least impropriety of conduct on the part of the person seeking specific

performance. In most of the cases there has been some other ingredient besides mere inadequacy of price. … [In] Day v Newman2 … the Court refused to decree specific performance, but left the parties to their remedies at law on the ground of inadequacy in price. That case appears to me to be a distinct decision on the question. White v Damon3 was a case of a purchase at an auction; yet Lord Rosslyn, on the simple ground of inadequacy in price, refused specific [page 792] performance. This case therefore shows that inadequacy in price is a sufficient ground for refusing specific performance. Lord Eldon took a different view, but it was on the ground that the sale was by auction. Now these two last-mentioned cases appear to me to be decisive on the point; and I am of opinion that in the present case I ought to refuse specific performance on the mere ground of inadequacy of price, even if there were none other. But there is another circumstance in this case besides mere inadequacy. What was the nature of the transaction? It was not the case of a bargain between seller and buyer, the one trying to get the highest, and the other to give the lowest, price. The intention of the parties was that a fair and reasonable price should be placed on the articles, and that [Falcke] should have the option of purchasing at such fair and reasonable price. [Gray], though she was told by [her agent] that he was not a judge of the value, thought that the £40 mentioned by him was such a fair price as a competent person would place on the jars; and it was upon that footing that she made the agreement. She was not herself a competent judge, though she knew they were of considerable value. [Falcke] knew that she was contracting on that footing, and he knew that the price put upon the jars by [Gray’s agent] was not a fair price. … The question is whether he can come to the Court to compel [Gray] to sell the jars to him for £40. I admit that this Court is not a Court of honor, but it appears to me that, although Mr Falcke has done nothing he was legally bound not to do, yet, consistently with the authorities and the justice of the case, I must refuse specific performance.

Comment 31.3.1 See Radan, Gooley, and Vickovich at 31.26–31.29.

CONTRACTS FOR PERSONAL SERVICES 31.4C

C H Giles & Co Ltd v Morris [1972] 1 All ER 960

Court: Chancery Division of the High Court of England and Wales Facts: Invincible Policies Ltd, a firm of insurance brokers whose shares were owned by Morris and others, agreed with Giles’ company for the sale of some shares and certain capital restructuring and reorganisation issues. One of the terms of the contract specified that Giles would be appointed under a service agreement as managing director of Invincible Policies for a five-year term. Morris and his fellow shareholders later disagreed over some matters and Giles’ appointment did not proceed. He took legal action against Morris and the others, seeking specific performance of the contract. During the proceedings and on legal advice the parties consented to an order for specific performance of, among other things, the service agreement with Giles. But the board of Invincible Policies refused to appoint Giles because he lacked insurance experience. When Giles and his company again took action, Morris and the others argued they were wrongly advised and that it [page 793] would be wrong for the court to enforce a contract for personal services in circumstances where they would have to terminate the contract and face a claim for damages from Giles. Issue: The main issue before the Chancery Division was whether an

order for specific performance could be made in relation to a contract that included an obligation involving personal services. Decision: Megarry J held that the order in the present case simply required the execution of the agreement. Just because the agreement contained an obligation to sign a contract for personal services that would otherwise not be specifically enforceable, did not mean that the obligation to sign such a contract could not be specifically enforced. Extract: The extracts from the judgment of Megarry J outline the principles relating to granting a specific performance order where a contract for personal services is involved.

Megarry J What I have to consider is whether the presence in the agreement of [a subclause], providing for Mr Giles to enter into a service agreement with Invincible in the form of the draft annexed to the contract, prevents the court from decreeing specific performance of the entire agreement, including that subclause. It will be observed that there is no question of [Giles’ company] seeking to enforce any order of the court which will compel any of [Morris and the others] to carry out, either as employer or employee, any personal services. The order made is an order to procure ‘the execution by the Company of the engrossment’ of the service agreement. The question is whether such an order falls within the principle that the court will not decree specific performance of a contract for personal services. On the face of it the answer must be No. There is no question of the execution of the decree requiring constant superintendence by the court of a continuous series of acts. … All that the decree requires in this respect is the procuring of a single act, namely, the execution of the service agreement. When that has been done, the question of any breach of the service agreement and any remedies for that breach is one between Invincible and Mr Giles, and not between Invincible and [Giles’ company]. Invincible, too, is a party neither to the contract nor to the action. The distinction between an order to perform a contract for services and an

order to procure the execution of such a contract seems to me to be sound both in principle and on authority. I do not think that the mere fact the contract to be made is one of which the court would not decree specific performance is a ground for refusing to decree that the contract be entered into. … The reasons why the court is reluctant to decree specific performance of a contract for personal services (and I would regard it as a strong reluctance rather than a rule) are … more complex and more firmly bottomed on human nature. If a singer contracts to sing, there could no doubt be proceedings for committal if, ordered to sing, the singer remained obstinately dumb. But if instead the singer sang flat, or sharp, or too fast, or too slowly, or too loudly, or too quietly, or resorted to a dozen of the manifestations of temperament [page 794] traditionally associated with some singers, the threat of committal would reveal itself as a most unsatisfactory weapon; for who could say whether the imperfections of performance were natural or self-induced? To make an order with such possibilities of evasion would be vain; and so the order will not be made. However, not all contracts of personal service or for the continuous performance of services are as dependent as this on matters of opinion and judgment, nor do all such contracts involve the same degree of the daily impact of person on person. In general, no doubt, the inconvenience and mischief of decreeing specific performance of most of such contracts will greatly outweigh the advantages, and specific performance will be refused. But I do not think that it should be assumed that as soon as any element of personal service or continuous services can be discerned in a contract the court will, without more, refuse specific performance. Of course, a requirement for the continuous performance of services has the disadvantage that repeated breaches may engender repeated applications to the court for enforcement. But so may many injunctions; and the prospects of repetition, although an important consideration, ought not to be allowed to negative a right. As is so often the case in equity, the matter is one of the balance of advantage and disadvantage in relation to the

particular obligations in question; and the fact that the balance will usually lie on one side does not turn this probability into a rule. The present case … requires not the performance of personal services or any continuous series of acts, but merely … the execution of an agreement which contains a provision for such services or acts.

Comment 31.4.1 See Radan, Gooley, and Vickovich at 31.42–31.47. 31.4.2. In Quinn v Overland [2010] FCA 799 at [100]–[101], after referring to Megarry J’s observation towards the end of the above extract that specific performance will not be refused merely because there is an ‘element of personal service or continuous services’, Bromberg J said: The circumstances of each particular case need to be examined. There ought not to be and there is no longer a fixed rule against specific performance of an employment contract. Furthermore, the appropriateness of specific performance as a remedy is strengthened by a growing acceptance at common law of the right of an employee to perform work. That recognition has arisen out of changed social attitudes. There is now a greater recognition than ever that employment is important to an employee not simply because it provides economic sustenance. Workplaces are a hub of important human exchanges which are vital to the wellbeing of individual workers. Work provides employees with purpose, dignity, pride, enjoyment, social acceptance and many social connections. As well, the performance of work allows for skill enhancement and advances career opportunities. These non pecuniary attributes of work are important and their denial can be devastating to the legitimate interests of any worker, either skilled or unskilled.

[page 795]

CONSTANT COURT SUPERVISION OF AN ORDER FOR SPECIFIC PERFORMANCE 31.5C Co-operative Insurance Society Ltd v Argyll Stores (Holdings)

Ltd [1998] AC 1 Court: House of Lords Facts: The Co-operative Insurance Society granted Argyll Stores a 35year lease to operate a supermarket in a unit of a shopping centre. The lease contained a term to the effect that Argyll was to keep the premises open for retail trade during the usual hours of business in that area. The supermarket was the anchor tenant, being the largest shop in the centre and the greatest attraction. About 15 years into the lease, Argyll undertook a major review of its business operations and decided to close a number of supermarkets, including the one in the Co-operative Insurance Society shopping centre. Co-operative Insurance Society urged Argyll to keep trading until a suitable assignee could be found and even offered to negotiate a temporary discount on the rental. However, Argyll unilaterally closed the supermarket and stripped out the fixtures and fittings. Co-operative Insurance Society brought an action against Argyll for specific performance of the contractual term requiring the premises to be kept open. In the alternative, it sought damages. Issue: The issue before the House of Lords was whether specific performance could be ordered of a term in a lease requiring the carrying on of a business. Decisions: The House of Lords (Lords Browne-Wilkinson, Slynn of Hadley, Hoffmann, Hope of Craighead, and Clyde) unanimously held in favour of Argyll and refused the application for specific performance of the lease.

Extract: The extracts from the speech of Lord Hoffmann emphasise that obligations of an ongoing nature contain the risk of repeated litigation and constant court supervision, making specific performance an inappropriate remedy.

Lord Hoffmann The [trial] judge refused to order specific performance. He said that there was on the authorities a settled practice that orders which would require a defendant to run a business would not be made. He was not content, however, merely to follow authority. He gave reasons why he thought that specific performance would be inappropriate. Two such reasons were by way of justification for the general practice. An order to carry on a business, as opposed to an order to perform a ‘single and welldefined act’, was difficult to enforce by the sanction of committal. And where a business was being run at a loss, specific relief would be ‘too farreaching and beyond the scope of control which the court should seek to impose’. The other two related to the particular case. A resumption of business would be expensive … and although Argyll had knowingly acted in breach of covenant, it had done so ‘in the light of the settled practice of the court to award damages’. Finally, while the assessment of damages might be difficult, it was the kind of exercise which the courts had done in the past. … [page 796] Specific performance is traditionally regarded in English law as an exceptional remedy, as opposed to the common law damages to which a successful plaintiff is entitled as of right. … [T]he general principle [is] that specific performance will not be ordered when damages are an adequate remedy. … The cases in which [a plaintiff] is confined to a claim for damages are regarded as the exceptions. … The principles upon which English judges exercise the discretion to grant specific performance are reasonably well settled and depend upon a number of considerations, mostly of a practical nature, which are of very general application. …

The practice of not ordering a defendant to carry on a business is not entirely dependent upon damages being an adequate remedy. … The most frequent reason given in the cases for declining to order someone to carry on a business is that it would require constant supervision by the court. In J C Williamson Ltd v Lukey and Mulholland, Dixon J said flatly: Specific performance is inapplicable when the continued supervision of the court is necessary in order to ensure the fulfilment of the contract.4 … The judges who have said that the need for constant supervision was an objection to such orders were no doubt well aware that supervision would in practice take the form of rulings by the court, on applications made by the parties, as to whether there had been a breach of the order. It is the possibility of the court having to give an indefinite series of such rulings in order to ensure the execution of the order which has been regarded as undesirable. Why should this be so? A principal reason is that, as Megarry J pointed out in [C H Giles & Co Ltd v Morris5] … the only means available to the court to enforce its order is the quasi-criminal procedure of punishment for contempt. This is a powerful weapon; so powerful, in fact, as often to be unsuitable as an instrument for adjudicating upon the disputes which may arise over whether a business is being run in accordance with the terms of the court’s order. The heavy-handed nature of the enforcement mechanism is a consideration which may go to the exercise of the court’s discretion in other cases as well, but its use to compel the running of a business is perhaps the paradigm case of its disadvantages and it is in this context that I shall discuss them. The prospect of committal or even a fine, with the damage to commercial reputation which will be caused by a finding of contempt of court, is likely to have at least two undesirable consequences. First, the defendant, who ex hypothesi did not think that it was in his economic interest to run the business at all, now has to make decisions under a sword of Damocles which may descend if the way the business is run does not conform to the terms of the order. This is, as one might say, no way to run a business. In this case the Court of Appeal made light of the point because it

assumed that, once the defendant had been ordered to run the business, self-interest and compliance with the order would thereafter go hand in hand. But, as I shall explain, this is not necessarily true. [page 797] Secondly, the seriousness of a finding of contempt for the defendant means that any application to enforce the order is likely to be a heavy and expensive piece of litigation. The possibility of repeated applications over a period of time means that, in comparison with a once-and-for-all inquiry as to damages, the enforcement of the remedy is likely to be expensive in terms of cost to the parties and the resources of the judicial system. This is a convenient point at which to distinguish between orders which require a defendant to carry on an activity, such as running a business over a more or less extended period of time, and orders which require him to achieve a result. The possibility of repeated applications for rulings on compliance with the order which arises in the former case does not exist to anything like the same extent in the latter. Even if the achievement of the result is a complicated matter which will take some time, the court, if called upon to rule, only has to examine the finished work and say whether it complies with the order. This point was made in the context of relief against forfeiture in Shiloh Spinners Ltd v Harding. If it is a condition of relief that the tenant should have complied with a repairing covenant, difficulty of supervision need not be an objection. As Lord Wilberforce said: … what the court has to do is to satisfy itself, ex post facto, that the covenanted work has been done, and it has ample machinery, through certificates, or by inquiry, to do precisely this.6 This distinction between orders to carry on activities and orders to achieve results explains why the courts have in appropriate circumstances ordered specific performance of building contracts and repairing covenants.7 It by no means follows, however, that even obligations to achieve a result will always be enforced by specific performance. There may be other objections, to some of which I now turn. One such objection, which applies to orders to achieve a result and a

fortiori to orders to carry on an activity, is imprecision in the terms of the order. If the terms of the court’s order, reflecting the terms of the obligation, cannot be precisely drawn, the possibility of wasteful litigation over compliance is increased. So is the oppression caused by the defendant having to do things under threat of proceedings for contempt. The less precise the order, the fewer the signposts to the forensic minefield which he has to traverse. The fact that the terms of a contractual obligation are sufficiently definite to escape being void for uncertainty, or to found a claim for damages, or to permit compliance to be made a condition of relief against forfeiture, does not necessarily mean that they will be sufficiently precise to be capable of being specifically enforced. So in Wolverhampton Corporation v Emmons, Romer LJ said that the first condition for specific enforcement of a building contract was that: … the particulars of the work are so far definitely ascertained that the court can sufficiently see what is the exact nature of the work of which it is asked to order the performance.8 … [page 798] Precision is of course a question of degree and the courts have shown themselves willing to cope with a certain degree of imprecision in cases of orders requiring the achievement of a result in which the plaintiffs’ merits appeared strong; like all the reasons which I have been discussing, it is, taken alone, merely a discretionary matter to be taken into account. … It is, however, a very important one. I should at this point draw attention to what seems to me to have been a misreading of certain remarks of Lord Wilberforce in Shiloh Spinners Ltd v Harding. He pointed out, as I have said, that to grant relief against forfeiture subject to compliance with a repairing covenant involves the court in no more than the possibility of a retrospective assessment of whether the covenanted work has been done. For this reason, he said: Where it is necessary, and, in my opinion, right, to move away from some 19th century authorities, is to reject as a reason against

granting relief, the impossibility for the courts to supervise the doing of work.9 This is plainly a remark about cases involving the achievement of a result, such as doing repairs, and, within that class, about making compliance a condition of relief against forfeiture. But in Tito v Waddell (No 2)10 Sir Robert Megarry V-C took it to be a generalisation about specific performance and, in particular, a rejection of difficulty of supervision as an objection, even in cases of orders to carry on an activity. Sir Robert Megarry V-C regarded it as an adoption of his own views (based, as I have said, on incomplete analysis of what was meant by difficulty of supervision) in C H Giles & Co Ltd v Morris. In the present case, Leggatt LJ took this claim at face value.11 In fact, Lord Wilberforce went on to say that impossibility of supervision ‘is a reality, no doubt, and explains why specific performance cannot be granted of agreements to this effect …’.12 Lord Wilberforce was in my view drawing attention to the fact that the collection of reasons which the courts have in mind when they speak of difficulty of supervision apply with much greater force to orders for specific performance, giving rise to the possibility of committal for contempt, than they do to conditions for relief against forfeiture. While the paradigm case to which such objections apply is the order to carry on an activity, they can also apply to an order requiring the achievement of a result. There is a further objection to an order requiring the defendant to carry on a business, which was emphasised by Millett LJ in the Court of Appeal. This is that it may cause injustice by allowing the plaintiff to enrich himself at the defendant’s expense. The loss which the defendant may suffer through having to comply with the order (for example, by running a business at a loss for an indefinite period) may be far greater than the plaintiff would suffer from the contract being broken. … It is true that [Argyll] has, by his own breach of contract, put himself in … an unfortunate position. But the purpose of the law of contract is not to punish wrongdoing but to satisfy the [page 799]

expectations of the party entitled to performance. A remedy which enables him to secure, in money terms, more than the performance due to him is unjust. From a wider perspective, it cannot be in the public interest for the courts to require someone to carry on business at a loss if there is any plausible alternative by which the other party can be given compensation. It is not only a waste of resources but yokes the parties together in a continuing hostile relationship. The order for specific performance prolongs the battle. If the defendant is ordered to run a business, its conduct becomes the subject of a flow of complaints, solicitors’ letters and affidavits. This is wasteful for both parties and the legal system. An award of damages, on the other hand, brings the litigation to an end. The defendant pays damages, the forensic link between them is severed, they go their separate ways and the wounds of conflict can heal. The cumulative effect of these various reasons, none of which would necessarily be sufficient on its own, seems to me to show that the settled practice is based upon sound sense. Of course the grant or refusal of specific performance remains a matter for the judge’s discretion. There are no binding rules, but this does not mean that there cannot be settled principles, founded upon practical considerations of the kind which I have discussed, which do not have to be re-examined in every case, but which the courts will apply in all but exceptional circumstances. … I think that no criticism can be made of the way in which [the trial judge] exercised his discretion. All the reasons which he gave were proper matters for him to take into account. In my view the Court of Appeal should not have interfered and I would allow the appeal and restore the order which he made.

Comment 31.5.1 See Radan, Gooley, and Vickovich at 31.48–31.57. 31.5.2 For a discussion of this case, see P Radan, ‘Specific Performance of a Lease Obligation to Operate a Business’ (1997) 71 Australian Law Journal 740; A Phang, ‘Specific Performance — Exploring the Roots of Settled Practice’ (1998) 61 Modern Law Review 421; D Pearce, ‘Remedies for Breach of a Keep-Open Covenant’ (2008) 24 Journal

of Contract Law 199. 31.5.3 In Diagnostic X-Ray Services Pty Ltd v Jewel Food Stores Pty Ltd (2001) 4 VR 632, Beach J in the Supreme Court of Victoria dealt with a case very similar in its facts to Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd. The anchor tenant operated a supermarket and petrol station, but it closed the petrol station. Beach J granted an interlocutory mandatory injunction (having a similar effect to an order for specific performance) requiring the tenant to operate the petrol station. His Honour said that there were exceptional circumstances justifying such an order, namely: the petrol station was an adjunct to the supermarket; there was no pressing urgency to sell the supermarket and petrol station; the tenant was seeking to sell the petrol station; [page 800] the tenant had acted unilaterally in closing the petrol station; and significant detriment would result to other tenants in the centre. Beach J, at 636–7, also said: In Argyll, in holding that the settled practice of the courts is not to grant a mandatory injunction requiring the carrying on of a business, much emphasis was placed on the fact that the grant of such an injunction would require constant supervision by the court. In my opinion, it is highly doubtful that that can be said in the present case. [Jewel Food Stores] operated the petrol station quite successfully over the last seven years. If it is ordered to continue to do so, there is no valid reason why it cannot, and without the supervision of the court.

LACHES 31.6C

Lamshed v Lamshed (1963) 109 CLR 440

Court: High Court of Australia Facts: In 1956 Lamshed entered into a contract for sale of his grazing property in South Australia to Lamshed & Co, a company representing his brother and other members of his extended family. Some weeks later, after denying its validity in conversations with the sale agent and others, Lamshed formally repudiated the contract by a letter from his solicitors. About four months later the company commenced proceedings seeking specific performance, to which Lamshed filed a defence. No further action was taken after the close of pleadings and the company did not set the matter down for trial until almost five years had passed. It did so shortly after Lamshed contracted to sell the property to another party, who placed a caveat on the title. The company’s delay was explained by the belief of its principals that Lamshed would eventually proceed with the sale once land values declined sufficiently. Issue: The issue before the High Court was whether the company was disentitled to the remedy of specific performance due to laches for failing to prosecute the action with reasonable diligence. Decisions: The majority of the High Court (Kitto and Windeyer JJ; McTiernan J dissenting) held that the company was guilty of laches and therefore dismissed its application for specific performance. Extracts: The extracts from the judgment of Kitto J highlight the main features of the equitable defence of laches, holding that in this case the prejudice to Lamshed was demonstrated by his being left indefinitely in a position of not knowing whether or not the contract would be enforced against him.

[page 801]

Kitto J There was a time in the history of equity jurisprudence when the case of Gibson v Patterson13 was regarded as a decision that in equity time was of no consequence and delay no impediment to decreeing specific performance of agreements. It seems that Lord Loughborough first showed that the case decided no such thing,14 and the doctrine has ever since been maintained that the special remedy of specific performance is available to those only who are prompt to claim it. The degree of promptness required depends on the nature of the case and all its circumstances. Accordingly there is little point in citing cases for the purpose of comparing the period of delay in the present case with the delay which has been considered fatal to claims for specific performance in the circumstances of other cases. The bare fact of delay is not enough. Where there is nothing at all in the circumstances to justify either a conclusion that the delay has been to the prejudice of the defendant or of any third party, or a conclusion that the plaintiff ought to be regarded as having abandoned any rights he ever had, specific performance is not ordinarily refused.15 But a circumstance which is of importance, where it exists, is that the defendant has denied that he is bound by the contract. The case in which that has occurred has been called ‘the typical case’ for refusing specific performance by reason of a delay of even a few months.16 ‘In such cases (as those of purported rescission for breach of contract or under a special condition as to title) the purchaser who wishes to attack the validity of the rescission must always come very promptly to a court of equity. It is natural and reasonable that this should be required of him, for the vendor is not to be placed indefinitely in the position of not knowing whether he can safely deal with the property in question on the footing that the contract has ceased to exist’.17 By parity of reasoning, a definite denial by one party that he has ever become bound by a contract of sale to which the other seeks to hold him places a clear obligation upon that other to sue promptly if he is to obtain from a court of equity a decree for specific performance. Equity will not allow the possibility of its making such a decree to be held unfairly long over the head of the party who denies the existence of the contract and asserts a right to deal with the property as his own. This is a particular application of the general principle of laches as expounded in Lindsay Petroleum Co v Hurd18 and Erlanger v New Sombrero Phosphate Co. To

repeat words from the latter case, ‘a court of equity requires that those who come to it to ask its active interposition to give them relief, should use due diligence, after there has been such notice or knowledge as to make it inequitable to lie by’.19 Plainly it would have been inequitable for [Lamshed & Co] in the present case, if [it] wanted specific performance, to lie by until 26th March 1962, continuing to assert the existence of a contract but taking no proceedings and leaving [Lamshed] in the position [page 802] of not knowing whether any money he might spend on the property would benefit him or [Lamshed & Co], or whether he was free to sell the property to a third party, or whether his estate, if he should die, would include the property or the purchase money for which [Lamshed & Co] said that he had agreed to sell it. … The case is therefore not one of bare delay; it is not even one in which all that can be said against the granting of relief is that [Lamshed & Co’s] delay has unfairly placed [Lamshed] in a position of uncertainty over a substantial period; it is a case in which a defendant, not precipitately but at length, in circumstances which made it not altogether unreasonable to do so, has prejudiced his position; and it is a case in which third parties, not shown to be in any way at fault and not being warned by any caveat on the title, have acquired interests which will be defeated if a decree for specific performance should now be made. It seems to me a clear case for refusing relief on the ground of delay unless the law be that delay after action brought cannot afford a defence to a suit for specific performance. Fry LJ did not think that that was the law. In par 1100 of his book20 he mentioned, as one form of delay that might constitute laches disentitling a plaintiff to the aid of the court, delay in not diligently prosecuting his action when instituted. He cited in this connexion Moore v Blake,21 in which Lord Manners as Lord Chancellor of Ireland held that laches in not prosecuting a suit was as strong a reason for refusing the discretionary remedy of specific performance as laches in not commencing a suit. The actual decision in that

case was reversed on appeal to the House of Lords,22 and expressions in the speeches of Lord Eldon and Lord Redesdale may seem at first sight to suggest that a defence of delay in prosecuting a suit must fail if (as is the case here) the defendant might have moved to have the suit dismissed for want of prosecution. But the real point of the case seems to have been that the suit was for specific performance of an agreement to grant a lease subject to the payment to the defendant of a debt owing to him by the plaintiff. As is said in the last two lines of the report, the defendant might refuse to execute the lease until paid his debt. He was in the position of a mortgagee of the promised lease. Delay by the plaintiff in prosecuting the suit was therefore delay in paying the mortgage debt. Their Lordships appear to have considered that the defendant’s proper remedy for that delay was to move, as a means of foreclosure, that the suit be dismissed for want of prosecution. The circumstances were very special. What is important in the judgments is Lord Eldon’s acknowledgement of ‘those cases which justify a dismissal on the ground that, though begun in due time, it (the suit) has not been prosecuted with due diligence’.23 Lord Manners’ judgment as a statement of general principle as to delay seems to be unimpaired and indeed reinforced.

[page 803]

Comment 31.6.1 See Radan, Gooley, and Vickovich at 31.66–31.78.

THE REQUIREMENT THAT THE PLAINTIFF BE READY, WILLING, AND ABLE 31.7C

Mehmet v Benson (1965) 113 CLR 295

Court: High Court of Australia

Facts: Mehmet entered into an instalment contract for the purchase of a half-share in land from Benson for £16,000. Settlement was delayed until payment of the final instalment, with interim possession given to Mehmet. An initial deposit of £3000 was payable, followed by a further instalment two months later in the same amount. Thereafter, the balance of the purchase price was to be paid by way of annual instalments of £1500 each plus interest. The contract provided for time to be of the essence and there was an express right given to Benson to rescind or terminate in the event Mehmet failed to comply or otherwise breached the contract. It also provided that Benson would retain his rights as vendor even if an extension of time was granted. In the event of default, the whole contract price became immediately due and payable. Mehmet paid the deposit and first instalment of £1500, but he then fell into arrears and negotiated settlement of the balance with Benson, making good a portion of the arrears. Eventually he was declared bankrupt. Benson served a notice of rescission on the basis of Mehmet’s earlier failure to make an instalment payment on time and to forfeit the instalment payments already made. After Mehmet was discharged from bankruptcy, he sought specific performance of the contract. Issue: The issue before the High Court was whether Mehmet, in order to obtain an order for specific performance, was ready, willing, and able to perform the contract. Decision: The High Court (Barwick CJ, McTiernan and Windeyer JJ) unanimously held that as Mehmet was at the time of the hearing ready, willing, and able to perform the contract, there was no reason to refuse the application for specific performance. The fact that he would not have satisfied this requirement at the time when he was an undischarged bankrupt did not matter. Extract: The extracts from the judgments of Barwick CJ and Windeyer J illustrate that a court should look to the substance, rather than the technical form, of a plaintiff’s readiness to perform the terms of a contract.

Barwick CJ

The question as to whether or not [Mehmet] has been and is ready and willing to perform the contract is one of substance not to be resolved in any technical or narrow sense. It is important to bear in mind what is the substantial thing for which the parties contract and [page 804] what on the part of [Mehmet] in a suit for specific performance are his essential obligations. Here the substantial thing for which [Benson] bargained was the payment of the price: and, unless time be and remain of the essence, he obtains what he bargained for if by the decree he obtains his price with such ancillary orders as recompense him for the delay in its receipt. To order specific performance in this case would not involve the court in dispensing with anything for which [Benson] essentially contracted. Of course, [Mehmet] must not by his unreadiness or unwillingness to perform have disowned his obligation to do so, or abandoned his rights to the benefit of the contract. But it is the essential terms of the contract which he must be ready and willing to perform. He seeks a transfer of the interest in land, the subject of the contract: the counterpart obligation is the payment of the price. In considering the question of [Mehmet’s] readiness and willingness in this respect in this case there are many factors. His default in paying the instalments of the price, whilst not conclusive, is amongst these factors. For a substantial period [Mehmet] was under the disability of an available act of bankruptcy, of which no doubt [Benson] might have sought to profit but did not. The concession of the plaintiff in Jennings’ Trustee v King24 that so long as it is available, an act of bankruptcy must prevent a purchaser from succeeding in specific performance, because he cannot make an effective payment in return for the conveyance, is justified by the two cases to which Harman J in that case refers. But neither of these cases, nor any others which I have been able to discover, would justify the conclusion that after the act of bankruptcy had ceased to be available, and in default of any effective action by the other party to bring the contract to an end meantime, a purchaser otherwise entitled to succeed

must be denied specific performance because during the period the act of bankruptcy was available he was unable to complete.

Windeyer J It is necessary that the plaintiff in an action for specific performance should allege in his pleading and prove at the hearing his readiness and willingness to perform the contract on his part: and readiness involves an ability to perform it.25 At the date when the suit is commenced the plaintiff must then be in a position to say that he is ready and willing to do at the proper time in the future whatever in the events that have happened the contract requires that he do.26 And he must show too that he has performed or been ready and willing to perform the terms of the contract on his part. But if, notwithstanding earlier breaches, the contract remained on foot, then it seems to me a plaintiff is not necessarily barred from having a decree for specific performance if those breaches, not having resulted in a valid rescission, can be made good by the payment of interest. … [I]t is I think sufficient that the plaintiff in a purchaser’s suit should allege that he is presently ready and willing and offers to pay the purchase money and that it is not strictly necessary in every case for him to go further. If some conditions had earlier been waived in the plaintiff’s favour and therefore not complied with, it is inappropriate to allege [page 805] that he was always ready and willing to perform them. It were better in such a case to allege that, save in so far as performance of any condition was waived or excused by the defendant, the plaintiff had performed, or been always ready and willing to perform, the contract on his part according to its terms. However that may be, I do not think that in this case [Mehmet] should have been refused specific performance because he did not prove all that he alleged. The case is difficult and unusual. I would, however, allow the appeal and substitute for the decree of the Supreme Court a decree for specific performance. But, as I am not convinced that [Mehmet] is now ready and willing to complete the contract, I think there should be a proviso to meet the situation if he should prove to be unready promptly to complete

the contract by payment in full. To that end [Benson] should be expressly enabled to apply to the Supreme Court to fix a date for completion. If [Mehmet] is not then ready to complete, the Supreme Court could make a decree for rescission. In the view I take it is unnecessary to consider in detail the terms on which his Honour granted relief against forfeiture. But I see no reason for thinking that, specific performance having been refused, relief on those terms ought not to have been given, or that terms similar in general effect would be inappropriate if [Mehmet] proves unready to complete. I would allow the appeal and dismiss the cross-appeal.

Comment 31.7.1 See Radan, Gooley, and Vickovich at 31.83–31.85. 31.7.2 In Bahr v Nicolay (No 2) (1988) 164 CLR 604 at 640, Wilson and Toohey JJ said: In our view the absence of a plea of readiness and willingness to perform is not inevitably fatal to a plaintiff’s claim for specific performance. It is true that in Mehmet v Benson [at 314] Windeyer J said: ‘It is necessary that the plaintiff in an action for specific performance should allege in his pleading and prove at the hearing his readiness and willingness to perform the contract on his part: and readiness involves an ability to perform it.’ When that passage is read in context, together with the authorities to which Windeyer J referred, it is apparent that his Honour was speaking of pleading and proof as part of a composite requirement and that he was not suggesting that, absent an appropriate plea, a plaintiff who proved his readiness and willingness to perform his obligations under a contract of which specific performance was sought would nevertheless fail. A reading of the judgment of Barwick CJ in Mehmet v Benson, a judgment with which McTiernan J agreed, shows that the Chief Justice placed emphasis on what was established by evidence rather than on what had been pleaded. And in that regard, his Honour commented

[at p 307]: ‘The question as to whether or not the plaintiff has been and is ready and willing to perform the contract is one of substance not to be resolved in any technical or narrow sense. It is important to bear in mind what is the substantial thing for which the parties contract and what on the part of the plaintiff in a suit for specific performance are his essential obligations.’

1.

Beswick v Beswick [1966] 3 All ER 1 at 14.

2. 3.

(1788) 2 Cox 77. (1800) 7 Ves 30.

4. 5.

J C Williamson Ltd v Lukey and Mulholland (1931) 45 CLR 282 at 297–8. [1972] 1 All ER 960.

6. 7.

Shiloh Spinners Ltd v Harding [1973] AC 691 at 724. See Wolverhampton Corporation v Emmons [1901] 1 KB 515 (building contract) and Jeune v Queens Cross Properties Ltd [1974] Ch 97 (repairing covenant).

8. 9.

Wolverhampton Corporation v Emmons [1901] 1 KB 515. Shiloh Spinners Ltd v Harding [1973] AC 691 at 724.

10. 11.

[1977] Ch 106 at 322. Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1996] Ch 286 at 292–3.

12. 13.

Shiloh Spinners Ltd v Harding [1973] AC 691 at 724. (1737) 26 ER 8.

14. 15.

See note to Lloyd v Collett (1793) 29 ER 992. Fitzgerald v Masters (1956) 95 CLR 420 at 433.

16. 17.

Fitzgerald v Masters (1956) 95 CLR 420 at 433. Fitzgerald v Masters (1956) 95 CLR 420 at 433.

18. 19.

(1874) LR 5 PC 221 at 239, 240. Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 at 1279.

20. 21.

Fry on Specific Performance, 6th ed, (1921), p 514. (1808) 1 Ball & B 62.

22. 23.

Moore v Blake (1816) 3 ER 1147. Moore v Blake (1816) 3 ER 1147 at 1152.

24. 25.

[1952] 1 Ch 899 at 909. Ellis v Rogers (1884) 29 Ch D 661 at 667; McDonald v McMullen (1908) 25 WN (NSW) 142; Alam v Preston (1938) 38 SR (NSW) 475; Bando v Goldberg (1944) 62 WN (NSW) 87; King v Poggioli (1923) 32 CLR 222 at 247.

26.

See Fullers’ Theatres Ltd v Musgrove (1923) 31 CLR 524 at 549.

[page 806]

32 INJUNCTIONS

INTRODUCTION 32.1 This chapter deals with the availability of the equitable remedy of the injunction to enforce a contract. Where the injunction is used in enforcing a contract, the effect of the remedy is in essence the same as where specific performance is used to enforce a contract — that is, the defendant is required to carry out his or her contractual obligation. Where the obligation is positive in substance — that is, the defendant is required to perform some positive act such as to execute a document — specific performance is the appropriate remedy. Where the obligation is negative in substance — that is, the defendant has promised not to do something — the appropriate remedy is an injunction. The effect of the injunction is to restrain the defendant from doing the act that he or she has promised not to do. The classic illustration of a negative contractual obligation is an enforceable restraint of trade clause. A common example of an enforceable restraint of trade clause in which an injunction is sought is where a defendant contracts to first provide his or her services to a plaintiff, and second not provide those services to another person during the currency of the contract. Because the first obligation will generally not be specifically enforced on the grounds that specific performance of a personal services contract is generally refused, the plaintiff will generally seek to enforce the restraint of trade — that is, the second obligation — by means of an injunction. The first significant case in this area is the well-known decision in Lumley v Wagner (1852) 42 ER 687.

The court will invariably have jurisdiction to enforce such restraint of trade clauses because invariably the plaintiff will have provided valuable consideration for them and common law damages will be inadequate because they are difficult to assess. The success of such injunction applications will depend upon discretionary factors. Apart from general discretionary factors such as laches and hardship, the major factor that is particular to this context is whether the effect of the injunction will be to leave the defendant with no option but to comply with the personal services obligation in his or her contract. As already noted, such obligations will rarely, if ever, be specifically enforced and the court will not allow this to be indirectly achieved by means of granting an injunction to enforce the restraint of trade obligation. The exercise of the court’s discretion in this context is discussed and illustrated in Warner Brothers Pictures Inc v Nelson [1937] 1 KB 209 (see 32.2C), Curro v Beyond Productions Pty Ltd (1993) 30 NSWLR 337 (see 32.3C), and Page One Records Ltd v Britton [1967] 3 All ER 822 (see 32.4C). [page 807]

RESTRAINTS OF TRADE IN PERSONAL SERVICES CONTRACTS 32.2C

Warner Bros Pictures Inc v Nelson [1937] 1 KB 209

Court: King’s Bench Division Facts: In 1934 Nelson, an actress professionally known as Bette Davis, entered into a one-year contract with Warner Bros. The contract also provided that Warner Bros could extend the arrangement with Nelson until 1942 by exercising options set out in it. The contract contained a restraint of trade clause, by which Nelson agreed that ‘she [would] not, during [the term of the contract] render any services for or in any other photographic, stage or motion picture production or productions, or business of any other person or engage in any other occupation without the written consent of

[Warner Bros] being first had and obtained’. In 1936 Nelson breached this provision by contracting to make a film in England without having obtained the consent of Warner Bros. Warner Bros sought an injunction to enforce the restraint of trade clause. There was no issue between the parties as to the validity of the restraint of trade clause. Issue: The issue before the court was whether, in the circumstances of the case, it was appropriate to grant the injunction. Decision: Branson J granted the injunction, but limited its application to a maximum of three years. Extract: The extracts from Branson J’s decision set out the relevant principles and apply them to the facts of the case.

Branson J I turn then to the consideration of the law applicable to this case on the basis that the contract is a valid and enforceable one. It is conceded that our Courts will not enforce a positive covenant of personal service; and specific performance of the positive covenants by the defendant to serve the plaintiffs is not asked in the present case. The practice of the Court of Chancery in relation to the enforcement of negative covenants is stated on the highest authority by Lord Cairns LC, in the House of Lords in Doherty v Allman. His Lordship says: My Lords, if there had been a negative covenant, I apprehend, according to well settled practice, a Court of Equity would have had no discretion to exercise. If parties, for valuable consideration, with their eyes open, contract that a particular thing shall not be done, all that a Court of Equity has to do is to say, by way of injunction, that which the parties have already said by way of covenant, that the thing shall not be done; and in such case the injunction does nothing more than give the sanction of the process of the Court to that which already is the contract between the parties. It is not then a question of the balance of convenience or inconvenience, or of the amount of damage or of injury — it

[page 808] is the specific performance, by the Court, of that negative bargain which the parties have made, with their eyes open, between themselves.1 That was not a case of a contract of personal service; but the same principle had already been applied to such a contract by Lord St Leonards, in Lumley v Wagner. The Lord Chancellor used the following language: Wherever this Court has not proper jurisdiction to enforce specific performance, it operates to bind men’s consciences, as far as they can be bound, to a true and literal performance of their agreements; and it will not suffer them to depart from their contracts at their pleasure, leaving the party with whom they have contracted to the mere chance of any damages which a jury may give. The exercise of this jurisdiction has, I believe, had a wholesome tendency towards the maintenance of that good faith which exists in this country to a much greater degree perhaps than in any other; and although the jurisdiction is not to be extended, yet a Judge would desert his duty who did not act up to what his predecessors have handed down as the rule for his guidance in the administration of such an equity.2 … [Nelson], having broken her positive undertakings in the contract without any cause or excuse which she was prepared to support in the witness box, contends that she cannot be enjoined from breaking the negative covenants also. The mere fact that a covenant, which the Court would not enforce if expressed in positive form, is expressed in the negative instead, will not induce the court to enforce it. … The Court will attend to the substance and not to the form of the covenant. Nor will the Court, true to the principle that specific performance of a contract of personal service will never be ordered, grant an injunction in the case of such a contract to enforce negative covenants if the effect of so doing would be to drive the defendant either to starvation or to specific performance of the positive covenants.3 … In [t]he case of Rely-a-Bell Burglar & Fire Alarm Co Ltd v Eisler … Russell J … said …:

It was said on the other side that there were points of distinction. It was said that the covenants in those two cases were so framed that the servant, if the covenants were enforced, could make his living neither by serving nor by carrying on business independently; whereas in the present case the covenant only prohibited serving. Therefore, it was said, he was still free to start in business on his own account, and it could not be said, if an injunction were granted in the terms of the covenant, that he would be forced to remain idle and starve. That distinction seems to me somewhat of a mockery. It would be idle to tell this defendant, a servant employed at a wage, that he must not serve anybody else in that capacity, but that the world was still open to him to start business as an independent man. It seems to me that if I were to restrain this man according to the terms of the covenant, he would be forced to remain idle and starve.4 … [page 809] The conclusion to be drawn from the authorities is that, where a contract of personal service contains negative covenants, the enforcement of which will not amount either to a decree of specific performance of the positive covenants of the contract or to the giving of a decree under which the defendant must either remain idle or perform those positive covenants, the Court will enforce those negative covenants; but this is subject to a further consideration. An injunction is a discretionary remedy, and the Court in granting it may limit it to what the Court considers reasonable in all the circumstances of the case. … The case before me is, therefore, one in which it would be proper to grant an injunction unless to do so would in the circumstances be tantamount to ordering the defendant to perform her contract or remain idle or unless damages would be the more appropriate remedy. With regard to the first of these considerations, it would, of course, be impossible to grant an injunction covering all the negative covenants in the contract. That would, indeed, force [Nelson] to perform her contract or remain idle; but this objection is removed by the restricted form in which

the injunction is sought. It is confined to forbidding [Nelson], without the consent of [Warner Bros], to render any services for or in any motion picture or stage production for anyone other than [Warner Bros]. It was also urged that the difference between what [Nelson] can earn as a film artiste and what she might expect to earn by any other form of activity is so great that she will in effect be driven to perform her contract. That is not the criterion adopted in any of the decided cases. [Nelson] is stated to be a person of intelligence, capacity and means, and no evidence was adduced to show that, if enjoined from doing the specified acts otherwise than for [Warner Bros], she will not be able to employ herself both usefully and remuneratively in other spheres of activity, though not as remuneratively as in her special line. She will not be driven, although she may be tempted, to perform the contract, and the fact that she may be so tempted is no objection to the grant of an injunction. This appears from the judgment of Lord St Leonards in Lumley v Wagner, where he used the following language: It was objected that the operation of the injunction in the present case was mischievous, excluding the defendant J Wagner from performing at any other theatre while this Court had no power to compel her to perform at Her Majesty’s Theatre. It is true, that I have not the means of compelling her to sing, but she has no cause of complaint if I compel her to abstain from the commission of an act which she has bound herself not to do, and thus possibly cause her to fulfil her engagement. The jurisdiction which I now exercise is wholly within the power of the court, and being of opinion that it is a proper case for interfering, I shall leave nothing unsatisfied by the judgment I pronounce. The effect too of the injunction in restraining J Wagner from singing elsewhere may, in the event — [that is a different matter] — of an action being brought against her by the plaintiff, prevent any such amount of vindictive damages being given against her as a jury might probably be inclined to give if she had carried her talents and exercised them at the rival theatre: the injunction may also, as I have said, tend to the fulfilment of her engagement; though, in continuing the injunction, I disclaim doing indirectly what I cannot do directly.5 …

[page 810] Then comes the question as to the period for which the injunction should operate. … [T]he Court should make the period such as to give reasonable protection and no more to [Warner Bros] against the ill effects to them of [Nelson’s] breach of contract. The evidence as to that was perhaps necessarily somewhat vague. The main difficulty that [Warner Bros] apprehend is that [Nelson] might appear in other films whilst the films already made by them and not yet shown are in the market for sale or hire and thus depreciate their value. I think that, if the injunction is in force during the continuance of the contract or for three years from now, whichever period is the shorter, that will substantially meet the case. The other matter is as to the area within which the injunction is to operate. The contract is not an English contract and the parties are not British subjects. In my opinion all that properly concerns this Court is to prevent the defendant from committing the prohibited acts within the jurisdiction of this court, and the injunction will be limited accordingly.

Comment 32.2.1 See Radan, Gooley, and Vickovich at 32.10. 32.2.2 Although Nelson lost her case against Warner Brothers, she emerged victorious in terms of her future career, as is seen in the following extract from E Sikov, Dark Victory, The Life of Bette Davis, Henry Holt & Co, New York, 2007, pp 96–7: Interviewed at her hotel in Rottingdean, Davis, wearing blue beach pajamas and smoking a cigarette, called her defeat ‘a sock in the teeth’. ‘I’m a bit bewildered’, she went on. ‘I didn’t make any plans for a hundred percent defeat. I thought at least that it would have been a partial victory for me and for everybody else with one of these body-and-soul contracts. Mind you, I didn’t fight it as a test case for the whole film industry. I fought it for myself and for my career. … Instead of getting increased freedom, I seem to have

provided — at my own expense — an object lesson for other would-be ‘naughty young ladies’. … The episode turned out not to be the total loss Davis felt it to be at the time. It provided her with vital publicity, the key element of which was precisely that it was not dictated by Warner Bros’ publicity department. She had despised not only the apparent indifference of her casting but also the way she had been marketed. She hated the early fashion shoots, the dyeing of her hair, the cereal ads. … Even Warners’ best promotions for Davis were in some ways more damaging to her psyche than her worst scripts because they tried to sell her as being someone she wasn’t. So although she lost the case, by taking such a belligerent stance against Warners in the full, bright glare of the English-speaking press, she adroitly bypassed the studio’s publicity machine and created a new persona for herself on her own terms: a strong-willed independent thinker as confrontational as any man. [page 811] It worked. Not only did Warners give her better, more suitable scripts upon her return to Burbank, but the studio’s publicists began to exploit her pugnacious, ready-to-erupt persona themselves — to the studio’s advantage as well as to Davis’s. Contentiousness became her legacy. As the Economist put it on the occasion of her death, ‘The two cigarettes lit by Paul Henreid in Now, Voyager — one for him, one for her — were as nothing compared to the two fingers she gave to the head of the studio, Jack Warner, in the high court in London in 1936’. 32.2.3 In relation to the decision in Lumley v Wagner discussed in this case, there is an excellent analysis of that case and the related case of Lumley v Gye [1853] 118 ER 749 and (1854) 23 LT 66 dealing with the tort of interference with contractual relations, in S Waddams,

‘Johanna Wagner and the Rival Opera Houses’ (2001) 117 Law Quarterly Review 431. 32.3C

Curro v Beyond Productions Pty Ltd (1993) 30 NSWLR 337

Court: Court of Appeal in New South Wales Facts: Tracey Curro, a television presenter, and her company entered into service contracts in 1991 with Beyond Productions, the producer of the documentary program Beyond 2000, which was screened on the Seven Network. The contracts contained a restraint clause, in that Curro promised ‘not to enter into any engagement or carry on any activity which might reasonably be expected to prevent her from rendering (her services) to Beyond’. In February 1993 Curro told Beyond Productions that she had accepted an offer from the Nine Network to work as a television reporter for its 60 Minutes program and that this did not conflict with her contractual obligations. Beyond Productions sought undertakings from her that she would comply with her obligations and not work on 60 Minutes. The undertakings were not given and Beyond Productions took legal action. Issues: The issues before the Court of Appeal were whether Beyond Productions was estopped from enforcing the negative contractual obligation, whether it was void as an unreasonable restraint of trade, and whether it could properly enforce the obligation by way of an injunction. Decision: The Court of Appeal (Meagher, Handley, and Cripps JJA) unanimously held in favour of Beyond Productions. Extract: The extracts from the court’s joint judgment deal with the issues of restraint of trade in personal service contracts and the role of injunctions in that context.

Meagher, Handley, and Cripps JJA

The … question is whether the negative promises themselves are unreasonable restraints of trade. The question that must be asked is whether those restrictions exceed what [page 812] is reasonably necessary for the protection of the legitimate interests of Beyond.6 The onus of establishing the reasonableness of the restraint lies upon the party seeking its enforcement.7 The validity of the restraint is to be tested at the time of entering into the contract and by reference to what the restraint entitles or requires the parties to do rather than what they intend to do or have actually done.8 The negative promises in this case do not continue in force after the contracts have expired. It is therefore necessary to identify the legitimate interests of Beyond while the contracts are on foot which would be protected by those promises. Beyond would always have an interest in protecting its investment in unfinished stories on which Miss Curro had been engaged, it might need her services for further filming or voice-over recording and therefore had a real interest in her fulfilling her contractual obligations in relation to those stories. … When the trial started there were still some fourteen unfinished stories for which she had been responsible. … It is clear that there would always be a substantial interval between the commencement of work by Miss Curro on a story and the date when it would be broadcast. Beyond also had an interest in retaining Miss Curro’s services and preventing her from appearing on a rival television program because of its obligations to Seven. The contract with Seven required Beyond to use its best endeavours to ensure that its presenters did not appear in other television programs or in television, radio or theatrical commercials without the written consent of Seven which it undertook not to unreasonably withhold. … Beyond had its own interest in its presenters not appearing on shows such as 60 Minutes while their stories were appearing on Beyond 2000 because of the differences between the two programs. Beyond had previously refused to consent to Miss Curro producing an advertisement for skin lotions because they were seen as inconsistent with

the reputation of Beyond 2000 for objectivity, integrity, and scientific accuracy. … Negative promises of this type, express or implied, are common in the entertainment industry. They date back to Lumley v Wagner,9 or earlier and were found in the contracts in White v Australian and New Zealand Theatres Ltd10 and Associated Newspapers Ltd v Bancks.11 Indeed, Miss Curro accepted greater contractual restrictions in the contracts she entered into with Nine in February. Beyond was obliged to give Miss Curro a reasonable opportunity to do her work. Any sterilisation of her services would result from a calculated decision by her to withdraw them from Beyond. Beyond had legitimate commercial reasons for including those negative promises in the agreements. Miss Curro had competent legal advice. … The parties were in an equal bargaining position and at the time Miss Curro had another offer of employment at [page 813] higher remuneration. She did not then object to the restraints or seek to have them modified. In these circumstances we agree with [the trial judge] that the negative promises were not unreasonable restraints of trade. … [The trial judge] granted the injunctions pursuant to the doctrine of Lumley v Wagner. [Curro] challenge[s] both the continuing authority of that case and its applicability in the present circumstances. In our view [the trial judge] was correct, and the challenges to his judgment on these bases must fail. … [W]e shall endeavour to state in a concise form what we understand to be the law on this topic. Until recently, it could be summarised as reflecting three principles: first, that under the doctrine enunciated by Lord Cairns LC in Doherty v Allman,12 a court of equity would always grant an injunction to enforce a negative contractual promise made for consideration; secondly, that, by way of exception a negative promise would not be enforced by injunction if that would have the practical effect of compelling specific performance of a contract of personal service or if it would force the

defendant either to perform that contract or remain idle (with overtones of destitution); and thirdly, by way of exception to the exception, in the case of special services a promise not to take employment with a competitor, would, under the doctrine of Lumley v Wagner, be restrained. It is no longer possible to state the law with such precision. The first rule enunciated in Doherty v Allman can no longer be maintained. Academic writers have long doubted the principle expressed in such wide terms and the High Court has now rejected it.13 The second rule has been departed from in England in Hill v C A Parsons & Co Ltd14 which was followed in Evans Marshall & Co Ltd v Bertola SA.15 … As to the third rule, which is in question here, Lumley v Wagner has been much discussed. It has, with varying degrees of enthusiasm, been followed by Australian courts. … The argument for [Curro] that this Court should not follow Lumley v Wagner cannot be accepted. … We are of the view that the authorities establish that in a Lumley v Wagner case, an injunction will still be granted when the balance of discretionary factors is in the plaintiff’s favour. In the present case, to grant the injunction sought is not to order specific performance of the service and services contracts. Miss Curro could comply with the injunctions without resuming work for Beyond. She would not be forced to choose between service with Beyond or idleness. Other employments would be open to her. There is no question of her being destitute. Damages would not be an adequate remedy. … The injunctions do no more than oblige Miss Curro to comply with negative promises which are part of a fair and freely negotiated bargain made less than two years ago. We see no reason at all why she should not be ordered to keep her word. These considerations alone would require that any judicial discretion be exercised in its favour.

[page 814]

Comment 32.3.1 See Radan, Gooley, and Vickovich at 32.12.

32.3.2 The consequence of this decision was that Curro’s start with 60 Minutes was delayed for 12 months, during which time her contract with Beyond Productions came to and end. 32.3.3 For a critique of cases in which injunctions in this context have been granted, see J Riley, ‘Sterilising Talent: A Critical Assessment of Injunctions Enforcing Negative Covenants’ (2012) 34 Sydney Law Review 617. 32.4C

Page One Records Ltd v Britton [1967] 3 All ER 822

Court: Chancery Division Facts: The Troggs, a successful British pop group in the mid-1960s with hits such as ‘Wild Thing’ and ‘With a Girl Like You’, were managed by Larry Page through his company Page One Records. The management and agency agreement was for a five-year term and it included a condition by which The Troggs were not to engage anyone else to manage their affairs or to take over that role themselves. Despite their success under the management of Page One Records, the members of the Troggs decided their interests were not being served properly and that they were going to appoint someone else to manage their careers. The Troggs, by letter from their legal advisers to Page One Records, claimed that the management company had in fact ‘materially breached and renunciated’ the contract between them. They purported to terminate the contract and demanded the return of all moneys received by the company from performances and record sales. Page One Records sought an injunction to prevent them from terminating the agreement. Issue: The issue before the court was whether it was appropriate in the circumstances to grant an injunction to enforce a negative contractual obligation. Decision: Stamp J of the Chancery Division refused the application for an injunction.

Extract: The extract below from the speech of Stamp J discloses the main grounds on which the application was refused.

Stamp J Counsel for The Troggs submits that even if [Page One Records] had throughout acted impeccably towards The Troggs, no such injunction as is asked for ought to be granted. He advances three propositions on behalf of The Troggs. (1) That specific performance is never granted to enforce a contract for personal services. (2) That an injunction is never granted which would have the effect of preventing an employer discharging an agent who is in a fiduciary position vis-à-vis the employer. He emphasises that here [Page One Records], [page 815] as manager and agent of The Troggs, is in the position of an employee. (3) That an injunction is never granted at the suit of the party against whom the party to be restrained could not obtain specific performance. It is urged — and, in my judgment, correctly — that The Troggs could have no action for specific performance of the management or agency agreements against [Page One Records]. The present case is clearly distinguished, in principle, from such cases as Lumley v Wagner,16 for there the only obligation on the part of the plaintiffs seeking to enforce the negative stipulation was an obligation to pay remuneration and an obligation which could clearly be enforced by the defendants. Here, however, the obligations to [Page One Records], involving personal services, were obligations of trust and confidence and were obligations which, plainly, could not be enforced at the suit of The Troggs. Here, indeed, so it seems to me, the totality of the obligations between the parties are more a joint venture almost approaching the relationship of partners than anything else, involving mutual confidence and reciprocal obligations on all sides. For the purposes of consideration of equitable relief, I must, I think, look at

the totality of the arrangements, and the negative stipulations on which [Page One Records] rely, are, in my judgment, no more or less than stipulations designed to tie the parties together in a relationship of mutual confidence, mutual endeavour and reciprocal obligations. … [W]here a contract of personal service contains negative covenants, the enforcement of which will amount either to a degree of specific performance of the positive covenants of the contract or to the giving of a decree under which the defendant must either remain idle or perform those positive covenants, the court will not enforce those negative covenants. … [I]t was said in this case, that if an injunction is granted The Troggs could, without employing any other manager or agent, continue as a group on their own or seek other employment of a different nature. So far as the former suggestion is concerned, in the first place, I doubt whether consistently with the terms of the agreements which I have read, The Troggs could act as their own managers; and, in the second place, I think that I can and should take judicial notice of the fact that these groups, if they are to have any great success, must have managers. Indeed, it is [Page One Records’] own case that The Troggs are simple persons, of no business experience, and could not survive without the services of a manager. As a practical matter on the evidence before me, I entertain no doubt that they would be compelled, if the injunction were granted on the terms that [Page One Records] seek, to continue to employ [Page One Records] as their manager and agent and it is, I think, on this point that this case diverges from the Lumley v Wagner case and the cases which have followed it … for it would be a bad thing to put pressure on The Troggs to continue to employ as a manager and agent in a fiduciary capacity one, who, unlike the plaintiff in those cases who had merely to pay the defendant money, has duties of a personal and fiduciary nature to perform and in whom The Troggs, for reasons good, bad or indifferent, have lost confidence and who may, for all I know, fail in its duty to them. [page 816] On the facts before me on this interlocutory motion, I should, if I granted the injunction, be enforcing a contract for personal services in which

personal services are to be performed by [Page One Records]. In Lumley v Wagner, [the trial judge] disclaimed doing indirectly what he could not do directly; and in the present case, by granting an injunction I would, in my judgment, be doing precisely that. I must, therefore, refuse the injunction which [Page One Records] seeks.

Comment 32.4.1 See Radan, Gooley, and Vickovich at 32.18–32.19. 32.4.2 Although Page One Records was unsuccessful in obtaining the injunction in this case, the parties reconciled in the early 1970s and Larry Page again managed The Troggs.

1.

Doherty v Allman (1878) 3 App Cas 709 at 719.

2. 3.

Lumley v Wagner (1852) 42 ER 687 at 693. See Whitwood Chemical Co v Hardman [1891] 2 Ch 416 at 427.

4. 5.

Rely-a-Bell Burglar & Fire Alarm Co Ltd v Eisler [1926] Ch 609 at 615. Lumley v Wagner (1852) 42 ER 687 at 693.

6. 7.

See Buckley v Tutty (1971) 125 CLR 353 at 376 and A Schroeder Music Publishing Co Ltd v Macaulay [1974] 3 All ER 616 at 618–19. Buckley v Tutty (1971) 125 CLR 353 at 377.

8. 9.

Adamson v New South Wales Rugby League Ltd (1991) 103 ALR 319 at 359–60. (1852) 42 ER 687.

10. 11.

(1943) 67 CLR 266. (1951) 83 CLR 322.

12. 13.

(1878) 3 App Cas 709 at 720. Dalgety Wine Estates Pty Ltd v Rizzon (1979) 141 CLR 552.

14. 15.

[1972] Ch 305. [1973] 1 WLR 349 at 379–80.

16.

(1852) 42 ER 687.

[page 817]

33 EQUITABLE DAMAGES

INTRODUCTION 33.1 This chapter deals with the awarding of damages in the context of cases where the plaintiff has sought enforcement of a contract by means of equitable relief in the form of an order for specific performance or an injunction. Prior to the passage of the Chancery Amendment Act 1858 (UK), more popularly known as Lord Cairns’ Act, if a plaintiff sought such equitable relief in the Chancery Court, but was, for example, denied such relief, if he or she wished to claim common law damages he or she had to commence proceedings afresh in the common law courts. Lord Cairns’ Act enabled the Chancery Court to award damages in addition to or in lieu of an injunction or an order of specific performance. In this way a party who was denied such relief could recover damages without having to re-commence proceedings before the common law courts. The damages awarded pursuant to Lord Cairns’ Act are usually referred to as ‘equitable damages’. However, an award of equitable damages could only be made if the Chancery Court had jurisdiction to order such equitable relief. Thus, if equitable relief was denied on the ground that common law damages was an adequate remedy, the Chancery Court could not exercise its power under Lord Cairns’ Act: Waterways Authority of New South Wales v Coal & Allied (Operations) Pty Ltd [2007] NSWCA 276 at [94]. On the other hand, if equitable relief was denied on a discretionary ground, the Chancery Court could grant equitable damages pursuant to Lord Cairns’ Act: Waterways Authority of New South Wales v Coal & Allied (Operations) Pty Ltd [2007] NSWCA 276 at [166].

All Australian jurisdictions except Queensland have legislative provisions that enact the substance of Lord Cairns’ Act. In Queensland a statutory provision to this effect, set out in s 62 of the Equity Act 1867 (Qld), has since been repealed. However, it has been held that the repeal did not affect the court’s power to award equitable damages: Barbagallo v J & F Catelan Pty Ltd [1986] 1 Qd R 245. It must also be noted that the awarding of equitable damages is confined to cases where the equitable relief that is sought is for an injunction or an order for specific performance. Thus, there is no power to award equitable damages in lieu of an account of profits: English v Dedham Vale Properties Ltd [1978] 1 All ER 382 at 399. Given the rationale behind Lord Cairns’ Act, in accordance with the maxim that equity follows the law, the court will in general apply common law principles in assessing the measure of equitable damages: Johnson v Agnew [1980] AC 367 at 400. Thus, in relation to the assessment of equitable damages, common law rules apply as to matters such as remoteness (Griffin v Mercantile Bank (1890) 11 LR (NSW) Eq 231), mitigation (Dillon v Nash Properties Pty Ltd [1950] VLR 293 at 301–2), certainty (Edward Street Properties Pty Ltd v Collins [1977] Qd R 399), the date for the assessment of damages (Johnson v Agnew [1980] AC 367 at 400–1), and the once and for [page 818] all lump sum rule (Neylon v Dickens [1987] 1 NZLR 402 at 407, 410). However, even if the court has the jurisdiction to award equitable damages, it can refuse to do so on discretionary grounds: Weily v Williams (1895) 16 LR (NSW) Eq 190 at 195–6. The decision of the House of Lords in Johnson v Agnew [1980] AC 367 (see 33.2C), where some of the principles relating to the assessment of equitable damages are discussed, is an example where equitable damages were awarded after compliance with an order for specific performance became impossible. The decision of the Chancery Division of the High Court of England and Wales in Ford-Hunt v Raghbir Singh [1973] 2 All ER 700 (see 33.3C) is an illustration where equitable damages were awarded in addition to an order for specific performance.

EQUITABLE DAMAGES IN LIEU OF SPECIFIC PERFORMANCE 33.2C

Johnson v Agnew [1980] AC 367

Court: House of Lords Facts: On 1 November 1973, when they were in arrears with the repayments of mortgages over a property in Buckinghamshire, the Johnsons entered into a written contract for its sale to Agnew. On the same day the Johnsons contracted to purchase another property and arranged for a loan from a bank to enable them to facilitate its purchase. The contract price was in excess of the sum required to discharge the mortgages over the Buckinghamshire property and to repay the loan that the Johnsons had arranged for the purchase of the other property. Agnew failed to complete. On 26 November 1974 the Johnsons obtained a summary order for specific performance of the contract. Meanwhile the mortgagees of the Buckinghamshire property exercised their right of sale over the property. Part of the Buckinghamshire property was sold at auction on 3 April 1975, with the remaining part sold at auction on 20 June 1975. The two mortgagee sales were completed on 11 July 1975 and 18 July 1975 respectively. The mortgagee sales meant that compliance by Agnew with the order for specific performance was impossible after the first mortgagee sale on 3 April 1975. The Johnsons initiated a claim for damages against Agnew. When the case was before the Court of Appeal it ruled that the order for specific performance be discharged. It further held that the Johnsons were entitled to Lord Cairns’ Act damages and ordered an inquiry as to damages. Before that enquiry took place Agnew appealed to the House of Lords. Issues: The issues before the House of Lords were whether the Johnsons were entitled to seek damages, given that compliance with the order for specific performance was impossible and if so, on what basis such damages were to be assessed. Decision: The House of Lords (Lords Wilberforce, Salmon, Fraser of Tulleybelton, Keith of Kinkel, and Scarman) unanimously held in

favour of the Johnsons. Lord Wilberforce, who delivered the only speech in the case, held that provided the order for specific performance was first formally vacated by the court (see Radan, Gooley, and Vickovich at 31.86), the Johnsons were entitled to claim damages for breach of contract against Agnew. A court had jurisdiction to order such damages pursuant to the provisions of Lord Cairns’ Act. [page 819] Extract: The extract from the speech of Lord Wilberforce sets out the principles that apply to the assessment of damages pursuant to the successor provisions of Lord Cairns’ Act.

Lord Wilberforce It is now necessary to deal with questions relating to the measure of damages. The Court of Appeal, while denying the [Johnsons’] right to damages at common law, granted damages under Lord Cairns’ Act. Since, on the view which I take, damages can be recovered at common law, two relevant questions now arise. (1) Whether Lord Cairns’ Act provides a different measure of damages from the common law: if so, the [Johnsons] would be in a position to claim the more favourable basis to them. (2) If the measure of damages is the same, on what basis they should be calculated. Since the decision of this House, by majority, in Leeds Industrial Cooperative Society Ltd v Slack1 it is clear that the jurisdiction to award damages in accordance with s 2 of Lord Cairns’ Act … may arise in some cases in which damages could not be recovered at common law; examples of this would be damages in lieu of a quia timet injunction and damages for breach of a restrictive covenant to which the plaintiff was not a party. To this extent the Act created a power to award damages which did not exist before at common law. But apart from these, and similar cases where damages could not be claimed at all at common law, there is sound authority for the proposition that the Act does not provide for the assessment of damages on any new basis. The wording of s 2 ‘may be

assessed in such manner as the court shall direct’ does not so suggest, but clearly refers only to procedure. In Ferguson v Wilson,2 Turner LJ sitting in a court which included Sir Hugh Cairns himself expressed the clear opinion that the purpose of the Act was to enable a court of equity to grant those damages which another court might give. … In Wroth v Tyler,3 however, Megarry J relying on the words ‘in lieu of specific performance’ reached the view that damages under the Act should be assessed as on the date when specific performance could have been ordered, in that case as at the date of the judgment of the Court. This case was followed in Grant v Dawkins.4 If this enables a different basis from that applicable at common law, I could not agree with it, but in Horsler v Zorro5 Megarry J went so far as to indicate his view that there is no inflexible rule that common law damages must be assessed as at the date of the breach. Furthermore, in Malhotra v Choudhury6 the Court of Appeal expressly decided that, in a case where damages are given in substitution for an order for specific performance, both equity and the common law would award damages on the same basis — in that case as on the date of judgment. On the balance of these authorities and also on principle, I find in the Act no warrant for the court [page 820] awarding damages differently from common law damages, but the question is left open on what date such damages, however awarded, ought to be assessed. The general principle for the assessment of damages is compensatory, ie, that the innocent party is to be placed, so far as money can do so, in the same position as if the contract had been performed. Where the contract is one of sale, this principle normally leads to assessment of damages as at the date of the breach — a principle recognised and embodied in s 51 of the Sale of Goods Act 1893. But this is not an absolute rule: if to follow it would give rise to injustice, the court has power to fix such other date as may be appropriate in the circumstances. In cases where a breach of a contract for sale has occurred, and the innocent

party reasonably continues to try to have the contract completed, it would to me appear more logical and just rather than tie him to the date of the original breach, to assess damages as at the date when (otherwise than by his default) the contract is lost. Support for this approach is to be found in the cases. In Ogle v Earl Vane7 the date was fixed by reference to the time when the innocent party, acting reasonably, went into the market: in Hickman v Haynes8 at a reasonable time after the last request of the defendants (buyers) to withhold delivery. In Radford v De Froberville,9 where the defendant had covenanted to build a wall, damages were held measurable as at the date of the hearing rather than at the date of the defendant’s breach, unless the plaintiff ought reasonably to have mitigated the breach at an earlier date. In the present case if it is accepted, as I would accept, that the [Johnsons] acted reasonably in pursuing the remedy of specific performance, the date on which that remedy became aborted (not by the [Johnsons’] fault) should logically be fixed as the date on which damages should be assessed. Choice of this date would be in accordance both with common law principle, as indicated in the authorities I have mentioned, and with the wording of the Act ‘in substitution for … specific performance’. The date which emerges from this is 3 April 1975 — the first date on which mortgagees contracted to sell a portion of the property. I would vary the order of the Court of Appeal by substituting this date for that fixed by them viz 26 November 1974.

[page 821]

Comment 33.2.1 See Radan, Gooley, and Vickovich at 33.9 and 33.23. 33.2.2 For a detailed analysis of this case, see C Mitchell, ‘Johnson v Agnew (1979)’, in C Mitchell and P Mitchell (eds), Landmark Cases in the Law of Contract, Hart Publishing, Oxford, 2008, pp 351–73.

EQUITABLE DAMAGES IN ADDITION TO SPECIFIC PERFORMANCE 33.3C

Ford-Hunt v Raghbir Singh [1973] 2 All ER 700

Court: Chancery Division of the High Court of England and Wales Facts: Mr and Mrs Ford-Hunt contracted to purchase a property from Singh. The Ford-Hunts obtained an order for specific performance of the contract. Singh failed to execute the transfer required by the order for specific performance. In due course the Ford-Hunts obtained possession of the property and brought a claim for damages for the losses occasioned by Singh’s failure to complete the contract in accordance with the order for specific performance. Issue: The issue before the High Court was whether it had the power to order damages occasioned by the failure to comply with the order for specific performance. Decision: Brightman J found in favour of the Ford-Hunts and ordered an enquiry into damages sustained by the Ford-Hunts as from the date the court made the order for specific performance. Extract: The extracts from the judgment of Brightman J discusses the awarding of equitable damages in addition to the order for specific performance.

Brightman J The decree of specific performance did not direct an enquiry as to damages. Accordingly, … the [Ford-Hunts] issued a notice of motion asking for an order, supplemental to the order of [specific performance], that there be an enquiry whether the [Ford-Hunts] had sustained any and what damage by reason of [Singh’s] delay in completing the sale agreement. A vendor who seeks specific performance is entitled to damages for delay, if he can prove that he has suffered damage: see Jaques v Millar, to which I shall refer later, and Jones v Gardiner. There is no doubt that, if the

plaintiffs had asked, an enquiry as to damages would have been added to the order for specific performance. The question is whether an enquiry can be directed now. … [page 822] The general rule is that a court has no jurisdiction to vary its order after the order has been passed and entered. For example, in Glasier v Rolls … Bowen LJ said this: To seek to alter the judgment by asking that something may be embodied in it, the demand for which was not even thought of at the time, and was never brought to the attention of the Court, is really to ask us to make a different judgment from that which has already been perfected.10 The question before me is whether the case with which I am concerned falls within any recognised exception to that general rule. In my view Re Scowby, Scowby v Scowby11 is an authority which would justify my making the order which is desired in the present case if and so far as such order is sought on new facts. Munro v Finlinson12 is … [a] decision … consistent with the … proposition … that I ought not to make the order which is sought [by the Ford-Hunts] so far as it is based on facts which were known at the date when the decree of specific performance was made. In my judgment I am entitled to, and should, direct an enquiry as to damages sustained by reason of the delay, limited to damage which arose after … the date of the decree for specific performance. Any such damage would be a new fact sufficient to ground a supplemental order. … The damages so recoverable will be confined in the usual way to— the damages which may be reasonably said to have naturally arisen from the delay, or which may be reasonably supposed to have been in the contemplation of the parties as likely to arise from the partial breach of the contract.13

[page 823]

Comment 33.3.1 See Radan, Gooley, and Vickovich at 33.18. 33.3.2 In Australian Hardboards Ltd v Hudson Investment Group Ltd (2007) 70 NSWLR 201 at [108], Young CJ in Eq referred to Ford-Hunt v Raghbir Singh as authority for the proposition that ‘where there is a specific performance suit the court is always able to make supplemental orders’. Similarly, in Neylon v Dickens [1987] 1 NZLR 402 at 409, the Court of Appeal in New Zealand held that ‘once a Court of Equity has control over a contract of sale as a result of the bringing of an action for specific performance, it may in some circumstances, at a stage later than the making of a decree for specific performance, make a supplemental order for an inquiry into additional damages’.

1.

[1924] AC 851.

2. 3.

(1866) LR 2 Ch 77 at 88. [1974] Ch 30.

4. 5.

[1973] 3 All ER 897. [1975] Ch 302 at 316.

6. 7.

[1980] Ch 52. (1867) LR 2 QB 275; LR 3 QB 272.

8. 9.

(1875) LR 10 CP 598. [1978] 1 All ER 33.

10. 11.

Glasier v Rolls (1889) 59 LJ Ch 63 at 65. [1897] 1 Ch 741.

12. 13.

(1903) 116 LT Journal 109. Jaques v Millar (1877) 6 Ch D 153 at 160.

[page 824]

34 RECTIFICATION

INTRODUCTION 34.1 This chapter is concerned with the equitable remedy of rectification of written contracts where a mistake has been made in recording the intention of the parties. It is not a means of reformulating the terms of an agreement set out in a document. The remedy of rectification is a manifestation of the maxim that ‘equity looks to the intent rather than the form’. Its purpose is the prevention of unconscientious conduct. Clear and convincing proof that the document does not accurately reflect the parties’ intention is needed before a court will order rectification. Being an equitable remedy, rectification can be denied on discretionary grounds such as unclean hands, laches, and acquiescence. Furthermore, if a third party has acquired rights bona fide and for valuable consideration in property transferred under a contract that would otherwise be amenable to an order for rectification, the order will be refused. Rectification of a written contract generally requires there to be a common mistake by all the parties to it, to the effect that the written contract fails to give expression to their true intention. The relevant principles relating to rectification for common mistake are discussed in Ryledar Pty Ltd v Euphoric Pty Ltd (2007) 69 NSWLR 603 (see 34.2C). The availability of rectification in cases of alleged illegality are discussed in CA & CA Ballan Pty Ltd v Oliver Hume (Australia) Pty Ltd [2017] VSCA 11 (see 34.3C). Furthermore, in special circumstances rectification is available in cases of unilateral mistake. The relevant principles relating to rectification for unilateral mistake are discussed

in George Wimpey UK Ltd v VI Construction Ltd [2005] EWCA Civ 77 (see 34.4C). Finally, voluntary agreements entered into by way of a deed can attract the remedy of rectification. In any of the cases the mistake can be one of fact or law.

RECTIFICATION FOR COMMON MISTAKE 34.2C

Ryledar Pty Ltd v Euphoric Pty Ltd (2007) 69 NSWLR 603

Court: Court of Appeal of New South Wales Facts: Ryledar was a petrol retailer operating under the business name Volume Plus. Euphoric distributed Mobil petroleum products and entered into a supply agreement with Ryledar in May 1998, which was varied in March 1999. The original contract was [page 825] expressed to have a two-year term, expiring in May 2000, which the 1999 agreement extended by six months to November 2000. However, the original contract also provided an option for three ‘renewal periods’ of one year each. The agreement also referred to a rebate entitlement in favour of Ryledar for gas and auto distillate. Litigation was initiated by Euphoric for recovery of moneys that required construction of the agreements in relation to the option terms and the application of the rebate to Ryledar’s outlets. Issues: The principal issues before the Court of Appeal were whether Ryledar was entitled to the rebate for distillate supplied to its sites located outside its ‘Sydney Metro locations’ and whether Euphoric breached the agreement by denying Ryledar’s entitlement to exercise the option for the first renewal period. Decision: The Court of Appeal (Mason P, Tobias and Campbell JJA) unanimously rejected Ryledar’s appeal and upheld Euphoric’s interpretation of the agreement between the parties as varied.

Extract: The extracts below from the separate judgments of Tobias JA and Campbell JA outline the principles to be applied for rectification of contracts in equity.

Tobias JA The relevant legal principles As is observed in Meagher Gummow & Lehane Equity, Doctrines & Remedies,1 it is of the upmost importance for a proper appreciation of the basis of the equitable doctrine of rectification to realise that the court, by its orders, merely reforms the instrument in which the parties have mistakenly expressed their agreement. The learned authors then cite the following passage from the judgment of Denning LJ in Frederick E Rose (London) Ltd v William H Pim Junior & Co Ltd: In order to get rectification it is necessary to show that the parties were in complete agreement on the terms of their contract but by an error wrote them down wrongly.2 … [I]n Club Cape Schanck Resort Co Ltd v Cape Country Club Pty Ltd … Tadgell JA [agreed with] the proposition that ‘the court may order rectification of a document which contains words used purposely, but mistakenly as to their effect, so as to give effect to the true intention of the parties’.3 His Honour observed that in Commissioner of Stamp Duties (NSW) v Carlenka the mistake or misapprehension in that case was ‘… such as to produce a fundamental inconsistency between what the words used in the deed, when properly interpreted, were apt to achieve and what the maker of the deed had antecedently determined to achieve by using them’.4 [page 826] His Honour concluded in these terms: … rectification will be ordered only to give effect to the common

intention [positively] shown. So, since the equitable doctrine of rectification exists for the purpose, in effect, of ordering actually or notionally the textual amendment of the document, it will not be available to achieve the amendment of a particular document just because the document is shown not to conform with a common intention of the parties to it. It must be shown further that words or expressions or other text inserted into or deleted from the document would give effect to the common intention.5 Phillips JA, after referring to the proposition that rectification is possible only where the written word fails to give effect to the parties’ common intention,6 summarised the relevant principles in the following passage: … I venture to suggest that the principle upon which rectification depends always remains the same; it depends in every case upon a want of correspondence between the form of the document (that is, in the words actually used) and the common intention of the parties at the time when the document is executed. Where the disconformity is the product of a common mistake, that mistake may be as to what words have been employed in the document or the meaning or effect of such words as appear. But whatever the common mistake, the lack of correspondence must be between the form of the document and the common intention, if rectification is to be available. In Rose v Pim the parties were mistaken as to the effect of their words, but there was no disconformity between the words employed and what was held to be their common intention — so rectification was not available. In Carlenka, there was a lack of correspondence between form and intention so rectification was available. Of course, whatever the nature or source of the underlying mistake of the parties, the common intention of the parties at the time of the execution of the document remains a matter of fact, which accounts, I believe for such variations as occur in result. The result in any given case will depend upon whether in the particular circumstances of that case there is (as a matter of fact) the requisite disconformity between the document as executed and the common intention of the parties. It is not enough that the parties have made a mistake about their document (whether the mistake be about the words used, their meaning or their effect); that mistake may serve to

explain such disconformity (if any) as is seen to exist, but it cannot be a substitute for it.7 … More recently, in Mander Pty Ltd v Clements,8 McKechnie J stated the relevant legal principle in terms of what Denning LJ had said in Frederick E Rose (London) Ltd v William H Pim Junior & Co Ltd,9 namely, that in order to get rectification it was necessary to show that the parties were in complete agreement on the terms of their contract, but by an error wrote them down wrongly. … [page 827] According to Carter on Contracts,10 it is sufficient for proving a continuing common intention to establish some manifestation or disclosure by words, conduct or outward expression of the accord which the subsequent instrument fails to express. Such an external (or objective) manifestation of intention although sufficient, is not necessary provided that the party seeking rectification has proved that both parties had the necessary common intention. However, the learned author suggests that in view of the requirement that the party seeking rectification to adduce clear and convincing evidence of the required common intention, lack of any outward manifestation of it may well signify that the party seeking rectification will not be able to discharge the relevant onus of proof. The proposition that there is a requirement for an outward expression of intention was rejected by L Bromley QC in his article ‘Rectification in Equity’.11 Bromley’s thesis was that although the presence or absence of an outward expression of accord may well go to whether the burden of proof can be discharged, it was not per se a requirement of rectification: rather, because the actual correction of instruments by rectification was only one of the ways in which the Court of Chancery acted in matters of conscience, what was required to be ascertained was the parties’ subjective or real or true intention. Thus … David Wright12 … refers with approval to Bromley’s suggestion that there is no need for an outward (or objective) expression of intention and that the relevant consideration is the subjective intention of the parties

given that the ancient equitable remedy of rectification is an application of the maxim that ‘equity looks to the intent, rather than to the form’. The lack of any need to establish some outward expression of accord was confirmed by Clarke J in the NSW Medical Defence Union case13 and by Gummow J in Elders Trustee and Executor Co Ltd v E G Reeves Pty Ltd.14 Therefore, it is the need to establish the subjective common intention of the parties which is critical, especially where the parties’ dealings prior to the execution of the instrument sought to be rectified are inconclusive. In any event, no basis exists in any of the authorities to which I have referred which suggests that the subjective intention of the parties is irrelevant, as Ryledar submitted. In Commissioner of Stamp Duties (NSW) v Carlenka,15 Mahoney AP stated that in the context of rectification the term ‘intention’ referred to that which was subjectively seen and intended to be effected by the relevant document. Such an approach is consistent … with the following observation of Pearce LJ in Earl v Hector Whaling Ltd: ‘It is a question of fact and degree what weight of evidence is needed to overcome [the] inherent probability, and to establish that, the parties did not mean what they wrote’.16 … [page 828] It follows from the foregoing that first, the common intention which must be established by clear and convincing proof to justify rectification must be the actual or true common intention of the parties. Second, evidence of that intention may be ascertained not only from the external or outward expressions of the parties manifested by their objective words or conduct but also from evidence of their subjective states of mind. Third, where, for instance, the correspondence between and/or conduct of the parties establishes a positive lack of an ‘objective’ common intention, then that evidence must be taken in conjunction with the evidence (if any) of their subjective states of mind to determine whether the necessary common intention has been established. In the example posited, that would be highly unlikely. Fourth, in Westland Savings Bank v Hancock17 it was held by Tipping J that

a party subsequently acting as if the instrument stood in the form into which it is sought to be rectified was strong evidence of that party’s intention at the time to execute the instrument in its rectified form. Such conduct is obviously of significance but, depending on other evidence, if any, is not necessarily conclusive although in the absence of any such evidence it may be. Fifth, it follows that where the correspondence and/or conduct positively establishes the necessary common intention, then assertions by the party opposing rectification of his or her subjective state of mind which is inconsistent with that party’s outward manifestation of his or her intention, being unexpressed and uncommunicated, is unlikely to trump his or her expressed intention. But this is because that party is unlikely to be believed. Sixth, where as in the present case, the outward expression of the parties’ common intention is at best inconclusive, then establishing that the subjective states of mind of the parties evinces the relevant common intention becomes critical if the necessary standard of proof to support an order for rectification is to be achieved.

Campbell JA Rectification and intention The first [additional remark] is Mr Rayment’s submission that it is possible, for the purpose of deciding whether to grant rectification, to determine the common intention of the parties objectively, and ignore any inconsistent evidence which established that, subjectively speaking, no such common intention was held. That submission runs counter to fundamental principle about the basis on which rectification of contracts is granted. It is now clearly established that what is necessary for rectification of a document is a common intention of the parties that continues to the time of execution of the document in question, but that an antecedent concluded contract is not needed. It is not sufficient to show that a written instrument does not represent the common intention of the parties — as well, it must be shown what their common intention was.18

[page 829] As well, it is commonplace that the task of the court in deciding whether a contract has been entered, and in construction of contracts, is to ascertain the common intention of the parties. Thus, both for the purpose of deciding whether a contract has been entered and construing it, and for the purpose of deciding whether to grant rectification of a contract already entered, a court seeks to ascertain the common intention of the parties to the contract. However, the use of the single expression ‘common intention’ masks two quite different concepts — what counts as a ‘common intention’ for one of these purposes is significantly different to what counts as a ‘common intention’ for the other of these purposes.

The type of intention relevant to contract formation and construction For the purpose of deciding whether a contract has been entered, or what construction it bears, the common intention that the court seeks to ascertain is what is sometimes called the ‘objective intention’ of the parties. That 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 had of the surrounding circumstances, would conclude that the parties had, concerning the subject matter of the alleged contract. There is also authoritative recognition that a factor to be taken into account in deciding whether a contract has been entered and if so what are its terms is ‘the purpose and object of the transaction’.19 In Pacific Carriers Ltd v BNP Paribas,20 the joint judgment of Gleeson CJ, Gummow J, Hayne J, Callinan J and Heydon J recognised the appropriateness of taking into account the purpose and object of the transaction, and continued: In Codelfa Constructions Pty Ltd v State Rail Authority of NSW,21 Mason J set out with evident approval the statement by Lord Wilberforce in Reardon Smith Line Ltd v Hansen-Tangen: 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.22 But the purpose and object of the transaction is itself ascertained objectively — it is ascertained by considering what a reasonable observer, in the situation of the parties, would conclude was the purpose and object of the transaction. In Prenn v Simmonds, Lord Wilberforce noted that Lord Blackburn’s judgment in River Wear Commissioners v Adamson23 had said that the task involved in construction required one to: ‘… 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’.24 (Emphasis added). [page 830] Lord Wilberforce also said: ‘the commercial, or business object, of the transaction, objectively ascertained, may be a surrounding fact’ (emphasis added), and, ‘… evidence of negotiations, or of the parties’ intentions … ought not to be received, and evidence should be restricted to evidence of the factual background known to the parties at or before the date of the contract, including evidence of the “genesis” and objectively the “aim” of the transaction’.25 (Emphasis added). There are some statements to the effect that there can be some exceptional cases where the subjective intention of the parties can be taken into account in deciding whether a contract has been entered or not, in situations where the parties were playacting, or ‘joking, or doing or saying anything that was intended to be taken other than at face value’.26 These are not, it seems to me, a real exception to the objective theory of contract. Rather, a subjective intention not to enter a contract comes to be taken into account, in situations like those of playacting or joking, because there is some form of communication between the parties, or context, such that a reasonable person would realise that the words were not intended to be taken at face value. Similarly, a subjective intention to use words with some meaning other than the meaning that an ordinary hearer of the words would put on

them, if the hearer were not in the specific context in which the words were spoken, comes to be taken into account, in deciding what are the terms of the contract, only because there is some form of communication between the parties, or context, such that a reasonable person would realise that the more usual meaning of the words was not intended. But a subjective intention to use words with some meaning other than their usual meaning, 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 in which the terms are accorded the meaning that a reasonable observer would take them to have. Similarly, 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. This is, it seems to me, an application of the objective theory of contract, not an exception to it.

The type of intention relevant to rectification By contrast, the type of intention that is relevant to rectification of a contract is the subjective intention — sometimes called the actual intention — of the parties. In Codelfa Construction Pty Ltd v State Rail Authority of New South Wales, Mason J said: The implication of a term is to be compared, and at the same time contrasted, with rectification of the contract. In each case the problem is caused by a deficiency in the [page 831] expression of the consensual agreement. A term which should have been included has been omitted. The difference is that with

rectification the term which has been omitted and should have been included was actually agreed upon; with implication the term is one which it is presumed that the parties would have agreed upon had they turned their minds to it — it is not a term that they have actually agreed upon. Thus, in the case of the implied term the deficiency in the expression of the consensual agreement is caused by the failure of the parties to direct their minds to a particular eventuality and to make explicit provision for it. Rectification ensures that the contract gives effect to the parties’ actual intention; the implication of a term is designed to give effect to the parties’ presumed intention.27 (Emphasis added).

Parol evidence admissible One way in which it can be seen that it is subjective intention that matters for rectification, concerns the evidence admissible in a rectification suit. Notwithstanding that the contract that it is sought to rectify is in writing, and notwithstanding the common law rule that parol evidence is not admissible to contradict a written agreement, parol evidence is receivable, in an action seeking rectification, to establish what was the intention of each of the parties to the contract.28 It is also possible to have evidence from the draftsperson of the document stating what his or her instructions were, and that particular words were included in the document by mistake. Lord Hardwicke explained why parol evidence was admissible in this way in Baker v Paine: ‘How can a mistake in an agreement, be proved but by parol evidence? It is not read to contradict the face of the agreement which the court would not allow, but to prove a mistake therein, which cannot otherwise be proved …’.29 Not only is parol evidence from the parties admissible to prove their intention, it is of considerable importance. In Fowler v Fowler,30 Lord Chelmsford LC said: Upon the question of rectifying a deed, the denial of one of the parties, that it is contrary to his intention, ought to have considerable weight. Lord Thurlow, in Irnham v Child says, ‘The difficulty of proving that there has been a mistake in a deed is so

great, that there is no instance of its prevailing against a party insisting that there was no mistake’.31 And Lord Eldon, in Marquis of Townshend v Stangroom, after observing that Lord Thurlow seems to say that the proof must satisfy the Court what was the concurrent intention of all the parties, adds, ‘And it must never be forgotten to what extent the Defendant, one of the parties, admits or denies the intention.’32 [page 832]

Outward expression of accord There is ongoing debate about whether it is necessary for there to be an ‘outward expression of accord’ before rectification can be granted. That debate is noted (but not resolved — ‘it may not be necessary to show that the accord found outward expression. …’ (Emphasis added)) in Pukallus v Cameron.33 That debate stems from the decision of the English Court of Appeal in Joscelyne v Nissen. Russell LJ,34 speaking for the Court, said … that an outward expression of accord was a requirement for rectification. In Joscelyne v Nissen, the parties had made their intentions clear to each other before signing the document in question, and the sole point at issue was whether it was necessary for there to be an antecedent concluded contract before rectification could be granted, so those remarks were obiter. The only explanation for them contained in the judgment is that closely similar language was used35 … to explain the decision in Frederick E Rose (London) Ltd v William H Pim Junior & Co Ltd.36 [This] was a case where parties had to all outward appearances entered an oral contract for the sale and purchase of horsebeans, then had accurately recorded that oral contract in writing. Each thought that ‘horsebeans’ was the same as ‘feveroles’, because a representative of the defendant had misinformed a representative of the plaintiff that that was the case. In fact ‘feveroles’ were a particular type of horsebeans, more valuable than the type of horsebeans that were delivered in purported performance of the contract. It was held that no rectification was available in those circumstances. Joscelyne v Nissen described Frederick E Rose (London) Ltd v William H Pim Jnr & Co Ltd as:

… a case in which there was nothing that could be described as an outward expression between the parties of an accord on what was to be involved in a term of the proposed agreement. … The decision … does not assert or reinstate the view that an antecedent complete concluded contract is required for rectification: it only shows that prior accord on a term or the meaning of a phrase to be used must have been outwardly expressed or communicated between the parties.37 That explanation of [the Frederick E Rose case] is puzzling — in [that case] there had been communication between the negotiating parties of the incorrect information that feveroles were the same as horsebeans. … Caution is needed in evaluating the case law relating to whether or not an outward expression of accord is needed. That is because it is not clear how much (or how little) is involved in an assertion, or denial, of the need for an ‘outward expression of accord’. It is not clear just what the phrase means. One possibility is that the parties have said ‘we agree’, or something similar, or performed an act like shaking hands or opening a bottle of champagne that is commonly [page 833] recognised as an indication of a consensus having been reached. Another possibility is that each of the parties has in some fashion stated (though not to each other) his or her belief that an accord has been reached. Another is that the expression should be taken as performing the work that, in its context in Joscelyne v Nissen, it was designed to perform, namely of indicating that identical subjective intentions, of parties involved in a contractual negotiation, to use a word with a meaning different to its actual meaning is not enough to give rise to rectification unless those subjective intentions of the negotiators have not only become known to each other, but as well they have in some way stated that they propose to use the word with a meaning different to its actual meaning. There is no point in multiplying examples. In my view, when the fundamental requirement for granting rectification is

a continuing common intention of the parties, it is of more assistance to concentrate on what is needed before an intention of the parties to a negotiation counts as a common intention. In my view, when that intention relates to the terms upon which they will contract with each other, it is still necessary for them to know enough of each other’s intentions for it to be said that there is a common intention. They might come to know of each other’s intentions in this way through those intentions being directly stated, or they might come to know of them through the various other means by which one person’s intention can become known to another person. Those means can sometimes involve a process of conscious and deliberate inference. Those means can sometimes involve simply perceiving a gestalt in a series of events. Those means can depend to some extent on the people involved sharing a common understanding of how particular bodies of knowledge or markets or social institutions they are operating in work — the experienced surgeon, or the experienced chess player, can sometimes see what another surgeon, or chess player, is seeking to do, in a way that an inexperienced person cannot. What matters for present purposes is that for a negotiating party to perform actions or say words from which the other party can gather his or her intention is itself a form of communication. Negotiation of any contract takes place in a context in which various facts are known or assumed by the negotiating parties. Sometimes, for example, if a contract is negotiated in a context where there are well understood business practices and conventions, and nothing is said about those practices and conventions not applying, it can be legitimate to conclude that both parties to the contract intended to act in accordance with those practices and conventions, even if they did not expressly communicate to each other that they intended to act in accordance with those practices and conventions. This view of what is needed before an intention is a common intention, accords, it seems to me, with the Australian case law since Joscelyne. …

Assistance from the rationale for rectification That the common intention must be in some manner disclosed is also consistent with the rationale on which rectification is granted. In Simpson v Vaughan, Lord Hardwicke saw the justification for granting

rectification as lying in mistake. He rectified a bond binding two people, that had not been stated to bind them severally, saying: Now here is a reasonable presumption that this bond was either through fraud, or for want of skill, made a joint, instead of a joint and several bond; for Baker, one of the obligors [page 834] who filled it up, is only a tradesman, and intirely unacquainted with the common form of bonds, where money is lent to two persons; but I do not think it was a fraud in Baker, but merely a mistake, and this is a head of equity on which the Court always relieves.38 Simonds J, in Crane v Hegeman-Harris Co Inc … also identified the rationale of rectification as lying in mistake, saying: … in order that this Court may exercise its jurisdiction to rectify a written instrument it is not necessary to find a concluded and binding contract between the parties antecedent to the agreement which it is sought to rectify … it is sufficient if you find a common continuing intention in regard to a particular provision or aspect of the agreement. If you find that in regard to a particular point the parties were in agreement up to the moment when they executed their formal instrument, and the formal instrument does not conform with that common agreement, then this court has jurisdiction to rectify although it may be that there was, until the formal instrument was executed, no concluded and binding contract between the parties. … if it were not so, it would be a strange thing, for the result would be that two parties binding themselves by a mistake to which each had equally contributed, by an instrument which did not express their real intentions, would yet be bound by it.39 The judgment of Simonds J in that case was endorsed by the Court of Appeal in England, and part of the passage that I have just quoted (from ‘if it were not so’ onwards) was quoted by Rich J, Dixon J and Williams J in

Slee v Warke.40 While Simonds J’s account is correct as far as it goes, it points to only one aspect of the problem that rectification aims to remedy. It does not go on to identify why it is that mistake ought result in a court administering equitable jurisdiction ordering rectification, and does not explain why granting rectification of the contract, rather than some other remedy such as rescission is the appropriate response to the problem. A fuller account of the rationale for the granting of a remedy of rectification is given in Story, Commentaries on Equity Jurisprudence as Administered in England and America. The author started by considering how the principles upon which equity granted rectification compared with the principle of the common law under which parol evidence was not admissible to vary or add to written contracts, and continued: The same principle lies at the foundation of each class of decisions, that is to say, the desire to suppress frauds and promote general good faith and confidence in the formation of contracts. The danger of setting aside the solemn engagements of parties when reduced to writing, by the introduction of parol evidence substituting other material terms and stipulations, is sufficiently obvious. But what shall be said where those terms and stipulations are suppressed or omitted by fraud or imposition? Shall the guilty party be allowed to avail himself of such a triumph over innocence and credulity to accomplish his [page 835] own base designs? That would be to allow a rule introduced to suppress fraud to be the most effectual promotion and encouragement of it. And hence Courts of Equity have not hesitated to entertain jurisdiction to reform all contracts where a fraudulent suppression, omission, or insertion of a material stipulation exists, notwithstanding to some extent it breaks in upon the uniformity of the rule as to the exclusion of parol evidence to vary or control contracts; wisely deeming such cases to be a proper exception to the rule, and proving its general soundness.

It is upon the same ground that equity interferes in cases of written agreements where there has been an innocent omission or insertion of a material stipulation contrary to the intention of both parties and under the mutual mistake. To allow it to prevail in such a case would be to work a surprise, or fraud, upon both parties; and it certainly upon the one who is the sufferer. As much injustice would to the full be done under such circumstances as would be done by a positive fraud or an inevitable accident. A Court of Equity would be of little value if it could suppress only positive frauds, and leave mutual mistakes, innocently made, to work intolerable mischiefs contrary to the intention of parties. It would be to allow an act originating in innocence to operate ultimately as a fraud, by enabling the party who receives the benefit of the mistake to resist the claims of justice under the shelter of a rule framed to promote it. In a practical view there would be as much mischief done by refusing relief in such cases as there would be introduced by allowing parol evidence in all cases to vary written contracts.41 In other words, the type of unconscientiousness that is prevented by the availability of the equity to rectify a written contract is that that would occur if a party to the contract sought the benefit of those legal rights he would have if the document contained the agreement that the parties had made, when the document does not accurately state the common intention that the parties had. … It is because the avoidance of unconscientious taking advantage of the common mistake is the rationale of the remedy that it does not matter that the mistaken drafting of the agreement was carried out by the plaintiff, or that the plaintiff is a legal practitioner.42 That the rationale for granting rectification is to avoid unconscientious departure from the common intention, assists in deciding what is required for there to be a ‘common intention’. If two negotiating parties each had a particular intention about the agreement they would enter, and their intentions were identical, but that intention was disclosed by neither of them, and they later entered a document that did not accord with that intention, what would be the injustice or unconscientiousness in either of them enforcing the document according to its terms?

Conclusion For the reasons I have given, the common intention that is required to grant rectification is subjective. Even though there is a requirement for the intention to be disclosed before it can count as a common intention, that disclosure need not be by words that say in substance ‘this [page 836] is my intention’. The need for disclosure fills the role of being a limitation on the types of subjective intention that can be enforced through the remedy of rectification, or a limitation on the circumstances in which a subjective intention must exist before it can be enforced through the remedy of rectification. It still remains that proof of the subjective intention of the parties to the contract is fundamental to the grant of rectification. Hence it is not possible to ignore a factual finding by the trial judge, to the effect that he was not satisfied that [Euphoric] intended the rebate to apply in relation to deliveries to any location within New South Wales outside the Sydney Metro locations, and look only to the correspondence for the purpose of finding a ‘common intention’.

Comment 34.2.1 See Radan, Gooley, and Vickovich at 34.14–34.29. 34.2.2 For a discussion of the policy justifications for the objective approach to establishing the mistaken common intention, see Daventry District Council v Daventry & District Housing Ltd [2012] 1 WLR 1333 at 1355–6. For a discussion of rectification for common mistake in the wake of the Daventry case, see D McLauchlan, ‘Refining Rectification’ (2014) 130 Law Quarterly Review 83.

RECTIFICATION FOR ILLEGALITY

34.3C

CA & CA Ballan Pty Ltd v Oliver Hume (Australia) Pty Ltd [2017] VSCA 11

Court: Court of Appeal of the Supreme Court of Victoria Facts: Oliver Hume (Australia) Pty Ltd and a related company entered into sales agreements as real estate agents for property developers CA & CA Ballan Pty Ltd and two other companies. Each of the developers paid certain commissions to the agents pursuant to the agreements. Hume and the other agent sought further commission payments. The developers argued inter alia that the agents were not entitled to any commissions because the sales agreements did not comply with s 49A(1) of the Estate Agents Act 1980, which makes it an offence for an estate agent to seek payment if its written appointment does not contain certain information. The developers alleged that the sales agreements did not include the form of rebate statement required by the Act and that some of the sales authorities did not include the dollar amount for commission as required by s 49A(1) of the Act. Section 50 of the Act prevented an agent from recovering commission if s 49A had been contravened. The developers counterclaimed in respect of the commissions they had already paid. The estate agents’ amended pleadings sought relief by way of rectification of the sales authorities to the extent that the agreements did not include the information required under s 49A(1). [page 837] Issue: The issue to be decided was whether the sales agreements could properly be the subject of a rectification order where the agreements were in contravention of statutory requirements. Decision: The Court of Appeal of the Supreme Court of Victoria (Redlich, Tate, and Ferguson JJA) unanimously held that noncompliance with a regulatory scheme is not necessarily a barrier to rectification. In this case the nature and extent of the contravention was a relevant consideration.

Extract: The extracts from the joint judgment of the court outline the relevant principles relating to the granting of a rectification order in the context of a contract tainted by illegality.

Redlich, Tate, and Ferguson JJA [68] [A] basis upon which the Developers say that rectification is not available is in relation to the principles concerning illegality. In Nelson v Nelson43 a woman had transferred a property into the names of her son and daughter. The reason this was done was to enable the mother to obtain a government subsidy to assist her with the purchase of another house. The subsidy was not available if she owned or had a financial benefit in another house. The intention was that the mother would retain the beneficial interest in the transferred property. It was later sold. There was a falling out between mother and daughter. There was a dispute as to who was entitled to the proceeds of sale. The mother and son sought a declaration that the proceeds were held on trust by the children for their mother. The High Court held that the declaration should be granted on the proviso that the benefit wrongly obtained on the purchase of the second property should be repaid to the Commonwealth. McHugh J stated: The doctrine of illegality expounded in Holman44 was formulated in a society that was vastly different from that which exists today. It was a society that was much less regulated. With the rapid expansion of regulation, it is undeniable that the legal environment in which the doctrine of illegality operates has changed. The underlying policy of Holman is still valid today — the courts must not condone or assist a breach of statute, nor must they help to frustrate the operation of a statute. … However, the Holman rule, stated in the bald dictum: ‘No court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act’ is too extreme and inflexible to represent sound legal policy in the late twentieth century even when account is taken of the recognised exceptions to this dictum.45 One of the most significant reasons for adopting a less rigid approach to illegality than the bald dictum in Holman or, for that matter, the

Bowmakers46 rule adopted in Tinsley [v Milligan47] is that statutory illegality can arise in a number of different ways. First, the statute may directly [page 838] prohibit the contract or trust. Second, while the statute may not prohibit making the contract or trust, it may prohibit the doing of some particular act that is essential for carrying it out. Third, the statute may not expressly prohibit the contract or trust but the contract or trust may be associated with or made in furtherance of a purpose of frustrating the operation of the statute. Fourth, the statute may make unlawful the manner in which an otherwise lawful contract or trust is carried out. It would be surprising if sound legal policy required each of these forms of illegality to be treated in the same way. There is, for example, a vast difference between the performance of a contract for carriage of goods by ship that is overloaded in breach of the law and the making of a contract for the carriage of goods where the making of the contract is specifically prohibited. [69] McHugh J observed that refusing to grant equitable relief because of an illegal transaction imposes a sanction on one of the parties when the other party will almost always be a willing participant in the illegality. Consequently, save where the statute made rights arising out of a particular type of transaction unenforceable in all circumstances, the court should only refuse relief if two conditions are met. The first relates to proportionality. In this regard, McHugh J said: It is not in accord with contemporaneous notions of justice that the penalty for breaching a law or frustrating its policy should be disproportionate to the seriousness of the breach. The seriousness of the illegality must be judged by reference to the statute whose terms or policy is contravened. It cannot be assessed in a vacuum. The statute must always be the reference point for determining the seriousness of the illegality.48 [70] Second, the civil penalty must not create a situation where there is double punishment. His Honour elaborated:

In most cases, the statute will provide some guidance, express or inferred, as to the policy of the legislature in respect of a transaction that contravenes the statute or its purpose. It is this policy that must guide the courts in determining, consistent with their duty not to condone or encourage breaches of the statute, what the consequences of the illegality will be. Thus, the statute may disclose an intention, explicitly or implicitly, that a transaction contrary to its terms or its policy should be unenforceable. On the other hand, the statute may inferentially disclose an intention that the only sanctions for breach of the statute or its policy are to be those specifically provided for in the legislation.49 [71] In Equuscorp Pty Ltd v Haxton50 loan agreements, which were part of failed tax driven schemes, were held to be unenforceable because they were made in furtherance of an illegal purpose. One question was whether the amounts advanced under the loan agreements could be recovered as money had and received. French CJ, Kiefel and Crennan JJ observed: The outcome of a restitutionary claim for benefits received under a contract which is unenforceable for illegality, will depend upon whether it would be unjust for the recipient of a benefit under the contract to retain that benefit. There is no one-size-fits-all answer [page 839] to the question of recoverability. As with the question of recoverability under a contract affected by illegality the outcome of the claim will depend upon the scope and purpose of the relevant statute. The central policy consideration at stake … is the coherence of the law. In that context it will be relevant that the statutory purpose is protective of a class of persons from whom the claimant seeks recovery. Also relevant will be the position of the claimant and whether it is an innocent party or involved in the illegality.51 [72] Their Honours concluded that in the case before them restitution was not available. They stated:

Had a right to claim restitution for money had and received been available to [the lender] in this case, it would have been able to recover by such claims what the policy of the law denied it in respect of the loan agreements. [The lender] was not an arms length financier. It was part of the closely related group of companies that were involved in the promotion of the schemes. The loan agreements were an integral part of the schemes and in so far as they involved the issue of invitations and offers to investors to take up prescribed interests without the benefit of the protections required by the Code, furthered that illegal purpose … while not essential to the investments, the loans made the investments more attractive. Recovery from the investors would have been recovery from persons whose protection was the object of the statutory scheme. The [borrowers] were not in pari delicto with [the lender]. The failure of consideration invoked … was the product of [the lender’s] own conduct in offering the loan agreements in furtherance of an illegal purpose. This is a clear case in which the coherence of the law, and the avoidance of stultification of the statutory purpose by the common law, lead to the conclusion that [the lender] did not have a right to claim recovery of money advanced under the loan agreements as money had and received.52 … [74] Most recently, in Patel v Mirza,53 the United Kingdom Supreme Court considered the doctrine of illegality. There, Patel paid Mirza £620,000 to bet on the movement of Royal Bank of Scotland shares on the basis of inside information. The agreement was contrary to the statutory prohibition on insider dealing. The inside information did not eventuate and Patel sought the return of the money. Having considered the law in Australia (as stated in Nelson v Nelson) Canada and the USA, Lord Toulson JSC observed that there are two broad policy reasons for the common law doctrine of illegality as a defence to a civil claim: first, that a person should not be allowed to profit from their own wrongdoing and second, the law ‘should be coherent and not self-defeating, condoning illegality by giving with the left hand what it takes with the right hand.’54 He stated: The essential rationale of the illegality doctrine is that it would be contrary to the public interest to enforce a claim if to do so would be

harmful to the integrity of the legal system (or, possibly, certain aspects of public morality, the boundaries of which have never been [page 840] made entirely clear and which do not arise for consideration in this case). In assessing whether the public interest would be harmed in that way, it is necessary (a) to consider the underlying purpose of the prohibition which has been transgressed and whether that purpose will be enhanced by denial of the claim, (b) to consider any other relevant public policy on which the denial of the claim may have an impact and (c) to consider whether denial of the claim would be a proportionate response to the illegality, bearing in mind that punishment is a matter for the criminal courts. Within that framework, various factors may be relevant, but it would be a mistake to suggest that the court is free to decide a case in an undisciplined way. The public interest is best served by a principled and transparent assessment of the considerations identified, rather than by the application of a formal approach capable of producing results which may appear arbitrary, unjust or disproportionate.55 [75] Leaving to one side for the moment the issue of illegality and incompatibility with regulatory schemes, what is clear from the cases concerning rectification is that the precise scope of the intention of the parties is critical to whether the remedy is available in the form sought. If the rectified document would not reflect the common intention of the parties, then the remedy will not be granted. Looked at in this way, the results in the different cases can generally be reconciled with one another. So, for example: (a) in Re Butlin’s Settlement Trusts56 the intention was that the majority of trustees could in all circumstances make decisions as to distributions but the deed did not reflect that intention. Rectification was available to make the deed conform with that intention. (b) in AMP (UK) plc v Barker57 the intention was only to benefit those forced to leave the pension scheme because of incapacity. The rectified

deed reflected that intention. (c) in Carlenka the intention was the company would only be a possible recipient of income of the trust and that it would not acquire any interest in the capital of the trust. The rectified deed implemented that intention. (d) in Cape Schanck58 the parties’ intention was that determination of the sewerage charges would be determined by the tribunal. It was impossible to rectify the agreement to implement that intention because the tribunal did not have jurisdiction to determine that issue. (e) in Frederick E Rose (London) Ltd v William H Pim Jnr & Co Ltd,59 the parties intended to buy and sell horsebeans. That is what the contract provided for and consequently, there was no need for rectification as the written document corresponded with the parties’ intention. (f) in Ryledar Pty Ltd v Euphoric Pty Ltd60 the court was not satisfied that the intention of the parties went beyond what was in the written agreement. The court was not satisfied that [page 841]

(j)

the parties intended to provide for a rebate to apply in respect of all areas outside Sydney (rather than just the three specific areas nominated in the contract). Consequently, rectification was not available. … in Francis v F Berndes Ltd61 and Oun v Ahmad62 the intention was as contained in the agreement for the sale of the property. There was no reference to any intention to comply with the legislation. Consequently, rectification was not available. …

The judge’s reasons [76] As noted above, to some extent events have overtaken the orders made by the judge. Nevertheless, the judge’s reasons for making the orders remain relevant on the appeal insofar as her Honour analysed the issue of whether rectification might be available if there was a breach of s 49A of the Act. In this regard, her Honour first considered the question when dealing

with an application by one of the Agents to file and serve an amended statement of claim in the proceeding it brought against Land Source. Her Honour observed that the Act is intended to have a strict operation and that harsh consequences may follow from a failure to comply with its terms. Her Honour stated: The authorities demonstrate that rectification can be distinguished from other equitable remedies which operate after the fact. For example, estoppel prevents loss suffered as a result of a party relying on an assumption. Likewise, unjust enrichment requires a party who has unjustly profited at another person’s expense to make restitution and similarly, quantum meruit requires payment of the reasonable value of services rendered. These remedies prevent a party from suffering loss but, unlike rectification, do not operate retrospectively. Equity, by operation of the doctrine of rectification, allows the parties to have the agreement they always intended. It does not come to the aid of a party to reconstruct their agreement to achieve a desired result or compliance with legislation that no party turned their mind to at the time. But, it allows the law to properly rest on the agreement that the parties always intended where there is disconformity with the written instrument.63 [77] The judge took the view that the Act ought to apply to the ‘final form of agreement, or instrument, between parties’ and observed that through the remedy of rectification, equity would come to the aid of parties ‘if there is a “disconformity” between their agreement as written and their common intention’. The judge stated: In appropriate circumstances, rectification should, in my opinion, be capable of being called in aid even in the face of legislation with a clear social policy objective — so long as there is nothing on a plain reading of the statute that prohibits it.64 … [page 842]

Proposed grounds of appeal and the question reserved for the Court

of Appeal [85] There are three proposed grounds of appeal. First, that the judge erred in holding that the respondent’s rectification pleading disclosed a viable cause of action. Second, that the judge erred in holding that, in the face of non-compliance with the requirements of s 49A(1) of the Act, rectification of the sales authorities could be ordered to avoid the consequences of such non-compliance under s 50(1). Finally, that the judge erred in holding that rectification may be available to correct a mistake as to the collateral legal consequences of the instrument, namely that the wording of the ESAs resulted in them complying with the requirements of s 49A(1) of the Act. …

Is rectification of the sales agreements incompatible with the statutory provisions? (Proposed grounds 1 and 2 and the question reserved under s 17B) [88] The Developers submit that rectification would be inconsistent with the statutory scheme and is therefore not available. They say that the disclosure requirements in the Act are of long standing, well known to estate agents, are there for the protection of the public and, importantly, are directed to an agent’s substantive entitlement to commission. So, they say, permitting rectification on grounds that an agent and its counterparty intended, but did not achieve, compliance with the Act would plainly be inconsistent with the operation, purpose and objectives of ss 49A(1) and 50(1). In particular, they point to: (a) the mandatory nature of the disclosures required and the explicit statement of the consequences of non-compliance; (b) the statutory purpose to ensure proper disclosure is made and to prevent recovery of commission where this does not occur; (c) the benefits conferred by the two sections being of a public character; (d) the prohibition on contracting out. [89] The Developers relied upon the authorities in which courts have refused to grant relief by way of estoppel or restitution. They say that rectification is in the same category even though it operates retrospectively. In this regard, they emphasise that the statutory provisions mandate

disclosure before the appointment of the agent which enables a consumer to negotiate the terms of an appointment. [90] As both a supporting and independent argument, the Developers rely upon the doctrine of illegality. They say that the rectification section of the pleading assumes that there has been a breach of the legislation such that offences have already been committed (the Agents having already been paid commission). The Developers submit that the granting of rectification in those circumstances would ‘fracture’ the civil and criminal law and therefore would not be granted. They suggest that it would be startling if retrospective relief could be granted to overcome and undo the commission of a strict liability offence, simply because the parties did not intend to commit the offence. [page 843] [91] The Agents submit that the [Exclusive Sales Authorities] [ESAs] are not unlawful or illegal by reason of any failure to meet the disclosure requirements with s 97 expressly preserving the validity and integrity of the ESAs. The Agents contend that the Developers have conflated two separate concepts: first, the rectification of an instrument that remains valid and lawful; and second, the prohibition of specified conduct that may be carried out pursuant to the terms of an otherwise valid and legal contract. So they argue, equity can intervene to rectify the ESAs so that they conform with the common intention of the parties without the Court sanctioning illegal conduct or nullifying the statutory provisions that create an offence. [92] The Agents also rely on the fact that rectification has retrospective operation. [93] It may be accepted that the statute places prime importance on disclosure by agents before they may claim commission. The required disclosures are explicitly stated in the legislation. Failure to comply with the legislative requirements may have both civil and criminal consequences. Contravention may lead to harsh results but that is a consequence of the legislation that must be accepted. In this regard, the identity, sophistication

and capability of vendors to look out for themselves, does not lessen the statutory disclosure obligations imposed on agents. [94] Nevertheless, in our opinion, when considering whether rectification might be granted, one should not ignore the totality of the circumstances. In this regard, the operation of the statute (both civil and criminal aspects), its objectives and purpose are clearly relevant. But so too the nature and extent of any contravention, the extent of the participation in any contravention by a vendor and the attributes of the vendor may all be relevant to a greater or lesser extent. If the written document does not reflect the common intention of the parties, then equity may intervene once all of the circumstances are considered, including, as we have said, the statutory context and purpose, to correct the parties’ mistake. We do not accept the Developers’ argument, which was put in absolute terms, that rectification could never be available if a sales authority on its face did not comply with the Act. The purpose of the statute may not be defeated or undermined by an order for rectification (having as it does retrospective effect) if the written document does not reflect the parties’ true agreement. It will depend upon the totality of the circumstances. [95] Turning then to the Developers’ separate argument based on illegality, we note that they accepted that the ESAs are not illegal and were not entered into for an illegal purpose. As McHugh J pointed out in Nelson v Nelson, proportionality is a relevant factor. In circumstances where the infringement is minor, it may not be a proportionate response to deny an agent its commission, particularly if the parties did not intend to commit the offence and their contract could be rectified so that (at least as between them) it would be treated as if there never had been any contravening conduct. To deny relief may well result in the double punishment that McHugh J cautioned against imposing. [96] Here then, the nature, significance and impact of the alleged contravention would have to be considered. In part, at least, evidence would be needed. On one view, at least, the alleged contraventions are minor; for example, the failure to give a dollar amount for estimated commission when the percentage of estimated commission has been specified. It would seem

[page 844] to be a simple matter for a developer (who is no doubt familiar with the calculation of costs and commission) to work out the dollar amount of commission for each lot. With respect to the July 2009 ESA, the calculation would be very straightforward as the dollar amount of commission is uniform for all but two lots and the car parks. With respect to the other ESAs the calculations would be minimal. That is not to say that there may not be a contravention but rather to underline the impact of the infringement which is likely to be relevant from an illegality point of view to the availability of rectification as a remedy. [97] It is not sufficiently clear (in the sense used by the High Court in Dey and General Steel)65 that the grant of rectification in the circumstances that are pleaded would be at odds with the coherence of the law such as would warrant striking out the claim now. The pleaded claim is not fanciful because of the legislative context in which the remedy is sought. [98] Having reached this conclusion, it would not be prudent to say more about the law of rectification and its application to the facts as pleaded. That is a matter for trial after evidence and submissions. It is also not necessary to consider the Developers’ notice of contention and reliance on s 97 of the Act.

In any event, does the rectification claim fall outside the bounds of the remedy? (Proposed grounds 1 and 3 and the question reserved under s 17B) [99] The Developers submit that what the Agents seek is to rectify the ESAs to change the consequence of their failure to comply with the legislation. They submit that the ESAs do all that the parties intended to embody in their contract and reflect the transaction and arrangements that they wanted to enter into. Relying on Carlenka and other authorities, the Developers contend that rectification in these circumstances is not permissible. They say that each of the pleaded intentions in paragraph 7C of the [amended statement of claim] (a single price estimate would satisfy the legislative requirements; words would appear in the ESAs which would constitute compliance with the legislation; the Agents would not be

prohibited from suing for, recovering or retaining commission) clearly concerns an impermissible collateral and remote matter which could never found a claim of rectification. They contend that they all relate to secondary legal consequences, concerning only compliance by one party, the relevant Agent, with the regulatory regime. This is supported and emphasised, so they say, by the extent of the changes that the Agents seek to make to the ESAs. [100] The difficulty with these submissions is that they do not pay sufficient regard to the manner in which the common intention is pleaded. It is not pleaded as a common intention as to consequence. Rather, the pleaded intention specifies both the intention to comply with the legislative requirements and how it was intended that that would be achieved. The pleadings specifically identify the belief the parties had about the means by which the requirements of the Act would be satisfied, namely, the insertion of a single price estimate for the commission to be charged and the inclusion of the rebate statement appearing on the REIV form. As [page 845] noted above, the precise scope of the intention is all important. The pleaded intentions here are sufficiently analogous to those in Mayo v W & K Holdings (NSW) Pty Ltd (in liq),66 Wills v Gibbs67 and GE Capital Finance Australasia Pty Ltd v Federal Commissioner of Taxation68 to find that the pleaded claim is not fanciful. Based on the analysis set out above, those cases are not clearly inconsistent with binding authority on this Court, nor are they clearly distinguishable. Leaving aside the Agents’ arguments that the ESAs do not fall foul of the Act and looking solely at the rectification pleading, it is apparent that the rights of the parties would be affected by a decision as to the availability of rectification. If rectification were not ordered, then the Developers would not have to pay, notwithstanding their contractual obligation to do so. If the ESAs were rectified, then (all other things being equal) the Agents would be entitled to payment. Although viewed in one way the transaction between the parties would not be altered if the ESAs were rectified because the ESAs would provide for the same amount of commission and (absent the effect of the legislation) the words

and figures used would suggest an obligation to pay that amount. However, in a real and meaningful way the substance of their agreement (payment for services) vanishes without rectification. This may be contrasted to a situation where rectification would only affect the rights of one of the parties in terms of a fiscal benefit. For example, if an unrectified ESA attracted stamp duty payable by the Agents but a rectified ESA would not, either way the rights of the Developers would not be affected. In that example, the Developers would have to pay commission regardless and the agreement between the parties would be the same and would have the same financial consequences as between them. … [102] We do not consider that the amendments raise a claim that has no real prospect of success, in the sense of being fanciful. Within the context of that test, and bearing in mind the caution expressed by the High Court in General Steel and Dey (particularly Dixon J’s observations), we are not satisfied that the pleaded claim should be struck out on the basis that it would not survive a summary judgment application. Exercising caution, it is not clear that the claim falls outside the bounds of the circumstances in which rectification may be ordered. To prevent the Agents from making this claim at a pleadings stage, when to do so would result in them being deprived of the chance of retaining the money already paid to them and recovering further substantial sums of money, would be unjust. It should not be overlooked that what is sought is equitable relief. Whilst the law in relation to some equitable principles may be described as ‘settled,’ that does not mean that there is not room for further refinement and development. As such, potentially even more caution must be taken before striking out a pleading of the kind in question here. This is in contrast to situations (such as existed in General Steel and Dey) where the case will be won or lost dependent upon the interpretation and operation of a piece of legislation at a fixed point in time and where equity has no role to play. For the relevant dispute in a statutory interpretation case, the terms of the statute cannot alter. Later legislative amendments (unless made to have retrospective operation) will not change the law so far as the particular dispute is concerned.

[page 846]

Comment 34.3.1 See Radan, Gooley, and Vickovich at 34.1 and 34.26–34.28. 34.3.2 On the topic of statutory illegality see Radan, Gooley, and Vickovich Chapter 26.

RECTIFICATION FOR UNILATERAL MISTAKE 34.4C

George Wimpey UK Ltd v VI Construction Ltd [2005] EWCA Civ 77

Court: Court of Appeal in England Facts: Wimpey entered into a contract with VI Construction under which Wimpey agreed to purchase land from VI Construction for the purposes of residential development. The price of the land was to be determined by a complex mathematical formula. Wimpey’s representative in the negotiations made the mistake of omitting an element of the formula, which resulted in the deal being less advantageous to Wimpey. VI Construction knew of the omission of the element from the formula. Wimpey sought rectification of the contract setting out the formula for determining the price. Issue: The issue before the court was whether Wimpey was entitled to rectification based upon VI Construction’s knowledge of Wimpey’s mistake. Decision: The Court of Appeal (Peter Gibson and Sedley LJJ, Blackburne J) unanimously held that Wimpey was not entitled to the remedy of rectification. The court held that the mere fact that a mistake has been made, even a serious one, is an insufficient basis for a claim for rectification. One has to establish that the other party knew of the mistake in circumstances such as to make its conduct dishonest or unconscionable. Peter Gibson LJ and Blackburne J took the view that VI Construction, inexperienced in property development, was entitled to assume that Wimpey, a very

experienced property developer, knew what it was doing when omitting the particular element in the price formula, rendering Wimpey’s mistake a product of its own carelessness. Sedley LJ took a different approach, assessing VI Construction’s conduct from the perspective of honourable and reasonable behaviour in the context of an arm’s-length commercial negotiation and concluded that VI Construction had no legal or moral responsibility. Extract: The extracts below set out the principles applicable to rectification for unilateral mistake and the variable approaches of Peter Gibson LJ and Sedley LJ in the context of the facts of this case.

[page 847]

Peter Gibson LJ [36] The modern authorities on unilateral mistake commence with the decision of Pennycuick J in A Roberts & Co Ltd v Leicestershire County Council where he said: 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 a variation of that term in the knowledge that the first party believed the term to be included.69 [37] In Riverlate Properties Ltd v Paul this court … approved the principle stated in Roberts but commented: Whether there was in any particular case knowledge of the intention and mistake of the other party must be a question of fact to be decided upon the evidence. Basically it appears to us that it must be such as to involve the lessee in a degree of sharp practice.70 [38] The requirements of the jurisdiction to rectify for unilateral mistake were considered further in Thomas Bates Ltd v Wyndham’s (Lingerie) Ltd. That case concerned a claim for rectification of a rent review clause in a

lease. When executing the lease, the tenants’ officer, Mr Avon, noticed that the rent review clause in the lease drafted by the landlords was defective in not including a provision in default of agreement. The trial judge held that the conduct of Mr Avon, who had not given evidence, amounted to sharp practice. This court did not approve that stricture but found that the tenants knew of the omission and of the landlords’ mistake. Buckley LJ … suggested that the reference in Riverlate to ‘sharp practice’ might be obiter, and continued: In that case the lessee against whom the lessor sought to rectify a lease was held to have had no such knowledge as would have brought the doctrine into play. The reference to ‘sharp practice’ may thus be said to have been an obiter dictum. Undoubtedly I think in any such case the conduct of the defendant must be 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 on 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. For this doctrine — that is to say the doctrine of A Roberts v Leicestershire County Council — 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. [page 848] 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.71 I accept that as the authoritative statement of the requirements for rectification for unilateral mistake. [39] Before I leave that case, I should refer to the observations of Brightman LJ on the standard of proof, where he said: The standard of proof required in an action of rectification to establish the common intention of the parties is, in my view, the civil standard of balance of probability. But as the alleged common intention ex hypothesi contradicts the written instrument, convincing proof is required in order to counteract the cogent evidence of the parties’ intention displayed by the instrument itself. It is not, I think, the standard of proof which is high, so differing from the normal civil standard, but the evidential requirement needed to counteract the inherent probability that the written instrument truly represents the parties’ intention because it is a document signed by the parties. The standard of proof is no different in a case of so-called unilateral mistake such as the present.72 [40] In The Nai Genova73 rectification was unsuccessfully sought of an escalation clause in a charter-party which provided for a base figure in US dollars to be increased by reference to Italian inflation. The plaintiffs claimed that an accord had been reached that the base figure should be in lire rather than dollars, but that when the defendants prepared a draft charter-party, they put the base figure in dollars. Slade LJ … noted … that the effect of allowing rectification for unilateral mistake was to impose on the defendants a contract which, at the time of its execution, they did not intend to make. He reviewed the authorities and found it a significant feature that they all required actual knowledge by the defendant of the existence of the plaintiff’s mistake. He accepted that there could be a case of an implied misrepresentation that a proffered draft gave effect to an accord and of a resultant estoppel if it was intended or reasonably foreseeable that the representation would be relied on and if the representee relied on that representation. However, Slade LJ said … that on the facts those conditions

were not satisfied, as it had not been shown that the defendants intended or could have foreseen that the plaintiff would rely on any such representation when the defendants could have reasonably assumed that the plaintiffs would have read the escalation clause for themselves and would have noted any objection when discussing the clause with the defendants. Slade LJ said that the greater the degree of the carelessness in not detecting the error, the more unrealistic it became for the plaintiffs to assert that the reliance on the representation was foreseeable. He thought it significant that the plaintiff’s witnesses did not attempt to blame the defendants for their mistake. He was unpersuaded that there had been sharp practice by the defendants or that it would be inequitable to allow them to resist the claim for rectification. [page 849] [41] In Commission74 the primary question determined by this court was whether the parties had entered into a binding agreement whereby the claimant had granted the defendant a put option. This court held that they had not. However, it went on to consider whether, if wrong on that, the contract should be rectified on the ground of unilateral mistake. That was on the basis that the claimant mistakenly believed that there was no agreement to grant the put option, while the defendant knew of the mistake or its conduct was such that it was unconscionable to insist on the performance of the contract. The trial judge held that the claimant was not entitled to rectification because the defendant did not have actual knowledge of the mistake and only actual knowledge would do. [42] [In Commission] Stuart-Smith LJ expressed the view that actual knowledge was not always necessary and that a fraudulent misrepresentation, intended to mislead and succeeding in misleading, when coupled with suspicion of a mistake, would suffice to allow rectification to be granted.75 That was one of the passages which the judge [in this case] quoted. … The judge also quoted the following passage76 from Stuart-Smith LJ’s judgment: Did [the defendant] have actual knowledge of the mistake? The judge held not; they merely suspected it. [Counsel for the claimant] submits that the judge was in error and he should have found actual

knowledge. His attention was drawn to the analysis of various forms of knowledge made by Peter Gibson J in Baden v Société Générale pour Favoriser le Développement du Commerce et de l’Industrie en France SA77 and cited by Millett J in Agip (Africa) Ltd v Jackson:78 Knowledge may be proved affirmatively or inferred from circumstances. The various mental states which may be involved were analysed by Peter Gibson J in Baden’s case as comprising: (i) actual knowledge; (ii) wilfully shutting one’s eyes to the obvious; (iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make; (iv) knowledge of circumstances which would indicate the facts to an honest and reasonable man; (v) knowledge of circumstances which would put an honest and reasonable man on inquiry. According to Peter Gibson J, a person in categories (ii) or (iii) will be taken to have actual knowledge, while a person in categories (iv) or (v) has constructive notice only. I gratefully adopt the classification but would warn against over refinement or a too ready assumption that categories (iv) or (v) are necessarily cases of constructive notice only. The true distinction is between honesty and dishonesty. It is essentially a jury question. If a man does not draw the obvious inferences or make the obvious inquiries, the question is: why not? If it is because, however foolishly, he did not suspect wrongdoing or, having suspected it, had his suspicions allayed, however unreasonably, that is one thing. But if he did suspect wrongdoing yet failed to [page 850] make inquiries because ‘he did not want to know’ (category (ii)) or because he regarded it as ‘none of his business’ (category (iii)), that is quite another. Such conduct is dishonest, and those who are guilty of it cannot complain if, for the purpose of civil liability, they are treated as if they had actual knowledge.

[43] Stuart-Smith LJ then referred to the trial judge’s view that actual knowledge within category (i) was needed, but disagreed with that view, saying that categories (ii) and (iii) also constituted actual knowledge in law. He described the defendant’s conduct in raising a smokescreen about one matter other than the put option as ‘dishonest and intended to deceive’. He also found that there had been a fraudulent misrepresentation by the defendant. He therefore found the defendant’s conduct unconscionable and the circumstances such that equity required the contract to be rectified. … [45] Mr Fetherstonhaugh [on behalf of Wimpey] relies on Commission as holding that actual knowledge by the non-mistaken party of the mistaken party’s mistake is not a requisite of the jurisdiction to rectify for unilateral mistake. He relies on the views expressed in that case that knowledge in categories (ii) and (iii) suffices. But he criticizes as illogical the reasoning of Millett J in Agip (Africa) Ltd that knowledge in those categories involves dishonesty, at any rate to the extent that this court adopted that reasoning as applicable to what knowledge of the mistaken party’s mistake is needed for rectification. Why, he asks, if rectification can be ordered if the nonmistaken party has actual knowledge of the mistaken party’s mistake, but there is neither dishonesty nor sharp practice, should knowledge in categories (ii) and (iii), which is the equivalent in law of actual knowledge, involve dishonest behaviour for the purposes of rectification? I see force in that submission. However, Mr Fetherstonhaugh’s difficulty, as it seems to me, lies, first, in this court’s acceptance in Commission of the reasoning of Millett J in the context of rectification for unilateral mistake and this court’s application of that reasoning to a case of dishonest conduct, and, second, in the judge’s acceptance of the same approach … in finding dishonest conduct when concluding that VIC had knowledge (in categories (ii) and (iii)) of Wimpey’s mistake. I do not accept that it is open to Wimpey to rely on the judge’s finding … that VIC had such knowledge but to say that such knowledge was without dishonesty or sharp practice where it is plain that the judge’s remarks … were permeated by his finding of dishonesty, which, because of Commission, he thought was required. [46] In any event, I cannot see that Wimpey has discharged the onus on it of providing convincing proof that VIC did have knowledge in either of categories (ii) and (iii) of Wimpey’s mistake. These were arm’s length negotiations for the sale of property for residential development between,

on the one hand, VIC, with no relevant experience and, on the other, Wimpey with its vast experience. … [47] [I]n the light of all the circumstances, in my judgment, Wimpey has failed to provide convincing evidence that VIC shut its eyes to the obvious or wilfully and recklessly failed to do what an honest and reasonable person would have done in the circumstances, and it would not be inequitable to allow VIC to resist the claim for rectification. … [51] I recognise that the mistake has had serious consequences for Wimpey and brought a benefit to VIC to an extent which it did not foresee in putting forward the formula. But that [page 851] is not determinative of whether Wimpey can successfully invoke the exceptional jurisdiction to rectify for unilateral mistake. For the reasons given, I do not think it can.

Sedley LJ [57] [The trial judge] was bound by authority to consider whether an honourable and reasonable person would have drawn Wimpey’s attention to the omission of [the particular element] from the final formula. … [58] There is, as it seems to me, a paradox in the notion of what an honourable and reasonable person would do in the context of an arm’slength commercial negotiation. This is a context in which honour (or honesty) and rationality (or reasonableness) are frequently not on speaking terms. I doubt whether Mr Fetherstonhaugh’s submission that the two epithets qualify each other does more than compound the paradox. [59] Take the present case. An honourable person negotiating for VIC would probably have asked Wimpey if they realised that [the particular element] had been left out, but I very much doubt whether a reasonable negotiator would have done so. His first duty would have been to his own principal, whose interests undoubtedly lay in leaving [the particular element] out and not alerting Wimpey to the omission.

[60] The phrase ‘honest and reasonable’ is not a term of art. It is a judicial attempt to sketch a line beyond which conduct may be regarded as unconscionable or inequitable. Its duality, however, is a recognition that honesty alone is too pure a standard for business dealings because it omits legitimate self-interest; while reasonableness alone is capable of legitimising Machiavellian tactics. [61] Mistake is a concept which sits awkwardly in this space. Absent a prior accord which has simply not been carried into effect, absent also a dishonest inducement to contract, one is looking for a mistake on the claimant’s own part which the defendant was honour-bound, despite his own legitimate business interests, to point out to him. I am unable to accept that this was such a case on any tenable view of the evidence. [62] There are at least two kinds of mistake. One is a literal misunderstanding of some fact material to the proposed contract. The other is an error of judgment in entering into the contract. I find it difficult to think that the second kind has any relevance to the law of unilateral mistake. Nobody is bound, even in honour, to help his opposite number to negotiate to the best advantage. [63] What then was the material fact that Wimpey misunderstood? That [the particular element] was omitted? They had only to look at VIC’s draft to see that it was. Their mistake was failing to renegotiate it, and that seems to me an error of judgment, not of fact. [64] Mr Fetherstonhaugh’s submissions in effect have recognised this. He submits that VIC must have realised that, unless Wimpey had undergone a sudden fit of altruism, they had overlooked the omission of [the particular element]. I think that this is a more convincing analysis of the evidence than [that by counsel for VIC], and more consistent with the judge’s appraisal of the witnesses. But it seems to me to take Wimpey into a dead end, for I do not see [page 852] how either honesty tempered with reasonableness or reasonableness

tempered with honesty can have required VIC to point out to Wimpey where the latter’s own best interests lay. [65] In saying this I recognise that sharp practice has no defined boundary. An arm’s-length negotiation between parties of unequal competence and resources may well place greater constraints of honest and reasonable conduct on the stronger party than on the weaker. But the present case practically reverses the paradigm: it is the weaker party which is accused by the stronger of having unconscionably misled it by failing to draw the stronger party’s attention to its own oversight. … [67] If ever a party was entitled to assume that its opponent knew what it was doing, it was VIC in its negotiations with one of the country’s largest construction and development enterprises. In my judgment the mistake made by Wimpey was a result of their own corporate neglect for which VIC bore no legal or — so far as it matters — moral responsibility.

Comment 34.4.1 See Radan, Gooley, and Vickovich 34.30–34.33. 34.4.2 For a discussion of this case, see E Palser, ‘Rectification for Unilateral Mistake: How Heavy is the Burden of Proof?’ [2006] Lloyd’s Maritime and Commercial Law Quarterly 139. 34.4.3 For a discussion of the circumstances in which rectification is available for unilateral mistake, see D McLauchlan, ‘The “Drastic” Remedy of Rectification for Unilateral Mistake’ (2008) 124 Law Quarterly Review 608.

1.

4th ed, LexisNexis Butterworths, Australia, 2002, at 886 [26-010].

2. 3.

[1953] 2 QB 450 at 461. Club Cape Schanck Resort Co Ltd v Cape Country Club Pty Ltd (2001) 3 VR 526 at 528.

4. 5.

Club Cape Schanck Resort Co Ltd v Cape Country Club Pty Ltd (2001) 3 VR 526 at 530. Club Cape Schanck Resort Co Ltd v Cape Country Club Pty Ltd (2001) 3 VR 526 at 531.

6. 7.

Club Cape Schanck Resort Co Ltd v Cape Country Club Pty Ltd (2001) 3 VR 526 at 538. Club Cape Schanck Resort Co Ltd v Cape Country Club Pty Ltd (2001) 3 VR 526 at 539.

8.

(2005) 30 WAR 46.

9. 10.

[1953] 2 QB 450 at 461. Vol 1, LexisNexis Butterworths, Sydney, 2002, at 52,521 [22-460].

11. 12.

(1971) 87 Law Quarterly Review 532. D Wright, ‘Rectification’ in P Parkinson (ed), The Principles of Equity, 2nd ed, Lawbook Co, Sydney, 2003, p 977.

13. 14.

NSW Medical Defence Union Ltd v Transport Industries Insurance Co Ltd (1986) 6 NSWLR 740. (1987) 78 ALR 193 at 253–4.

15. 16.

Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd (1995) 41 NSWLR 329 at 630. Earl v Hector Whaling Ltd [1961] 1 Lloyd’s Rep 459 at 468.

17. 18.

[1987] 2 NZLR 21 at 31. Slee v Warke (1949) 86 CLR 271 at 281.

19. 20.

Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at 462; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at 179. Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at 462.

21. 22.

(1982) 149 CLR 337 at 350. Reardon Smith Line Ltd v Hansen-Tangen [1976] 3 All ER 570 at 574.

23. 24.

(1877) 2 App Cas 743 at 763. Prenn v Simmonds [1971] 1 WLR 1381 at 1384.

25. 26.

Prenn v Simmonds [1971] 1 WLR 1381 at 1385. Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 at 550 per Gleeson CJ; Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 at 330–1.

27. 28.

(1982) 149 CLR 337 at 346. Ball v Storie (1823) 57 ER 84 at 88; NSW Medical Defence Union Ltd v Transport Industries Insurance Co Ltd (1986) 6 NSWLR 740 at 751, 752; Farrow Mortgage Services Pty Ltd (in liq) v Slade and Nelson (1996) 38 NSWLR 636 at 642; Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd (1995) 41 NSWLR 329 at 332; Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153 at 164; Green v AMP Life (2005) 13 ANZ Insurance Cases 90–124 (86,632) at 86,665.

29. 30.

Baker v Paine (1750) 27 ER 1140 at 1141. (1859) 45 ER 97 at 106–7.

31. 32.

Irnham v Child (1781) 28 ER 1006. Marquis of Townshend v Stangroom (1801) 31 ER 1076.

33. 34.

(1982) 180 CLR 447 at 452. Joscelyne v Nissen [1970] 2 QB 86 at 99.

35. 36.

Joscelyne v Nissen [1970] 2 QB 86. [1953] 2 QB 450.

37. 38.

Joscelyne v Nissen [1970] 2 QB 86 at 97. Simpson v Vaughan (1739) 26 ER 415 at 416.

39. 40.

Crane v Hegeman-Harris Co Inc [1971] 1 WLR 1390 at 1391. (1949) 86 CLR 271 at 280–1.

41.

J Story, Commentaries on Equity Jurisprudence as Administered in England and America, 13th ed,

42. 43.

Little, Brown & Co, Boston, 1886, at 168–9, [154]–[155]. Ball v Storie (1823) 57 ER 84 at 88. (1995) 184 CLR 538.

44. 45.

Holman v Johnson (1775) 98 ER 1120. Nelson v Nelson (1995) 184 CLR 538 at 611.

46. 47.

Bowmakers Ltd v Barnet Instruments Ltd [1945] KB 65. [1994] 1 AC 340.

48. 49.

Nelson v Nelson (1995) 184 CLR 538 at 612–13. Nelson v Nelson (1995) 184 CLR 538 at 612–13.

50. 51.

(2012) 246 CLR 498. Equuscorp Pty Ltd v Haxton (2012) 246 CLR 498 at 518.

52. 53.

Equuscorp Pty Ltd v Haxton (2012) 246 CLR 498 at 522–3. [2016] 3 WLR 399.

54. 55.

Patel v Mirza [2016] 3 WLR 399 at 428. Patel v Mirza [2016] 3 WLR 399 at 433.

56. 57.

[1976] Ch 251. [2001] PLR 77.

58. 59.

The Club Cape Schanck Resort Co Ltd v Country Club Pty Ltd (2001) 3 VR 526. [1953] 2 QB 450.

60. 61.

[2007] NSWCA 65; (2007) 69 NSWLR 603. [2012] 1 All ER 735.

62. 63.

[2007] EWCA Civ 412. Oliver Hume (Australia) Pty Ltd v Land Source Australia Pty Ltd [2015] VSC 77 at [43].

64. 65.

Oliver Hume (Australia) Pty Ltd v Land Source Australia Pty Ltd [2015] VSC 77 at [45]. Dey v Victorian Railways Commissioners (1949) 78 CLR 62; General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125;

66. 67.

[2015] NSWCA 119. [2007] EWHC 3361.

68. 69.

(2011) 219 FCR 420. A Roberts & Co Ltd v Leicestershire County Council [1961] Ch 555 at 570.

70. 71.

Riverlate Properties Ltd v Paul [1975] Ch 133 at 140. Thomas Bates Ltd v Wyndham’s (Lingerie) Ltd [1981] 1 WLR 505 at 515–16.

72. 73.

Thomas Bates Ltd v Wyndham’s (Lingerie) Ltd [1981] 1 WLR 505 at 521. Agip SpA v Navigazione Alta Italia SpA [1984] 1 Lloyd’s Rep 353.

74. 75.

Commission for the New Towns v Cooper (Great Britain) Ltd [1995] Ch 259. Commission for the New Towns v Cooper (Great Britain) Ltd [1995] Ch 259 at 280.

76. 77.

Commission for the New Towns v Cooper (Great Britain) Ltd [1995] Ch 259 at 280–1. [1993] 1 WLR 509. (Note: This case was decided in 1984.)

78.

[1990] Ch 265 at 293.

[page 853]

35 RESCISSION

INTRODUCTION 35.1 This chapter deals with the remedy of rescission of a contract. This right is recognised both at common law and in equity. The right to rescind may arise in favour of an innocent party to a contract who is a victim of a vitiating factor such as misrepresentation, mistake, duress, unconscionability, or undue influence. The purpose of rescission is to put the parties back into the position they were in before the transaction was entered into (restitutio in integrum). If restitutio in integrum is not possible, rescission will not be available. Whether restitutio in integrum is achievable in any given case will depend upon the differences between the common law and equitable understandings of rescission. At common law, rescission is available in relatively limited circumstances. The most important instances are contracts induced by fraudulent misrepresentations or duress and, in the case of insurance contracts, for non-disclosure of material facts. In equity, rescission is not so limited and extends to transactions resulting from non-fraudulent misrepresentations, certain unilateral mistakes, unconscionable transactions, and undue influence. A further distinction is that the common law takes a stricter approach to the requirement of restitutio in integrum: Alati v Kruger (1955) 94 CLR 216 (see 35.2C). At common law precise or exact restitutio in integrum is required. However, in equity, if the court can do what is practically just as between the parties and in substance restore the parties to their precontractual positions, then rescission is available. Equity can bring about substantive restitutio in integrum by making supplementary orders such as an

account of profits or equitable compensation, as it did in Brown v Smitt (1924) 34 CLR 160 (see 35.3C). In appropriate cases a court can, in order to avoid the all-or-nothing consequences of rescission, order a partial rescission of a contract, as occurred in Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102 (see 35.4C). The right to rescind can be lost in a variety of circumstances, including affirmation, delay, and prejudice to the rights of a third party who has gained an interest in property the subject of the contract prior to rescission. With affirmation the right to rescind is generally lost once the innocent party has elected to affirm the contract by undertaking conduct that is inconsistent with maintaining a right to rescind. Any such conduct undertaken by the innocent party once he or she is aware of the circumstances grounding the right to rescind is generally regarded as conduct amounting to an election to affirm. However, in Coastal Estates Pty Ltd v Melevende [1965] VR 433 (see 35.5C) it was held that the innocent party must also have knowledge of the right to rescind before conduct amounting to an election to rescind can be taken into account. [page 854]

THE MEANING OF RESTITUTIO IN INTEGRUM 35.2C

Alati v Kruger (1955) 94 CLR 216

Court: High Court of Australia Facts: Kruger purchased a fruit shop business from Alati in Brisbane for the sum of £700. He alleged that Alati and his agents assured him in precontractual negotiations that the average takings of the business were £100 per week. A written contract was executed in which Alati agreed to obtain the landlord’s consent to an assignment of the lease of the shop premises to Kruger. It also contained a ‘special clause’, which repeated Alati’s statement as to weekly takings. After a couple of weeks Kruger sought legal advice because the weekly takings were less than half of the amount expected. Of

several courses of action open to him, Kruger sought to rescind the contract and sue to recover his purchase money with interest and damages. Alati argued that the purported rescission was invalid because a true restitution was not possible. The trial judge held that the statement as to takings was a representation made either fraudulently or negligently by Alati. Kruger’s rescission of the contract was held to be valid. The court ordered that all executed copies of the contract be cancelled, that the lease be reassigned to Alati (subject to the payment by Kruger of a reasonable rental for his short occupation), that the purchase moneys plus interest be repaid to Kruger, and that Alati pay damages to cover Kruger’s conveyancing costs and stamp duty. Alati appealed to the High Court. Issues: The issues before the High Court were whether Kruger’s purported rescission of the contract was valid and whether the requirements of restitutio in integrum had been met in this case. Decision: The High Court (Dixon CJ, Webb, Fullagar, Kitto, and Taylor JJ) unanimously dismissed Alati’s appeal, but made certain variations to the Supreme Court orders. Extract: The extracts below from the joint judgment of the majority (Fullagar J delivered a separate and concurring judgment) address the issues of rescission and the differences between the common law and equitable interpretations of restitutio in integrum.

Dixon CJ, Webb, Kitto, and Taylor JJ The validity of his rescission depended … only upon the question whether restitutio in integrum was possible in the circumstances as they existed at the commencement of the action. … If the case had to be decided according to the principles of the common law, it might have been argued that at the date when [Kruger] issued his writ he was not entitled to rescind the purchase, because he was not then in a position to return to [Alati] in specie that which he had received under the contract, in the same plight as that in which he had received it.1 But it is

necessary here to apply the doctrines of equity, and equity has always regarded as valid [page 855] the disaffirmance of a contract induced by fraud even though precise restitutio in integrum is not possible, if the situation is such that, by the exercise of its powers, including the power to take accounts of profits and to direct inquiries as to allowances proper to be made for deterioration, it can do what is practically just between the parties, and by so doing restore them substantially to the status quo.2 It is not that equity asserts a power by its decree to avoid a contract which the defrauded party himself has no right to disaffirm, and to revest property the title to which the party cannot effect. Rescission for misrepresentation is always the act of the party himself.3 The function of a court in which proceedings for rescission are taken is to adjudicate upon the validity of a purported disaffirmance as an act avoiding the transaction ab initio, and, if it is valid, to give effect to it and make appropriate consequential orders.4 The difference between the legal and the equitable rules on the subject simply was that equity, having means which the common law lacked to ascertain and provide for the adjustments necessary to be made between the parties in cases where a simple handing back of property or repayment of money would not put them in as good a position as before they entered into their transaction, was able to see the possibility of restitutio in integrum, and therefore to concede the right of a defrauded party to rescind, in a much wider variety of cases than those which the common law could recognize as admitting of rescission. Of course, a rescission which the common law courts would not accept as valid cannot of its own force revest the legal title to property which had passed, but if a court of equity would treat it as effectual the equitable title to such property revests upon the rescission. In the present case, what changes affecting the possibility of restitution had occurred in the short period between [the time] when [Kruger] took possession of the business and … when he issued the writ? He had had possession of the premises, and although that might have sufficed at common law to preclude rescission,5 it could hardly do so in equity, since a

money payment could compensate for any difference there might be between the rental value of the premises and the rent paid by [Kruger] to the landlords. The title to the term created by the lease had been vested in [Kruger] by assignment, but that was subject to any right which he had to disaffirm the transaction. The title would revest in equity when he elected to rescind, and he was in a position to make a legal re-assignment with the landlords’ consent. He had taken over (as he said in evidence) about twenty pounds’ worth of stock, but while of course he could not restore that to [Alati] in specie he could pay or allow for its value, and nothing more could in justice be required. The business itself had deteriorated but this would not matter, for, as the trial judge has found, it was not due to any fault on [Kruger’s] part, and even at common law the necessity to return property in its original condition was qualified so as to allow for incidents for which the buyer was not responsible, such as those to which the property was liable either from its inherent nature6 or in the course of the [page 856] exercise by the buyer of those rights over it which the contract gave.7 No other change had occurred. The case was therefore typical of the class of cases in which a defrauded purchaser is regarded by a court exercising equitable jurisdiction as entitled to rescind the purchase and obtain a decree, on proper terms, declaring and giving effect to the rescission as an avoidance of the transaction from the beginning. There remains, however, the question whether [Kruger] lost his right to such a decree by his conduct in discontinuing the business and leaving the premises before judgment was given in the action. The remedy is discretionary … and if [Kruger] had acted unconscientiously during the pendency of the action, as by causing the loss of a valuable leasehold and goodwill by discontinuing the business and abandoning the premises without giving [Alati] a reasonable opportunity to take them back, no doubt the court might refuse relief. But nothing of that kind happened. The term was, of course, still vested at law in [Kruger], and it is not impossible that, despite low takings and actual losses, the business had some residual

goodwill. But it is impossible to convict [Kruger] of any unfairness in the circumstances. The service of the writ had given [Alati] clear notice that if the case alleged against him were made out at the trial the business and the lease would be held to have been his all along. He knew from the judge’s announcement of his findings that in fact the issues of fact in the case had gone against him. He could have applied for the appointment by the court of a receiver and manager to preserve the property pending the determination of the case, but he made no such application. He did not even make any offer to [Kruger] to take the property back or suggest any modus vivendi. He took his chance, contenting himself with such maintenance of the business as [Kruger’s] continuing conduct of it might afford. But [Kruger] was under no duty to go on indefinitely, working for nothing and incurring losses, especially after the judge had announced findings of fact in his favour. It does not appear from the material before us whether he gave [Alati] any specific warning of his intention to give up the business and leave the premises, but, even if he did not, [Alati] had ample opportunity to protect his interests, and his inaction is far more likely to have been due to an opinion that neither the lease nor the business was worth worrying about, particularly in view of the competition which the ‘super-market’ had created, than to any expectation that [Kruger] would obligingly continue to act as an unpaid manager.

[page 857]

Comment 35.2.1 See Radan, Gooley, and Vickovich at 35.5–35.7 and 31.20–31.21. 35.3C

Brown v Smitt (1924) 34 CLR 160

Court: High Court of Australia Facts: Smitt purchased a farm from Brown and after paying part of the purchase price entered into possession. He made certain

improvements and ran his business on the property. He then rescinded the contract, claiming that Brown made certain misrepresentations to the effect that the land had been cleared and that it contained high quality soil for dairying purposes. Smitt was granted an order for rescission and return of the moneys paid. However, the trial judge awarded an additional amount of £175 as compensation. This sum was arrived at by crediting Smitt with £345 for improvements and then deducting £130 for gross receipts from the farm plus £40 to compensate Brown because the returned property was no longer capable of a hay-crop in that season. Brown appealed this decision. Issue: The issue before the High Court was whether the relief awarded to Smitt pursuant to the rescission order was appropriate in the circumstances where the parties were not able to be put back precisely into the position they were in before the contract was formed. Decision: The High Court (Knox CJ, Isaacs, Gavan Duffy, Rich, and Starke JJ) unanimously held the award of compensation for the improvements to the farm be upheld, but not so in relation to the business losses. Extract: In the extracts from the High Court’s joint judgment Knox CJ, Isaacs, Gavan Duffy, and Starke JJ discuss the reasoning of the High Court in the assessment of appropriate compensation where precise restitutio in integrum is not possible.

Knox CJ, Gavan Duffy and Starke JJ No one disputed that [Smitt] is entitled to repayment of the sum of £755 9s if the contract is rescinded, but we have to consider what further relief ought to be granted to him. The parties being relieved of the contractual obligations, each must give back all that he obtained under the contract. Where the property the subject matter of a contract remains unchanged, no difficulty arises. Where it has been wholly or substantially destroyed by the default of the party seeking rescission, there can be no rescission because there can be no restitution. But where the property has

been improved or deteriorated by the act of the purchaser, and yet remains in substance what it was before the contract, equity adjusts the rights of the parties by awarding money compensation to one or the other, and so substantially putting each party in the position which he occupied before the contract was made. Lord Blackburn in Erlanger’s Case said: ‘It would be obviously unjust that a person who has been in possession of property under the contract which he seeks to repudiate should be allowed [page 858] to throw that back on the other party’s hands without accounting for any benefit he may have derived from the use of the property, or if the property, though not destroyed, has been in the interval deteriorated, without making compensation for that deterioration. … And … the practice has always been for a Court of equity to give this relief whenever, by the exercise of its powers, it can do what is practically just, though it cannot restore the parties precisely to the state they were in before the contract’.8 It would be … unjust … that a person whose fraud or misrepresentation has induced the contract should be allowed to take back his property, with permanent and lasting improvements upon it made by the other party, without making any allowance for those improvements, which increased the sale value of the estate in his hands. … [N]ecessary repairs may be allowed in such cases. … This doctrine however, would not justify improving the vendor out of his estate, as is the phrase in the books, or rendering it impossible for him to recover his estate. Rescission in such a case would be impossible, and restitution out of the question. Again, allowances for improvements which were matters of taste or personal enjoyment could not be justified. Nor will allowances be given for improvements made after the party making them knows, or has reasonable notice, of the defect in title. He must then take the risk. And putting the parties in the position they were in before the contract, replacing them in statu quo, does not involve replacing them in the same position in all respects, but only in respect of the rights and obligations created by the contract which is rescinded. A party, in case of rescission, cannot ask the Court to award him compensation for all collateral losses which he may

have sustained by reason of the fact that he entered into the contract, such as losses incurred in carrying on a business but only such compensation as will restore the status quo ante in relation to the subject matter of the contract.

[page 859]

Comment 35.3.1 See Radan, Gooley, and Vickovich at 35.10.

PARTIAL RESCISSION 35.4C

Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102

Court: High Court of Australia Facts: Vadasz and his wife were the sole shareholders of Vadipile Drilling Pty Ltd, which conducted a foundation piling business. The company purchased ready-mixed concrete from Pioneer Concrete (SA) Pty Ltd and had accrued debts of over $200,000 to Pioneer for concrete already supplied up to July 1992. At that time Pioneer advised it would immediately stop further concrete deliveries to Vadipile unless Vadasz executed a personal guarantee. Vadasz was informed by Pioneer’s employees that the guarantee would cover Vadipile’s future debts, but the guarantee document provided for the payment of ‘all monies which are now or may at any time’ be due from Vadipile. Vadasz signed the guarantee without reading it. Vadipile continued to incur debts on the delivered concrete and in November of the same year was sued by Pioneer for the entire outstanding debt amounting to over $350,000. Vadasz argued that the guarantee was unenforceable. The trial judge found that Pioneer’s employees had misrepresented the effect of the guarantee

without indicating whether the misrepresentation was fraudulent, and that Vadasz had at all times understood the guarantee would cover future debts only. The court ruled he was entitled to equitable relief, but that this would mean the guarantee would be unenforceable only as far as past debts were concerned. Vadasz was ordered to pay over $170,000 for post-guarantee debts on the basis that the guarantee was rescinded only as regards past indebtedness. Vadasz’s appeal to the Full Court of the Supreme Court was dismissed. He then appealed to the High Court. Issue: The issue before the High Court was whether the trial judge was entitled to order partial rescission of the guarantee so that Vadasz remained liable to Pioneer for the debts incurred after the guarantee was signed. Decision: In a joint judgment the High Court (Deane, Dawson, Toohey, Gaudron, and McHugh JJ) unanimously dismissed Vadasz’s appeal. Extract: The extracts from the High Court’s joint judgment focus on its reasoning in allowing partial rescission of the contract, enabling Pioneer to enforce Vadasz’s obligation for future debts even though Pioneer had misrepresented the nature of the agreement.

Deane, Dawson, Toohey, Gaudron, and McHugh JJ [I]t should be remembered that the trial judge held that [Vadasz] was ‘entitled to equitable relief on the ground of [Pioneer’s] misrepresentation’. And his Honour held that [Pioneer] was entitled in equity … to enforce [Vadasz’] liability under the guarantee for [page 860] future indebtedness. Had [Vadasz] sought to rely on the common law, he would not have been entitled to rescission because the contract did not remain completely executory and ‘because he was not then in a position to return to [Pioneer] in specie that which he had received under the contract,

in the same plight as that in which he had received it’.9 Complete restitution was not and is not possible in the circumstances of the present case where the consideration which moved from [Pioneer] to [Vadasz] was, in the words of the guarantee, [Pioneer’s] ‘having agreed or agreeing to sell goods … or giving credit’ to a company owned by [Vadasz] and his wife and where, in reliance upon the guarantee, [Pioneer] in fact supplied on credit to that company, which was or became insolvent, large quantities of concrete which have been used and cannot be returned. That being so, the assumption of fraud does not avail [Vadasz] at common law. Thus we are very much in the realm of equity. Indeed … [Vadasz] did not really seek to attack the conclusion of the trial judge and the Full Court that the appropriate relief in the circumstances of the present case is equitable in its nature in the sense that its origins can be traced to the old Court of Chancery. [Vadasz’] case is that the appropriate equitable relief was the unconditional rescission or setting aside of the guarantee in its entirety. In that respect it is useful to have regard to what was said by Mason J in Commercial Bank of Australia Ltd v Amadio: Historically, courts have exercised jurisdiction to set aside contracts and other dealings on a variety of equitable grounds. They include fraud, misrepresentation, breach of fiduciary duty, undue influence and unconscionable conduct. In one sense they all constitute species of unconscionable conduct on the part of a party who stands to receive a benefit under a transaction which, in the eye of equity, cannot be enforced because to do so would be inconsistent with equity and good conscience.10 Where, as in this case, the court has granted equitable relief in the shape of rescission of a contract, the result is to set aside the contract ab initio. While equity followed the law in requiring restitution as a condition of rescission where the contract had been wholly or partly executed, it allowed greater flexibility in the basis upon which restitution and accounting between the parties may be ordered. Thus, equity did not require complete restitution of the position which existed before the contract but allowed its remedies, particularly an order for monetary accounts, to be utilized to achieve practical restitution and justice. … In the present case, [Vadasz] obtained the benefit which he sought as

consideration for entering the contract of guarantee, namely, the subsequent supply on credit by [Pioneer] of goods to Vadipile. In those circumstances, a practical restoration of the status quo which existed before the execution of the guarantee and the subsequent supply of goods on credit by [Pioneer] would involve not only a cancellation of [Vadasz’] obligations under the guarantee but either a return of the goods subsequently supplied by [Pioneer] or the actual payment, [page 861] either by Vadipile or [Vadasz], of an amount equivalent to the value of the goods which were subsequently supplied in reliance upon [Vadasz’] guarantee of payment of their price. However, [Vadasz] does not offer to pay [Pioneer] the amount which Vadipile has failed to pay for those subsequently supplied goods. Nor does he offer to submit to terms or conditions which would ensure that the purchase price of those goods, which has not been suggested to exceed their true value, is received by [Pioneer]. As has been said, [Vadasz] seeks to be relieved completely and unconditionally from all liability under the guarantee, leaving [Pioneer] without either its subsequently supplied goods or any payment for them. If such complete and unconditional relief is to be granted, it must be on some basis other than mere entitlement to a practical restoration of the status quo upon rescission or ‘disaffirmance’ of a contract induced by fraud. The only such basis that comes to mind is equity’s general jurisdiction, in setting aside contracts and other dealings on equitable grounds, to ensure the observance of the requirements of good conscience and practical justice. Thus in O’Sullivan v Management Agency Ltd11 an exclusive management agreement made by a young composer was set aside by reason of undue influence because of a fiduciary relationship between the parties. The Court of Appeal upheld rescission even though the parties could not be restored to their original position. In their judgments the members of the Court of Appeal pointed out that a contract may be set aside in equity so long as ‘the court can achieve practical justice between the parties’12 and that ‘the court will do what is practically just in the individual case’13 so long as ‘it is possible to achieve what is practically

just by granting rescission and restitution together with orders for accounts’.14 In the present case, the consideration provided by [Pioneer] involved the supply of goods upon credit to Vadipile. Any need for restitution arises by reason of Vadipile’s insolvency. [Pioneer] points to the fact that goods were supplied on credit in pursuance of its promise given as consideration for [Vadasz’s] guarantee and says in effect: ‘I would not have made further deliveries of concrete to Vadipile and risked non-payment if [Vadasz] had not guaranteed payment for those deliveries’. In the way in which the action between the parties was constituted, practical justice is achieved, so [Pioneer’s] argument runs, by holding [Vadasz] liable on a money claim for that proportion of Vadipile’s debt incurred after [he] signed the guarantee. As Cussen J noted in The Bank of Victoria Limited v Mueller, in the context of insisting that equity shall be done as a condition of setting aside a guarantee: ‘This is, of course, something quite different from rectification, although in some cases its effect may be much the same’.15 The idea of a Court of Equity using its powers to do ‘what is practically just’ was referred to by Lord Blackburn in Erlanger v New Sombrero Phosphate Company well over 100 years ago. In contrasting the relief available in law and in equity on rescission of a contract, in [page 862] particular the ability of equity to take account of profits and make allowance for deterioration of property, his Lordship said: And I think the practice has always been for a Court of Equity to give this relief whenever, by the exercise of its powers, it can do what is practically just, though it cannot restore the parties precisely to the state they were in before the contract.16 … In Amadio, Deane J referred to what was said by Cussen J in [Bank of Victoria Ltd v Mueller] in support of the proposition: Where appropriate, an order will be made which only partly nullifies a transaction liable to be set aside in equity pursuant to the

principles of unconscionable dealing. … (T)he order will, in an appropriate case, be made conditional upon the party obtaining relief doing equity.17 Thus unconscionability works in two ways. In its strict sense, it provides the justification for setting aside a transaction. More loosely, it provides the justification for not setting aside the transaction in its entirety or in doing so subject to conditions, so as to prevent one party obtaining an unwarranted benefit at the expense of the other. In Amadio this Court upheld an order setting aside a mortgage in its entirety where the mortgagors believed they were committing themselves to securing their son’s overdraft to a limit of $50,000 and for six months only. The reason for not setting aside the mortgage only to the extent that it involved a liability in excess of $50,000 was that the Amadios would not have entered into the transaction at all, had they known the true financial position of their son. In the present case it cannot be maintained that [Vadasz] would not have entered into the guarantee had it been confined to the future indebtedness of Vadipile. Rather, the evidence is that he would have done so, if not happily, because it was the only way to secure future supplies of concrete for Vadipile. … He stood to benefit personally from the operations of the company. … The concern of equity, in moulding relief between the parties is to prevent, nullify, or provide compensation for, wrongful injury. If it appears that the other party would not have entered into the contract at all if the true position were known, the contract may be set aside in its entirety as in Amadio. [Vadasz] is ‘seeking the assistance of a court of equity and he who seeks equity must do equity’.18 The Court must look at what is practically just for both parties, not only [for Vadasz]. To enforce the guarantee to the extent of future indebtedness is to do no more than hold [Vadasz] to what he was prepared to undertake independently of any misrepresentation. …

[page 863]

Comment 35.4.1 See Radan, Gooley, and Vickovich at 35.14–35.17. 35.4.2 For a discussion of this case, see A Robertson, ‘Partial Rescission, Causation and Benefit’ (2001) 17 Journal of Contract Law 163.

LOSS OF THE RIGHT TO RESCIND BY AFFIRMATION 35.5C

Coastal Estates Pty Ltd v Melevende [1965] VR 433

Court: Full Court of the Supreme Court of Victoria Facts: In September 1960 Melevende purchased eight blocks of land from Coastal Estates in a seaside subdivision on Westernport Bay by way of an instalment contract for the sum of £1768. He became aware by 1961 that Coastal Estates, through its agents, had misrepresented the value of the blocks and that he had contracted to pay far more than the blocks were worth. He tried to renegotiate the terms of the agreement with Coastal Estates without success and even tried to sell the blocks. By this time he had already paid the deposit and instalment payments totalling just over £1000. Although he was aware of the fraudulent misrepresentation, Melevende was not aware that he had a right to rescind the contract on that basis until he sought legal advice two years after the contract had been entered into. He rescinded the contract and began proceedings in the County Court to recover £1000. Coastal Estates defended on the grounds that Melevende had affirmed the contract by making regular instalment payments, trying to renegotiate the contract, seeking finance from his employer and trying to sell the land. It also counter-claimed for moneys due under the contract. The County Court found Melevende was unaware of his right to elect to affirm or rescind the contract at the relevant times, having become aware of his rights only when he sought advice. It held his conduct did not amount to affirmation and that his rescission was valid. Judgment

was given in his favour in the sum of £1000 as claimed. Coastal Estates appealed to the Supreme Court. Issue: The main issue before the Full Court was whether Melevende’s conduct amounted to affirmation of the contract on the grounds that it was inconsistent with maintaining at the same time a right to rescind. Decision: In three separate judgments the Full Court (Herring CJ, Sholl and Adam JJ) unanimously dismissed the appeal by Coastal Estates. Extract: The extracts from the judgments of Sholl J and Adam J deal not only with the general proposition that affirmation does not come into play until there is knowledge of the right to rescind, but also with the main qualification or exception to that principle.

[page 864]

Sholl J This case requires us to decide just what will and what will not amount to affirmation, given on the part of the defrauded party a full knowledge, or a certain and correct assumption, of the falsity of the material representations. Here, there was no evidence that [Melevende] knew at any time before he saw his solicitor in September 1962 that he had a legal right to rescind the contract ab initio for fraud, and I think on the whole of the evidence the proper inference is that he did not know that. In my opinion, the law is this. Assuming that rescission is still possible (if necessary, with the aid of equitable orders), and that the defrauded party fully knows, or positively and correctly assumes, the falsity of the representations which induced the contract, then: (1) If he knows that he has a legal right to rescind or affirm the contract on that ground (a) if he expressly communicates to the other party what his choice is, he makes an election, once and for all, which is binding upon him; (b) if he does anything which is referable only to a

decision to adhere to the contract — ie, which he has a right to do, as against the opposite party, or is obliged to do, only if the contract stands — that is an election and he is bound thereafter to go on with it, unless, perhaps, what he does is a trifling and unconsidered action. (2) If the defrauded party does not know that he has a legal right to rescind, he is not bound by acts which on the face of them are referable only to an intention to affirm the contract, unless those acts are ‘adverse to’ the opposite party, ie, unless they involve something to the other party’s prejudice or detriment, as eg, if the defrauded party goes into possession of property sold to him by the contract, or accepts some other benefit thereunder. This is a form of estoppel, for the other party has in such a case acted to his prejudice upon a representation, made by the defrauded party’s conduct, that the latter is going on with the contract. The law does not require the representor in such a case to inquire of the representee whether he knows his legal rights. (3) Acts of the defrauded party which are not adverse in the above sense, such as payments made by him to the other party, or to others (eg, rates), or negotiations for sale, are some but not conclusive evidence of a binding election made with knowledge of his rights. They may be enough to pass to him the shifting onus of proof so that he has to show non-knowledge of his rights at the time, but they do not of themselves involve an estoppel. They may, however, form part of the foundation for an estoppel, eg, if the opposite party, misled by such an act into supposing that the other is proceeding with the contract, refuses a more advantageous offer for the property the subject of the contract, or otherwise acts to his prejudice. (4) Except in special classes of case, such as contracts to take shares in companies, where the representee must disaffirm with great promptness after knowledge (because the rights of creditors and other shareholders are affected), the defrauded party, subject to the above principles, need not make his election within any fixed time. He may defer a decision — ‘suspend judgment’, as it is put in some of the cases — and he may negotiate for a variation of the contract, or as to terms on which he may be relieved of it, but if he does these things he takes the risk of rescission becoming impossible or inequitable meanwhile, or of his inaction being treated as warranting an inference of

knowledge and an intention to elect for affirmation of the contract. [page 865]

Adam J It remains then to consider whether the proper inference from the evidence is, as [Coastal Estates] claims, that [Melevende] affirmed the contract during 1962 so as to have precluded himself from rescinding when he brought his action. What is affirmation which deprives a party of a right of rescission in these circumstances? The right to rescind for misrepresentation may be lost in a variety of ways, some depending on the principle of election, others not. Once a representee has, by discovery of the truth, been put to his election, he will of course lose his right to rescind once he has elected not to rescind. Once he has made his election, he cannot resile from it. But not only will a party lose any right to elect in favour of rescission by reason of his once having elected to affirm, he may apart altogether from this principle of election lose his right to rescind before he has made any election. He may lose his right of avoidance where by reason of his own conduct, or of other circumstances, it would be unjust or inequitable that he retain any right to elect. One example is where third parties have acquired rights under the contract which would be defeated by an avoidance of the contract. Another example is where rescission would be unjust to the representor because it has become impossible to restore him to the position in which he was at the making of the contract. Restitutio in integrum is not only a consequence of rescission, its possibility is indispensable to the right to rescind. Again delay in electing to rescind may make it unjust to others that the right to elect continue. For this reason the right of rescission for misrepresentation in general must be promptly exercised in transactions regarding company shares. In my opinion, affirmation as a defence to a claim to rescind a contract rests on the principle that having elected to adhere to a contract after discovery of the falsity of the representations inducing it, the right to rescind is lost. In

other words affirmation is the determination of an election by affirming the contract. Affirmation may take the form of an express communication from the representee that he has elected to treat the contract as binding, or conduct of his in relation to the contract or its subject-matter from which the proper inference is that he has so elected. Where in addition to knowing all material facts, which would entitle him to avoid the contract, the representee is aware also that he has the choice open either to avoid or to affirm, it is a question of fact whether his conduct evidences a determination of his election. Before he will be held to have elected his conduct must be unequivocal. More difficult problems arise where the representee, while knowing the facts which in law give him the choice to avoid or affirm, is in fact unaware that he has any choice in the matter. In such a case it would seem on principle that no question can arise of his having made an election. In the nature of things how can one elect between alternative courses, unless one is aware that alternative courses are open? In other branches of the law, where questions of election arise — eg under the Workers Compensation Acts19 or under the well-known equitable doctrine of election as between estates — actual knowledge of the existence of the right to elect as between alternatives has [page 866] been considered essential. The relevance of such knowledge where the right of election arises in cases of contracts induced by misrepresentation is more obscure. There are not wanting in the authorities statements to the effect that a party may effectually elect to affirm a contract, although unaware that he has any option to avoid it — and that knowledge of his right to elect upon discovery of fraud will be conclusively presumed.20 … Furthermore in many of the cases the test whether a representee has affirmed a contract after discovery of the fraud which induced him to enter into it, is stated to be whether he has so acted as to show unequivocally that he elected to treat the contract as binding without any discussion of the relevance of his knowledge or absence of knowledge of his right to elect.21 …

The conclusion I have reached after considering the foregoing and other authorities which were cited to us — particularly the leading case of Clough v London and North Western Railway Co22 — is that the ultimate question to be answered in cases where affirmation is relied upon as a defence to a rescission is whether the representee has after discovery of the falsity of the relevant misrepresentations, in truth elected to affirm the contract and thereby elected not to avoid it. Because the making of an election necessarily presupposes a knowledge that a choice between alternative courses is open, in general, no question of affirmation can arise in the absence of such knowledge. There appears, however, to be one important qualification upon this. If a representee, after discovery of the facts which entitle him to avoid a contract, exercises, in an unequivocal manner, rights under the contract adversely to the other party he will in general be deemed to have elected to affirm it, although not aware of his right to elect. In the case of a representee unaware of his right of election there is, I consider, a distinction to be drawn between acts done by him in exercise of rights under the contract adversely to the other party which, were the contract not on foot, could not be justified, and acts which do no more than show that the representee recognized the contract as still subsisting, but are not prejudicial or adverse to the other party. Such a distinction may be explained as an application of the doctrine of estoppel, or of the rule against approbating and reprobating, or perhaps more broadly on general considerations of justice. Strictly speaking I would think that the so-called affirmation without knowledge of any right to elect should be regarded as an example of the loss of a right to rescind apart from the principle of election, and that it tends only to confusion to treat it as of the same species as a true election to affirm. … I do not find these conclusions inconsistent with any of the authorities binding on this Court. The foregoing observations are applicable in this case because on the evidence it seems proper to infer that [Melevende] was in fact unaware that he had any right to repudiate the contract until he consulted his solicitors in September 1962 just prior to commencement of these proceedings. Indeed if, as I think, the ultimate onus of establishing all elements of the defence of affirmation rests on the representor, it would be sufficient perhaps to say that the evidence fails to establish affirmatively that [Melevende] had sufficient knowledge of

[page 867] his rights at any relevant time. This being so the question is not whether [Melevende], after discovery of the facts, did any act which recognized the continued existence of the contract, but any act in exercise of his contractual rights adversely to [Coastal Estates]. The payment of instalments of purchase money merely discharged an obligation which [Melevende] supposed to be irrevocably binding on him — it certainly did not amount to the exercise of any contractual right by him adversely to [Coastal Estates]; the payment of rates stands in no different position; in any case the payment in 1962 was made after [Melevende] had elected to rescind, and the negotiations with [Coastal Estates] for release from or variations of the contract would seem to carry the matter no further. No doubt had it been proved that [Melevende] was actually aware that he could, if he chose, have repudiated the contract for fraud, his conduct after knowledge of the fraud in paying instalments of purchase money would have provided most cogent evidence of a considered affirmation by him of the contract and precluded his later rescinding it; but any such inference of actual election it is impossible to draw in the absence of any such awareness of his rights.

Comment 35.5.1 See Radan, Gooley, and Vickovich at 35.25–35.28. 35.5.2 The correctness of the decision in this case is not beyond dispute, as is discussed in Radan, Gooley, and Vickovich at 35.29–35.31.

1.

Clarke v Dickson (1858) 120 ER 463.

2. 3.

Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 at 1278, 1279; Brown v Smitt (1924) 34 CLR 160 at 165, 169; Spence v Crawford [1939] 3 All ER 271 at 279, 280. Reese River Silver Mining Co v Smith (1869) LR 4 HL 64 at 73.

4. 5.

Abram Steamship Co Ltd v Westville Shipping Co Ltd [1923] AC 773. Blackburn v Smith (1848) 154 ER 707 at 711.

6.

Newbigging v Adam (1886) 34 Ch D 582 at 588; Adam v Newbigging (1888) 13 App Cas 308 at 330.

7. 8.

Head v Tattersall (1871) LR 7 Exch 7 at 12. Erlanger v New Sombrero Phosphate Company (1878) 3 App Cas 1218 at 1278–9.

9. 10.

Alati v Kruger (1955) 94 CLR 216 at 223. Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 461.

11. 12.

[1985] QB 428. O’Sullivan v Management Agency Ltd [1985] QB 428 at 458.

13. 14.

O’Sullivan v Management Agency Ltd [1985] QB 428 at 466. O’Sullivan v Management Agency Ltd [1985] QB 428 at 471.

15. 16.

The Bank of Victoria Limited v Mueller [1925] VLR 642 at 659. Erlanger v New Sombrero Phosphate Company (1878) 3 App Cas 1218 at 1278–9.

17. 18.

Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 481. Cheese v Thomas [1994] 1 WLR 129 at 136.

19. 20.

Dey v Victorian Railway Commissioners (1949) 78 CLR 62. O’Connor v SP Bray Ltd (1936) 36 SR (NSW) 248; Evans v Benson and Co [1961] WALR 13.

21.

Scarf v Jardine (1882) 7 App Cas 345 at 361; Abram Steamship Co Ltd v Westville Shipping Co Ltd [1923] AC 773; Brown v Smitt [1924] VLR 333; Watson v Burton [1956] 3 All ER 929; Tropical Traders v Groonan (1964) 37 ALJR 497 at 500. (1871) LR 7 Exch 26.

22.

[page 869]

Part VIII: Other Bases of Relief

[page 871]

36 EQUITABLE ESTOPPEL

INTRODUCTION 36.1 This chapter deals with relief based upon equitable estoppel. Equitable estoppel is a doctrine rooted in the prevention of unconscientious conduct by a promisor or representor. In essence it precludes such a person from resiling from his or her promise or representation in circumstances where it would be unconscientious to do so. Equitable estoppel brings together what have been traditionally seen as separate forms of estoppel in equity, namely, promissory estoppel and proprietary estoppel. In the realm of contract law, promissory estoppel is the most important form of estoppel, particularly in relation to circumventing the requirement of consideration in relation to the enforcement of promises made to a promisee. Thus, in Equititrust Ltd (formerly Equitiloan Ltd) v Franks (2009) 259 ALR 388 at 401, Handley AJA noted that promissory estoppel ‘is based on a non-contractual promise or assurance which, in its orthodox form, becomes binding in equity, so as to restrain the promisor from enforcing his strict legal rights’. The pivotal case in Australia in which the nature and principled basis of equitable estoppel is discussed is the High Court decision in Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 (see 36.2C). A crucial element of equitable estoppel is detriment suffered by the representee or promise, as is illustrated in Je Maintiendrai Pty Ltd v Quaglia (1980) 26 SASR 101 (see 36.3C).

Although both forms of equitable estoppel are seen as species of equitable estoppel, there are distinctions between them, especially in relation to the form of relief granted once the estoppel is established. As is discussed and illustrated in ACN 074 971 109 (as trustee for the Argot Unit Trust) v National Mutual Life Association of Australasia Ltd (2008) 21 VR 351 (see 36.4C), with promissory estoppel relief is generally reliance-based, whereas with proprietary estoppel it is more often expectation-based.

THE NATURE OF EQUITABLE ESTOPPEL 36.2C Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 Court: High Court of Australia Facts: The Mahers owned commercial premises in Nowra, which Waltons was interested in leasing. Waltons needed to relocate its business in Nowra to new premises and the [page 872] Mahers’ site was available. Waltons agreed that the Mahers would demolish the existing premises and erect a new building to meet Waltons’ requirements. A draft agreement for lease was sent to the solicitors for the Mahers and some amendments were discussed. Waltons’ solicitors indicated that they expected their client’s agreement to the alterations and said that they would let the Mahers know if the amendments were not acceptable. The Mahers’ solicitors sent the amended lease, duly executed by the Mahers, to Waltons’ solicitors ‘by way of exchange’. The letter was not acknowledged by Waltons’ solicitors until two months later. The Mahers began to demolish the existing premises, as time was critical if they were to complete the demolition and the new construction in time for the start of the lease agreement. It was later established in court that Waltons knew what the Mahers were doing. However, after receiving the letter and executed lease, Waltons reconsidered its position and

a few months later wrote to the Mahers’ solicitors saying that the lease had not been executed by Waltons and that Waltons was not proceeding with it. The Mahers sued Waltons for damages for breach of contract on the basis that Waltons was estopped from denying the existence of the lease. Issues: The issues before the High Court were whether Waltons could be estopped from denying the existence of a binding contract to take a lease of the Mahers’ premises at Nowra and, if so, whether Waltons should be ordered to pay damages, rather than to specifically perform the lease agreement. Decision: The High Court (Mason CJ, Wilson, Brennan, Deane, and Gaudron JJ) unanimously dismissed Waltons’ appeal and upheld the lower court’s order that damages be paid to the Mahers. Mason CJ and Wilson J in a joint judgment and Brennan J found for the Mahers on the basis of equitable estoppel. Deane and Gaudron JJ found for the Mahers on the basis of common law estoppel. Extract: The extracts below from the joint judgment of Mason CJ and Wilson J and the judgment of Brennan J reveal the main elements of equitable estoppel and its application to the facts of the case. They also discuss the availability of equitable estoppel in cases where there is no pre-existing contractual relationship between the parties. The judgment of Brennan J includes an often-cited summary of the main elements of equitable estoppel.

Mason CJ and Wilson J Promissory estoppel certainly extends to representations (or promises) as to future conduct.1 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.2 But Denning J in Central London Property Trust Ltd v High Trees House Ltd,3 [page 873]

treated it as a wide-ranging doctrine operating outside the pre-existing contractual relationship. … In principle there is certainly no reason the doctrine should not apply so as to preclude departure by a person from a representation that he will not enforce a non-contractual right.4 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 equity5 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, the estoppel ‘may be part of a cause of action, but not a cause of action in itself’.6 But the [Mahers] ask us to drive promissory estoppel one step further by enforcing directly in the absence of a pre-existing relationship of any kind a non-contractual promise on which the representee has relied to his detriment. For the purposes of discussion, we shall assume that there was such a promise in the present case. The principal objection to the enforcement of such a promise is that it would outflank the principles of the law of contract. Holmes J expressed his objection to the operation of promissory estoppel in this situation when he said: It would cut up the doctrine of consideration by the roots, if a promisee could make a gratuitous promise binding by subsequently acting in reliance on it.7 Likewise, Sir Owen Dixon considered that estoppel cut across the principles of the law of contract, notably offer and acceptance and consideration.8 And Denning LJ in Combe v Combe, after noting that ‘The doctrine of consideration is too firmly fixed to be overthrown by a side-wind’, said that such a promise could only be enforced if it was supported by sufficient consideration.9 Moreover, it has been suggested that the enforcement of a promise given without consideration is by no means consistent with Hoyt’s Pty Ltd v Spencer10 and Maybury v Atlantic Union Oil Co Ltd.11

[page 874] There is force in these objections and it may not be a sufficient answer to repeat the words of Lord Denning MR in Crabb v Arun District Council: ‘Equity comes in, true to form, to mitigate the rigours of strict law’.12 True it is that in the orthodox case of promissory estoppel, where the promisor promises that he will not exercise or enforce an existing right, the elements of reliance and detriment attract equitable intervention on the basis that it is unconscionable for the promisor to depart from his promise, if to do so will result in detriment to the promisee. And it can be argued that there is no justification for applying the doctrine of promissory estoppel in this situation, yet denying it in the case of a non-contractual promise in the absence of a pre-existing relationship. The promise, if enforced, works a change in the relationship of the parties, by altering an existing legal relationship in the first situation and by creating a new legal relationship in the second. The point has been made that it would be more logical to say that when the parties have agreed to pursue a course of action, an alteration of the relationship by non-contractual promise will not be countenanced, whereas the creation of a new relationship by a simple promise will be recognized.13 … Some recent English decisions are relevant to this general discussion. Amalgamated Property Co v Texas Bank14 in the Court of Appeal and Pacol Ltd v Trade Lines Ltd,15 are instances of common law or conventional estoppel. However, the comment of Robert Goff J in Texas Bank at first instance is significant. His Honour observed: Such cases are very different from, eg, 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.16 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 [page 875] 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,17 the Court of Appeal treated promissory estoppel and proprietary estoppel or estoppel by acquiescence as mere facets of the same general principle, a point also made by Lord Denning MR in Texas Bank,18 and seemingly accepted by the Privy Council in Attorney-General (Hong Kong) v Humphreys Estate Ltd.19 In Taylors Fashions, Oliver J also remarked 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.20 Indeed, Scarman LJ in Crabb saw the question in terms of whether an equity had arisen from the conduct and relationship of the parties, concluding that the court should determine what was ‘the minimum equity to do justice to the plaintiff’.21 The decision in Crabb is consistent with the principle of proprietary estoppel applied in Ramsden v Dyson.22 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’.23 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 … 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 [page 876] created or encouraged by a defendant given by Lord Cottenham LC in Hammersley v De Biel,24 affirmed by the House of Lords in that case, was undermined by the insistence in Jorden v Money25 on a representation of existing fact and destroyed by Maddison v Alderson.26 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 eighty-three 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.27 Their Lordships observed: 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.28 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 [page 877] reliance on an executory promise to do something, resulting in the promisee changing his position or suffering detriment, does not bring promissory estoppel into play. Something more would be required. Humphreys Estate suggests that this may be found, if at all, in the creation or encouragement by the party estopped in the other party of an assumption that a contract will come into existence or a promise will be performed and that the other party relied on that assumption to his detriment to the knowledge of the first party. Humphreys Estate referred in terms to an assumption that the plaintiff would not exercise an existing legal right or liberty, the right or liberty to withdraw from the negotiations, but as a matter of substance such an assumption is indistinguishable from an assumption that a binding contract would eventuate. On the other hand the United States experience, distilled in the Restatement (2d, §90), suggests that the principle is to be expressed in terms of a reasonable expectation on the part of the promisor that his promise will induce action or forbearance by the promisee, the promise inducing such action or forbearance in circumstances where injustice arising from unconscionable conduct can only be avoided by holding the promisor to his promise. 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 Bank29 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 [Waltons] entitled to stand by in silence when it must have known that [the Mahers] 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 [Waltons]. 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. As we have noted, [Waltons] was bound to give up possession of its existing commercial premises in Nowra in January 1984; the new building was to be available for fitting out by 15 January and completed by 5 February 1984. The … solicitor [for the Mahers] had said to [Waltons’] solicitor on 7 November that it would be impossible for Maher to complete the building within the agreed time unless the agreement were concluded ‘within the next day or two’. The outstanding details were agreed within a day or two thereafter, and the work of preparing the site commenced almost immediately. The second factor of importance is that [the Mahers] executed the counterpart deed and it was forwarded to [Waltons’] solicitor on 11 November. The assumption on which [the Mahers] acted thereafter was that completion of the necessary exchange was a formality. The next their [page 878] solicitor heard from [Waltons] was a letter from its solicitors dated 19 January, informing him that [Waltons] did not intend to proceed with the matter. It had known, at least since 10 December, that costly work was proceeding on the site. It seems to us, in the light of these considerations, that [Waltons] was under an obligation to communicate with [the Mahers] 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 Mahers] that it had not yet decided upon the course it would take. It was not entitled simply to retain the counterpart deed executed by the respondents and do nothing. [Waltons’]

inaction, in all the circumstances, constituted clear encouragement or inducement to [the Mahers] to continue to act on the basis of the assumption which they had made. It was unconscionable for it, knowing that [the Mahers] 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.

Brennan J Equitable estoppel … does not operate by establishing an assumed state of affairs. … [A]n equitable estoppel is a source of legal obligation. It is not enforceable against the party estopped because a cause of action or ground of defence would arise on an assumed state of affairs; it is the source of a legal obligation arising on an actual state of affairs. An equitable estoppel is binding in conscience on the party estopped, and it is to be satisfied by that party doing or abstaining from doing something in order to prevent detriment to the party raising the estoppel which that party would otherwise suffer by having acted or abstained from acting in reliance on the assumption or expectation which he has been induced to adopt. Perhaps equitable estoppel is more accurately described as an equity created by estoppel. … The element which both attracts the jurisdiction of a court of equity and shapes the remedy to be given is unconscionable conduct on the part of the person bound by the equity, and the remedy required to satisfy an equity varies according to the circumstances of the case. … Sometimes it is necessary to decree that a party’s expectation be specifically fulfilled by the party bound by the equity; sometimes it is necessary to grant an injunction to restrain the exercise of legal rights either absolutely or on condition; sometimes it is necessary to give an equitable lien on property for the expenditure which a party has made on it. However, in moulding its decree, the court, as a court of conscience, goes no further than is necessary to prevent unconscionable conduct. What, then, is unconscionable conduct? An exhaustive definition is both impossible and unnecess--ary, but

the minimum elements required to give rise to an equitable estoppel should be stated. Some indication of what constitutes unconscionable conduct can be gleaned from the instances in which an equity created by estoppel has been held to arise. If cases of equitable estoppel are in truth but particular instances of the operation of the general principles of [page 879] equity, there is little purpose in dividing those cases into the categories of promissory and proprietary estoppel which are not necessarily exhaustive of the cases in which equity will intervene. … I do not find it generally helpful to divide into classes the cases in which an equity created by estoppel has been held to exist. However, the familiar categories serve to identify the characteristics of the circumstances which have been held to give rise to an equity in the party raising the estoppel. In cases of promissory estoppel, the equity binds the holder of a legal right who induces another to expect that that right will not be exercised against him. In cases of proprietary estoppel, the equity binds the owner of property who induces another to expect that an interest in the property will be conferred on him. In cases where there has been an imperfect gift of property the equity binds the donor of the property when, after the making of the imperfect gift, he does something to induce the donee to act on the assumption that the imperfect gift is effective or on the expectation that it will be made effective. In all cases where an equity created by estoppel is raised, the party raising the equity has acted or abstained from acting on an assumption or expectation as to the legal relationship between himself and the party who induced him to adopt the assumption or expectation. The assumption or expectation does not relate to mere facts, whether existing or future. (An assumption as to a legal relationship may be an assumption that there is no legal relationship, as in the cases where A builds on B’s land assuming it to be his own.) Though the party raising the estoppel may be under no mistake as to the facts, he assumes that a particular legal relationship exists or expects that a particular legal relationship will exist between himself and

the party who induced the assumption or expectation. The assumption or expectation may involve an error of law. Thus a promissory or a proprietary estoppel may arise when a party, not mistaking any facts, erroneously attributes a binding legal effect to a promise made without consideration. But, if the party raising the estoppel is induced by the other party’s promise to adopt an assumption or expectation, the promise must be intended by the promisor and understood by the promisee to affect their legal relations. … [T]he basic object of the doctrine … is to avoid the detriment which the promisee would suffer if the promisor fails to fulfil the promise. It … is important to observe that the doctrine has no application to an assumption or expectation induced by a promise which is not intended by the promisor and understood by the promisee to affect their legal relations. … It follows that an assumption or expectation by one party which does not relate to what the other party is bound to do or not to do gives no foundation for an equitable estoppel, though the assumption or expectation relates to the prospect of the other party conducting himself in a particular way. The risk that the other party who, being free to conduct himself in whatever way he chooses, may choose to conduct himself in a way different from that assumed or expected rests with the party who adopts the assumption or expectation. Parties who are negotiating a contract may proceed in the expectation that the terms will be agreed and a contract made but, so long as both parties recognize that either party is at liberty to withdraw from the negotiations at any time before the contract is made, it cannot be unconscionable for one party to do so. Of course, the freedom to withdraw may be fettered or extinguished by agreement but, in the absence of agreement, either party ordinarily retains his [page 880] freedom to withdraw. It is only if a party induces the other party to believe that he, the former party, is already bound and his freedom to withdraw has

gone that it could be unconscionable for him subsequently to assert that he is legally free to withdraw. It is essential to the existence of an equity created by estoppel that the party who induces the adoption of the assumption or expectation knows or intends that the party who adopts it will act or abstain from acting in reliance on the assumption or expectation. When the adoption of an assumption or expectation is induced by the making of a promise, the knowledge or intention that the assumption or expectation will be acted upon may be easily inferred. But if a party encourages another to adhere to an assumption or expectation already formed or acquiesces in the making of an assumption or the entertainment of an expectation when he ought to object to the assumption or expectation — steps which are tantamount to inducing the other to adopt the assumption or expectation — the inference of knowledge or intention that the assumption or expectation will be acted on may be more difficult to draw. The unconscionable conduct which it is the object of equity to prevent is the failure of a party, who has induced the adoption of the assumption or expectation and who knew or intended that it would be relied on, to fulfil the assumption or expectation or otherwise to avoid the detriment which that failure would occasion. The object of the equity is 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. If this object is kept steadily in mind, the concern that a general application of the principle of equitable estoppel would make non-contractual promises enforceable as contractual promises can be allayed. A noncontractual promise can give rise to an equitable estoppel only when the promisor induces the promisee to assume or expect that the promise is intended to affect their legal relations and he knows or intends that the promisee will act or abstain from acting in reliance on the promise, and when the promisee does so act or abstain from acting and the promisee would suffer detriment by his action or inaction if the promisor were not to fulfil the promise. When these elements are present, equitable estoppel almost wears the appearance of contract, for the action or inaction of the promisee looks like consideration for the promise on which, as the

promisor knew or intended, the promisee would act or abstain from acting. Lord Westbury in Dillwyn v Llewelyn, assimilated the relationship arising from equitable estoppel to the relationship arising in contract: If A puts B in possession of a piece of land, and tells him, ‘I give it to you that you may build a house on it’, and B on the strength of that promise, with the knowledge of A, expends a large sum of money in building a house accordingly, I cannot doubt that the donee acquires a right from the subsequent transaction to call on the donor to perform that contract and complete the imperfect donation which was made. (Emphasis added.)30 … But there are differences between a contract and an equity created by estoppel. A contractual obligation is created by the agreement of the parties; an equity created by [page 881] estoppel may be imposed irrespective of any agreement by the party bound. A contractual obligation must be supported by consideration; an equity created by estoppel need not be supported by what is, strictly speaking, consideration. The measure of a contractual obligation depends on the terms of the contract and the circumstances to which it applies; the measure of an equity created by estoppel varies according to what is necessary to prevent detriment resulting from unconscionable conduct. In Combe v Combe Denning LJ limited the application of promissory estoppel, as he expounded the doctrine, to ensure that it did not displace the doctrine of consideration. His Lordship’s solution of the problem was to hold that the promise should not itself be a cause of action, but merely the foundation of a defensive equity. … The remedy offered by promissory estoppel has been limited to preventing the enforcement of existing legal rights. In Crabb v Arun District Council Lord Denning MR said that if a person: by his words or conduct, so behaves as to lead another to believe that he will not insist on his strict legal rights — knowing or

intending that the other will act on that belief — and he does so act, that again will raise an equity in favour of the other; and it is for a court of equity to say in what way the equity may be satisfied.31 If the object of the principle were to make a promise binding in equity, the need to preserve the doctrine of consideration would require a limitation to be placed on the remedy. But there is a logical difficulty in limiting the principle so that it applies only to promises to suspend or extinguish existing rights. If a promise by A not to enforce an existing right against B is to confer an equitable right on B to compel fulfilment of the promise, why should B be denied the same protection in similar circumstances if the promise is intended to create in B a new legal right against A? There is no logical distinction to be drawn between a change in legal relationships effected by a promise which extinguishes a right and a change in legal relationships effected by a promise which creates one. Why should an equity of the kind to which Combe v Combe refers be regarded as a shield but not a sword? … Moreover, unless the cases of proprietary estoppel are attributed to a different equity from that which explains the cases of promissory estoppel, the enforcement of promises to create new proprietary rights cannot be reconciled with a limitation on the enforcement of other promises. If it be unconscionable for an owner of property in certain circumstances to fail to fulfil a non-contractual promise that he will convey an interest in the property to another, is there any reason in principle why it is not unconscionable in similar circumstances for a person to fail to fulfil a noncontractual promise that he will confer a non-proprietary legal right on another? It does not accord with principle to hold that equity, in seeking to avoid detriment occasioned by unconscionable conduct, can give relief in some cases but not in others. If the object of the principle of equitable estoppel in its application to promises were regarded as their enforcement rather than the prevention of detriment flowing from reliance on promises, the courts would be constrained to limit the application of the principles of [page 882]

equitable estoppel in order to avoid the investing of a non-contractual promise with the legal effect of a contractual promise. In Ajayi v R T Briscoe (Nigeria) Ltd, the Privy Council sought to qualify the enforceability of a non-contractual promise in this way: The principle, which has been described as quasi estoppel and perhaps more aptly as promissory estoppel, is that when one party to a contract in the absence of fresh consideration agrees not to enforce his rights an equity will be raised in favour of the other party. This equity is, however, subject to the qualifications (1) that the other party has altered his position, (2) that the promisor can resile from his promise on giving reasonable notice, which need not be a formal notice, giving the promisee a reasonable opportunity of resuming his position, (3) the promise only becomes final and irrevocable if the promisee cannot resume his position.32 The qualifications proposed bring the principle closer to a principle the object of which is to avoid detriment occasioned by non-fulfilment of the promise. But the better solution of the problem is reached by identifying the unconscionable conduct which gives rise to the equity as the leaving of another to suffer detriment occasioned by the conduct of the party against whom the equity is raised. Then the object of the principle can be seen to be the avoidance of that detriment and the satisfaction of the equity calls for the enforcement of a promise only as a means of avoiding the detriment and only to the extent necessary to achieve that object. So regarded, equitable estoppel does not elevate non-contractual promises to the level of contractual promises and the doctrine of consideration is not blown away by a side wind. Equitable estoppel complements the tortious remedies of damages for negligent misstatement or fraud and enhances the remedies available to a party who acts or abstains from acting in reliance on what another induces him to believe. As an element in unconscionable conduct is the inducing of the other party to adopt an assumption or expectation as to the parties’ legal relations, the question arises whether silence is capable of inducing the adoption of the assumption or expectation. … Clearly an assumption or expectation may be adopted not only as the result of a promise but also in certain circumstances as the result of

encouragement to adhere to an assumption or expectation already formed or as the result of a party’s failure to object to the assumption or expectation on which the other party is known to be conducting his affairs. In the present case the question is whether Waltons, knowing that Mr Maher was labouring under the belief that Waltons was bound to the contract, was under a duty to correct that belief. The evidence was capable of supporting an inference that Waltons knew the belief under which Mr Maher was labouring when Waltons became aware that Mr Maher was doing the work specified in the deed. Waltons deliberately refrained from correcting what Waltons must have regarded as an erroneous belief. Was it Waltons’ duty to do so? … Silence will support an equitable estoppel only if it would be inequitable thereafter to assert a legal relationship different from the one which, to the knowledge of the silent party, the other party assumed or expected. What would make it inequitable to depart from such an [page 883] assumption or expectation? Knowledge that the assumption or expectation could be fulfilled only by a transfer of the property of the person who stays silent, or by a diminution of his rights or an increase in his obligations. A person who knows or intends that the other should conduct his affairs on such an assumption or expectation has two options: to warn the other that he denies the correctness of the assumption or expectation when he knows that the other may suffer detriment by so conducting his affairs should the assumption or expectation go unfulfilled, or to act so as to avoid any detriment which the other may suffer in reliance on the assumption or expectation. It is unconscionable to refrain from making the denial and then to leave the other to bear whatever detriment is occasioned by nonfulfilment of the assumption or expectation. In my opinion, to establish an equitable estoppel, it is necessary for a plaintiff to prove that (1) the plaintiff assumed or expected 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. 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 plaintiff’s 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. This is such a case, as a brief recapitulation of the facts will show. The terms of the proposed contract had been agreed between the solicitors and set out in the counterpart deed executed and delivered to Waltons’ solicitor by way of exchange. In the days immediately following … receipt [by Waltons’ solicitor] of the executed counterpart deed, Waltons could properly have had the document returned and could have withdrawn from the negotiations. But the counterpart deed was not returned; it was retained presumably on the terms on which it had been delivered, ie, by way of exchange. The retention of the counterpart deed and the absence of any demur as to the schedule of finishes or terms of the deed was tantamount to a promise by Waltons that it would complete the exchange. That would not have sufficed to raise an equitable estoppel unless the Mahers acted on the promise to their detriment. But, after Waltons knew that Mr Maher had commenced work and (as it must have known) that Mr Maher had done so in the expectation that Waltons would execute and deliver the original deed, Waltons remained silent in order to have the benefit of the proposed contract if and when Waltons should decide to execute and deliver the original deed. As Waltons (by its solicitor) knew that Mr Maher (by his solicitor) had said that he would commence the work only if an agreement was concluded, Waltons must have known that Mr Maher either assumed that the contract had been made or expected that

[page 884] it would be made and that Waltons was not free to withdraw. Waltons intended that Mr Maher should continue to build the store in reliance on that assumption or expectation. Then, if not before, the time had come for Waltons to elect between terminating the negotiations or allowing Mr Maher to continue on the footing that Waltons was bound to enter into the proposed contract. Waltons’ silence induced Mr Maher to continue either on the assumption that Waltons was already bound or in the expectation that Waltons would execute and deliver the original deed as a matter of obligation. It was unconscionable for Waltons subsequently to seek to withdraw after a substantial part of the work was complete, leaving the Mahers to bear the detriment which non-fulfilment of the expectation entailed. Having elected to allow Mr Maher to continue to build, it was too late for Waltons to reclaim the initial freedom to withdraw which Waltons had in the days immediately following 11 November. As the Mahers would suffer loss if Waltons failed to execute and deliver the original deed, an equity is raised against Waltons. That equity is to be satisfied by treating Waltons as though it had done what it induced Mr Maher to expect that it would do, namely, by treating Waltons as though it had executed and delivered the original deed. It would not be appropriate to order specific performance if only for the reason that the detriment can be avoided by compensation. The equity is fully satisfied by ordering damages in lieu of specific performance.

Comments 36.2.1 See Radan, Gooley, and Vickovich at 36.21, 36.27, 36.35–36.40, 36.54–36.82, 36.85, and 36.88. 36.2.2 In relation to the first of Brennan J’s six elements of equitable estoppel, a broader view was taken by Priestley JA in Austotel Pty Ltd v Franklins Selfserve Pty Ltd (1989) 16 NSWLR 582 at 610, where his Honour indicated that it was enough if the relying party assumed that ‘a promise [would] be performed’. An example where the representor’s behaviour is outside any existing or

expected legal relationship and which might come within Priestley JA’s formulation, is where A promises to pay B $200 within 10 days. 36.2.3 Before the elements of equitable estoppel can be invoked, the promise or representation that is made must be sufficiently clear and unambiguous. In Crown Melbourne Ltd v Cosmopolitan Hotel (Vic) Pty Ltd (2016) 33 ALR 384 there was a division of opinion between Keane J and Nettle J on the level of clarity required in cases of promissory estoppel. Keane J, at 417, was of the view that it ‘should be no less … than would be required for an effective contractual variation’. Nettle J, at 434–5, took the view that a lesser standard of certainty was sufficient, it being the same as applied to instances of proprietary estoppel. 36.2.4 For discussions of the Waltons case, see E Clark, ‘The Swordbearer Has Arrived: Promissory Estoppel and Waltons Stores (Interstate) v Maher’ (1987–1989) 9 University of Tasmania Law Review 68; C N H Bagot, ‘Equitable Estoppel and Contractual Obligations in the Light of Waltons v Maher’ (1988) 62 Australian Law [page 885] Journal 926; P Parkinson, ‘Equitable Estoppel: Developments after Waltons Stores (Interstate) Ltd v Maher’ (1990) 3 Journal of Contract Law 50; M Bryan, ‘Almost 25 Years On: Some Reflections on Waltons v Maher’ (2012) 6 Journal of Equity 131; and J C Campbell, ‘Waltons v Maher: History, Unconscientiousness and Remedy — The “Minimum Equity”’ (2013) 7 Journal of Equity 171.

DETRIMENT AND EQUITABLE ESTOPPEL 36.3C

Je Maintiendrai Pty Ltd v Quaglia (1980) 26 SASR 101

Court: Full Court of the Supreme Court of South Australia

Facts: The Quaglias (the tenants) operated a hairdressing salon in premises leased from shopping centre proprietor, Je Maintiendrai Pty Ltd (the landlord). The three-year lease provided for a monthly rental of $278, to be increased annually on the basis of consumer price index rises. Some time after the lease term commenced, the parties had further discussions and the landlord company agreed to accept a reduced monthly rental of $240 for the remainder of the term. Quaglia paid the reduced rent as agreed, but then attempted to vacate before the lease term had expired. When the landlord discovered the Quaglias’ plans, it demanded payment of arrears of $2392, claimed to be the difference between the paid rent and the rental provided for in the lease. Its action was denied by a trial judge in the Local Court, who held it was estopped from claiming arrears because of the reduced rental promise. The landlord appealed to the Full Court. Issue: The issue before the Full Court was whether estoppel was applicable in circumstances where the promise to accept a reduced rent was made by the landlord in the absence of consideration from the tenant. Decision: The majority of the Full Court (King CJ and White J; Cox J dissenting) rejected the landlord’s appeal. It held that although the promisor/landlord had the right to resile from its gratuitous promise in respect of future payments, it could not recover arrears where the promisee/tenant established injustice by way of detriment suffered. The tenants’ detriment was the debt accumulated, by way of unpaid rent, in reliance on the landlord’s promise. Extract: The extracts from the judgment of King CJ highlight the requirement of proving a detriment suffered by the promisee for estoppel to be operative.

King CJ The issue on this appeal is whether [the landlord], having told [the tenants] that their rent was reduced, is estopped from recovering from

[them] as arrears of rent the additional amount which would have been due under the lease but for the reduction. … [page 886] The [landlord’s] promise to reduce the rent has no contractual force because it was made without consideration. The acceptance of a sum which is less than that legally due is not binding and does not extinguish liability for the balance unless there is fresh consideration.33 The evidence does not disclose fresh consideration. The [tenants’] case therefore rests upon an estoppel to which the facts are alleged to give rise. Few areas of law have given rise to more controversy in the last few decades than the area of promissory estoppel. There is a question as to whether the very notion of estoppel based upon promise or statement of future intention has any place in our law. It appears to run directly counter to the decision of the House of Lords in Jorden v Money.34 That case appeared to decide that to found an estoppel a representation of existing fact was required as contrasted with a mere expression of future intention. Yet twenty-three years after Jorden v Money, Lord Cairns LC in Hughes v Metropolitan Railway Co was able to say: … it is the first principle upon which all Courts of Equity proceed, that if parties who have entered into definite and distinct terms involving certain 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.35 The principle of equity expressed by Lord Cairns in that passage was applied by the Court of Appeal in Birmingham and District Land Company

v London and North Western Railway Co. Bowen LJ, referring to the principle enunciated by Lord Cairns, said: It seems to me to amount to this, that if persons who have contractual rights against others induce by their conduct those against whom they have such rights to believe that such rights will either not be enforced or will be kept in suspense or abeyance for some particular time, those persons will not be allowed by a Court of Equity to enforce the rights until such time has elapsed, without at all events placing the parties in the same position as they were before.36 The notion of promissory estoppel was given a modern formulation and a new impetus by the decision of Denning J … in Central London Property Trust Ltd v High Trees House Limited, where it was said to be the ‘natural result of the fusion of law and equity’.37 The doctrine has been expounded by Lord Denning in a number of subsequent cases. It has been recognized and confirmed by the House of Lords.38 In Woodhouse Ltd v Nigerian Produce Ltd [page 887] Lord Hailsham recognized the doctrine as ‘an expanding doctrine’ which raised ‘problems of coherent expression which have never been systematically explored’.39 The doctrine has received recognition in New Zealand.40 The learned authors of the third Australian edition of Cheshire and Fifoot on the Law of Contract (1974) maintain that the High Court has rejected the doctrine and that promissory estoppel forms no part of the law of Australia. The learned authors rely, in support of that contention, on Albert House Ltd (In Voluntary Liquidation) v Brisbane City Council.41 … I do not think that [that] case can be regarded as a rejection of the doctrine of promissory estoppel. The learned authors of Cheshire and Fifoot also rely upon the Privy Council case Chadwick v Manning.42 This was an appeal from a decree made by the Chief Judge in Equity in the Supreme Court of New South Wales in a suit to restrain a guarantor from

proceeding at law to enforce an indemnity against his co-guarantor on the ground that the co-guarantor had altered his position on the faith of a representation that the indemnity would not be enforced. The Privy Council held that there had been no such representation, but also held, endorsing Jorden v Money, that a representation as to intention as distinct from existing fact could not found an estoppel. The latter holding is inconsistent, however, with the subsequent Privy Council case of Ajayi v R T Briscoe (Nigeria) Ltd.43 In [that case] the Privy Council clearly and unequivocally recognized estoppel arising from promise or statement of intention, as part of the law, although it did not find the necessary conditions to be present in that case. I think that until the question is dealt with by the High Court, this Court should treat the formulation of the principle in Ajayi’s case as authoritative. In that case the Privy Council formulated the principle as follows: Their lordships are of opinion that the principle of law as defined by Bowen LJ has been confirmed by the House of Lords in the case of the Tool Metal Manufacturing Co Ltd v Tungsten Electric Co Ltd,44 where the authorities were reviewed, and no encouragement was given to the view that the principle was capable of extension so as to create rights in the promises for which he had given no consideration. The principle, which has been described as quasi estoppel and perhaps more aptly as promissory estoppel, is that when one party to a contract in the absence of fresh consideration agrees not to enforce his rights an equity will be raised in favour of the other party. This equity is, however, subject to the qualification (1) that the other party has altered his position, (2) that the promisor can resile from his promise on giving reasonable notice, which need not be a formal notice, giving the promisee a reasonable opportunity of resuming his position, (3) the promise only becomes final and irrevocable if the promisee cannot resume his position.45 [page 888] It is clear from the above formulation that there can be no estoppel unless the promisee has altered his position on the faith of the promise. Lord

Denning maintains that it is sufficient that the promisee has acted upon the promise and that in the case of promissory estoppel, unlike estoppel by representation, detriment to the promisee is unnecessary.46 The rule in the case of estoppel by representation of an existing fact is clear. The representor is estopped only if the representee would suffer a detriment in the event of the representor being permitted to set up rights against the representee inconsistent with the representation. The principle upon which estoppel in pais is founded, as expressed by Dixon J in Grundt v Great Boulder Gold Mines Pty Ltd, ‘is that the law should 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’.47 The principle upon which estoppel arising from a promise or statement of intention is founded, as expressed by Lord Cairns LC in Hughes v Metropolitan Railway Co, is that ‘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’.48 The basic principle underlying both types of estoppel is, I apprehend, the same. It rests upon the injustice to the representee or promisee of allowing the representor or promisor, in the circumstances which exist, to depart from the representation or promise. If the representee or promisee will suffer no detriment as a consequence of the other party resiling from his position and asserting his strict legal rights, it is difficult to see where the injustice of permitting him to do so would lie. I can see no valid reason for making a distinction between these two types of estoppel in this respect. In my opinion, a person who promises or states his intention to another not to enforce or insist upon his legal rights is not estopped from resiling from that position and reverting to the strict legal position, unless his doing so would result in some detriment and therefore some injustice to that other. In the present case there was an intimation that the rent legally due under the lease was reduced. This clearly amounts to a promise not to enforce the legal right to the difference between the reduced amount and the amount legally due. It is not disputed that [the landlord] was entitled to revert to the strict legal position as to future payments upon giving due notice. The claim in the action relates to the difference between the reduced amount and that legally due from the time the intimation was given and the time when it was clear that [the landlord] required payment in full. Whether on the facts [the

landlord] might have been permanently estopped does not therefore fall for decision. What must be decided is whether, if [the landlord] were allowed to recover the arrears, [the tenants] would suffer a detriment which renders it unjust that [the landlord] should be permitted to do so. [page 889] The learned trial Judge found that [the tenants] would suffer a detriment as a result of being faced with a lump sum liability. I quote his reasons: That it is often easier for people to make small periodical payments than to find a lump sum is obvious, and there is no need to point to the use by many people of instalment credit facilities, on which extra costs are incurred in respect of the credit charges, to pay for houses, goods or services. Where, as in the present case [the landlord] has agreed to forego, and not merely to defer, the receipt of part of the future payments contractually due he cannot, without prejudicing [the tenant], subsequently demand as a lump sum all the money which would have been paid by past instalments had [the landlord] not agreed to accept less. In the present case, instead of having to find a comparatively small sum of money every month, which [the tenants] were, though not without difficulty, able to do, they were in fact, after almost eighteen months of being lulled to sleep, suddenly faced with a demand to pay a large sum of accumulated ‘arrears’. … The evidence as to detriment is sparse. The [tenants’] case would be stronger if there were evidence of financial hardship or embarrassment as a result of the debt accumulating or, as in Holt v Markham,49 that the money had been spent in other ways and that [they] were unable to pay, at any rate without difficulty or inconvenience. It would be stronger if there were evidence that they had conducted their affairs differently as a result of the reduction, for example that they had refrained from exploring the possibility of selling the business and assigning the lease. The sparsity of evidence of detriment has caused me to consider anxiously whether the learned Judge’s conclusion can be supported. In the end I have reached the conclusion that we should not disturb it. The [tenants] conducted a small

business. There was some evidence of their financial position and the learned trial Judge heard it given. He was in a better position than is this Court to judge whether the accumulation of arrears of this magnitude would be a detriment to [the tenants], and to assess whether any significance was to be attached to [the tenants’] failure to say so expressly. I think that we should accept the conclusion which he reached.

[page 890]

Comment 36.3.1 See Radan, Gooley, and Vickovich at 36.73–36.80.

RELIEF BASED UPON EQUITABLE ESTOPPEL 36.4C ACN 074 971 109 (as trustee for Argot Unit Trust) v National

Mutual Life Association of Australasia Ltd (2008) 21 VR 351 Court: Court of Appeal in Victoria Facts: National Mutual Life Association of Australia (NML) issued policies of life insurance called ‘prosperity bonds’, within portfolios that were ultimately subdivided into ‘units’. Changes in the market value of the investments in each portfolio were reflected in the prices of the units. Policyholders could switch units from one portfolio to another. Adjustments to the number of units held were made using unit prices as at the date on which the requested transfer was made. In 1998 Keller entered into negotiations with NML to make prosperity bonds available to persons introduced by Keller (the investors) on special terms. The special terms included terms that entitled the appellants (themselves investors) to switch between portfolios on three days’ notice of intending to switch, and at the price applicable on the date of giving notice (the agreement). The investors (using

Keller’s representations) exploited the agreement by switching or declining to switch between various portfolios with the benefit of hindsight and thus achieving risk-free profits. This was achieved because prices published by NML on one day reflected movements in asset values that had occurred on the previous day and the price of the units in the some portfolios (secure portfolios) almost always reflected movements in the all ordinaries index (historic pricing). Keller was therefore able to time his portfolio switching along those price movements. In 2000 NML discovered the activity and took steps to prevent it by removing historic pricing. This action triggered the proceedings. Issue: The issue before the Court of Appeal was whether NML was, in all the circumstances, estopped from its contractual right to nonhistoric pricing. Decision: The Court of Appeal in Victoria (Buchanan, Nettle, and Dodds-Streeton JJA) unanimously held that NML was estopped from relying on its contractual rights in relation to pricing. Extract: The extracts from the joint judgment of the Court of Appeal discuss the nature of equitable relief in equitable estoppel cases and why, in this case, reliance-based relief, rather than expectation-based relief, was appropriate.

Buchanan, Nettle, and Dodds-Streeton JJA As has been observed, the reason that the [trial] judge limited relief to the avoidance of detriment was because of what his Honour perceived to be the difference between cases like [page 891] Dillwyn v Llewellyn,50 in which the requirements of conscience necessitate that a defendant be held to an assumption which he or she has created, and what his Honour called ‘other cases’ in which ‘the Australian preference is not to fulfil the plaintiff’s expectation but to analyse what is the detriment

suffered by the plaintiff from doing acts and things which he or she might not otherwise have done because of the promise’.51 Based upon his extensive survey of the authorities, his Honour concluded that this case fell within the latter category. With respect we agree. As Brennan J explained in Waltons Stores (Interstate) Ltd v Maher, (‘Waltons Stores’) the object of the principle of equitable estoppel is the avoidance of the detriment occasioned by the conduct of the party against whom the equity is raised. It follows that satisfaction of the equity calls for the enforcement of a promise only as a means of avoiding the detriment and only to the extent necessary to achieve that object. As such, equitable estoppel complements the tortious remedies of damages for negligent misstatement or fraud and enhances the remedies available to a party who acts or abstains from acting in reliance of what another induces him to believe.52 Building on that approach, in Verwayen v Commonwealth, Deane J said that although the prima facie operation of an estoppel by conduct is to preclude departure from the assumed state of affairs, that will yield to some lesser form of relief if relief framed on the basis of the assumed state of affairs would be inequitably harsh; and holding an estopped party to the assumed stated of affairs is inequitably harsh if it exceeds what could be justified by the requirements of conscientious conduct and is unjust to the estopped party.53 Similarly, Mason CJ, Brennan, Dawson and Gaudron JJ all spoke in terms of the doctrine as one which permits the court to do what is required in order to avoid detriment to the party who has been induced to act upon an assumed state of affairs and thus that, according to the circumstances of any given case, the relief required may be less than making good the assumption on the basis of which the plaintiff was encouraged to deal. McHugh J also concluded that what is required to satisfy the equity which arises against an estopped party depends on the circumstances. It is true that in Giumelli v Giumelli,54 Gleeson CJ and McHugh, Gummow and Callinan JJ said that Verwayen did not foreclose as a matter of doctrine relief making good the assumption in an appropriate case. But nothing which their Honours said in Giumelli suggests that there was any change from the view expressed in Verwayen that the doctrine of equitable estoppel enables a court to do what is required to avoid detriment to the party who

has been induced to act upon an assumed state of affairs, and thus that the relief required in a given case may be less than making good the assumption. Accordingly, since Giumelli, in the majority of commercial cases not involving the acquisition of an interest in real property in which the doctrine of equitable estoppel had been invoked, the relief accorded it has been no more than was necessary to avoid detriment. [page 892] In concluding that the relief required in this case was no more than was necessary to avoid detriment, the judge said this: To frame the relief on such a basis ‘would be inequitably harsh’ and ‘would otherwise exceed what could be justified by the requirements of conscientious conduct’. The plaintiffs have the right and have always had the right to have their investment returned in full. They may be entitled to be compensated for such costs as they reasonably incurred in borrowing and maintaining their investment until such time as they were given reasonable notice of [NML’s] intention to discontinue its use of historical pricing. They may also make out a right to compensation for the payment of management fees to Coneview until the expiration of such time. They may also make out a claim that they would have made other investments or entered into other contracts had they not been induced to invest in [NML’s] prosperity bonds. If they are able to establish such a claim they may be awarded such damages as they can establish arising from such a loss of opportunity. That is the minimum equity needed to avoid the plaintiffs’ detriment. The expectation profits or loss of bargain which would flow from the fulfilment of the plaintiffs’ assumption of a right to make arbitrage profits for the life of the policies is not a detriment for which equity should provide relief. If, contrary to my view, the loss of bargain should be treated as a detriment, discretionary considerations militate against the granting of equitable relief for the loss of expected profits. [NML] has identified a number of factors which would make it inequitable and oppressive were such

relief to be granted. The nature and the quantum of the plaintiffs’ claim and their conduct makes it wholly inappropriate that they should have the benefit of the assumption either for the life of the policy or the specified lesser period of 10 years claimed. [NML’s] unconscionable conduct does not require it to be bound to give effect to the assumption after the giving of reasonable notice that it no longer intended to act as the plaintiffs assumed. The minimum equity to avoid the detriment does not call for the enforcement of the assumption. The plaintiffs are entitled to an award of damages as the minimum equity arising from the [NML’s] unconscionable conduct. …55 With respect, we agree. By standing by and allowing the appellants to act on the assumption that the contracts would continue to be administered in the same manner as the other [Coneview] investors’ policies, [NML] in effect represented that it would not enforce its contractual rights under the policy. The appellants’ reliance upon that state of affairs gave rise to an equity in favour of the appellants. But, in accordance with Brennan J’s exposition of principle in Waltons Stores, the equity was subject to the qualification that [NML] could resile from its ‘promise’ (which is to say the assumed basis of dealing), on giving reasonable notice, unless the appellants could not resume their position. In this case, the appellants could resume their position. As [the trial judge] observed, they could have redeemed their policies and repaid their loans at any time; and they still can. The orders which [the trial judge] made will restore them to their original positions with, in effect, the benefits, for a [page 893] reasonable period following [NML’s] departure from that assumed basis of dealing, of the terms which the appellants assumed would apply. … We agree with [the trial judge’s] analysis. In our view, the appellants’ conduct and the nature and the quantum of their claim would make it inappropriate that they should have the benefit of the assumption either for the life of the prosperity bonds or the specified lesser period of 10 years

claimed. This is not a case in which the effects of unconscionable conduct are to be measured in the imponderables of human feelings. There is nothing personal or heartfelt or otherwise special about the appellants’ disappointment at [NML’s] departure from the assumed state of dealing. The case is simply about money and more precisely about how much of it each side sought to make out of the other. As is apparent from the appellants’ particulars of October 2006, there is a massive disproportion between their claim for reliance/detriment based relief, which is quantified in the sum of $37m, and the supposed expectation based relief which is claimed in the sum of $1.44b. In the circumstances of this case, such an exorbitant amount of money could not be justified by the requirements of conscientious conduct.

Comment 36.4.1 See Radan, Gooley, and Vickovich at 36.84–36.88.

1.

Legione v Hateley (1983) 152 CLR 406 at 432.

2.

Ajayi v R T Briscoe (Nigeria) Ltd [1964] 3 All ER 556 at 559; State Rail Authority of New South Wales v Heath Outdoor Pty Ltd (1986) 7 NSWLR 170 at 193. [1947] KB 130 at 134–5.

3. 4. 5.

Durham Fancy Goods Ltd v Michael Jackson (Fancy Goods) Ltd [1968] 2 QB 839 at 847; AttorneyGeneral v Codner [1973] 1 NZLR 545 at 553. Hughes v Metropolitan Railway Co (1877) 2 App Cas 439 at 448; Combe v Combe [1951] 2 KB 215 at 219–20.

6. 7.

Combe v Combe [1951] 2 KB 215 at 220. Commonwealth v Scituate Savings Bank (1884) 137 Mass 301 at 302.

8. 9.

O Dixon, ‘Concerning Judicial Method’ (1956) 29 Australian Law Journal 468 at 475. Combe v Combe [1951] 2 KB 215 at 220.

10. 11.

(1919) 27 CLR 133. (1953) 89 CLR 507. See P D Finn, ‘Equitable Estoppel’ in P D Finn (ed), Essays in Equity, Lawbook Co, Sydney (1985), 59 at 75, and D W Greig and J L R Davis, The Law of Contract, Lawbook Co, Sydney, 1987, pp 146–9, 175; but cf N Seddon, ‘A Plea for the Reform of the Rule in Hoyt’s Pty Ltd v Spencer’ (1978) 52 Australian Law Journal 372.

12. 13.

Crabb v Arun District Council [1976] Ch 179 at 187. D Jackson, ‘Estoppel as a Sword’ (1965) 81 Law Quarterly Review 223 at 242.

14.

[1982] QB 84.

15.

[1982] 1 Lloyd’s Rep 456.

16. 17.

Amalgamated Investment & Property Co Ltd v Texas Commerce International Bank Ltd [1982] QB 84 at 107. [1982] QB 133 at 153.

18. 19.

[1982] QB 84 at 122. [1987] 1 AC 114 at 123–4.

20. 21.

Taylors Fashions Ltd v Liverpool Victoria Trustees Co Ltd [1982] QB 133 at 153. Crabb v Arun District Council [1976] Ch 179 at 193–4, 198. See also Pascoe v Turner [1979] 2 All ER 945 at 951.

22. 23.

(1866) LR 1 HL 129. Grundt v Great Boulder Pty Gold Mines Ltd (1937) 59 CLR 641 at 675. See also Thompson v Palmer (1933) 49 CLR 507 at 547.

24. 25.

(1845) 8 ER 1312. (1854) 10 ER 868.

26. 27.

(1883) 8 App Cas 467. Attorney-General of Hong Kong v Humphreys Estate Ltd [1987] 1 AC 114 at 124.

28. 29.

Attorney-General of Hong Kong v Humphreys Estate Ltd [1987] 1 AC 114 at 127–8. [1982] QB 84 at 107.

30. 31.

Dillwyn v Llewelyn (1862) 45 ER 1285 at 1286. Crabb v Arun District Council [1976] Ch 179 at 188.

32. 33.

Ajayi v R T Briscoe (Nigeria) Ltd [1964] 3 All ER 556 at 559. Foakes v Beer (1884) 9 App Cas 605.

34. 35.

(1854) 10 ER 868. Hughes v Metropolitan Railway Co (1877) 2 App Cas 439 at 448.

36. 37.

Birmingham and District Land Company v London and North Western Railway Co (1889) 40 Ch D 268 at 286. Central London Property Trust Ltd v High Trees House Limited [1947] KB 130 at 134.

38. 39.

Tool Metal Manufacturing Co Ltd v Tungsten Electric Co Ltd [1955] 1 WLR 761. Woodhouse Ltd v Nigerian Produce Ltd [1972] AC 741 at 758.

40. 41.

Commissioner of Inland Revenue v Morris [1958] NZLR 1126; McCathie v McCathie [1971] NZLR 58 especially at 71. (1968) 42 ALJR 158.

42. 43.

[1896] AC 231. [1964] 3 All ER 556.

44. 45.

[1955] 2 All ER 657. Ajayi v R T Briscoe (Nigeria) Ltd [1964] 3 All ER 556 at 559.

46. 47.

W J Alan Ltd v El Nasr Export and Import Co [1972] 2 QB 189. Grundt v Great Boulder Gold Mines Pty Ltd (1937) 59 CLR 641 at 674.

48. 49.

Hughes v Metropolitan Railway Co (1877) 2 App Cas 439 at 448. [1923] 1 KB 504.

50.

(1862) 45 ER 1285.

51.

ACN 074 971 109 (as trustee for Argot Unit Trust) v The National Mutual Life Association of Australasia Ltd [2006] VSC 507 at [943].

52. 53.

Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 at 413. Commonwealth of Australia v Verwayen (1990) 170 CLR 394 at 443.

54. 55.

(1999) 196 CLR 101 at 125. ACN 074 971 109 (as trustee for Argot Unit Trust) v The National Mutual Life Association of Australasia Ltd [2006] VSC 507 at [952]–[954].

[page 894]

37 LIABILITY IN THE LAW OF TORTS

INTRODUCTION 37.1 This chapter deals with circumstances in which remedies from the law of torts are relevant in cases where a contract is involved. First, damages in the tort of deceit are available where a contract has been entered into as the result of a fraudulent misrepresentation. The principles relating to the tort of deceit are fleshed out in Derry v Peek (1889) 14 App Cas 337 (see 37.2C) and Zurich Insurance Co plc v Hayward [2017] AC 152 (see 37.3C). Second, damages in the tort of negligence can be recovered in cases of carelessly made pre-contractual statements, as is illustrated in Esso Petroleum Co Ltd v Mardon [1976] QB 801 (see 37.4C). Third, damages in the tort of negligence are also available to a plaintiff where the defendant’s action amounts to both a breach of contract and the tort of negligence. These cases of concurrent liability give rise to differences in the measure of damages that the plaintiff can recover, depending upon whether he or she seeks to recover contractual or tortious damages. One reason for this difference stems from different rules as to remoteness between contract law and tort law, as is discussed in Koufos v C Czarnikow Ltd [1969] 1 AC 350 (see 37.5C). Fourth, the tort of inducing a breach of contract gives rise to tortious damages in favour of a party to the contract against a third party in circumstances where:

the third party has knowledge that he or she induced a breach of contract by the other party to the contract; the third party intended to procure the breach of contract; and the other party breached the contract: OBG Ltd v Allan [2008] 1 AC 1 (see 37.6C). The only defence to the tort of inducing a breach of contract is that the third party’s interference was justified: Zhu v Treasurer of the State of New South Wales (2004) 218 CLR 530 (see 37.7C). [page 895]

FRAUDULENT MISREPRESENTATION 37.2C

Derry v Peek (1889) 14 App Cas 337

Court: House of Lords Facts: The Plymouth, Devonport and District Tramways Co was given the statutory power, with the consent of the Board of Trade, to move carriages on the tramways it produced by animal power, steam power, and any mechanical means. The directors of the company issued a prospectus seeking public investment in which they claimed that ‘by the special Act of Parliament obtained, the company has the right to use steam or mechanical power …’. Sir Henry Peek, in reliance on the prospectus, purchased shares in the company, but the Board of Trade refused its consent for the use of steam and mechanical power on most of the tramways. The company’s fortunes declined and it was eventually wound up. Peek took legal action against Derry and the other directors on the basis of fraudulent misrepresentation for deceitfully inducing him to invest. Issue: The issue before the House of Lords was whether the directors were liable in the face of their defence that they held an honest belief that obtaining the Board of Trade’s consent was a mere formality. Decision: The House of Lords (Lords Halsbury, Watson, Bramwell,

Fitzgerald, and Herschell) unanimously ruled that the directors’ representations were not fraudulent and that they were not liable for damages in the tort of deceit. Extract: The extract from the judgment of Lord Herschell contains what is often quoted as the most authoritative definition of fraudulent misrepresentation.

Lord Herschell My Lords, in the statement of claim in this action [Peek] … alleges that [the directors] made in a prospectus issued by them certain statements which were untrue, that they well knew that the facts were not as stated in the prospectus, and made the representations fraudulently, and with the view to induce [him] to take shares in the company. ‘This action is one which is commonly called an action of deceit, a mere common law action.’ This is the description of it given by Cotton LJ in delivering judgment. I think it important that it should be borne in mind that such an action differs essentially from one brought to obtain rescission of a contract on the ground of misrepresentation of a material fact. The principles which govern the two actions differ widely. Where rescission is claimed it is only necessary to prove that there was misrepresentation; then, however honestly it may have been made, however free from blame the person who made it, the contract, having been obtained by misrepresentation, cannot stand. In an action of deceit, on the contrary, it is not enough to establish misrepresentation alone; it is conceded on all hands that something more must be proved to cast liability upon the defendant, though it has been a matter of controversy what additional elements are requisite. … Care must obviously be observed in applying the language used in relation to such actions to an [page 896] action of deceit. Even if the scope of the language used extends beyond the particular action which was being dealt with, it must be remembered that

the learned judges were not engaged in deter--mining what is necessary to support an action of deceit, or in discriminating with nicety the elements which enter into it. There is another class of actions which I must refer to also for the purpose of putting it aside. I mean those cases where a person within whose special province it lay to know a particular fact, has given an erroneous answer to an inquiry made with regard to it by a person desirous of ascertaining the fact for the purpose of determining his course accordingly, and has been held bound to make good the assurance he has given. Burrowes v Lock1 may be cited as an example, where a trustee had been asked by an intended lender, upon the security of a trust fund, whether notice of any prior incumbrance upon the fund had been given to him. In cases like this it has been said that the circumstance that the answer was honestly made in the belief that it was true affords no defence to the action. Lord Selborne pointed out in Brownlie v Campbell2 that these cases were in an altogether different category from actions to recover damages for false representation, such as we are now dealing with. … In the Court below Cotton LJ said: What in my opinion is a correct statement of the law is this, that where a man makes a statement to be acted upon by others which is false, and which is known by him to be false, or is made by him recklessly, or without care whether it is true or false, that is, without any reasonable ground for believing it to be true, he is liable in an action of deceit at the suit of anyone to whom it was addressed or anyone of the class to whom it was addressed and who was materially induced by the misstatement to do an act to his prejudice. About much that is here stated there cannot, I think, be two opinions. But when the learned Lord Justice speaks of a statement made recklessly or without care whether it is true or false, that is without any reasonable ground for believing it to be true, I find myself, with all respect, unable to agree that these are convertible expressions. To make a statement careless whether it be true or false, and therefore without any real belief in its truth, appears to me to be an essentially different thing from making, through want of care, a false statement, which is nevertheless honestly believed to be true. And it is surely conceivable that a man may believe that what he states

is the fact, though he has been so wanting in care that the Court may think that there were no sufficient grounds to warrant his belief. I shall have to consider hereafter whether the want of reasonable ground for believing the statement made is sufficient to support an action of deceit. I am only concerned for the moment to point out that it does not follow that it is so, because there is authority for saying that a statement made recklessly, without caring whether it be true or false, affords sufficient foundation for such an action. … [page 897] [The learned Lord Justice] says that when statements are made in a prospectus like the present, to be circulated amongst persons in order to induce them to take shares, … there is a duty cast upon the director or other person who makes those statements to take care that there are no expressions in them which in fact are false; to take care that he has reasonable ground for the material statements which are contained in that document which he prepares and circulates for the very purpose of its being acted upon by others. The learned judge proceeds to say: Although in my opinion it is not necessary that there should be what I should call fraud, yet in these actions, according to my view of the law, there must be a departure from duty, that is to say, an untrue statement made without any reasonable ground for believing that statement to be true; and in my opinion when a man makes an untrue statement with an intention that it shall be acted upon without any reasonable ground for believing that statement to be true he makes a default in a duty which was thrown upon him from the position he has taken upon himself, and he violates the right which those to whom he makes the statement have to have true statements only made to them. Now I have first to remark on these observations that the alleged ‘right’

must surely be here stated too widely, if it is intended to refer to a legal right, the violation of which may give rise to an action for damages. For if there be a right to have true statements only made, this will render liable to an action those who make untrue statements, however innocently. This cannot have been meant. I think it must have been intended to make the statement of the right correspond with that of the alleged duty, the departure from which is said to be making an untrue statement without any reasonable ground for believing it to be true. I have further to observe that the Lord Justice distinctly says that if there be such a departure from duty an action of deceit can be maintained, though there be not what he should call fraud. … I may state at once that, in my opinion, without proof of fraud no action of deceit is maintainable. When I examine the cases which have been decided upon this branch of the law, I shall endeavour to show that there is abundant authority to warrant this proposition. … [A]ll the learned judges [in the Court of Appeal] concurred in thinking that it was sufficient to prove that the representations made were not in accordance with fact, and that the person making them had no reasonable ground for believing them. They did not treat the absence of such reasonable ground as evidence merely that the statements were made recklessly, careless whether they were true or false, and without belief that they were true, but they adopted as the test of liability, not the existence of belief in the truth of the assertions made, but whether the belief in them was founded upon any reasonable grounds. … I think there is … some confusion between that which is evidence of fraud, and that which constitutes it. A consideration of the grounds of belief is no doubt an important aid in ascertaining whether the belief was really entertained. A man’s mere assertion that he believed the statement he made to be true is not accepted as conclusive proof that he did so. There may be such an absence of reasonable ground for his belief [page 898] as, in spite of his assertion, to carry conviction to the mind that he had not really the belief which he alleges. If the learned Lord intended to go further, as apparently he did, and to say that though the belief was really

entertained, yet if there were no reasonable grounds for it, the person making the statement was guilty of fraud in the same way as if he had known what he stated to be false, I say, with all respect, that the previous authorities afford no warrant for the view that an action of deceit would lie under such circumstances. A man who forms his belief carelessly, or is unreasonably credulous, may be blameworthy when he makes a representation on which another is to act, but he is not, in my opinion, fraudulent in the sense in which that word was used in all the cases from Pasley v Freeman3 down to that with which I am now dealing. … I think the authorities establish the following propositions: First, in order to sustain an action of deceit, there must be proof of fraud, and nothing short of that will suffice. Secondly, fraud is proved when it is shown that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false. Although I have treated the second and third as distinct cases, I think the third is but an instance of the second, for one who makes a statement under such circumstances can have no real belief in the truth of what he states. To prevent a false statement being fraudulent, there must, I think, always be an honest belief in its truth. And this probably covers the whole ground, for one who knowingly alleges that which is false, has obviously no such honest belief. Thirdly, if fraud be proved, the motive of the person guilty of it is immaterial. It matters not that there was no intention to cheat or injure the person to whom the statement was made. … I desire to say distinctly that when a false statement has been made the questions whether there were reasonable grounds for believing it, and what were the means of knowledge in the possession of the person making it, are most weighty matters for consideration. The ground upon which an alleged belief was founded is a most important test of its reality. I can conceive many cases where the fact that an alleged belief was destitute of all reasonable foundation would suffice of itself to convince the Court that it was not really entertained, and that the representation was a fraudulent one. So, too, although means of knowledge are … a very different thing from knowledge, if I thought that a person making a false statement had shut his eyes to the facts, or purposely abstained from inquiring into them, I should hold that honest belief was absent, and that he was just as fraudulent as if he had knowingly stated that which was false.

I have arrived with some reluctance at the conclusion to which I have felt myself compelled, for I think those who put before the public a prospectus to induce them to embark their money in a commercial enterprise ought to be vigilant to see that it contains such representations only as are in strict accordance with fact, and I should be very unwilling to give any countenance to the contrary idea. I think there is much to be said for the view that this moral duty ought to some extent to be converted into a legal obligation, and that the want of reasonable care to see that statements, made under such circumstances, are [page 899] true, should be made an actionable wrong. But this is not a matter fit for discussion on the present occasion. If it is to be done the legislature must intervene and expressly give a right of action in respect of such a departure from duty. It ought not, I think, to be done by straining the law, and holding that to be fraudulent which the tribunal feels cannot properly be so described. I think mischief is likely to result from blurring the distinction between carelessness and fraud, and equally holding a man fraudulent whether his acts can or cannot be justly so designated.

Comment 37.2.1 See Radan, Gooley, and Vickovich at 39.9–39.15. 37.3C

Zurich Insurance Co plc v Hayward [2017] AC 142

Court: Supreme Court of the United Kingdom Facts: Hayward was injured at work and brought proceedings against his employers on the ground of negligence. The employers’ insurer, Zurich Insurance Co, admitted liability, but disputed quantum, pleading that Hayward was exaggerating his condition and ongoing disabilities. Zurich settled his claim to the amount of

almost £135,000 before the quantum hearing. The terms were recorded in a settlement agreement. Two years later information was given to Zurich by Hayward’s neighbours about his conduct, which led to the inference that he had based his claim on fraudulent exaggerations. The evidence obtained by Zurich indicated that Hayward had fully recovered from his injuries more than a year prior to the settlement. Zurich commenced proceedings to rescind the settlement agreement or, in the alternative, to obtain damages for deceit. It argued that it had been induced to enter into the agreement by Hayward’s fraudulent misrepresentations. Although Zurich succeeded at first instance, the Court of Appeal held that Zurich should fail because it gave some credit to the truth of Hayward’s claim and was therefore not induced fraudulently. It also considered that to hold otherwise would seriously undermine the finality of settlement agreements. Zurich appealed to the Supreme Court. Issue: The issue before the Supreme Court was whether a settlement agreement could be set aside for one party’s fraudulent misrepresentation even though the other party had not fully accepted the truth of the representations. Decision: The Supreme Court (Lord Neuberger P, Lady Hale DP, Lord Clarke, Lord Reed, and Lord Toulson SCJJ) held unanimously that a party will not necessarily be precluded from setting aside a settlement agreement on the ground that it was induced by the fraudulent misrepresentations of the other party, despite not fully accepting the truth of those representations. [page 900] Extracts: The extracts below from the judgment of Lord Clarke, with whom Lord Neuberger, Lady Hale, and Lord Reed agreed, set out the rationale for setting aside settlement agreements in such cases.

Lord Clarke

Issue 1 Subject to one point, the ingredients of a claim for deceit based upon an alleged fraudulent misrepresentation are not in dispute. It must be shown that the defendant made a materially false representation which was intended to, and did, induce the representee to act to its detriment. To my mind it is not necessary, as a matter of law, to prove that the representee believed that the representation was true. In my opinion there is no clear authority to the contrary. However, that is not to say that the representee’s state of mind may not be relevant to the issue of inducement. Indeed, it may be very relevant. For example, if the representee does not believe that the representation is true, he may have serious difficulty in establishing that he was induced to enter into the contract or that he has suffered loss as a result. … [The trial judge makes a point] which is of importance in the context of this somewhat unusual case. It is this. A person in the position of the employer or its insurer may have suspicions as to whether the representation is true. It may even be strongly of the view that it is not true. However, the question in a case like this is not what view the employer or its insurer takes but what view the court may take in due course. This is just such a case, as the judge correctly perceived. As he put it, the employer and its advisers must take into account the possibility that Mr Hayward would be believed by the judge at the trial. That is because the views of the judge will determine the amount of damages awarded. In any event this is not a case in which Zurich or the employer knew that Mr Hayward was deliberately exaggerating the seriousness and long-term effects of his injuries. We now know that he was thoroughly dishonest from October 1999 and that he continued to make false claims in the witness box at the trial even when the evidence against him was overwhelming. Each case of course depends upon its own facts but it seems to me to be putting the case too high to say, as Briggs LJ does at para [30], that Zurich went so far as to plead that Mr Hayward was fraudulent and to support it by a statement of truth. He says this at para [31]: In my opinion the true principle is that the equitable remedy of rescission answers the affront to conscience occasioned by holding to a contract a party who has been influenced into making it by

being misled or, worse still, defrauded by his counterparty. Thus, once he discovers the truth, he must elect whether to rescind or to proceed with the contract. It must follow that, if he already knows or perceives the truth by the time of the contract, he elects to proceed by entering into it, and cannot later seek rescission merely because he later obtains better evidence of that which he already believed, still less if he merely repents [page 901] of it. This seems to me to be a fortiori the case where, as here, the misrepresentation consists of a disputed claim in litigation, and the contract settles that claim. To my mind that is to put the position too high in favour of fraudsters in general and Mr Hayward in particular. It is true that in its defence dated 30 October 2001 the employer (no doubt through Zurich) stated that the facts stated in the defence were true. The relevant facts were pleaded in paras 6 and 7 as follows: 6. It is admitted that the claimant suffered an injury to his back as a result of the accident. The defendant relies on the medical reports of Mr Sharp dated 11 June 2000, 20 August 2000 and 26 November 2000. The view of the claimant’s ongoing physical condition from Mr Bracegirdle relied on by the claimant is not accepted by the defendant. As a result of video surveillance obtained Mr Sharp formed the view that the claimant’s disability was not as great as he had described and he was capable of working full time even if not with heavy lifting. In view of the claimant’s lack of candour in relation to his physical condition it is not possible to accept that his depressive state, as described, has been consistent, is continuing or will continue into the future. 7. The claimant has exaggerated his difficulties in recovery and current physical condition for financial gain. These pleas show that Zurich was suspicious of Mr Hayward but no very

clear allegations were, or could be, made. However, it is not in dispute that Zurich did as much as it reasonably could to investigate the position before the settlement. The evidence was not as good from its point of view as it might have hoped but the fact is that Zurich did not know the extent of Mr Hayward’s misrepresentations. The case was settled at a time when the only difference between the experts was the likely duration of future loss. The figure agreed was about half way between the respective opinions of the experts. It was not until the advent of Mr and Mrs Cox that Zurich realised the true position. Hence, as the judge expressly found, the amount of the settlement was very much greater than it would have been but for the fraudulent misrepresentations made by Mr Hayward. The small amount ultimately awarded by the judge, which is not challenged, shows the extent of the dishonest nature of the claim. I am not persuaded that the importance of encouraging settlement, which I entirely agree is considerable, is sufficient to allow Mr Hayward to retain moneys which he only obtained by fraud.

The authorities I am not persuaded that the authorities lead to any other conclusion. As stated above, the ingredients of the tort of deceit are not in dispute subject to one question, which is whether a claimant alleging deceit must show that he believed the misrepresentation. In my opinion the answer is no. There are many formulations of the relevant principles in the authorities. I take two examples. In Briess v Woolley Lord Tucker said: The tort of fraudulent misrepresentation is not complete when the representation is made. It becomes complete when the misrepresentation — not having been corrected [page 902] in the meantime — is acted upon by the representee. Damage giving rise to a claim for damages may not follow or may not result until a later date, but once the misrepresentation is acted on by the

representee the tortious act is complete, provided that the representation is false at that date.4 To like effect, Lord Mustill said in Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd: In the general law it is beyond doubt that even a fraudulent misrepresentation must be shown to have induced the contract before the promisor has a right to avoid, although the task of proof may be made more easy by a presumption of inducement.5 The authorities show that questions of inducement and causation are questions of fact. I would accept the submissions made on behalf of Zurich in support of the proposition that belief is not required as an independent ingredient of the tort. It may however be relevant as part of the court’s consideration of the questions whether there was inducement and, if so, whether causation has been established. In this regard I agree with the [trial] judge when he [agreed with … Clerk and Lindsell’s statement]: ‘The claimant must have been influenced by the misrepresentation.’ … [A]lthough the claimant must show that he was induced to act as he did by the misrepresentation, it need not have been the sole cause. It is submitted on behalf of Mr Hayward that the claimant’s mind must be at least partly influenced by the defendant’s misstatements. In Edgington v Fitzmaurice Bowen LJ said: The real question is, what was the state of the Plaintiff’s mind, and if his mind was disturbed by the misstatement of the Defendants, and such disturbance was in part the cause of what he did, the mere fact of his also making a mistake himself could make no difference.6 I see no conflict between the [trial] judge’s approach and those conclusions. Mr Hayward relies upon the references in the textbooks and, indeed, in cases like Edgington v Fitzmaurice to the requirement that the representation must have impacted upon the representee’s mind. To my mind that simply means that the representee must have been induced to act as he did in reliance upon the representation. In Zurich’s written case its argument in support of the position that belief

in the truth of the representation is not required is summarised as follows: (i) Inducement is concerned with causation — not the representee’s credulity. Although one may infer that a representee who believes a misrepresentation has been induced to rely on it, an absence of belief does not mean there was no inducement. This is because what is required for there to be inducement is a causal connection between the misrepresentation [page 903] and the representee making a decision or undertaking a course of action on the basis of that representation. That does not require belief in the misrepresentation itself. (ii) Just as belief in the misrepresentation is not required, so also belief in other inducing causes is irrelevant. (iii) There is a ‘presumption of inducement’, particularly where there is an intention to induce by means of fraud. If the defrauded representee first had to show he believed the misrepresentation, there would be little (or no) utility in having the presumption. (iv) That presumption should not be rebutted merely because the representee is sceptical. Otherwise, the doubting representee would be placed in a worse position than the gullible or trusting one. Given that misgivings and suspicion might be more likely to arise where there is fraud, it would be perverse for the prospects of redress to be extinguished on account of those very doubts. Of all representees, it may be thought the defrauded representee (whether believing or not) should be the most deserving of protection. (v) There is no duty upon the defrauded representee to exercise ‘due diligence’ to determine whether there are reasonable grounds to believe the representations made. Conversely, the fact that the representee does not in fact wholly credit the fraudster and carries out its own investigations does not preclude it from having been induced by those representations. Qualified belief or disbelief does

not rule out inducement, particularly where those investigations were never going to find out the evidence that subsequently came to light. (vi) Whereas proof that the representee had knowledge (or ‘blind eye knowledge’) of the falsity suffices, nothing short of that avails the misrepresentor. As to sub-para (i), inducement, I would accept the submission on behalf of Zurich that materiality is evidence of inducement because what is material tends to induce. As Hutley JA put it in the Court of Appeal of New South Wales, ‘[t]o state that a person is induced by a statement is to affirm a causal relation which is a question of fact, not of law’.7 … In … his judgment … the [trial] judge held that the continuing representations influenced Zurich into agreeing to a higher level of settlement than it would otherwise have done. The judge was entitled to adopt the proposition in Clerk and Lindsell that ‘the claimant must have been influenced by the misrepresentation’. … As I see it, the representee’s reasonable belief as to whether the misrepresentation is true cannot be a necessary ingredient of the test, because the representee may well settle on the basis that, at any rate in a context such as the present, he thinks that the representation will be believed by the judge. But it is centrally relevant to the question of inducement and causation. Logically, the representee is more likely to settle for a different reason other than the representation, if his reasonable belief is that it is false. One of the extraneous factors in this case, for example, was the fact that [Zurich’s] expert Mr Sharp had failed to produce, in their view, a report which set out the extent of the misrepresentations with sufficient clarity. … [page 904] As to sub-para (ii), multiple causes, the textbooks strongly support the proposition that it is sufficient for the misrepresentation to be an inducing cause and that it is not necessary for it to be the sole cause. … See also, for example, Barton v Armstrong8 where Lord Cross, delivering the majority

advice of the Privy Council in a case involving duress by threats of physical violence, invoked, as an appropriate analogy, the treatment of contributing causes in fraud cases. He said: If it were established that Barton did not allow the representation to affect his judgment then he could not make it a ground for relief. … If on the other hand Barton relied on the misrepresentation Armstrong could not have defeated his claim to relief by showing that there were other more weighty causes which contributed to his decision … for in this field the court does not allow an examination into the relative importance of contributing causes.9 … Lord Hoffmann made much the same point in Standard Chartered Bank v Pakistan National Shipping Corp (No 2):10 [I]f a fraudulent representation is relied upon, in the sense that the claimant would not have parted with his money if he had known that it was false, it does not matter that he also had some other negligent or irrational belief about another matter and, but for that belief, would not have parted with his money either. The law simply ignores the other reasons why he paid.11 … As to sub-para (iii), the ‘presumption’ of inducement, it is not a presumption of law but an inference of fact. For example, Chitty on Contracts put it thus: Once it is proved that a false statement was made which is ‘material’ in the sense that it was likely to induce the contract, and that the representee entered the contract, it is a fair inference of fact (though not an inference of law) that he was influenced by the statement, and the inference is particularly strong where the misrepresentation was fraudulent.12 … As to sub-para (iv), rebutting the presumption of inducement, the authorities are not entirely consistent as to what is required to rebut the presumption. However, it is not strictly necessary to address those differences in this case because, however precisely the test is worded — whether what must be proved is that the misrepresentation played ‘no part at all’ or that it did not play a ‘determinative part’, or that it did not play a

‘real and substantial part’ — I would accept the submission made on behalf of Zurich that the presumption is not rebutted on the facts as found in this case. There can be no doubt on the judge’s findings of fact that, if Zurich had known the true position as to Mr Hayward’s state of recovery, it would not have offered anything like as much as it in fact offered and settled for in October 2003. … [page 905] [T]he authorities seem to me to support the conclusion that it is very difficult to rebut the presumption. As it seems to me, the orthodox view is contained in Sharland v Sharland.13 In Smith v Kay Lord Chelmsford LC asked this question in a rescission case based on an allegation of fraudulent misrepresentation: can it be permitted to a party who has practised a deception, with a view to a particular end, which has been attained by it, to speculate upon what might have been the result if there had been a full communication of the truth?14 In Sharland v Sharland Lady Hale observed of Smith v Kay that it indeed held that a party who has practised deception with a view to a particular end, which has been attained by it, cannot be allowed to deny its materiality or that it actually played a causative part in inducement. … As to sub-para (v), I would accept the submissions made on behalf of Zurich. In particular I agree that the representee has no duty to be careful, suspicious or diligent in research. As Rigby LJ put it in Betjemann v Betjemann: What is the duty of a man to inquire? To whom does he owe that duty? Certainly not to the person who has committed the concealed fraud.15 Here Zurich did as much as it reasonably could to investigate the accuracy and ramifications of Mr Hayward’s representations before entering into any settlement.

[T]he questions whether Zurich was induced to enter into the settlement agreement and whether doing so caused it loss are questions of fact, which were correctly decided in its favour by the [trial] judge. I accept the submission that the fact that the representee (Zurich) does not wholly credit the fraudster (Mr Hayward) and carries out its own investigations does not preclude it from having been induced by those representations. Qualified belief or disbelief does not rule out inducement, particularly where those investigations were never going to find out the evidence that subsequently came to light. That depended only on the fact that [Hayward’s neighbours] subsequently came forward. Only then did Zurich find out the true position. As Mr Hayward knew, Zurich was settling on a false basis. … As to sub-para (vi), knowledge of falsity, as I understand it, it is accepted on behalf of Zurich that, where the representee knows that the representation is false, he cannot succeed. There is some support in the authorities for this view. … So, for example Chitty says …: The burden of proving that the claimant had actual knowledge of the truth, and therefore was not deceived by the misrepresentation, lies on the defendant; if established, knowledge on the part of the representee is of course a complete defence, because he is then unable to show that he was misled by the misrepresentation.16 [page 906] In … Spencer Bower & Handley [the authors] say this: A representee cannot be misled by a statement which he knew to be false. … The representee’s knowledge of the truth must normally be full and complete. Partial and fragmentary information, or mere suspicion, will not do, ‘suspicion, doubt and mistrust do not have the same consequence as knowledge’. A representee who knows that the representation was false to some extent, but acts on it, may establish inducement if the departure from the truth was significantly greater than expected.17 … [I]t cannot fairly be said that Zurich had full knowledge of the facts here. It

follows that it is not necessary to express a final view on the question whether it always follows from the fact that the representee knows that the representation is false that he cannot succeed. As explained earlier, questions of inducement and causation are questions of fact. It seems to me that there may be circumstances in which a representee may know that the representation is false but nevertheless may be held to rely upon the misrepresentation as a matter of fact. …

Issue 2 The second issue … is in these terms: ‘Under what circumstances, if any, does the suspicion by the defendant of exaggeration for financial gain on the part of the claimant preclude unravelling the settlement of that disputed claim when fraud is subsequently established?’ The answer seems to me to follow from the answer to the first question. As I see it, it is difficult to envisage any circumstances in which mere suspicion that a claim was fraudulent would preclude unravelling a settlement when fraud is subsequently established.

[page 907]

Comment 37.3.1 See Radan, Gooley, and Vickovich at 37.14–37.17.

CARELESSLY MADE PRE-CONTRACTUAL STATEMENTS 37.4C

Esso Petroleum Co Ltd v Mardon [1976] QB 801

Court: Court of Appeal in England

Facts: Esso bought a site on a busy main street for a filling station after calculating that the potential throughput was likely to reach 200,000 gallons by the third year of operation. During construction of the station the local planning authority refused permission for the pumps to front onto the main street and the station had to be built back to front. Mardon, a prospective tenant, was informed by Esso’s representatives of their calculated throughput. When he suggested that 100,000 to 150,000 gallons was more likely, they assured him by emphasising their expertise. Mardon signed a three-year tenancy agreement for the petrol station, but in the first 15 months the pump throughput was only 78,000 gallons. Lack of exposure to the main street was the main problem for the business. Mardon incurred large debts and eventually gave notice to Esso, but they offered him a new lease at a lower rental plus a surcharge on all petrol sold. Despite entering into the new arrangement, the losses continued. Finally, when Mardon could no longer pay cash for petrol, Esso cut off supplies. Esso claimed possession of the premises, moneys owed, and mesne profits. Mardon counterclaimed for damages for breach of warranty and for negligent misrepresentation. Issues: The issues before the Court of Appeal were whether Esso was liable for tortious damages to Mardon on the basis of the precontractual warranty as to petrol throughput and, if so, what damages were appropriate. Decision: The Court of Appeal (Denning MR, Ormrod and Shaw LJJ) unanimously held in favour of Mardon. Extract: The judgment of Denning MR, extracts of which appear below, shows how tortious liability can attach to pre-contractual misrepresentations.

Lord Denning MR Negligent misrepresentation [After finding there was a warranty made by Esso with reasonable care and skill that was breached, and for which they were liable in damages.]

Assuming that there was no warranty, the question arises whether Esso are liable for negligent misstatement under the doctrine of Hedley Byrne & Co Ltd v Heller & Partners Ltd.18 It has been suggested that Hedley Byrne [page 908] cannot be used so as to impose liability for negligent pre-contractual statements: and that, in a pre-contract situation, the remedy (at any rate before the [Misrepresentation] Act of 1967) was only in warranty or nothing. [Counsel for Esso] submitted that when the negotiations between two parties resulted in a contract between them, their rights and duties were governed by the law of contract and not by the law of tort. There was, therefore, no place in their relationship for Hedley Byrne, which was solely on liability in tort. He relied particularly on Clark v Kirby-Smith19 where Plowman J held that the liability of a solicitor for negligence was a liability in contract and not in tort, following the observations of Sir Wilfrid Greene MR in Groom v Crocker.20 [Counsel] might also have cited Bagot v Stevens Scanlan & Co Ltd,21 about an architect; and other cases too. But I venture to suggest that those cases are in conflict with other decisions of high authority which were not cited in them. These decisions show that, in the case of a professional man, the duty to use reasonable care arises not only in contract, but is also imposed by the law apart from contract, and is therefore actionable in tort. It is comparable to the duty of reasonable care which is owed by a master to his servant, or vice versa. It can be put either in contract or in tort.22 [Note] the high authority of Viscount Haldane LC in Nocton v Lord Ashburton: [T]he solicitor contracts with his client to be skilful and careful. For failure to perform his obligation he may be made liable at law in contract or even in tort, for negligence in breach of a duty imposed on him.23 That seems to me right. A professional man may give advice under a contract for reward; or without a contract, in pursuance of a voluntary

assumption of responsibility, gratuitously without reward. In either case he is under one and the same duty to use reasonable care.24 In the one case it is by reason of a term implied by law. In the other, it is by reason of a duty imposed by law. For a breach of that duty he is liable in damages: and those damages should be, and are, the same, whether he is sued in contract or in tort. It follows that I cannot accept [counsel for Esso’s] proposition. It seems to me that Hedley Byrne & Co Ltd v Heller & Partners Ltd, properly understood, covers this particular proposition: if a man, who has or professes to have special knowledge or skill, makes a representation by virtue thereof to another — be it advice, information or opinion — with the intention of inducing him to enter into a contract with him, he is under a duty to use reasonable care to see that the representation is correct, and that the advice, information or opinion is reliable. If he negligently gives unsound advice or misleading [page 909] information or expresses an erroneous opinion, and thereby induces the other side to enter into a contract with him, he is liable in damages. … Applying this principle, it is plain that Esso professed to have — and did in fact have — special knowledge or skill in estimating the throughput of a filling station. They made the representation — they forecast a throughput of 200,000 gallons — intending to induce Mr Mardon to enter into a tenancy on the faith of it. They made it negligently. It was a ‘fatal error’. And thereby induced Mr Mardon to enter into a contract of tenancy that was disastrous to him. For this misrepresentation they are liable in damages.

The measure of damages Mr Mardon is not to be compensated here for ‘loss of a bargain’. He was given no bargain that the throughput would amount to 200,000 gallons a year. He is only to be compensated for having been induced to enter into a contract which turned out to be disastrous for him. Whether it be called

breach of warranty or negligent misrepresentation, its effect was not to warrant the throughput, but only to induce him to enter the contract. So the damages in either case are to be measured by the loss he suffered. Just as in Doyle v Olby (Ironmongers) Ltd he can say: ‘I would not have entered into this contract at all but for your representation. Owing to it, I have lost all the capital I put into it. I also incurred a large overdraft. I have spent four years of my life in wasted endeavour without reward: and it will take me some time to re-establish myself.’25 For all such loss he is entitled to recover damages. It is to be measured in a similar way as the loss due to a personal injury. You should look into the future so as to forecast what would have been likely to happen if he had never entered into this contract: and contrast it with his position as it is now as a result of entering into it. The future is necessarily problematical and can only be a rough-and-ready estimate. But it must be done in assessing the loss.

[page 910]

Comment 37.4.1 See Gooley, Radan, and Vickovich at 37.23–37.25.

CONCURRENT LIABILITY AND THE MEASURE OF DAMAGES 37.5C

Koufos v C Czarnikow Ltd [1969] 1 AC 350

Court: House of Lords Facts: Czarnikow, a sugar merchant, chartered a vessel owned by Koufos to transport sugar to the Middle East. The ship was contracted to load a consignment of 3000 metric tons of white sugar in

Constanza and proceed to Basrah, where the sugar was to be sold. The trip to Basrah took about nine days longer than anticipated because of deviations to Berbera, Bahrain, and Abadan. The sugar was sold upon delivery in Basrah, but fetched a lower price per ton than would otherwise have been attained if the ship had arrived on time. Czarnikow sued for the price difference as damages. At arbitration Koufos admitted breach, but argued the claimed loss was too remote to be compensable and that Czarnikow’s claim for damages should be limited to interest on the value of the cargo for the period of the delay. An umpire decided that although the ship owner did not know that Czarnikow intended to sell the sugar in Basrah, he was aware of the sugar market there. It was decided that Czarnikow was entitled to damages for the difference between the actual sale price and the price that was attainable nine days earlier. Issues: The issues before the House of Lords were whether the test for remoteness was the same in a tort action as in an action for breach of contract and, if not, how damages were to be properly measured in such a case. Decision: The House of Lords (Lords Reid, Morris of Borth-y-Gest, Hodson, Pearce, and Upjohn) unanimously upheld the umpire’s award of damages, but in doing so differed in the formulations of the differences between the rules of remoteness in contract and tort. Extract: The extract from Lord Reid’s speech is the most frequently relied upon for the proposition that the remoteness test in contract is narrower than in tort.

Lord Reid It may be well first to set out the knowledge and intention of the parties at the time of making the contract so far as relevant or argued to be relevant. The charterers [Czarnikow] intended to sell the sugar in the market at Basrah on arrival of the vessel. They could have changed their mind and exercised their option to have the sugar delivered at Jeddah but they did not do so. There is no finding that they had in mind any particular date as the likely date of arrival at Basrah or that they had any knowledge or

expectation that in late November or December there would be a rising or a falling market. The shipowner [Koufos] was given [page 911] no information about these matters by the charterers. He did not know what [Czarnikow] intended to do with the sugar. But he knew there was a market in sugar at Basrah, and it appears to me that, if he had thought about the matter, he must have realised that at least it was not unlikely that the sugar would be sold in the market at market price on arrival. And he must be held to have known that in any ordinary market prices are apt to fluctuate from day to day: but he had no reason to suppose it more probable that during the relevant period such fluctuation would be downwards rather than upwards — it was an even chance that the fluctuation would be downwards. So the question for decision is whether a plaintiff can recover as damages for breach of contract a loss of a kind which the defendant, when he made the contract, ought to have realised was not unlikely to result from a breach of contract causing delay in delivery. I use the words ‘not unlikely’ as denoting a degree of probability considerably less than an even chance but nevertheless not very unusual and easily foreseeable. For over a century everyone has agreed that remoteness of damage in contract must be determined by applying the rule (or rules) laid down by … Hadley v Baxendale.26 But many different interpretations of that rule have been adopted by judges at different times. So I think that one ought first to see just what was decided in that case, because it would seem wrong to attribute to that rule a meaning which, if it had been adopted in that case, would have resulted in a contrary decision of that case. … The rule is that the damages: … should be such as may fairly and reasonably be considered either arising naturally, ie, 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.27 I do not think that it was intended that there were to be two rules or that two different standards or tests were to be applied. … [T]he line of reasoning there is that because in the great majority of cases loss of profit would not in all probability have occurred, it followed that this could not reasonably be considered as having been fairly and reasonably contemplated by both the parties, for it would not have flowed naturally from the breach in the great majority of cases. I am satisfied that the court did not intend that every type of damage which was reasonably foreseeable by the parties when the contract was made should either be considered as arising naturally, ie, in the usual course of things, or be supposed to have been in the contemplation of the parties. Indeed the decision makes it clear that a type of damage which was plainly foreseeable as a real possibility but which would only occur in a small minority of cases cannot be regarded as arising in the usual course of things or be supposed to have been in the contemplation of the parties: the parties are not supposed to contemplate as grounds for the recovery of damage any type of loss or damage which [page 912] on the knowledge available to the defendant would appear to him as only likely to occur in a small minority of cases. In cases like Hadley v Baxendale or the present case it is not enough that in fact the plaintiff’s loss was directly caused by the defendant’s breach of contract. It clearly was so caused in both. The crucial question is whether, on the information available to the defendant when the contract was made, he should, or the reasonable man in his position would, have realised that 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. The modern rule of tort is quite different and it imposes a much wider liability. The defendant will be liable for any type of damage which is

reasonably foreseeable as liable to happen even in the most unusual case, unless the risk is so small that a reasonable man would in the whole circumstances feel justified in neglecting it. And there is good reason for the difference. In contract, if one party wishes to protect himself against a risk which to the other party would appear unusual, he can direct the other party’s attention to it before the contract is made, and I need not stop to consider in what circumstances the other party will then be held to have accepted responsibility in that event. But in tort there is no opportunity for the injured party to protect himself in that way, and the tortfeasor cannot reasonably complain if he has to pay for some very unusual but nevertheless foreseeable damage which results from his wrongdoing. I have no doubt that today a tortfeasor would be held liable for a type of damage as unlikely as was the stoppage of Hadley’s Mill for lack of a crankshaft: to anyone with the knowledge the carrier had that may have seemed unlikely but the chance of it happening would have been seen to be far from negligible. But it does not at all follow that Hadley v Baxendale would today be differently decided. … For a considerable time there was a tendency to set narrow limits to awards of damages. Such phrases were used as that the damage was not ‘the immediate and necessary effect of the breach of contract’.28 The Parana29 was decided during that period. But later a more liberal tendency can be seen. I do not think it useful to review the authorities in detail but I do attach importance to what was said in this House in R & H Hall Ltd v W H Pim (Junior) & Co Ltd.30 In that case Pim sold a cargo of wheat to Hall but failed to deliver it. Hall had resold the wheat but as a result of Pim’s breach of contract lost the profit which they would have made on their sub-sale. Three of their Lordships dealt with the case on the basis that the relevant question was whether it ought to have been in the contemplation of the parties that a resale was probable. The finding of the arbitrators was: [page 913] The arbitrators are unable to find that it was in the contemplation of the parties or ought to have been in the contemplation of Messrs

Pim at that time that the cargo would be resold or was likely to be resold before delivery; in fact, the chances of its being resold as a cargo and of its being taken delivery of by Messrs Hall were about equal. On that finding the Court of Appeal31 had decided in favour of Pim, saying that, as the arbitrators had stated as a fact that the chances of the cargo being resold or not being resold were equal, it was therefore ‘idle to speak of a likelihood or of a probability of a resale’. … I think that Hall’s case must be taken to have established that damages are not to be regarded as too remote merely because, on the knowledge available to the defendant when the contract was made, the chance of the occurrence of the event which caused the damage would have appeared to him to be rather less than an even chance. I would agree … that it is generally sufficient that that event would have appeared to the defendant as not unlikely to occur. It is hardly ever possible in this matter to assess probabilities with any degree of mathematical accuracy. But I do not find in that case or in cases which preceded it any warrant for regarding as within the contemplation of the parties any event which would not have appeared to the defendant, had he thought about it, to have a very substantial degree of probability.

[page 914]

Comment 37.5.1 See Radan, Gooley, and Vickovich at 37.29–37.31 and 37.35–37.36.

TORTS FOR ECONOMIC LOSS CAUSED BY INTENTIONAL ACTS

37.6C

OBG Ltd v Allan [2008] 1 AC 1

Court: House of Lords Facts: The decision in this appeal to the House of Lords dealt with three separate cases. In OBG Ltd v Allan OBG Ltd became insolvent. One of its creditors appointed Allan as the company’s administrative receiver. However, the appointment was invalid because OBG did not owe the creditor anything. Allan took control of OBG’s assets and affairs, including making arrangements relating to contracts to which OBG was a party and settling claims OBG had under some of the contracts. OBG, through its liquidators, brought a number of claims against Allan, including that of interference with contractual relations concerning the arrangements made in relation to OBG’s contracts. In Douglas v Hello Ltd, Douglas and Zeta-Jones, a celebrity couple, contracted with Northern & Shell plc, which published the magazine OK!, for the latter to have exclusive rights to publish the couple’s wedding photographs. Douglas and Zeta-Jones imposed stringent conditions on their wedding guests with the aim of preventing unauthorised photographs being taken. However, photographs taken by an unauthorised photographer were published in Hello!, a rival magazine owned by Hello Ltd, which knew that the photographs were unauthorised. Northern & Shell’s principal claim against Hello Ltd was for breach of the obligation of confidence, although it also argued a claim of causing loss by unlawful means. In Mainstream Properties v Young, Young and Broad, employees of Mainstream Properties, a property development company, diverted a development opportunity to a joint venture between themselves and De Winter, who financed the development. The action of Young and Broad constituted a breach of their contractual obligations to act in the best interests of their employer and not to have any conflicts of interest. Mainstream Properties sued De Winter on a claim for inducing a breach of contract. Issue: An issue in all three cases was whether Allen, Hello Ltd, and De Winter had committed any tort for economic loss caused by intentional acts.

Decision: A key aspect of the decision in these cases was the recognition by the House of Lords (Lords Hoffmann, Nicholls of Birkenhead, Walker of Gestingthorpe, Baroness Hale of Richmond, and Lord Brown of Eaton-Under-Heywood) that wrongful interference with contractual relations claims comprised two distinct intentional torts: first, inducing a breach of contract; and second, causing loss by unlawful means. Each tort has its own [page 915] conditions for liability. Although both are torts of intention, the results that a defendant must have intended in each are different. In both OBG Ltd v Allan and Mainstream Properties Ltd v Young the House of Lords unanimously held that neither of these two torts was established. (In OBG Ltd v Allan a claim in conversion against Allan was also dismissed by the majority consisting of Lords Hoffmann, Walker of Gestingthorpe, and Brown of Eaton-Under-Heywood.) In Douglas v Hello Ltd a majority of the House of Lords (Lord Hoffmann, Baroness Hale of Richmond, and Lord Brown of EatonUnder-Heywood; Lords Nicholls of Birkenhead and Walker of Gestingthorpe dissenting) held Hello Ltd liable to Northern & Shell plc on a claim for breach of the obligation of confidence. Extract: The extract from the speech of Lord Hoffmann outlines the reasons why the two intentional torts are distinct and separate torts and describes their respective elements.

Lord Hoffmann Causing loss by unlawful means … The tort of causing loss by unlawful means differs from the Lumley v Gye32 principle [relating to inducing a breach of contract], as originally formulated, in at least four respects. First, unlawful means is a tort of primary liability, not requiring a wrongful act by anyone else, while Lumley

v Gye created accessory liability, dependent upon the primary wrongful act of the contracting party. Secondly, unlawful means requires the use of means which are unlawful under some other rule (‘independently unlawful’) whereas liability under Lumley v Gye requires only the degree of participation in the breach of contract which satisfies the general requirements of accessory liability for the wrongful act of another person.33 Thirdly, liability for unlawful means does not depend upon the existence of contractual relations. It is sufficient that the intended consequence of the wrongful act is damage in any form; for example, to the claimant’s economic expectations. … Under Lumley v Gye, on the other hand, the breach of contract is of the essence. If there is no primary liability, there can be no accessory liability. Fourthly, although both are described as torts of intention … the results which the defendant must have intended are different. In unlawful means the defendant must have intended to cause damage to the claimant (although usually this will be … a means of enhancing his own economic position). Because damage to economic expectations is sufficient to found a claim, there need not have been any intention to cause a breach of contract or interfere with contractual rights. Under Lumley v Gye, on the other hand, an intention to cause a breach of contract is both necessary and sufficient. Necessary, because this is essential for liability as accessory to the breach. Sufficient, because the fact that the defendant did not intend to cause damage, or even thought that the breach of contract would make the claimant better off, is irrelevant. In South Wales Miners’ Federation v Glamorgan Coal Co Ltd the miners’ union said that their intention in calling a strike (inducing miners [page 916] to break their contracts of employment) was … to restrict production of coal and thereby raise its price. So far from wishing to cause the mine owners loss, they intended to make both owners and miners better off. The House of Lords said that this made no difference. It was sufficient that the union intended the employment contracts to be broken. It was no defence, as Lord Macnaghten put it, that ‘if the masters had only known their own interest they would have welcomed the interference of the federation’.34 …

The Law Lords who formed the majority in Allen v Flood35 showed a clear recognition that Lumley v Gye and causing loss by unlawful means are separate torts, each with its own conditions for liability. … [T]here is no reason why the same facts should not give rise to both accessory liability under Lumley v Gye and primary liability for using unlawful means. If A, intending to cause loss to B, threatens C with assault unless he breaks his contract with B, he is liable as accessory to C’s breach of contract under Lumley v Gye and he commits the tort of causing loss to B by unlawful means. The areas of liability under the two torts may be intersecting circles which cover common ground. This often happened in 20th century industrial disputes, where, for example, a union would use unlawful means (inducing members to break their contracts of employment) to put pressure upon the employer to break his contract with someone else who was the union’s real target. Leaving aside statutory defences, this would make the union liable both under Lumley v Gye as accessory to the employer’s breach of contract and for causing loss to the target by unlawful means. That does not make Lumley v Gye and unlawful means the same tort. But the close proximity of the circumstances in which they could be committed, particularly in industrial disputes, may explain why they were often thought to be manifestations of the same principle. … [In D C Thomson & Co Ltd v Deakin] Jenkins LJ … fully adopted the theory … that the principle of Lumley v Gye extended to all interference with contractual relations by unlawful means. ‘Direct persuasion or procurement or inducement applied by the third party to the contract breaker’ was ‘regarded as a wrongful act in itself’ and constituted the ‘primary form’ of the tort.36 But other forms of interference with contracts by unlawful means … came within the same tort. From the dicta of Lord Macnaghten and Lord Lindley in Quinn v Leathem37 Jenkins LJ deduced two propositions: First … there may … be an actionable interference with contractual rights where other means of interference than persuasion or procurement or inducement, in the sense of influence of one kind or another brought to bear on the mind of the contract breaker to cause him to break his contract, are used by the interferer; but, secondly, that (apart from conspiracy to injure, which, as I have

said, is not in question so far as this motion is concerned) acts of a third party lawful in themselves do not constitute [page 917] an actionable interference with contractual rights merely because they bring about a breach of contract, even if they were done with the object and intention of bringing about such breach.38 The unified theory thus treated procuring breach of contract, the old Lumley v Gye tort, as one species of a more general tort of actionable interference with contractual rights. … My Lords, I do not wish to exaggerate the difficulties which have arisen from the adoption of the unified theory. To some extent it is a matter of nomenclature. If, as Jenkins LJ made clear, liability outside the primary form of the tort requires the use of unlawful means, does it matter whether the tort is classified as causing loss by unlawful means or an extension of Lumley v Gye? In most cases, the question of taxonomy will make no difference. It is not easy to point to cases which were wrongly decided because the court had adopted the unified theory rather than the two-tort analysis of Allen v Flood. Is there something to be said in principle for a unified theory? … I … do not think that the two causes of action can be brought within a unified theory and agree with Professor Peter Cane that: The search for ‘general principles of liability’ based on types of conduct is at best a waste of time, and at worst a potential source of serious confusion; and the broader the principle, the more is this so. Tort law is a complex interaction between protected interests, sanctioned conduct, and sanctions; and although there are what might be called ‘principles of tort liability’, by and large, they are not very ‘general’. More importantly, they cannot be stated solely in terms of the sorts of conduct which will attract tort liability. Each principle must refer, as well, to some interest protected by tort law and some sanction provided by tort law.39

That said, I would not expect your Lordships to reject the unified theory adopted in D C Thomson & Co Ltd v Deakin unless it had serious practical disadvantages. … To these problems created by the unified theory I now turn.

Direct and indirect interference The distinction between the original Lumley v Gye tort and its extension in DC Thomson & Co Ltd v Deakin has been described in later cases as a distinction between ‘direct’ and ‘indirect’ interference. The latter species requires the use of independently unlawful means while the former requires no more than inducement or persuasion. But the use of these terms seems to me to distract attention from the true questions which have to be asked in each case. For example, in Daily Mirror Newspapers Ltd v Gardner the Federation of Retail Newsagents resolved to boycott the ‘Daily Mirror’ for a week to put pressure on the publishers to allow its members higher margins. The Federation advised their members to stop buying the paper from wholesalers. The publishers claimed an injunction on the ground that the Federation was procuring a breach of the wholesalers’ [page 918] running contracts with the publishers to take a given number of copies each day. Counsel for the Federation … said that it was a case of indirect inducement because the Federation ‘did not exert directly any pressure or inducement on the wholesalers: but at most they only did it indirectly by recommending the retailers to give stop orders’. Lord Denning said that it did not matter whether one procured a breach of contract ‘by direct approach to the one who breaks his contract or by indirect influence through others’.40 There seems to me much sense in this observation, although whether it leads to the conclusion that the defendant should be liable in both cases or neither is another matter. In Torquay Hotel Co Ltd v Cousins, Lord Denning changed his mind. He said that there was a distinction between ‘direct persuasion’, which was ‘unlawful in itself’, and bringing about a breach by indirect methods, which had to involve independently unlawful means. On reconsideration of the

Daily Mirror case he thought the Federation had ‘interfered directly by getting the retailers as their agents to approach the wholesalers’.41 This treats the distinction as turning simply upon whether there was communication, directly or through an agent, between the defendant and the contract-breaker. But, like Lord Denning in the Daily Mirror case, I cannot see why this should make a difference. If that is what the distinction between ‘direct’ and ‘indirect’ means, it conceals the real question which has to be asked in relation to Lumley v Gye: did the defendant’s acts of encouragement, threat, persuasion and so forth have a sufficient causal connection with the breach by the contracting party to attract accessory liability? The court in Lumley v Gye made it clear that the principle upon which a person is liable for the act of another in breaking his contract is the same as that on which he is liable for the act of another in committing a tort. It follows, as I have said, that the relevant principles are to be found in cases such as CBS Songs Ltd v Amstrad Consumer Electronics plc42 and Unilever plc v Chefaro Proprietaries Ltd.43 By the test laid down in these cases, the Federation could not have incurred any liability. They were not encouraging or assisting the wholesalers in breaking their contracts. They were simply advising their members to exercise their own freedom to buy whatever newspapers they liked. The wholesalers had no right to the co-operation of the retailers in enabling them to perform their contracts. Liability could not depend upon the accident of whether the Federation had communicated (directly or through an intermediary) with the wholesalers. The distinction between direct and indirect interference was therefore irrelevant and misleading. The distinction between direct and indirect interference has the further disadvantage that it suggests that the ‘primary form’ of the Lumley v Gye tort and the extension of the tort are mutually exclusive. Interference cannot be both direct and indirect. But, as I have said earlier, there is no reason why the same act should not create both accessory liability for procuring a breach of contract and primary liability for causing loss by unlawful means. [page 919]

In my opinion, therefore, the distinction between direct and indirect interference is unsatisfactory and it is time for the unnatural union between the Lumley v Gye tort and the tort of causing loss by unlawful means to be dissolved. They should be restored to the independence which they enjoyed at the time of Allen v Flood. I shall therefore proceed to discuss separately the essential elements of each.

Inducing breach of contract: elements of the Lumley v Gye tort To be liable for inducing breach of contract, you must know that you are inducing a breach of contract. It is not enough that you know that you are procuring an act which, as a matter of law or construction of the contract, is a breach. You must actually realize that it will have this effect. Nor does it matter that you ought reasonably to have done so. … The question of what counts as knowledge for the purposes of liability for inducing a breach of contract has also been the subject of a consistent line of decisions. In Emerald Construction Co Ltd v Lowthian, union officials threatened a building contractor with a strike unless he terminated a subcontract for the supply of labour. The defendants obviously knew that there was a contract — they wanted it terminated — but the court found that they did not know its terms and, in particular, how soon it could be terminated. Lord Denning MR said: Even if they did not know the actual terms of the contract, but had the means of knowledge — which they deliberately disregarded — that would be enough. Like the man who turns a blind eye. So here, if the officers deliberately sought to get this contract terminated, heedless of its terms, regardless whether it was terminated by breach or not, they would do wrong. For it is unlawful for a third person to procure a breach of contract knowingly, or recklessly, indifferent whether it is a breach or not.44 This statement of the law … is in accordance with the general principle of law that a conscious decision not to inquire into the existence of a fact is in many cases treated as equivalent to knowledge of that fact. It is not the same as negligence or even gross negligence: in British Industrial Plastics Ltd v Ferguson,45 for example, Mr Ferguson did not deliberately abstain from inquiry into whether disclosure of the secret process would be a breach of

contract. He negligently made the wrong inquiry, but that is an altogether different state of mind. The next question is what counts as an intention to procure a breach of contract. It is necessary for this purpose to distinguish between ends, means and consequences. If someone knowingly causes a breach of contract, it does not normally matter that it is the means by which he intends to achieve some further end or even that he would rather have been able to achieve that end without causing a breach. … Again, people seldom knowingly cause loss by unlawful means out of simple disinterested malice. It is usually to achieve the further end of securing an economic advantage to themselves. … [page 920] On the other hand, if the breach of contract is neither an end in itself nor a means to an end, but merely a foreseeable consequence, then in my opinion it cannot for this purpose be said to have been intended. That, I think, is what judges and writers mean when they say that the claimant must have been ‘targeted’ or ‘aimed at’. … Finally, what counts as a breach of contract? … If the torts are to be separated, then I think that one cannot be liable for inducing a breach unless there has been a breach. No secondary liability without primary liability. …

Causing loss by unlawful means: elements of the tort The most important question concerning this tort is what should count as unlawful means. … The essence of the tort … appears to be (a) a wrongful interference with the actions of a third party in which the claimant has an economic interest and (b) an intention thereby to cause loss to the claimant. … In my opinion, and subject to one qualification, acts against a third party count as unlawful means only if they are actionable by that third party. The qualification is that they will also be unlawful means if the only

reason why they are not actionable is because the third party has suffered no loss. … But the threat must be to do something which would have been actionable if the third party had suffered loss. … [I]n National Phonograph Co Ltd v Edison-Bell Consolidated Phonograph Co Ltd46 the defendant intentionally caused loss to the plaintiff by fraudulently inducing a third party to act to the plaintiff’s detriment. The fraud was unlawful means because it would have been actionable if the third party had suffered any loss, even though in the event it was the plaintiff who suffered. In this respect, procuring the actions of a third party by fraud (dolus) is obviously very similar to procuring them by intimidation (metus). … Unlawful means … consists of acts intended to cause loss to the claimant by interfering with the freedom of a third party in a way which is unlawful as against that third party and which is intended to cause loss to the claimant. It does not in my opinion include acts which may be unlawful against a third party but which do not affect his freedom to deal with the claimant. … Finally, there is the question of intention. In the Lumley v Gye tort, there must be an intention to procure a breach of contract. In the unlawful means tort, there must be an intention to cause loss. The ends which must have been intended are different. South Wales Miners’ Federation v Glamorgan Coal Co Ltd47 shows that one may intend to procure a breach of contract without intending to cause loss. Likewise, one may intend to cause loss without intending to procure a breach of contract. But the concept of intention is in both cases the same. In both cases it is necessary to distinguish between ends, means and consequences. One intends to cause loss even though it is the means by which one achieved the end of [page 921] enriching oneself. On the other hand, one is not liable for loss which is neither a desired end nor a means of attaining it but merely a foreseeable consequence of one’s actions.

Comments 37.6.1 See Radan, Gooley, and Vickovich at 37.38–37.59. 37.6.2 For discussions of this case, see H Carty, ‘OBG Ltd v Allan: The House of Lords Shapes the Economic Torts and Explores Commercial Confidences and Image Rights’ (2007) 15 Torts Law Journal 283; S Deakin and J Randall, ‘Rethinking Economic Torts’ (2009) 72 Modern Law Review 519.

JUSTIFICATION AND INDUCEMENT TO BREACH A CONTRACT 37.7C Zhu v Treasurer of the State of New South Wales (2004) 218

CLR 530 Court: High Court of Australia Facts: TOC Management Services was party to a licence agreement with the Sydney Organising Committee of the Olympic Games (SOCOG), by which it was authorised to use Olympic Games intellectual property, such as logos and other indicia, and to license others in that use. Zhu, an Australian citizen, entered into an agreement with TOC which authorised him to sell memberships in the Olympic Club in mainland China. The Olympic Club, which included two committee members appointed by SOCOG, gave members certain ticketing and other benefits related to the 2000 Olympic Games in Sydney. Zhu was given Olympic Club material and letters of authority for presentation to Chinese officials. The agreement, the agency rights for which Zhu paid $260,000, required him to sell 10,000 memberships (initially 2000) in China. At one point TOC had major financial problems and SOCOG took control of the Olympic Club. SOCOG ordered TOC’s executive to terminate Zhu’s contract on the basis of alleged serious breaches by him. On his return to Sydney Zhu was arrested by police and charged with

various deception offences. These charges were later dropped when it transpired that SOCOG’s brief to the police was incomplete and deficient. Zhu sued SOCOG for inducement to breach a contract. The New South Wales Supreme Court found SOCOG’s ‘disgraceful’ behaviour responsible for the invalid termination of the agency agreement. Any breaches of the contract by Zhu did not justify termination and he was awarded damages of $4.23 million, including $200,000 in exemplary damages for SOCOG’s conduct and $95,000 in aggravated damages for injured feelings due to the arrest. The Court of Appeal reversed the decision, accepting SOCOG’s defence of justification on the grounds that Zhu had made unauthorised use of intellectual property. Zhu appealed to the High Court. [page 922] Issues: The High Court had to determine whether the tort of inducing a breach of contract had been proved on the established facts and, if so, whether the elements of the justification defence had been made out on behalf of SOCOG (now represented by the State Treasurer). Decision: The High Court (Gleeson CJ, Gummow, Kirby, Callinan, and Heydon JJ) unanimously allowed Zhu’s appeal. Zhu’s conduct in Australia was found to have been lawful, despite only obtaining oral consent for the use of Olympic words and symbols in China. He was not required to obtain SOCOG’s consent because of its preexisting licence agreement with TOC and there was no justification for termination of the contract. Extract: The extracts from the joint judgment of the High Court focus on the circumstances in which a party may be justified in inducing a breach of contract.

Gleeson CJ, Gummow, Kirby, Callinan, and Heydon JJ Independent Oil Industries Ltd v The Shell Co of Australia Ltd48 …

[contains] a valuable analysis of the defence of justification which has been much neglected by both judge and jurist. Jordan CJ … cited Lord Lindley’s reference to: … cases in which a person, whose rights will be violated if a contract is performed, is justified in endeavouring to procure a breach of such contract.49 Jordan CJ said justification in that sense rested on the principle that: … an act which would in itself be wrongful as infringing some legal right of another person may be justified if shown to be no more than reasonably necessary for the protection of some actually existing superior legal right in the doer of the act.50 He illustrated the operation of the principle thus: [A]n occupier of land may after notice lawfully eject a trespasser, and anyone may lawfully defend himself, by acts which would in other circumstances constitute the tort of assault.51 The legal strength of the trespasser’s position could not be improved, and the legal strength of the occupier’s position could not be reduced, by the fact that the trespasser had entered the occupier’s land pursuant to a contract with a third party. Nor could the third party complain. Thus he extended the example: [page 923] If A without authority from B employs C to cut down trees upon B’s land, B may lawfully procure C not to commit the trespass, just as he may lawfully prevent him from committing it.52 He gave another example of justification in the relevant sense as follows: If one person without authority employs another to sell the land or goods of a third party, neither of them can complain if the third

party procures the other not to perform a contract which cannot be performed without violating his superior legal right.53 Jordan CJ continued: [I]t does not appear to have yet been authoritatively decided that anything short of the protection of an actually existing superior legal right will justify the wilful procuring of a breach of contract.54 … Ordinarily, to justify the wilful attempt of a stranger to procure a breach of contract, a superior legal right must be established. It appears to follow that by ‘actually existing superior legal right’ Jordan CJ meant a right in real or personal property, not merely a right to contractual performance. The former type of right may be seen as superior to the latter because the former is proprietary, while the latter is at most quasiproprietary, in the sense which Kitto J appeared to be employing. Two competing rights to contractual performance involving no proprietary interest would be equal rights, neither being superior to the other; but Jordan CJ did not mention the protection of an equal right as a form of justification. The conclusion that by ‘superior legal right’ Jordan CJ meant a right to real or personal property is also indicated by the fact that he limited his examples of persons justified in interfering with contracts to the owners of rights in real or personal property that were inconsistent with rights created by contracts between other persons. … [I]n stating the law for Australia, it should now be accepted that, where the superiority of right rests in some characteristic of the general law, then, as indicated above, and as perceived by Jordan CJ, temporal priority of other purely contractual rights will not suffice.

Was SOCOG’s conduct ‘reasonably necessary’? Even if SOCOG’s conduct had fallen within some existing judicial test, it would not constitute justification for an additional reason. According to Jordan CJ in Independent Oil Industries Ltd v The Shell Co of Australia Ltd an act of interference may be justified: … if shown to be no more than reasonably necessary for the

protection of some actually existing superior legal right in the doer of the act.55 [page 924] This ‘reasonably necessary’ requirement is consistent with two statements in Building Workers’ Industrial Union of Australia v Odco Pty Ltd. There the Full Court of the Federal Court of Australia said: There is good reason for the rarity of cases where justification has been shown. In a society which values the rule of law, occasions when a legal right may be violated with impunity ought not to be frequent.56 The Court concluded that: The matter was quite susceptible of determination by … means [other than interference with contract].57 Jordan CJ’s requirement is supported by Dixon J’s opinion that: … the law always countenances resort to the courts … as the proper means of determining any assertion of right.58 [E]qually, the law discountenances refusal to resort to the courts and the employment of self-help without notice instead. It is also supported by Simonds J’s denial of justification in Camden Nominees Ltd v Forcey59 on the ground that the defendants had curial remedies to which they did not resort. That may not defeat the defence of justification in every case, but it supports the relevance of an inquiry into whether the defendant’s interference was reasonably necessary. The ‘reasonably necessary’ test directs attention to how a reasonable and prudent person or body in SOCOG’s position would have behaved.60 If SOCOG had been able to prove the cause of action it claimed to have against [Zhu] under s 12 of the [Sydney 2000 Games (Indicia and Images) Protection Act 1996 (Cth)], it could have sought an injunction under s 43, an interlocutory injunction under s 44, an order for corrective

advertisements under s 45 or damages under s 46. None of these forms of relief were sought. Instead, a course of action was embarked upon which was precipitous, high-handed and oppressive in its consequences. SOCOG was a statutory body created by the Parliament of New South Wales. Its conduct in the present case fell far short of the conduct conventionally expected of bodies exercising powers granted by an Australian Parliament.

[page 925]

Comment 37.7.1 See Radan, Gooley, and Vickovich at 37.60–37.66.

1.

(1805) 32 ER 927.

2. 3.

(1880) 5 App Cas 925 at 935. (1798) 100 ER 450.

4. 5.

[1954] 1 All ER 909 at 918. [1994] 3 All ER 581 at 610.

6. 7.

[1881–5] All ER Rep 856 at 861–2. Gipps v Gipps [1978] 1 NSWLR 454 at 460.

8. 9.

[1975] 2 All ER 465. [1975] 2 All ER 465 at 474.

10. 11.

[2003] 1 All ER 173. [2003] 1 All ER 173 at [15]–[16].

12. 13.

Chitty on Contracts (32nd edn, 2015) vol 1, at 7-040. [2016] 1 All ER 671.

14. 15.

(1859) 7 HL Cas 750 at 759; (1859) 11 ER 299 at 303. [1895] 2 Ch 474 at 482.

16. 17.

Chitty on Contracts (32nd edn, 2015) vol 1, at 7-036. Spencer Bower & Handley, Actionable Misrepresentation (2014), p 122.

18. 19.

[1964] AC 465. [1964] Ch 506.

20. 21.

[1939] 1 KB 194 at 206. [1966] 1 QB 197.

22.

See Lister v Romford Ice and Cold Storage Co Ltd [1957] AC 555 at 587 and Matthews v Kuwait Bechtel Corporation [1959] 2 QB 57.

23. 24.

Nocton v Lord Ashburton [1914] AC 932 at 956. See Cassidy v Ministry of Health [1951] 2 KB 343 at 359–60.

25. 26.

Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158 at 167. (1854) 156 ER 145.

27. 28.

Hadley v Baxendale (1854) 156 ER 145 at 151. Hobbs v London and South Western Railway Co (1875) LR 10 QB 111 at 118.

29. 30.

(1877) 2 PD 118. (1928) 33 Com Cas 324.

31. 32.

(1927) 32 Com Cas 144 at 151. (1853) 118 ER 749.

33. 34.

CBS Songs Ltd v Amstrad Consumer Electronics plc [1988] AC 1013 and Unilever v Chefaro [1994] FSR 135. South Wales Miners’ Federation v Glamorgan Coal Co Ltd [1905] AC 239 at 246.

35. 36.

[1898] AC 1. D C Thomson & Co Ltd v Deakin [1952] Ch 646 at 694.

37. 38.

[1901] AC 495 at 510 and 535 respectively. D C Thomson & Co Ltd v Deakin [1952] Ch 646 at 669.

39. 40.

P Cane ‘Mens Rea in Tort Law’ (2000) 20 Oxford Journal of Legal Studies 533 at 552. Daily Mirror Newspapers Ltd v Gardner [1968] 2 QB 762 at 781.

41. 42.

Torquay Hotel Co Ltd v Cousins [1969] 2 Ch 106 at 138–9. [1988] AC 1013.

43. 44.

[1994] FSR 135. Emerald Construction Co Ltd v Lowthian [1966] 1 WLR 691 at 700–1.

45. 46.

[1940] 1 All ER 479. [1908] 1 Ch 335.

47. 48.

[1905] AC 239. Independent Oil Industries Ltd v The Shell Co of Australia Ltd (1937) 37 SR (NSW) 394.

49. 50.

South Wales Miners’ Federation v Glamorgan Coal Co Ltd [1905] AC 239 at 254. Independent Oil Industries Ltd v The Shell Co of Australia Ltd (1937) 37 SR (NSW) 394 at 415.

51. 52.

Independent Oil Industries Ltd v The Shell Co of Australia Ltd (1937) 37 SR (NSW) 394 at 415. Independent Oil Industries Ltd v The Shell Co of Australia Ltd (1937) 37 SR (NSW) 394 at 416.

53. 54.

Independent Oil Industries Ltd v The Shell Co of Australia Ltd (1937) 37 SR (NSW) 394 at 415. Independent Oil Industries Ltd v The Shell Co of Australia Ltd (1937) 37 SR (NSW) 394 at 416.

55. 56.

Independent Oil Industries Ltd v The Shell Co of Australia Ltd (1937) 37 SR (NSW) 394 at 415. Building Workers’ Industrial Union of Australia v Odco Pty Ltd (1991) 29 FCR 104 at 144.

57. 58.

Building Workers’ Industrial Union of Australia v Odco Pty Ltd (1991) 29 FCR 104 at 146. James v The Commonwealth (1939) 62 CLR 339 at 373.

59.

[1940] Ch 352 at 365.

60.

Stanford v Roberts [1901] 1 Ch 440 at 444; In re Chemists’ Federation Agreement (No 2) [1958] 1 WLR 1192 at 1206.

[page 926]

38 RESTITUTION

INTRODUCTION 38.1 Restitution is a remedy that is based upon the principle of unjust enrichment. It is a remedy that, for example, will enable a person to enforce a demand for payment in circumstances where there is no enforceable contract between them and another person. This will be particularly so when the other person has obtained a benefit or gain at someone else’s expense and where it would be unjust for them to retain that benefit or gain. In BP Exploration Co (Libya) Ltd v Hunt (No 2) [1979] 1 WLR 783 at 839, Goff J formulated the principle of unjust enrichment in the following way: The principle of unjust enrichment presupposes three things: (1) receipt by the defendant of a benefit, (2) at the plaintiff’s expense, (3) in such circumstances that it would be unjust to allow the defendant to retain the benefit. This formulation has led some commentators to the view that the purpose of restitution is the reversal of unjust enrichment. In this chapter illustrations are given of the principles applicable to restitution. In particular, the focus is upon circumstances where the courts have had to examine whether it can be said that it is just and fair to allow, for example, person A to receive payment from person B in situations where person B has obtained a benefit at person A’s expense. Similarly, if money is paid to another by mistake or where there has been a total failure of consideration but nevertheless a benefit has been obtained by one person, it

may be that it would be unjust for the recipient to retain the benefit without payment of a fair and just value for that benefit. In such cases restitution is often the appropriate remedy. Principles applicable to restitution have been developed over time. In relation to circumstances where applications for payment have been made in consequence of work being done or other non-monetary benefits being supplied, the courts have developed and applied principles designed to circumvent unjust enrichment settling upon another person if the status quo were to be maintained. This was illustrated in Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 (see 38.2C), where the court was faced with a claim from a builder that was based on quantum meruit in consequence of work done for and materials supplied to a homeowner pursuant to an unenforceable (and oral) building contract. In that case members of the High Court noted the independent existence of a claim to restitution from an implied contract claim and after finding that there had been unjust enrichment, applied the doctrine of restitution to enable payment to be made. [page 927] By way of contrast, in Lumbers v W Cook Builders Pty Ltd (in liq) (2008) 232 CLR 635 (see 38.3C) the court was unable to find that there had been unjust enrichment in the circumstances. In reaching its decision the High Court confirmed that in restitution cases the problem in identifying a conferring or accepting of a benefit remains. Restitution has also arisen in the context of circumstances in which a contract existed between parties, but had been abandoned by one of the parties prior to completion but after they had done work pursuant to the contract. The unfinished work was subsequently carried out by the other party to the contract, who argued that he should be paid on a quantum meruit basis by the party who abandoned the contract. This situation arose in Sumpter v Hedges [1898] 1 QB 673 (see 38.4C). Not all claims in restitution will be successful. In circumstances where money has been paid as a result of a mistake of law and where the other side changes its position in reliance upon the payment, restitution may not be available. Principles applicable to this situation were examined in David

Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353 (see 38.5C) and Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd (2014) 253 CLR 560 (see 38.6C). Finally, failure of consideration is one of the factors that makes retention of a benefit prima facie unjust and one which triggers the operation of restitutionary remedies. However, this is not always the case, as was illustrated in Equuscorp Pty Ltd v Haxton (2012) 246 CLR 498 (see 38.7C), where the application of the remedy was denied in consequence of the acceptance of the view that public policy operated so as to prevent restitution applying in the circumstances.

PRINCIPLES REGULATING THE RECOVERY OF THE VALUE OF WORK DONE OR OTHER NON-MONETARY BENEFITS SUPPLIED 38.2C

Pavey & Matthews Pty Ltd v Paul (1986) 162 CLR 221

Court: High Court of Australia Facts: Paul and Pavey & Matthews entered into an oral contract for Pavey & Matthews, a licensed builder, to do certain building work on Paul’s property in return for which Paul would pay Pavey & Matthews ‘a reasonable remuneration for that work, calculated by reference to prevailing rates of payment in the building industry’. The building work was ‘building work’ within the meaning of s 45 of the Builders Licensing Act 1971 (NSW), which required such contracts to be in writing. After the work was completed, Pavey & Matthews instituted quantum meruit proceedings for the balance owing. Paul denied the reasonableness of these charges and argued that the contract was unenforceable because of non-compliance with s 45 of the Act. Issue: The issue before the court was whether s 45 of the Act precluded Pavey & Matthews from bringing a quantum meruit claim to recover a reasonable sum for the work done and materials supplied pursuant to the oral contract and accepted by the owner.

Decision: The High Court (Mason, Wilson, Deane, and Dawson JJ; Brennan J dissenting) held in favour of Pavey & Matthews on the basis of its quantum meruit claim. The court [page 928] held that the quantum meruit claim was based upon unjust enrichment arising from Paul’s acceptance of the benefits which accrued from Pavey & Matthews’ performance of an unenforceable oral contract. The claim was independent of any contract between the parties. Section 45 of the Act did not prevent Pavey & Matthews from bringing its quantum meruit claim. Extract: The extracts from the joint judgment of Mason and Wilson JJ and the judgment of Deane J explain the rationale of a quantum meruit claim.

Mason and Wilson JJ [A]n action on a quantum meruit … rests, not on implied contract, but on a claim to restitution or one based upon unjust enrichment, arising from [Paul’s] acceptance of the benefits accruing to [Paul] from [Pavey & Matthews’] performance of an unenforceable oral contract. … Once the true basis of the action on a quantum meruit is established, namely execution of work for which the unenforceable contract provided, and its acceptance by the defendant, it is difficult to regard the action as one by which the plaintiff seeks to enforce the oral contract. True it is that proof of the oral contract may be an indispensable element in the plaintiff’s success but that is in order to show that (a) the benefits were not intended as a gift, and (b) that the defendant has not rendered the promised exchange value. The purpose of proving the contract is not to enforce it but to make out another cause of action having a different foundation in law. … [W]hen success in a quantum meruit depends, not only on the plaintiff proving that he did the work, but also on the defendant’s acceptance of the work without paying the agreed remuneration, it is evident that the court is

enforcing against the defendant an obligation that differs in character from the contractual obligation had it been enforceable.

Deane J The quasi-contractual obligation to pay fair and just compensation for a benefit which has been accepted will only arise in a case where there is no applicable genuine agreement or where such an agreement is frustrated, avoided or unenforceable. In such a case, it is the very fact that there is no genuine agreement or that the genuine agreement is frustrated, avoided or unenforceable that provides the occasion for (and part of the circumstances giving rise to) the imposition by the law of the obligation to make restitution. … To identify the basis of such actions as restitution and not genuine agreement is not to assert a judicial discretion to do whatever idiosyncratic notions of what is fair and just might dictate. The circumstances in which the common law imposes an enforceable obligation to pay compensation for a benefit accepted under an unenforceable agreement have been explored in the reported cases and in learned writings and are unlikely to be greatly affected by the perception that the basis of such an obligation, when the common law imposes it, is preferably seen as lying in restitution rather than in the implication of a genuine agreement where in fact the unenforceable agreement left no room for one. That is [page 929] not to deny the importance of the concept of unjust enrichment in the law of this country. It constitutes a unifying legal concept which explains why the law recognizes, in a variety of distinct categories of case, an obligation on the part of a defendant to make fair and just restitution for a benefit derived at the expense of a plaintiff and which assists in the determination, by the ordinary processes of legal reasoning, of the question whether the law should, in justice, recognise such an obligation in a new or developing category of case.1 In a category of case where the law recognises an obligation to pay a reasonable remuneration or compensation for a benefit actually or constructively accepted, the general concept of

restitution or unjust enrichment is … also relevant, in a more direct sense, to the identification of the proper basis upon which the quantum of remuneration or compensation should be ascertained in that particular category of case. … There is no apparent reason in justice why a builder who is precluded from enforcing an agreement should also be deprived of the ordinary common law right to bring proceedings on a common indebitatus count to recover fair and reasonable remuneration for work which he has actually done and which has been accepted by the building owner.2 Nor, upon a consideration of the words of s 45 in their context in the Act, am I able to identify any legislative intent to deprive the builder of that ordinary common law right. The section does not make an agreement to which it applies illegal or void. Nor do its words disclose any legislative intent to penalise the builder beyond making the agreement itself unenforceable by him against the other party. It may be that the bringing of an action as on a common indebitatus count would conflict with the apparent legislative policy underlying s 45 if the claimant in such an action were entitled as of right to recover the amount which the building owner had agreed to pay under the unenforceable agreement. I am, however, unpersuaded that the bringing by a builder of an action on the common indebitatus count in which he can recover no more than what is fair and reasonable in the circumstances as compensation for the benefit of the work which he has actually done and which has been accepted by the building owner conflicts with any discernible legislative policy. Plainly enough, the survival of the ordinary common law right of the builder to recover, in an action founded on restitution or unjust enrichment, reasonable remuneration for work done and accepted under a contract which is unenforceable by him does not frustrate the purpose of the section to provide protection for a building owner. The building owner remains entitled to enforce the contract. He cannot, however, be forced either to comply with its terms or to permit the builder to carry it to completion. All that he can be required to do is to pay reasonable compensation for work done of which he has received the benefit and for which in justice he is obligated to make such a payment by way of restitution. In relation to such work, he can rely on the contract, if it has not been rescinded, as to the amount of remuneration and the terms of payment. If the agreed remuneration exceeds what is reasonable in the circumstances, he can rely on the unenforceability of the

contract with the result that he is liable to pay no more than what is fair and reasonable. [page 930] The tendency in some past cases to see the rationale of the right to recover remuneration for a benefit provided and accepted under an unenforceable contract as contract or promise rather than restitution has tended to distract attention from the importance of identifying the basis upon which the quantum of the amount recoverable should be ascertained. What the concept of monetary restitution involves is the payment of an amount which constitutes, in all the relevant circumstances, fair and just compensation for the benefit or ‘enrichment’ actually or constructively accepted. Ordinarily, that will correspond to the fair value of the benefit provided (eg remuneration calculated at a reasonable rate for work actually done or the fair market value of materials supplied). In some categories of case, however, it would be to affront rather than satisfy the requirements of good conscience and justice which inspire the concept or principle of restitution or unjust enrichment to determine what constitutes fair and just compensation for a benefit accepted by reference only to what would represent a fair remuneration for the work involved or a fair market value of materials supplied. One such category of case is that in which unsolicited but subsequently accepted work is done in improving property in circumstances where remuneration for the unsolicited work calculated at what was a reasonable rate would far exceed the enhanced value of the property. More relevant for present purposes is the special category of case where restitution is sought by one party for work which he has executed under a contract which has become unenforceable by reason of his failure to comply with the requirements of a statutory provision which was enacted to protect the other party. In that category of case, it would be contrary to the general notions of restitution or unjust enrichment if what constituted fair and just compensation for the benefit accepted by the other party were to be ascertained without regard to any identifiable real detriment sustained by that other party by reason of the failure of the first party to ensure that the requirements of the statutory provision were satisfied. Thus, if it is established on the hearing of the present case that Mrs

Paul has sustained an identifiable real detriment by reason of the failure of the builder to ensure that there was a written memorandum of the oral contract which satisfied the requirements of s 45 of the Act, that would be an important factor in determining what constituted fair and just restitution in the circumstances of the case for the work done and materials supplied of which she has accepted the benefit. The mere fact that the reasonable remuneration for the building work done at Mrs Paul’s request exceeded Mrs Paul’s expectations would not, however, of itself constitute any such identifiable real detriment since it is not necessary for the purposes of s 45 of the Act that a written contract contain either an agreed price for the building work or an estimate of what the cost of it to the building owner will ultimately be.

Comments 38.2.1 See Radan, Gooley, and Vickovich at 38.3, 38.5, 38.6, 38.10, 38.26, 38.28, 38.33, 38.34, and 38.44. 38.2.2 For a discussion on this landmark Australian decision, see G Jones, ‘Restitution: Unjust Enrichment as a Unifying Concept in Australia?’ (1988) 1 Journal of Contract Law 8.

[page 931] 38.3C Lumbers v W Cook Builders Pty Ltd (in liq) (2008) 232 CLR 635 Court: High Court of Australia Facts: Matthew and Warwick Lumbers contracted with a building company, Cook & Sons, for the construction of a house. During the building construction, Sons sub-contracted the work to a closelyrelated company, Cook Builders. The Lumbers were unaware of this arrangement. After the building work was completed, Builders advised the Lumbers of the arrangement it had entered into with

Sons, told the Lumbers that they owed nothing to Sons, and requested payment of the balance of money for the construction of the house. Issue: The issue before the High Court was whether Builders, not having a contract with the Lumbers, could bring a quantum meruit claim against the Lumbers. Decision: The High Court (Gleeson CJ, Gummow, Hayne, Crennan, and Kiefel JJ) unanimously held that the claim by Builders failed because there was no unjust enrichment of the Lumbers at Builders’ expense. Extract: The extracts from the judgment of Gleeson CJ and the joint judgment of Gummow, Hayne, Crennan, and Kiefel JJ discuss the relevance of the contracts in this case and the reasons why they precluded a successful quantum meruit claim.

Gleeson CJ [In this case there] was … a head contract between the Lumbers and Sons, and a sub-contract between Sons and Builders. … The contractual arrangements that were made effected a certain allocation of risk; and there is no occasion to disturb or interfere with that allocation. On the contrary, there is every reason to respect it. There was no mistake or misunderstanding on the part of Builders. It was accepted on both sides in argument that in the ordinary case a building sub-contractor does not have a restitutionary claim against a property owner, but must look for payment to the head contractor.3 That was said to be subject to exceptions, but the difficulty for Builders was to show that the case fell within any recognised exception or within general principles justifying a new exception. In Pan Ocean Shipping Co Ltd v Creditcorp Ltd, Lord Goff of Chieveley said: I am of course well aware that writers on the law of restitution have been exploring the possibility that, in exceptional circumstances, a plaintiff may have a claim in restitution when he has conferred a benefit on the defendant in the course of performing an obligation

to a third party. But, quite apart from the fact that the existence of a remedy in restitution in such circumstances must still be regarded as a matter of debate, it is always recognised that serious difficulties arise if the law seeks to expand the law of restitution to redistribute risks for which provision has been made under an applicable contract.4 [page 932] In some Australian jurisdictions, there has been legislation enacted to protect the interests of building subcontractors, but such protection is confined within a certain statutory framework. The fact that such legislation exists should discourage, rather than encourage, attempts to extend the scope of restitutionary claims beyond the bounds set by legal principle, especially where to do so would be to cut across or disturb contractual relationships and established allocation of risk. To repeat, Builders’ services were not performed at the request of the Lumbers, but pursuant to a contract between Sons and Builders. There was no acquiescence by the Lumbers in the provision of services by Builders. The Lumbers were unaware of the existence or role of Builders. As far as they were concerned, the services were being provided by Sons under the building contract. That was not provision of services for the protection of the Lumbers’ property. The majority in the Full Court [in South Australia] decided the case on the basis that Builders performed services that conferred an incontrovertible benefit on the Lumbers, and that it would be unconscionable for the Lumbers to keep the benefit of those services without paying a reasonable sum for them. In their application to the facts of the present case, each of the two elements in that proposition should be rejected. As to the concept of conferring of benefit, what was involved was the performance of building work on property owned by the Lumbers in circumstances where there was a building contract between the Lumbers and Sons obliging Sons to perform that work and the Lumbers to pay Sons for it, and a sub-contract between Sons and Builders obliging Builders to

perform the work and Sons to pay Builders. … In Steele v Tardiani,5 … Dixon J explained the problems of identifying, for the purpose of a quantum meruit claim not based on the contract, a ‘benefit’ conferred on a building owner by the performance of work otherwise than in accordance with the contract. He accepted that, where building work is done outside the contract, and the benefit of the work is taken, there may arise an obligation to pay for the work. He went on to refer, however, to ‘the dilemma in which a building owner is placed’. He quoted Collins LJ who said, in Sumpter v Hedges: Where, as in the case of work done on land, the circumstances are such as to give the defendant no option whether he will take the benefit of the work or not, then one must look to other facts than the mere taking the benefit of the work in order to ground the inference of a new contract. … The mere fact that a defendant is in possession of what he cannot help keeping, or even has done work upon it, affords no ground for such an inference.6 The reference to an ‘inference of a new contract’ may reflect an approach since overtaken by Pavey & Matthews Pty Ltd v Paul,7 but the problem involved in identifying a conferring or accepting of a benefit remains. [page 933] The concept of ‘free acceptance’ invoked by the majority in the Full Court, whatever its exact scope, is commonly related to a defendant who ‘did not take a reasonable opportunity open to him to reject the proffered services’.8 That was not the situation of the Lumbers in the present case. Similarly, what was sought to be characterised as an ‘incontrovertible benefit’ was that which Sons had undertaken to provide for the Lumbers and for which the Lumbers had agreed to pay Sons. If the principle relied upon by Builders extends to the claim by Builders against the Lumbers, it is difficult to see why it would not extend also to the work performed by the numerous sub-contractors engaged by Sons and later by Builders. … Why Builders was in a different position from them vis-à-vis the Lumbers was not explained. In a broad colloquial sense, they were conferring benefits on

the Lumbers, and the Lumbers were accepting those benefits, but that was not so in any legal sense. It was argued that the Lumbers had received a ‘windfall’ and that it would be unconscionable of them to refuse to pay Builders for the work in question. This characterisation proceeds upon assumptions as to the respective rights and obligations of the Lumbers, Sons and Builders which, for reasons already stated, have not been justified. In so far as the Lumbers have been relieved from liability to pay the full agreed price for the work done on their property it appears principally to be the consequence of Builders’ failure to make or pursue a prompt claim against Sons, and Builders’ failure to pursue its claim against Sons in the present proceedings. If that claim had been pursued, it may well have resulted in a claim by Sons against the Lumbers. … The procedural and evidentiary deficiencies in the case make it impossible to conclude that the conduct of the Lumbers in refusing to pay Builders is unconscionable. If they have been enriched, it is at the expense of Sons. If any party has been enriched at the expense of Builders, it is Sons.

Gummow, Hayne, Crennan, and Kiefel JJ The doing of work, or payment of money, for and at the request of another, are archetypal cases in which it may be said that a person receives a ‘benefit’ at the ‘expense’ of another which the recipient ‘accepts’ and which it would be unconscionable for the recipient to retain without payment. And as is well apparent from this Court’s decision in Steele v Tardiani,9 an essential step in considering a claim in quantum meruit (or money paid) is to ask whether and how that claim fits with any particular contract the parties have made. It is essential to consider how the claim fits with contracts the parties have made because, as Lord Goff of Chieveley rightly warned in Pan Ocean Shipping Co Ltd v Creditcorp Ltd, ‘serious difficulties arise if the law seeks to expand the law of restitution to redistribute risks for which provision has been made under an applicable contract’.10 … Likewise, it is essential to consider whether the facts of the present case yield to analysis as a claim for work and labour done, or money paid, because where one party (in this case, Builders) seeks recompense from another (here the Lumbers) for some service done

[page 934] or benefit conferred by the first party for or on the other, the bare fact of conferral of the benefit or provision of the service does not suffice to establish an entitlement to recovery. As Bowen LJ said in Falcke v Scottish Imperial Insurance Company: The general principle is, beyond all question, that work and labour done or money expended by one man to preserve or benefit the property of another do not according to English law create any lien upon the property saved or benefited, nor, even if standing alone, create any obligation to repay the expenditure. Liabilities are not to be forced upon people behind their backs any more than you can confer a benefit upon a man against his will.11 (Emphasis added.) The principle is not unqualified. Bowen LJ identified salvage in maritime law as one qualification. Other cases, including other cases of necessitous intervention, may now be seen as further qualifications to the principle but it is not necessary to examine in this case how extensive are those further qualifications or what is their content. For the purposes of this case the critical observations to make are first that Builders’ restitutionary claim does not yield to analysis as a claim for work and labour done or money paid and secondly, that Builders’ restitutionary claim, if allowed, would redistribute not only the risks but also the rights and obligations for which provision was made by the contract the Lumbers made with Sons.

A claim for work and labour done or money paid? At trial, Builders did not frame its claim against the Lumbers as a claim for work and labour done or money paid at the Lumbers’ request. … [T]he evidence that was led at trial showed that the Lumbers had never asked Builders to do anything in connection with the Lumbers’ house. On the hearing of the appeal to this Court, however, Builders submitted that acceptance of a benefit, without a request, would be sufficient, at least in this case, to found an action by Builders for work and labour done or money paid. Builders submitted that this conclusion was supported, if not

required, by this Court’s decision in Pavey & Matthews Pty Ltd v Paul. That is not so. In Pavey & Matthews, a majority of this Court held that the right to recover on a quantum meruit does not depend on the existence of an implied contract but on a claim to restitution or one based on unjust enrichment.12 … It is important to recognise two points about Pavey & Matthews. First, there was no issue in that case about whether the plaintiff, a builder, had a claim for work and labour done and materials supplied. The issue in the case was whether that claim was defeated by a statutory provision analogous to s 4 of the Statute of Frauds 1677 (UK). … In particular, the issue was whether the builder’s action on a quantum meruit was a direct or indirect enforcement of the oral contract the parties had made. The majority in Pavey & [page 935] Matthews held that because ‘the true foundation of the right to recover on a quantum meruit does not depend on the existence of an implied contract’ the action was not ‘one by which the plaintiff seeks to enforce the oral contract’.13 The second point to be noted is that unjust enrichment was identified as a legal concept unifying ‘a variety of distinct categories of case’.14 It was not identified as a principle which can be taken as a sufficient premise for direct application in particular cases. Rather, as Deane J emphasised in Pavey & Matthews, it is necessary to proceed by ‘the ordinary processes of legal reasoning’ and by reference to existing categories of cases in which an obligation to pay compensation has been imposed. ‘To identify the basis of such actions as restitution and not genuine agreement is not to assert a judicial discretion to do whatever idiosyncratic notions of what is fair and just might dictate’.15 On the contrary, what the recognition of the unifying concept does is to assist ‘in the determination, by the ordinary processes of legal reasoning, of the question whether the law should, in justice, recognise

such an obligation in a new or developing category of case’ (emphasis added).16 Builders’ submission that acceptance of a benefit, without a request, suffices to found an action for work and labour done or money paid thus finds no direct support in Pavey & Matthews. That issue did not arise and was not decided in that case. Rather, the question to which Pavey & Matthews directs attention is whether the long-established and well-recognised category of cases constituted by claims for work and labour done or money paid at the request of another should be extended or developed in the manner for which Builders contended. … Builders did not submit that it could be found that the Lumbers had made any request directed to Builders. Rather, Builders’ arguments proceeded from the premise that, in the present case, the Lumbers’ request (or requests) for work to be done and money paid was (or were) directed to Sons and not to Builders. Although Builders thus accepted that … it could not be said that the Lumbers made any request directed to Builders, this … was said to be immaterial. The identity of the party to whom the request was directed was said to be of no moment because confusion about which company in a group of companies is party to a contract is a common occurrence in modern corporate life. And although no case of mistake was run at trial, or on appeal to the Full Court, the possibility of confusion of identity between Sons and Builders was said by Builders to be reason enough to treat the fact of a request, regardless of the identity of the party to whom the request was directed, as the relevant consideration. The propositions just described take several steps that would require the closest consideration before they could be accepted. First, it may greatly be doubted that any sufficient foundation was laid in the evidence adduced or arguments advanced in the courts [page 936] below for either an argument based in mistake about the identity of the party with whom the Lumbers dealt, or an argument based in some confusion of identity between Sons and Builders. Secondly, even if it were

to be accepted that confusion about the identity of the relevant contracting parties can and sometimes does occur when a contract is made with one of a group of companies, the legal consequences of any such confusion have hitherto been determined by application of the law of contract and doctrines of mistake. It is not necessary, however, to pursue these aspects of the matter further. Rather, it is important to recognise that, although expressed in different terms, Builders’ argument that the identity of the party to whom the Lumbers directed their request to do work and pay money should be dismissed as irrelevant, was an argument that sought to treat the contract made between the Lumbers and Sons as irrelevant. …

The relevance of the contract between the Lumbers and Sons When account is taken of the contractual relationship between the Lumbers and Sons several observations may then be made. First, the Lumbers accepted no benefit at the expense of Builders which it would be unconscionable to retain. The Lumbers made a contract with Sons which either has been fully performed by both parties or has not. Sons made an arrangement or agreement with Builders which again has either been fully performed or it has not. If either the agreement between Sons and the Lumbers or the agreement or arrangement between Sons and Builders has not been fully performed (because all that is owed by one party to the other has not been paid) that is a matter between the parties to the relevant agreement. A failure of performance of either agreement is no reason to conclude that Builders should then have some claim against the Lumbers, parties with whom Builders has no contract. Because Builders had no dealings with the Lumbers, Builders has no claim against the Lumbers for the price of any work and labour Builders performed or for any money that Builders may have paid in relation to the construction. Builders has no such claim because it can point to no request by the Lumbers directed to Builders that Builders do any work it did or pay any money it did. Reference to whether the Lumbers ‘accepted’ any work that Builders did or ‘accepted’ the benefit of any money it paid is irrelevant. It is irrelevant because it distracts attention from the legal relationships between the three parties: the Lumbers, Sons and Builders. To now impose

on the Lumbers an obligation to pay Builders would constitute a radical alteration of the bargains the parties struck and of the rights and obligations which each party thus assumed. There is no warrant for doing that. The second observation to be made is more general. It is that identification of the rights and obligations of the parties, in this as in any matter, requires close attention to the particular facts and circumstances of the case. Necessarily that requires close attention to what contractual or other obligations each owes to the other. … Builders claim in restitution against the Lumbers fails.

[page 937]

Comments 38.3.1 See Radan, Gooley, and Vickovich at 38.40–38.45. 38.3.2 For additional reading, see M Riley, ‘The Conceptual Relationship Between Contract Law and Unjust Enrichment and the Decision in Lumbers v Cook’ (2011–12) 28 Journal of Contract Law 267.

ENTIRE CONTRACTS AND RESTITUTION 38.4C

Sumpter v Hedges [1898] 1 QB 673

Court: Court of Appeal in England Facts: Sumpter, a builder, contracted with Hedges to construct certain buildings on Hedges’ land for a lump sum. Sumpter did part of the work and then abandoned the contract due to a lack of funds on his part. Hedges completed the work. Sumpter sued Hedges on a quantum meruit for the value of the work he had carried out. Issue: The issue before the Court of Appeal was whether the fact that

the contract was an entire contract affected Sumpter’s claim to recover the value of work and materials supplied. Decision: The Court of Appeal (A L Smith LJ, Chitty and Collins LLJ) unanimously rejected Sumpter’s quantum meruit. Extract: The extracts from the judgments of Chitty LJ and Collins LJ set out the reasons why Sumpter’s claim failed.

Chitty LJ [Sumpter] had contracted to erect certain buildings for a lump sum. When the work was only partly done, [Sumpter] said that he could not go on with it, and the judge has found that he abandoned the contract. The position therefore was that the defendant found his land with unfinished buildings upon it, and he thereupon completed the work. That is no evidence from which the inference can be drawn that he entered into a fresh contract to pay for the work done by the plaintiff. If we held that [Sumpter] could recover, we should in my opinion be overruling Cutter v Powell,17 and a long series of cases in which it has been decided that there must in such a case be some evidence of a new contract to enable the plaintiff to recover on a quantum meruit. There was nothing new in the decision in Pattinson v Luckley,18 but Bramwell B there pointed out with his usual clearness that in the case of a building erected upon land the mere fact that the defendant remains in possession of his land is no evidence upon which an inference of a new [page 938] contract can be founded. He says: ‘In the case of goods sold and delivered, it is easy to shew a contract from the retention of the goods; but that is not so where work is done on real property’. I think … that in this case there was no evidence from which a fresh contract to pay for the work done could be inferred.

Collins LJ

I think the case is really concluded by the finding of the learned judge that [Sumpter] had abandoned the contract. If [Sumpter] had merely broken his contract in some way so as not to give [Hedges] the right to treat him as having abandoned the contract, and [Hedges] had then proceeded to finish the work himself, [Sumpter] might perhaps have been entitled to sue on a quantum meruit on the ground that the defendant had taken the benefit of the work done. But that is not the present case. There are cases in which, though the plaintiff has abandoned the performance of a contract, it is possible for him to raise the inference of a new contract to pay for the work done on a quantum meruit from the defendant’s having taken the benefit of that work, but, in order that that may be done, the circumstances must be such as to give an option to the defendant to take or not to take the benefit of the work done. It is only where the circumstances are such as to give that option that there is any evidence on which to ground the inference of a new contract. Where, as in the case of work done on land, the circumstances are such as to give the defendant no option whether he will take the benefit of the work or not, then one must look to other facts than the mere taking of the benefit of the work in order to ground the inference of a new contract. In this case I see no other facts on which such an inference can be founded. The mere fact that a defendant is in possession of what he cannot help keeping, or even has done work upon it, affords no ground for such an inference. He is not bound to keep unfinished a building which is in an incomplete state which would be a nuisance on his land.

Comment 38.4.1 See Radan, Gooley, and Vickovich at 38.37–38.38.

RESTITUTION AND RECOVERY OF MONEY PAID BY MISTAKE 38.5C David Securities Pty Ltd v Commonwealth Bank of Australia

(1992) 175 CLR 353

Court: High Court of Australia Facts: David Securities borrowed money from the Commonwealth Bank. The loan was through the Bank’s Singapore office. Clause 8(b) of the loan agreement required David [page 939] Securities to pay certain sums to the Bank. However, cl 8(b) was void pursuant to s 261 of the Income Assessment Act 1936 (Cth). David Securities sought to recover the sums paid to the Bank in accordance with cl 8(b). Issue: The issue before the High Court was whether the payments pursuant to cl 8(b) could be recovered in a restitution claim, given that the payments were made as the result of a mistake of law. Decision: The High Court (Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron, and McHugh JJ) unanimously found in favour of David Securities. The majority of the court (Brennan J expressing somewhat different views) held that a defence to the restitution claim exists if the payee has adversely changed his or her position in reliance upon the payment. Extract: The extract from the joint judgment of Mason CJ, Deane, Toohey, Gaudron, and McHugh JJ sets out the relevant principles relating to restitution of mistaken payments.

Mason CJ, Deane, Toohey, Gaudron, and McHugh JJ The Restatement of the Law of Restitution states: Until the nineteenth century no distinction was made between mistake of fact and mistake of law and restitution was freely granted both in law and in equity to persons who had paid money to another because of a mistake of law.19

In Farmer v Arundel De Grey CJ stated: When money is paid by one man to another on a mistake either of fact or of law, or by deceit, this action [ie assumpsit] will certainly lie.20 However, in Bilbie v Lumley21 Lord Ellenborough CJ refused recovery of moneys paid under a mistake of law. An underwriter sought recovery of moneys from a successful insurance claimant whom he had paid, unaware that non-disclosure by the insured of essential facts at the time of entering the insurance contract relieved the insurer from liability. The underwriter was in possession of all the facts which would have allowed him to deny liability. After counsel was unable to name a case in which recovery had been allowed to a plaintiff who was aware of all relevant facts, Lord Ellenborough CJ denied recovery on the basis of a maxim wholly inapplicable to the case, namely, ignorantia juris non excusat. This approach appears to have been based on an obiter dictum in the judgment of Buller J in Lowry v Bourdieu.22 On its facts, the decision in Bilbie v Lumley was probably correct because the payment appears to have been made voluntarily and not under any mistake at all. … [page 940] [R]ather than being confined to its facts, Bilbie v Lumley became recognized as authority for the broad proposition that recovery will not be ordered of moneys paid under a mistake of law. It was followed by the majority in Brisbane v Dacres where Gibbs J said: [W]here a man demands money of another as a matter of right, and that other, with a full knowledge of the facts upon which the demand is founded, has paid a sum, he never can recover back the sum he has so voluntarily paid.23 Bilbie v Lumley was distinguished in Kelly v Solari,24 a case allowing recovery of moneys paid under a mistake of fact. It thereby became entrenched as a decision denying recovery because the mistake of the plaintiff was one of law. Despite its dubious foundation, the principle

gained such acceptance that Croom-Johnson J said of it that it was ‘beyond argument at this period in our legal history’.25 The [Bank] claims that the principle has also been accepted in this Court; however, an examination of the relevant cases, apart from the statement of Williams J in York Air Conditioning,26 suggests that they may also be reconciled with the narrower principle of voluntary submission. In Werrin v The Commonwealth, in which the plaintiff sought recovery of sales tax that he had paid upon secondhand goods sold by him, Latham CJ stated: The principle appears to me to be quite clear that if a person, instead of contesting a claim, elects to pay money in order to discharge it, he cannot thereafter, because he finds out that he might have successfully contested the claim, recover the money which he so paid merely on the ground that he made a mistake of law.27 In South Australian Cold Stores Ltd v Electricity Trust of South Australia,28 the plaintiff made monthly payments to the defendant of electricity charges assessed at an increased rate, then successfully challenged the validity of the Minister’s order increasing the charges and sought recovery of the excessive charges paid over. Prior to making the monthly payments, the plaintiff had objected to the increased charge and had even declined to pay the extra amount pursuant to the first monthly account. In a unanimous judgment, the Court denied recovery. It stated: In the present case the only reason why the higher rates were not chargeable was because the formal requirements of the law were not observed by a third party for expressing or giving effect to the decision at which he had actually arrived. Neither he nor the trust were aware of his failure lawfully to exercise his authority. They were unaware because they did not perceive what was required or the true effect of what the document contained. On the side of the company it was simply taken for granted that somehow or another the charges might be lawfully made. This seems to fall outside the reason of [page 941]

the rule under which an action of money had [and] received lies in cases of payment by mistake. Under that rule the action is available when the payee cannot justly retain the money paid to him because it would not have come to his hands if it had not been for a false supposition of fact on the part of the payer causing the latter to believe that he was compellable to make the payment or at all events that he ought to make it. It is to be noticed that Parke B in Kelly v Solari defines the requisite mistake as ‘the supposition that a specific fact is true, which would entitle the other to the money, but which fact is untrue’.29 According to the decision of Pilcher J in Turvey v Dentons (1923) Ltd30 it is too restrictive to say that the fact would if true have entitled the payee to the money; and perhaps the word ‘specific’ may also be too definite. But here there was nothing but an assumption that in some way or other the increased charge might lawfully be made and a readiness to comply with the payee’s demand without more, a demand which but for formal defects in the authorisation would have been enforceable.31 … An important feature of the relevant judgments in these … cases is the emphasis placed on voluntariness or election by the plaintiff. The payment is voluntary or there is an election if the plaintiff chooses to make the payment even though he or she believes a particular law or contractual provision requiring the payment is, or may be, invalid, or is not concerned to query whether payment is legally required; he or she is prepared to assume the validity of the obligation, or is prepared to make the payment irrespective of the validity or invalidity of the obligation, rather than contest the claim for payment. We use the term ‘voluntary’ therefore to refer to a payment made in satisfaction of an honest claim, rather than a payment not made under any form of compulsion or undue influence. If such qualifying, factual circumstances are considered relevant, the sweeping principle that money paid under a mistake of law is irrecoverable or even the Federal Court’s modification of that principle to the effect that mistake of law does not on its own found an action for the recovery of money paid is broader and more preclusive than is necessary. As the authorities cited earlier in explanation of the term ‘mistake of law’ make clear, the concept includes cases of sheer ignorance as well as cases of positive but incorrect belief. To define ‘mistake’ as the supposition that a specific fact is true, as

Parke B did in Kelly v Solari, which was a mistake of fact case, leaves out of account many fact situations. A narrower principle, founded firmly on the policy that the law wishes to uphold bargains and enforce compromises freely entered into, would be more accurate and equitable. The identification and acceptance of such a narrow principle is strongly supported by the difficulty and illogicality of seeking to draw a rigid distinction between cases of mistake of law and mistake of fact. The artificiality of this distinction and the numerous exceptions to it lie behind many of the calls for abolition of the traditional rule. … Commentators have been highly critical of both the fact versus law distinction and the traditional rule precluding recovery. … [page 942] The criticism gains added impetus in Australia by virtue of the recognition by this court in Pavey & Matthews Pty Ltd v Paul32 of the ‘unifying legal concept’ of unjust enrichment. As Dickson J stated in Ontario Hydro: Once a doctrine of restitution or unjust enrichment is recognised, the distinction as to mistake of law and mistake of fact becomes simply meaningless.33 If the ground for ordering recovery is that the defendant has been unjustly enriched, there is no justification for drawing distinctions on the basis of how the enrichment was gained, except in so far as the manner of gaining the enrichment bears upon the justice of the case. In the light of our view that the decision in South Australian Cold Stores can in this Court be justified on a narrower basis and that the traditional rule was not necessary to the decision, there is no other decision of this Court which constrains us to adopt the traditional rule. For the reasons stated above, the rule precluding recovery of moneys paid under a mistake of law should be held not to form part of the law in Australia. In referring to moneys paid under a mistake of law, we intend to refer to circumstances where the plaintiff pays moneys to a recipient who is not legally entitled to receive them. It would not, for example, extend to a case

where the moneys were paid under a mistaken belief that they were legally due and owing under a particular clause of a particular contract when in fact they were legally due and owing to the recipient under another clause or contract. Having rejected the so-called traditional rule denying recovery in cases of payments made under a mistake of law, it is necessary to consider what principle should be put in its place. It would be logical to treat mistakes of law in the same way as mistakes of fact, so that there would be a prima facie entitlement to recover moneys paid when a mistake of law or fact has caused the payment. Jurisdictions which have abolished the traditional rule by legislation have done so by stating that recovery should be allowed in cases of mistake of law in the same circumstances as it would be were the mistake one of fact (Western Australia and New Zealand). The proposition that there should be a prima facie entitlement to recover moneys paid when a mistake of fact or law has caused the payment has not been universally accepted. Two alternative formulations of the basis of recovery have been proposed: first, that the person making the mistaken payment must have supposed that he or she was legally liable to make the payment; and, secondly, that the mistake of the person making the payment must have been a fundamental one. The first of these formulations can be subjected to the same criticism levelled at the traditional rule denying recovery in cases of mistake of law, namely, that it is illogical to concentrate upon the type of mistake made when the crucial factor is that the recipient has been enriched. To overturn the traditional rule and then replace it with a proposition incorporating the classic formulations of the liability [page 943] approach by Parke B in Kelly v Solari and Bramwell B in Aiken v Short34 would be counter-productive. … In Australia & New Zealand Banking Group Ltd v Westpac Banking Corporation, this Court implicitly accepted that view and we see no reason now to doubt that conclusion. The second alternative formulation asserts that, in addition to being causative, the mistake must also be fundamental. This raises the question

expressly left open in Westpac Banking Corporation. In that case, the Court stated: [I]t is unnecessary, for the purposes of the present case, to investigate what constitutes a ‘fundamental mistake’ for the purposes of the principle that money payable under a fundamental mistake of fact is prima facie recoverable by the payer. It can, however, be said that we can see no reason to doubt the correctness of the view expressed or implicit in the judgments in the courts below to the effect that the notion of ‘fundamental mistake’ does not require either that the payer’s mistake be shared by the payee or that the mistake be as to the existence of a fact which, if it had existed, would have resulted in the payee being under a legal obligation to make the payment. That having been said, it is preferable to leave for another day consideration of the question whether the requirement that the mistake be fundamental involves any more than that it appears that, without the mistake on the part of the payer, the payment would not have been made.35 The requirement that the mistake be fundamental as well as causative is not as restrictive as the liability approach considered above, but it has been suggested that the requirement is still a worthwhile precaution against a potential flood of claims and consequent insecurity of receipts. The notion of fundamentality is, however, extremely vague and would seem to add little, if anything, to the requirement that the mistake cause the payment. If the payer has made the payment because of a mistake, his or her intention to transfer the money is vitiated and the recipient has been enriched. There is therefore no place for a further requirement that the causative mistake be fundamental; insistence upon that factor would only serve to focus attention in a non-specific way on the nature of the mistake, rather than the fact of enrichment. If a strict approach is taken towards the issue of mistake so that a plaintiff bears the burden of establishing on the balance of probabilities that a causative mistake has been made, there would also be no need to appeal to the element of fundamentality as a limiting factor. So, the payer will be entitled prima facie to recover moneys paid under a mistake if it appears that the moneys were paid by the payer in the mistaken belief that he or she was under a legal obligation to pay the

moneys or that the payee was legally entitled to payment of the moneys. Such a mistake would be causative of the payment. However, the [Bank] argues that a plaintiff should be required to prove that retention of the moneys by the recipient would be unjust in all the circumstances before recovery should be [page 944] granted; if the circumstances of the case showed that it would not be unjust for the recipient to retain the money, the fact that the plaintiff could point to a causative mistake, whether of fact or law, would not assist the plaintiff. According to the [Bank’s] submissions, moneys paid under a mistake of law could only be recoverable in so far as the recipient has been unjustly enriched at the expense of the payer, such that it would be unconscionable for the recipient not to give restitution to the payer. In support of this approach, the respondent relies, inter alia, on the recent decisions of this Court in Westpac Banking Corporation and Pavey & Matthews. Although this alternative approach is not greatly different from that stated above, it does have important consequences in relation to the elements of the action which the plaintiff must plead and prove. It also appears to proceed from the view that in Australian law unjust enrichment is a definitive legal principle according to its own terms and not just a concept. The two decisions of this Court just mentioned reject that approach. In Pavey & Matthews, Deane J stated: To identify the basis of such actions as restitution and not genuine agreement is not to assert a judicial discretion to do whatever idiosyncratic notions of what is fair and just might dictate. … That is not to deny the importance of the concept of unjust enrichment in the law of this country. It constitutes a unifying legal concept which explains why the law recognizes, in a variety of distinct categories of case, an obligation on the part of a defendant to make fair and just restitution for a benefit derived at the expense of a plaintiff and which assists in the determination, by the ordinary processes of legal reasoning, of the question whether the law should,

in justice, recognize such an obligation in a new or developing category of case.36 Accordingly, it is not legitimate to determine whether an enrichment is unjust by reference to some subjective evaluation of what is fair or unconscionable. Instead, recovery depends upon the existence of a qualifying or vitiating factor such as mistake, duress or illegality. As this Court stated in Westpac Banking Corporation: In other words, receipt of a payment which has been made under a fundamental mistake is one of the categories of case in which the facts give rise to a prima facie obligation to make restitution, in the sense of compensation for the benefit of unjust enrichment, to the person who has sustained the countervailing detriment.37 … The [Bank’s] submission that [David Securities] must independently prove ‘unjustness’ over and above the mistake cannot therefore be sustained. The fact that the payment has been caused by a mistake is sufficient to give rise to a prima facie obligation on the part of the respondent to make restitution. Before that prima facie liability is displaced, the [Bank] must point to circumstances which the law recognizes would make an order for [page 945] restitution unjust. There can be no restitution in such circumstances because the law will not provide for recovery except when the enrichment is unjust. It follows that the recipient of a payment, which is sought to be recovered on the ground of unjust enrichment, is entitled to raise by way of answer any matter or circumstance which shows that his or her receipt (or retention) of the payment is not unjust. The two ‘defences’ upon which the [Bank] relies in this Court are, first, that the payments by [David Securities] were made for good consideration and, secondly, that in reliance upon receipt of the payments the [Bank], in good faith, changed its position to its detriment. In the context of a mistake case, these ‘defences’ were included in the well known formulation of Goff J in Barclays Bank. His Lordship stated:

(1) If a person pays money to another under a mistake of fact which causes him to make the payment, he is prima facie entitled to recover it as money paid under a mistake of fact. (2) His claim may however fail if (a) the payer intends that the payee shall have the money at all events, whether the fact be true or false, or is deemed in law so to intend; or (b) the payment is made for good consideration, in particular if the money is paid to discharge, and does discharge, a debt owed to the payee (or a principal on whose behalf he is authorised to receive the payment) by the payer or by a third party by whom he is authorised to discharge the debt; or (c) the payee has changed his position in good faith, or is deemed in law to have done so.38 The [Bank] argues that this is a case where [David Securities], having accepted the benefit of performance by the [Bank], now seek to recover part of the consideration promised for that performance, namely, the payments made referable to withholding tax. This argument and the [Bank’s] attempt to analyse the facts on the broader basis of unjust enrichment rather than mistake specifically, already discussed, echo the view expressed by some writers that ‘the true basal principle which enables recovery of money paid under a mistake, whether of fact or law, is “failure of consideration”’.39 It is unnecessary in the present context to assess the merits of this argument because, as we have stated, the more traditional approach, exemplified by the judgment of Goff J in Barclays Bank and the decision of this Court in Westpac Banking Corporation, specifically provides for the ‘defence’ of valuable consideration. The [Bank] submits that it agreed to lend money to [David Securities] at the rate named in the loan agreements because of [David Securities’] agreement to pay the additional amounts pursuant to cl 8(b). If it had known that these additional amounts were not payable, the [Bank] argues, it would have negotiated a different interest rate to ensure that its net return reached the required level. By not being charged this higher interest, [David Securities] have received consideration for the bargain. In the circumstances, [page 946]

they should not be allowed to take advantage of the chance to recover some of the money they had agreed to pay. The difficulty in evaluating this argument lies in the fact that it depends primarily upon an assessment of the intention and purpose of [David Securities] at the time of entering the loan agreements and paying the additional amounts pursuant to cl 8(b). By stating that [David Securities] contracted to pay the additional amounts without adverting to the question of whether they could legally be forced to pay, the [Bank] effectively submits that [David Securities] voluntarily submitted to payment. This entails the conclusion that [David Securities] either cannot truly be said to have made a mistake, as they knew what they were agreeing to — a proposition discussed above — or waived inquiry into the issue and paid the additional amounts with the intention to effect an absolute transfer. It is necessary to examine closely the terms of the loan agreement and the course of events preceding its signing in order to discover what the payer gave and expected to receive by way of consideration. It is only by doing this that it can be ascertained whether the payment of the additional amounts was absolute or conditional. If the payment was conditional, it was subject to the original or continued existence of a particular subject-matter, such as an existing or future indebtedness or other obligation owed to the payee. In this case, the evidence suggests that [David Securities] agreed to pay and actually paid the amounts representing withholding tax because the [Bank] represented that the withholding tax on interest payments must be met by [David Securities]. Such representations may have caused [David Securities] to believe that cl 8(b) took its form because of a general obligation on borrowers to pay the particular tax. When the matter is looked at in this light, it can be argued that [David Securities] agreed to pay the nominated interest rate as the price of the loan and further agreed to pay the additional amounts with which the Dee Why branch, as agent of [David Securities], discharged what [David Securities] considered to be their own tax liability. However, the true situation was, of course, that the liability for payment of withholding tax fell upon the lender and that s 261 avoided any attempt to pass this burden on to a borrower in circumstances such as the present. [David Securities] thus had no indebtedness in respect of withholding tax, the discharge of which could form consideration for the

payments under cl 8(b). Those payments were therefore not made for good consideration within the terms of the defence outlined in Barclays Bank and Westpac Banking Corporation. The [Bank], taking a different view of the contractual arrangements, asserts that all its pre-contractual statements concerning payment of withholding tax simply took the form of a contractual offer, which [David Securities] were at liberty to accept or to reject. Viewed from the angle of contract formation between equal and experienced parties, this is undoubtedly true. But we are not concerned in this case with what a hypothetical, experienced commercial person believed he or she was contracting for; in order to decide whether [David Securities] in this case have received consideration for payment of the additional moneys, we must ask what these particular appellants, in all the circumstances, thought they were receiving as consideration. In this context, [page 947] consideration means the matter considered in forming the decision to do the act, ‘the state of affairs contemplated as the basis or reason for the payment’.40 And, as we have stated, the ‘state of affairs’ existing in [David Securities’] minds was that the withholding tax was their liability. So, in the context of failure of consideration, the failure is judged from the perspective of the payer. In Rover International Ltd v Cannon Film Ltd, Kerr LJ stated: The question whether there has been a total failure of Consideration is not answered by considering whether there was any consideration sufficient to support a contract or purported contract. The test is whether or not the party claiming total failure of consideration has in fact received any part of the benefit bargained for under the contract or purported contract.41 On the other hand, there has been an insistence that the failure of consideration be total. The law has traditionally not allowed recovery of money if the person who made the payment has received any part of the ‘benefit’ provided for in the contract. However, as the passage already

quoted from Rover International Ltd demonstrates, the notion of total failure of consideration now looks to the benefit bargained for by the plaintiff rather than any benefit which might have been received in fact. Thus, in Rowland v Divall, the plaintiff succeeded in an action for repayment of the purchase price of a car he had bought from the defendant, unaware that the car had been stolen before it came into the defendant’s possession. The defendant resisted the claim with the argument that the plaintiff could not prove total failure of consideration because he had used the car for several months. The Court of Appeal, however, dismissed this argument on the ground that the plaintiff had not received ‘any part of that which he contracted to receive — namely, the property and right to possession’.42 Similarly, in Rover International Ltd itself, the plaintiff succeeded in its claim for restitution of payments made to the defendant even though the defendant had performed some of its obligations under the contract. The plaintiff was to dub and distribute films provided to it by the defendant and receive a share of the box office receipts as its payment. The plaintiff was also required to make substantial payments to the defendant in advance of recovering its share of the receipts. The defendant supplied the films to the plaintiff and the plaintiff made the pre-payments before breaching the contract. The plaintiff was then able to recover the pre-payments on the basis that the delivery and possession of the films were not what the plaintiff had bargained for; the ‘relevant bargain’ was the opportunity to earn a substantial share of the gross receipts. In cases where consideration can be apportioned or where counterrestitution is relatively simple, insistence on total failure of consideration can be misleading or confusing. In the present case, for instance, it is relatively simple to relate the additional amounts paid by [page 948] [David Securities] to the supposed obligation under cl 8(b) of the loan agreements. [David Securities] were told that they were required to pay withholding tax and the payments that they made were predicated on the fact that, by so doing, they were discharging their obligation. Such an

approach is no different in effect from the cases under the old statutes of usury whereby a borrower could recover from the lender the excess interest which the lender was prohibited from stipulating or receiving. In this case, the Bank must prove that [David Securities] are not entitled to restitution because they have received consideration for the payments which they seek to recover. It does not avail the Bank to argue that [David Securities] were provided with the loan moneys agreed. … It might be said that to order restitution in the present case would, in the absence of any other defences, confer something in the nature of a windfall upon [David Securities] at the expense of the [Bank]. This possible result flows from the fact that, having proven mistake, [David Securities] are prima facie entitled to recovery and the [Bank] bears the onus of proving why an order for restitution would be unjust. Given the conclusion we have reached upon the issue of mistake and consideration, we need not examine [David Securities’] argument, based upon Lord Denning’s judgment in Kiriri Cotton Co Ltd v Dewani,43 that the Bank was primarily responsible for the mistaken payment or the argument that the payment should be recoverable because it was made pursuant to a contractual obligation rendered void by statute. However, factors of the kind outlined in Kiriri reinforce our conclusion as to the purposes of the parties when entering the loan agreement. … The [Bank] knew of the existence of s 261 and understood its potential reach even if it was not aware that it invalidated cl 8(b). It acknowledged drafting cl 8(b) with s 261 in mind. In circumstances where the party in the best position to order its affairs in the light of specialist advice has deliberately chosen to charge a particular interest rate and seek additional amounts by virtue of separate provision in the loan agreement, there is no injustice to that party in ordering recovery. Otherwise the policy of s 261 would be defeated. The [Bank] next submits that an order for restitution would be unjust because it has changed its position. The defence of change of position has not been expressly accepted in this country. In Westpac Banking Corporation, the Court referred to the displacement of prima facie liability by ‘some adverse change of position by the recipient in good faith and in reliance on the payment’.44 The issue did not, however, arise for decision in

that case. In this country, conflicting views have been expressed. … In England, there is strong authority in favour of acceptance of the defence. … If we accept the principle that payments made under a mistake of law should be prima facie recoverable, in the same way as payments made under a mistake of fact, [page 949] a defence of change of position is necessary to ensure that enrichment of the recipient of the payment is prevented only in circumstances where it would be unjust. This does not mean that the concept of unjust enrichment needs to shift the primary focus of its attention from the moment of enrichment. From the point of view of the person making the payment, what happens after he or she has mistakenly paid over the money is irrelevant, for it is at that moment that the defendant is unjustly enriched. However, the defence of change of position is relevant to the enrichment of the defendant precisely because its central element is that the defendant has acted to his or her detriment on the faith of the receipt. In the jurisdictions in which it has been accepted (Canada and the United States), the defence operates in different ways but the common element in all cases is the requirement that the defendant point to expenditure or financial commitment which can be ascribed to the mistaken payment. In Canada and in some United States decisions, the defendant has been required to point to specific expenditure being incurred because of the payment. Other cases in the United States allow a wider scope to the defence, such that a defendant can rely upon it even though he or she cannot precisely identify the expenditure caused by the mistaken payments. In no jurisdiction, however, can a defendant resort to the defence of change of position where he or she has simply spent the money received on ordinary living expenses. The difficulty lying in the path of acceptance or detailed explication of the defence in this case is that the facts which might give rise to a plea of the defence and thus require a decision by this Court were not adduced in the courts below. As mistake of law was only briefly raised by [David Securities] in the Federal Court, the [Bank] addressed no argument in support of the

defence of change of position. Only in this Court were submissions made by the parties on this issue. In its written outline of submissions, the respondent puts its case thus: In the present case, on the occasion of each rollover, the [Bank] changed its position by acceding to [David Securities’] request to ‘rollover’ a rollover which it would not have been bound to do, by the operation of clause 8(c). The [Bank], thereby incurred a liability for withholding tax which it otherwise would not have incurred. If the [Bank] is now obliged to repay amounts to [David Securities], it will be out of pocket. Counsel for the [Bank] submits that an inference should be drawn that, having regard to the terms of the bargain, it would have exercised whatever contractual rights were open to it to ensure the performance of its bargain. The short answer to this submission is that there is simply an insufficient basis in the evidence for reaching this conclusion. The [Bank] should not be penalized for failing to provide evidence in support of the defence before the lower courts; it had no reason to fight the case on that basis. The case should be remitted to the trial judge for consideration of this issue. … As [David Securities] were successful in this Court with their submissions as to the construction of the loan agreements, the interpretation of s 261 of the Act and the issue of mistake of law, the Bank should pay [David Securities’] costs of this appeal. However, in view of the fact that [David Securities’] appeal to the Full Court of the Federal Court succeeded on only one of many issues, we would decline to make any order as to costs in respect of that appeal.

[page 950]

Comments 38.5.1 See Radan, Gooley, and Vickovich at 38.9, 38.11–38.12, 38.14, 38.68, 38.70–8.71, 38.74, 38.76, and 38.83.

38.5.2 For a discussion of this case in the context of an analysis of the distinction between mistakes of fact and law, see B Sangha, ‘The Law/Fact Distinction: A Lawyer’s Plaything’ (1994) 7 Journal of Contract Law 113. 38.6C Australian Financial Services and Leasing Pty Limited v Hills

Industries Limited (2014) 253 CLR 560 Court: The High Court of Australia Facts: The appellant, AFSL, was a financier who made payments in consequence of having received forged invoices from a person who was a director of various companies in the Total Concept Projects group (TCP), to Hills Industries Ltd and Bosch Security Systems Pty Ltd (together, the respondents), who were two manufacturers and suppliers of commercial equipment. The forged invoices implied that they were issued by the respondents and suggested a purchase of equipment by TCP from the respondents. With that background, AFSL agreed to purchase the equipment and lease it back to TCP. AFSL subsequently paid the amounts directly to the respondents, who credited TCP’s accounts with the amount of the payments. However, the equipment did not exist and in making the payments AFSL was under the mistaken impression that it was paying for the purchase of the equipment for the purpose of leasing it back to TCP. The payments were treated as being in reduction of the indebtedness to the respondents of companies within TCP and rental agreements were entered into by AFSL on the basis of those invoices. The first respondent subsequently withdrew a threat of legal action and recommenced trading with TCP and the second respondent agreed to set aside default judgements against TCP and its directors and resumed trading. After discovering the fraud, AFSL brought an action against the respondents for recovery of the money it paid to them. Issue: One of the key issues was whether a person can recover money from a recipient when the money has been paid under a

mistake of fact and where it may not be inequitable for the recipient to retain the benefit due to the fact that the recipient has changed its position on the faith of the receipt and has thereby suffered a detriment. Decision: The High Court, in dismissing an appeal from the Court of Appeal in New South Wales, held that the change of position defence was a complete defence to AFSL’s claim. In the circumstances the respondents were found to have suffered an irreversible detriment when they decided on the faith of the receipt of the payments made to them by AFSL not to pursue their legal remedies against their fraudulent client and TCP. Extract: The extracts from the judgment of Hayne, Crennan, Kiefel, Bell, and Keane JJ set out the scope of the relevant enquiry in such circumstances.

[page 951]

Hayne, Crennan, Kiefel, Bell, and Keane JJ The relevant enquiry: whether retention of monies unconscionable The entitlement to recover money mistakenly paid to another in an action for money had and received has its roots in the decision of the Court of King’s Bench led by Lord Mansfield in Moses v Macferlan.45 Lord Mansfield expressly founded the action to recover money had and received to the use of the payer on the notion that retention of the money by the payee would be ‘against conscience’.46 Lord Mansfield explained47 that, in the case of mistaken payment, a plaintiff need not show special circumstances and may simply declare that the money was received by another to his use. His Lordship went on to say that, equally beneficially, a defendant ‘may go into every equitable defence, upon the general issue; he may claim every equitable allowance; … in short, he may defend himself by every thing which shews that the plaintiff, ex aequo et bono, is not intitled to the whole of his demand, or to any part of

it.’ In Sadler v Evans,48 it was said that ‘[t]he defence is any equity that will rebut the action’ Thus, in David Securities Pty Ltd v Commonwealth Bank of Australia,49 it was said that payment caused by mistake is sufficient to give rise to a prima facie obligation on the part of the recipient to make restitution. Before that prima facie liability is displaced, the recipient must point to circumstances which would make an order for restitution unjust. In words which echo those of Lord Mansfield in Moses v Macferlan, it was said that, in order to show that retention of the payment is not unjust, the recipient is entitled to raise ‘by way of answer any matter or circumstance’. There can be no denying the equitable roots of the principle by which a claim for restitution of money had and received to the use of the payer is to be determined. In Dale v Sollet,50 Lord Mansfield said of the action: ‘This is an action for money had and received to the plaintiff’s use. The plaintiff can recover no more than he is in conscience and equity entitled to’. In Clarke v Shee,51 his Lordship referred to the action as ‘a liberal action in the nature of a bill in equity; and if, under the circumstances of the case, it appears that the defendant cannot in conscience retain what is the subject-matter of it, the plaintiff may well support this action.’ In Roxborough v Rothmans of Pall Mall Australia Ltd,52 Gummow J explained that the ‘equitable notions’ of which Lord Mansfield wrote have been absorbed into the ‘fabric of the common law’ right of action for money had and received. In this regard, it is to be [page 952] noted that any reference to equitable notions does not invite a balancing of competing equities as between the parties, based on considerations such as fault. The question here is whether it would be inequitable in all the circumstances to require Hills and Bosch to make restitution. The answer to that question is not at large, but neither is it simply a measure of the monetary extent to which the recipient remains enriched by the receipt at the time of demand for repayment. In the United States, in Atlantic Coast Line Railroad Co v Florida,53

Cardozo J said: The claimant to prevail must show that the money was received in such circumstances that the possessor will give offense to equity and good conscience if permitted to retain it. The continuing influence of Lord Mansfield’s view that the cause of action for money had and received depends on legal rules framed by reference to considerations of good conscience is also apparent in the judgment of Lord Wright in Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd54 and in the decision of the Supreme Court of the United States in GreatWest Life & Annuity Insurance Co v Knudson.55 In Lipkin Gorman (a firm) v Karpnale Ltd,56 Lord Goff of Chieveley stated that a defendant may rely upon a defence of change of position whenever ‘it would be inequitable in all the circumstances to require him to make restitution’. Lord Templeman57 referred, with evident approval, to the observations of Lord Wright in Fibrosa in a way which suggests that Lord Templeman identified an unjust enrichment as a benefit that it would be against ‘conscience’ to retain. Lipkin Gorman also proceeded upon the basis that English law had accepted unjust enrichment as a legal principle to be applied as a ground for liability. By reference to what was said by Lord Goff in that case respecting the defence of change of position,58 it would appear that the principle of unjust enrichment may have been intended to operate more widely than the action for money had and received, which requires the presence of vitiating factors such as mistake. In David Securities,59 the submission that unjust enrichment was a definitive legal principle was rejected. That position has since been maintained consistently by this Court.60 In Friend v Brooker,61 it was said that the concept of unjust enrichment was not a principle supplying a sufficient premise for direct application [page 953] in a particular case. In Farah Constructions Pty Ltd v Say-Dee Pty Ltd,62 it was commented that there was potential for unjust enrichment as a

principle to distort equitable doctrine and to generate new fictions. In Roxborough.63 Gummow J pointed out that: [S]ubstance and dynamism may be restricted by dogma. In turn, the dogma will tend to generate new fictions in order to retain support for its thesis. It also may distort well settled principles in other fields, including those respecting equitable doctrines and remedies, so that they answer the newly mandated order of things. Then various theories will compete, each to deny the others. More recently, Equuscorp Pty Ltd v Haxton64 confirmed that unjust enrichment does not found or reflect any ‘all-embracing theory of restitutionary rights and remedies’.65 That case identified unconscionability as relevant and as derived from general equitable notions which find expression in the action for money had and received66. As this Court acknowledged in Australia and New Zealand Banking Group Ltd v Westpac Banking Corporation,67 ‘contemporary legal principles of restitution or unjust enrichment can be equated with seminal equitable notions of good conscience’. In Australia, the equitable roots of the action for money had and received were early recognised in Campbell v Kitchen & Sons Ltd and Brisbane Soap Co Ltd.68 There, Barton J69 observed that recovery ‘depends largely on the question whether it is equitable for the plaintiff to demand or for the defendant to retain the money’. In National Commercial Banking Corporation of Australia Ltd v Batty,70 Gibbs CJ said: Whether the action is based on an implied promise to pay, or on a principle designed to prevent unjust enrichment, the emphasis on justice and equity in both old and modern authority on this subject supports the view that the action will not lie unless the defendant in justice and equity ought to pay the money to the plaintiff. This is not to suggest that a subjective evaluation of the justice of the case is either necessary or appropriate. The issues of conscience which fall to be resolved assume a conscience ‘properly formed and instructed’71 by established equitable principles and doctrines. As was said in Kakavas v Crown Melbourne Ltd,72 ‘[t]he conscience spoken of here is a construct of

values and standards against which the conduct of “suitors” — not only defendants — is to be judged’.73 [page 954]

Change of position and detrimental reliance As Gummow J,74 writing extra-judicially, has said: ‘[I]t is important to appreciate that “change of position” is a species of the genus “inequitable”, not a synonym for it’. One category of case in which it would be inequitable to require a recipient to repay is where the recipient has so far altered its position in relation to the receipt that it would be a detriment to it if it were now required to repay. The approach argued by AFSL does not involve an enquiry as to whether it would be inequitable to require the recipient to repay. Instead, AFSL’s approach focuses upon the extent to which Hills and Bosch have been ‘disenriched’75 subsequent to the receipt. This approach seeks to give effect to an understanding of unjust enrichment as a principle of direct application, which operates by measuring the extent of enrichment or, where a defence of change of position is invoked, the extent of disenrichment subsequent to that receipt. Such a ‘principle’ does not govern the resolution of this case because the concept of unjust enrichment is not the basis of restitutionary relief in Australian law. The principle of disenrichment, like that of unjust enrichment, is inconsistent with the law of restitution as it has developed in Australia. Disenrichment operates as a mathematical rule whereas the enquiry undertaken in relation to restitutionary relief in Australia is directed to who should properly bear the loss and why. That enquiry is conducted by reference to equitable principles. In §65 of the Restatement of the Law Third, Restitution and Unjust Enrichment, under the rubric ‘Change of Position’, the American Law Institute states: If receipt of a benefit has led a recipient without notice to change position in such manner that an obligation to make restitution of

the original benefit would be inequitable to the recipient, the recipient’s liability in restitution is to that extent reduced. In Lipkin Gorman,76 Lord Goff used similar language in explaining the basis of the change of position defence: [W]here an innocent defendant’s position is so changed that he will suffer an injustice if called upon to repay or to repay in full, the injustice of requiring him so to repay outweighs the injustice of denying the plaintiff restitution. In David Securities, reference was made to what was said in Lipkin Gorman concerning the defence. It was observed77 that in Lipkin Gorman, Lord Bridge of Harwich, Lord Ackner and Lord Goff said that the defence should be recognised by English law but declined to define its scope. However, in David Securities the ‘central element’ of the defence was identified as being ‘that the defendant has acted to his or her detriment on the faith of [page 955] the receipt’78 (emphasis in original). Whether English cases subsequent to Lipkin Gorman have taken a wider view of the defence, one which eschews a requirement of detrimental reliance in favour of a mere causal link,79 cannot alter what was said in David Securities regarding the defence. Whether the conclusion reached in the English cases, including Lipkin Gorman, is different from that which would be reached by reference to equitable principles is a moot point. In any event, consistently with an enquiry as to whether it is unconscionable for the recipient to retain the monies, it is necessary in cases such as the present to consider what was done by the recipient in reliance upon the receipt. In David Securities, in the passage in which reference is made to a recipient acting on the faith of the receipt, it was said that a common element in cases in Canada and the United States, where the defence has been accepted, is that it is necessary that the defendant point to ‘expenditure or financial commitment’ which can be ascribed to the mistaken payment.80 The passage does not provide precise direction as to the resolution of the

issue in this case, but it is tolerably clear that their Honours did not suggest that the defence was available only to a recipient who was able to demonstrate monetary disenrichment on the faith of the mistaken payment. AFSL argued that it is necessary and appropriate to assess, forensically, the value of TCP’s debts to Hills and Bosch, or their prospects of recovery, in order to measure the extent to which they remained enriched by AFSL’s mistaken payments. AFSL’s argument in this regard relied upon cases such as The Commonwealth v Amann Aviation Pty Ltd81 and Sellars v Adelaide Petroleum NL.82 However, these cases concerned the assessment of damages by way of compensation for breach of contract or statutory or common law norms of conduct predicated upon proof of loss by reason of the breach. Here, Hills and Bosch had done AFSL no wrong that gave rise to an obligation to compensate AFSL for the loss suffered by it as a result. As Lord Goff observed in Lipkin Gorman, restitutionary claims are not founded upon a wrong done to the payer.83 More importantly, under Australian law, a mathematical assessment of enduring economic benefit does not determine the availability of restitutionary remedies. The equitable doctrine which protects expectations, with which the notion of ‘detriment’ is associated, is not concerned with loss caused by a wrong or a breach of promise84. As Deane J observed in The Commonwealth v Verwayen,85 ‘[e]quity has never adopted the [page 956] approach that relief should be framed on the basis that the only relevant detriment … is that which is compensable by an award of monetary damages’. The equitable doctrine concerning detriment is concerned with the consequences that would enure to the disadvantage of a person who has been induced to change his or her position if the state of affairs so brought about were to be altered by the reversal of the assumption on which the change of position occurred.86 On this view, the injustice which precludes such a result lies in the disadvantage which would result to the recipient if the payer were to be permitted to recover payments as mistakenly made where they have been applied by the recipient.

This view accords with the understanding of detrimental reliance sufficient to ground an estoppel, as explained in Grundt v Great Boulder Pty Gold Mines Ltd87 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.88 While it may be accepted that estoppel affords a level of protection to expectations different from that afforded by the change of position defence,89 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.90 In Grundt, Dixon J explained the precise ground on which estoppel precludes an otherwise good claim. Although lengthy, it is worthwhile setting his Honour’s91 explanation out in full: [I]t is often said simply that the party asserting the estoppel must have been induced to act to his detriment. Although substantially such a statement is correct and leads to no misunderstanding, it does not bring out clearly the basal purpose of the doctrine. That purpose 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. This means that the real detriment or harm from which the law seeks to give protection is that which would flow from the change of position if the assumption were deserted that led to it. So long as the assumption is adhered to, the party who altered his situation upon the faith of it cannot complain. His complaint is that when afterwards the other party makes a different state of affairs the basis of an assertion of right against him then, if it is allowed, his own original change of position will operate as a detriment. His action or inaction must be such that, if the [page 957] assumption upon which he proceeded were shown to be wrong and an inconsistent state of affairs were accepted as the foundation of

the rights and duties of himself and the opposite party, the consequence would be to make his original act or failure to act a source of prejudice. 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,92 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.93 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. Campbell94 is an example of a case where the continuance of an assumed state of affairs in business over a period of time and the disruption which would be caused if one or more payments were to be corrected were held to be determinative. Griffith CJ95 held that it would be inequitable to require repayment from the defendant, which had, over a long time, received mistaken payments on a regular basis and took them into account in estimating and directing annual profits. His Honour dismissed the plaintiff’s action for money had and received. In London and River Plate Bank v Bank of Liverpool,96 Mathew J referred to the detrimental effect of the passage of time in the context of business: A holder of a bill cannot possibly fail to have his position affected if there be any interval of time during which he holds the money as his own, or spends it as his own, and if he is subsequently sought to be made responsible to hand it back. It may be that no legal right may be compromised by reason of the payment … but even in such a case it is manifest that the position of a man of business may be most seriously compromised, even by the delay of a day.

In Lipkin Gorman,97 Lord Goff referred to London and River Plate Bank as, on one possible view, an example of the change of position defence. These considerations have also … [page 958] influenced courts in the United States in decisions such as Stephens v Board of Education of the City of Brooklyn98 and Banque Worms v BankAmerica International.99 What was said in London and River Plate Bank may be understood to refer to the concern which has often been expressed in decisions of the courts about the finality of transactions and the security of receipts. In Kleinwort Benson Ltd v Lincoln City Council,100 Lord Goff suggested that defences such as change of position are concerned to protect the stability or finality of transactions. It may perhaps be more accurate to say that, where the defence of change of position is made out, finality is the result that is achieved. But the desirability of ‘certainty of receipts’ cannot itself dictate the outcome of the enquiry respecting the actions taken by a recipient where a mistaken payment is made in a commercial context. It is necessary to recall that the action for money had and received is itself a qualification upon what the law otherwise regards as the overriding importance attached to the security of actual receipts. Here, Hills and Bosch not only continued to trade on the basis of the payments received, they discharged TCP’s debts and no longer sought to recover them. In the Restatement of the Law Third, the American Law Institute acknowledges forbearance as relevant to the defence of change of position.101

[page 959]

Comment 38.6.1 See Radan, Gooley, and Vickovich at 38.3, 38.9–38.10, 38.16,

38.67–68.68, and 38.83–31.84.

RECOVERY OF MONEY PAID WHERE CONSIDERATION HAS TOTALLY FAILED 38.7C

Equuscorp Pty Ltd v Haxton (2012) 246 CLR 498

Court: High Court of Australia Facts: This case concerned a complex investment scheme involving a number of companies, which was designed to take advantage of tax laws that permitted investors to deduct farming expenses from nonfarming income. The scheme related to the growing, harvesting, and sale of blueberries at Corindi in New South Wales. The investors borrowed money from Rural Finance Pty Ltd to fund their participation in the scheme. Subsequently, Equuscorp Pty Ltd acquired Rural Finance’s rights in relation to the loans. Equuscorp sought to enforce the rights it acquired from Rural Finance against the investors in an action for restitution. Issues: A number of issues arose for determination by the High Court. The first issue was whether Rural Finance had a claim in restitution against the investors. The second issue was, if Rural Finance had such a claim, whether it was assignable. The third issue was, if the claim in restitution was assignable, whether it had been assigned to Equuscorp. Decision: The majority of the High Court (French CJ, Gummow, Crennan, Kiefel, and Bell JJ; Heydon J dissenting) held for various reason that Rural Finance did not have a claim in restitution against the investors, which meant that there was no assignment of any such claim to Equuscorp, with the result that Equuscorp’s claims against the investors failed. However, the High Court was unanimous in holding that if Rural Finance had a claim in restitution against the investors, it was assignable. Finally, French CJ, Crennan and Kiefel JJ held that even if Rural Finance had an assignable claim in restitution

against the investors, it had not been validly assigned. Gummow, Heydon, and Bell JJ came to the opposite conclusion on this issue. Extract: The extract from the judgment of Heydon J discusses the circumstances in which a claim in restitution is assignable.

Heydon J The [investors] submitted that an action for money had and received was not an assignable chose in action, but only a bare right of action which was not assignable. They relied on three authorities. [page 960] The first authority was Poulton v Commonwealth. It contains dicta by Williams, Webb and Kitto JJ to the following effect: [I]f it were true that the Commonwealth were guilty of conversion of the Donlons’ wool, it would be the Donlons alone who could elect to waive the tort and take the proceeds of sale. This would be so, both because there was not in fact any purported assignment to the plaintiff of the right of action for the tort, and because, according to well-established principle, the right was incapable of assignment either at law or in equity. The plaintiff’s theory of that case was that if he waived the right to sue the Commonwealth for conversion he could recover the value of the amount which the Commonwealth had received as money had and received. On one reading, the dicta in Poulton’s case say that not only was the right of action for the tort unassignable, but so was the right to recover on account for money had and received. At trial, Fullagar J said that the purported assignment was ineffective because ‘even actual causes of action in tort are not assignable at law or in equity’, and also because ‘the document did not purport to assign any such cause of action. The second authority relied on was Mutual Pools & Staff Pty Ltd v Commonwealth. Mason CJ referred to an assumption in Werrin v

Commonwealth that a claim for recovery of taxes mistakenly paid was not assignable. His Honour cited Poulton’s case in a footnote. Brennan J, on the other hand, considered that whether the claim of the plaintiff in the Mutual Pools case to a refund of sales tax paid pursuant to invalid legislation was regarded as owing as a debt or as recoverable in an action for money had and received, it was property. The third authority was Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd. It contains a statement to the effect that there was a serious question whether the Court of Appeal of the Supreme Court of New South Wales in that case was correct to say that certain causes of action for money had and received were historically claims in debt and readily assignable. That statement was supported by reference to the Mutual Pools case and to Poulton’s case. The dicta in Poulton’s case in the Full Court are to be assessed in the light of their Honours’ reference to Dawson v Great Northern and City Railway. Collins MR, Stirling LJ and Mathew LJ said that an assignment of a chose in action which was obnoxious to the law relating to champerty and maintenance was bad at law and in equity. ‘An assignment of a mere right of litigation is bad …; but an assignment of property is valid, even although that property may be incapable of being recovered without litigation’. Here the deed of assignment assigned property in addition to the actions in money had and received. That property included Rural Finance Pty Ltd’s unenforceable ‘debts’, its unenforceable ‘interests under the loan contracts’ and the indebtedness. … There is a different point which favours [Equuscorp]. Poulton’s case predates Trendtex Trading Corporation v Credit Suisse … where Lord Roskill … said: [A]n assignee who can show that he has a genuine commercial interest in the enforcement of the claim of another and to that extent takes an assignment of that claim to himself is entitled to enforce that assignment unless by the terms of that assignment he falls foul of our law of champerty, which, as has often been said, is a branch of our law of maintenance.

[page 961] In Poulton’s case no argument was presented that there was any ‘genuine commercial interest’ associated with the supposed assignment. There is a ‘genuine commercial interest’ here, because [Equuscorp] was on 10 January 1991 granted a charge over the assets of Rural Finance Pty Ltd (which included rights to sue for money had and received) to secure the indebtedness of Rural Finance Pty Ltd to [Equuscorp]. The assignment of 30 October 1997 was a means by which [Equuscorp] recovered part of the assets which that charge gave it as security for Rural Finance Pty Ltd’s indebtedness to it. Hence what was said in Poulton’s case is distinguishable. It is to be noted that in the footnote in Mason CJ’s judgment in the Mutual Pools case in which he cited Poulton’s case, he also cited the Trendtex case, prefacing the citation with ‘cf.’ This suggests that his Honour may have seen the dicta in Poulton’s case as not applying where a ‘genuine commercial interest’ can be located in association with an assignment. Finally, the statement in the Campbells Cash and Carry case was part of an obiter dictum in a dissenting judgment that raised a question about a matter asserted by the Court of Appeal on a point not argued in that Court. The question was based on what was said in Poulton’s case and the Mutual Pools case. The statement was not dealing with a case in which there was any ‘genuine commercial interest’ in a Trendtex sense. The [investors] also submitted that a claim for money had and received is a personal one, infused with equitable notions of conscience, requiring a detailed analysis and balancing of the particular merits of the case, and so personal in nature as to be incapable of assignment. They cited authority relating to the non-assignability of the benefit of a contract involving personal skill and confidence. This case has nothing to do with the assignment of the benefit of a contract involving personal skill and confidence. And the circumstance that, like other legal rights, a claim for money had and received might rest on a detailed analysis of matters of fact that call for judgment does not prevent the right, once established, from being assignable.

Comments 38.7.1 See Radan, Gooley, and Vickovich at 38.15, 38.58–38.62, 38.74, 40.22, and 40.28–40.29. 38.7.2 In relation to what is meant by a ‘genuine commercial interest’, in Project 28 Pty Ltd (formerly Narui Gold Coast Pty Ltd) v Barr [2005] NSWCA 240 at [41], Ipp JA (Hodgson JA and Campbell AJA agreeing) said that it ‘must be distinct from the benefit that the person supporting the action seeks to derive from the litigation. It must be something beyond a mere personal interest in profiting from the outcome of the proceedings.’ In National Mutual Property Services (Australia) Pty Ltd v Citibank Savings Ltd (1995) 132 ALR 514 at 540, Lindgren J said that ‘the expression [genuine commercial interest] refers to a commercial interest which exists already or by reason of other matters, and which receives ancillary support from the assignment’.

1.

Muschinski v Dodds (1985) 160 CLR 583 at 619–20.

2. 3.

Johnsons Tyne Foundry Pty Ltd v Maffra Corporation (1948) 77 CLR 544 at 565. Hampton v Glamorgan County Council [1917] AC 13.

4. 5.

Pan Ocean Shipping Co Ltd v Creditcorp Ltd [1994] 1 All ER 470 at 475. (1946) 72 CLR 386 at 402–3.

6. 7.

Sumpter v Hedges [1898] 1 QB 673 at 676. (1987) 162 CLR 221.

8. 9.

cf G Jones, Goff & Jones: The Law of Restitution, 7th ed, Sweet & Maxwell, London, 2007, [1-019]. (1946) 72 CLR 386.

10. 11.

Pan Ocean Shipping Co Ltd v Creditcorp Ltd [1994] 1 All ER 470 at 475. Falcke v Scottish Imperial Insurance Company (1886) 34 Ch D 234 at 248.

12. 13.

Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 at 227, 256–7. Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 at 227.

14. 15.

Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 at 257. Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 at 256.

16. 17.

Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 at 257. (1795) 101 ER 573.

18. 19.

(1875) LR 10 Ex 330. American Law Institute (1937) at 179.

20.

Farmer v Arundel (1772) 96 ER 485 at 486.

21.

(1802) 102 ER 448.

22. 23.

(1780) 99 ER 299 at 300. Brisbane v Dacres (1813) 128 ER 641 at 645.

24. 25.

(1841) 152 ER 24. Sawyer & Vincent v Window Brace Ltd [1943] KB 32 at 34.

26. 27.

York Air Conditioning (A/asia) Pty Ltd v The Commonwealth (1949) 80 CLR 11 at 30. Werrin v The Commonwealth (1938) 59 CLR 150 at 159.

28. 29.

(1957) 98 CLR 65. Kelly v Solari (1841) 152 ER 24 at 26.

30. 31.

[1953] 1 QB 218. South Australian Cold Stores Ltd v Electricity Trust of South Australia (1957) 98 CLR 65 at 74–5.

32. 33.

(1987) 162 CLR 221 at 256–7. Hydro Electric Commission of Nepean v Ontario Hydro [1982] 1 SCR 347 at 367.

34. 35.

(1856) 156 ER 1180 at 1182. Australia & New Zealand Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662 at 671–2.

36. 37.

Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 at 256–7. Australia & New Zealand Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662 at 673.

38. 39.

Barclays Bank v W J Simms Son & Cooke (Southern) Ltd [1980] QB 677 at 695. Butler, ‘Mistaken Payments, Change of Position and Restitution’ in Finn (ed), Essays on Restitution (1990) at 88.

40. 41.

Birks, An Introduction to the Law of Restitution (1989) at 223. Rover International Ltd v Cannon Film Ltd [1989] 3 All ER 423 at 433.

42. 43.

Rowland v Divall [1923] 2 KB 500 at 507. [1960] AC 192 at 204.

44. 45.

Australia & New Zealand Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662 at 673. (1760) 97 ER 676.

46. 47.

(1760) 97 ER 676 at 680. (1760) 97 ER 676 at 679.

48. 49.

(1766) 98 ER 34 at 35. (1992) 175 CLR 353 at 379.

50. 51.

(1767) 98 ER 112 at 113. (1774) 98 ER 1041 at 1042.

52. 53.

(2001) 208 CLR 516 at 554–5. 295 US 301 at 309 (1935).

54. 55.

[1943] AC 32 at 63. 534 US 204 at 213–4 (2002).

56. 57.

[1991] 2 AC 548 at 580. Lipkin Gorman (a firm) v Karpnale Ltd [1991] 2 AC 548 at 559.

58. 59.

Lipkin Gorman (a firm) v Karpnale Ltd [1991] 2 AC 548 at 578. (1992) 175 CLR 353 at 378.

60.

61.

Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at 156; Lumbers v W Cook Builders Pty Ltd (In liq) (2008) 232 CLR 635 at 665; Friend v Brooker (2009) 239 CLR 129 at 141; Bofinger v Kingsway Group Ltd (2009) 239 CLR 269 at 299. (2009) 239 CLR 129 at 141.

62. 63.

(2007) 230 CLR 89 at 156. (2001) 208 CLR 516 at 545.

64. 65.

(2012) 246 CLR 498 at 516. Roxborough v Rothmans of Pall Mall Australia Ltd (2001) 208 CLR 516 at 544.

66. 67.

Equuscorp Pty Ltd v Haxton (2012) 246 CLR 498 at 517. (1988) 164 CLR 662 at 673.

68. 69.

(1910) 12 CLR 515. Campbell v Kitchen & Sons Ltd and Brisbane Soap Co Ltd (1910) 12 CLR 515 at 531.

70. 71.

(1986) 160 CLR 251 at 268. Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199 at 227.

72. 73.

(2013) 298 ALR 35 at 39. Gummow, Change and Continuity: Statute, Equity, and Federalism, (1999) at 44–51.

74. 75.

Gummow, ‘Moses v Macferlan: 250 years on’ (2010) 84 Australian Law Journal 756 at 760. Birks, Unjust Enrichment, 2nd ed (2005) at 208–212.

76. 77.

[1991] 2 AC 548 at 579. David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353 at 385.

78. 79.

Birks, An Introduction to the Law of Restitution, (1989) at 410. Scottish Equitable plc v Derby [2001] 3 All ER 818; Commerzbank AG v Price-Jones [2003] EWCA Civ 1663.

80. 81.

Rural Municipality of Storthoaks v Mobil Oil Canada Ltd [1976] 2 SCR 147 at 164; Grand Lodge, AOUW of Minnesota v Towne 161 NW 403 at 407 (1917). (1991) 174 CLR 64 at 83–4, 89–94, 100–104, 112–113, 118–26, 138, 145–7, 157–8.

82. 83.

(1994) 179 CLR 332 at 349–50, 368. Lipkin Gorman (a firm) v Karpnale Ltd [1991] 2 AC 548 at 578.

84.

Crabb v Arun District Council [1976] Ch 179 at 198–9; The Commonwealth v Verwayen (1990) 170 CLR 394 at 415, 429. (1990) 170 CLR 394 at 448.

85. 86. 87. 88. 89. 90.

Legione v Hateley (1983) 152 CLR 406 at 437; Riches v Hogben [1985] 2 Qd R 292 at 300–302; Giumelli v Giumelli (1999) 196 CLR 101 at 121–4; Delaforce v Simpson-Cook (2010) 78 NSWLR 483 at 486. (1937) 59 CLR 641 at 674–5. Grundt v Great Boulder Pty Gold Mines Ltd (1937) 59 CLR 641 at 674; The Commonwealth v Verwayen (1990) 170 CLR 394 at 410. Lipkin Gorman (a firm) v Karpnale Ltd [1991] 2 AC 548 at 579. Norman v Federal Commissioner of Taxation (1963) 109 CLR 9 at 33; The Commonwealth v Verwayen (1990) 170 CLR 394 at 415, 429, 445.

91.

Grundt v Great Boulder Pty Gold Mines Ltd (1937) 59 CLR 641 at 674–5.

92. 93.

The Commonwealth v Verwayen (1990) 170 CLR 394 at 415. [2001] Ch 210 at 232–3, referring with approval to Grundt v Great Boulder Pty Gold Mines Ltd (1937) 59 CLR 641.

94. 95.

(1910) 12 CLR 515. Campbell v Kitchen & Sons Ltd and Brisbane Soap Co Ltd (1910) 12 CLR 515 at 525.

96. 97.

[1896] 1 QB 7 at 11–12. [1991] 2 AC 548 at 578–9.

98. 99.

79 NY 183 at 186–8 (1879). 77 NY 2d 362 at 372–3 (1991).

100. [1999] 2 AC 349 at 382, 384. 101. American Law Institute, Restatement of the Law Third, Restitution and Unjust Enrichment, (2010), §65, Comment e.

[page 963]

Part IX: Third Party Rights

[page 965]

39 PRIVITY OF CONTRACT

INTRODUCTION 39.1 This chapter deals with what has been referred to as one of the ‘fundamental’ principles of contract law, namely, privity of contract. Pursuant to this principle, only parties to a contract can enforce the contract. Persons who stand to gain a benefit from the contract, but are not parties to it, have no rights of enforcement. The relationship of the doctrine of privity to the doctrine of consideration is discussed in Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460 (see 39.2C). Although the doctrine is well entrenched by authority, it has not escaped considerable judicial and academic criticism. Thus, in Swain v Law Society [1983] 1 AC 598 at 611, Lord Diplock described it as ‘an anachronistic shortcoming that has for many years been regarded as a reproach to English private law’. In Australia in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 (see 39.3C), although the status of privity as part of Australian law was confirmed, a number of judges expressed the view that the doctrine should be abandoned. In any event, the High Court was generally supportive of a more liberal application of the so-called ‘exceptions’ to the doctrine of privity. There are several situations where a non-contracting third party who is intended to be benefited by a contract made between other parties has a legal remedy against a party who has promised to confer the benefit. These situations are often referred to as ‘exceptions’ to the doctrine of privity, but are more correctly analysed as arising for reasons other than from contract

law. These include agency, covenants in land, equitable estoppel, trusts, unjust enrichment, and, as discussed in New Zealand Shipping Co Ltd v A M Satterthwaite & Co Ltd [1975] AC 154 (see 39.4C), the enforcement of exclusion clauses by third parties.

THE PRIVITY OF CONTRACT PRINCIPLE 39.2C

Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460

Court: High Court of Australia Facts: Mr Coulls owned land and entered into an agreement by which O’Neil Construction Pty Ltd was given a right to quarry stone from his land. The agreement stipulated that royalties would be paid to Mr and Mrs Coulls as joint tenants. (According to the principle [page 966] of survivorship, where property is held by two or more persons as joint tenants, on the death of one joint tenant the property automatically passes to the surviving joint tenant(s).) After Mr Coulls’ death, the issue was whether the royalties were to be paid to Mrs Coulls or to the executor of Mr Coulls’ estate. Issue: The issue before the High Court was whether Mrs Coulls was privy to the contract with O’Neil Construction. Decision: Mrs Coulls’ claim to the royalties was denied because a bare majority of the High Court (McTiernan, Taylor, and Owen JJ) held that the promise by O’Neil Construction was not made to Mr and Mrs Coulls jointly. The minority (Barwick CJ and Windeyer J) held that the promise was made jointly, and as long as one of them provided consideration, that was enough for the other to enforce the promise. Two of the three majority judges, Taylor and Owen JJ,

agreed on the legal principle stated by the minority, but did not find that it applied to the facts. Extract: The extracts from the judgments of Barwick CJ and Windeyer J discuss the doctrine of privity and its relationship with the doctrine of consideration. Windeyer J also discusses the remedies of damages and specific performance in cases where one party to the contract sues the other in relation to an obligation owed by the latter to a third party to the contract.

Barwick CJ 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.1 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 Ltd2 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. [page 967]

Windeyer J By the common law of England only those who are parties to a contract can sue upon it. For us that statement is incontrovertible. But what exactly is meant by it? Is there a useful distinction between denying a right of action to a person because no promise was made to him, and denying a right of action to a person to whom a promise was made because no consideration for it moved from him? The change the learned authors of Cheshire and Fifoot on Contract made in their sixth (1964) edition from their earlier editions illustrates the question. Now, after a recantation of earlier opinion, they say that: So long as consideration is an essential feature of English law it would seem to be immaterial whether a person is forbidden to sue on the ground that he has given no consideration or on the ground that he is a stranger to the contract. They are but two ways of saying the same thing.3 Yet a distinction was from an early date made, verbally at least, between the two matters. Actions of assumpsit were sometimes said to fail because the promise sued on was not made to the plaintiff — a very early example is Jordan v Jordan.4 In other cases they were said to fail because, as it was put in Bourn v Mason and Robinson: … the plaintiff did nothing of trouble to himself or benefit to the defendant but is a mere stranger to the consideration.5 And sometimes it was said of an unsuccessful plaintiff that he was not privy to either the promise or the consideration. The two matters were stated separately, and each was said to be fundamental, by Lord Haldane in the well-known passage in his speech in Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd.6 And Lord Wright, in Vandepitte v Preferred Accident

Insurance Corporation of New York also stated them separately when he said that: … no doubt at common law no one can sue on a contract except those who are contracting parties and (if the contract is not under seal) from and between whom consideration proceeds.7 Doubtless the two requisites merge in the strict view of a contract as a bargain, a promise for which the promisee has paid the price. Yet the question as posed by Williston has perhaps not been firmly and finally answered: Does the law require that promises shall be paid for by the promisee, or does it merely require that the promise shall be paid for by someone?8 … [page 968] The question which presents itself at this point is what is the measure of damages for breach of a promise to confer a benefit upon a third party? Take the case supposed above — a contract by A with B under which B is to pay $500 to C. A sues B for breach of contract. There are authorities which say that he could recover only nominal damages, because it is C who has suffered not he.9 As Else-Mitchell J remarked in Cathels v Commissioner of Stamp Duties, the cases on this point are ‘conflicting and unsatisfactory’.10 No difficulty would arise if a statement of Lush LJ, in Lloyd’s v Harper, could be accepted without qualification and regardless of its context. He 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.11 But I think we must take it that when the learned Lord Justice spoke of a contract for the benefit of B he was thinking of a contract of which A was a trustee for B — that is to say of a case in which A held his legal rights under

a contract as a trustee for B. In such a case of course the question disappears: but the case I have supposed, a contract by A with B that B will pay C $500, is a transaction at law devoid of any equity in C. Yet I do not see why, if A sued B for a breach of it, he must get no more than nominal damages. If C were A’s creditor, and the $500 was to be paid to discharge A’s debt, then B’s failure to pay it would cause A more than nominal damage. Or, suppose C was a person whom A felt he had a duty to reward or recompense, or was someone who, with the aid of $500, was to engage in some activity which A wished to promote or from which he might benefit — I can see no reason why in such cases the damages which A would suffer upon B’s breach of his contract to pay C $500 would be merely nominal: I think that, in accordance with the ordinary rules for the assessment of damages for breach of contract, they could be substantial. They would not necessarily be $500; they could I think be less, or more. That is as I see it. I realize that … there are statements in Cleaver v Mutual Reserve Fund Life Association12 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. Suppose that A does recover substantial damages for B’s failure to perform his promise to A to pay C $500 — the next question is does he recover these damages for himself or for C. Notwithstanding the statements in Beswick v Beswick suggesting that he would recover them for C, I do not see why this should be. On the hypothesis of a purely contractual right with no trust attached, why should A hold for C the proceeds of his action? He sued at law for damages he himself suffered, not as the representative of C. C had no right of action. A, not being a trustee of his contractual rights, might, had he wished, have released B from his contract, or declined to sue him for breach of it; or by agreement between A and B the contract could [page 969] have been varied. C could not have complained. Why then is it said that proceedings brought by A to enforce his legal right give C a right against A when previously he had none? (I leave out of consideration the possibility

of a bargain between A and C supported by consideration moving from C.) Of course A, whose purpose had miscarried because of B’s breach of contract, might make over any damages he recovered to C: but that would not be because C had a right to them, but because A still wished to give effect to his plan to confer a benefit on him. In a case in which specific performance was an available remedy, A might choose to seek that form of redress against B, and thus obtain a judgment that B pay C $500. But that would not be because A was enforcing a right of C, but because he was enforcing his own right against B by obtaining an order that B perform his contract with him, A. For this reason — and always on the assumptions that there was no trust and that the transaction was as between A and C wholly gratuitous — I am not persuaded that C could force A to seek redress from B, or dictate to him what form of redress, specific performance or damages, he should seek. On the interpretation of the royalty agreement now under consideration Coulls, or his executor, could in my opinion obtain an order for specific performance by the construction company of its promise to pay the royalties. This agreement can be regarded as specifically enforceable because of the interests in land involved. That suffices, in this case, but I would be prepared to go further. The decision in Beswick v Beswick points out the way and, as at present advised, I would follow it. I do not think it is really a new way, although it is perhaps now more easily seen. It seems to me that contracts to pay money or transfer property to a third person are always, or at all events very often, contracts for breach of which damages would be an inadequate remedy — all the more so if it be right (I do not think it is) that damages recoverable by the promisee are only nominal. Nominal or substantial, the question seems to be the same, for when specific relief is given in lieu of damages it is because the remedy, damages, cannot satisfy the demands of justice. ‘The Court’, said Lord Selborne, ‘gives specific performance instead of damages only when it can by that means do more perfect and complete justice’.13 Lord Erskine in Alley v Deschamps said of the doctrine of specific performance: This Court assumed the jurisdiction upon this simple principle; that

the party had a legal right to the performance of the contract; to which right the courts of law, whose jurisdiction did not extend beyond damages, had not the means of giving effect.14 Complete and perfect justice to a promisee may well require that a promisor perform his promise to pay money or transfer property to a third party. I see no reason why specific performance should not be had in such cases — but of course not where the promise was to render some personal service. There is no reason today for limiting by particular categories, rather than by general principle, the cases in which orders for specific performance will be made. The days are long past when the common law courts looked with jealousy upon what they thought was a usurpation by the Chancery Court of their jurisdiction.

[page 970]

Comments 39.2.1 See Radan, Gooley, and Vickovich at 39.6–39.10, 39.16, and 39.25. 39.2.2 For further discussion on this case in relation to consideration and specific performance, see Radan, Gooley, and Vickovich at 6.31–6.32 and 31.38–31.40 respectively.

THE TRIDENT CASE 39.3C

Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107

Court: High Court of Australia Facts: A construction company, Blue Circle, entered into an insurance contract with Trident in relation to a construction site at Marulan. The

policy stated that insurance coverage applied to Blue Circle and ‘all its subsidiary, associated and related Companies, all Contractors and Sub-Contractors and/or Suppliers’. McNiece Bros was Blue Circle’s principal contractor on the site. A worker on the site, Hammond, working under the direction of McNiece Bros, was injured and suffered personal injuries. He successfully sued McNiece Bros for damages for those injuries. McNiece Bros sought to be indemnified by Trident under the insurance policy in relation to the damages of over half a million dollars that it had been ordered to pay to Hammond. Trident denied liability to McNiece Bros on the basis that McNiece Bros could not enforce a claim under the insurance policy to which it was not a party. Issue: The issue before the High Court was whether the doctrine of privity of contract applied to preclude McNiece Bros from enforcing the policy against Trident and, if so, whether McNiece Bros could nevertheless succeed in its claim against Trident on the basis of an exception to the privity doctrine. Decision: By a majority, the High Court (Mason CJ, Wilson, Deane, Toohey, and Gaudron JJ; Brennan and Dawson JJ dissenting) found in favour of McNiece Bros. Although McNiece Bros won the case, there was no majority reasoning in its favour. The judges who constituted the majority did so for differing reasons. Mason CJ, Wilson and Toohey JJ held that the doctrine of privity did not apply to liability insurance contracts; Deane J held that the trust exception to privity applied; and Gaudron J held that principles relating to unjust enrichment could give rise to an exception to the privity doctrine. For the minority, Brennan and Dawson JJ held that because no applicable exception had been pleaded by McNiece Bros, the doctrine of privity applied to defeat its claim against Trident. Extract: The extracts below cover a variety of issues. Divergent views on the status of the doctrine of privity are seen between on the one hand the joint judgment of Mason CJ and Wilson J and the judgment of Toohey J, and on the other hand the views set out in the judgments of Deane J and Brennan J. The trust exception is discussed by Deane J and the unjust enrichment exception is detailed by Gaudron J.

[page 971]

Mason CJ and Wilson J 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. 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.15 The decision in Bourne v Mason 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’.16 Thereafter, until Tweddle v Atkinson,17 the question whether the third party could bring an action on the contract was the subject of conflicting decisions. … With reference to the common law before 1861, Windeyer J observed in Coulls v Bagot’s Executor and Trustee Co Ltd: 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.18 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.19 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.20 The decision in Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd21 firmly entrenched the two principles in the common law of England. … The Privy Council [page 972] in Vandepitte v Preferred Accident Insurance Corp of New York22 subsequently applied the law as stated in Dunlop … 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 recognised 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 promise-trustee a defendant in an action against the promisor. However, Lord Wright went on to say 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’.23 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.24 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.25 … However, as Windeyer J noted in Coulls,26 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.27 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 byproduct 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 Western Australia dissatisfaction with those rules has resulted in the enactment of s 11 of the Property Law Act 1969 (WA), which confers in certain circumstances a right on a third party to sue on a contract for his benefit. In 1973 the Queensland Law [page 973] Reform Commission recommended that the law be amended so as to allow that a contract conferring a benefit on a third party should be enforceable by him in his own name. … The recommendation was adopted and is expressed in s 55 of the Property Law Act 1974 (Q). … 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.28 On the other hand, Lush LJ in Lloyd’s v Harper 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.29 Windeyer J in Coulls thought, correctly in our opinion, that Lush LJ was referring to a contract where A was trustee of the promised benefit for B.30 … 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 expressed his disagreement with suggestions … that the promisee could recover not unliquidated damages but any sum which the promisor had agreed to pay to the third party.31 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 Ltd32 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. … 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 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.33 Windeyer J went even further, asserting 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

[page 974] remedy and that on this ground such contracts are susceptible of specific performance.34 We agree with his Honour’s comment and with his additional observations which point the way to a more general recognition of the availability of specific performance as a remedy. … 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 none the less 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 none the less 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. 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 Vandepitte35 and In Re Schebsman,36 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.37 In [a number of cases] the courts readily inferred the existence of a trust from the circumstance that the contract was made for the benefit of a third party.38 … As we have seen, critics of the common law rules have pointed to the uncertainty surrounding the circumstances in which the courts will recognise 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.39 This apparent uncertainty should be resolved by stating that the courts will recognise 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. … [page 975] 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. In order to justify the privity and consideration rules in the face of these problems, three practical policy considerations are sometimes invoked. First, they preclude the risk of double recovery from the promisor by the third party as well as the promisee. If the third party is permitted to sue the risk of double recovery arises from the possibility that the one party may seek specific performance after another has recovered damages. The risk is insignificant; joinder of all parties in the first action will make the resulting decision binding on all. The second point is that the privity requirement imposes an effective barrier to liability on the part of a contracting party to a vast range of potential plaintiffs. This may be significant in the case of government

contracts intended to benefit a class of persons. … But it is difficult to justify the existence of a rule by reference to one of its indirect results, if in other respects its operation is unsatisfactory. The third matter is more important. The recognition of an unqualified entitlement in a third party to sue on the contract would severely circumscribe the freedom of action of the parties, particularly the promisee. He may rescind or modify the contract with the assent of the promisor, arrive at a compromise or assign his contractual rights. He may even modify the contract so that he diverts to himself the benefit initially intended for the third party. Professor Corbin suggested that any entitlement in the third party to enforce the provision in his favour would necessarily exist at the expense of the rights, privileges and liberties that the contracting parties enjoy under the common law rules.40 But this does not entirely follow. The entitlement of the third party to enforce the provision in his favour can be subordinated to the right of the contracting parties to rescind or modify the contract, in which event the third party would lose his rights except in so far as he relied on the promise to his detriment. To subordinate the third party’s entitlement in this way would accord with legal principle and with the protection of the interests of the parties to the contract. There is to our minds no compelling reason the interests of the third party should be preferred, though we acknowledge that in Queensland the parties lose their right to rescind and modify the contract without the [page 976] third party’s consent on the third party’s acceptance of it41 and in Western Australia on the third party’s adoption of the contract.42 … Should it be a sufficient foundation for the existence of a third party entitlement to sue on the contract that there is a contractual intention to benefit a third party? Or, should an intention that the third party should be able to sue on the contract be required? Under s 48 of the Insurance Contracts Act 1984 (Cth) and in the United States an intention to benefit a third party alone is necessary and that seems to be the position in Western Australia. But in Queensland43 … an intention that the third party should be able to sue is required. … As the contracting parties are unlikely

to turn their attention to the enforcement by the third party, the ascertainment of this intention may well be fraught with similar problems to those that have surrounded the trust concept. 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.

[page 977] 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 recognised that McNiece was entitled to succeed in the action.

Brennan J (dissenting) In 1861, Tweddle v Atkinson was decided. The law was then settled that ‘no stranger to the consideration can take advantage of a contract, although made for his benefit’.44 … The rule was affirmed by the House of Lords in Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd. … The doctrine of privity has been treated as settled not only by the House of Lords45 but also by the Supreme Court of Canada46 and by this Court. In Wilson v Darling Island Stevedoring and Lighterage Co Ltd Kitto J spoke 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’.47 … The doctrine of privity has long been settled and it was settled as a doctrine of general application. … In this case … [t]he true question for decision is … 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. … According to the settled law, when A (a promisor) contractually promises B (a promisee) to confer a benefit on C, a third party who is not a party to the contract and who has given A no consideration for the promise, C acquires no right to sue A on the promise. … The law of contract admits the capacity of persons who are sui juris to create by offer and acceptance rights and obligations binding as between each other. A proposal that a contractual promise in favour of a third party should give rise to a common law right in C to sue A to enforce the promise goes further. The proposal postulates the capacity of the contracting parties to create rights as between the third party and the promisor. Moreover, it precludes application of the principles of trust to any case to which the proposed exception applies. If C’s right were held to grow out of a contractual promise by A to B, it is hard to see how B might be the trustee of the promise for C: C could hardly have a legal right to the performance of A’s promise while [page 978] B retained the same legal right as trustee for C. The principles of trust would be irrelevant in such a case. Indeed, the proposal may postulate that B, though the promisee, loses the contractual right to performance of the promise by A, that right being conferred solely upon, or being transferred to, C. And, if the proposal postulates a cause of action in C while leaving B’s cause of action intact, it would expose A to double liability. To postulate the creation of a legal right in C to enforce a third party promise against A is to postulate the creation of legal relationships between the three parties which the doctrines of our legal system are not presently able to define. If a third party promise is to confer on C a common law right enforceable against A, do A and B retain a capacity to defeat C’s right by varying or abrogating their contract or is C’s right indefeasible on the making of the contract? If C’s right becomes indefeasible, what makes it so? Does C become subject to any obligation under the contract? Does C’s right or obligation depend on C’s acceptance of it? Or does C’s acquisition of the right against A automatically impose any associated obligation? Does B

retain a right to enforce the promise against A? Can C and A vary the right without B’s consent? Does B have any right to contribution from C in respect of the consideration for the promise? If want of consideration moving from C to A is no bar to C’s cause of action, is consideration moving from B to A essential? Does C lose his right to enforce the promise if he does not comply with the contractual conditions binding on B? Is B under a common law duty to C to perform the contract? Can A raise against C any defence which would be effective against B, eg, a set off? Legal systems which recognise the effectiveness of a third party promise to create a right in a third party to sue (a jus quaesitum tertio) give different answers to these questions. … The … Scottish institutional writer, Lord Stair, considered that C acquires a right to sue if the parties to the contract intend C immediately to have an indefeasible right, though Scottish case law requires — at least in some cases — a delivery or other act to evidence that intention. However, it seems that C may renounce the right. … German law gives C an indefeasible right on the making of the contract though the German Civil Code [in Article 1121] permits C to renounce the right. In French law, however, a stipulation in favour of C is revocable until ‘the third party has declared his wish to take advantage of it’ and the Roman-Dutch law of South Africa requires notification of acceptance by C to A before C’s right is perfected though in the meantime B may by interdict hold A to his bargain. The American Restatement, Second, Contracts … sets out a number of propositions which may be summarised (though accuracy is sacrificed) by saying that a contract by which the promisor and promisee intend to benefit an ‘intended beneficiary’ creates a duty by the promisor to the beneficiary which the beneficiary may enforce directly against the promisor. The first Restatement … drew a distinction between the indefeasibility of rights acquired on the making of the contract by two different classes of beneficiaries — donee beneficiaries and creditor beneficiaries. The tide of authority has turned against maintaining the distinction … but, if the doctrine of privity were to be modified or abandoned, there is much to be said for maintaining the distinction. … 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

[page 979] have been enacted in order to confer on C a statutory right enforceable directly against A. Those provisions have become increasingly complex. The Property Law Act 1969 (WA), s 11 contains relatively simple provisions; the Property Law Act 1974 (Q), s 55 is more detailed; and the Contracts (Privity) Act 1982 (NZ) is yet more detailed and sophisticated. Their provisions are not uniform. For example, only Western Australia requires the intention to benefit the third party to be expressed in the contract. Queensland requires the third party to ‘accept’ the contract and upon acceptance, the beneficiary may become subject to a duty enforceable against him. New Zealand alone extends the provisions of its Act to immunities and limitations on liability. 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 AngloAustralian 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 — ie, 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 … the apparent exceptions are in truth applications of other legal principles to the contractual relationship of promisor and promise. … 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.48 Where the promisee is a trustee, the third party acquires only an equitable interest in the promise. The third party does not become a party to the contract.49 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 [page 980] in which the promisee is joined as a defendant,50 the promisee being an essential party in an action against the promisor.51 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.52 The agency cases show that, unless the third party is in truth a promisee, he cannot take the benefit of the contract. … 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 recognised 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. [In the Court of Appeal in this case] McHugh JA saw no difficulties of substance in admitting the proposed exception to the doctrine of privity.

His Honour said: ‘if we can now assert that a trust will be invariably imputed in the case of a liability insurance policy, as I think we can, then a refusal to allow the beneficiary to sue directly at common law is one of form and procedure’.53 The assertion that a trust ‘will be invariably imputed’ is large indeed but, passing that by, it is erroneous to regard the admission of a third party’s right to sue as a matter of mere ‘form and procedure’. It would not be a right to sue on a cause of action vested in the promisee; it would be a right to sue on a cause of action vested in the third party. Such a right to sue is a new substantive right. His Honour (in a subsequent part of his judgment) endeavoured to define some of the conditions of its existence and enforcement. He said: To be able to sue at common law the beneficiary must be a person who is specified or referred to in the contract, whether by name or otherwise. The insurer is entitled to the same defences as he would have in an action brought by the promisee-party. Moreover, so that the insurer will not be liable at the suit of the promisee-party, the latter will need to be a defendant in the action. The problems which can arise when the promisee-party is not joined in the action are graphically illustrated by Westralian Farmers Cooperative Ltd v Southern Meat Packers Ltd,54 a decision under Property Law Act 1969 (WA), s 11(2), where the buyer was required to pay twice for cattle.55 McHugh JA did not purport to propound these rules as rules of the common law. As the common law knows of no exception to the doctrine of privity, it has developed no rules to condition the admission of a third party’s right to sue. But it should not be thought that all the problems attendant on admitting the proposed exception were solved by propounding the rules set out in the quoted paragraph. A basic problem which the propounded rules do not address is whether the third party’s right to sue is intended by the parties to the contract [page 981] to be irrevocable. If one or both of the contracting parties can revoke the

third party’s right to sue, the right is contingent on the continued will of the parties to the contract. Should this be sufficient to give a third party a common law right to sue? How could it be admitted that the third party has a right to sue on the policy if that right might be abrogated at any time without his knowledge and consent? In Scots law, it would not suffice to establish a jus quaesitum tertio to show that the tertius is ‘a person who is specified or referred to in the contract, whether by name or otherwise’. The third party would have to acquire an irrevocable right and ‘the mere execution of the document will not constitute irrevocability’56 least not in the majority of cases.57 In Blumer & Co v Scott & Sons Lord Ardmillan … said: Even if not named, the third party may be entitled to adopt the agreement, and enforce it by action. But in such a case it must be clear that both the contracting parties intended so to secure him, and that they could not, separately or together, revoke the stipulation.58 It may be difficult to establish that the parties to a policy of loss insurance intended to confer an irrevocable right to sue on an unnamed ‘Assured’ who (like McNiece) becomes a member of an insured class. Would the insurer have intended to go on risk without knowing the identity of a third party ‘Assured’? And would the insured party to the contract have intended to abandon a right to negotiate with the insurer for an early termination of the policy and a refund of portion of the premium? In this case there was no inquiry whether Blue Circle and Trident intended McNiece to have an irrevocable right to an indemnity under the policy. Indeed, if the Court of Appeal was precluded from determining whether Blue Circle was trustee for McNiece of Trident’s promise, it would surely have been precluded from investigating whether Blue Circle and Trident intended the policy to enure irrevocably for the benefit of any person who subsequently became an ‘Assured’. Of greater significance is his Honour’s suggested rule that a promisee-party must be a defendant in a beneficiary’s action ‘so that the insurer will not be liable at the suit of the premisee-party’. If the insurer could be liable at the suit of the promisee, the admission of a third party’s right to sue duplicates the causes of action on the promise. Presumably it is thought that the

joinder of the parties in whom separate causes of action are vested is effective to extinguish one of the causes of action. But mere procedural steps do not extinguish substantive rights. Joinder of the promisee-party as a defendant would not discharge any cause of action vested in him. And if the proposed exception were treated as no more than conferring on the third party a right to sue on the single cause of action vested in the promisee so that either the beneficiary third party or the promiseeparty (but not both) might enforce it, what principle would govern a contest between them? Which of them would be the true creditor of the stipulation? (A question which is likely to be of more importance in life insurance than in loss insurance, though in either case the third party ‘beneficiary’ may be a donee of the benefit purchased by the assured’s payment of the premium.) The [page 982] difficulties encountered in propounding a set of rules to condition the proposed exception to the doctrine of privity demonstrate the undesirability of endeavouring now to overthrow the doctrine in whole or (what might be more confusing) in part. If our legal history had taken a different turning in 1861, the problems raised by a third party promise would have been differently addressed. In the United States, two years before Tweddle v Atkinson, it was decided to admit a third party’s right to sue when the third party is a creditor of the promisee.59 The first and second Restatements reveal the great difference between the frames of reference within which American jurisprudence addresses the problems raised by a third party promise and the frames of reference within which Anglo-Australian jurisprudence addresses them. No one would suggest that the Anglo-Australian solutions are perfect. But our legal system has produced a tolerably coherent set of principles operating in conjunction with the fundamental doctrine of privity. When a third party promise is in a contract to which the third party is not a party, the promise can be enforced only by an action brought by the promisee or to which the promisee is a party. The legal cause of action against the promisor is vested solely in the promisee. Double recovery is

impossible. Where the promisor has promised to pay money to or otherwise to confer a benefit on the third party directly, the promisee may compel him specifically to perform his promise, for damages would be an imperfect remedy for the promisee.60 The availability of specific performance goes a long way towards shutting out injustice. Where damages are the appropriate remedy for breach of a promise to pay money to the promisee for the benefit of a third party, the promisee may recover the whole of the amount promised where the promisee is a trustee for the third party61 or an agent who is authorised by the contract to sue on behalf of the principal.62 These may not be the only cases in which a promisee may recover the full amount promised. It is still an open question whether a promisee who is neither a trustee for nor an agent of a third party can recover in some circumstances more than nominal damages if the promisor’s breach of a promise which is intended to confer a benefit on a third party causes the promisee no personal loss.63 The speech of Lord Diplock in Albacruz v Albazero64 raises the question whether a promisee may recover in full what was lost by a third party provided the promisee is accountable to the third party for what he recovers. It is not appropriate in this case to decide the limits of the promisee’s remedies. It is sufficient to note that the possibility of injustice which might be thought to flow from the effect of the doctrine of privity on the promisee’s remedies depends on the rules relating to the measure [page 983] of damages. If such a case of injustice should arise, it will be appropriate to consider what Windeyer J said in Coulls: It is, I think, a faulty analysis of legal obligations to say that the law treats a promisor as having a right to elect either to perform his promise or to pay damages. Rather, using one sentence from the passage from Lord Erskine’s judgment [in Alley v Deschamps], the promisee has ‘a legal right to the performance of the contract’.65 Moreover, we are concerned with what Fullagar J66 once called ‘a system which has never regarded strict logic as its sole inspiration’.67

A development of the rules relating to damages rather than the acceptance of a third party’s right to sue offers the prospect of an orderly development of the law if such a development be needed to avoid injustice. If a third party were to complain of injustice on the ground that he has no right to cause the promisee to enforce a policy of loss insurance, the supposed injustice must arise because there is no relevant relationship between the third party and the promisee. Such a case can arise only if the third party is one (a) for whom the promisee is not an agent, fiduciary or trustee, (b) who has no relevant contractual relationship with the promisee, and (c) who has not been induced to assume or expect that the policy covers the risk of loss by the third party by any representation made by the promisor or the promisee in circumstances which would entitle the third party to claim the benefit of the policy by estoppel.68 Whether an injustice is likely to arise in such a case may be doubted, especially in modern times when the courts no longer feel the reluctance to infer the existence of a trust which courts felt in earlier times.69 Of course, the question whether a trust has been constituted is related to the question whether the promisee reserves the right to agree with the promisor to vary or abrogate the promise. Consideration of the rights reserved by a promisee against the promisor and of the nature of the obligation accepted by the promisor may indicate that a trust of the benefit of the promise has been constituted. There is no reason to think that a system of law under which a third party’s (equitable) right to sue depends on the existence of a trust is less likely to do justice than a system under which a jus quaesitum tertio is admitted. Indeed, it may be that the constitution of a trust as a criterion of a third party’s right to sue is capable of adjusting more nicely the rights of promisor, promisee and third party. For example, if a third party’s right to sue were admitted only when the terms of the contract show that the promisor and promisee intend the third party’s right to be irrevocable, that right would be more inflexible than the right of a beneficiary under a trust who is able to sue even if the trust is revocable so long as it is not revoked.70 Indeed, the injustice which could flow from a rigid criterion of [page 984]

irrevocability in Scotland arose in but was avoided by the judgment of the Court of Session in Love v Amalgamated Society of Lithographic Printers.71 This is not the occasion to spell out the developments in the law of trusts, estoppel and damages which are needed if the law is finally to scale the heights of justice. This case did not raise those questions. I have referred to them merely to state my view that the appropriate path of legal development lies in those areas, not in the admission of a third party’s right to sue. I think that is the path which accords with the views expressed by Sir Owen Dixon in his paper ‘Concerning Judicial Method’ which Dawson J cites in his judgment. In this case, McNiece endeavours to turn aside from the familiar path of privity, trust, agency and estoppel. But there is no other path unless we retrace our steps back at least to 1861. That is a course we ought not follow. It is a course we cannot follow.

Deane J At the time of the establishment of this Court, the common law of England and of this country was long settled in its insistence upon the principle of privity of contract, that is to say, the general rule that only the parties to a contract are bound by, and entitled to enforce, its terms. … In the course of the present century, the ‘decided cases’ have served only to reinforce the principle of privity of contract as a fundamental rule of the common law. … In this Court, the requirement of privity as a general rule has never been doubted. The closest one comes to any questioning of the doctrine in any judgment in this Court is in an obiter comment of Windeyer J in Olsson v Dyson that ‘it may be that someday this Court … will see the way clear’ to find a right of action at common law for the third party beneficiary under a contract.72 … Equally important, Windeyer J’s passing speculation in Olsson about what might happen at some future time was preceded by the statement that the doctrine of privity ‘is now firmly established and it binds us’ and followed by the conclusion that ‘we must take the law as it is and refuse to recognise a ius tertii arising by way of contract’.73 Other cases in this Court confirm the fundamental nature and binding character of the common law rule that a third party is neither bound by nor entitled to enforce the terms of a contract between others. … [I]n Coulls v

Bagot’s Executor & Trustee Co Ltd Barwick CJ referred to the general rule of privity of contract as one which ‘must be accepted’,74 while Windeyer J described the common law rule that ‘only those who are parties to a contract can sue upon it’ as being ‘[f]or us … incontrovertible’.75 … [T]he rule of privity is not properly to be seen as a rule of exclusion of rights of action which would otherwise exist. It is a statement or reflection of an aspect of the nature of a contract, namely, that a contract between two or more parties does not, of itself, directly [page 985] confer rights or impose liabilities upon persons who are not parties to it. If a third party is to be entitled to rights and subject to obligations in relation to a contract to which he is a stranger, those rights and obligations must have some basis, either in statutory provision or in common law principle, beyond the mere contract. They cannot be based merely on the contract since the contract, of itself, directly operates only between the parties to it. On the other hand, if they arise by reason of the operation of some other principle or some statutory provision, the rule of privity will have nothing to say to them. It is in that context that it would seem accurate to say … that there are no true exceptions at common law to the rule of privity. Circumstances can undoubtedly arise in which accepted processes of legal reasoning require a court, usually a final appellate court, to reverse the development of the law by disowning established principle. However, where the established principle is as entrenched, by authority and in legal conception, as is the principle of privity, such a reversal can only be justified by precisely defined and compelling reasons advanced as part of a plainly identified process of legal reasoning. No such reasons are available to justify a wholesale abrogation of the general common law rule of privity of contract. … Of its nature, the rule of privity operates within the confines of the law of contract. Within those confines, it neither operates to deny the validity of a promise to benefit a third party nor hinders proceedings by the promisee against the promisor for specific performance of such a

contractual obligation. That being so, the chose in action constituted by rights to enforce the promise will, in some circumstances, be susceptible of assignment by the promisee to the third party. Nor does the rule of privity preclude the promisee from undertaking a collateral contractual obligation to the third party to institute and maintain such proceedings against the promisor for specific performance or to authorise the third party to maintain such proceedings for specific performance in the name of the promisee. If the promisee contracts as agent for a disclosed or undisclosed principal, the principal will ordinarily himself be, for the purposes of the requirement of privity, a party to the contract. If the terms of a contract incorporate a promise to benefit a third party in the form of an offer which is susceptible of being accepted by the third party, that third party can, at least if the consideration provided to the offeror under the head contract can be treated as having been provided (jointly or partly) by or on behalf of the third party,76 acquire direct contractual rights against the promisor by an appropriate acceptance of the offer. If, within the confines of the law of contract, a third party who would be benefited by the performance of a contractual promise is left without redress, other principles of law operate (unhindered by the rule of privity) upon or within the context of contractual rights and obligations to avoid injustice in particular categories of case. The point can be conveniently illustrated by reference to a contract of the type involved in the present case, namely, a policy of liability insurance which includes a stranger to the contract among the persons whom the insurer promises to indemnify. If the insurer under such a policy induces, by his conduct, the third party to act to his detriment on the assumption that he is effectively indemnified under the policy, the insurer will, in an appropriate case, be estopped from denying the [page 986] enforceability of such indemnity. Even if, in such a case, the assumption induced by the insurer is, upon analysis, an assumption as to future fact (eg that the third party will, in the event of liability within the period of the policy, be effectively protected by the policy) the doctrine of estoppel by

conduct would, in my view, be applicable to preclude the insurer from raising the requirement of privity of contract (or from denying enforceability or the existence of a trust of the promise) as a basis for a departure from that assumption as to future fact.77 Again, if the insurer under such a policy has received the moneys payable for the promised indemnity but has then refused to indemnify the third party on the ground that the third party was not a party to the contract of insurance, the circumstances could conceivably be such as to give rise to a cause of action by the third party against the insurer founded upon principles of unjust enrichment.78 The path by which relief would be granted in such a case might well involve some reassessment of the extent of curial powers, both statutory and inherent, to mould the relief appropriate to do justice in the circumstances of a particular case. … It is, however, unnecessary in the present case to embark upon a detailed examination of questions of estoppel by conduct or to seek to identify what, if any, circumstances could found an action in unjust enrichment by the third party against an insurer who has refused to honour the indemnity which he has been paid to provide. … The reason that is so is that … [i]f there be a doctrinal basis for the recognition … of a right of action in the third party assured to enforce the insurer’s promise of indemnity in the present case, it must be found, either directly or by way of analogy, in the law of trusts. In the course of his judgment in Wilson v Darling Island Stevedoring Fullagar J 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’.79 … 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. … In equity, ‘intention alone will not constitute a trust obligation [and] …

mere conduct without such intention is ineffectual to impose it …’.80 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 [page 987] of such a contractual promise, the requisite intention should be inferred if it clearly appears that it was the intention of the promisee that the third party should himself be entitled to insist upon performance of the promise and receipt of the benefit and if trust is, in the circumstances, the appropriate legal mechanism for giving effect to that intention. A fortiori, equity’s requirement of an intention to create a trust will be at least prima facie satisfied if the terms of the contract expressly or impliedly manifest that intention as the joint intention of both promisor and promisee. A trust can attach to the benefit of the whole contract or of the whole or part of some particular contractual obligation. In the case of a policy of liability insurance under which the insurer agrees to indemnify both a party to the contract and others, there is 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 none the less 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 (ie 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.81 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 [page 988] the contract. Those terms must, however, be construed in context and a trust of a contractual promise will obviously be more readily discerned in the terms of some classes of contracts than it will in others. It is difficult to envisage a class of contract in which the creation of such a trust would be more readily discernible than the type of contract which is involved in the present case, namely, a policy of liability insurance indemnifying both a party to the contract and others who are designated either by specific identification or by their membership of an identified group. In the case of such a policy, the terms of the contract itself will, in the context of the

nature of insurance, ordinarily manifest an intention to the effect that each non-party assured is to be fully entitled to the benefit of the promisor’s promise to indemnify him, that is to say, that the promisee should hold the chose in action constituted by the right to enforce that promise upon trust for the relevant non-party assured.82 The intention so manifested will commonly be a joint intention of promisor and promisee. It would suffice, however, that it be the intention of the promisee alone. … It suffices to say that, in the context of the nature of liability insurance, … contractual terms [such as those in the present case] manifest an unmistakable intention that each assured should be entitled to the benefit of the insurer’s promise to indemnify it against the specified loss and should be itself entitled to insist upon enforcement of that promise. That intention is properly to be construed in legal terms as an intention that the chose in action constituted by the benefit of Trident’s promise to indemnify each contractor and sub-contractor on the identified sites in respect of specified loss should be held by the promisee (‘Blue Circle’) upon trust for the relevant contractor or sub-contractor. Prima facie, the contract operated to give effect to that intention which it manifested. That being so, the prima facie effect of the policy itself in the events which occurred (ie McNiece becoming a designated contractor or sub-contractor) was to create a trust for McNiece of the benefit of Trident’s promise to indemnify it against relevant loss. There is nothing in the material before the Court which could have the effect of negativing or modifying the creation or effect of that trust. Indeed, in the context of the circumstances disclosed by that material, it is difficult to conceive of any real possibility of the existence of circumstances which could have had that effect.

Toohey J The proposition that ‘… only a person who is a party to a contract can sue on it’83 has been the subject of much criticism by judges, academics and law reform agencies. … The law, although still fluid by the middle of the nineteenth century, is generally taken to have been settled by Tweddle v Atkinson in favour of the view that at common law a third party cannot sue on a contract made for his benefit. Nevertheless doubts surround the true ratio of this case. It may be that it was decided on the basis that the plaintiff

was a stranger to the consideration rather than on the ground that he was not a party to the agreement,84 although [page 989] this is disputed by Jacobs,85 or, as the defendant argued in Tweddle, on both grounds. The reports of the case do not provide a conclusive answer. … If this conflict had to be resolved, the better view seems to be that the plaintiff in Tweddle failed because he was not a party to the contract and because he had not provided any consideration. … [S]everal Law Lords have expressed their unease at a law which precludes a third party from suing on a contract taken by another for his benefit. Lord Reid in Beswick v Beswick;86 Lords Keith of Kinkel and Scarman in Woodar Investment Development Ltd v Wimpey Construction UK Ltd;87 Lord Diplock in Swain v Law Society,88 provide instances. ‘Unease’ is perhaps too mild a word, at any rate for Lord Diplock, who spoke of the non-recognition of a jus quaesitium tertio as ‘an anachronistic shortcoming that has for many years been regarded as a reproach to English private law’. In Australia the privity rule has been recognised in Wilson v Darling Island Stevedoring & Lighterage Co Ltd; Coulls v Bagot’s Executor & Trustee Co Ltd and in Olsson v Dyson. … In the last of these cases Windeyer J joined the critics, commenting: We must take the law as it is and refuse to recognize a ius tertii arising by way of contract. In jurisprudence and legal theory and for recent commentators, this may be seen as a regrettable example of the rigidity of conceptual thinking.89 … Not all are critical of the notion of privity. … But this debate does not go to the issue which lies at the heart of this appeal. That issue, as I see it, is whether the principled development of the common law supports the conclusion of the Court of Appeal [in this case] that ‘this Court should now declare that at common law a non party assured is,

and has been for some time at common law, able to sue on a written policy of liability insurance’.90 Even when courts have expressed their impatience with the limitations imposed by privity of contract, they have applied the doctrine. At the same time they have not withheld approval from developments in the law that have by-passed privity of contract, so that, for instance, a promisee might be regarded as holding his right under a contract on trust for a third person to whom a benefit had been promised and might be required to exercise that right at the instance of the third person. There is no doubt considerable scope for the development of the law of trusts in this direction, and with reference to contracts of insurance. … [page 990] In the circumstances of the present case, given the scope of the insurance cover as formulated in the policy, it might not have been difficult to spell out a trust in favour of the respondent. … Can it be said that, in the present case, to uphold the Court of Appeal is to encroach on what is the proper field of the legislature, given the very strong preponderance of authority against the enforcement of a contract by a person who is not a party thereto? The insurance policy in the present case indemnifies the assured against liability in respect of death or bodily injury to third parties. ‘The Assured’ is defined as: Blue Circle Southern Cement Ltd, all its subsidiary, associated and related Companies, all Contractors and Sub-Contractors and/or Suppliers. … I do not accept that a non-party assured is, as the common law presently stands, able to sue. But equally I accept that the law which precludes him from doing so is based on shaky foundations and, in its widest form, lacks support both in logic or in jurisprudence. My concern is whether the law is so well entrenched that nothing short of legislative interference can fairly budge it.

My conclusion is that the law is not so well entrenched as to be incapable of change. Lord Reid commented in Tomlinson (A) (Hauliers) Ltd v Hepburn: No doubt the principle preventing jus quaesitum tertio has been firmly established for at least half a century. But it does not appear to me to be a primeval or necessary principle of the law of England.91 It is true that his Lordship added: ‘We must uphold it until it is altered’. But I do not understand Lord Reid to be excluding the possibility of alteration judicially as well as legislatively; the same may be said of Windeyer J in Olsson v Dyson.92 … At common law apparent exceptions have been recognised in the fields of agency, assignment of choses in action, carriage of goods, commercial letters of credit, covenants concerning land, claims in tort and proprietary or possessory rights. … Jacobs’ Law of Trusts in Australia notes thirteen ‘common law modifications of the principles governing third party contracts’. Within the area of insurance there has arisen a number of exceptions to privity of contract, though generally statutory in origin. Section 48 of the Insurance Contracts Act 1984 (Cth) now authorises the sort of action which the respondent brought against the appellant. While the enactment of s 48 should not be taken as more than legislative recognition of the abrogation of privity of contract in the circumstances to which it refers, equally it does not stand in the way of this Court upholding the Court of Appeal if that course is otherwise warranted. … [W]hen a rule of the common law harks back no further than the middle of the last century, when it has been the subject of constant criticism and when, in its widest form, it lacks a sound foundation in jurisprudence and logic and further, when that rule has been so [page 991] affected by exceptions or qualifications, I see nothing inimical to principled development in this Court now declaring the law to be otherwise in the circumstances of the present case. … [Trident] entered into a contractual obligation with Blue Circle Southern Cement Ltd and it did so

with the intention that the benefit of that obligation should extend to those involved with Blue Circle as contractors and sub-contractors on the work sites in question. That is borne out by the terms of the policy. [McNiece Bros] was sufficiently identified as one of those involved. The policy was intended by both [Trident] and Blue Circle to be a basis of insurance in respect of the work being carried out on the sites and Blue Circle and its contractors and sub-contractors could be expected to arrange their business in that light. Certainly a court must look long and hard at the implications of declaring the law to be otherwise than hitherto accepted. In particular the court must consider the impact of any change on existing rights and obligations. But in the present case, to allow [McNiece Bros] to sue [Trident] is to give effect to the presumed intention of [Trident] at the time it issued the insurance policy. … The proposition which I consider this Court should now endorse may be formulated along these lines. When an insurer issues a liability insurance policy, identifying the assured in terms that evidence an intention on the part of both insurer and assured that the policy will indemnify as well those with whom the assured contracts for the purpose of the venture covered by the policy, and it is reasonable to expect that such a contractor may order its affairs by reference to the existence of the policy, the contractor may sue the insurer on the policy, notwithstanding that consideration may not have moved from the contractor to the insurer and notwithstanding that the contractor is not a party to the contract between the insurer and assured.

Gaudron J In my view a promisor who has accepted an agreed consideration for a promise to benefit a third party comes under an obligation to the third party to fulfil that promise and the third party acquires a right to bring an action to secure the benefit of that promise. The right of the third party is not a right to sue on the contract: rather, it is a right independent of, but ordinarily corresponding in content and duration with, the obligation owed under the contract by the promisor to the promise. The doctrine of privity of contract and the related requirement that

consideration should be provided by the person seeking to enforce a contractual obligation do not deny the binding nature of a contractual promise the performance of which will benefit a third party. Breach of the contractual obligation may sound in damages at the suit of the promise. … If damages are an inadequate remedy, the promisee may obtain a decree of specific performance of the contract. … The third party, however, cannot institute an action for breach of contract or for specific performance unless he can bring himself within one of the recognised exceptions to or qualifications of the rules. … Although the position of the third party is commonly expressed — and in my view accurately expressed — in terms of inability to sue on the contract, common understanding [page 992] is that the consequence of the rules is that no obligation is owed by the promisor to the third party and no right is created in the third party to secure the benefit of the contract. For the sake of simplicity I leave out of account conduct by the promisor which may create some other recognisable obligation to the third party, or which may lead to an assumed state of affairs by reference to which their mutual rights and obligations will be determined. The source of the obligation to perform a contractual promise is the contract itself, but there is no reason in logic or in law why the existence of a contract should preclude the existence of another obligation ordinarily corresponding in content and duration with the contractual obligation, but having its source in law rather than in the contract. … [I]f consideration has been wholly executed under an unenforceable contract, the law imposes an obligation or imputes a promise to make compensation for the benefit accepted.93 The obligation may be limited by the terms of the contract to correspond in content with the unenforceable contractual obligation, but it is an obligation which has its source in law and not in the contract. In Pavey & Matthews it was stated by Deane J94 … that the basis of the

obligation imposed by law to pay compensation for a benefit accepted under an unenforceable contract was preferably to be seen as lying in restitution. Deane J added: That is not to deny the importance of the concept of unjust enrichment in the law of this country. It constitutes a unifying legal concept which explains why the law recognises, in a variety of distinct categories of case, an obligation on the part of a defendant to make fair and just restitution for a benefit derived at the expense of a plaintiff and which assists in the determination, by the ordinary processes of legal reasoning, of the question whether the law should, in justice, recognise such an obligation in a new or developing category of case.95 The obligation to make restitution and the concept of unjust enrichment are not limited to situations in which the parties stand in a contractual relationship, or would so stand but for some matter rendering the contract invalid or bringing the relationship to an end. … Where the consideration is wholly executed in favour of a promisor under a contract made for the benefit of a third party a rule that the third party may not bring action to secure the benefit of the contract permits of the possibility that the promisor may be unjustly enriched to the extent that the promise is not fulfilled. Certainly that is so if the promisee is unable or unwilling to bring an action on the contract. It will also be the case if action by the promisee will result only in the award of nominal damages. True it is that the possibility of unjust enrichment does not exist in all cases, but, as Mason CJ and Wilson J demonstrate in their reasons for judgment, the right of action available to the promisee and the limited rights available to the third party by operation of trust or estoppel, fail to provide a universal guarantee that the contractual obligation will be fulfilled, or if not fulfilled, will attract legal consequences proportional to its non-fulfilment. [page 993] In my view it should now be recognised that a promisor who has accepted agreed consideration for a promise to benefit a third party is unjustly

enriched at the expense of the third party to the extent that the promise is unfulfilled and the non-fulfilment does not attract proportional legal consequences. Although exceptions to and qualifications of the rules of privity and consideration and the doctrines of trust and estoppel operate in certain circumstances to preclude any unjust enrichment, the exceptions, qualifications and doctrines should not be seen as reasons to impede the development of legal principle which will obviate all possibility of unjust enrichment. Rather, their existence should be seen as demonstrating the necessity for the recognition of such an obligation. The possibility of unjust enrichment is obviated by recognition that a promisor who has accepted agreed consideration for a promise to benefit a third party owes an obligation to the third party to fulfil that promise and that the third party has a corresponding right to bring action to secure the benefit of the promise. It may be that the perceived pre-eminence in the field of contract law of the writ of assumpsit, with its associated requirements of privity and consideration, has delayed the recognition of an enforceable obligation and corresponding right as between promisor and third party. Whether or not this be so, there is no legal principle to preclude the recognition of an obligation and corresponding right as between promisor and third party separate from the contractual obligation existing between promisor and promisee. Rather the fact that the law, as it is presently understood, permits of the possibility of unjust enrichment provides a compelling reason for the recognition of such an obligation of the same nature of the obligation imposed by law to compensate for a benefit received under an unenforceable contract. To recognise an obligation on the part of a promisor who has accepted agreed consideration for a promise to benefit a third party, is not to abrogate the doctrine of privity of contract. It is merely to confine it to the only area in which it can properly operate, viz. the area of rights and obligations having their source in contract. The matter can be put another way. A right to enforce an obligation imposed by law by reason of the acceptance of agreed consideration for a promise to benefit a third party is no more a right to sue on the contract than an action to recover a debt on an executed consideration is an action upon a contract. The circumstances which warrant the imposition of an obligation, viz. the acceptance of agreed consideration for a promise to benefit a third party,

also necessarily require that the content and duration of that obligation should ordinarily correspond with the content and duration of the contractual obligation owed to the promisee. Thus should the obligation as between promisor and promisee be varied, modified or extinguished, then correspondingly the obligation of the promisor to the third party will be varied, modified or extinguished. It may be that in a particular case there will be some intervening circumstance which will create an obligation not to vary, modify or extinguish the promise or which will create an assumed state of affairs such that the mutual rights and obligations of the promisor and third party are to be ascertained by reference to that state of affairs rather than by reference to the contract between the promisor and promisee. But these considerations aside, the content and duration of the obligation by the promisor to the third party will correspond with the contractual obligation of the promisor to the promisee. [page 994] On the basis that [Trident] received the agreed consideration specified in the policy of insurance … it came under an obligation to [McNiece Bros] to fulfil its promise to indemnify it as provided in the policy. [McNiece Bros] is entitled to maintain an action to enforce that obligation.

Comments 39.3.1 See Radan, Gooley, and Vickovich at 39.29–39.44, 39.69–39.81, and 39.86–39.88. 39.3.2 For a discussion of Trident, see P Kincaid, ‘The Trident Insurance Case: Death of Contract?’ (1989) 12 University of New South Wales Law Journal 59. For a judicial analysis of its impact by Gummow J, see Winterton Constructions Pty Ltd v Hambros Australia Ltd (1991) 101 ALR 363. 39.3.3 In Mizzi v Reliance Financial Services Pty Ltd [2007] NSWSC 37 at [79], Brereton J said the following in relation to the use of trusts law to circumvent the principle of privity of contract:

At law, the beneficiary of a trust could not sue an obligor to the trust, the proper plaintiff being the trustee. However, in equity, the beneficiary may sue in its own name, joining the trustee and other beneficiaries as defendants. In the case of a trust of a contractual promise, the beneficiary can sue the promisor if the trustee refuses, joining the trustee as a defendant. … In substance, the action involves the beneficiary compelling the reluctant trustee to sue by joining it as a defendant. For a discussion of the application of trusts law in this context, see B M Dwyer, ‘Trusts, Contracts and Covenants’ (1995) 14 University of Tasmania Law Review 143. 39.3.4 The decision in Trident would now be decided on the basis of the statutory exception to privity contained in s 48 of the Insurance Contracts Act 1984 (Cth), which was enacted after the facts of Trident arose, but before the decision of the High Court.

‘HIMALAYA CLAUSES’ AND PRIVITY OF CONTRACT 39.4C

New Zealand Shipping Co Ltd v A M Satterthwaite & Co Ltd [1975] AC 154

Court: Judicial Committee of the Privy Council Facts: A Himalaya clause in a bill of lading read that ‘no servant or agent of the employer … shall in any circumstances whatsoever be under any liability whatsoever’. In this case, when the stevedore, New Zealand Shipping Co, unloaded the ship, The Eurymedon, the goods were damaged due to the stevedore’s negligence. International rules of carriage of goods [page 995]

by sea discharged the carrier from liability if there was no claim made within a year. The owners did not commence the action within the year. Satterthwaite & Co sued for damages caused by the negligence of New Zealand Shipping Co. Issue: The issue before the Privy Council was whether New Zealand Shipping Co, as the stevedore, had the benefit of the Himalaya clause and was thus exempt from liability. Decision: A majority of the Privy Council (Lords Wilberforce, Hodson, and Salmon; Viscount Dilhorne and Lord Simon of Glaisdale dissenting) found in favour of New Zealand Shipping Co. Extract: The extract from Lord Wilberforce’s speech applies the principles set out by Lord Reid in Midland Silicones Ltd v Scruttons Ltd [1962] AC 446 to the facts of this case.

Lord Wilberforce The question in the appeal is whether the stevedore can take the benefit of the time limitation provision. The starting point, in discussion on this question, is provided by the House of Lords decision in Scruttons Ltd v Midland Silicones Ltd.96 There is no need to question or even to qualify that case insofar as it affirms the general proposition that a contract between two parties cannot be sued on by a third person even though the contract is expressed to be for his benefit. Nor is it necessary to disagree with anything which was said to the same effect in the Australian case of Wilson v Darling Island Stevedoring & Lighterage Co Ltd.97 Each of these cases was dealing with a simple case of a contract the benefit of which was sought to be taken by a third person not a party to it, and the emphatic pronouncements in the speeches and judgments were directed to this situation. But Midland Silicones left open the case where one of the parties contracts as agent for the third person: in particular Lord Reid’s speech spelt out, in four propositions, the prerequisites for the validity of such an agency contract. … The question in this appeal is whether the contract satisfies these propositions. …

Clause 1 of the bill of lading, whatever the defects in its drafting, is clear in its relevant terms. The carrier, on his own account, stipulates for certain exemptions and immunities: among these is that conferred by art III(6) of the Hague Rules which discharges the carrier from all liability for loss or damage unless suit is brought within one year after delivery. In addition to these stipulations on his own account, the carrier as agent for, inter alios, independent contractors stipulates for the same exemptions. Much was made of the fact that the carrier also contracts as agent for numerous other persons; the relevance of this argument is not apparent. It cannot be disputed that among such independent contractors, for whom, as agent, the carrier contracted, is the appellant company which habitually acts as stevedore in New Zealand by arrangement with the carrier and which is, moreover, the parent company of the carrier. The carrier was, indisputably, authorised by the stevedore to contract as its agent [page 996] for the purposes of cl 1. … The only question was, and is, the fourth question presented by Lord Reid, namely that of consideration. … If the choice, and the antithesis, is between a gratuitous promise, and a promise for consideration, as it must be, in the absence of a tertium quid, there can be little doubt which, in commercial reality, this is. The whole contract is of a commercial character, involving service on one side, rates of payment on the other, and qualifying stipulations as to both. The relations of all parties to each other are commercial relations entered into for business reasons of ultimate profit. To describe one set of promises, in this context, as gratuitous, or nudum pactum, seems paradoxical and is prima facie implausible. It is only the precise analysis of this complex of relations into the classical offer and acceptance, with identifiable consideration, that seems to present difficulty, but this same difficulty exists in many situations of daily life, eg sales at auction; supermarket purchases; boarding an omnibus; purchasing a train ticket; tenders for the supply of goods; offers of reward; acceptance by post; warranties of authority by agents; manufacturers’ guarantees; gratuitous bailments; bankers’ commercial credits. These are all examples which show that English law, having

committed itself to a rather technical and schematic doctrine of contract, in application takes a practical approach, often at the cost of forcing the facts to fit uneasily into the marked slots of offer, acceptance and consideration. In their Lordships’ opinion the present contract presents much less difficulty than many of those above referred to. It is one of carriage from Liverpool to Wellington. The carrier assumes an obligation to transport the goods and to discharge at the port of arrival. The goods are to be carried and discharged, so the transaction is inherently contractual. It is contemplated that a part of this contract, viz discharge, may be performed by independent contractors — viz [New Zealand Shipping Co]. By cl 1 of the bill of lading the shipper agrees to exempt from liability the carrier, his servants and independent contractors in respect of the performance of this contract of carriage. Thus, if the carriage, including the discharge, is wholly carried out by the carrier, he is exempt. If part is carried out by him, and part by his servants, he and they are exempt. If part is carried out by him and part by an independent contractor, he and the independent contractor are exempt. The exemption is designed to cover the whole carriage from loading to discharge, by whomsoever it is performed: the performance attracts the exemption or immunity in favour of whoever the performer turns out to be. There is possibly more than one way of analysing this business transaction into the necessary components; that which their Lordships would accept is to say that the bill of lading brought into existence a bargain initially unilateral but capable of becoming mutual, between the shippers and the stevedore, made through the carrier as agent. This became a full contract when the stevedore performed services by discharging the goods. The performance of these services for the benefit of the shipper was the consideration for the agreement by the shipper that the stevedore should have the benefit of the exemptions and limitations contained in the bill of lading. The conception of a ‘unilateral’ contract of this kind was recognised in Great Northern Railway Co v Witham98 and is well established. This way of regarding the matter is very close to, [page 997] if not identical to, that accepted by Beattie J in the Supreme Court; he

analysed the transaction as one of an offer open to acceptance by action such as was found in Carlill v Carbolic Smoke Ball Co. But whether one describes the shipper’s promise to exempt as an offer to be accepted by performance or as a promise in exchange for an act seems in the present context to be a matter of semantics. The words of Bowen LJ in Carlill v Carbolic Smoke Ball Co, ‘why should not an offer be made to all the world which is to ripen into a contract with anybody who comes forward and performs the condition?’99 seem to bridge both conceptions: he certainly seems to draw no distinction between an offer which matures into a contract when accepted and a promise which matures into a contract after performance, and, though in some special contexts (such as in connection with the right to withdraw) some further refinement may be needed, either analysis may be equally valid. On the main point in the appeal, their Lordships are in substantial agreement with Beattie J. … In the opinion of their Lordships, to give the stevedore the benefit of the exemptions and limitations contained in the bill of lading is to give effect to the clear intentions of a commercial document, and can be given within existing principles. They see no reason to strain the law or the facts in order to defeat these intentions. It should not be overlooked that the effect of denying validity to the clause would be to encourage actions against servants, agents and independent contractors in order to get round exemptions (which are almost invariable and often compulsory) accepted by shippers against carriers, the existence, and presumed efficacy, of which is reflected in the rates of freight. They see no attraction in this consequence.

[page 998]

Comment 39.4.1 See Radan, Gooley, and Vickovich at 39.47–39.65.

1.

[1966] 1 Ch 538.

2.

[1915] AC 847.

3. 4.

G Cheshire and C Fifoot, Cheshire and Fifoot on Contract, 6th ed, Butterworths, London, 1964, p 65. (1595) 78 ER 616.

5. 6.

(1669) 86 ER 5 at 6. Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847 at 853.

7. 8.

Vandepitte v Preferred Accident Insurance Corporation of New York [1933] AC 70 at 79. S Williston, Williston on Contracts, 3rd ed, vol 1, Lawyers Co-operative Publishing Co, Rochester, NY, 1972, s 114.

9. 10.

West v Houghton (1879) 4 CPD 197; Viles v Viles [1939] SASR 164; but cf Drimmie v Davies [1899] 1 IR 176. Cathels v Commissioner of Stamp Duties [1962] SR (NSW) 455 at 472.

11. 12.

Lloyd’s v Harper (1880) 16 Ch D 290 at 321. [1892] 1 QB 147 at 153, 157, 158.

13. 14.

Wilson v Northampton and Banbury Junction Railway Co (1874) 9 Ch App 279 at 284. Alley v Deschamps (1806) 33 ER 278 at 279.

15. 16.

R Flannigan, ‘Privity — The End of an Era (Error)’ (1987) 103 Law Quarterly Review 564 at 564–5, especially fn 6. Bourne v Mason (1669) 86 ER 5 at 6.

17. 18.

(1861) 121 ER 762. Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460 at 498.

19. 20.

Smith and Snipes Hall Farm Ltd v River Douglas Catchment Board [1949] 2 KB 500 at 514; White v John Warrick & Co Ltd [1953] 2 All ER 1021. Gandy v Gandy (1885) 30 Ch D 57 at 69.

21. 22.

[1915] AC 847. [1933] AC 70 at 79.

23. 24.

Vandepitte v Preferred Accident Insurance Corp of New York [1933] AC 70 at 79–80. Wilson v Darling Island Stevedoring & Lighterage Co Ltd (1956) 95 CLR 43 at 56, 67, 80, 91; Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460 at 478, 482–3, 486–7, 494.

25. 26.

Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847 at 853. Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460 at 494.

27.

B Coote, ‘Consideration and the Joint Promisee’ [1978] Cambridge Law Journal 301 at 309–10; M P Furmston, ‘Return to Dunlop v Selfridge?’ (1960) 23 Modern Law Review 373 at 383–5. West v Houghton (1879) 4 CPD 197; Viles v Viles [1939] SASR 164; but cf Drimmie v Davies [1899] 1 IR 176.

28. 29. 30.

Lloyd’s v Harper (1880) 16 Ch D 290 at 321. Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460 at 501.

31. 32.

Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460 at 502. [1975] 3 All ER 92.

33. 34.

Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460 at 478. Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460 at 503.

35.

Vandepitte v Preferred Accident Insurance Corp of New York [1933] AC 70 at 79–80.

36.

[1944] Ch 83 at 104.

37. 38.

Wilson v Darling Island Stevedoring & Lighterage Co Ltd (1956) 95 CLR 43 at 67. Robertson v Wait (1853) 155 ER 1360; Lloyd’s v Harper (1880) 16 Ch D 290; Les Affréteurs Réunis Société Anonyme v Leopold Walford (London) Ltd [1919] AC 801; Williams v Baltic Insurance Association of London Ltd [1924] 2nKB 282.

39.

A L Corbin, ‘Contracts for the Benefit of Third Persons’ (1930) 46 Law Quarterly Review 12, especially 17. A L Corbin, ‘Third Party Beneficiary Contracts in England’ (1968) 35 University of Chicago Law Review 544 at 549.

40. 41. 42.

Property Law Act 1974 (Qld), s 55(2), 55(3)(d). Property Law Act 1969 (WA) s 11(3). See also Westralian Farmers Cooperative Ltd v Southern Meat Packers Ltd [1981] WAR 241 at 246, 251.

43. 44.

Property Law Act 1974 (Qld), s 55(1), 55(6)(c)(ii). Tweddle v Atkinson (1861) 121 ER 762 at 764.

45. 46.

Beswick v Beswick [1968] AC 58. Greenwood Shopping Plaza Ltd v Beattie (1980) 111 DLR (3d) 257.

47. 48.

Wilson v Darling Island Stevedoring & Lighterage Co Ltd (1956) 95 CLR 43 at 80. Les Affréteurs Réunis Société Anonyme v Leopold Walford (London) Ltd [1919] AC 801; Vandepitte v Preferred Accident Insurance Corp of New York [1933] AC 70.

49. 50.

Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd (1985) 155 CLR 541. Vandepitte v Preferred Accident Insurance Corp of New York [1933] AC 70 at 79.

51. 52.

Harmer v Armstrong [1934] Ch 65. Port Jackson Stevedoring Pty Ltd v Salmond & Spraggon (Aust) Pty Ltd (1978) 139 CLR 231 (HC); (1980) 144 CLR 300 (PC).

53. 54.

Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1987) 8 NSWLR 270 at 287. [1981] WAR 241.

55. 56.

Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1987) 8 NSWLR 270 at 288. Carmichael v Carmichael’s Executrix 1920 SC (HL) 195 at 201.

57. 58.

Allan’s Trustees v Lord Advocate 1971 SC (HL) 45 at 54. Blumer & Co v Scott & Sons (1874) 1R 379 at 387.

59. 60.

Lawrence v Fox (1859) 20 NY 268. Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460 at 478, 502–3; Beswick v Beswick [1968] AC 58 at 82, 89, 101–2.

61.

Lloyd’s v Harper (1880) 16 Ch D 290; Wilson v Darling Island Stevedoring & Lighterage Co Ltd (1956) 95 CLR 43 at 67; Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460 at 501; Beswick v Beswick [1968] AC 58 at 101. Lloyd’s v Harper (1880) 16 Ch D 290; Woodar Investment Development Ltd v Wimpey Construction UK Ltd [1980] 1 All ER 571 at 576–7, 585, 588.

62. 63. 64.

Woodar Investment Development Ltd v Wimpey Construction UK Ltd [1980] 1 All ER 571 at 576–7. [1977] AC 774 at 847.

65. 66.

Alley v Deschamps (1806) 33 ER 278 at 279. Tatham v Huxtable (1950) 81 CLR 639 at 649.

67.

Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460 at 504.

68. 69.

Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387. Wilson v Darling Island Stevedoring & Lighterage Co Ltd (1956) 95 CLR 43 at 67.

70. 71.

Wilson v Darling Island Stevedoring & Lighterage Co Ltd (1956) 95 CLR 43 at 67. (1912) 2 SLT 50 at 52.

72. 73.

Olsson v Dyson (1969) 120 CLR 365 at 393. Olsson v Dyson (1969) 120 CLR 365 at 393.

74. 75.

Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460 at 478. Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460 at 494.

76. 77.

Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460 at 478–9, 486, 493. Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 at 452.

78. 79.

Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 at 227, 256–7; Australia & New Zealand Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662 at 673–4. Wilson v Darling Island Stevedoring & Lighterage Co Ltd (1956) 95 CLR 43 at 67.

80. 81.

Commissioner of Stamp Duties (Q) v Jolliffe (1920) 28 CLR 178 at 189. Royal Exchange Assurance v Hope [1928] Ch 179 at 185, 195.

82. 83.

K S Jacobs, Jacobs’ Law of Trusts in Australia, 5th ed, Butterworths, Sydney, 1986, pp 24–5. Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847 at 853.

84.

P S Atiyah, The Rise and Fall of Freedom of Contract, Oxford University Press, Oxford, 1979, pp 413– 14. E J Jacobs, ‘Judicial Reform of Privity and Consideration’ [1986] Journal of Business Law 466 at 467, n 12.

85. 86. 87.

[1968] AC 58 at 72. [1980] 1 All ER 571 at 588–9, 591.

88. 89.

[1983] 1 AC 598 at 611. Olsson v Dyson (1969) 120 CLR 365 at 393.

90. 91.

Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1987) 8 NSWLR 270 at 287. Tomlinson (A) (Hauliers) Ltd v Hepburn [1966] AC 451 at 470–1.

92. 93.

(1969) 120 CLR 365 at 393. Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 at 227–8, 255–6, 269.

94. 95.

Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 at 256. Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 at 256–7.

96. 97.

[1962] AC 446. (1956) 95 CLR 43.

98. 99.

(1873) LR 9 CP 16. Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 at 268.

[page 999]

40 ASSIGNMENT OF CONTRACTUAL RIGHTS AND LIABILITIES

INTRODUCTION 40.1 This chapter deals with situations where parties to a contract decide to assign to a third party their rights or obligations that arise under the contract. The essential feature of an assignment is the transfer of rights. The effect of the assignment is that there is an immediate transfer of existing rights from the party assigning those rights (known as the assignor), to the recipient (known as the assignee). At common law it was not possible to make an effective assignment of contractual rights other than through the use of devices such as a power of attorney and novation. Despite this, legislative provisions such as those set out in s 12 of the Conveyancing Act 1919 (NSW) now allow for a legal assignment of contractual rights. Contractual rights are choses in action. As discussed in Torkington v Magee [1902] 2 KB 427 (see 40.2C), choses in action are ‘personal rights of property which can only be claimed or enforced by action, and not by taking physical possession’. Assignable contractual rights can be assigned at law or in equity: Pacific Sport & Leisure Pty Ltd v Underworks Pty Ltd (2006) 149 FCR 395 at 404. For the assignment to be effective in law, the requirements of s 12 of the Conveyancing Act 1919 (NSW) (or its equivalents in other Australian jurisdictions1) must be satisfied. However, if the assignment is ineffective at law it may be assigned in equity in accordance with the principles of equitable

assignment of property, which are discussed by the High Court in Norman v Federal Commissioner of Taxation (1963) 109 CLR 9 (see 40.3C). In relation to the assignment of the right to litigate for breach of a contract, the general proposition is that such rights are not assignable on the public policy ground that such assignments savour of maintenance and champerty: Glegg v Bromley [1912] 3 KB 474. However, if, as was held in Trendtex Trading Corporation v Credit Suisse [1982] AC 679 (see 40.4C), the assignee has a genuine commercial interest in such an assignment, the assignment will be valid. [page 1000]

CONTRACTUAL RIGHTS AS CHOSES IN ACTION 40.2C

Torkington v Magee [1902] 2 KB 427

Court: King’s Bench Division Facts: Magee contracted to sell his reversionary interest in property to Rayner. Rayner subsequently assigned his interest under the contract to Torkington. Notice of this was given in writing to Magee. However, after the assignment to Torkington, Magee refused to perform the contract. Torkington, as assignee of the contract from Rayner, sought to enforce the contract against Magee. Magee defended the claim on the ground that Torkington was not entitled to sue because there had been no effective assignment pursuant to s 25(6) of the Supreme Court of Judicature Act 1873 (UK), since the contract was not a legal chose in action within the terms of that provision. Issue: The issue before the court was whether an executory contract of purchase under which each party has rights and responsibilities, but of which there had been no breach at the date of the assignment, was assignable pursuant to s 25(6) of the Supreme Court of Judicature Act 1873 (UK).

Decision: The Court (Alverstone CJ, Darling and Channell JJ) in a unanimous judgment delivered by Channell J found in favour of Torkington and upheld the validity of the assignment from Rayner to Torkington. Extract: The extract from the judgment delivered by Channell J discusses the scope of s 25(6) of the Supreme Court of Judicature Act 1873 (UK) and its application to the facts of this case.

Channell J We have, therefore, to consider the meaning of the expression ‘other legal chose in action’ in sub-s 6 of s 25 of the Judicature Act, 1873. In order to arrive at this meaning, I think it necessary to consider what is the object of the Act, and of the particular section of the Act in which the words are to be found. The Act provided for the amalgamation of the then existing superior Courts of Law and Equity with a view to the administration in the new Court of one system of law in place of the two systems previously known as Law and Equity, and the general scope of the Act was to enable a suitor to obtain by one proceeding in one Court the same ultimate result as he would previously have obtained either by having selected the right Court, as to which there frequently was a difficulty, or after having been to two Courts, in succession. … ‘Chose in action’ is a known legal expression used to describe all personal rights of property which can only be claimed or enforced by action, and not by taking physical possession. It is an expression large enough to include rights which it can hardly have been intended to be assignable by virtue of the sub-section in question, as, for instance, shares, which can only be transferred as provided by the Companies Acts. It is probably necessary. Therefore, to put some limit upon the generality of the words; but I think that the necessary limitation is shewn by … the words of sub-s 6 itself. I think the words ‘debt or other legal chose in action’ mean ‘debt or right which the common law looks on as not assignable by reason of its being a chose in action, but which a Court of Equity [page 1001]

deals with as being assignable’. That is the point of difference or variance between the rules of equity and common law which it is intended to deal with by this sub-section. … Now, the question we have to consider in the present case is whether an executory contract of purchase under which each party has rights and responsibilities, but of which there had been no breach at the date of the assignment, so that at that date no action could be brought upon the contract, but which, if occasion should ever rise to enforce it, must of necessity be enforced by action, is assignable by this sub-section as a ‘legal chose in action’. That it is a legal chose in action, and was so at the date of the assignment, cannot be denied; but the question is whether it is so within the meaning of the words as used in the sub-section. I think it is, because it is a case in which the assignee would, at any rate after giving notice of the assignment, have rights if the Act has not been passed. The Court of Equity would undoubtedly have recognised his right, and would have treated the assignor as being trustee for his assignee, and they would have given the assignee all the rights and remedies as against the assignor which they gave to [a beneficiary] against his trustee, and would have given him as against the other party to the contract all the rights and remedies which they gave to a [beneficiary] against a third person dealing with his trustee in reference to the subject matter of the trust after notice of the trust. … Here the contract is one to purchase a reversion. It is a class of contract in which the Court of Equity recognised the right of each party, vendor as well as the purchaser, to specific performance, and where the purchaser was entitle to specific performance he was recognized as having an equitable interest in the property. In that state of things he could assign the contract and his equitable interest thereunder without any objection arising from the law as to champerty. The fact that something subsequently happened which prevented his getting specific performance, or the fact that he elected to claim damages, would not take away the right which had vested in him, on notice of the assignment, to all the legal and other remedies for the chose in action. … I think that in the present case, where there was a contract of sale which gave [Rayner] an equitable interest in the property contracted to be sold, the assignment and notice gave [Torkington] a legal right to sue, not only for specific performance if he had a case for it, but also for damages if he either was driven or elected to take that remedy.

Comment 40.2.1 See Radan, Gooley, and Vickovich at 40.4.

ASSIGNMENTS IN EQUITY 40.3C Norman v Federal Commissioner of Taxation (1963) 109 CLR

9 Court: High Court of Australia Facts: In 1956 Norman purported to assign two items of property to his wife: first, was ‘all his right title and interest in and to the income being payable’ on a loan of £3000 owed [page 1002] to Norman, which the borrower was entitled to repay to Norman at any time and without notice; and second, was his interest in and dividends on certain shares in which Norman had an equitable interest as the beneficiary of a deceased estate. The assignments were by means of a voluntary deed. After the deed was executed, the shares were registered in Norman’s name. The Commissioner of Taxation argued that because the assignments were voluntary, they were ineffective on the basis that they involved future, not presently existing, property. (Future property can only be validly assigned if the assignee gives valuable consideration for the assignment.) If the Commissioner’s argument was correct, the interest on the loan (£450) and the dividends (£460) earned in the 1958 financial year constituted part of Norman’s taxable income, and not that of his wife. Issue: The issue before the High Court in relation to both

assignments was whether present or future property had been assigned. Decision: In relation to the dividends, the High Court (Dixon CJ, McTiernan, Windeyer, Menzies, and Owen JJ) unanimously held that the assignment was not effective because it involved an assignment of future income for which the assignee did not provide consideration. A bare majority (Dixon CJ, Menzies and Owen JJ; McTiernan and Windeyer JJ dissenting) came to the same conclusion in relation to the interest on the loan. Extract: The extract from the judgment of Menzies J illustrates the approach of the majority on the question of the interest on the loan. The extract from the judgment of Windeyer J illustrates the view of the court on the dividends as well as the minority view on the issue of the interest on the loan. Windeyer J also discusses in detail the principles relating to the assignment of property in equity.

Menzies J The debt was for no fixed term and the [borrower] was at liberty to repay it or any part of it at any time without notice. The lender was required to give eighteen months’ notice if he should require payment of the debt or any part of it and in that event interest was from the date of the notice reduced to 1½ per cent per annum. No notice in writing of the assignment was given to the [borrower]. It is common ground that the assignment did not operate as a legal assignment of interest or the taxpayer’s right to it, and the real question is whether there was an effectual equitable assignment of a right to interest. I do not think there was because what was assigned was not an existing right but was no more than a right which might thereafter come into existence and so could not be effectually assigned in equity without consideration. In general future property was not assignable at common law2 but in equity after-acquired property was assignable for value according to the principles stated by Lord Macnaghten in Tailby v Official Receiver3 but only for value notwithstanding the assignment was by deed.

[page 1003] If then interest that may arise under a contract has the character of a future rather than an existing right, the deed, lacking consideration, was not effective to entitle the assignee to the interest in question as and when it became due and payable. I regard interest which may accrue in the future upon an existing loan repayable without notice as having the character of a right to come into existence rather than of a right already in existence. … What was said in Horwood v Millar’s Timber and Trading Co Ltd has application here. There, the question of the assignability of wages to be earned arose and Warrington LJ, speaking, I think, without any reference to the Judicature Act, s 25(6), said: The assignment with which we have to deal is not the assignment of an actual debt, not the assignment of a chose in action which is in existence, but the assignment of a chose in action, wages which a man is going to earn, which may hereafter come into existence. Now the effect of that is nothing more than to create a contractual obligation between the two parties. That was stated by Lord Macnaghten in his speech to the House of Lords in Tailby v Official Receiver in these terms: ‘It has long been settled that future property, possibilities and expectancies are assignable in equity for value. The mode or form of assignment is absolutely immaterial provided the intention of the parties is clear. To effectuate the intention an assignment for value, in terms present and immediate, has always been regarded in equity as a contract binding on the conscience of the assignor and so binding the subject-matter of the contract when it comes into existence, if it is of such a nature and so described as to be capable of being ascertained and identified’.4 In other words, the real effect of such an assignment where property is not in existence is that it is carried into effect not because it passes the property, but because it is a contractual obligation binding upon the assignor, and one which can be specifically enforced if the contract and the subject-matter of it are sufficiently definite.5 Under the contract of loan now under consideration, there was no liability for or right to interest until it began to accrue in an annual period and in

1956 the borrowers were under no liability for and the lender had no right to interest for 1958. It is not that interest for 1958 was not payable in 1956; it is that in 1956 interest for 1958 was nothing but an expectancy. It appears to me that the entries which were made in the books of the firm, clearly enough with the approval of both the assignor and the assignee, accorded with the true legal position in that the taxpayer was credited with all interest falling due upon his loan and his account was then debited and his wife’s account was then credited with so much of the interest as was interest upon £3,000 of the debt. To put it shortly, there were gifts of interest paid but not a gift of interest to be paid.

Windeyer J The ultimate question in this case is whether before 1st July 1957 the taxpayer had effectually assigned his right to receive certain moneys that would otherwise have been receivable by him and been part of his income for the year ending on 30th June 1958. … [page 1004]

(i) As to attempted assignments of things not yet in existence: As it is impossible for anyone to own something that does not exist, it is impossible for anyone to make a present gift of such a thing to another person, however sure he may be that it will come into existence and will then be his to give. He can, of course, promise that when the thing is his he will make it over to the intended donee. But in the meantime he may change his mind and when the time comes refuse to carry out his promise, even though it were by deed. A court of law could not compel him to perform it. A court of equity would not. Courts of equity never had the objections to all agreements about future interests that, until the seventeenth century, were deeply rooted in the common law. Equity did not share the view that such agreements were void on the ground of maintenance. But things not yet in existence could only be the subject of agreement, not of present disposition. And, in relation to promises and agreements, equity has been faithful to its maxim that it does not come to

the aid of volunteers. For equity a deed does not make good a want of consideration. If we turn from attempted gifts of future property to purported dispositions of it for value, the picture changes completely. The common law objection remains. But in equity a would-be present assignment of something to be acquired in the future is, when made for value, construed as an agreement to assign the thing when it is acquired. A court of equity will ensure that the would-be assignor performs this agreement, his conscience being bound by the consideration. The purported assignee thus gets an equitable interest in the property immediately the legal ownership of it is acquired by the assignor, assuming it to have been sufficiently described to be then identifiable. The prospective interest of the assignee is in the meantime protected by equity. … [A] purported assignment of a thing before the thing exists can have no effect at law, except as a covenant or contract to assign. The earliest moment at which the property in the thing can actually pass is when it first becomes extant. …

(ii) As to assignments of choses in action: In Lampet’s Case, Coke spoke of ‘the great wisdom and policy of the sages and founders of our law, who have provided that no possibility, right, title, nor thing in action, shall be granted or assigned to strangers, for that would be the occasion of multiplying of contentions and suits’.6 It was a somewhat unsophisticated view of legal rights that led the common lawyers to classify choses in action and debts with mere possibilities, and to condemn all assignments of them as leading to maintenance. Assignment means the immediate transfer of an existing proprietary right, vested or contingent, from the assignor to the assignee. Anything that in the eye of the law can be regarded as an existing subject of ownership, whether it be a chose in possession or a chose in action, can today be assigned, unless it be excepted from the general rule on some ground of public policy or by statute. But a mere expectancy or possibility of becoming entitled in [page 1005]

the future to a proprietary right is not an existing chose in action. It is not assignable, except in the inexact sense into which … lawyers slipped when it is said to be assignable in equity for value. The distinction between a chose in action, which is an existing legal right, and a mere expectancy or possibility of a future right is of cardinal importance in this case, as will appear. It does not, in my view, depend on whether or not there is a debt presently recoverable by action because presently due and payable. A legal right to be paid money at a future date is, I consider, a present chose in action, at all events when it depends upon an existing contract on the repudiation of which an action could be brought for anticipatory breach. … It is settled that any assignment that satisfies the requirements of the statute is valid and fully effectual although it be voluntary. That is to say the law now provides a means whereby the legal owner of a chose in action may make a complete and perfect gift of it. That being so, and as equity does not perfect an imperfect gift, can there ever now be an effectual voluntary assignment unless all the statutory requirements are met? The question is not an easy one if a purely logical answer be sought. Equity intervened to assist the assignments of choses in action because they were not assignable at law. Now that they are, why, it may be asked, should equity aid imperfect attempts at voluntary assignments of them. On the other hand, it can be urged that the statute provides a method or machinery whereby assignment may be effected, but that it does not detract from the validity of any transaction that would have been effective in equity if it had occurred before the statute came into operation. … [T]he weight of authority is, I think in favour of the view that in equity there is a valid gift of property transferable at law if the donor, intending to make, then and there, a complete disposition and transfer to the donee, does all that on his part is necessary to give effect to his intention and arms the donee with the means of completing the gift according to the requirements of the law. I think therefore that, if a man, meaning to make an immediate gift of a chose in action that is his, executes an instrument that meets the requirements of the statute and delivers it to the donee, actually or constructively, he has put it out of his power to recall his gift. It is true that until notice is given to the debtor or person against whom the chose is enforceable at law, all the requirements of the statute have not been

complied with. But the notice can be given by the donee; and, if the donee has express or implied authority to give it, I think that equity would not allow the donor to deny the right of the donee to do so and so intercept his gift. I reach this conclusion with some hesitation. … But it accords, it seems to me with general principle. For these reasons I consider that, if the debt that the deed in this case purported to assign had been an existing chose in action assignable by the statutory procedure, the only question would be whether the assignor had purported to make an absolute assignment of it, and whether he did all that on his part had to be done to that end. …

(iii) As to assignments of part of a debt: It has been held that the statutory method of assignment is not available for the assignment of parts of debts or choses in action.7 There were some earlier decisions to the contrary; but they [page 1006] must be taken to be overruled. The later decisions should, I consider, be followed by this Court. They are in accordance with general principle. The conclusion does not depend simply on a literal interpretation of the statutory language and of the phrase ‘absolute assignment’. Before the statute an assignee was permitted to bring his action at law in the name of the assignor when he was seeking to recover a whole debt assigned to him. If a debt had been broken into parts this procedure was not appropriate. A creditor cannot recover a debt piecemeal in a court of law. Therefore, when part of a debt was assigned, proceedings to enforce the assignment had to be brought in a court of equity. And the assignee, not the assignor, would be the plaintiff in the suit. The assignor (the creditor) as legal owner, the debtor and any assignee of other parts of the debt were all necessary parties, so that all the obligations of the debtor and the rights of all persons interested in the fund might be established by the decree. This was the rule of the Chancery Court. It is still the law.8 As an assignment of part of a debt is still necessarily an equitable assignment, the question arises can it be made by way of gift; and, if so, how?

(iv)

As to whether consideration is required for the equitable assignment of a chose in action not assignable at law:

One might have expected that this would long ago have been authoritatively settled. But … Lord Evershed said in In re McArdle (dec’d) that the problem is ‘vexed and difficult’.9 … I do not think it necessary to discuss all the cases that were cited to us in argument, nor all those on this topic that I have read since then. I shall state the conclusions that I have reached on matters that are significant for the determination of the case before us. There are several senses in which the phrase ‘equitable assignment’ may be used; and the question, Is consideration necessary for an equitable assignment?, does not admit of a single short answer covering all of them. If the interest to be assigned is a creature of equity, such as the beneficial interest of a cestui que trust, then, apart from any statutory provisions, an assignment of it can, of course, only be effected in equity; for the common law does not know it. Any present assignment of such an interest, that is to say of a chose in equity, is therefore necessarily an equitable assignment. Such an assignment can be by way of gift; and, except that writing is required by s 9 of the Statute of Frauds, no formality is necessary beyond a clear expression of an intention to make an immediate disposition. In short, there is no reason at all why a person should not give away any beneficial interest that is his. … It is, of course, necessary that the transaction should take the form of, and be intended as, an immediate transfer of the beneficial interest of the assignor, as distinct from an agreement to assign it. The distinction is critical, for consideration is always necessary to attract the support of equity to a transaction that is a contract rather than a conveyance. … Turning, from assignments that are equitable because the property assigned is a chose in equity, to assignments that are equitable because the property assigned is a legal chose in action not assignable except by the aid of equity: It has been said that historically there could be [page 1007] no equitable assignment of a debt except for value. Whether this be correct

or not as a general proposition, it never meant that there must be consideration as now understood in the law of contract. An assignment in satisfaction, or part satisfaction, of an antecedent debt was taken in equity as made for value. And this was what had happened in case after case appearing in the reports in which assignments were upheld in equity before the Judicature Act. Whether equity would then give any aid to an assignment of a chose in action made for no value at all, but as a pure gift, is less clear. … It seems to me that, in principle, so far as a deed has any efficacy in connexion with equitable assignments, it is not that a deed takes the place of valuable consideration where that is needed to attract the aid of equity. Rather it is that, in cases where value is not so required but a clear expression of intention is, the delivery of a deed couched in terms of present gift manifests, in the best possible way, the intention of the assignor to make an immediate and irrevocable transfer. … An agreement to assign will be effective as an equitable assignment if it be for value; for then equity looks on that as done which ought to be done. But this does not mean that there cannot be in equity an actual assignment of a chose in action as distinct from an agreement to assign. I think there can, and that it can be by way of gift. In such a case equity enforces the assignment, not by compelling the assignor to do something, but by refusing to allow him to act in a way inconsistent with what he has done, that is by restraining him from derogating from his gift. His conscience becomes bound, not by value received, but because, as between him and the assignee, his gift was complete. … Why should consideration be said to be necessary to bind the conscience in the one case when it is not necessary in the other? Before 1873 a chose in equity and a chose in action were both transferable in equity and only in equity. The assignments were alike made effective because of the remedies that a court of equity could provide. To speak of equity not perfecting an imperfect gift seems beside the point where no gift could be made except in equity. To say that the donor must do everything that according to the nature of the property is necessary to transfer it means little when it is in law not transferable; for equity looks to the intent not the form. These considerations have added weight in the case of part of a debt; for a part of a debt never was assignable so as to be recoverable at law even

in an indirect way. It being necessary for the decision of this case to come to a conclusion on a vexed question, my conclusion is that the deed that [Norman] executed did not fail because it was voluntary. The whole of a debt being now voluntarily assignable under the statute, it would be a strange anomaly if a part could not be the subject of voluntary equitable assignment. To say, ‘you can give away the whole, but you cannot give away a part, for a part you must get a price’ would seem to contradict common sense. And I do not think it necessary to do so.

(v)

As to the facts:

… It is true too that the interest, to the extent of £450, that the deed assigned was not due and payable at the date of the deed. But a contract to pay a sum of money on a future [page 1008] day, call it interest or what you will, calculable in amount according to conditions presently agreed, is in my view a presently existing chose in action. As between the parties to a contract of money lent at interest the borrower is simply a debtor who must pay a sum or sums (called interest) that he has, for good consideration (the forbearance of the creditor) contracted to pay to his creditor at the time or times stipulated. Why should not the creditor before the date when this debt becomes due and payable, assign his right to receive payment on the due date? He could assign the whole under the statute.10 Why not part in equity? What he assigns is not, it seems to me, a right to arise in the future but a present contractual right to be paid at a future date a sum of money, to be calculated in the agreed manner. In Brice v Bannister, Lord Coleridge CJ said ‘that a debt to become due is a chose in action, is clear’.11 Interest on money lent is recoverable by action at law as a debt separate from the principal, as the common indebitatus count for interest shows. But it was urged this case is not like a case of a loan for a fixed term. What was owing might, it is pointed out, have been repaid by the partnership, or

reduced below £3,000, after the date of the deed of assignment and before 1st July 1957. As a matter of law, no doubt that is so. But it does not, I think, follow that [Norman] had for that reason no assignable right. He had a present right to be paid interest at a future date on the money he had lent, unless in the meantime the loan was repaid. [Norman] assigned the benefit of this contract, to the extent of £450 to become due conditionally in 1958, to his wife by the deed of 1956. I consider that the deed was an effectual equitable assignment. It operated, I think, upon its delivery as a deed. The assignee had notice of it and assented. It was valid and binding as between assignor and assignee. … Is a dividend that may become payable in the future upon shares presently held something that can be assigned in equity? Is it a present chose in action or a mere possibility? Is it property in existence, or something not in existence and therefore not capable of being assigned in the absence of consideration? I think it is the latter. The court will not compel directors to declare a dividend.12 A dividend is not a debt until it is declared. Until then it is in the eye of the law a possibility only. When it is declared it becomes a debt for which a shareholder who is on the register at the date of the declaration may sue. The companies paid the dividends to the registered holder of the shares, [Norman]. They knew nothing of the purported assignment. Depending perhaps in some cases on their articles of association, they might have paid the dividends directly to [Norman’s] wife had they been directed by him to do so. But, in the absence of consideration, such a direction would have been merely a revocable mandate, not an assignment. Dividends that may be declared are to my mind quite unlike the interest that will become due according to an existing contract of loan if the loan be not repaid.

[page 1009]

Comment 40.3.1 See Radan, Gooley, and Vickovich at 40.18–40.40.

ASSIGNMENT OF THE RIGHT TO LITIGATE FOR BREACH OF CONTRACT 40.4C Trendtex Trading Corporation v Credit Suisse [1982] AC 679 Court: House of Lords Facts: Trendtex sued the Central Bank of Nigeria (CBN) in relation to a letter of credit issued by CBN which the bank failed to honour. Trendtex then assigned its cause of action against CBN to Credit Suisse for a price of US$800,000. At that time Trendtex owed Credit Suisse a substantial sum of money, which Credit Suisse had no hope of recovering unless Trendtex’s claim against CBN succeeded. Five days later Credit Suisse assigned the cause of action to an unidentified third party for a price of US$1.1m. In the following month the case against CBN was settled for US$8m. Trendtex then sued Credit Suisse, claiming that the assignment of its contractual claim against CBN was void because it was an assignment of a bare right to litigate. Credit Suisse sought a stay of the proceedings on the ground that the matter was properly one to be heard by the courts of Switzerland because the proper law of the agreement between Trendtex and Credit Suisse was Swiss law. Issues: The main issue before the House of Lords was whether the proceedings should be heard by the Swiss courts, although the issue of the validity of Trendtex’s assignment to Credit Suisse was also raised. Decision: The House of Lords (Lords Wilberforce, Edmund-Davies, Fraser of Tullybelton, Keith of Kinkel, and Roskill) unanimously held that the English proceedings should be stayed because the validity of Trendtex’s assignment to Credit Suisse was a matter to be determined by the courts in Switzerland. Nevertheless, their Lordships observed that, had Credit Suisse not assigned Trendtex’s claim against CBN to the unidentified third party, the assignment by Trendtex to Credit Suisse would have been valid under English law. However, the further assignment to the third party rendered the earlier assignment invalid.

Extract: The extracts from the speech of Lord Roskill discuss the law relating to the assignment of the bare right to litigate and explain why, in the circumstances of this case, the assignment by Trendtex to Credit Suisse violated that law.

Lord Roskill My Lords, it is clear, when one looks at the cases upon maintenance in this century and indeed towards the end of the last, that the courts have adopted an infinitely more liberal attitude towards the supporting of litigation by a third party than had previously been the case. … [page 1010] My Lords, one of the reasons why equity would not permit the assignment of what became known as a bare cause of action, whether legal or equitable, was because it savoured of maintenance. If one reads the well known judgment of Parker J in Glegg v Bromley,13 one can see how the relevant law has developed. Though in general choses in action were assignable, yet causes of action which were essentially personal in their character, such as claims for defamation or personal injury, were incapable of assignment for the reason already given. But even so, no objection was raised to assignments of the proceeds of an action for defamation as in Glegg v Bromley, for such an assignment would in no way give the assignee the right to intervene in the action and so be contrary to public policy.14 My Lords, just as the law became more liberal in its approach to what was lawful maintenance, so it became more liberal in its approach to the circumstances in which it would recognise the validity of an assignment of a cause of action and not strike down such an assignment as one only of a bare cause of action. Where the assignee has by the assignment acquired a property right and the cause of action was incidental to that right, the assignment was held effective. Ellis v Torrington is an example of such a case. Scrutton LJ stated that the assignee was not guilty of maintenance or champerty by reason of the assignment he took because he was buying not in order to obtain a cause of action but in order to protect the property

which he had bought.15 But, my Lords, as I read the cases it was not necessary for the assignee always to show a property right to support his assignment. He could take an assignment to support and enlarge that which he had already acquired as, for example, an underwriter by subrogation.16 My Lords, I am afraid that, with respect, I cannot agree with the learned Master of the Rolls [Lord Denning] when he said in the instant case that ‘The old saying that you cannot assign a “bare right to litigate” is gone’.17 I venture to think that that still remains a fundamental principle of our law. But it is today true to say that in English law an assignee who can show that he has a genuine commercial interest in the enforcement of the claim of another and to that extent takes an assignment of that claim to himself is entitled to enforce that assignment unless by the terms of that assignment he falls foul of our law of champerty, which, as has often been said, is a branch of our law of maintenance. For my part I can see no reason in English law why Credit Suisse should not have taken an assignment to themselves of Trendtex’s claim against CBN for the purpose of recouping themselves for their own substantial losses arising out of CBN’s repudiation of the letter of credit upon which Credit Suisse were relying to refinance their financing of the purchases by Trendtex of this cement from their German suppliers. … If the assignment is of a property right or interest and the cause of action is ancillary to that right or interest, or if the assignee had a genuine commercial interest in taking the assignment and in enforcing it for his own benefit, I see no reason why the assignment should be struck down as an assignment of a bare cause of action or as savouring of maintenance. [page 1011] But, my Lords … [that] does not mean that … [the assignment by Trendtex to Credit Suisse] is not objectionable as being champertous, for it is not an assignment designed to enable Credit Suisse to recoup their own losses by enforcing Trendtex’s claim against CBN to the maximum amount recoverable. Though your Lordships do not have the agreement between Credit Suisse and the anonymous third party, it seems to me obvious, as already stated, that the purpose of [the assignment by Trendtex to

Credit Suisse] was to enable the claim against CBN to be sold on to the anonymous third party for that anonymous third party to obtain what profit he could from it, apart from paying to Credit Suisse the purchase price of US $1,100,000. In other words, the ‘spoils’, whatever they might be, to be got from CBN were in effect being divided, the first US $1,100,000 going to Credit Suisse and the balance, whatever it might ultimately prove to be, to the anonymous third party. Such an agreement, in my opinion, offends for it was a step towards the sale of a bare cause of action to a third party who had no genuine commercial interest in the claim in return for a division of the spoils, Credit Suisse taking the fixed amount which I have already mentioned.

Comments 40.4.1 See Radan, Gooley, and Vickovich at 40.52–40.54. 40.4.2 In relation to what is meant by a ‘genuine commercial interest’, in Project 28 Pty Ltd (Formerly Narui Gold Coast Pty Ltd) v Barr [2005] NSWCA 240 at [41], Ipp JA (Hodgson JA and Campbell AJA agreeing) said that it ‘must be distinct from the benefit that the person supporting the action seeks to derive from the litigation. It must be something beyond a mere personal interest in profiting from the outcome of the proceedings.’ In National Mutual Property Services (Australia) Pty Ltd v Citibank Savings Ltd (1995) 132 ALR 514 at 540, Lindgren J said that ‘the expression [genuine commercial interest] refers to a commercial interest which exists already or by reason of other matters, and which receives ancillary support from the assignment’.

1.

The equivalent provisions of this section in Australia are: Civil Law (Property) Act 2006 (ACT) s 205; Conveyancing Act 1919 (NSW) s 12; Law of Property Act 2000 (NT) s 182; Property Law Act 1974 (Qld) s 199; Law of Property Act 1936 (SA) s 15; Conveyancing and Law of Property Act 1884 (Tas) s 86; Property Law Act 1958 (Vic) s 134; Property Law Act 1969 (WA) s 20.

2. 3.

Lunn v Thornton (1845) 135 ER 587. (1888) 13 App Cas 523.

4.

Tailby v Official Receiver (1888) 13 App Cas 523 at 543.

5.

Horwood v Millar’s Timber and Trading Co Ltd [1917] 1 KB 305 at 315.

6. 7.

Lampet’s Case (1612) 77 ER 994 at 997. Williams v Atlantic Assurance Co [1933] 1 KB 81; Re Steel Wing Co Ltd [1921] 1 Ch 349.

8. 9.

See Performing Right Society Ltd v London Theatre of Varieties Ltd [1924] AC 1 at 14, 20, 30, 31. In re McArdle (dec’d) [1951] 1 Ch 669 at 673.

10. 11.

Walker v Bradford Old Bank Ltd (1884) 12 QBD 511. Brice v Bannister (1878) 3 QBD 569 at 573.

12. 13.

Bond v Barrow Haematite Steel Co (1902) 1 Ch 353. [1912] 3 KB 474 at 490.

14. 15.

See Glegg v Bromley [1912] 3 KB 474 at 488–9. Ellis v Torrington [1920] 1 KB 399 at 412–13.

16. 17.

See Compania Colombiana de Seguros v Pacific Steam Navigation Co [1965] 1 QB 101. Trendtex Trading Corporation v Credit Suisse [1980] QB 629 at 657.

INDEX References are to Introductions to Chapters, Extracts, and Comments to Extracts

A Abandonment of contract discharge, by …. 23.1, 23.5C quantum meruit …. 38.1, 38.4C Acceptance see also Offer appropriateness of rules …. 4.1 ‘battle of the forms’ cases …. 4.13C commencement of performance …. 4.8C communication of acceptance …. 4.2C, 4.10C overview …. 4.1, 4.6C postal acceptance rule …. 4.1, 4.10C exclusion of rule …. 4.12C extent of rule …. 4.11C telex messages …. 4.11C types of communications …. 4.11C reliance on offer …. 4.1, 4.9C Accord and satisfaction overview …. 23.1, 23.4C Account …. 2.2E Administration of justice contracts prejudicial to …. 27.1, 27.4C, 27.4.2 Advertisements invitations or offers …. 4.1, 4.2C

Affirmation overview …. 35.5C right to rescission, and …. 35.5C Agents misleading or deceptive conduct …. 15.1, 15.6C privity of contract, and …. 39.3C Agreements see also Commercial agreements; Family or social agreements acceptance see Acceptance ‘battle of forms’ cases …. 4.1, 4.13C informal agreements see Informal agreements offer see Offer overview …. 1.2E, 4.1 Anticipatory breach discharge of contract …. 24.1, 24.7C overview …. 24.1 Assignments choses in action …. 40.1, 40.2C, 40.3C contractual rights, as …. 40.2C common law …. 40.1, 40.2C effect of assignment …. 40.1 equity …. 40.1, 40.3C choses in action …. 40.2C, 40.3C consideration, and …. 40.3C future property …. 40.3C part of a debt …. 40.3C overview …. 40.1 rights to litigate …. 40.1, 40.4C genuine commercial interest …. 40.4C, 40.4.2 Assumpsit historical development …. 2.1, 2.2E

consideration …. 2.5E Slade’s Case …. 2.4C indebitatus assumpsit …. 2.2E Atiyah, P S …. 1.2E Auctions invitations to treat or offers …. 4.1, 4.4C without reserve …. 4.4C Australian Consumer Law commencement …. 21.1 misleading or deceptive conduct see Misleading or deceptive conduct overview …. 15.1, 21.1 unconscionable conduct …. 14.1, 19.1, 19.5C, 19.5.2 categories of conduct …. 19.5.2 remedies …. 19.5C unwritten law …. 19.5C unfair contract terms see Unfair contract terms

B Baker, J H …. 2.5E Barnett, R E …. 3.4E ‘Battle of the forms’ cases …. 4.1, 4.13C Bills of lading Himalaya clauses …. 39.4C incorporation of terms …. 10.1, 10.6C Breach of contract assignment of rights to litigate …. 40.1, 40.4C genuine commercial interest …. 40.4C, 40.4.2 auctions …. 4.4C damages see Damages discharge by breach see Discharge by breach

inducement to breach …. 37.1, 37.6C damages …. 37.1, 37.7C elements …. 37.6C justification defence …. 37.1, 37.7C minors’ contracts …. 9.1, 9.4C liquidated damages see Liquidated damages Brownsword, R …. 1.3E Business inexperience unconscionable bargains …. 19.3C

C Capacity to contract companies …. 9.1, 9.5C ultra vires …. 9.5C statutory provisions …. 9.5.2 minors …. 9.1 affirmation of contract …. 9.3C inducement to breach …. 9.4C necessities …. 9.2C overview …. 9.1 Carrying on a business specific performance …. 31.5C, 31.5.3 Causation misleading or deceptive conduct …. 15.1, 15.4C, 15.5C Certainty see also Completeness agreements to agree …. 5.1 good faith negotiations …. 5.1, 5.4C informal agreements …. 5.1, 5.5C categories of cases …. 5.5C, 5.5.2, 5.6C intention of parties …. 5.6C

sale of land …. 5.5.3 overview …. 5.1 principles …. 5.3.2 sufficient certainty …. 5.1, 5.3C Chattels specific performance …. 31.1, 31.3C Choses in action assignments …. 40.1, 40.2C, 40.3C Collateral contracts auctions …. 4.4C consistency requirement …. 10.1, 10.11C, 10.11.3 pre-contractual statements, as …. 10.1, 10.10C intention of parties …. 10.10.2 Commercial agreements certainty …. 5.1 government agreements …. 7.1 intention to create legal relations …. 7.1, 7.4C letters of comfort …. 7.1 Commercial contracts construction of terms …. 12.3C exclusion clauses …. 13.1, 13.2C implied good faith …. 11.1, 11.6C intention of parties …. 34.2C notice of termination …. 23.1, 23.2C reasonable period …. 23.2C Commercial leases specific performance …. 31.1, 31.5C unconscionable transactions …. 19.5C Common law assignments …. 40.1, 40.2C

damages for breach see Damages frustration of contract …. 25.1, 25.6C implied terms …. 11.1, 11.4C misrepresentation …. 14.1 mistake …. 16.1, 16.2C, 16.4C employment contracts …. 16.3C existence of subject matter …. 16.2C rescission …. 35.1, 35.2C Common law illegality see also Statutory illegality administration of justice, prejudicial to …. 27.1, 27.4C, 27.4.2 effects of illegality …. 28.1 tortious claims, and …. 28.4C, 28.5C unlawful purpose …. 28.2C, 28.3C overview …. 27.1, 27.2E, 34.3C policy rationales …. 27.1, 27.2E, 34.3C public policy, against …. 27.1, 27.3C, 27.4.2, 28.1 restraints of trade see Restraints of trade severance …. 28.1, 28.6C unlawful purpose …. 27.1, 28.1, 28.2C, 28.3C Companies capacity to contract …. 9.1, 9.5C statutory provisions …. 9.5.2 ultra vires …. 9.5C Compensation principle see Damages Competition and Consumer Act see also Australian Consumer Law restraints of trade …. 27.1 Completeness see also Certainty overview …. 5.1 sufficient completeness …. 5.1, 5.2C Conditions see also Warranties

discharge by breach …. 24.1, 24.2C, 24.3C, 24.4C frustration of contract …. 25.5C overview …. 24.2C, 24.3C test of essentiality …. 24.2C warranties, distinction …. 24.2C, 24.4C Conditions precedent discharge by agreement …. 23.1, 23.3C overview …. 23.3C, 24.3C substantial performance, and …. 22.2C, 22.3C, 22.4C Conditions subsequent overview …. 23.3C Consent theories …. 3.1, 3.4E Consideration adequacy of consideration …. 2.5E, 6.1 assignments in equity …. 40.3C bargain requirement …. 6.1, 6.2C definition …. 4.2C existing contractual duties …. 6.1, 6.5C, 6.5.3 failure of consideration …. 38.1, 38.5C, 38.7C restitution …. 38.5C, 38.7C total failure …. 38.5C, 38.7C forbearance to sue …. 6.1, 6.6C frustration of contract …. 25.6C historical development …. 2.1, 2.2E, 2.5E assumpsit declarations …. 2.5E delimitation attempts …. 2.5E mutual promises …. 2.5E joint promisees …. 6.3C, 6.3.2 movement from promisee …. 2.2E, 6.1, 6.3C, 6.3.2, 6.5C, 6.5.3 overview …. 6.1

part payment of debt …. 6.1, 6.6C, 6.6.2, 6.6.3 Pinnel’s Case …. 6.6C past consideration …. 6.1, 6.4C privity of contract, and …. 39.1, 39.2C promise, and …. 2.5E, 6.1, 6.2C public duties, performance …. 6.1 sufficient consideration …. 6.1 Construction of terms exclusion clauses …. 13.1, 13.2C four corners rule …. 13.5C general principles …. 13.2C liability in negligence …. 13.3C, 13.3.2, 13.4C general principles …. 12.2C intention of parties …. 34.2C objective meaning …. 12.1, 12.2C surrounding circumstances …. 12.2C, 12.3C overview …. 12.1, 12.2C parol evidence rule …. 12.1, 12.2C pre-contractual negotiations …. 12.2C, 12.4C reasonable endeavours …. 12.3C surrounding circumstances …. 12.1, 12.2C, 12.3C ambiguities …. 12.2C, 12.2.2 more than one meaning …. 12.2C United Kingdom …. 12.1 technical meanings …. 12.1 Constructive notice …. 19.4C Consumer contracts implied guarantees …. 11.1 unfair terms see Unfair contract terms Contract law

dispute resolution …. 1.3E facilitation of exchange …. 1.3E feminist perspectives …. 3.1, 3.5E functions …. 1.3E history see Historical development importance …. 1.1 overview …. 1.1, 1.2E protective function …. 1.3E Contract theory analytic questions …. 3.1, 3.2E categories of theories …. 3.2E consent theories …. 3.1, 3.4E contract, definition …. 1.2E economic efficiency …. 29.11C functions of contract law …. 1.3E mitigation …. 29.11C normative questions …. 3.1, 3.2E overview …. 3.1 promissory theories …. 3.1, 3.2E moral obligations …. 3.3E, 3.4E reliance theories …. 3.1, 3.2E rights-based theories …. 3.2E transfer theories …. 3.1, 3.2E consent theories …. 3.4E utilitarian theories …. 3.2E Contracts bargain element …. 1.2E breach of contract see Breach of contract definition …. 1.1, 1.2E formal contracts …. 8.1

formation see Formation of contract freedom and equality …. 1.3E oral contracts see Oral contracts overview …. 1.1, 1.2E privity of contract see Privity of contract terms see Terms of contract Contractual obligations see Contract theory Counter-offers overview …. 4.1, 4.6C requests for further information …. 4.1, 4.6C Covenants historical development …. 2.1, 2.2E sale of business …. 27.1 Custom and usage implied terms …. 11.1, 11.5C

D Damages see also Equitable damages; Liquidated damages assessment …. 29.1, 29.6C date for assessment …. 29.3C compensation principle …. 29.1, 29.3C date for assessment …. 29.1, 29.3C deceit …. 15.5C, 37.1, 37.2C fraudulent misrepresentation …. 37.2C, 37.3C exemplary damages …. 29.1, 29.2C international positions …. 29.2C rationale for rule …. 29.2C expectation interest …. 29.1 expectation loss …. 15.4C, 29.6C loss of chance …. 29.4C

non-economic loss …. 29.5C indemnity interest …. 29.1 indemnity loss …. 29.1, 29.7C rectification costs …. 29.7C, 29.7.3 inducing breach of contract …. 37.1, 37.7C loss of chance …. 29.1, 29.4C measure of damages …. 15.4C, 15.5C misleading or deceptive conduct …. 15.4C, 15.5C mitigation …. 29.1, 29.11C negligent misrepresentations …. 15.5C, 37.1, 37.4C non-economic loss …. 29.1, 29.5C disappointment and distress …. 29.5C mental distress …. 29.5.3 peace of mind …. 29.5C, 29.5.3 onus of proof …. 29.6C, 30.1 overview …. 29.1, 29.2C reliance interest …. 29.1, 29.6C reliance loss …. 15.4C, 29.6C onus of proof …. 29.6C wasted expenditure …. 29.6C remoteness …. 15.5C, 29.1, 29.5C, 29.8C, 37.5C contemplation test …. 29.9C foreseeability …. 29.8C, 29.9C, 29.10C Hadley v Baxendale …. 29.8C, 29.9C, 29.10C, 37.5C knowledge …. 29.8C, 29.9C mental distress …. 29.5.3 rules …. 29.8C, 29.9C, 29.10C special circumstances …. 29.8C, 29.9C torts …. 15.5C, 37.1, 37.5C type or kind of loss …. 29.10C

specific performance, and …. 31.1, 31.2C, 31.2.3 chattels …. 31.3C third parties …. 31.1, 31.2.3 third parties …. 31.1, 31.2.3, 39.2C torts …. 15.4C, 15.5C, 37.1 deceit …. 15.5C, 37.1, 37.2C, 37.3C exemplary damages …. 29.2C inducing breach of contract …. 37.1, 37.7C negligent misstatement …. 15.5C, 37.1, 37.4C remoteness of damage …. 15.5C, 37.1, 37.5C wasted expenditure …. 29.1, 29.6C onus of proof …. 29.6C Date for completion see Time stipulations Debt actions advantages …. 30.1 historical development …. 2.1, 2.2E available remedies …. 2.3C quid pro quo …. 2.2E, 2.5E Slade’s Case …. 2.4C instalment contracts …. 30.1, 30.5C historical development …. 2.3C mitigation, and …. 30.1, 30.6C onus of proof …. 30.1 overview …. 30.1 Debts part payments …. 6.1, 6.6C, 6.6.2, 6.6.3 Pinnel’s Case …. 6.6C Deceit accord and satisfaction …. 23.4C damages …. 15.5C, 37.1, 37.2C, 37.3C

elements …. 37.2C fraudulent representation …. 37.1, 37.2C, 37.3C historical development …. 2.2E overview …. 37.2C Deeds writing requirement …. 8.1 Defences change of position …. 38.6C illegality defence …. 27.1, 27.2E laches see Laches justification defence …. 37.7C Definitions consideration …. 4.2C contract …. 1.1, 1.2E, 21.1, 21.3C penalty …. 30.3C unjust contract …. 20.1, 20.2C Delay notices to complete …. 24.5C specific performance, and …. 31.1, 31.6C Detinue historical development …. 2.2E illegal contracts, and …. 28.5C Directors authority to contract …. 9.5C Disadvantage see Unconscionable transactions Discharge by agreement abandonment …. 23.1, 23.5C accord and satisfaction …. 23.1, 23.4C conditions precedent …. 23.1, 23.3C notice of termination …. 23.1, 23.2C

reasonable period …. 23.2C overview …. 23.1 subsequent agreements …. 23.1, 23.4C Discharge by breach actual breach …. 24.1, 24.7C anticipatory breach …. 24.1, 24.7C classification of terms …. 24.1, 24.2C intermediate terms …. 24.3C, 24.4C warranties …. 24.2C, 24.3C conditions or essential terms …. 24.1, 24.2C, 24.3C, 24.4C contractual right to terminate …. 24.1, 24.6C election …. 24.6C waiver of right …. 24.6C election not to terminate …. 24.1 intermediate terms …. 24.3C, 24.4C seriousness of breach …. 24.4C overview …. 24.1 ready and willing to perform …. 24.7C relief against forfeiture …. 24.1, 24.8C time stipulations …. 24.1, 24.5C unconscientious reliance …. 24.8C Discharge by frustration see Frustration Discharge by performance divisible contracts …. 22.1 exact performance …. 22.1, 22.2C, 22.4C amelioration of requirement …. 22.1 overview …. 22.1 part performance …. 22.1, 22.3C quantum meruit …. 22.2C, 22.3C substantial performance …. 22.1, 22.3C, 22.4C

extent of performance …. 22.4C Dispute resolution functions of contract law …. 1.3E Domestic agreements see Family or social agreements Duress economic duress …. 17.1, 17.2C, 17.4C, 17.5C elements …. 17.1, 17.2C, 17.4C goods, of …. 17.1, 17.5C meaning …. 17.1, 17.2C, 17.2.2 origins of doctrine …. 17.2C overbearing of will theory …. 17.4C overview …. 17.1 person, of the …. 17.1, 17.3C remedies …. 17.1 rescission …. 17.1, 35.1

E Economic efficiency theory …. 29.11C Efficiency theories …. 3.2E Election contractual right to terminate …. 24.6C knowledge requirement …. 24.6C overview …. 24.6C Employment contracts see also Personal services contracts implied terms …. 11.1, 11.3C mutual trust and confidence …. 11.4C ministers of religion …. 7.5C, 7.5.2, 7.5.3, 7.5.4 mistake …. 16.3C overview …. 1.2E restraints of trade …. 27.1, 27.6C

post-employment …. 27.8C, 27.8.2 repudiation of contract …. 27.8C, 27.8.2 unfair contracts …. 21.3C Enforcement informal agreements …. 5.1, 5.5C restraints of trade …. 27.5C, 27.6C Equitable damages assessment of damages …. 33.1, 33.2C historical background …. 33.1 Lord Cairns’ Act …. 33.1 overview …. 33.1 specific performance, and …. 33.1, 33.3C, 33.3.3 in lieu of …. 33.2C Equitable estoppel assumption or expectation …. 36.2C, 36.4C detriment …. 36.1, 36.2C, 36.3C, 36.4C development …. 36.1 elements …. 36.2C, 36.2.2, 36.2.3 forms of relief …. 36.1, 36.4C nature …. 36.2C overview …. 36.1, 36.2C part performance, and …. 36.2C promissory estoppel …. 36.1, 36.2C, 36.3C reliance-based relief …. 36.4C proprietary estoppel …. 36.1, 36.2C expectation-based relief …. 36.4C time stipulations …. 24.8C Equitable remedies damages see Equitable damages injunctions see Injunctions

rectification see Rectification rescission see Rescission specific performance see Specific performance Equity assignments …. 40.1, 40.2C constructive notice …. 19.4C laches see Laches mistake …. 16.1, 16.4C, 16.5C relief against forfeiture …. 24.8C relief against penalties see Penalties unconscionable transactions see Unconscionable transactions undue influence see Undue influence Essential terms see Conditions Estoppel equitable estoppel see Equitable estoppel forms of estoppel …. 36.3C, 36.4C Exclusion clauses construction of clauses …. 13.1, 13.2C four corners rule …. 13.5C general principles …. 13.2C liability in negligence …. 13.3C, 13.3.2, 13.4C incorporation by notice …. 10.1, 10.6C reasonable notice …. 10.7C incorporation by prior dealings …. 10.1, 10.8C incorporation by signature …. 10.4C misrepresentation …. 10.5C misleading or deceptive conduct …. 15.1, 15.2C negligence …. 13.1, 13.3C, 13.3.2, 13.4C overview …. 13.1 third parties …. 39.1, 39.4C

Exclusive dealing restraints of trade …. 27.1, 27.7C Exemplary damages breach of contract …. 29.1, 29.2C international positions …. 29.2C rationale for rule …. 29.2C Express terms see also Implied terms collateral contracts …. 10.1, 10.10C consistency requirement …. 10.11C, 10.11.3 intention of parties …. 10.10.2 discharge by agreement …. 23.2C incorporation by notice …. 10.1, 10.6C bills of lading …. 10.6C failure to read …. 10.6C reasonable notice …. 10.7C incorporation by prior dealings …. 10.1, 10.8C incorporation by signature …. 10.1, 10.4C failure to read …. 10.4C misrepresentation …. 10.4C, 10.5C oral contracts …. 10.1, 10.3C overview …. 10.1 parol evidence rule …. 10.1, 10.9C representations or terms …. 10.1, 10.2C intention of parties …. 10.2C, 10.3C

F Family or social agreements intention to create legal relations …. 7.1, 7.2C, 7.5C, 7.6C rebuttal of presumption …. 7.3C Feminism

‘ethics of care’ …. 3.5E perspectives on contract law …. 3.1, 3.5E Fixed sums see Debt actions; Liquidated damages Foreseeability remoteness of damage …. 29.8C, 29.9C, 29.10C Forfeiture, relief against overview …. 24.1, 24.8C time stipulations …. 24.8C Formal contracts implied terms …. 11.1, 11.2C, 11.3C writing requirement …. 8.1 Formation of contracts acceptance see Acceptance capacity see Capacity to contract certainty see Certainty completeness …. 5.1, 5.2C consideration see Consideration intention of parties …. 34.2C intention to create legal relations see Intention to create legal relations offer see Offer overview …. 4.1, 16.6C writing requirement see Writing requirement Fraud rescission …. 35.3C, 35.5C Fraudulent misrepresentation damages …. 37.1, 37.2C, 37.3C inducement to contract …. 37.3C overview …. 37.2C, 37.3C Fried, C …. 3.3E Frustration

common law, at …. 25.1, 25.6C consequences of frustration …. 25.1 statutory relief …. 25.1 destruction of subject matter …. 25.1, 25.4C, 25.5C elements …. 25.1, 25.2C, 25.3C failure of condition …. 25.5C failure of consideration …. 25.6C foreseeability …. 25.3C future obligations, and …. 25.1 implied terms …. 25.2C injunctions leading to …. 25.2C mutual mistake, and …. 25.2C, 25.3C non-occurrence of event …. 25.1, 25.5C overview …. 25.1 principles …. 25.2C, 25.3C recovery of payments …. 25.6C test for frustration …. 25.2C, 25.3C

G Gambling unconscionable transactions …. 19.1, 19.4C Good faith implied terms …. 11.1, 11.6C Good faith negotiations certainty, and …. 5.1, 5.4C overview …. 3.5E, 5.4C Government agreements …. 7.1 Guarantees unconscionable transactions …. 19.3C, 19.4C undue influence …. 18.1, 18.6C

wife as guarantor …. 18.5C, 18.6C Guest, A G …. 2.2E

H Historical development assumpsit …. 2.2E consideration …. 2.5E Slade’s Case …. 2.4C consideration …. 2.2E, 2.5E adequacy of consideration …. 2.5E delimitation attempts …. 2.5E covenant …. 2.2E debt actions …. 2.2E available remedies …. 2.3C quid pro quo …. 2.2E, 2.5E Slade’s Case …. 2.4C equitable damages …. 33.1 indebitatus assumpsit …. 2.2E Medieval actions …. 2.2E, 2.5E overview …. 2.1, 2.2E penalties …. 30.3C, 30.4C writing requirement …. 1.2E

I Illegality see Common law illegality; Statutory illegality Implied terms see also Express terms business efficacy …. 11.1, 11.2C, 11.3C common law, by …. 11.1, 11.4C custom and usage, by …. 11.1, 11.5C discharge by agreement …. 23.2C

employment contracts …. 11.1, 11.3C mutual trust and confidence …. 11.4C facts of the case, by …. 11.1, 11.2C, 11.3C formal contracts …. 11.1, 11.2C, 11.3C frustration of contract …. 25.2C good faith …. 11.1, 11.6C informal contracts …. 11.1, 11.3C law, by …. 11.1, 11.3C, 11.4C overview …. 11.1 presumed intention of parties …. 11.1, 11.2C statutory implication …. 11.1 Incompleteness see Completeness Indemnity loss damages …. 29.1, 29.7C Indebitatus assumpsit …. 2.2E Inducement to breach damages …. 37.1, 37.7C elements …. 37.6C justification defence …. 37.1, 37.7C minors’ contracts …. 9.1, 9.4C overview …. 37.1, 37.6C Infants see Minors’ contracts Informal agreements categories of cases …. 5.5C, 5.5.2, 5.6C enforcement …. 5.1, 5.5C intention of parties …. 5.1, 5.6C sale of land …. 5.5.3 Informal contracts see also Oral contracts implied terms …. 11.1, 11.3C Injunctions

discretionary factors …. 32.1 frustration of contract …. 25.2C overview …. 32.1, 32.2C personal services contracts …. 32.1, 32.4C restraints of trade …. 32.2C, 32.3C Instalment contracts debt actions …. 30.1, 30.5C historical development …. 2.3C Insurance contracts privity of contract, and …. 39.3C Intention to create legal relations commercial agreements …. 7.1, 7.4C family or social agreements …. 7.1, 7.2C, 7.5C, 7.6C rebuttal of presumption …. 7.3C government agreements …. 7.1 letters of comfort …. 7.1 ministers of religion …. 7.1, 7.5C, 7.5.2, 7.5.3, 7.5.4 objective approach …. 7.1, 7.3C, 7.5C, 7.5.4, 7.6C overview …. 7.1 presumptions …. 7.1, 7.5C, 7.5.4 commercial agreements …. 7.4C family or social agreements …. 7.2C, 7.3C, 7.5C, 7.6C Interference with contractual relations …. 37.6C Intoxication unconscionable transactions …. 19.2C Invitations to treat offers or invitations …. 4.1 advertisements …. 4.2C auctions …. 4.4C self-service stores …. 4.3C

tenders …. 4.5C

J Jurisdiction specific performance …. 31.1 Justification defence …. 37.7C

K Knowledge remoteness of damage …. 29.8C, 29.9C

L Laches specific performance, and …. 31.1, 31.6C Land see Sale of land contracts Language difficulties unconscionable transactions …. 19.3C Letters of comfort …. 7.1 Liquidated damages advantages …. 30.1 genuine pre-estimates …. 30.1, 30.2C, 30.2.3, 30.3C overview …. 30.1, 30.2C penalties, distinction …. 30.2C, 30.2.2, 30.3C, 30.4C Dunlop tests …. 30.3C Loss see Damages

M Maintenance and champerty …. 40.1, 40.4C Mental incapacity non est factum …. 16.8C, 19.2C

unconscionable transactions …. 19.2C Ministers of religion employment contracts …. 7.5C, 7.5.2, 7.5.3, 7.5.4 Minors’ contracts affirmation of contract …. 9.1, 9.3C inducement to breach …. 9.1, 9.4C necessities …. 9.1, 9.2C overview …. 9.1 restraints of trade …. 9.3C Misleading or deceptive conduct agents …. 15.1, 15.6C conduct constituting …. 15.1, 15.2C, 15.3C confusion or wonderment …. 15.3C erroneous assumptions …. 15.3C point of sale …. 15.3C silence …. 15.2C damages …. 15.4C, 15.5C exclusion clauses …. 15.1, 15.2C loss or damage …. 15.1, 15.4C causal connection …. 15.4C, 15.5C meaning …. 15.2C overview …. 14.1, 15.1 passing off, and …. 15.1, 15.3C reliance on conduct …. 15.2C remedies …. 15.1 loss or damage …. 15.1, 15.4C, 15.5C silence …. 15.1, 15.2C statutory provisions …. 15.1 Misrepresentation common law …. 14.1

fraudulent misrepresentation …. 37.1, 37.2C, 37.3C inducement to contract …. 37.3C future matters …. 14.2C inducement to contract …. 14.1, 14.3C, 14.4C, 14.5C innocent misrepresentation …. 10.2C, 10.3C materiality of statement …. 14.1, 14.6C negligent misrepresentation …. 15.5C, 37.1, 37.4C damages …. 15.5C, 37.4C overview …. 14.1 reliance …. 14.4C, 14.5C rescission …. 14.1, 35.1, 35.3C partial rescission …. 35.4C signature rule, and …. 10.1, 10.4C, 10.5C silence …. 15.2C statements of fact …. 14.1, 14.2C, 14.3C future matters …. 14.2C materiality of statement …. 14.6C opinions, as …. 14.4C Mistake common law …. 16.1, 16.2C, 16.3C, 16.4C common mistake …. 16.1, 16.2C, 16.4C employment contracts …. 16.3C equitable relief …. 16.4C, 16.5C existence of subject matter …. 16.2C frustration, and …. 25.2C, 25.3C rectification …. 34.1, 34.2C, 34.2.2 equity …. 16.1, 16.4C, 16.5C money payments …. 38.1, 38.5C, 38.6C restitution …. 38.5C, 38.6C non est factum …. 16.1, 16.8C

overview …. 16.1 rescission …. 16.1, 16.5C, 35.1 unilateral mistake …. 16.1 identity of parties …. 16.6C rectification …. 34.1, 34.4C terms of contract …. 16.7C Mitigation damages claims …. 29.1, 29.11C debt actions, and …. 30.1, 30.6C overview …. 29.11C theoretical justifications …. 29.11C Moral obligations promises …. 3.1, 3.3E, 3.4E Mulcahy, L …. 3.5E

N Necessities minors’ contracts …. 9.1, 9.2C Negligence exclusion clauses …. 13.1, 13.3C, 13.3.2, 13.4C misrepresentations …. 15.5C, 37.1, 37.4C damages …. 15.5C, 37.4C New South Wales Contracts Review Act see Unjust contracts frustrated contracts …. 25.1 restraints of trade …. 27.1 unfair contracts …. 21.1, 21.3C contract, definition …. 21.1, 21.3C employment contracts …. 21.3C

performance of work in an industry …. 21.3C scope of Commission’s power …. 21.4C, 21.4.2 writing requirement …. 8.1 Non est factum mental incapacity …. 16.8C, 19.2C overview …. 10.4C, 16.1, 16.8C signature …. 10.4C, 16.8C Notices discharge by agreement …. 23.2C incorporation of terms, by …. 10.1, 10.6C bills of lading …. 10.6C failure to read …. 10.6C reasonable notice …. 10.7C Notices to complete …. 24.5C Novation …. 40.1

O Offer see also Acceptance advertisements …. 4.1, 4.2C appropriateness of rules …. 4.1 ‘battle of the forms’ cases …. 4.13C auctions …. 4.1, 4.4C continuing offers …. 4.6C counter-offers …. 4.1, 4.6C requests for further information …. 4.1, 4.6C invitations to treat or offers …. 4.1 advertisements …. 4.2C auctions …. 4.4C self-service stores …. 4.3C tenders …. 4.5C

overview …. 4.1 rejection of offer …. 4.6C reliance on offer …. 4.1, 4.9C revocation of offer …. 4.1, 4.6C, 4.8C commencement of performance …. 4.8C communication requirement …. 4.7C tenders …. 4.1, 4.5C withdrawal of offer …. 4.7C commencement of performance …. 4.8C world at large …. 4.1, 4.2C Onus of proof damages …. 30.1 reliance loss …. 29.6C debt actions …. 30.1 Oral agreements sale of land …. 8.1 part performance …. 8.1, 8.3C Oral contracts see also Informal contracts; Restitution implied terms …. 11.1, 11.3C terms or representations …. 10.1, 10.3C

P Parol evidence rule application of rule …. 10.9C overview …. 10.1, 10.9C, 12.2C pre-contractual negotiations …. 12.1, 12.2C, 12.4C rectification, and …. 34.2C Part performance discharge of contract …. 22.1, 22.3C quantum meruit …. 22.2C, 22.3C

equitable estoppel, and …. 36.2C overview …. 8.3C payment of money …. 8.3C sufficient acts …. 8.3C Passing off misleading or deceptive conduct, and …. 15.1, 15.3C Penal bonds …. 30.3C Penalties definition …. 30.3C historical background …. 30.3C, 30.4C late payment fees …. 30.1, 30.3C, 30.4C liquidated damages, distinction …. 30.2C, 30.2.2, 30.3C, 30.4C Dunlop tests …. 30.3C overview …. 30.1, 30.2C, 30.3C, 30.4C parking charges …. 30.4C Performance see Discharge by performance; Part performance; Specific performance Personal services contracts injunctions …. 32.1, 32.4C restraints of trade …. 32.2C, 32.3C specific performance …. 31.1, 31.4C, 31.4.2, 32.4C Physical weakness unconscionable transactions …. 19.2C Pinnel’s Case …. 6.6C Postal acceptance rule exclusion of rule …. 4.1, 4.12C extent of rule …. 4.11C overview …. 4.1, 4.10C telex messages …. 4.11C types of communications …. 4.1, 4.11C

Pre-contractual negotiations misrepresentation see Misrepresentation parol evidence rule …. 12.1, 12.2C, 12.4C Prior dealings terms, incorporation by …. 10.1, 10.8C Privity of contract consideration, and …. 39.1, 39.2C criticisms of doctrine …. 39.1, 39.3C exceptions to doctrine …. 39.1, 39.3C agency …. 39.3C insurance contracts …. 39.3C trusts …. 39.3C unjust enrichment …. 39.3C Himalaya clauses …. 39.4C overview …. 39.1, 39.2C, 39.3C Trident case …. 39.3C Problem gambling unconscionable transactions …. 19.1, 19.4C Productivity Commission review consumer policy framework …. 21.1 unfair practices and conduct …. 21.2E unfair contract terms …. 21.1, 21.2E alternative approaches …. 21.2E benefits from policy action …. 21.2E consumer guidance …. 21.2E costs …. 21.2E implementation …. 21.2E potential rationales …. 21.2E unfairness, definition …. 21.2E Promises

consideration, and …. 2.5E, 6.1, 6.2C movement from promisee …. 2.2E, 6.3C, 6.3.2, 6.5C, 6.5.3 historical development …. 2.2E, 2.5E moral obligations …. 3.1, 3.3E mutual promises …. 2.5E overview …. 1.2E Promissory estoppel see Equitable estoppel Promissory theories moral obligations …. 3.1, 3.3E, 3.4E overview …. 3.1, 3.2E Promotional materials invitations to treat or offers …. 4.1, 4.2C Proprietary estoppel see Equitable estoppel Public policy contracts against …. 27.1, 27.3C, 27.4.2, 28.1 statutory illegality …. 26.3C, 28.2C, 28.3C restraints of trade …. 27.5C employment contracts …. 27.6C exclusive dealing contracts …. 27.7C

Q Quantum meruit abandonment of contract …. 38.1, 38.4C entire contracts …. 38.4C identification of benefit …. 38.1, 38.3C overview …. 38.1, 38.2C, 38.3C part performance …. 22.2C, 22.3C rationale of right to recover …. 38.2C Queensland equitable damages …. 33.1

R Rectification common intention …. 34.2C, 34.2.2, 34.3C common mistake …. 34.1, 34.2C, 34.2.2 intention of parties …. 34.2C outward expression of accord …. 34.2C parol evidence rule …. 34.2C illegality, and …. 34.1, 34.3C overview …. 34.1, 34.3C principles …. 34.2C unilateral mistake …. 34.1, 34.4C Reliance loss see Damages Reliance theories …. 3.1, 3.2E Relief against forfeiture …. 24.1, 24.8C Relief against penalties see Penalties Remedies damages see Damages; Equitable damages duress …. 17.1 equitable estoppel see Equitable estoppel historical development …. 2.2E instalment contracts …. 2.3C injunctions see Injunctions misleading or deceptive conduct …. 15.1 loss or damage …. 15.1, 15.4C, 15.5C rectification see Rectification rescission see Rescission restitution see Restitution specific performance see Specific performance statutory unconscionability …. 19.5C unconscionable conduct …. 19.5.2

unjust contracts …. 20.1 Remoteness of damage contemplation test …. 29.9C foreseeability …. 29.8C, 29.9C, 29.10C type or kind of loss …. 29.10C Hadley v Baxendale …. 29.8C, 29.9C, 29.10C, 37.5C knowledge …. 29.8C, 29.9C mental distress …. 29.5.3 overview …. 15.5C, 29.1, 29.5C, 29.8C, 37.5C rules …. 29.8C, 29.9C, 29.10C special circumstances …. 29.8C, 29.9C torts …. 15.5C, 37.1, 37.5C Representations see also Misleading or deceptive conduct; Misrepresentations overview …. 10.2C terms or representations …. 10.1, 10.2C, 10.3C intention of parties …. 10.2C, 10.3C Rescission affirmation, and …. 35.5C anticipatory breach …. 24.7C common law …. 35.1, 35.2C duress …. 17.1, 35.1 fraud …. 35.3C, 35.5C loss of right to rescind …. 35.1, 35.5C misrepresentation …. 14.1, 35.1, 35.3C, 35.4C mistake …. 16.1, 16.5C overview …. 35.1, 35.2C partial rescission …. 35.1, 35.4C restitutio in integrum …. 35.1, 35.2C common law and equity …. 35.2C meaning …. 35.2C

supplementary orders …. 35.1, 35.3C Restitution failure of consideration …. 38.1, 38.5C, 38.7C genuine commercial interest …. 38.7C, 38.7.2 total failure …. 38.5C, 38.7C formulation of principle …. 38.1 mistaken money payments …. 38.1, 38.5C, 38.6C change of position …. 38.6C overview …. 38.1, 38.2C quantum meruit …. 38.1, 38.2C, 38.3C abandonment of contract …. 38.1, 38.4C entire contracts …. 38.4C identification of benefit …. 38.1, 38.3C part performance …. 22.2C, 22.3C rationale of right to recover …. 38.2C Restraints of trade employment contracts …. 27.1, 27.6C post-employment …. 27.8C, 27.8.2 repudiation of contract …. 27.8C, 27.8.2 enforceability …. 27.5C, 27.6C, 27.7C exclusive dealing contracts …. 27.1, 27.7C minors’ contracts …. 9.3C overview …. 27.1, 27.5C personal services contracts …. 32.1 injunctions …. 32.2C, 32.3C public policy …. 27.5C, 27.6C, 27.7C sale of business …. 27.1 Rights-based theories …. 3.2E

S

Sale of goods contracts implied guarantees …. 11.1 Sale of land contracts informal agreements …. 5.5.3 oral agreements …. 8.1 part performance …. 8.1, 8.3C writing requirement …. 8.1 note or memorandum …. 8.1, 8.2C Self-service stores invitations to treat or offers …. 4.1, 4.3C Severance construction test …. 28.1, 28.6C overview …. 28.1, 28.6C Signature incorporation of terms, by …. 10.1, 10.4C failure to read …. 10.4C misrepresentation …. 10.4C, 10.5C non est factum …. 10.4C, 16.8C overview …. 10.4C Silence misleading or deceptive conduct …. 15.1, 15.2C misrepresentation …. 15.2C Slade’s Case …. 2.1, 2.2E, 2.4C Smith, S A …. 3.2E Social agreements see Family or social agreements Specific performance adequacy of damages …. 31.1, 31.2C, 31.2.3 chattels …. 31.3C third parties …. 31.1, 31.2.3 carrying on a business …. 31.5C, 31.5.3

chattels …. 31.1, 31.3C constant court supervision …. 31.1, 31.5C carrying on a business …. 31.5C, 31.5.3 delay …. 31.1, 31.6C discretionary factors …. 31.1 equitable damages, and …. 33.1, 33.3C, 33.3.3 in lieu of …. 33.2C jurisdiction …. 31.1 laches …. 31.1, 31.6C overview …. 31.1, 31.2C, 32.1 personal services contracts …. 31.1, 31.4C, 31.4.2, 32.4C readiness and willingness …. 31.1, 31.7C, 31.7.2 third parties …. 31.1, 31.2.3, 39.2C Spouses see also Family or social agreements undue influence …. 18.1, 18.5C wife as guarantor …. 18.5C, 18.6C Standard form contracts overview …. 21.1 unfair terms see Unfair contract terms Statutory illegality see also Common law illegality categories of cases …. 26.6C construction of statute …. 26.1, 26.3C, 26.4C, 26.6C effects of illegality …. 26.6C, 28.1 tortious claims, and …. 28.4C, 28.5C unlawful purpose …. 28.2C, 28.3C express illegality …. 26.1, 26.2C, 26.3C, 26.5C, 26.6C, 28.1, 28.2C implied illegality …. 26.3C, 26.4C, 26.5C, 26.6C, 28.1, 28.2C overview …. 26.1, 26.3C, 34.3C policy rationales …. 27.2E principles …. 26.3C, 26.6C

public policy …. 26.3C, 28.2C, 28.2C rectification, and …. 34.3C severance …. 28.1, 28.6C underlying rationale …. 26.1 unlawful purpose …. 28.2C, 28.3C, 34.3C Statutory unconscionability categories of conduct …. 19.5.2 overview …. 14.1, 19.1, 19.5C, 19.5.2, 21.2E remedies …. 19.5C unwritten law …. 19.5C Subject to contract categories of cases …. 5.5C, 5.5.2, 5.6C enforcement …. 5.1, 5.5C intention of parties …. 5.1, 5.6C sale of land …. 5.5.3 Substantial performance discharge of contract …. 22.1, 22.3C, 22.4C extent of performance …. 22.4C

T Tenders invitations to treat or offers …. 4.1, 4.5C Termination of contract see Discharge by agreement; Discharge by breach; Discharge by performance; Frustration Terms of contract classification of terms …. 24.1, 24.2C, 24.3C, 24.4C conditions see Conditions construction of terms see Construction of terms essential terms see Conditions express terms see Express terms

implied terms see Implied terms intermediate terms …. 24.1, 24.3C, 24.4C mistake …. 16.7C unfair terms see Unfair contract terms warranties see Warranties Third parties see Assignments; Privity of contract Threats see Duress Time stipulations discharge by breach …. 24.1, 24.5C, 24.8C overview …. 24.5C unconscientious reliance …. 24.8C Torts causing loss by unlawful means …. 37.6C concurrent liability …. 37.1, 37.5C damages …. 15.4C, 15.5C, 37.1 deceit …. 15.5C, 37.1, 37.2C, 37.3C exemplary damages …. 29.2C inducing breach of contract …. 37.1, 37.7C negligent misstatement …. 15.5C, 37.1, 37.4C remoteness of damage …. 15.5C, 37.1, 37.5C deceit …. 37.2C damages …. 15.5C, 37.1, 37.2C fraudulent misrepresentation …. 37.1, 37.2C, 37.3C historical development …. 2.2E detinue …. 2.2E illegal contracts, and …. 28.5C interference with contractual rights …. 37.6C fraudulent misrepresentation …. 37.1, 37.2C, 37.3C inducement to contract …. 37.3C historical development …. 2.2E

illegal contracts, and …. 28.1, 28.4C, 28.5C inducing breach of contract …. 37.1, 37.6C damages …. 37.7C elements …. 37.6C justification defence …. 37.7C minors’ contracts …. 9.1, 9.4C negligent misstatement …. 15.5C, 37.1, 37.4C damages …. 15.5C, 37.1, 37.4C passing off…. 15.3C misleading or deceptive conduct, and …. 15.1, 15.3C remedies …. 37.1 Transfer theories consent theories …. 3.4E overview …. 3.1, 3.2E Trespass historical development …. 2.2E Trusts privity of contract, and …. 39.3C

U Ultra vires doctrine …. 9.5C Uncertainty see Certainty Unconscionable transactions see also Equitable estoppel; Statutory unconscionability; Unjust contracts business inexperience …. 19.3C elements …. 19.1, 19.4C overview …. 19.1, 19.3C, 19.5C remedies …. 19.5.2 rescission …. 35.1 special disadvantage …. 19.1, 19.3C, 19.4C, 19.5C, 19.5.2

constitutional disadvantage …. 19.5C intoxication …. 19.2C language difficulties …. 19.3C mental incapacity …. 19.2C physical weakness …. 19.2C problem gambling …. 19.4C situational disadvantage …. 19.5C undue influence, distinction …. 19.3C Undue influence husband and wife …. 18.5C, 18.6C independent advice …. 18.2C, 18.4C overview …. 18.1, 18.2C, 18.3C presumed undue influence …. 18.1, 18.2C, 18.3C characteristics of relationship …. 18.2C husband and wife …. 18.5C rebuttal of presumption …. 18.4C recognised relationships …. 18.2C, 18.3C principles …. 18.2C, 18.3C rebuttal of presumption …. 18.1, 18.4C rescission …. 35.1 third party guarantees …. 18.1, 18.6C wife as guarantor …. 18.5C, 18.6C Yerkey v Jones …. 18.5C, 18.6C unconscionable conduct, distinction …. 19.3C Unfair contract terms application of provisions …. 21.1 overview …. 21.1 Productivity Commission review …. 21.1, 21.2E alternative approaches …. 21.2E benefits from policy action …. 21.2E

consumer guidance …. 21.2E costs …. 21.2E implementation …. 21.2E potential rationales …. 21.2E unfairness, definition …. 21.2E United Kingdom …. 30.4C Unfair contracts contract, definition …. 21.1, 21.3C employment contracts …. 21.3C overview …. 21.1, 21.3C performance of work in an industry …. 21.3C scope of Commission’s power …. 21.4C, 21.4.2 United Kingdom exemplary damages …. 29.2C illegality defence …. 27.1, 27.2E policy rationales …. 27.2E unfair contract terms …. 30.4C Unjust contracts application of Act …. 20.1 evaluation process …. 20.1, 20.2C, 20.3C relevant factors …. 20.2C, 20.3C overview …. 20.1, 20.2C, 21.2E public interest …. 20.2C purpose of Act …. 20.2C remedies …. 20.1 unjust, definition …. 20.1, 20.2C Unjust enrichment see also Restitution privity of contract, and …. 39.3C Unlawful contracts see Common law illegality; Statutory illegality Utilitarian theories

efficiency theories …. 3.2E overview …. 3.2E

W Waiver contractual right to terminate …. 24.6C Warranties see also Conditions breach of warranty …. 10.2C, 24.1, 24.3C collateral warranties …. 10.10C conditions, distinction …. 24.2C, 24.4C overview …. 24.2C, 24.3C representations or terms …. 10.2C, 10.3C Writing requirement formal contracts …. 8.1 historical background …. 1.2E overview …. 8.1 parol evidence rule …. 10.9C sale of land contracts …. 8.1 note or memorandum …. 8.2C part performance …. 8.3C

Related LexisNexis Titles Companion Book Radan, Gooley & Vickovich, Principles of Australian Contract Law, 4th ed, 2017 Other Books on Contract Butler, LexisNexis Questions and Answers: Contract Law, 5th ed, 2014 Carter, Contract Law in Australia, 6th ed, 2013 Carter, Cases and Materials on Contract Law in Australia, 6th ed, 2011 Carter, Carter’s Guide to Australian Contract Law, 3rd ed, 2016 Carter, Quick Reference Card: Contract Law I, 2nd ed, 2015 Carter, Quick Reference Card: Contract Law II, 2nd ed, 2015 Croese, LexisNexis Glance Card Contract Law at a Glance, 2015 Giancaspro & Langos, Understanding Contract Law, 2016 Mellick & Newlyn, LexisNexis Study Guide: Contract Law, 2015 Seddon & Bigwood, Cheshire & Fifoot Law of Contract, 11th ed, 2017 Smith, LexisNexis Case Summaries: Contracts, 7th ed, 2011 Thampapillai, Bozzi & Bruce, Contract Law: Text and Cases, 2nd ed, 2016

Wiseman, Backstrom & Trowse, Focus: Contracts, 4th ed, 2011