Law Notes > LAWS1075 - Contract Law Notes
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Introduction to Express Terms - 3 -
Written Terms and Signature - 3 -
Identifying terms in an electronic contract - 4 -
Identifying Express Terms - 4 -
Incorporation by a course of dealing - 6 -
Interpretation of the Express terms - 7 -
The use of extrinsic material - 7 -
Parol Evidence Rule and Construction - 8 -
The process of interpretation - 8 -
In Law or In Fact or From Custom - 9 -
Implied by custom (impossible to prove) - 10 -
Implied by fact (Byrne v Australian Airlines; Frew v Australian Airlines) - 10 -
Australian Consumer Law - 11 -
Competition and Consumer Act 2010 (Cth) sched 2 - 11 -
Termination by subsequent agreement - 13 -
Termination inferred from subsequent agreement - 14 -
Termination by abandonment - 14 -
For Breach of a Condition - 14 -
For Breach on an Intermediate Term - 15 -
Termination for failure of a contingent condition - 17 -
Restrictions on Termination - 20 -
Consequences of Affirmation/termination - 20 -
Outline of an answer on Termination - 22 -
Law Against Unfair and Unjust Contract Terms - 23 -
Damages for Breach of Contract - 26 -
Map of the General Principles - 27 -
The Compensation Principle - 27 -
Expectation Damages – Compensation - 27 -
Limitations to Recovering Damages - 29 -
Causation and Remoteness - 29 -
Issues when assessing damages - 29 -
Agreed Remedies and Penalties - 30 -
Vitiating Factors and Rescission - 34 -
General law misrepresentation - 38 -
Misleading or Deceptive Conduct under Statute - 40 -
General Law Unconscionable Dealing - 43 -
Statutory Prohibitions on Unconscionable Conduct - 44 -
Terms of a contract determine what the parties have agreed to do by way of performance to their contract
The objective approach in assessing parties’ intentions:
“the intention which reasonable persons would have had if placed in the situations of the parties” (Reardon Smith Line v Hansen-Tangen)
What are the terms of a contract?
The provisions and obligations of the contracts – find them
The scope of the performance that is necessary
What damage was caused by the breach of contract
Express terms may be incorporated:
By signature
By adequate notice
By a course of dealing
Under the principle established in the ticket cases
Statements made orally during negotiations may also be incorporated into a contract
Written terms and the effect of signature
General rule (L’estrange v Graucob; Toll (FGCT) v Alphapharm)
A party will be bound by the terms contained in a contractual document which they have signed, irrelevant of if they’ve read the document
The agency issues
A method of overcoming the requirements of privity in a commercial context
Circumstances in which the effect of signature may be avoided
The rule in L’estrange v Graucob does not apply where the signature was induced by misrepresentations of the nature or scope of obligation, or fraud, or in some cases of mistake
Also, where the document cannot reasonably be considered a contractual document, for instance if it appears to have another function, like a receipt (Curtis v Chemical Cleaning & Dyeing)
Nonesfacto (latin: this is not my document) – it is clear that someone cannot read a document
Incorporation of terms by notice
It is not uncommon for one party to allege that the contract contains terms which have been displayed or delivered before or at the time of the transaction
Whether or not the party will be bound depends upon whether:
The terms were available to the party to be bound by those terms before the contract was made
Reasonable steps were taken to bring the terms to the notice of the party to be bound
Timing
For delivered or displayed terms to form part of a contract they must be available to the party to be bound before the contract is made (Oceanic Sun Line Special Shipping Company v Fay)
Knowledge or Notice (Thornton v Shoe Lane Parking)
If the timing requirement is satisfied, a party will be bound by delivered or displayed terms if they have either knowledge or reasonable notice of the terms
If a party knows that the relevant document contains contractual terms, they will be bound by those terms
In the absence of knowledge, a party will be bound by delivered or displayed terms if they had reasonable notice of the terms
Reasonable notice depends on the type of contract
Was notice given? Was it adequate timing before formation?
Electronic Transaction Act 2000 (NSW)
Signatures
A method is used to identify if a person and to indicate the persons intention in respect of the information communicated
The method used was either:
As reliable as appropriate for the purposes for which the electronic communication was generated or communicated
Proven to the fact to have fulfilled the functions described in paragraph A (above)
The person to whom the signature is required to be given consents to that requirement being met by the way of the use of the method mentioned in paragraph a
Identify the terms
Express terms written document, displayed terms of use
Implied terms
Written documents
Consider the method of incorporation of terms?
By signature
Is it a contractual document?
By notice (if the document is not contractual)
Is the notice sufficient?
Timing - For delivered or displayed terms to form part of a contract they must be available to the party to be bound before the contract is made (Oceanic Sun Line Special Shipping Company v Fay)
Knowledge - a party will be bound by delivered or displayed terms if they have either knowledge or reasonable notice of the terms (Thornton v Shoe Lane Parking)
Includes reference of other terms
Oral agreements, additional documents, advertising promises
Is the contract conclusive?
No oral statements and extrinsic material is included
What is meant by parol evidence everything that is not the document
What is the rationale of the rule? to give effect to the intentions of the parties
What is the parole evidence rule? a circle statement
If the contract is whole in writing, then extrinsic material cannot be used
Therefore, the PER does not apply (State railway Authority)
Statements made during negotiations
Parties negotiating a contract may make statements about matters relating to the contract
If one of the statements is false, the party to whom it was made can seek legal remedy
Promissory: and this a term of the contract, then there will be a remedy for breach of contract
Representation: not part of the contract, relief must be sought under the law relating to misrepresentation
To determine if a statement proves part of a contract:
Consider whether evidence of the purported term is admissible to the court
Parole evidence rule limits the extent to which extrinsic evidence is available to “add to or vary” the terms of a contract
Courts must determine if parties would have intended the statement to form part of the contract.
Entire agreement clauses
Parties may expressly clarify their intention for a contract to be wholly in writing through a merger or entire contract clause
Which states that the written contract contains the entire agreement of the parties
Therefore, the PER does not apply because all the terms are in the contracts written document and cannot rely on extrinsic material
The parol evidence rules
The evidence available to the court will be important in identifying the terms that form part of the contract and the construction given to those terms
Common law: regards contracts that the parties have reduced to writing as being in a special category, and severely limits the kind of evidence outside the written document
Consists of two parts:
It prevents extrinsic evidence being given to add to, vary or contradict the terms of the contract – the ambit of the contract
Limits the evidence that might be given to explain the meaning of those terms
Evidence included
Any evidence extrinsic to the contract
In writing
Oral conversation
Letters
Early drafts
Can extrinsic evidence be used to determine whether a contract is wholly in writing? (Corbin on contracts; state railway authority of NSW v Health Outdoor)
The parol evidence rule only applies to contracts wholly in writing
Therefore, will not apply to exclude evidence of the oral terms of a contract that are only partly in writing
Exceptions to the parol evidence rule in identifying terms – Cases in which extrinsic material is admissible
Collateral contracts
What is a collateral contract?
A collateral contract is a contact the consideration for which is entry into another contract (Mann v Nunn)
Specific type of contract that is the entry into another agreement
EG looking for an apartment but the oven is broken and the guy showing the apartment says that hell fix it if you sign the contract, so you do but he never does – the oral agreement is not a part of the main contract
EG if you sign this then ill give you $100
Contract made when one party makes a promise, connected to but independent of a main contract
Parol evidence rule does not work to exclude evidence of a collateral contract
Requirements for establishing a collateral contract (Heilbut Symons & Co v Buckleton)
Must be strictly proven
Lighter burden if alleged contract deals with a subject matter that one would not naturally expect in the main contract (Shepperd v Municipality of Ryde)
Must be made as a promise
Must be intended to induce entry into the contract (JJ Savage & Sons Pty Ltd v Blakney)
Must be consistent with the terms of the main contract (Hoyt’s Pty Ltd v Spencer)
Estoppel
Divided to if the PER precludes the admission of extrinsic material for the purpose of establishing an estoppel
(Saleh v Romanous) yes to estoppel
(Australian Co-operative foods v Norco Co-operative) no to estoppel
When is a statement a term of a contract?
Oral statement prove intentions objectively
Promises/terms/warranties (incorporated into contract)
D a binding promise
Legal Effect promissory statements are incorporated into the contract
Remedies damages in tort
Mere representation (not binding, have no legal affect in contract law)
D statements which induce entrance into a contact but are not guaranteed by their maker
Remedies recession, damages in tort, remedies under the ACL
Legal Effect no contractual effect – it may give rise to an estoppel or be tortious
Puffs – making something seem better than it is – advertising (does not induce entry into a contract)
D laudatory statements which are not intended to be taken seriously
Legal Effect no contractual effect
Judged objectively by the courts
Potentially relevant factors: (Equuscorp v Glengallen Investments; JJ Savage & Sons v Blakney; Oscar Chess v Williams; Dick Bentley Productions v Harold Smith (Motors))
Significance of a written contract
Language used (Oscar Chess v Williams; Dick Bentley Productions v Harold Smith (Motors))
Relevant expertise of the parties (JJ Savage & Sons v Blakney; Oscar Chess v Williams)
Importance of the statement
Timing of the statement
Form of the written contract
A term can be incorporated by a course of dealing if there are enough facts to establish that a course of dealing has been established enough time that it is incorporate (Renaldo)
Therefore, if a you walk past a sign every day, then 30 days later there is a storm and the sign is washed away, the sign has been incorporated into a course of dealing enough time to count
criteria:
Regular
Uniform
Test:
Was sufficient notice given?
Objective test: reasonable person would have had notice
Construction (contractual interpretation)
the process by which a court determines the meaning and legal effect of the terms of the contract agreed by the parties – this is with the presumption that the parties intended to say that which they have said
Meaning of words assessed objectively: - 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” (Chartbrook Ltd v Persimmon Homes Ltd)
Pacific Carriers Ltd v BNP Paribas – highlights the implications with adopting the objective approach
How is the intention of the parties determined?
The intention of the parties is ascertained from the words they have used or their contract
The question is not what the parties meant to say or what the other party actually understood to have been intended. It is what the meaning of what the parties have said
Courts will have regard to: (Arnold v Britton)
The natural and ordinary meaning of the clause
Any other relevant provisions of the contract
The overall purpose of the clause and the contract
The facts and circumstances known or assumed by the parties at the time the document was executed – to the extent that these surrounding circumstances are admissible
Commercial common sense
Disregarding subjective evidence of any party’s intentions
Extrinsic evidence in constructing a contract
Evidence excluded
PER states that where a contract is in writing, the meaning of the terms of the contract will be ascertained from the words the parties have used
Generally, not admitted:
Evidence that is subjective
Private intentions about the meaning of the contract
Evidence post-contractual
Where the parol evidence rule applies, extrinsic evidence is inadmissible
Evidence of the surrounding circumstances
Uncertainty when evidence of the context or surrounding circumstances may be admitted
In England, surrounding circumstances are always admissible (Investors Compensation Scheme Ltd v West Bromwich Building Society)
In Australia, “evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous” (Codelfa Construction Pty Ltd v State Rails Authority of NSW)
The current approach is far from clear
Codelfa Constructions v State Rail Authority of NSW – THE TRUE RULE
Mason: “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”
Ambiguity is a gateway requirement to establishing the use of extrinsic material
Ambiguity means the contract is not wholly in writing, therefore the parol evidence rule does not apply, and extrinsic material/ evidence of context is admissible
There is always an ambiguity?
Is ambiguity a gateway requirement for extrinsic material in the High Court?
Maggbury v Hafele Australia generally admissible
Royal Botanic Gardens and Domain Trust issue avoided
Pacific Carriers v BNP Paribas Issue avoided
Western Export Services v Jireh Intl’
EGC v Woodside Energy
Mount Bruce Mining v Wright Prosecting
To remind the parol evidence rule has two aspects:
It prevents the admission of evidence so as to subtract from, add or vary written documents
It excludes the use of extrinsic evidence in determining the meaning of written terms
Exceptions?
Ambiguity of the wholly written contract (Codelfa Constructions v State Rail Authority of NSW)
The process of construction
Consider the meaning that a reasonable person would give to the contract (Royal Botanic Gardens and Domain Trust v South Sydney City Council; Pacific Carriers Ltd v BNP Paribas)
Pacific Carriers Ltd v BNP Paribas – objective approach taken by the courts
Pacific wanted to be sure that if something happened during the agreed shipment, then they would be compensated for the loss. They signed a letter of indemnity. Royal signed the letter and the bank authorised the signature – the bank itself does not promise to indemnify Pacific, they are just authorising the signature. They ended up agreeing to remove this disclaimer that stated that the bank was just authorising the signature. The court decided that a reasonable person would have put a disclaimer, therefore the bank has to indemnify.
Exclusion or exception clause (The Law of Contract) as follows: a term of a contract that attempts either:
To modify the principal obligations arising under a contract of that particular type
To limit or exclude the liability of a party which would otherwise arise as a result of a breach by that party of his primary obligations to perform the contract in accordance with its terms
Indemnity clause similar to exception clause, seeks to exclude the liability of one party by imposing on the other a duty to indemnify the former in respect of any loss incurred (Pacific Carriers Ltd v BNP Paribas)
Legislation restrictions on exclusion clause
Whether an exclusion or limitation clause is effective, a number of issues must be considered (ACL pts 2-3 (Unfair Contract Terms) and 3-2 (Consumer Guarantees)
The common law approach to exclusion clauses
At common law, whether an exclusion clause applies
Issue of if a third party can claim the benefit of an exception clause in a contract made by another two parties
A party can rely on the protection of an exclusion clause it must be shown that the clause was incorporated into the contract
If the clause is incorporated asked as a matter of construction, applies to exclude or restrict liability in relation to the issue in dispute
Overly broad exclusion clause may even be found to empty a contract of all contents (MacRobertson Miler Airline Services v Commissioner of State Taxation)
Does the clause apply to the issue in dispute?
High court discusses the proper approach to be taken in construing an exclusion clause (Darlington Futures v Delco Aust; Nissho Iwai Australia Ltd v Malaysian International Shipping Corp)
Exclusion clause is to be construed according to its natural and ordinary meaning
Read in the light of the contract as a whole
Thereby giving due weight to the contract in which the clause appears
Construing the clause contra proferentem in case of ambiguity
Negligence
Contra proferentem principle --. Clear words are necessary to exclude liability for negligence (Darlington Futures Ltd v Delco Australia Pty Ltd) – the scope of any exclusion clause to be determined by reference to its natural and ordinary meaning.
When will we try to imply a term?
To safeguard a client where the contract does not expressly protect
A term that works in your interest but not the other parties
Shift responsibility to other party
“In this specific contract there is an implied term…”
“In the case of a problem, there is an implied term of an extension”
Imply a limitation clause to shift blame for quality of the goods supplied
Impose liability on the other party by manipulating the facts
When will terms be implied
Implied on the basis of custom where the custom is “well known and acquiesced in”; then “everyone making a contract in that situation can reasonably be presumed to have imported that term into the contract”
This is a difficult requirement (Con-Stan Industries of Aust v Norwich Winterthur Ins (Aust))
There was 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
Alternatively, similar terms should be implied to give business efficacy to the contract
Cases have established the following propositions:
The existence of a custom or usage will justify the implication of a term into a contract is a question of fact (Nelson v Dahl)
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 (Thornley v Tilley)
A term will not be implied into a contract on the basis of custom where it is contrary to the express term of the agreement
A person may be bound by a custom notwithstanding the fact that he had no knowledge of it
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 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
Based on “presumed” intentions
Give effect to intentions of the parties to the particular contract
Implications of the term is not an addition to the instrument. It only spells out what the contract means (Lord Hoffmann in Attorney General of Belize v Belize Telecom Ltd)
Reliance is usually placed on the Privy Councils statement in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council
For a term to be implied, the following conditions must be satisfied:
It must be reasonable and equitable
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
It must be so obvious that “it goes without saying”
It must be capable of clear expression
It must not contradict any express term of the contract
Terms implied as a legal incident of all contracts of a particular class
Traditional examples include: (Byrne v Australian Airlines Ltd)
Conditions of reasonable fitness and merchantable quality of a contract for sale of goods
The rule that payment and delivery of good are concurrent with conditions
Warranty of seaworthiness
Letting of a furnished house that it is reasonably fit for habitation
Promise by a servant not to disclose secret processes
Not to hand over to a rival written work completed for the master
And, not while still in the master’s employment
To solicit the master’s customers to transfer their custom to himself (overruling)
Promise by an employer to furnish work
Duty of care in the carriage of passengers
Duty of care in looking after bailed goods
Promise by a banker not to disclose the state of his customers account
State affairs essential to performance (Codelfa Construction v State Rail Authority of NSW)
Difficulty accepting that the doctrine of frustration rests on an implied term
In many situations, it is easier to say that the parties never agreed to be bound in a fundamentally different situation which has unexpectedly emerged than it is to assert that in a like situation the parties have impliedly agreed that the contact is to remain on foot with a new provision
My reluctance to imply a term is stronger because the contract in this case was not a negotiated 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.
Is the person acquiring the goods or services a “consumer”?
Three-stage test for whether goods or services acquired by a“consumer” (s 3).
In broad terms, the acquirer is a "consumer" if, for the good or service in question:
Price $40,000; OR
Price > $40,000 but goods or services of a kind ordinarily acquired for personal, domestic or household use or consumption (or vehicles or trailers acquired for use principally in transport of goods); AND
The goods were NOT acquired for re-supply (s 3(2)(a)), or for the purpose of using them up or transforming them in trade or commerce in the course of certain activities (s 3(2)(b)).
If the good or service is not acquired by a “consumer”, the guarantees do not apply.
If so,whichof the consumerguaranteesin respect of goods or services apply?
Guarantees in respect of the supply of goods,include guarantees, in broad terms:
As totitle(s 51);
As to right to undisturbedpossession(s 52);
As to undisclosed securities etc (s 53);
That goods are ofacceptable quality(which includes that goods are fit for all purposes for which goods of that kind are commonly supplied) (s 54);
That goods are reasonablyfit for any disclosed purpose, and for any purpose for which the supplier represents they are reasonably fit (s 55);
That goods correspond with theirdescription, if they are sold by description (s 56);
That goods correspond withsample or demonstrationmodel, if sold by reference to sample or demonstration model (s 57);
That the manufacturer will ensure reasonable access to service facilities andspare parts(s 58); and
Compliance with anyexpress warrantymade by supplier or manufacturer (s 59).
Guarantees in respect of the supply of services,include guarantees that:
Services will be rendered withdue care and skill(s 60);
Services, and products resulting from service, will bereasonably fit for particular purposespecified (s 61); and
Services will be rendered within areasonable time(s 62).
Were the goods or services supplied in “trade or commerce”? This is a requirement for most, but not all, consumer guarantees.
Exceptionsare the guarantees of title, undisturbed possession and undisclosed securities which apply whether or not the goods were supplied in trade or commerce: ss 51-53.
Has the supplier failed to fulfil the relevant guarantee? If so, was it a “major failure”?
According to ss 260, 268, a failure is a "major failure" if, in broad terms, the goods or services:
would not have been acquired by a reasonable consumerfully acquainted with the nature and extent of the failure; or
aresubstantiallyunfit for a purposefor which they are commonly supplied; or
areunfit for a disclosed purpose; or
goods are not of acceptable quality because they areunsafe, or services create unsafe situation; or
In respect ofgoods:
theydepart in one or more significant respects from their description, or from a sampleor demonstration model, where they were supplied by either of those methods; or
In respect ofservices:
they, and any resulting product, arenotof such a nature, or quality, state or condition, that they might reasonably be expected toachieve a result desired by consumerthat was made known to the supplier.
Whatremediesare available? This will depend, in part, on whether or not it was a major failure.
If there is amajor failurein respect of the supply ofgoodsin trade or commerce, the consumer may:
rejectthe goods and get a refund or replacement (ss 259(3)(a), 263); OR
recovercompensationfor any reduction in value of the goods as a result of the failure (s 259(3)(b)).
There are limits on the right to reject goods, including limitations relating to:
the passage of time and return of the rejected goods; and
loss of, damage to or destruction of the goods: s 262.
If there is amajor failurein respect of the supply ofservicesin trade or commerce, the consumer may:
terminatethe contract for supply of services; OR
recovercompensationfor any reduction in value of the services as a result of the failure: s 267(3).
If the failure isnotmajor in respect of the supply ofgoods, the consumer may:
require the supplier to remedythe failure within a reasonable time; OR
if the supplier fails to do so, have the failure remedied at the supplier's cost or reject the goods: s 259(2).
There are limits on the right to reject goods, including limitations relating to:
the passage of time and return of the rejected goods; and
loss of, damage to or destruction of goods: s 262.
If the failure is not majorin respect of the supply ofservices, the consumer may:
require the supplier to remedythe failure within a reasonable time; OR
if the supplier fails to do so, have the failure remedied at the supplier's cost or terminate the contract: s 267(2).
Bringing an end to the obligations of parties to preform specific terms of a contract. Discharge one-self of obligation to perform.
Express powers to terminate
By providing that the contact is to last for a fixed period of time – after that time expires the contract will automatically come to an end EG a lease for a specified number of years
A term for termination may specify a procedure to be followed before the contract is terminated
For example, may require a party to give notice of decision in a particular form
Requirements of commercial contract should not be construed in an overly technical or restrictive manner (Kirby in Pan Foods Company importers and Distributors Pty Ltd v Austrlia and New Zealand Banking Group)
The scope of the express termination clause is a question of construction
Prove ambiguity in construction
Underpin an implied term
Implied right to terminate a contract to otherwise indefinite duration
Where a contract is silent as to its duration, courts may be prepared to imply a right for one or both of the parties to terminate the contract
The right is based on the inference that the parties would not have intended the contract to continue indefinitely
Where the right to terminate is implied, the requirement is:
“to bring to an end in an orderly way their relationship”
“a reasonable opportunity to enter into alternative arrangements and to wind up matters which arise out of their relationship” (Alivar v Calandra)
Terminate by making a subsequent agreement under which each agrees to release the other from the original contract
To be binding in law, an agreement to terminate an existing agreement must comply with the ordinary rules of contract formation, including the requirement of consideration
Partly preformed contracts and the issue of consideration
Consideration becomes difficult where one party has fully preformed the original contract and the other party has not
Formal requirements
In all Australian jurisdictions, the Statute of frauds requires certain contracts to be in writing
It has been held that writing is not required for an agreement to terminate an existing contract
Writing will be required where the subsequent contract seeks to vary, rather than terminate, the original contract
Sometime parties make a subsequent agreement without explaining how that agreement is to interact with their original contract
Two possible interpretations of the subsequent agreement
Parties may have intended the subsequent agreement to replace and thus terminate the original contract
Intended the subsequent agreement merely to vary or supplement the original contract
The distinction: is a “matter of degree”
In the absence of an express term explaining the relationship between the two agreements, whether a subsequent agreement varies or terminates the original contract will depend on the intentions of the parties as disclosed by the terms and circumstances of the subsequent agreement (Tallerman v Nathans Merchandise)
Where a subsequent contract does not change the obligations of the parties under the original contract, but rather substitutes new parties, the substitute contract is called a novation and is treated as a new contract discharging the original one
The courts may determine that the parties conducted themselves so as to mutually abandon their contract
Also, when an inordinate length of time has lapsed during which neither party attempted to perform the contract (Fitzgerald v Masters)
Forms of breach:
Non-performance: there is no performance at all
Defective performance: performance is not of the quality or quantity required by the contract
Late performance: a type of defective performance, the obligation is preformed but after the time set in the contract for performance
Some contractual duties are strict – EG the obligation to pay a fixed sum on a specified day
Some contractual provisions impose a standard of performance EG an obligation to take reasonable care or make reasonable efforts
Breach can be distinguished from lawful termination
Rights conferred by the common law
A party nay be entitled to terminate where the other party repudiates his or her obligations under the contract
Regardless of whether or not the aggravated party decides to terminate the contract or not, he or she will have a right to damages to compensate for loss caused by any breach of the contract
Where the aggravated party seeks to terminate a contract, the other party may argue that the right to terminate has been lost by some conduct on the part of the aggravated party
What constitutes a breach of contract?
When a party fails to perform at the time or to the standard required by the contract
When is there a right to terminate for breach at common law?
Depends on the classification of the term breached, this is three-fold:
Condition: aggravated party is entitled to terminate for any breach of that term by the other party regardless of the gravity or consequences of the breach
Damages to compensate for any loss suffered by the aggrieved party will also be available
Right to terminate and claim breach damages
Warranty: aggrieved party will not be entitled to terminate merely by reason of a breach of the term by the other party
Although, damages to compensate for any loss suffered by the aggrieved party will be available
Right to claim breach damages but no right to terminate
Intermediate or innominate: the aggrieved parties right to terminate depends on the gravity and consequences of the breach of the term
Of the breach is likely to have serious consequences for further performance of the contract then the aggrieved party will be entitled to terminate the contract in addition to claiming damages for any losses cause by the breach
Right to terminate depends on the severity of the breach
Termination for breach of a condition
If the term is classified as a condition, any breach of the term, regardless of its gravity, will give the aggrieved party a right to terminate the contract
The accepted test: (tramways advertising v Luna Park and approved by the High Court in Associated Newspaper v Bancks) Essentiality
An essential or inessential promise depends on the intentions of the parties as appearing in or from the contract
Essentiality depends on if it appears in the general nature of the contract
Particular term, that the promise is of such importance to the promisee that he wouldn’t have entered into the contract unless he had been assured of a strict and substantial performance of the promise
Where the term is immediate, the right to terminate depends on the nature of the breach and its foreseeable consequences
Whether the promisee is entitled to terminate requires analysis of the actual and foreseeable consequences of the breach
The right will arise if the breach is grave, sufficiently serious, fundamental and goes to the root of the contract, or in cases where the breach gives rise to events that frustrate the commercial purpose of the contract
The breach must deprive the innocent party of substantially the whole benefit which it was the express intention of the parties that should obtain from the contract (diploc in Hong Kong shipping v Kawasaki)
The breach must be “serious or deprive the aggrieved party of substantially the whole benefit which it was intended that he or she should obtain form the contract” (Ankar v National Westminister Finance)
Where one party manifests an unwillingness or inability to perform his or her obligations under the contract, the other party may have the right to terminate
Traditionally, the party who is unwilling or unable to perform the contract has been said to have repudiated the contract
High Court used the term renunciation to describe conduct of a party who is no longer willing or able to perform the contract (Koompahtoo Local Aboriginal Land Council v Sanpine)
The term should be used to describe any breach of contract which justifies termination by the other party
Hargrave in Earney v Austrlian Property Investment Strategic set out a summary of the relevant legal principles concerning repudiation
The term is used in a number of senses
The high court has stated that repudiation may refer to conduct which evinces an unwillingness or an inability to render substantial performance of the contract
Described as conduct of a party which evinces an intention no longer to be bound by the contract or to fulfil it
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
It is not necessary to prove a subjective intention to repudiate – the test is objective
Whether there has been repudiation is a question of fact
Repudiation is not to be inferred lightly – it is a serious matter
Repudiation may be evidenced by a single act or by an accumulation of conduct in circumstances where no individual act on its own constituted repudiation
Repudiation does not bring an end to a contract – it is necessary for the innocent party to elect to accept the repudiation
Repudiatory conduct may be cured by the party in breach, but only prior to the acceptance of the repudiation
Repudiation and anticipatory breach
Anticipatory breach occurs when one party repudiates his or her obligations under the contract prior to the time set for performance of those obligations
The aggrieved party will be entitled to terminate the contract
The aggrieved party may immediately sue for damages for breach
Reasons for the doctrine of repudiation
Purely practical (Hochster v De La Tour)
The absence of willingness or ability
Where a party indicates an unwillingness or inability to perform the whole contract there is no difficulty in finding that there has been a repudiation which the aggrieved party may accept by terminating the contract
This is the case where the unwillingness relates to a condition or essential term of the contract (Foran v Wight)
Conduct amounting to a repudiation
A party will repudiate a contract where he or she evinces a lack of willingness or ability to preform the contract – either will suffice
Express statement
The straightest forward case is when the parties make an express statement to the effect that they are unwilling or unable to perform the contract
Repudiation based on words or conduct
In absence of a statement, words or conducts may suffice
Carr v JA Berriman
Maple Flock v Universal Furniture Products
Acontingent conditionis a term which makes the performance of the whole or part of the contractconditional on a particular eventoccurring or not occurring, but neither party promises to ensure that event occurs or does not occur.
Types of contingent conditions:
Acontingent condition to performancequalifies theperformanceof part or whole of the contract – a binding contract exists, but the obligation to perform some or all of its terms is suspended until the condition is fulfilled – eg, an obligation to purchase is subject to Foreign Investment Review Board (FIRB) approval.
Acontingent condition to formationqualifies theformationof a contract – the contract is not binding on the parties, and the transaction creates no rights, until condition is fulfilled – eg, the parties sign a non-binding Memorandum of Understanding (MOU) and the parties' main agreement is subject to preparation of a formal contract.
Conditions precedent vs conditions subsequent– fulfilment is required before parties are bound to perform vs there is an obligation to perform which comes to an end if the condition is met. This distinction is now criticised as "artificial".
Duty to Cooperate
Parties do not promise to ensure a contingent condition is fulfilled, but they may agree on anexpress termthat they will use 'reasonable endeavours' to ensure the condition is met. The contract may specify what 'reasonable endeavours' means.
There is also generally animplied termthat each party will do what is reasonably necessary to enable the fulfilment of the contingent condition. That is, there is an implied duty to cooperate:Meehan v Jones(1982) 149 CLR 571, 591.
A party in breach of their duty to cooperate cannot rely on the failure of the condition to terminate the contract, and the condition may be treated as fulfilled. However, the condition will not be treated as fulfilled in these circumstances if the condition was for the benefit of theotherparty:Newmont Pty Ltd v Laverton Nickel NL[1983] 1 NSWLR 181.
The aggrieved party may also be able to claimdamagesfor the other party's breach of the duty to cooperate.
Non-fulfilment of a contingent condition occurs when:
Anevent occurs which is contraryto the contingent condition – e.g., the requisite FIRB approval is refused.
The condition is not fulfilled within thetimeexpressly fixed for its fulfilment, or, on the basis of construction of the contract, the condition is not fulfilled within a reasonable time for fulfilment of that condition.
When the condition depends onone party's decision or judgment, it will fail when one party is not satisfied of, or does not approve, a certain matter.
The party's state of mind must be proved as a question of fact. The party must act honestly, but there is a question whether that party must also act reasonably or only in its own interests (Meehan v Jones; Renard Constructions v Minister for Public Works)
These conditions are also subject to the duty to cooperate.
Consequences of non-fulfilment
Non-fulfilment of a contingent condition is not a breach of the contract.
Failure of the conditionexcuses performanceeither of a particular obligation or of the whole contract, depending on how the contract is construed.
This is a question of determining the objective meaning of the relevant terms, according to the ordinary principles of construction.
If the contingent condition qualifies performance of the whole contract, the contract will generally bevoidable– that is, one or both parties will have the right to elect to terminate the contract.
No prior notice is required before the contract can be terminated: the right to terminate arises immediately upon non-fulfilment of the condition.
Whether one or both parties can terminate depends on the construction of the contract, taking into account, for example, whether only one party's obligations were conditional on fulfilment of that condition.
Non-fullment with Express Terms
The contract may include anexpress termwhich provides that the contract automatically comes to an end or is deemed to come to an end on non-fulfilment, or that one party may elect to terminate the contract on non-fulfilment.
But what happens if non-fulfilment of the condition is due to one party’sdefault? (e.g., breach of duty to cooperate)
A party cannot take advantage of its own wrong:MK & JA Roche v Metro Edgely.
If the non-fulfilment is due to one party's default, the contract is not void but only voidable at the option of the non-defaulting party:Suttor v Gundowda.
Where one party induces the other to believe the contract was still on foot, that party may be estopped from asserting that the contract automatically came to an end:Waterman v Gerling Australia.
Waiver of Contingent Condition
Both parties mayagree to waivea contingent condition, in which case both parties will be bound by the agreement and neither party can terminate for non-fulfilment.
One party acting alone can waive compliance where the condition is for the benefit of that party:
For example, inPerri v Coolangatta Investments Pty Ltd(1982) 149 CLR 537, since the contract for the sale of land was subject to the purchasers completing a sale of their own property, the purchasers acting alone could waive compliance with the condition since it was substantially for their benefit and inserted for their protection.
ContrastGough Bay Holdings v Tyrwhitt-Drake, where the sale of the property was subject to the parties obtaining development approval - this condition was for the benefit of both purchaser and vendor since the vendor was retaining the adjacent land.
Restrictions on right to terminate for non-fulfilment
Restrictions on the right to terminate for non-fulfilment of a contingent condition include:
Waiver of the benefit of the condition – the relevant party or parties are bound by the waiver once it is communicated to the other party.
Prevention of fulfilment of the condition – a party who prevents fulfilment of the condition cannot rely on non-fulfilment of the condition.
Estoppel – the right to terminate can be lost by subsequent conduct which gives rise to an estoppel.
Doctrine of good faith – termination for non-fulfilment may be subject to an implied obligation to act in good faith.
Unconscionable conduct under ss 20-21 Australian Consumer Law – may prevent reliance on non-fulfilment of the condition.
1. When is performance required?
There may be anexpress termof the contract setting a certain period or date for performance; or
If the contract provides no express time for performance, there will be animplied termrequiring performance of the obligation within a ‘reasonable time’ (reasonableness depends on the circumstances); or
Where one party has given the otheran extension of timefor performance, the time for performance will depend on the terms of the notice and the nature of the original time stipulation (discussed later).
2. What can the aggrieved party do if the other party is late performing?
If the time stipulated is anessential term, any breach of the time stipulation will entitle the aggrieved party to elect to terminate.
If the time stipulation isnot an essential term, the aggrieved party can only terminate for breach of the term where the delay – possibly combined with other conduct – amounts to repudiation,orwhere the breach of the time stipulation is sufficiently serious.
3. When is a time stipulation anessentialterm of the contract?
The contract states that ‘time is of the essence’; or
The contract specifies that breach of the time stipulation amounts to repudiation and that it will entitle the other party to terminate;but
If there is merely an express right to terminate for delay, the time stipulation may not be essential: seeHewitt v Debus;
The usual considerations for construing a term as essential apply;
A term regarding time for performance will only be essential where it would have been deemed to be essential in a court of equity – ie where that was the intent of the parties, judgedobjectively(since theJudicature Act 1873): Conveyancing Act 1919(NSW) s 13;
It is generally unlikely that an implied term regarding time will be essential.
4. If thetime stipulation isnot an essential term, what are the aggrieved party’s rights if the time stipulation is breached?
There is generally no right to terminate for breach of a non-essential term as to time, UNLESS
The delay is a serious breach of the time stipulation in terms of the degree of delay and its consequences, in which case the aggrieved party may terminate based on the seriousness of the breach (but there is some uncertainty concerning this ground for termination – seeBunge Corp New York v Tradax(UK);Ankar v National Westminster; Carter,Contract Law); or
The delay amounts to repudiation of the contract in that, on its own or with other conduct, it indicates the party is not willing or able to perform the contract.
The aggrieved party may also use the notice procedure to establish a right to terminate (as explained below).
5. If the time stipulation isnot an essential term,and one party has breached that stipulation,the aggrieved party can also acquire a right to terminate if it provides a valid notice including a time for performance, and that notice is breached.
Requirements for valid notice procedure:
The notice mustspecify a timefor performance;
The time specified for performance must bereasonable(depending on the circumstances of the case, including subject matter; what remains to be done; earlier delay; time required to perform the obligation). The onus is on the party giving notice to show the period was reasonable; and
It must clearly indicate that the time stipulated in the notice is of the essence, or "convey a definite and specific intent to require strict compliance with the terms of the contract", including, eg, by indicating that the party giving notice regards themselves as entitled to terminate for non-compliance.
For further detail, readLaurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd(1989) 166 CLR 623
Other requirements for terminating after notice:
The party issuing the notice should beready and willingto perform their own obligations under the agreement at the time the notice is given (unless the party is only in breach of a non-essential term which would only entitle the other party to damages);
The notice must relate to a time stipulation in the contract that has been breached, andnot some other obligationunder the contract which is not yet due for performance:Louinder v Leis(1982) 149 CLR 509; and
If the contract does not expressly provide a time for performance and the party relies on animplied term, notice can only be given after an initial period of unreasonable delay which amounts to breach:Laurinda v Capalaba Park Shopping Centre.
6. What happens if the aggrieved party gives an EXTENSION OF TIME for performance?
If the time stipulation was originally an essential term and the extension stipulates a new time for performance, time will remain of the essence (entitled to terminate immediately if the extended time for performance is breached);
If the time stipulation was originally an essential term and the extension does not stipulate a new time for performance, time will no longer be of the essence (only entitled to terminate later if the subsequent delay amounts to repudiation or by following the notice procedure);
If time was not originally an essential term, time is still not of the essence (only entitled to terminate if the subsequent delay amounts to repudiation or by following the notice procedure).
The right to elect
On the breach of condition, grave breach of an intermediate term or repudiation, the aggrieved party has a right to terminate the contract
The aggrieved party is put to their election
The essence of election is that an aggrieved party cannot take up two inconsistent positions
The aggrieved party must make an election:
Terminate the contract
Affirm – continue with the contract
Once an election is made, it cannot be retracted (tropical Traders)
Where the contract is affirmed
Consequences of affirmation for the aggrieved party
The breaching or repudiating party may rely on the contract demanding performance of it (Foran v Wight; Bowes v Chaleyer)
Consequences of affirmation for the non-preforming party
Right to rely on subsequent events (Bowes v Chaleyer)
Affirmation keeps the contract alive for the benefit of both parties
A party who has breached or repudiated a contract may be able to rely to her or his advantage on subsequent events
Where the contract is terminated
Consequences of termination for the aggrieved party
Where an aggrieved party terminates a contract, the action brings to an end both parties future obligations to perform under the contract
The contract is not rescinded from the beginning
The rights that have already been unconditionally acquired or accrued are not discharged (McDonald v Dennys Lasceles)
Consequences of termination for the non-preforming party
Where a contract is terminated, rights which have accrued prior to termination continue in force and may accordingly be relied upon even by a party who has breached or repudiated the contract
A party who claims to have lawfully and validly terminated a contract must prove the existence of a right to terminate and that the right of election was exercised lawfully.
The aggrieved party must also prove their readiness and willingness to perform the contract as the time of the other party’s breach
Restrictions on the right to terminate
Where one party has a prima facie right to terminate a contract, the other party may claim that there is some form of restriction on that right
The parties may impose such restrictions – EG through the use of a clause excluding the consequences of certain types of breach of contract
Statues may impose restrictions on the right to terminate for breach
Readiness and willingness
To be entitled to terminate a contract for breach or repudiation, an aggrieved party must show that he or she was ready – and able – and willing to perform the contract
The time at which an aggrieved party must have been ready and willing to preform, and what the aggrieved party much show to satisfy the requirement
Readiness and Willingness must be proved only where damages were also sought (Hodgson JA in Sharjade Pty Ltd v Commonwealth support Deane in Foran v Wight)
Where the other party intimates that performance would be futile an aggrieved party may be absolved of the consequences of non-performance (Foran v Wight)
An aggrieved party faced with an event which entitles her or him to terminate the contract has a choice between terminating and continuing with or affirming the contract
The doctrine of election refers to the choice between alternative rights
An election is usually finals and cannot be retracted
There are two requirements for election: (Tropical Traders v Goonan)
Knowledge of at least the facts giving rise to the right to terminate
Unequivocal conduct consistent only with a choicer to continue with the contract
The exercise of a right to terminate a contract may be restricted by equitable estoppel
An aggrieved party may be estopped from terminating a contract: (Legione v Hateley)
where they induced the other party to believe that the contract will not be terminated in the circumstances that occurred
The other party has relied on that assumption to their detriment
Waiver (Agricultural and Rural Finance v Gardiner)
Firstly, advise Con Tracts of his rights
A defective performance – not having the whole
The breach must be “serious or deprive the aggrieved party of substantially the whole benefit which it was intended that he or she should obtain form the contract” (Ankar v National Westminister Finance)
Is there a termination clause? Express or implied
What right of termianton are they activating
Common law tight
Contractual right
If no, is there an obligation that will be breached
What is the method of incorporation? (“assuming valid incorporation, the contract contains this obligation….”
Course of dealing
Signatrure
Notice
Is it oral, written or implied?
Determine the scope of the obligation and construction
Establish what the bleach was
Compare actual conduct with the standards set in the contract to establish breach
If you client is in breach but you want to advise them of their rights
Potentially imply a term
Determine the implication is not excluded
There is a gap in the express term
The scope of the implied term
Argue not a breach – related to construction
Argue not essential to the purpose of the contract
Argue an intermediate condition that is not detrimental to the whole purpose
Frustration as an excuse for non-performance
The performance of a contract may sometimes be disrupted by catastrophic event that have not been provided for by parties to the contract
Inferred there is a gap in the contract
The doctrine of frustration provides an excuse for non-performance
When is the contract frustrated?
The test for frustration (Davis Contractors v Fareham; Codelfa v State Railway Authority)
Occurs whenever the law recognises without default of wither 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
Construction of the contract
Illustrations
Destruction of subject matter (Taylor v Caldwell)
Disappearance of the basis of the contract (Krell v Henry)
On true construction of the term which are in the contract read in light of the nature of the contract and of the relevant surrounding circumstances (Brisbane City Council v Group Projects)
Brisbane City Council is accepted by Codelfa
Overview of the Unfair Contract Terms Law
Part 2-3 of the Australian Consumer Law (ACL) regulates unfair contract terms in consumer, and small business, standard form contracts.
This unfair contract terms law (UCTL) took effect on:
1 July 2010 for "consumer contracts"; and
12 November 2016 for "small business contracts".
The UCTLdoes not prohibitunfair contract terms, but only makes anunfair term voidwhere Part 2-3 applies to the contract in question.
This is in contrast to the more recent proposals of the ACCC to make unfair contract terms unlawful and subject to pecuniary penalties
When a term is void under the UCTL
A term isvoidunderACL s 23(1)if:
no exception applies to that term;
it is in a “consumer contract” or “small business contract”
the contract is also a standard form contract; and
it is unfair.
1. Does an exception apply to the term? ACL ss26 and 28
The UCTLdoes not applyto certain terms or contracts, including:
terms that define the main subject matter of the contract;
terms that set the up-front price payable;
terms required or expressed permitted by a law of the Commonwealth, State or Territory; or
terms in certain contracts, including certain...
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