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LEGT 1710 Business and the Law

Lecture 5 Contract Law (Contd)

Capacity/Privity/Vitiating elements Lecturer: Dr Leela Cejnar
2013 The University of New South Wales Sydney 2052 Australia The original material prepared for this guide is copyright. Apart from fair dealing for the purposes of private study, research, criticism or review, as permitted under the Copyright Act, no part may be reproduced by any process without written permission. Enquiries should be addressed to the Head of School, Taxation and Business Law, UNSW, Sydney

On Blackboard from today Contract law, problem question See Guidelines to Students (attached to the assignment) DUE Monday 23 September, 2013 See Course Outline (paragraph 4.4) for details about how to submit your Assignment ONLINE SUBMISSION ONLY - Check your plagiarism score, amend and re-submit as required - FINAL VERSION MUST BE SUBMITTED BY 5pm on MONDAY 23 SEPTEMBER 2013 on Blackboard (via Turnitin)
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Research materials: Your starting point: - Reading materials on Blackboard (PDFs) - Paul Latimers Australian Business Law, 31st edn, 2012 or 32ndedn, 2013 Do some independent research beyond the Blackboard readings and beyond the textbook using other research tools: Look for Cases/Journal articles/Other materials from legal publishers that are available online through UNSW Library database Focus your research on ONLINE materials Do NOT bother the UNSW librarians unnecessarily

Do not plagiarise be careful to acknowledge all source materials that you use References source materials appropriately: see Appendix A of the Course Outline for how to footnote your references Provide full names for cases AND full case citations Include a bibliography at the end of your Assignment

Plan your answer

Identify relevant facts
What are the main problems in the problem? What key issues do these facts raise?

How to answer a legal problem

1. Identify relevant facts What are the key facts that are relevant to the problem? 2. Identify key, relevant statutory provisions and case law principles Ask: (a) does a statutory provision apply to this situation and does it provide a specific answer to the problem? (b) are there any cases which have dealt with a similar fact situation to the one you are considering and/or which have interpreted any relevant statutory provisions? NOTE: you should provide the name/section of any relevant legislation and the names of any relevant cases in your answer

Identify relevant legal principles:

What legal principles apply to the facts you have identified? What relevant cases do you know that deal with these legal principles? What additional research can you do to find other cases/journal articles etc about these legal principles?

Weigh up the evidence and come to a conclusion:

Apply the evidence (that is, the case law, including any additional research you have found) to the relevant facts of the assignment problem Remember to reference appropriately: do not plagiarise Provide a tentative conclusion based on your evidence/research Provide a bibliography (list of all research materials you have used) at the end of your assignment

How to answer a legal problem

3. Note similarities to (follow) or differences from (distinguish) prior cases Jot down the names of cases that you have studied, where the facts were similar, if not identical to the ones in the problem you are considering Note any factual differences from previous cases and state whether or not you consider that the differences matter to your problem Often the facts of a problem may be similar to but a little different to those in a decided case: think about whether any factual differences matter Whether or not any differences matter will depend on the scope of the legal principle that the relevant case stands for

How to answer a legal problem

4. Apply the relevant statutory provisions and case law principles to the facts Key aspect of answering legal problem question After identifying the relevant facts, and referring to the relevant statutory provisions and case law, you then have to apply the relevant statutory and/or case law principles to the facts of your problem This step involves saying what the legal principles you have identified mean to the facts of your problem and what the effect of these legal principles will be on the rights and obligations of the parties in your problem Key part of the process of reasoning that leads to a conclusion both in a legal problem question and in an actual court case

How to answer a legal problem

5. Reach a conclusion based on the application of the statutory provisions and case law principles to the facts You need to reach a conclusion The fact that a subsequent court can overrule the decision of a previous court demonstrates that there is no absolutely correct answer to legal problem questions More important than the conclusion you reach is the process of reasoning that led you to that conclusion

How to answer a legal problem

In your discussion/answer, you must include references to relevant case names and in time, also to statutory provisions (legislation name and, where possible, section numbers)


Sample Answer
On Blackboard THIS IS A GUIDE for FORMAT AND STYLE OF WRITING ONLY DO NOT COPY the content of the sample answer the facts are completely different from your assignment problem! 1. 2.

Legal Research
Primary resources - cases and legislation Secondary sources (journals, textbooks, commentaries, annotators)
Legal encyclopedias
eg: Halsbury's Laws of Australia (Butterworths); the Laws of Australia (LBC)

Textbooks Journals Commentaries/loose-leaf services Statute annotators


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Legal Research
Always rely on primary resources, and use secondary resources to support your argument. Refer to UNSW library electronic database Hard copies of legal resources are also available in the UNSW Law School Library

Legal Research
For the Assignment, also refer to: RESEARCH GUIDANCE NOTES ON BLACKBOARD, UNDER ASSESSMENTS APPENDIX A - Style Guide and Written Submission Guidelines in Part B of the Course Outline

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Useful Legal Websites

The Library Website and the Law subject guide has links to: Legal encyclopedias; Law Reports; Legal Journals; Commentaries & loose-leaf services

Statutory research
Locate the relevant Acts and the relevant sections within those Acts Law libraries Online Check whether the Act has been amended Make sure you are using current legislation

Other useful websites:

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Case law research

Case law is published in authorised reports Each court has its own report series High Court: Commonwealth Law Report Various legal publishers also publish their own law report series dedicated to particular areas of law CCH Australia Australian Torts Reporter; Australian Trade Practices Reporter etc Consult textbooks, legal encyclopaedias, current law publications, case digests

The case report

Mabo v Queensland (1992) 175 CLR 1
The v is read as and Date is usually the year of the trial or appeal Letters are abbreviation for the law report series Number after the round brackets is the volume number of the law report series

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The case report

Donoghue v Stevenson [1932] AC 562
Square brackets [ ] indicate the the law report series are in volumes by year Final numbers (eg 562) are the page numbers which indicates what page the report starts on

Lecture 3: Summary
Essential elements of a contract: Intention to enter into a legally binding contract Agreement Offer Acceptance Consideration
Something of value (price) Exception: Promissory Estoppel

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Lecture 3: Summary
Other elements for a valid contract: Legal capacity Genuine consent Legality of purpose Any formal/procedural requirements must be satisfied (See Latimer at 5-510 to 5-570)

Lecture 4: Summary
Intention to create legal relations
Social/family/domestic/voluntary: implied presumption no intention Commercial/business: implied presumption there is intention Both presumptions can be rebutted

Terms of a contract
Representation: - Pre-contractual negotiations Term (to be discussed today) - Express/Implied - Condition/Warranty - Uncertain/Meaningless/Ambiguous terms - Exclusion/exemption clauses No liability Statutory exemptions (to be studied in Consumer Law)


Terms of the contract

Terms include both: express terms implied terms

Terms of the contract

(1) Express can be: oral written oral and written (2) Implied can be: to give the contract business efficacy (ie: to help make sense of the contract) from custom or business usage from previous dealings by the intention of the parties by the courts (ie: to define uncertain/meaningless/ambiguous terms)
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Implied Terms
Case: The Moorcock See Latimer at 6-110

Implied Terms
For terms to be implied into a contract, they must: be reasonable and equitable be necessary to give business efficacy be so obvious it goes without saying be capable of clear expression not contradict an express term of the contract
See Latimer at 6-110 at footnote 16: BP Refinery Case



Statutory Implied Terms

Some statutes imply (add) terms to contracts where consumers are involved
For example, concerning fitness for purpose, merchantable (acceptable) quality, compliance with description/sample etc

Types of terms
1. Condition
an essential term going to the root of the contract allows injured party option of rescinding (ie ending) the contract and/or suing for damage a non-essential term of lesser importance allows the injured party only to recover damages (and requires continued performance of the contract)

Australian Consumer Law, which is Schedule 2 of the Competition and Consumer Act, 2010 (Cth) Sale of Goods Acts (different States)

2. Warranty

See Latimer at 6-140


See Latimer at 6-050 to 6-090


Condition or Warranty
Cases: Bettini v Gye Poussard v Spiers (Compare these two decisions) Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market See Latimer at 6-050

Uncertain terms
If there have been prior dealings, courts may imply appropriate terms Where there are no past dealings, courts may be forced to find contract void for uncertainty See Latimer at 6-150



Meaningless terms
If the term has no meaning, the courts will sever it if possible and leave the rest of the contract valid If this is not possible, the contract will be void for uncertainty See Latimer at 6-160

Ambiguous terms
If a term has more than one meaning, the contract will not necessarily be void for uncertainty, so long as the term can be given a meaning See Latimer at 6-170



Terms and collateral contracts

Collateral contract: a promise in the main contract that gives rise to a separate contract This promise is NOT a term of the main contract; it has an independent existence to the main contract It co-exists side by side with the main contract

Collateral contracts
Example: In consideration of the manufacturers promise that his product will do X You (the customer) will contract with the retailer to buy it Main contract: between you and the retailer Collateral contract: manufacturers contractual promise to retailer


Changing the terms of a contract

Terms of an existing contract may be changed by:
Completely discharging existing contract and substituting with new contract. Leaving existing contract in place but adding new terms or changing some of the terms: BUT this can only happen with the full agreement of all the parties.

Todays lecture
Exclusion clauses Requirements for a valid contract (contd)
Capacity Consent Proper form Agency: the exception to Privity Mistake Misrepresentation Illegality Inequality between the parties Unconscionable conduct (Commercial Bank v Amadio)

Privity of contract

See Latimer at 6-250

Vitiating elements


Overview - Lecture 5
Capacity/Privity/Vitiating Elements On completion of this lecture you should be able to: 9 Identify and explain what exclusion clauses are 9 Explain what it means to have capacity (or to consent) to enter into contractual relations 9 Explain the doctrine of privity of contract 9 Explain the concept of agency 9 Identify different vitiating elements and their effect on a contract (eg mistake, misrepresentation, unconscionable conduct etc)

Exclusion clauses
Also known as exception or exemption clauses or no liability clauses Their purpose is exclude or limit the liability of the person inserting them Their effectiveness will depend on the construction of the contract as a whole, taking into account the bargaining position of the parties See Latimer at 6-180 to 6-250

Exclusion clauses
Notice of exclusion clause must be given BEFORE contract is made (not afterward)
Thompson v London, Midland & Scottish Railway Co eBay International AG v Creative Festival Entertainment Pty Ltd

Exclusion clauses
BE CAREFULyou are bound by what you sign, even if you do not know what you have signed READ what you sign BEFORE you sign it Signing = evidence you intend to be bound! Case: LEstrange v Graucob Ltd See Latimer at 6-190

See Latimer at 6-210

Olley v Marlborough Court Ltd Balmain New Ferry Co Ltd v Robertson

See Latimer at 6-220

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Exclusion clauses
Terms, including exclusion clauses, may not be binding unless properly incorporated into a contract Cases: Parker v South Eastern Railway Co Curtis v Chemical Cleaning and Dyeing Co Causer v Browne See Latimer at 6-200

Exclusion clauses
How to interpret exclusion clauses: The ambiguity rule (or the contra proferentem rule): The negligence rule The four corners rule Look at what the main contract says

Cases: White v John Warwick & Co Ltd Bright v Sampson and Duncan Enterprises Pty Ltd Sydney County Council v West Thomas National Transport (Melb) Pty Ltd v May & Baker (Aust) Pty Ltd Darlington Futures Ltd v Delco Australia Pty Ltd See Latimer 6-240
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Exclusion clauses
Statutory modifications Some statutory provisions may render an exclusion/exemption clause ineffective, particularly legislation dealing with:
Consumer Protection Sale of Goods Insurance

Presumption that everyone has full legal capacity Lack of capacity will invalidate the contract

See Latimer at 6-250

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Classes of persons subject to incapacity: Minors Mentally ill Intoxicated Corporations See Latimer at 5-510 to 5-570

Is there genuine consent? Ask what have the parties agreed to? There must be genuine agreement between the parties to a contract as to its nature and scope



Proper Form
Consider - are there any statutory procedural requirements that need to be satisfied? A lack of compliance with the required formalities may make the contract void or unenforceable

Privity of contract
Means part of Only a party to the contract has any rights under the contract Similarly, the contract only imposes obligations on the parties to the contract Case: Beswick v Beswick See Latimer at 6-260



Exception to doctrine of privity An agent: person who is authorised to enter into contracts on behalf of another person, called the principal The contract is between the principal and the third party, and is generally not enforceable against the agent Doctrine of privity not relevant in agency situation

Agency: definition
The legal relationship between one person, the AGENT (A) having authority to act, and having consented to act on behalf of another person, the Principal (P), places the Principal in a contractual relationship with a Third Party (TP)


Principal P

grant of authority

Agent A

Agency: how it is created

By agreement (express or implied) By operation of law under the doctrine of agency of necessity Retrospectively by ratification of the agents acts done on behalf of the principal but without prior grant of authority

The contractual relationship

negotiates contract on behalf of P Third Party TP



Agency: some examples

Real estate agent Travel agent Insurance broker Share broker

Vitiating elements
Vitiate means: to corrupt to damage to reduce value Vitiating elements include: Mistake Misrepresentation Illegality Inequality between the parties
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Vitiating elements
A vitiating factor operates to render a contract voidable or void retrospectively (ie void ab initio)

Voidable vs void
If a contract is bad because of a vitiating element, it can be: VOIDABLE: the contract will continue on foot unless the injured party elects to rescind (ie cancel) or avoid the contract or VOID: void back to the moment of formation, as if it never existed (void ab initio)



If a mistake operates, it often renders a contract void ab initio (from the very beginning) Places the parties in the same position as if no contract had ever been made

Types of mistake
Common mistake: both parties make the same mistake as to the existence or identity of the subject matter Mutual mistake: parties are at cross-purposes both parties have made a mistake but each party has made a different mistake Unilateral mistake: only one of the parties is mistaken, and the other is, or should be, aware of this and does nothing to correct the mistake See Latimer at 5-620 to 5-695
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A representation is a statement of fact made by one party to another, either before or at the time of contracting, relating to an existing fact or a past event, which induces the contract

In contract In tort Misrepresentation legislation
Australian Consumer Law

See Latimer at 5-700



Statement of fact Communicated to another An inducement

Minor misrepresentation:
non-contractual or mere misrepresentation no remedy for breach of contract but may be remedies under other heads of law (such as tort/Australian Consumer Law)

Major misrepresentation:
Actionable misrepresentation Voidable: allows innocent party to cancel/rescind the contract

See Latimer at 5-701



Fraudulent Misrepresentation: intention to induce a person to enter into a contract voidable: rescission (and/or damages) Innocent Misrepresentation: misstatement of a material fact lack of intentional deceit not known to be false rescission Negligent Misrepresentation: statement made innocently but carelessly right to damages See Latimer at 5-702

Misrepresentation and legislation

Australian Consumer Law, see Schedule 2 to the Competition and Consumer Act, 2010 (Cth) s 18: misleading or deceptive conduct s 29: false representations
See Latimer at 5-705 at section (3)

Illegal contracts
Contracts will be illegal if they involve illegal conduct Contracts can be illegal or void:
- by statute or - at common law

Examples of Illegal Contracts

Contracts to commit a crime, a tort or a fraud on a third party Contracts that are immoral Contracts to the prejudice of public safety, or of good relations with other countries Contracts prejudicial to the administration of justice Contracts which tend to promote corruption in public life:
Contracts to defraud the revenue Contracts that involve a breach of duty



Inequality between the parties

Duress Undue influence Unconscionable conduct Statute law dealing with unfairness or unconscionability:
Australian Consumer Law, see Sch 2 to Competition and Consumer Act 2010 (Cth)

Duress involves use of violence or illegal threats against a person, their goods or economic interest to force them to enter into a contract against their will Lack of voluntary agreement



To the person Actual or threatened violence to one contracting party, or their immediate family or near relatives To goods Wrongful threats to seize, damage or destroy the goods of one contracting party Economic duress Economic pressure beyond normal acceptable commercial practice

Undue influence
Involves the improper use of a position of influence or power possessed by one person over another in order to induce that other person to act for their benefit Lack of genuine consent to the agreement


Unconscionable or Unfair Contracts

Contract will be set aside as unconscionable (unfair) where the defendant has abused their superior bargaining position in their dealings with the plaintiff Case: Commercial Bank of Australia v Amadio See Latimer at 5-730

Unconscionable contracts
The plaintiff has to establish: They were in a position of special disability or special disadvantage That substantially affected their ability to protect themselves The defendant knew, or ought to have known, of the plaintiffs disability/disadvantage and should not have taken advantage of it AND The actions of defendant were unconscionable


Unconscionable contracts
Examples of special disability/special disadvantage include: age financial needs illness ignorance inexperience inability to understand the language inability to read See Latimer at 5-730

Restraint of trade clauses

Clauses in restraint of trade are found in: Contracts for employment Contracts for sale of business Contracts between manufacturers and traders Clauses in contracts in restraint of trade will generally be void as being contrary to public policy unless the restraint is reasonable


Restraint of trade clauses

What is reasonable is determined by: The geographic extent The time period involved The nature of the business and the activity being restrained Whether the restraint is reasonable, both in the interests of the parties and the public

Next lecture
Breach of contract Termination for breach Remedies for breach of contract Read: Latimer Ch 6 6-280- 6-510 REMEMBER: DOWNLOAD ASSIGNMENT 2, READINGS AND RESEARCH GUIDANCE NOTES FROM BLACKBOARD
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