TERMINATION

1. FOR BREACH

IS THERE A RIGHT TO TERMINATE FOR BREACH?

- A breach occurs when one party fails to perform at the time or to the standard required by the contract.
- The other party has a right to damages to compensate for loss caused by the breach.
- In addition, they may seek to terminate the contract and claim loss of bargain damages (to put them in the same position as if
the contract were fulfilled).

Q1: How is the breached term classified?

- Common law only confers a right to terminate in respect of some breaches.

- This depends on the classification of the term breached.
- The High Court in Ankar followed the tripartite classification of terms into conditions (essential term),
intermediate/innominate terms, and warranties propounded by Diplock LJ in Hongkong Fir.
- A term may be classified by:
o Statute
o The parties; or
▪ Express words;
▪ But the use of the word alone is not conclusive – parties must clearly express their intention for the term to have
this status.

o The courts
▪ The courts try to ascertain the intention of the parties as a matter of construction of the contract;
▪ Taking into consideration:
1. Importance of term
- General test: Is the promise of ‘such importance to the promisee that he would not have entered into the
contract unless he had been assured of a strict or substantial performance of the promise, and this ought
to have been apparent to the promisor’? (Jordan CJ in Tramways, approved by the High Court in
Bancks);
- Does it go to the ‘root’ of the contract?
- If yes = condition or intermediate term, if no = warranty.
- This can be deduced from:
i. Language
▪ Is the term expressed to be important?
▪ Eg the use of strong, promissory language (‘we guarantee’; Tramways);
▪ Not conclusive in itself (in Ankar the HC still found the clauses to be conditions even
though the language provided no clear indication).

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 ii. Other terms
▪ Are there other terms that reinforce the purpose of the breached term? If yes, this implies
purpose is important to the party.
▪ For example:
- In Tramways, breached term = boards would be displayed for at least 8 hours per day.
Other term = payment would not begin until all 53 boards were displayed at the same
time. => The completeness and continuity of the display was an essential element;
- In Bancks, breached term = to present comic on front page. Other terms = to present
comic weekly, and on a full-page. => The manner of publication was of ‘prime
importance’ to the artist.
iii. General nature
▪ Does the general nature of the contract make that promise important?
▪ For example:
- Contracts of guarantee – purpose of ‘notice’ clauses are to enable the surety to take
such action as it can to safeguard its position and its interests (notice alerts surety and
enables them to consult with the debtor and creditor) (Ankar).

2. Adequacy of damages
- Would damages not adequately compensate for breach or be difficult to prove?
- If yes = condition;
- Rationale: In such cases the right to terminate is the only remedy available to AP and hence is
important in protecting the party’s interests.
- For example:
In Ankar, damages for breach of the clauses requiring the creditor to give notice would be difficult to
prove. This was used by HC to justify classifying them as conditions, rather than innominate terms (at
562).

3. Likely character of breach

- If there are a variety of ways to breach the term, do the consequences of these breaches range from the
trivial to the serious1?
- If yes = intermediate term;
- For example:
In Hongkong Fir, breached term = shipowners’ would tender a seaworthy ship. Since this can be
broken by the presence of trivial defects easily and rapidly remediable as well as by serious defects
which might result in the loss of the ship, the Court of Appeal held that it was an intermediate term. It
was considered ‘unthinkable that all the relatively trivial matters which have been held to be
unseaworthiness could be regarded as conditions of the contract’ (at 56).

4. Balanced consideration
- Courts will favour a classification that does not give rise to an automatic right to terminate (ie
intermediate term) (Ankar at 556);

1
Serious = consequences ‘deprive the AP of substantially the whole benefit which it was intended that he should obtain from the
contract’ (Hongkong Fir at 70 per Diplock LJ).
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 - Rationale: Courts prefer a construction that will encourage performance rather than avoidance of
contractual obligations (at 556-7).

- REMEMBER: a balanced consideration must be made and all the factors, including the courts’
reluctance to construe terms as conditions, must be weighed against each other.

Q2: Given this classification, is there a right to terminate for breach?

1. Condition

- Common law right to terminate in respect of any breach of that term.

2. Intermediate/innominate term

- Right to terminate depends on the nature of the breach and its foreseeable consequences:
▪ Nature = ‘grave’, ‘serious’ breach (Ankar at 562);
▪ Consequences = ‘deprive the AP of substantially the whole benefit which it was intended that he should obtain
from the contract’ (Diplock LJ’s test in Hongkong Fir).
- For example:
In Hongkong Fir, the unavailability of a ship for 7 months out of a total hire period of 24 months did not justify
termination.

3. Warranty

- Breach of term does not give rise to a right to terminate.

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 2. FOR REPUDIATION

- Repudiation = unwillingness or inability of a party to perform its obligations;

- The aggrieved party (AP) may, by accepting the repudiation, elect to terminate the contract and claim damages.

Q1: Identify repudiative Words/Conduct

Q2: ASSESS EACH. DO THEY ALONE AMOUNT TO REPUDIATION?

- There will be a repudiation where the words, conduct or facts show an unwillingness or inability to perform that:
1. Relates to a condition;
2. Is ‘fundamental’; or
3. Relates to the whole contract.

- Always keep in mind that the question is: Has the BP evinced an intention no longer to be bound by the contract or to fulfil it
only in a manner substantially inconsistent with his obligations and not in any other way?
(Brennan J in Capalaba)

Condition

- Right to terminate arises where one party either:

▪ Breaches a condition; or
▪ By their words or conduct, leads a reasonable person to conclude that the party will breach the condition (called an
anticipatory breach – the party has repudiated his obligation prior to the time set for performance).

Fundamental

- Is the unwillingness to perform ‘fundamental’?

- Fundamental = ‘so serious that it goes to the root of the contract and deprives the other party of substantially the whole
benefit of the contract’ (Progressive Mailing House);
- Eg serious breach (actual or anticipatory) of an intermediate term;

- See Carr: the building owner contracted the fabrication of steel, which was to be done by the builder, to a third party. The
High Court held this was a ‘fundamental’ breach because it went to ‘a very substantial part of the contract’ (the profit from
fabrication was about ¼th of the total estimated profit to the builder).

Whole contract

- Eg an express statement that he is unwilling or unable to perform the contract.

SPECIAL CASES

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Was there an ineffective termination?

- A party who attempts to terminate a contract where no such right exists may have repudiated;

- However, there are two principles that reduce the likelihood of repudiation:
1. Where a party has purported to terminate a contract upon an untenable/invalid ground, they are entitled to rely upon
any valid ground which in fact existed at the time, even if unknown to the party (Tramways at 643); and
2. The honesty or bona fides considerations (ie Is the party still willing and able to perform the contract according to its
correct terms?)

- For example:
In DTR Nominees, D could not rely on M’s purported termination as a repudiation justifying termination. M’s purported
termination did no more than evince an intention not to proceed with the contract on the basis of D’s incorrect interpretation.

Is there a breach of an instalment?

- Instalment contracts = where one or both of the parties’ obligations are divided into a number of instalments;
- Breach of an instalment may be a repudiation of the whole contract – as per s 38(2) of Goods Act 1958 (Vic), which provides:

Where “the seller makes defective deliveries, or the buyer neglects or refuses to take delivery of or pay
for one or more instalments, it is a question in each case depending on the terms of the contract and the
circumstances of the case whether the breach of contract is a repudiation of the whole contract or whether
it is a severable breach giving rise to a claim for compensation but not to a right to treat the whole
contract as repudiated.”

- The equivalent English provision was interpreted by the Court of Appeal in Maple Flock. Lord Hewart CJ identified two
main tests to be used in applying the subsection to cases (at 157):
1. The quantitative ratio the breach bears to the whole contract; and
2. The degree of probability or improbability that such a breach will be repeated (can it be reasonably inferred that
similar breaches would occur in the future?)

- For example:
In Maple Flock the court held that the defective delivery was not a repudiation, because it involved only a small ratio of the
whole (1½ out of 100 tons) and the chance of the breach being repeated was ‘practically negligible’.

Q3:IF NO, DO THEY, LOOKED AT TOGETHER, AMOUNT TO REPUDIATION?

- Repudiation may be found in a combination of events, which, on their own would not entitle the innocent party to terminate;

- Examples:
▪ In a lease, failure to pay rent, on its own, does not constitute a repudiation. However, this breach and the other breaches
(inflicting physical damage, failing to rectify the damage, and subletting the premises without the lessor’s consent)

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 showed ‘a persistence in carrying out the obligations in a way substantially inconsistent with these terms’ = repudiation
(Progressive Mailing House); and
▪ In Carr, the building owner’s failure to excavate and deliver the site and the subcontracting of the fabrication of steel,
which was to be done by the builder, to a third party inferred that BO ‘does not intend to take the contract seriously,
that he is prepared to carry out his part of the contract only if and when it suits him’ = an intention not to be bound =
repudiation (Carr).

BUT WATCH OUT IF BP IS ACTING ON OR ASSERTING AN ERRONEOUS INTERPRETATION!

- TEST: Notwithstanding their incorrect interpretation, is BP still willing and able to perform the contract according to its
correct terms?
Unless this can be answered in the negative, there is no repudiation because BP has not evinced an intention that he will not
perform the contract according to its terms (DTR Nominees).

- To not have repudiated, BP must:

▪ Honestly and bona fide believe in their interpretation; and
▪ Not be ‘persisting in its interpretation willy nilly in the face of a clear enunciation of the true agreement’ (DTR
Nominees).

- In a strong dissent in the House of Lords two years after DTR Nominees was decided, Lord Salmon questioned why an honest
but mistaken belief could excuse a party from the consequences of his conduct (Woodar).

- Sometimes, factual inability will prevent BP from performing the contract according to its correct terms (eg in Tramways, the
High Court found that LP was also entitled to terminate for repudiation. T incorrectly interpreted the contract as requiring
them to display the boards for ‘an average of 8 hours daily,’ and since they did not control the running of the trams they were
unable to perform the contract according to its correct terms ~‘substantially 8 hours per day’).

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 3. FOR DELAY

Q: IS TIME ‘OF THE ESSENCE’ = A CONDITION?

- Express stipulation by the parties (eg ‘time is to be of the essence’)?

- If no, whether or not time is of the essence is a matter of construction of the contract (s 4 Property Law Act 19582);
- Use test in ‘1. For Breach’.
Important points:
▪ It is uncertain whether the category of ‘intermediate terms’ applies to time stipulations (the High Court in Ankar
expressly refrained from deciding); and
▪ Courts are more likely to construe time as being ‘of the essence’ in mercantile contracts (ie commercial contracts for
the sale of goods).

- YES: Any delay will entitle the AP to elect to terminate;

- NO: Delay does not of itself give rise to a right to terminate. BUT a right to terminate can become available if:
▪ Delay continues so long or in such circumstances as to amount to repudiation (the delay continues for so long and in
such circumstances as ‘to evince an intention no longer to be bound by the contract’; Carr per Fullagar J); or
▪ AP gives notice and BP still does not perform.

Special case: Where contract is silent as to time

- Where contract does not expressly specify a time for performance, ‘a reasonable time’ will be implied;
- Generally, time is not ‘of the essence’;
- AP must wait until a reasonable time has passed, and can then give notice (see Louinder, where the vendor’s notice to
complete was held to be invalid because there was no unreasonable delay).

NOTICE

Q1: When can it be given?

- Where:
▪ Time is not ‘of the essence’ (if stipulation classified as warranty);
▪ Breach not serious enough (if intermediate term);
▪ No repudiation; or
▪ Where AP has earlier elected not to terminate for that breach (Carr per Fullagar J at 348).
AP may nonetheless gain a right to terminate for the delay by giving notice.
- This can be issued as soon as the stipulated time has passed (no need to wait for an unreasonable delay; Louinder).

Q2: What must it contain?

2
Time stipulations ‘shall receive in all courts the same construction and effect as they would have received in equity’ => only ‘of
the essence’ where this was intended by the parties.
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- To be valid the notice must satisfy three requirements:
1. The notice must specify a reasonable time for performance;
o Court must consider all the circumstances of the case, including:
o What remains to be done at the time of the notice;
o Time required to perform the remainder (can use expert evidence);
o Any unnecessary delay on the part of BP before notice was given; and
o Whether AP has been continually pressing for performance.
o In Capalaba, while C had almost a year to complete performance they were under ‘no explicit pressure’
from L to do so. Expert evidence also showed that 13 days was inadequate to stamp and register a lease.
Time specified = unreasonable.
2. Of the obligation breached;
o You cannot request performance of some other obligation3;
o Hence to request completion, obligation must be (1) to complete or (2) where breach of it has the
practical effect of making it impossible to complete the contract within the time stipulated (per Mason J
in Louinder).
3. The notice must clearly convey to a reasonable person in the recipient’s position that either the time fixed for
performance is of the essence, or the party giving the notice will regard himself as being entitled to terminate
should the notice not be complied with (Capalaba per Deane and Dawson JJ)
o The majority in Capalaba held the phrase ‘our clients naturally reserve their rights in respect of your
client’s default’ is inadequate.

Q3: What is its effect?

- If BP does not perform within the reasonable time specified in the notice, AP may immediately terminate.

4. RESTRICTIONS ON THE RIGHT TO TERMINATE

- A number of restrictions can preclude AP’s right to terminate;

- In such a case, the AP can still obtain damages for breach but not for loss of contract.

COMMON LAW RESTRICTIONS

Readiness and Willingness

- Really a prerequisite of a right to terminate;

- To terminate the contract, AP must show that he was ready, willing and able to perform at the time of the breach or the
repudiation.

3
In Louinder, the vendor was not entitled to give a notice requiring the purchaser to complete the contract, because the obligation
breached was merely to tender a transfer. As Gibbs CJ said, ‘Mere breach of one contractual provision does not enable the injured
party to rewrite another’.
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Election

- The right to terminate gives AP a irrevocable choice between terminating and affirming (continuing with) the contract (called
an election);
- This choice needs to be made within a reasonable time (as long as delay does not prejudice the other party).

Requirements for election

- There are two requirements for an election to be held to be binding:

1. Knowledge; and
▪ AP must have knowledge of the facts giving rise to the right to terminate (this is sufficient where right to terminate
is conferred by the contract itself; Sargent);
▪ BUT it is undecided whether, in addition, AP must know that the facts confer a legal right to terminate.

2. Unequivocal conduct.
▪ AP can communicate their election by any unequivocal words or conduct;
▪ It 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 other’ (Sargent) – eg for affirmation, acts must be ‘consistent only with the continued
existence of the contract.’

▪ Examples of affirming conduct:

o Accepting or insisting upon performance from the other party (eg in Carr the builder continued to press for
commencement of the work after building owner’s breach);
o Continuing to perform acts contemplated by contract (eg the builder subcontracting the fabrication of steel to
Hurll&Douglas in Carr); or
o Unreasonable delay in making choice.
▪ Examples of terminating conduct:
o Failure to perform; or
o Putting performance out of the power of the other party.
▪ Generally, an extension of time does not amount to affirmation of the contract (Kitto J in Tropical Traders thought
an extension is a mere announcement of an intention to refrain from electing until either the thing was done or the
time arrived).

Further breaches of the same term

- If AP affirms the contract following the breach of a promise, will he later be able to terminate in response to that same
breach?
- Q: Depends on categorisation of breach:
▪ Once and for all breach; vs
○ Where BP has undertaken to do ‘a definite act and omits to do it within the time allowed for the purpose’ (eg not
excavating and delivering the land by the stipulated time in Carr);
○ Right to terminate is lost by election (the promise has been broken ‘finally’ and BP’s ‘continued failure to do
that act is nothing but a failure to remedy his past breach and not the commission of any further breach’).
▪ Continuing breach;
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 ○ Where BP undertakes to do some continuous act (eg to maintain a state or condition of affairs’);
○ A fresh right to terminate arises every successive moment the breach is not remedied (even though AP initially
affirmed).

Estoppel

- An AP may be estopped from terminating a contract where he has induced the other party to believe that the contract will not
be terminated, and the other party has relied on that assumption;
- The elements of equitable estoppel need to be satisfied (assumption, inducement, detrimental reliance, reasonableness,
unconscionable conduct, and departure);
- Eg in Legione the purchasers asked whether they could have an extension in payment to which the vendor’s secretary replied
‘I think that’ll be all alright.’ The court would have found the vendors were estopped from terminating if all elements made
out, but in this case the majority thought the inducement was not reasonable;

- Estoppel vs election
In an estoppel:
▪ Knowledge of right to terminate may not be relevant (Stephen J in Sargent thought so; but lack of knowledge may
mean departure is not unconscionable);
▪ Choice is not final (vs where in an election the choice is irrevocable); AP may regain his right to terminate by giving
reasonable notice of intention to terminate, or by compensating the BP for any loss.

Waiver

- Sometimes a party is said to have ‘waived’ a breach if he indicates an intention to continue with performance, but this is
better described as an ‘election’ (Mason J in Sargent).

Relief Against Forfeiture

- Where termination by AP would result in BP forfeiting a proprietary interest (ie land), a court may grant relief against
forfeiture and decree specific performance of the contract in favour of BP;
- Proprietary interest = land, and possibly personal property (doubtful).

Test

- High Court in Tanwar said RAF is based on relief against ‘unconscientious’ exercise of legal rights. You must consider why
AP ought not to be heard to assert the exercise of their legal right to terminate in answer to the claim by BP for specific
performance;

- In deciding whether to grant RAF, Mason and Deane JJ in Legione identified five ‘subsidiary questions’ the court should ask:
1. Did AP’s conduct ‘cause or contribute to’ BP’s breach?
2. Was BP’s breach (a) trivial or slight, and (b) inadvertent and not wilful?
3. What damage or other adverse consequences did AP suffer by reason of BP’s breach?
4. What is the magnitude of BP’s loss and AP’s gain if forfeiture is to stand?

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 5. Is specific performance with or without compensation an adequate safeguard for AP?

- However, the High Court in Tanwar expressed doubt over the role of these considerations;
- Their Honours preferred the traditional approach:
▪ It will be unconscientious for AP to terminate where circumstances fall under ‘the special heads of fraud, accident,
mistake or surprise’;
▪ Not exhaustive;
▪ BUT it is necessary that AP’s conduct ‘significantly’ caused or contributed to BP’s breach
(at least where accident and mistake are not involved); similarly
▪ It is NOT enough that AP will reap the benefit of any improvements made by BP – that is, consequences of termination
should not be taken into account (per their Honours, quoting Mason CJ in Stern; equity is 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”).

Examples

- Legione (1982):
▪ Where BP is in breach of an essential term, RAF will only be granted in ‘exceptional circumstances’ (per the majority);
▪ Majority thought RAF would be available (remitted to the Supreme Court for decision);
▪ Important facts: AP’s conduct had contributed to the breach by giving BP the impression that time for completion was
extended4 (note: this would fall under the head of ‘surprise’); BP’s breach was quite trivial (4 days), inadvertent and
not wilful; and BP had erected a house of considerable value on the land.
- Tanwar (2003):
▪ RAF unanimously rejected;
▪ AP did not contribute to BP’s breach (‘there is nothing to suggest that the vendors lulled Tanwar into any relevant false
sense of security’);
▪ Nor was there any accident. Their Honours said ‘equity will not relieve where the possibility of accident may fairly be
considered to have been within the contemplation of the contracting parties’. Failure by a third party to provide finance
was reasonably within contemplation of Tanwar and they could have protected against it by inserting relevant clauses
(eg subject to finance).

Unconscionable termination

- May be a general equitable power to preclude any termination which would be unconscionable;
- Not yet confirmed.

Good faith

- Some courts have considered that a duty of good faith may qualify the exercise of a right to terminate a contract;
- Duty requires the right to be exercised fairly and reasonably (Priestley JA in Renard);

4
Although Mason and Deane JJ held the secretary’s statement was not sufficient to ground an estoppel, their Honours still thought
it ‘contributed’ to the breach (Miss Williams’ words ‘created the impression’ that settlement would be extended and they were
‘capable of being understood’ in this sense).
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- For example, in Renard, Priestley JA found that the principal (Minister for Public Works) failed to exercise reasonableness in
deciding whether the contractor had satisfactorily ‘shown cause’ and in choosing to exercise the power of termination, when
other powers were available;
- But no binding High Court authority (only Supreme Court decisions).

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 FRUSTRATION

- Doctrine of frustration provides an excuse for non-performance;

- A contract will be frustrated only in ‘exceptional circumstances’ (Davis).

TEST

- Modern test expressed by Lord Reid and Lord Radcliffe in Davis (approved by the High Court in Codelfa):
i. Determine what the parties undertook to perform (matter of construction of the terms of the contract in light of the
surrounding circumstances);
ii. Identify frustrating event (must supervene after the making of the contract; Codelfa. Eg in McRae frustration was not
available because wreck never existed);
iii. Compare this to the situation produced by the frustrating event;
iv. If ‘radically’ or ‘fundamentally’ different = frustration.
(Non haec in foedera veni = it was not this that I promised to do).

Examples of Frustrating events

- Destruction of subject matter

o Has the subject matter of the contract been destroyed?
o Eg Caldwell
▪ Subject of lease, a music hall, was destroyed by fire;
▪ Court held contract was frustrated;
▪ Blackburn J said: where parties contract on the basis of the continued existence of a thing that is fundamental to
performance, the law will imply a condition that performance is contingent upon existence.
o See also Goods Act 1958 (Vic) s 12:
Where there is an agreement to sell specific goods, and subsequently the goods without any fault on the part
of the seller or buyer perish before the risk passes to the buyer, the agreement is thereby avoided.

- Disappearance of the basis of the contract

o Has the whole basis or purpose of the contract been destroyed?
o Eg Krell
▪ Contract for hire of rooms on Pall Mall on two dates corresponding to the coronation procession of King
Edward VII through that street;
▪ Coronation was postponed;
▪ English Court of Appeal held contract was frustrated;
▪ Vaughan Williams LJ thought that the procession was regarded by both contracting parties as the ‘foundation of
the contract’.
o Eg Brisbane City Council
▪ Group Projects entered into contract with BCC to have some land owned by GP zoned residential in return for
GP carrying out certain works, mostly off their land;
▪ The land was resumed by the Crown for development as a school;

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 ▪ High Court held contract was frustrated;
▪ Although performance was not rendered impossible;
▪ The acquisition ‘wholly destroyed GP’s purpose in undertaking any obligations at all’;
BUT
▪ Stephen J stresses that “this is not the common case of two contracting parties, both interested in a commercial
venture, one of them supplying to the other, in return for a money payment, goods, land or services.” BCC is not
concerned with its own financial or commercial advancement but rather the attainment of ‘appropriate standards
of amenity’ in a new subdivisional area. Point of distinction between other cases.

- Disappearance of a state of affairs essential to performance

○ Was there a disappearance of a state of affairs necessary to enable the contract to be performed in the manner
contemplated by the parties?
○ Eg Codelfa
▪ Contract for construction of a railway provided a time limit that required C to work 3 shifts per day 7 days a
week;
▪ Both parties erroneously believed that legislation prevented residents from obtaining an injunction to restrain a
nuisance. In fact, an injunction was granted restraining C to only work 2 shifts per day 6 days a week;
▪ High Court held the granting of the injunction frustrated the contract;
▪ Mason J found performance by means of a two shift operation was fundamentally different from that contemplated
by the contract;
▪ Aickin J said the situation created by the injunction made it impossible to perform the contract according to its
terms. The ‘Suez Canal cases’ show that a contract will not be frustrated where an alternative method of
performance, although more onerous, is not ‘radically’ different from that contemplated in the contract. Here,
however, the alternative method of performance would mean the work was not completed by time specified, and
this is radically different.

Limitations

1. Risk of frustrating event must not have been provided for by the parties in their contract;
○ Parties must not have expressly provided for the consequences of the particular event (otherwise performance cannot
be ‘radically’ different);
○ Does the clause exclude frustration?
▪ Matter of construction;
▪ Just because the clause specifies the consequences of a broad class of potentially disruptive events does not
necessarily prevent contract from being frustrated by an event within that class;
▪ The courts may construe the clause narrowly and find that the event which occurred was of a different character
or dimension from that which could have been contemplated by those parties when they made the contract;
▪ Eg Codelfa
• The contract provided that C will not operate the plant and equipment so as to cause a nuisance, and,
looked at the possibility of a restriction on working hours;
• However, court held these did not bar frustration;
• Mason J thought the clauses were not so ‘wide-ranging’ as to cover an injunction, and they were ‘quite
consistent with the contemplated method of work being an essential element of the contract.’

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2. Event must not have been reasonably foreseeable by the parties at time of making their contract;
○ Where it could be foreseen, it may be presumed that the parties have, at least impliedly, allocated the risk of the
event occurring to the party affected.

3. Event must have occurred without fault by the party seeking to rely on frustration.
○ Event must arise without blame or fault by the party seeking to rely on the contract being frustrated;
○ Negligence may amount to fault (but the scope is uncertain).

CONSEQUENCES

- Contract automatically comes to an end when the event giving rise to frustration occurs;
- Parties are discharged from future obligations (except for those intended to survive frustration, eg arbitration clauses;
Codelfa).

At common law

1. Recovery of money paid before event

○ Was there total or substantial5 failure of consideration?
○ Ie Has the party received none, or an unsubstantial proportion, of the performance which the money was paid to
secure?
○ If yes, the party may recover all the money paid by a claim in restitution (he is also released from the obligation to
pay any money due);
○ Eg Fibrosa
▪ Contract for sale of machinery between an English company (sellers) and a Polish company (purchasers) with
prepayment of £1,000. Germany invaded Poland, frustrating the contract. P sued for return of the money;
▪ House of Lords held P could recover because there had been a total failure of consideration (the machinery had
not been delivered);
▪ It is irrelevant that S had incurred expenses in constructing the machinery. There being a total failure of
consideration, money paid by P cannot be kept by S to cover expenses. The common law does not allow
apportionment.

2. Claims for payment for work done before event

○ Does contract expressly provide for payment of that work done?
○ If yes, party can seek payment because rights unconditionally accrued prior to frustrating event remain unaltered (eg
bring action for debt);
○ If no, no remedy at CL (party may not be able to recover on a quantum meruit).

3. Claims for payment for work done after event

○ Party may claim in restitution for reasonable remuneration for the work done (recover on a quantum meruit);
○ This was the basis of C’s claim in Codelfa.

5
‘Substantial’ added by Mason J in Baltic Shipping.
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Under statute

- Consequences of frustration now regulated by the Frustrated Contracts Act 1959 (Vic);
- Applies where a contract has become ‘frustrated’ (s 3(1));
- BUT does not apply to any charter-party, carriage of goods by sea, or insurance contracts (s 4(5)).

- Adjusts parties’ rights in three main respects:

a. Provides for recovery of sums paid before event, and release of obligation to pay sums due (s 3(2));
b. BUT, where the party to whom the sums were so paid or payable incurred expense6 before the event, the court may
(if it considers just to do so) allow him to retain or recover the whole of part of the sums so paid or payable
(maximum amount recoverable = amount of expense; s 3(2));

c. Where a party has obtained a valuable benefit (other than payment of money) before event, the other party may
recover such sum as the court considers just (maximum = value of benefit; s 3(3)). The court will have regard to all
the circumstances, in particular (a) the amount of any expenses incurred2 by the benefited party (including sums paid
or payable, or retained or recoverable under s 3(2)), and (b) the effect, in relation to the benefit, of the circumstances
giving rise to the frustration.

6
The amount of any expenses incurred may include such sum as appears to be reasonable in respect of overhead expenses and in
respect of any work or services performed personally by the party (s 3(4)).
Page 16 of 61
 REMEDIES

MEASURE OF DAMAGES

GUIDING PRINCIPLE

- Damages are compensatory;

- ‘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’ (by Parke B in Robinson v Harman, approved by
High Court in Amann);
- In giving effect to this principle, courts can make an award of:
2. Expectation damages (including damages for loss of a chance); or
3. Reliance damages (where the value of (1) cannot be established).

- AP bears the onus of proving that he has suffered a loss as a result of the breach of contract. Where no loss is established,
AP will usually recover only nominal damages (eg Tramways).
If AP establishes a loss he will be entitled to substantial damages (meaning an amount to compensate that loss).

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Expectation Damages

- Expectation damages compensate P for the benefit he expected to gain from performance of the contract but has lost by
reason of the breach;
- Generally:
o Where contract is not terminated, ED = difference in value between what D has done and what D should have
done if he had complied with the contract (but see Bellgrove); or
o Where contract is terminated, ED = either the price promised under the contract (called loss of bargain damages)
or the cost of obtaining performance to replace that promised under the contract;
+
o P may also be entitled to recover damages to compensate him for consequential losses (eg loss of profit, or
reasonably incurred expenses as a result of the breach).

- The courts have shown a concern to genuinely compensate P for his expectation loss (Bellgrove);
- Bellgrove:
The High Court held that where the breach of contract involves defective construction of property the ED = reasonable cost
of rectifying the defects, and not the difference between the value of the house as it stood and the value it would have borne
if erected in accordance with contract (at 617);
- Two important points:
i. Rectification must be a reasonable course to adopt.
In this case the court held it was reasonable to demolish and re-erect the house because the defects seriously
threatened its stability.
Cf with Ruxley, where the House of Lords found that the cost of rebuilding the pool (£21,560) was ‘out of all
proportion’ to the benefit which would be obtained by D (a one foot deeper diving area); and
ii. It is “immaterial” whether P actually intends to rectify the work.

Page 18 of 61
 RELIANCE DAMAGES

- Where P is unable to prove the value of ED (ie where it is not possible to predict what position P would have been in had
the contract been fully performed) the general principle cannot be used;
- But P is entitled to reliance damages, to compensate P for expenditure incurred in reasonable reliance on the contract being
performed (Amann);

- The relationship between RD and ED is: ED = RD + profit.

Burden on D

- According to the majority in Amann, P has a prima facie entitlement to recoup all of his wasted expenditure;
- BUT where the contract is loss making7, P is only entitled to the expenditure that would have been recovered if the contract
had been performed (that is, RD – loss on contract);
- Rationale: an award of damages should not put P in a superior position than he would have been in if the contract had been
performed (eg Amann per Mason CJ and Dawson J at 82).

- The onus of proof is on D to show that P had entered into a loss-making contract (per the majority in Amann; minority
thought onus was evidentiary).

Amann
The majority held that the Cth failed to show that the benefits from the initial contract + value of the prospect of renewal <
expenditure incurred by Amann. As onus on Cth to show contract was loss making, Amann was entitled to all reliance damages.

7
Where, even if the contract had been fully performed, P would not have recouped all his expenditure.
Page 19 of 61
 LOSS OF A CHANCE

- Courts may award damages compensating P for the loss of a chance or an opportunity of obtaining a benefit;
- A form of expectation damages – damages for LOC aim to put P in the position he would have been in if the contract had
been performed in cases where performance would have provided P with a chance of a benefit;

Test

- Test = was ‘P possessed of something which had a monetary value and of which he was deprived by D’s breach’?
(Howe per Street CJ)
- It is irrelevant that no market exists, or that P paid nothing to get the chance (Chaplin v Hicks);
- Damages for LOC have been awarded where breach has deprived P of a chance:
o To succeed in a contest or game (in Howe, the court declined to interfere with the jury’s award of £250 in damages
for loss of chances to win prizes on a horse, to win bets placed on the horse and to make profits from supplying
information); and
o To pursue a potentially successful commercial opportunity (in Amann, the High Court took the prospect of renewal
of an aircraft surveillance contract into account in calculating damages available to Amann).

Quantification

- The jury must calculate how much P’s chance is worth (= value of benefit x probability of benefit eventuating); but
- Just because the calculation is difficult or uncertain does not relieve a jury, they must ‘do their best to estimate’ (Howe).

* While prob can equal anything, recovery of loss of some chances can be limited by remoteness.

Discounting ED for unforeseen contingences

- D may show that, if the contract had not been terminated, the benefit P expected to gain from performance was likely to
have been reduced by other events;
- Uncertain whether courts will do so.

Eg Amann
- In this case the Cth argued that, had the contract continued, there was a chance that they would have validly terminated it
before renewal;
- The minority (Deane, Toohey and McHugh JJ) held that A’s damages should be discounted by 20% to reflect this chance;
- The majority held no discount:
o Mason CJ and Dawson J held that damages should not be discounted on account of an event which is ‘unlikely’
(even though they agreed that there was a 20% chance of cancellation); and
o Brennan J said that if A was claiming ED they should be reduced by 20%. Since, however, A was claiming RD
and the Cth had not proved that A’s return, even discounted by 20%, would not have covered its wasted
expenditure they were entitled to all RD.
Page 20 of 61
Page 21 of 61
Limitations on Award of Damages

Causation

- P must show D’s breach caused the loss for which P is seeking compensation;
- Breach just needs to be ‘a’ cause, not the sole cause (Cambridge Credit).

- Two stage approach:

1. ‘But for’ test
○ Q: ‘But for D’s breach would P have suffered the loss?’
○ No = breach may be a cause;
Yes = may not a cause.
○ But this test is ‘not definitive’ and ‘only a guide’ (Cambridge).
2. ‘Common sense’ judgment
○ ‘Ultimate question’: ‘as a matter of common sense was the relevant act or omission a cause?’ (Cambridge per
McHugh JA)

- In some cases an intervening event (called a novus actus interveniens) may break the chain of causation between D’s
breach and P’s loss (the causal connection). Decided using common sense.

Cambridge Credit
▪ ‘But for’ test suggests A was ‘a’ cause (but for the auditor’s negligence CC would not have continued to trade and sustain
further loss). However, the majority held that the loss suffered by CC was not caused by A’s defective report in 1971;
▪ McHugh JA said that as a matter of common sense the mere ‘existence of a company cannot be a cause of its trading
losses’ (at 359);
▪ Furthermore, a ‘package’ of external economic factors broke the chain of causation between the loss and A’s report in 1971
(A’s negligence was ‘so superseded in potency by supervening events as not to rank as a cause either in common sense or
in law’).

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Remoteness of Damage

- Remoteness sets limits beyond which D’s responsibility will not extend;
- P must show their loss was not too remote.

- Test propounded by Alderson B in Hadley v Baxendale:

Damages that are to be received are ‘such as may fairly and reasonably be considered either (1) arising naturally,
that is, according to the usual course of things, from such breach of contract itself, or (2) 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.’

- Step 1: Define ‘loss.’

McHugh JA said in Cambridge it includes both:
○ The general nature of the loss (eg profit from a specially lucrative contract vs general business profits in VL); and
○ The general manner of its occurrence (eg damage ‘by trading with insufficient equity capital’ in C).
- Step 2: Apply Hadley:
(1) Would a reasonable person have realised that the loss was ‘not unlikely’ to result from the breach to make it proper to
hold that the loss flowed naturally (according to the usual course of things) from the breach?
or
(2) Would a reasonable person on the information available to D when the contract was made, have realised that the loss
was ‘not unlikely’ to result from the breach to make it proper to hold that loss of that kind should have been within
reasonable contemplation?
(‘not unlikely’ was preferred by McHugh JA in Cambridge);

- No need to contemplate the degree or extent of loss suffered, or the precise details of how the loss arose (Cambridge at
366).

Impecunious plaintiff?

▪ Burns:
o In the case of continuing loss flowing from a breach, a point in time may exist beyond which the loss could no
longer have been within the parties’ contemplation (eg where the loss should have been mitigated) (at 668);
o As per the majority in Burns’ case, this may reduce an impecunious P’s damages where he could not afford to
mitigate his loss.

Examples

▪ Victoria Laundry:
o Supplier delivered a boiler for use in P’s laundry and dyeing business 20 weeks late;

Page 23 of 61
 o Asquith LJ held that P could recover loss of general business profits but not profits expected on highly lucrative
contracts (because D did not know of the prospect of such contracts).
▪ Cambridge Credit:
o McHugh JA thought the auditors would have contemplated as a serious possibility that, if they were negligent in
preparing their reports, the company might suffer damage;
o But the damage actually suffered could in no way be contemplated (“The track which the parties looked down in
1970 bore few, if any, resemblances to the track which Cambridge went down”).

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Mitigation of Damage

- Did P take all reasonable steps to reduce/ mitigate the loss caused by D’s breach?

- The principle of mitigation comprises three rules (McGregor on Damages):

1. P cannot recover for avoidable loss
○ P cannot recover damages for any loss which could have been avoided by taking reasonable steps;
○ Onus is on D to prove that P failed to take reasonable steps to mitigate that loss;
○ It is uncertain whether an impecunious P is required to take reasonable steps (in Burns, the majority
thought the losses were too remote; of the judges who considered mitigation (Gibbs CJ and Brennan J),
both thought an option will be unreasonable if P cannot afford to take it 8);
○ Example: reasonable steps will often require P to seek a substitute performance for that lost by reason of
the breach (damages then = difference between price under original contract and price under substitute
contract)9.

2. P can recover for loss incurred in reasonable attempts to avoid loss

○ Where P does take reasonable steps to mitigate the loss to him, he can recover for loss incurred in so
doing; this is so even though the resulting damage is greater than it would have been had the mitigating
steps not been taken.

3. P cannot recover for avoided loss

○ Where P does take steps (reasonable or not) to mitigate the loss to him and these steps are successful, P
cannot recover for the loss that has been diminished or avoided;
○ Thus, any benefits obtained by P as a consequence of D’s breach will be taken into account in calculating
P’s damages.

8
However, Gibbs CJ held that B could not recover for loss of profits after the condition of the engine was discovered because
there was another course open to mitigate the damage – he could’ve stopped running the business (“He was under no compulsion
to go on losing money”).
9
The Goods Act 1958 (Vic) assumes that P will go into the market to reduce his loss (eg where a seller fails to deliver goods, s
57(3) provides that if there is an available market the damages = difference between contract price and market price).
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Limitations relating to Specific Types of claim

Disappointment, distress and loss of reputation

- General rule: Damages not awarded to compensate non-pecuniary losses (such as any disappointment, anxiety, distress or
loss of reputation occurring on breach) (affirmed by High Court in Baltic Shipping).

- However, the High Court in Baltic confirmed that the restrictive rule is subject to 3 exceptions. Damages can be recovered:
1. For pain and suffering arising from physical injury caused by breach;
2. For disappointment and distress resulting from physical inconvenience (eg court in Bailey v Bullock awarded
damages for inconvenience and discomfort where P had to live with his parents-in-law in circumstances of physical
inconvenience); or
3. Where object of the contract was to provide enjoyment, relaxation or freedom from distress (eg in Baltic, contract
impliedly promised to provide a pleasurable and enjoyable cruise and hence she was entitled to damages for
disappointment and distress when cruise ship sunk ~$5,000).

Contributory negligence

- P’s negligence may have contributed to his own loss;

- It may act as a novus;
or
- Where P has concurrent claims in tort and contract (s 25(b));
- s 26(1)(b) of the Wrongs Act permits a court to reduce the damages recoverable to such extent as the court thinks ‘just and
equitable’ having regard to P’s share in the responsibility for the loss (allows court to apportion responsibility between
parties).

Loss of bargain damages and termination under a term

- Loss of bargain damages = contract price – market price (a type of expectation damages).

- LBD are available where P terminates pursuant to a CL right;

- BUT they are not available where P terminates pursuant to a contractual right, and no CL right existed (Shevill);
- Examples:
▪ In Shevill, the lessor exercised its contractual right to terminate when the lessee was late in paying rent. P claimed
arrears of rent and LBD. The High Court held that LBD were not available because P would not have been entitled to
terminate under CL (Gibbs CJ found no breach nor repudiation);
▪ Cf Progressive Mailing House. In this case the lessee had committed a number of breaches, including refusing to pay
rent, which together amounted to a repudiation of the contract. Therefore the lessor was entitled to LBD, even though it
terminated pursuant to a contractual term.

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LIQUIDATED DAMAGES AND PENALTIES

- The contract may specify an amount which is payable to AP in the event of breach;
- This clause can be either a:
1. Liquidated damages clause; or
2. Penalty clause.

Test

- Is the clause a penalty clause?

▪ Express classification is not conclusive (Dunlop);
▪ A question of construction of the contract (judged at the time it was formed);
▪ Q: Is the sum is a genuine pre-estimate of the loss likely to be caused by breach?
If no= penalty (Lord Dunedin in Dunlop at 86).

▪ Lord Dunedin identified several tests to help answer this question:

i. Sum will be penal where it is ‘extravagant and unconscionable10 in amount in comparison with the greatest
loss that could conceivably be proved to have followed from the breach’;
ii. There is a presumption that a clause is a penalty when it specifies a single lump sum payment on breach of
one or more of several terms, some of which may result in serious and others but trifling damage;
○ Q: Is stipulated sum unconscionable with respect to the lowest possible loss?
○ In Dunlop the presumption was rebutted. Lord Dunedin did not think the possible indirect damages from
breaching the various terms varied in magnitude (“You cannot weigh such things in a chemical balance”).
£5 not an unconscionable sum, and therefore sum was not a penalty.
iii. A sum can still be a genuine pre-estimate of damages even though precise pre-estimation is ‘almost an
impossibility’.

AMEV-UDC Finance
The High Court held the agreed damages clause was a penalty because it required the lessee to pay the balance of the instalments
without any rebate for the accelerated payment of future instalments, and without the lessor having to credit the lessee for the
proceeds from the sale of the repossessed equipment.

10
Or wholly ‘disproportionate’ (Mason and Wilson JJ in AMEV-UDC).
Page 27 of 61
 Outcome

1. Liquidated damages clause;

▪ Enforceable;
▪ AP may sue to enforce the clause and recover the specified sum in an action for a liquidated sum (instead of having
to prove loss in an action for damages).

2. Penalty clause.
▪ Void/ unenforceable (the Rule Against Penalties);
▪ AP must rely on an action for damages;
▪ It is uncertain whether or not the amount specified in a penalty clause sets the maximum amount which may be
recovered as damages (ie ‘does the penal sum provide a limit to recovery?’ – The High Court in AMEV-UDC
thought it was unnecessary to answer this question).

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EQUITABLE REMEDIES

- Principal remedy = damages (common law);

- Equitable remedies will be granted only when damages are inadequate;
- And they are discretionary (cf CL remedies, which are available as of right).

SPECIFIC PERFORMANCE

- Specific performance = any order of the court directing a party to perform his obligations under a contract in specie.

Test

- There are three essential requirements for a decree of specific performance:

1. P must have provided valuable consideration;
2. Contract must be enforceable (ie not subject to any of the vitiating factors in Rescission); and
3. Damages must be inadequate.
o Damages will be inadequate where:
▪ Subject matter is rare (eg a licensed taxi-cab; Dougan. Dixon J thought SP was appropriate because of
the limited number of taxi licences – 950, their great demand – 6 buyers: 1 seller, and the licence
represented a substantial proportion of the sale price); or
▪ Unique or has some special value (eg parcels of land);
* Note: It is ‘immaterial’ that AP later succeeded in purchasing similar property (Dougan);
▪ Losses are difficult to prove or quantify (eg where contract confers a benefit on a 3rd party).
o Ie damages are inadequate in these cases because they cannot put AP in the same situation he would have
been in if the contract had been performed.

- The court will also look at other discretionary factors such as:
4. Supervision
o Extent to which supervision might be required;
o Does SP compel performance of a definite thing or a continuing obligation?
SP is inapplicable when continued supervision of the Court is necessary to ensure fulfilment of the contract
(JC Williamson per Dixon J; eg selling sweets in a theatre).
o Is the obligation well defined?
The parties and court must be able to judge whether performance has taken place in accordance with contract
(if no, no SP).

5. Personal services
o SP will be ordered to enforce a contract of personal service or contracts requiring continual co-operation
between the parties only in ‘exceptional circumstances.’
o Rationale: It is an undue interference with personal liberty to require someone to serve a particular master.

6. Mutuality

Page 29 of 61
 o SP will only be awarded where it is equally available to both parties;
o This is because the court must be able to ensure that P, as well as D, perform their obligations;
o Onus on D to prove that he would be denied the remedy if it was sought;
o Eg in JC Williamson, the court held it would be unjust to bind D to perform their obligations by a decree of
SP, while leaving them only to a remedy in damages in the event of a breach by P.

7. Hardship
○ SP can be refused if it would cause unfairness or undue hardship to D that would not be caused by an award of
damages.

8. P is not entirely blame free

o SP may be refused where:
▪ There has been unreasonable delay in seeking relief and this has caused prejudice to D which cannot
adequately be compensated;
▪ P has breached an essential term; or
▪ P is not ready, willing and able to perform all his essential obligations under the contract (the court will
also take into account whether P is RWA to perform inessential terms).

9. Impossibility, illegality and futility

o SP may be refused where:
▪ Contract can no longer be performed (impossibility);
▪ Performance is illegal; or
▪ Performance is likely to be futile – that is, D’s performance is unlikely to confer any real benefit on P.

10. The court will balance the above factors against the injustice to P in being restricted to a remedy in damages.

INJUNCTIONS

- Injunction = an order of the court prohibiting or compelling the performance of a term (cf with SP, which compels the
performance of the whole contract).

- Types of injunctions:
o Prohibitory; or
▪ Most common;
▪ Granted to prevent performance of an act;
▪ That is, to restrain breach of a negative stipulation (a stipulation where inactivity constitutes compliance; eg
restraint of trade clauses).
o Mandatory.
▪ Less frequent;
▪ Granted to compel performance of an act;
▪ That is, to restrain breach of a positive obligation.

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 Test

- Injunction is an equitable remedy;

- Therefore entirely in the court’s discretion;
- Consider the same factors as for SP11 (inadequacy of damages, supervision, personal services, mutuality 12…)
+ One more limitation:
o An injunction will not be granted where it would be an indirect way of compelling SP in circumstances where SP
would be unavailable (JC Williamson at 299, Curro at 346);
o Examples:
▪ Desired injunctions = (1) not to revoke P’s licence to sell sweets and (2) not to grant licence to another party.
Held: not granted; confectionary must be sold and to grant injunctions would be to compel SP, which was
unavailable (JC Williamson);
▪ Desired injunction = to prevent Mme Wagner from singing at another theatre for 3-month season. Held: granted;
injunction only of short duration, and obedience would not confront D with a choice between performance and
destitute idleness (Lumley v Wagner); and
▪ Desired injunction = to prevent music group ‘The Troggs’ from employing another manager. Held: not granted;
very long time (4 years), managers are crucial to success in the music industry and hence injunction would force
D to re-employ P or go out of business (Page One Records v Britton);
▪ Desired injunction = to prevent television presenter, Curro, from working for another show. Held: granted;
similar to Wagner, she would not be forced to choose between service with Beyond or idleness (Curro).

EQUITABLE DAMAGES

- s 38 of Supreme Court Act 1986 (Vic)13 gives courts the power to award ‘equitable damages’ (damages in addition to, or in
substitution for, SP or an injunction);
- Equitable damages are assessed according to the same compensatory principle as CL damages.

- Test:
o P must be entitled to an equitable remedy;
o That is, all essential requirements must be established;
o Eg in JC Williamson, the High Court refused to award damages in lieu of an injunction because an injunction would
not be granted as it would be an indirect way of compelling SP (per Dixon J at 300).

- Provision mainly used in three situations:

1. Where SP or an injunction is refused on discretionary grounds;
2. Where it is more convenient to award damages rather than specific relief; and
3. Where it is necessary to award damages in addition to SP or an injunction, in order to fully compensate P (eg to
compensate for past breaches).

11
“The reason why SP could not be decreed ought not to be forgotten in considering whether an injunction might be granted”
(Dixon J at 298 in JC Williamson).
12
Mutuality alone is not decisive (Warren v Mendy at 866, cited in Curro).
13
The Lord Cairns’ Act.
Page 31 of 61
- VERY important in situations where damages are unavailable at CL, and SP is unsuitable.

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 ACTIONS FOR DEBT

- P may be entitled to claim from D money owing under a contract through an action for debt;
- Action to recover a debt ≠ action for damages;
- Three advantages:
1. P can recover a debt even where he has breached the contract;
2. D has onus of proving defence of payment; and
3. Principle of mitigation of loss does not apply to the recovery of a debt.

REQUIREMENTS

- For P to bring an action to recover a debt, two requirements must be satisfied:

1. Contract must impose an obligation on D to pay a certain or ascertainable sum of money; and
2. Right to payment of the sum must have ‘accrued.’

When has payment accrued?

- Question: Has P sufficiently performed the obligations to which payment relates?

- This is answered by asking:

- Q1: Is obligation entire or divisible?

o Entire obligation = must be wholly performed for a party to be entitled to recover any of the payment for
that performance;
o Cf Divisible obligation =
▪ Performance and price are divided into corresponding parts;
▪ P is entitled to payment of each instalment of the contract price for which the required
performance has been given;
▪ Note: each ‘divisible’ part is ‘entire’ (ie P will only be entitled to payment for the parts that have
been ‘wholly performed’) (Steele).

o A matter of construction, depending on the presumed intentions of the parties and the circumstances of
each particular case.
Eg:
Entire: contract provides for a single sum of money payable on completion (suggests parties intended that
performance would only be acceptable if exact and complete; but not conclusive; Hoenig at 180).
Divisible: payment and services and divided into instalments (eg in Steele the plaintiffs’ contract
provided for payment for each ton of timber cut to the specified dimensions. Dixon J held this was an
‘infinitely divisible’ contract).

○ Might be affected by legislation:

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 s 54 of Supreme Court Act 1986 (Vic) provides that periodical payments (rent, annuities,
dividends etc) shall accrue from day to day, and shall be apportionable in respect of time
accordingly.
○ Ie it allows recovery of payments pro rata;
○ Eg in Nemeth an aircraft was hired for a monthly sum payable at the end of each month. The contract was
frustrated when it crashed on February 16. McPherson J applied the Queensland equivalent of s 54 and
held that the hirer had to pay 16/28 of the monthly sum.

- Q2: Has there been substantial performance of that obligation?

o Doctrine of substantial performance;
o Has the entire obligation14, or a part of a divisible obligation, been substantially performed?
o Courts will consider:
i. Performance rendered (amount; how much have they not done?) Look at proportion between the
cost of rectifying defects and contract price; and
ii. Nature of the defects in that performance (are they trivial or serious?)
o Examples:
▪ Hoenig: contract to decorate and furnish D’s flat. Work faulty (trivial defects: wardrobe door faulty,
bookshelf too short). Cost of remedying defects £55, contract price £750 (7% => minor). English
Court of Appeal held contract was substantially performed (but Somervell LJ described it as a
‘border line’ case);
▪ Cf Mahdeva: contract for installation of combined heating and hot water system in D’s home. Work
faulty (serious defects: it did not heat the house adequately – ‘ineffective for its primary purpose’,
and gave out fumes making the living room uncomfortable). Cost or remedying defects £174,
contract price £560 (31% => major, the defects cannot be ‘put right’ by some ‘slight amendment’).
Held: not substantially performed.

- If yes: P will recover the payment price, less the cost of remedying the defects.

- Special case 1: Where payment is independent of performance.

o Sum will be owing as a debt when the time for payment arises;
o What happens if performance is not rendered? Can V claim or retain the sum?
o Eg Instalment contracts for the sale of land:
▪ Where a contract for the sale of property requires instalments towards the purchase price to be paid
prior to the transfer of ownership of the property;
▪ Instalment will be owing as a debt when the time for payment arises (and the vendor can bring an
action to recover this debt before the time of transfer has arrived; Dennys);
▪ However the right of V to retain the payments is conditional upon completion of contract (‘He
cannot have the land and its value too’; Dennys);
▪ Therefore, if the contract is not completed:
i. An unpaid overdue instalment ceases to be payable by the purchasers; and

14
There is some debate as to whether this doctrine should apply to entire obligations. Dixon J in Steele assumed it does (at 401).
But the authors of PCL argue it should not, as the parties have intended nothing less than complete performance to earn payment.
Page 34 of 61
 ii. Purchaser will be able to make a claim in restitution for return of all payments on the
ground of total failure of consideration (as they have not received the property); or
iii. If the contract expressly provides that instalment payments will be forfeited, P may be
entitled to equitable relief (eg RAF of those payments).
(Dennys per Dixon J)

- Special case 2: Deposits

○ Deposit = a % of overall purchase price payable by a purchaser on entering into a contract of sale;
○ It guarantees the purchaser’s genuine intention to perform, and is paid in return for V entering into
transaction;
○ Can V claim or retain the deposit?
▪ Express provision.
Usual arrangements are that:
i. If transaction goes ahead => deposit is treated as part of purchase price;
ii. If transaction does not go ahead, and this is because of:
a. V’s breach => purchaser is entitled to recover deposit;
b. Purchaser’s breach => vendor will retain deposit.
→ If purchaser has not paid deposit before termination, V may recover the deposit
(Brooking J said in Bot that V’s title to retain or recover a deposit is not conditional
upon completion, and hence survives termination).

▪ No provision.
Matter of construction of the contract based on the parties’ presumed intentions.
i. If deposit is not excessive – represents a reasonable sum => usual rights are implied (see
above);

▪ NOTE: Deposit is not usually treated as a penalty, but courts may grant RAF of a deposit in cases
where sum is penal-like (>10-20%).

MITIGATION

- Principles of mitigation do not apply to an action for a debt;

- That is, P does not have to take steps to reduce the debt;

- The outcome of this is that, at least in principle, P may choose not to accept a repudiation, complete his obligations and sue
in debt for the contract price;
- Subject to two limitations (White and Carter as upheld in The Alaskan Trader):
1. P must be able to fulfil his obligations without D’s co-operation;
and
2. P must have a legitimate interest in pursuing that course of action;
○ ‘If it can be shown that a person has no legitimate interest he ought not to be allowed to saddle the other party
with an additional burden with no benefit to himself’ (W&C);
○ Legitimate interests include where:

Page 35 of 61
 ▪ Damages are difficult to assess;
▪ It is uncertain whether other party was repudiating; or
▪ P had other sub-contracts to consider.
- No Australian authority (uncertain if the courts will follow the English approach; rather than the American approach that
the innocent party is always obliged to mitigate).

- Examples:
White and Carter
Concerned a contract for the display of advertisement for D’s garage by P on litter bins for 3 years. D repudiated on the
same day as formation. P affirmed the contract, performed his obligations and successfully sued for full contract price.
The Alaskan Trader
Contract for the charter of a ship. The plaintiff charterers repudiated after the ship suffered a serious engine breakdown.
However, the owners proceeded with the repairs and put the ship with a full crew at P’s disposal for 8 months, until the
contract expired. P claimed back the hire for the period after repudiation. It was found that D had no legitimate interest in
keeping the ship at anchor with a full crew after P made it clear they would not give the ship any orders.

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 VITIATING FACTORS

MISINFORMATION

MISTAKE

UNILATERAL MISTAKE

- Unilateral mistake by M occurs where:

o Two parties, M and N, not in actual subjective agreement (not ad idem);
o That is, they hold different opinions; and
o N is objectively right in his interpretation, or, N knows of M’s error.

- Relief is found in equity (Taylor);

- Test:
1. What is the mistake regarding?
○ ‘Serious’ mistake;
○ Regarding the content or existence of a ‘fundamental’ term of the contract (Taylor);
○ Eg in Smith v Hughes the court drew a distinction between a belief that the oats were oat, and a belief that
the seller contracted the oats were old.
2. Are there ‘special circumstances’?
○ Equity will only intervene if the court thinks it is unconscientious to enforce;
○ Need ‘special circumstances’;
○ Examples include where:
▪ M’s mistake is induced by a material misrepresentation of N;
▪ N knows15 of M’s mistake, and lets him ‘remain under his delusion and does not point it out’;
(Denning LJ in Solle, quoted in Taylor); and
▪ N knows of M’s mistake, and ‘deliberately sets out to ensure that M does not become aware of his
mistake’ (narrow ratio in Taylor).

15
Perhaps ‘ought to know’ (US and Canadian position, as discussed in Taylor).
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MISLEADING AND DECEPTIVE CONDUCT

COMMON LAW MISREPRESENTATION

- Elements:
○ Positive;
○ Misrepresentation;
○ Of existing/ past fact; that
○ Induces entry into contract (=reliance).
- If made out, contract is void.

Statute

- Misleading and Deceptive Conduct is prohibited by the Trade Practices Act 1974 (Cth) and Fair Trading Act 1999 (Vic).

Elements

- Where R engages in conduct in relation to I;

- Elements found in s 52 (TPA) and s 9 (FTA):
1. A corporation (TPA), or person (FTA) (R)
○ Corporation in TPA can extend to natural persons.
For example where:
▪ ‘Trade or commerce’ is interstate, or ‘engage in conduct’ involves the use of post or telephone or takes
place in a radio or TV broadcast (s 6); or
▪ A person has aided or abetted (a), induced (b), been knowingly concerned in (c), or conspired with
others to effect to (d), the contravention (s 75B).
○ Person in FTA includes both corporations and natural persons.
2. Shall not,
3. Engage in conduct
○ TPA = doing or refusing to do any act (s 4(2)). Where ‘refusing to do’ = refraining (otherwise than
inadvertently) from doing that act, or making it known that that act will not be done (s 4(2)(c));
○ FTA = doing or refusing to do any act, refraining (otherwise than inadvertently) from doing an act, making
it known an act will not be done, or offering to do an act (s 3).
4. In trade or commerce,
○ Q: Is the conduct an aspect or element of activities or transactions which, of their nature, bear a trading or
commercial character?
○ Ie conduct ‘of the essence of’, and not ‘merely incidental to’, R’s trade or commerce (CC);
○ The High Court in Concrete Constructions held a misleading statement by one employee to another is not
conduct ‘in trade or commerce’;
○ Includes professional activities, even if not performed for reward.
5. That is misleading or deceptive or is likely to mislead or deceive.

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 ○ Look at ordinary meaning of the words (Einstein J in Carpet Fashion):
○ Misleading = to lead into error (regardless of intent; Henjo). Ie capacity to lead someone into believing
things that are not true or correct;
○ Deceptive = to ensnare; to take unawares by craft or guile; to get the better of by trickery (Henjo).
○ Q: Is there a ‘real or not remote chance’ that a reasonable member of the audience at whom the conduct is
directed would be misled or deceived? (Carpet Fashion)
▪ Reasonable audience member = someone of less than average intelligence (but not unusually stupid;
Franki J in Annand & Thompson);
▪ Don’t need to prove that anyone was mislead or deceived;
▪ Although will be very persuasive (not determinative).
○ Disclaimer?
▪ Cannot exclude liability (Henjo);
▪ But may mean a reasonable audience member would not have been misled or deceived;
▪ Look at the manner and extent to which the disclaimer was brought to the audience’s attention, and
its timing in relation to the conduct.
○ Just because I has been careless or could have discovered the misrepresentation does not absolve R from
liability (Henjo; but see s 82(1B)).

What type of conduct may be misleading?

Silence

- (3) Silence must be deliberate – R must deliberately withhold the information (otherwise not conduct, s 4/ 3).

- (5) The courts have recognised that, in some circumstances, silence can constitute misleading conduct (Henjo;
Demagogue);
- What are these circumstances?
- 2 approaches:
i. Lockhart J in Henjo thought the circumstances of the case may impose a duty to disclose relevant facts (the vendor
had led the purchaser to believe that the seating limitations on a restaurant were less restrictive than was in fact the
case, which gave rise to a duty for him to reveal the true position to the purchaser).
Criticised by Gummow J in Demagogue as ‘unhelpful’ because it digresses from the words of the statute.
ii. Gummow J preferred the question, whether, in light of all relevant circumstances constituted by acts, omissions,
statements or silence, there has been conduct which is or is likely to be misleading or deceptive?
This can be answered by asking, ‘whether the circumstances were such as to give rise to a reasonable expectation
that if some relevant fact exists it would be disclosed?’

Opinions, Predictions and Promises

- ss 51A(1) and (2) TPA; ss 4(1) and (2) of FTA provide that:
i. Where representation concerns a future matter
ii. (Including the doing of, or the refusing to do, any act)
iii. It is presumed to be misleading.
iv. The evidential burden then shifts R to prove they had reasonable grounds for making the representation.
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- If R had reasonable grounds at the time, then the fact that the future matter does not eventuate (eg because R had a genuine
change of mind) does not make representation misleading or deceptive (James v ANZ Banking Group).

Contractual promises

- (i) Do contractual promises = representations?

- Definition of ‘engaging in conduct’: includes the making of, or the giving effect to a provision of, a contract… (s 4(2)(a)
TPA);
- Only an unconditional promise will be treated as a representation as to a future matter (Ormiston J in Futuretronics).

- Hence some breaches can be dealt with under both CL and statute. The statute may be used because:
○ It offers more attractive remedies; or
○ Contract is unenforceable, void or illegal (eg in Futuretronics the vendor’s property was knocked down to Mr
Gadzhis at an auction, but he refused to sign contract of sale. The contract was unenforceable because it did not
comply with s 126 of Instruments Act 1958. Ormiston J held that G’s promise to sign and pay the deposit was
unconditional and therefore a representation).

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 ABUSE OF POWER

ECONOMIC DURESS

- Has one party (SP) put illegitimate pressure on the other party (WP), in the form of threats?

- Two elements:

1. Illegitimate pressure; and

Q1: Identify threat. Does it create illegitimate pressure?
o The courts have accepted that, in some circumstances, a threat to break an existing contract may be illegitimate
pressure (see Sundell);
o According to Lord Scarman in Monrovia the court will consider two matters:
i. Nature of the pressure; and
Pressure will be illegitimate if it:
▪ Consists of threats of unlawful action (Monrovia); or
▪ Amounts to unconscionable conduct (Crescendo). Was the pressure prompted by events over which
SP had control or involve a risk SP might reasonably be expected to have assumed?
ii. Nature of the demand which the pressure is applied to support (eg the demand for money by a blackmailer
may render a lawful threat illegitimate).

2. Impaired consent.
Q2: Determine effect of threat on WP. Did it impair consent?
○ WP’s will must have been impaired, inhibited or deflected;
○ That is, pressure must result in compulsion or absence of choice16 as opposed to an intention to settle to avoid
the inconvenience of litigation (which won’t be duress);
o This can be proved by:
▪ Protest;
▪ The absence of independent advice;
▪ A declaration of intention to go to law to recover money paid (and how quickly WP initiated
proceedings); or
▪ Silence, where WP proves the lack of any practical choice but to submit (eg in Monrovia the plaintiff
ship owners did not protest – they needed the ship urgently and the only way to do this was to pay the
money).

16
Lord Scarman in Monrovia describes the classic case as ‘WP’s intentional submission arising from the realisation that there is no
other practical choice open to him’.
Page 41 of 61
- For example:
Sundell
Key characteristics: Due to an increase in the price of zinc, D threatened that P would not get the iron unless it paid more; P
needed the iron urgently; P paid, but made it clear that it was relying on the original contract price and payment was
‘without prejudice to its rights’.
FC of SC of NSW held P could recover price difference.

Undue Influence

- Does WP, by virtue of reliance on and confidence in SP, suffer from impaired judgment as to his own best interests?
- Looks to the quality of the consent or assent of the WP.

Test

- Three possible classes of claim:

1. Actual undue influence;
2. Presumed undue influence, made up of:
A. Deemed relationships of influence; and
B. Relationships of influence in fact.

- Q1: Is the relationship a deemed relationship of influence (Class 2A)?

o Equity deems certain relationships to be ROI:
▪ Parent and child;
▪ Guardian and ward;
▪ Religious advisor and disciple;
▪ Solicitor and client;
▪ Doctor and patient.
○ But not:
▪ Accountant (financial advisor) and client;
▪ Principal and agent;
▪ Trustee and beneficiary;
▪ Husband and wife.
○ There is a presumption that the 1st named person (SP) unduly influenced the 2nd named person (WP) in any contract
between them or in any gift given.

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- Q2: If no, Do the facts prove a relationship of influence (Class 2B)?
o WP needs to prove that the relationship is in fact one of influence;
o No closed list (Dixon J in Buttress);
o Does SP occupy or assume towards WP a position naturally involving an ascendancy or influence over that other, or
a dependence or trust on his part (Buttress)?
If yes = ROI => presumption of undue influence.
o Eg fiduciary-like17 relationships (Buttress);
o For example:

Buttress
Dixon J thought that the donor’s reliance and dependence upon the donee created an antecedent relation of influence
(the donee cared for the donor’s dying wife, and, after Mrs Buttress died, continued to visit and help the donor;
filling the void of ‘guidance and support’ created by the loss of his wife).

- Q3: If no, Can WP prove actual undue influence (Class 1)?

○ No presumption of undue influence;
○ WP must prove OBP actual undue influence;
○ That is, that SP exerted such influence over WP’s mind that entering into the contract cannot be considered a free
act.

Rebutting the presumption (Classes 2A and 2B)

- Evidential burden shifts to SP;

- SP needs to prove that entering into the contract was an independent and well understood act of a man in a position to
exercise free and informed judgment (Buttress);
- Ie that SP ‘took no advantage’ of the relationship;
- It was the exercise of a free and independent will;
- The court will consider:
o Adequacy of the consideration given by SP;
o Was WP was given competent advice by an independent and well informed advisor?
▪ If no, not fatal (Westmelton). But, then ask, would legal advice have had any effect on the transaction
(look at WP’s knowledge and expertise)? If yes, not exercise of free will;
▪ If yes, was there adequate time to reflect on that advice?
o BUT the matters will ‘vary enormously with all the circumstances of the case’ (Westmelton).

- Examples:
○ Buttress
▪ Gift of land and cottage;
▪ WP = illiterate man, who viewed the giving of financial benefit as a means of securing much needed help and
support (twice he changed his will in favour of whoever was helping him at the time);

17
A relationship of trust and confidence; SP undertakes to act in WP’s best interests in the exercise of a power or discretion, which
affects WP’s interests.
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 ▪ SP = had looked after WP’s wife while she was ill and WP was very fond of her, recently she began to visit and
care for him;
▪ HC held presumption was not rebutted (SP had not shown that the transfer was the result of WP’s free will, as
opposed to a will overborne with an instilled fear of losing her help and support).
○ Cf Westmelton
▪ Agreement to reduce $25,000 bill of costs to $10,000+7.5% of profits;
▪ WP = sophisticated and well informed corporate client, who had ‘more expertise in commerce and finance than
most solicitors would have’;
▪ SP = dealt fairly, honestly and openly with WP;
▪ In these circumstances the Vic SC held the presumption was rebutted, even though the defendant client did not
obtain independent legal advice (the WP was in no way relying upon any confidence or expectation of legal
advice).

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UNCONSCIONABLE DEALING

- Has SP exploited or taken advantage of the disadvantage of WP?

- Looks to the conduct of SP.

TEST

- Elements outlined by Deane J in Amadio:

1. Was WP under a special disability in dealing with SP?

○ Special disability
= Creates an absence of any reasonable degree of equality between the parties (Deane J);
= A circumstance that places WP at a ‘serious’ and ‘special’ disadvantage vis-à-vis the SP (Fullagar J in
Blomley);
= A circumstance that ‘seriously affects’ the WP’s ability to make an informed judgment as to his own best
interests (Mason J in Amadio; described as the ‘essence’ of the disability by Gleeson CJ and Callinan J in
Bridgewater).
○ No closed list (Fullagar J).

○ Some circumstances which may place a person under a special disability include:
Identified by Fullagar J:
▪ Drunkenness;
- Mere drunkenness not enough;
- If WP’s judgment is ‘seriously affected by drink’ equity will refuse specific performance, but
contract is still valid (CL damages);
- If contracted was obtained ‘by drawing WP into drink’ or there has been ‘real unfairness’ in
taking advantage of his condition, contract may be rescinded;
- In Blomley the 78-year-old defendant sold his grazing property during the middle of a drinking bout.
The HC rescinded the contract. While the general nature of the transaction was not beyond his
comprehension, he was ‘utterly incapable of forming a rational judgment.’
▪ Age (see Blomley and Amadio);
▪ Illiteracy;
▪ Lack of assistance or education where assistance or explanation is necessary (eg in Amadio the plaintiffs
had not read the contract, nor had it explained to them);
▪ Poverty or need of any kind;
▪ Sickness; or
▪ Infirmity of body or mind.

▪ Emotional dependence;
- Recognised by the High Court in Louth and Bridgewater;

Page 45 of 61
 - In Louth the majority thought that plaintiff was under a special disability, which arose from his
infatuation and ‘extraordinarily vulnerability in the false atmosphere of crisis which D
manufactured’;
- Toohey J, the lone dissentient, argued that since P was a solicitor he must’ve fully appreciated
the legal consequences of his gift, and had plenty of time to consider what he was doing (‘he did
not commit himself by one impulsive or hasty act’) ≠ special disability;

- In Bridgewater, Bill sold land to his nephew Neil with a $550,000 deed of forgiveness. The
majority thought B’s goal to preserve his land intact and his close relationship with N (he fully
trusted him and regarded him as the son he never had) created a strong emotional attachment to
and dependency upon N, which placed B under a special disability;
- Gleeson CJ and Callinan J (dissenting) argued there was no special disability (B knew and
understood what he was doing, and the transaction gave effect to his long standing and firmly
held wishes). Their Honours said, “The facts of Blomley (D took advantage of P’s alcoholism to
induce him to enter a transaction), Amadio (pressure to enter in haste into a transaction Ps did
not understand) and Louth (infatuation and a manufactured false atmosphere of crisis) are a long
way removed from the facts of the present case”.

▪ Inequality of bargaining power, without anything more, is not sufficient (although the WP may be at a
‘distinct disadvantage’, there is nothing ‘special’ about it; ‘good conscience does not require parties to
contractual negotiations to forfeit their advantages, or neglect their own interests’; Berbatis).

○ For example:
Amadio
The majority thought the Amadios were under a special disability because of: their age (76 and 71), their
limited grasp of written English, their lack of knowledge and understanding of the contract, their reliance on
and confidence in their son who was clearly biased, and their false belief in the financial stability of their son’s
company.

2. If so, Was the disability sufficiently evident to SP?

○ WP needs to prove that SP:

▪ Knew of (actual knowledge); or
▪ Ought to have known of (evident to a reasonable person); or
▪ Closed his eyes to (as quoted with approval by Mason and Deane JJ in Amadio, ‘in some cases wilful
ignorance is not to be distinguished from knowledge’);
His disability.
○ This makes it prima facie unfair or ‘unconscientious’ that SP procure, or accept, WP’s assent to the
transaction in the circumstances in which he procured, or accepted, it;
○ Ie it creates a rebuttable presumption that the transaction is unfair.

3. If so, Has the SP discharged the onus cast on it to show that the transaction was fair, just and reasonable?

○ SP has the burden of proving that the transaction is fair, just and reasonable.
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 ○ This can be done by:
▪ Showing that the terms of the transaction are fair;
The court will consider:
- Adequacy of consideration moving from SP (Amadio, however, makes it clear that it is not
essential to have an inadequate consideration);
- Overall benefit obtained by WP (improvident?18);
- Fairness of the terms;
- Whether WP would have entered into the contract at all had special disability not existed.
Examples:

Blomley
WP sold his property at £9000 undervalue, the deposit was only £5, and the interest rate was only 4%
(whereas the bank interest rate at that time was 5% – and WP was proposing to retire and live on this
interest) = unfair contract.
Amadio
The contract was unfair because the Amadios obtained no benefit (the consideration moving from the
bank to their son), and they would not have entered into it knowing its true terms and the financial
problems of their son’s company.

▪ Showing that WP received independent advice.

- Does not show that the contract was fair, but might prove that SP did not take advantage of WP;
- It is the denial of the opportunity to have independent legal advice, and not the speculation as to
what might have followed, that produces the unconscientious conduct (hence it is irrelevant that
the WP would still have entered into the transaction had the advice been provided; Bridgewater).

18
Failing to provide for the future.
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IMPROPRIETY BY THIRD PARTIES

Improper
B = debtor A = surety
conduct?
3rd party plaintiff

loan contract of guarantee

C=creditor
defendant

- Two questions arise:

1. Was B’s conduct vis-à-vis A improper?
○ Identify any duress, misrepresentation, undue influence, or unconscionable dealing.
2. If so, Should that conduct give A rights against C?
○ Are the circumstances of the case such that C should be bound by B’s impropriety?
○ Q: Did C know of the impropriety?
Or Did C have reason to believe that impropriety had occurred (ie the circumstances are such that C is “put on
notice” of possible impropriety)?

THE RULE IN YERKEY V JONES

- Where a wife (A) acts as surety for her husband (B)19;

- A special principle applies (enunciated by Dixon J in Yerkey v Jones; and affirmed by the High Court in Garcia).

- The rule in Yerkey says that:

i. Where the wife is a ‘volunteer’;
○ That is, A does not benefit from the transaction;
○ She is still a volunteer if the debtor is a company controlled by the husband and she does not have a
substantial interest in the company (per Dixon J);
○ The wife in Garcia was held to be a volunteer, even though she was a director of and shareholder in her
husband’s company (although some benefit flowed to the family from time to time, she obtained no real
benefit from entering the transaction).
ii. And, either she:
a. Did not understand the effect of the document or the nature of the transaction of suretyship; or
b. Understood the transaction, but her consent was obtained by her husband’s actual undue influence.
iii. AND
Where creditor knew at the time of formation that the surety was married to the debtor;
iv. The wife has a prima facie right to have the transaction set aside20;

19
= Where a married woman (A) executes a contract of suretyship with a creditor (C) to become a surety of her husband’s debts (B).
Page 48 of 61
 v. The creditor can rebut this by showing:
For:
a. They took adequate steps to inform the wife or reasonably believed that its purport and effect had been
explained to her by a competent, independent and disinterested stranger;
b. The wife was given independent advice or relief from the ascendancy of her husband over her judgment and
will.

- Eg in Garcia the wife succeeded in having the guarantee set aside. She knew she was signing a guarantee, but she did not
know it was secured by the ‘all moneys’ mortgage and thought it was a guarantee of limited overdraft accommodation to be
applied only in the purchase of gold bullion (she thought it was ‘risk-proof’). And the bank took no steps to explain the
transaction and knew of no independent advice to her about it.

- The majority did not decide whether this rule could be extended to other relationships ‘short of marriage’ (where the
requisite ‘trust and confidence’ exists).

KIRBY J’S TEST IN GARCIA

- Kirby J rejected the rule in Yerkey as ‘inappropriate’, ‘offensive’, an ‘unacceptable discrimination’ and a ‘historical
anachronism’;
- His Honour preferred the principle in the English case of O’Brien;
- His re-formulated test says that:

1. Where a person acts as surety for another and the creditor knows, or ought to know, that there is a relationship
involving emotional dependence on the part of the surety towards the debtor;
2. The transaction will be invalid where:
a. It was procured by a legal wrong of the debtor (eg undue influence…);
b. AND The creditor has not taken reasonable steps to satisfy itself that the surety entered into the obligation freely
and in knowledge of the true facts.
○ Reasonable steps = unless there are special exceptional circumstances or the risks are large, warning the
surety (when debtor is absent) of the amount of their potential liability, of the risks involved to the
surety’s own interests, and advising the surety to take independent advice.

20
The majority in Garcia said that, for cases falling within (a), the creditor must be 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.
Page 49 of 61
 STATUTORY UNCONSCIONABILITY

Unconscionability

- The legislative provisions can apply to:

o Pre-contractual conduct (formation); or
Advantages over CL:
▪ P has access to a wider range of remedies;
▪ Potentially broader definition of unconscionable conduct; and
▪ May cover substantive unconscionability (ie terms of a contract), and not merely procedural unconscionability
(ie conduct in the process of making a contract).
o Post-contractual conduct (performance and termination).

- Note: unconscionable conduct in relation to financial services is not governed by the TPA, but the Australian Securities and
Investments Commission Act 2001 (Cth).

TRADE PRACTICES ACT 1974 (CTH)

Section 51AB: Consumer transactions

- s 51AB(1):
o A corporation shall not,
o In trade or commerce,
o In connection with the supply, or possible supply, of goods or services to a person,
▪ ‘Goods or services’ = of a kind ordinarily acquired for personal, domestic or household use or consumption (s
51AB(5));
▪ ‘Supply or possible supply’ = does not include for the purpose of re-supply or for the purpose of using them
up or transforming them in trade or commerce (s 51AB(6)).
o Engage in conduct
o That is, in all the circumstances, unconscionable.
▪ The Act does not define ‘unconscionable’;
▪ Sundberg J in Simply No-Knead said, as obiter, that ‘unconscionable’ in this section is not limited to legal
categories of unconscionable conduct (his Honour reached this conclusion for s 51AC, and then thought it
would be ‘curious’ if unconscionable in the two provisions had different meanings 21);
▪ It is likely that ‘unconscionable’ will bear its ordinary meaning of “showing no regard for conscience;
irreconcilable with what is right or reasonable”. BUT the conduct must ‘serious misconduct or something
clearly unfair or unreasonable’ (Full Court in Hurley, quoted in SNK).

▪ The court may consider (s 51AB(2)(a)→(e)):

(a) Relative strengths of the bargaining positions of corporation (D) and consumer (P);

21
The non-exhaustive list of factors that the court may consider in s 51AB also points to a wider meaning.
Page 50 of 61
 (b) Whether, as a result of conduct engaged in by D, P was required to comply with conditions that were
not reasonably necessary for the protection of the legitimate interests of D;
(c) Whether P was able to understand any documents relating to the supply or possible supply of the goods
or services;
(d) Whether any undue influence or pressure was exerted on, or any unfair tactics were used against, P or a
person acting on their behalf by D or a person acting on their behalf in relation to the supply or possible
supply of the goods or services; and
(e) The amount for which, and the circumstances under which, P could have acquired identical or equivalent
goods or services from a person other than D.
▪ Non-exhaustive list;
▪ A corporation shall not be taken to engage in unconscionable conduct by reason only of the institution of legal
proceedings or the referral of a dispute to arbitration (s 51AB(3)).

Section 51AC: Small business transactions

- s 51AC(1):
o A corporation must not,
o In trade or commerce,
o In connection with:
(a) The supply, or possible supply, of goods or services to a person (other than a listed public company); or
(b) The acquisition, or possible acquisition, of goods or services from a person (other than a listed public company);
For (a)
▪ Acquisition must be for the purpose of trade or commerce (ss 51AC(7), (8)); and (b)
▪ Price of goods or services <$3,000,000 (ss 51AC(9), (10); and price = amount paid or payable; (11)).
○ (NOTE: s 51AC(2) imposes a prohibition in identical terms on a person in respect of a corporation)
○ Engage in conduct
○ That is, in all the circumstances, unconscionable.
▪ The Act does not define ‘unconscionable’;
▪ Sundberg J said in Simply No-Knead that ‘unconscionable’ in this section is not limited to legal categories of
unconscionable conduct (the factors the court may consider point to an ‘enlarged notion of
unconscionability’);
▪ His Honour concluded that ‘whether conduct is unconscionable is at large’ – the court is aided but not
controlled by the factors listed in ss (3);
▪ It is likely that ‘unconscionable’ will bear its ordinary meaning of “showing no regard for conscience;
irreconcilable with what is right or reasonable”. BUT the conduct must ‘serious misconduct or something
clearly unfair or unreasonable’ (Full Court in Hurley, quoted in SNK).

▪ The court may consider:

NOTE: Where D (corporation or person) = supplier (use s 51AC(3) – extracted below), or = acquirer (use s
51AC(4), and replace S and BC with ‘acquirer’ and ‘small business supplier’):
(a) Relative strengths of the bargaining positions of the supplier (S) and the business consumer (BC);
(b) Whether, as a result of conduct engaged in by S, BC was required to comply with conditions that were
not reasonably necessary for the protection of the legitimate interests of S;
(c) Whether BC was able to understand any documents;

Page 51 of 61
 (d) Whether any undue influence or pressure was exerted on, or any unfair tactics were used against, BC or
a person acting on their behalf by S or a person acting on their behalf;
(e) The amount for which, and the circumstances under which, BC could have acquired identical or
equivalent goods or services from a person other than S;
(f) The extent to which the S’s conduct towards BC was consistent with the S’s conduct in similar
transactions between the supplier and other like business consumers;
(g) The requirements of any applicable industry code;
(h) The requirements of any other industry code, if BC acted on the reasonable belief that S would comply
with that code;
(i) The extent to which S unreasonably failed to disclose to BC:
(i) Any intended conduct of S that might affect the interests of BC; and
(ii) Any risks to BC arising from S’s intended conduct (being risks that S should have foreseen
would not be apparent to BC).
(j) The extent to which S was willing to negotiate the terms and conditions of any contract for supply of
the goods or services with BC; and
(k) The extent to which the S and BC acted in good faith.
▪ Inclusive list;
▪ A corporation/ person shall not be taken to engage in unconscionable conduct by reason only of the institution
of legal proceedings or the referral of a dispute to arbitration (s 51AC(5)).

- For example:
Simply No-Knead
SNK devised and carried out a plan to cause its franchisees to terminate or not renew their agreements (SNK competed
with the franchisees, refused to deliver products, deleted their telephone numbers from Telstra’s directory assistance,
omitted their names from promotional material and refused to negotiate and discuss concerns). Sundberg J of the Federal
Court of Australia thought that the facts demonstrated “an overwhelming case of unreasonable, unfair, bullying and
thuggish behaviour” constituting unconscionable conduct for the purposes of s 51AC(1).

Section 51AA: Large-scale commercial transactions

- s 51AA(1):
o A corporation must not,
o In trade or commerce,
o Engage in conduct
o That is unconscionable within the meaning of the unwritten law, from time to time, of the States and Territories.
▪ Refers to the principles of law and equity expounded by the High Court (the ‘Australian common law’;
Berbatis);
▪ The Act does not define ‘unconscionable’;
▪ The High Court in Berbatis said that ‘unconscionable’ is restricted to legal categories of unconscionable
conduct;
▪ Includes ‘Unconscionable Dealing’ (Berbatis);
▪ But it is uncertain what other categories are ‘reached’ by s 51AA (it was unnecessary to decide this question
in Berbatis).

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- Does not apply to conduct that is prohibited by ss 51AB or 51AC (s 51AA(2)).

FAIR TRADING ACT 1999 (VIC)

- Provisions replicated by FTA:

o s 51AB = s 8;
o s 51AC = ss 8A and 8B; and
o s 51AA = s 7.
- Replace ‘corporation’ with ‘person’.

UNFAIR TERMS

- Part 2B Fair Trading Act 1999 (Vic);

- Aimed at substantive unfairness (but issues of procedural and substantive unfairness may be interrelated).

Q1: Does it apply?

- Applies to consumer contracts;

- ‘Consumer contract’ = an agreement to supply goods or services of a kind ordinarily acquired for personal, domestic or
household use or consumption, AND for the purposes of the ordinary personal, domestic or household use or consumption
of those goods or services (s 3).

Q2: Is the term ‘unfair’?

- A term is to be regarded as unfair if, contrary to the requirements of good faith and in all the circumstances, it causes a
significant imbalance in the parties’ rights and obligations arising under the contract to the detriment of the consumer (s
32W).
- Two elements:
1. Good faith; and
○ Not defined in Act;
○ Consumer Affairs Victoria suggest that good faith = a principle of fair and open dealing; that is ‘playing fair’;
○ This is reinforced by s 163 (requires consumer contracts to be easily legible, clearly expressed, and, if printed or
typed, in a minimum 10 point font).
2. Significant imbalance.
○ s 32X lists a range of factors which a court may consider in assessing whether a term is unfair:
▪ Whether the term was individually negotiated;
▪ Whether the term is a prescribed unfair term (defined as ‘a term that is prescribed by the regulations to be
an unfair term or a term to the like effect’; s 32U);
▪ And whether the term has the object or effect of:
(a) Permitting the supplier (S) but not the consumer (C) to avoid or limit performance of the contract;
(b) Permitting S but not C to terminate the contract;

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 (c) Penalising C but not S for a breach or termination of the contract;
(d) Permitting S but not C to vary the terms of the contract;
(e) Permitting S but not C to renew or not renew the contract;
(f) Permitting S to determine the price without the right of C to terminate the contract;
(g) Permitting S unilaterally to vary the characteristics of the goods or services to be supplied under
the contract;
(h) Permitting S unilaterally to determine whether the contract had been breached or to interpret its
meaning;
(i) Limiting S’s vicarious liability for its agents;
(j) Permitting S to assign the contract to C’s detriment without the their consent;
(k) Limiting C’s right to sue S;
(l) Limiting the evidence C can lead in proceedings on the contract;
(m) Imposing the evidential burden on C in proceedings on the contract.

- Consumer Affairs Victoria suggests that unfair terms will typically fall into the following categories (Preventing Unfair
Terms in Consumer Contracts (2003), p9):
o Lock in terms (ie terms that require the consumer to continue to perform a contract while the supplier may vary
the terms);
o Terms that restrict consumers’ options for resolving disputes;
o Terms that restrict the liability of the supplier for a breach of contract; and
o Terms that impose a penalty payment on consumers.

Q3: Effect of an ‘unfair’ term

- An unfair term is void (s 32Y(1));

- A prescribed unfair term is void (s 32Y(2)) and it is an offence under s 32Z to use ((1)), or attempt to use ((2)), one in a
standard form contract (‘standard form contract’ = a consumer contract that has been drawn up for general use in a
particular industry; s 32U; penalty = 10PU (natural person) or 20PU (body corporate); s 32Z);
- The contract will continue to bind the parties only to the extent that it is able to exist without the unfair term (s 32Y(3)).

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 REMEDIES

For Common Law/ Equity

- Remedy is rescission;
- P = party claiming rescission;
- NOTE: Watch my language! Traditionally, rescission is the act of the party – the court just ‘adjudicates upon its validity’
and ‘gives effect to it’ (Alati). However, the recognition of partial rescission in Vadasz, and the description of the remedy as
‘discretionary’ in Alati, suggests it is more accurate to describe rescission as ‘a discretionary remedy granted by decree of
the court.’

Is rescission available?

- Vitiating factor (Mistake, Duress, Undue Influence, Unconscionable Dealing, and The Rule in Yerkey v Jones);
- This makes the contract voidable (valid until P elects to rescind);
- The effect of a valid election to rescind is to render the contract void ab initio (a nullity from the beginning).

- Rescission is a discretionary remedy (as High Court said in Alati);

- And the following requirements must be met for the court to give effect to an election to rescind:
1. Substantial restoration
○ Rescission effects a restitutio in integrum;
○ So it must be possible to restore the parties to their original position;
○ CL only allows rescission for fraud, duress and total failure of consideration, and requires precise restitution (P
must be ‘in a position to return to D in specie that which he had received under the contract, in the same plight
as that in which he had received it’; Alati);
○ BUT equity only requires substantial restoration (can the court, by the exercise of its powers, restore the parties
substantially to the status quo? – Alati);
○ In Alati the purchaser of a fruit shop elected to rescind the contract after he discovered the seller had
fraudulently misrepresented the takings of the business. P had possession of the premises, sold stock, made
revenue, and the business had deteriorated => no rescission at CL, but the High Court effected rescission in
equity:
▪ Possession = a money payment could compensate for any difference between the rental value of the
premises and the rent paid by P;
▪ Revenue = take accounts of profits;
▪ Stock = pay for its value;
▪ Deterioration = even at CL it is not necessary to return the property in its original condition if changes
occurred as a result of the inherent nature of the property or by reason of P’s exercise of contractual
rights.

2. Practical justice
○ A court exercising equitable jurisdiction will look at what is ‘practically just’ for both parties (Vadasz);
○ ‘He who seeks equity must do equity’;
○ Two consequences:
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 i. Partial rescission
○ The High Court in Vadasz recognised possibility of partial rescission:
1. Where a case has been made out for a contract to be set aside in equity (vitiating
factor), the court must consider what would have happened in the absence of the
vitiating factor;
2. The court should set the contract aside in its entirety only if, had it not been for the
vitiating factor, P would not have entered into the contract at all (eg in Amadio the
parents would not have entered into the guarantee/ mortgage at all had they known the
company’s true financial position);
3. If P would have accepted some obligation in the absence of the vitiating factor, then
partial rescission should be granted, and P held to that obligation.
○ In Vadasz the guarantor was told the guarantee would only cover future debts, whereas it in fact
covered all debts (past and future). Since Vadasz would have ‘happily’ entered into a guarantee
of future debts, the High Court held him to that obligation. The concern of equity is ‘to prevent,
nullify, or provide compensation for, wrongful injury’, and courts will not go beyond this if it
involves injustice D (eg to set aside the contract in its entirety would allow P to obtain an
unwarranted benefit at the expense of the other).

ii. Unconscionability by P
○ Has P acted unconscionably?
○ In Alati, it was argued that P lost his right to a decree giving effect to rescission by his conduct
in discontinuing the business and leaving the premises before judgment was given. P did not act
unconscionably; the seller knew he might lose the case, but ‘He took his chance’ and failed to
take the property back or offer any solution to P. P was not under a duty to go on indefinitely,
working for nothing and incurring losses. Relief might have been refused if P had caused loss of
goodwill and a valuable leasehold by abandoning the premises without giving the seller a
reasonable opportunity to take them back.

3. Affirmation
○ Vitiating factor makes contract voidable;
○ P has an irrevocable choice between ‘rescinding’ and ‘affirming’ the contract (called an election);
○ If P has affirmed the contract, he cannot later rescind.

4. Notice
○ Generally, P needs to give notice of his choice to the other party;
○ Except where it is not possible to communicate to them (eg wrongdoer has absconded; Caldwell);
○ Notice may be by express or implied unequivocal conduct (unequivocal in the sense that it is consistent only
with the exercise of one of two sets of rights and inconsistent with the other);
○ Eg if P makes a claim for damages for breach of contract he is electing to affirm.

5. Delay
○ Mere passage of time is not of itself a disqualification;
○ But a court will not order rescission where delay caused prejudice to the other party (see Unconscionability by
P).
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6. Intervening 3rd party rights
○ Since voidable contract is valid until rescinded, if D sells the goods to an innocent 3rd party before contract is
rescinded by P a good title passes;
○ Restitutio in integrum is impossible, and rescission has traditionally been barred;
○ However, monetary remedies may now be granted (eg allowing ‘pecuniary rescission’ between the original
parties; Hartigan).

7. Executed contracts
○ Some contracts cannot, in the absence of fraud, be rescinded if they have been executed (eg contracts for the
sale of land);
○ Uncertain scope and application.

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For Statute

- Misleading and Deceptive Conduct (s 52), and Unconscionability (Unconscionable Dealing by virtue of s 51AA, or
Unconscionable Conduct under ss 51AB and 51AC);
- Remedies found in ss 82 and 87 of TPA (s 159 and 158 of FTA respectively).

Causation

- Both sections refer to loss or damage ‘by’ contravening conduct;

- Connotes a causal requirement;
- Q: Did D’s conduct cause P’s loss or damage?
- CL analogies can be applied:
o Conduct need only be ‘a’ cause, not the ‘sole’ cause (Henjo);
o ‘But for’ test: Would P have suffered loss or damage but for D’s conduct? If no => causal link. This must be
tempered with common sense (Cambridge);
o A novus actus interveniens may break the chain of causation (but, generally, unreasonable reliance by P on the
representation will not be a novus; Henjo; but this may reduce damages, per s 82(1B)).

- For example:
Marks
Gummow J (with whom Gaudron J agreed) refused relief to the plaintiff borrower because causation was not made out.
‘But for’ the financier’s representation, B still would have entered into the loan facility. Furthermore, as F gave B an
opportunity to leave the contract without penalty, it is against common sense to say that F increasing the margin caused B’s
loss.

s 52: Misleading and Deceptive Conduct

- Need to prove actual reliance on misleading conduct (Henjo);

- Ie P was induced to enter the contract (CL analogy);
- Remember: the conduct only needs to be ‘a’ factor in P’s decision to enter the contract (Henjo).
- For example:
Carpet Fashion
Need actual reliance. In this case, Einstein J thought it unlikely that P, a very experienced business man who was intimately
familiar with, discussed at length, and agreed to the terms of the lease, relied on the owner’s representation that the
shopping centre would be exclusively used for home renovation.

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DAMAGES

s 82(1): A person who suffers loss or damage by conduct of another person that was done in contravention of
a provision of Part IV, IVA (ss 51AA, AB and AC), IVB or V (s 52) may recover the amount of the loss or
damage by action against that other person, or against any person involved in the contravention (by virtue of s
75B22).

- P will be entitled, as of a right, to damages if he can prove:

1. Contravention;
2. Loss or damage; and
3. Causation.

Element 2: Loss or damage

- To interpret and apply this provision, the courts have drawn analogies with the law of contract, tort or equitable
remedies;
- Such analogies are ‘helpful’ but not ‘binding’ (Marks; Murphy).

1. Tort analogy: Reliance loss

- Compensatory damages;
- That is, damages are awarded to put P in the same position as if the tort had not been committed;
- Q: Compare the position P is in to the position in which he would have been but for the contravening
conduct;
- P must be ‘worse off’.

- For M&D Conduct:

○ * P must sustain a prejudice or disadvantage as a result of altering his position in reliance on the
misleading conduct (ie there was a ‘more beneficial or less detrimental course’ available);
○ This can arise in two ways:
i. Difference in value; or
○ Damages = price paid – market value (objective)23 + any consequential loss (if causally
linked to the conduct);
○ In Gates the plaintiff added a total disability clause to his existing life policy, on an
assurance that the policy benefits would apply if he could not attend to his occupation
for 90 days. In fact, the clause provided that he must not be able to attend any gainful
occupation for 90 days. P was injured and claimed the benefits. Applying the torts
analogy, P was entitled to the difference between what he paid for the premiums and
their market value. But there was no evidence that the cover was not worth what he
paid => P was not entitled to damages on this basis;

22
Includes persons who have aided or abetted (a), induced (b), been knowingly concerned in (c), or conspired with others to effect to
(d), the contravention (s 75B).
23
The price freely contracting and fully informed parties would have offered and accepted for it (Marks).
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 ii. Loss of an opportunity.
○ Court can compensate P for the loss of an opportunity to enter a profitable contract
with another party;
○ Very similar to expectation damages, except it is for P to establish that he could and
would have entered into a different contract and it would have been more profitable;
○ In Gates the High Court thought that Mr Gates could have obtained an award for
damages equal to the policy benefits if he could show that, but for his reliance on Mr
Rainbird’s representations, he would have entered a more beneficial transaction.
However, this was not established. There was no evidence to show Gates would have
approached another company, nor that any company actually offered disability
insurance on those or similar terms;
○ Similarly, in Marks, a financier misrepresented that the interest on loans would have a
margin set at 1.25% per annum. In fact, the contract enabled F to vary the margin on
giving 90 days notice. The borrowers claimed relief under ss 82 and 87. Since there
was no cheaper loan available on the market, McHugh, Hayne and Callinan JJ refused to
give relief.

2. Contract analogy: Expectation loss

- The High Court in Murphy held that reliance loss is not the only kind of compensable damage;
- *Their Honours said P can suffer loss when, as a result of misleading conduct, he undertakes a
contractual obligation more onerous than he was lead to believe;
- This is an expectation loss;
- Contradicts Marks where McHugh, Hayne and Callinan JJ said, ‘The mere 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 P has suffered loss or damage’;
- In Murphy the plaintiffs purchased a leasehold interest in a unit in a retirement village. The defendant
operators misrepresented the estimated ‘outgoings’ that the tenants were likely to be charged. The Full
Court refused relief as there was no reliance loss (no diff in value, and no evidence of a less detrimental
course). On appeal, the High Court said P’s suffered a loss because ‘the continuing financial obligations
they undertook proved to be larger than they had been led to believe.’

P’s failure to take reasonable care

- Where P’s failure to take reasonable care has contributed to the loss;
- s 82(1B) provides that a court may reduce damages to such extent as it thinks ‘just and equitable’ having regard to
P’s share in the responsibility for the loss or damage;
- Does not apply where D intentionally or fraudulently caused the loss or damage (s 82(1B)(c)).

Other orders

s 87(1): The court may, on the application of a person who has suffered, or is likely to suffer, loss or damage
by conduct of another person that was engaged in a contravention of a provision of Part IV, IVA (ss 51AA,
AB and AC), IVB or V (s 52), make such order or orders as the Court thinks appropriate against the person
who engaged in the conduct or a person who was involved in the contravention if the court considers that the
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 order or orders concerned will compensate the person who made the application in whole or in part for he loss
or damage, or will prevent or reduce the loss or damage suffered, or likely to be suffered, by such person.
Possible orders include (s 87(2)):
(a) Declaring a contract void in whole or in part;
(b) Varying a contract;
(ba) Refusing to enforce all or any of the provisions of the contract;
(c) Directing refund of money or return of property;
(d) Directing payment to P of the amount of the loss or damage;
(e) Directing repair of, or provision of spare parts for, goods;
(f) Directing the supply of specified services; and
(g) Directing variation of, or termination of, an instrument creating or transferring an interest in land.

s 80: Injunctions.

- This provision is different to s 82 in a number of respects:

○ Discretionary; and
○ Stand-alone remedy (no requirement that P has sought relief under another provision; s 87(1C));
○ No need for actual loss or damage (must be ‘likely’ = ‘real chance or possibility’);

- Three elements:
1. Contravention;
2. Loss or damage (see above – the court in Murphy thought the requirements were the same, except that s 87
applies to loss or damage which has occurred or is likely to occur); and
3. Causation.

- Like in s 82, the court may seek guidance from analogies with the general law;
- Eg in Henjo, the purchasers sought rescission under s 87. Even though rescission under statute is not restricted by
limitations which apply under the CL, Lockhart J held rescission was not appropriate in the circumstances. His Honour
considered the delay in bringing the case to court (2 years) and the number of adverse changes that have occurred to the
business.

P’s failure to take reasonable care

- s 82(1B) may apply to monetary awards under s 87.

DISCLAIMERS

- Generally ineffective (Byers, Henjo, Carpet Fashion);

- But they form part of the evidence to be taken into account;
- See p3 (eg was is really misleading, or did P actually rely on the conduct?)

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