Chapter 7 Answer Guides

Hello everyone

These answer guides outline the main legal principles and how they apply to the facts given in
the exercise. I have stepped through more detail for the questions that you were asked to
post your answers to.

Compare your answers to the guides to check you have identified the main principles and
correctly stated them. Consider how you have applied the legal principles to the facts (have
you considered the facts in your analysis?) in order to reach your conclusion.

Your answers may be a bit different as there is room for differences of opinion when facts put
a case right on the borderline :) That is why parties end up in court – both sides think they will
win.

Any questions, or any points that are not clear, please post.

Regards to all

Janette

Exercise 7.1 — Mistake

Johnny buys Ash a pair of diamond earrings. Gemstone Jewellery said that the diamonds are
not conflict diamonds. Are the diamonds conflict diamonds ???? Yes :(

Johnny wants to know what his rights are against the seller. Note the legal issues would be
the same if we were advising the seller. We are asked specifically to focus on mistake.

Exam tip # 1 – consider the legal question you are asked. Here the question is about mistake
in a contract situation. Not misrepresentation. Not consumer law.

Both Johnny (J) and Gemstone Jewellery (GJ) believed the diamonds were not conflict
diamonds, but they were both wrong. They are both mistaken, and they have both made the
same mistake. This is a situation of common mistake. There maybe innocent misrep here
also, but we are not asked about that.

What is the legal effect of a common mistake on the contract? It depends on what the mistake
is about. If the mistake is about a matter that is fundamental to the contract then the contract
will be void. If the mistake is about a matter that goes to the quality of the subject matter of
the contract then the contract is not void.

Matters are not fundamental to the contract merely because the matter is of some importance
in a general sense. We need to look for what the main or fundamental thing is under the
contract between J and GJ.

Please review the case of Leaf v International Galleries, page 199. The court looked at what
Mr Leaf contracted to buy – was it that particular painting that he looked at on the wall and
chose, or, was it a John Constable painting? In the Leaf case, Mr Leaf chose a particular
painting after looking at the painting and he got the painting that he chose and this was the

2
main or fundamental thing under the contract. Whether or not the painting was painted by the
famous painter Constable went to what the court described as the quality of the painting that
Mr Leaf got. This went to the value of the painting and how resalable it was, whether it would
be a good investment etc etc. Although these are all important things they are not the main
thing, which is whether he got the painting he contracted for.

Note – in real life, if you think something is so important that you want to be able to avoid the
contract if it is not true then you can say so in your contract. Contract law is all about
voluntary agreements so the parties can agree, for example, that the contract is conditional
upon the painter being Constable. The parties can expressly state that if the condition is
breached then the buyer can terminate the contract, give the painting back, get their money
back, perhaps even with interest. But Mr Leaf did not specify any such thing in his contract
with the gallery.

Did J buy those earrings on display, or perhaps those earring that he looked at and thought
were lovely? (not fundamental) Or did he buy a pair of conflict free diamond earrings?
(fundamental).

There is no evidence that J contracted for conflict free diamonds on the given facts. I would
conclude that the mistake here is about quality of the diamonds, and not fundamental. Sorry J
:(

Exercise 7.2 — Duress – Economic

Johnny and his waiters Sam and Dan. S and D demand a pay rise or else they will walk out. J
agrees, but can he refuse to pay?

J clearly has an agreement (O + A), and it is in a business setting (intention). But did J
genuinely consent to pay the extra wages to D and S?

J will claim that he agreed because of S and D’s threat to walk out and that this threat made
him feel compelled to agree.

Is the threat here sufficient to amount to duress? Duress can be a threat to the person, their
property, or their economic wellbeing. If the threat is economic in nature then it needs to be
more than hard bargaining (regarded as legitimate pressure and inherent in the market
place). The economic pressure needs to be illegitimate. A threat to break a contract would be
regarded as illegitimate. See North Ocean Shipping.

What economic pressure have D and S applied? Threatened not to perform their employment
contracts. This is economic duress.

Duress makes the contract voidable – J has a choice to avoid the contract. It is not
automatically void. As soon as the threat has subsided, J needs to make his election whether
to affirm or avoid the contract clear. He cannot delay.

Exercise 7.3 — Undue influence

Illiterate, depressed Ross, who relies on Ash for advice and support, sells his land to Ash. Can R get out of the
sale?

As in 7.2, there is an agreement (O + A), commercial (intention), but is there genuine consent by R? R will claim
he agreed to the sale because of A’s undue influence over him. If the agreement was subject to UI then R will be
able to avoid the contract (it is not automatically void).

2
The policy reason is that the agreement is a result of the UI and not the result of both parties entering the
agreement freely and voluntarily after exercising their own independent judgement about whether the agreement
was in their own best interests. Note that even though a party may be unhappy about entering an agreement they
may have decided that, in the circumstances, the agreement is in their best interests. UI is about influence that
impairs one party’s ability to make the decision.

Is there a presumption of undue influence given the relationship between R and A? Is it one of the specific
categories where there is a presumption of UI? No. See page 202 list.

Can R prove there was actual UI? That A is the strong party and that A did in fact have UI over R? A useful case
for R is Johnson v Buttress. Note the onus of proving UI is on R (given it is not a relationship of presumed UI).

If R can prove there was UI, then the onus of proof switches to A prove that the agreement was the result of R’s
free and genuine consent.

Here, R is like old Mr Buttress, without skills and position to be able to make independent decisions, and relies on
A. This would establish UI. I don’t think there is any evidence that A can use to rebut.

Ross will be able to avoid the contract of sale.

Real life lesson – to avoid a later claim of UI, ensure the other party receives advice from an independent third
party who can give evidence if required about the weaker party and whether they understood the decision and
voluntarily chose to enter the agreement, such as a lawyer or financial advisor.

Exercise 7.4 — Conditions, warranties, and terminating contracts

Ash agrees to buy Stephen’s car …. and there is no fuel in the tank. Can A terminate the
contract for S’s breach?

A can terminate if there is a term in the contract that there must be fuel in the car’s tank, and,
that the term is a condition and not merely a warranty.

Implied term?
On the given facts, there is no express term about fuel. Could there be an implied term? The
courts will only imply terms if it is necessary to make the contract work. The court will ask
whether a bystander who watched as the parties made the agreement would say “of course
the parties intended this would be a term of the contract”. Any implied term must also be
reasonable and fair between the parties in the circumstances, something that can be clearly
expressed (not vague or simply descriptive), and consistent with the terms the parties
expressly agreed.

Here, A cannot collect the car without some fuel, so it seems necessary and obvious. Putting
fuel in the tank, and the price of sufficient fuel in the tank, is not something that changes the
contract or nature of the bargain between A and S, or impose a burden on S, so I would say it
is fair and reasonable.

Condition or warranty?
Does the implied term re fuel go to the heart of the contract? Is it fundamental to the contract?
I don’t think so.

The term is more likely a warranty, which means A cannot terminate but can only sue for
damages for breach. This would be the costs associated with getting fuel to the car.

Exercise 7.5 — Part performance of the contract and payment

Johnny contracts with Elaine to paint his restaurant, total cost $5,000. E doesn’t finish the work but wants to be
paid.

2
The starting position is that a party has to perform their contractual obligations exactly and completely or else they
have not right to enforce payment of the contract price. But this can be unfair – consider if you performed 99.9% of
the work but the other party said “bad luck, you get nothing”!

To deal with that unfairness, the courts have developed some more principles to apply in addition to the starting
principle. Broadly, if the party who is in breach by not performing their obligations exactly has done most of the
work, and has not acted badly (e.g. just abandoning the contract), then they may get a part payment if that would
be fair.

The contract between J and E is entire, not divisible. This means E has to complete the whole scope of work, it is
not broken into separate parts (e.g. $1,000 for the front wall of the restaurant, $2,000 for the internal walls, etc. Or
a payment based on time worked such as an hourly or daily rate).

Has E performed most, that is substantially all the work, she contracted to do? We cannot tell from the facts given
how much work was in fact done. If J gets quotes to complete the painting work then this will be useful evidence.
There is no clear cart % or number, but the court will look at whether the cost to complete the work is only a small
portion of the $5,000 contract price. If it is only a small portion, then E has completed a substantial portion.

Why didn’t E finish the contract performance? Because she is moving to Melbourne …. This may count against E
as the courts will not assist someone who just abandons the contract because it no longer suits them.

Has J accepted the part performance? The innocent party needs to be careful what they say to the party in breach
to ensure it does not look like they have accepted the part performance. This is not such a big issue where the
performance of the contract cannot be handed back (J cannot unpaint the walls!). It is a big issue when the
contract involves supply of goods that can either be accepted or rejected.

Unless the evidence shows that E clearly did most of the work, I think J can refuse to pay.

Exercise 7.6 — Calculating damages for breach of contract

Johnny (J) contracts with Gary (G) – terms install pizza oven in J’s restaurant byn 20
February. Oven installed late on 27 February. Breach of contract by G.

What damages can J claim against G? Cost of advertising flyers for the launch? Customers
he had to turn away? The extremely lucrative private function?

Define damages - monetary compensation sufficient to restore the plaintiff (J) to the position
they would have been in if the breach had not occurred, that is, if the defendant (G) had
performed the contract properly. The plaintiff can claim all losses caused by the defendant’s
breach that are within direct or indirect losses, provided that the plaintiff acted reasonably to
mitigate their losses.

If G had performed the contract then J would not have wasted the expense on the flyers,
would not have lost pizza sales when he turned away customers, and would have made the
lucrative profit from the private function.

Three losses – let’s check whether all of these three losses come with direct losses or indirect
losses. If not, then J cannot claim those losses from G.

Direct losses – those losses that naturally flow from the breach. The sorts of losses where
you would say something like “Yes, you would expect something like that to happen after that
breach by the defendant”. Would you expect J to have spent money on promotional types
expenses like flyers for his expected pizza opening date? I would say yes. So the cost of
flyers is a direct loss. Which means G is liable.

The lost sales from turning away customers who want the advertised pizzas? I would say that
you would expect this loss. Direct loss, so G is liable.

2
The lucrative function? This sounds like something different or extra to ordinary business, so I
would say it is not a direct loss. Is it an indirect loss? An indirect loss is where you would say
something like “I wouldn’t have ordinarily expected that loss but the plaintiff said blah blah
blah and that did (or should have) made me think that loss was a possibility from my breach”.
So let’s look at what J said to G about the lucrative function– was there anything to alert G to
this loss so that J can say the parties had those losses in mind when they made the contract?
J didn’t say anything about the function to G. It is not an indirect loss, and G is not liable.

Exercise 7.7 — Frustration and effect on contract

Ash (A) has a contract with Stephen (S) to buy S’s car. A pays $500 deposit. A loses her
drivers licence. A wants to know if she can refuse to complete the contract. If A doesn’t
complete the contract, can she get her deposit back?

If something ‘bad’, ‘problematic’ happens and makes a contract either m ore difficult to
perform, or of less value if performed, then one of the parties will be motivated to try and get
out of the contract. They may consider frustration because frustration terminates the contract
and terminates their obligations under the contract. It is like bit like a ‘get out of gaol free’ card
for the party that would otherwise be in breach of contract and liable for damages. This can
be an attractive outcome :)

The general rule is that if you enter a contract then you must complete your obligations
exactly, or be in breach and liable for damages in compensation.

However, over time, courts have considered this is not always fair. One circumstance where
this is not fair is part performance, discussed above. Another is where is where something
has happened that makes the performance obligations something completely different from
what the parties had in mind when they made their agreement. And this thing that happened
was no-one’s fault, and was totally unexpected. This is the doctrine of frustration – given what
has happened, the fair thing is to terminate the contract. But it is not easy to convince the
court to terminate for frustration because doing so will have a negative impact on the other
party who is relying on performance of the contract.

If A wants to persuade the court to terminate for frustration she will need to prove that some
event occurred after the contract was made that made performing the contract impossible to
perform as the parties originally contemplated, that she did not cause the event, the contract
does not deal with the event (or allocate the risk for the event to one of the parties), and it
would not be fair to hold A to her obligations to perform given the event.

Here, I think A’s main problem is that she lost her licence, which is an event caused by her
own actions (and actions that the court will disapprove of too!). I also don’t think that losing
her licence makes a fundamental change to her obligations under the contract. You do not
need a licence to buy a car. A is more likely simply unhappy that she will not get the benefits
from the contract that she was hoping for, given she will not be able to drive the car. That is
not frustration. Add to this that it seems unfair to S.

I don’t think A will be successful in persuading the court that the contract was frustrated.