Business The Law - (Pages 341 To 408)

Chapter 6 Contracts: Concepts of agreement
Light was the step of Mr Archibald Nugent Robertson as he left the Supreme In commercial
contracts
Court. He had proved his argument and had no objection of receiving £100 for an negotiated
hour’s catch-as-catch-can wrestling. The Balmain ferry people, however, left the between
court with heavy hearts. If the verdict was sound, they were in a sorry pickle. They businessmen
capable of
would have to employ turnstile-watchers at the Balmain wharf as well as the looking after
Erskine Street one and that would cost a fortune. It was very distressing. They their own
interests … it is,
sought a stay of proceedings and appealed to the Full Bench of the Supreme Court in my view,
of New South Wales claiming that the judge had wrongly instructed the jury. They wrong to place a
strained
asserted that any assault to enforce a just and legitimate demand was justified construction on
assault, and that the demand for a penny had been just and legitimate. words in an
exclusion clause
In May 1906 the Full Bench of the Supreme Court got to work on the Balmain which are clear
and fairly
Ferry Penny case. To the three judges, it seemed important that the night being susceptible of
dark, Mr Robertson and his fiancee had not been able to see clearly the company’s one meaning
only. Photo
notices about hopping on and off the wharf. The couple had walked unsuspectingly Production Ltd v
into a trap and been held prisoner. Water round three sides of the wharf had Securicor
Transport Ltd
provided “prison walls” that barred them from leaving. The court apparently felt it [1980] AC 827
would have been ridiculous to expect Mr Robertson and his friend to win their per Shaw LJ.
liberty by plunging into the harbour in midwinter and swimming over to Balmain.
The appeal was dismissed, with costs against the ferry company. Once more
Mr Robertson was triumphant …
The Balmain Ferry Company, now desperate, decided on just one gamble; it
appealed to the High Court of Australia, employing an expensive array of counsel
to plead its cause. Mr Robertson, full of confidence, also gathered round him a big
crowd of important legal eagles.
On 9 October 1906 the hearing opened. Mr Robertson decided to speak for

himself, for he felt he was more expert on the issue than the barristers he had
employed – and he had not been shy of employing expensive lawyers. All the old
evidence was flogged out again, and the same old lines of argument – and it
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seemed certain that the same old result would be reached. Mr Robertson related
with many a flourish how he had been imprisoned against his will by men who
were trying to force an extra penny out of his pocket. There had been guarded
turnstiles in front of him and water round the other three sides. No prison could
have been more secure.
All went smoothly until the High Court delivered its judgment. Then the judges
began saying the most amazing things. It was ridiculous, they declared, that
Mr Robertson should have considered himself a prisoner; he could have got off the
wharf with ease. All he had to do was step on the ferry and, bingo, he would have
been off the wharf. He had contracted to go on the ferry, and could have gone
ahead with that project. Furthermore, the High Court declared, as the ferry wharf
was private properly, the Balmain Ferry Company was quite entitled to ask a penny
of anyone going off it or on it. And it didn’t matter threepence if that person took
a ferry trip or not. And finally, said the judges, the men at the turnstiles had been
293
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Business and the Law
completely justified in forcibly resting Robertson’s attempts to leave the wharf

without sparring up his penny. Therefore they upheld the appeal.
You could have knocked Mr Robertson down with a turnstile. He had been in no
way prepared, psychologically or financially, to receive such an adverse verdict.
Costs being high against him, he was faced with ruin. But, a fighter through and
through, he appealed to the Privy Council.
Three years later the Law Lords of England got around to considering the matter.
They were amazed to discover that a case involving the payment of a penny had
come to them from the other side of the world. They expressed themselves even
more amazed at Mr Robertson’s case. “The man’s argument is completely
unreasonable,” they declared unanimously. “Of course he should have paid the
penny. We dismiss this appeal.”
The Balmain Ferry Company thereupon went on gathering in its pennies in the old
way – and all ferry companies operating on Sydney Harbour still use the same
collection system, catching customers coming or going at the same point.
Mr Robertson, overwhelmed by debts, never recovered from the legal punishment
he had taken, and his law practice never quite flourished again; maybe because
people felt that he was a trifle shaky on the finer points of law. He was obliged to
take work as a Crown prosecutor, a function not eagerly sought in those days by
successful practitioners. He died in 1922, aged sixty-six, still a melancholy man,
and without having much patronised the Balmain Ferry Company since the night
he refused to pay his expensive penny.
Study your The prosaic principle of the “Expensive penny” case is simply that, in the words of
mathematics or
some accountant
Griffiths CJ (Balmain New Ferry Co Ltd v Robertson [1906] HCA 83; (1906) 4 CLR 379
is going to beat at 386):
you out of your

money. Don’t If the plaintiff were aware of the terms he must be held to have agreed to them when he
wait until you obtained admission. If he had been a stranger who had never been on the premises it would
get famous to try have been sufficient for the defendants to prove that they had done what was reasonably
to read a
contract. George sufficient to give the plaintiff notice of the conditions of admittance. In this case, however, it
Foreman. appeared that the plaintiff had been on the premises before, and was aware of the existence of
the turnstiles and of the purpose for which they were used. It was therefore established that he
was aware of the terms on which he had obtained admittance, and it follows that he had agreed
to be bound by them.
The interpretation of exemption clauses

[6.2400] Even if an exemption clause is found to be part of the contract, it will not defeat
a claim for damages unless the wording of the clause covers the type of breach that
occurred. The Australian approach in the construction of such clause is as stated in
Darlington Futures Pty Ltd v Delco [1986] HCA 82 at [16]:
294
[T]he interpretation of an exclusion clause is to be determined by construing the clause Most of the
according to its natural and ordinary meaning read in the light of the contract as a whole, disputes in the
thereby giving due weight to the context in which the clause appears, including the nature and world arise from
words. Morgan v
object of the contract, and, where appropriate, construing the clause contra proferentem in case Jones (1773)
of ambiguity. Lofft 160 per
Mansfield CJ.
Thus an exemption clause must be examined firstly for its language and when that
language is not clear, the clause is construed contra proferentem. This is the primary rule
to be applied and all other rules of construction can only be used as a subsidiary to this.
ALEX KAY PTY LTD V GENERAL MOTORS ACCEPTANCE CORP &

HARTFORD FIRE INSURANCE CO
[6.2410] Alex Kay Pty Ltd v General Motors Acceptance Corp & Hartford Fire Insurance Co [1963] VR
458
Alex Kay carried on a business of hiring cars out to the public. Its insurance policy with Hartford contained a
clause exempting Hartford from any liability for any loss or damage arising from “any breach of contract”.
Alex Kay hired a car to Mr Houmatsio and when he subsequently disappeared with the car, it claimed on the
insurance policy. The insurance company refused the claim on the basis that the loss arose due to
Mr Houmatsio’s breach of the hire contract. It was held that the clause was ambiguous. It could refer to
breaches of the hire contract by Alex Kay, breaches of the hire contract by the hirer or any breaches of
contract whatsoever. Given the ambiguity, the contra proferentem rules meant that the first meaning – the one
least favourable to the insurance company – had to be adopted. Consequently the clause did not apply and the
claim could not be refused.
GOODMAN FIELDER CONSUMER FOODS LTD (FORMERLY MEADOW

LEA FOODS LTD) V COSPAK INTERNATIONAL PTY LTD
[6.2420] Goodman Fielder Consumer Foods Ltd (formerly Meadow Lea Foods Ltd) v Cospak International
Pty Ltd [2004] NSWSC 704
The wording “to the full extent permitted by law all other warranties or liabilities imposed or implied by law
or by statute are expressly negatived” contained in the contract were held to be wide enough to cover any
claim made in negligence. The court said that looking at the contract as a whole, it could be seen to be one
between two large corporations “who must be presumed to have the ability to manage their own risk” (at
295
[89]).
The common [6.2430] There are a number of other rules which have been applied in the construction
law ought never of such clauses. Each of these must be read by firstly looking at the wording of the clause to
to produce a
wholly see if the wording is clear. These rules include:
unreasonable
result. Cartledge 1. If a party wishes to exclude liability for negligence, this must be clearly expressed or
v Topling [1943] be clearly implicit in the meaning of the words used. In Davis v Pearce Parking
AC 772 per
Lord Reid.
Station Pty Ltd (1954) 91 CLR 642, the High Court found that the words “parked at
the owner’s risk” and excluding liability “for loss or damage of any description”
were enough to protect the car park from liability when the parked vehicle was
stolen due to its negligence. The words were sufficient to alert the plaintiff to the fact
that she should have insured the vehicle to cover such an event.
2. If no such wording is used, the courts must look to see if the wording is wide
enough to exclude liability for negligence, with any ambiguity construed contra
proferentem.
3. Where the clause is wide enough to cover a claim in negligence, it may not be wide
enough to cover a claim that is made on some other basis eg breach of contract
(White v John Warwick & Co Ltd [1953] 1 WLR 1285).
4. The four corners rule – a party who undertakes an obligation under a contract and
has breached that obligation cannot rely on conditions which were intended as a
protection only if it had carried out the contract properly.
SYDNEY CORPORATION V WEST [1965] HCA 68

[6.2440] Sydney Corporation v West [1965] HCA 68
West parked his vehicle in the council’s car park and was issued with a ticket which had to be presented on
exiting. The ticket excluded liability for loss or damage to the vehicle however caused. A thief approached the
ticket office, claimed he had “lost” his parking ticket for the vehicle and was issued with a duplicate. He then
broke into West’s vehicle, presented the ticket at the exit and drove off. West sued the council for breach of
duty in taking care of the vehicle. The High Court held that the exemption clause did not apply. Barwick CJ
and Taylor J said that the clause did not cover a loss which was caused by an unauthorised act of the council
ie the delivery of the car to a third party.
1. Whether a clause in a contract excuses any breach of contract, even misperformance, will be a matter
of construction of the clause, although the court is unlikely to favour such a construction.
In TNT Ltd v May and Baker Ltd [1966] HCA 46, the High Court reaffirmed that the question “is to be
resolved by construing the language that the parties used, read in its context and with any necessary
implications based upon their presumed intention”. It follows that the more extreme the liability sought to be
excluded the more difficult it is to conclude that this was the parties’ intention without clear words to that
effect.
296
NISSHO IWAI AUSTRALIA LTD V MALAYSIAN INTERNATIONAL

SHIPPING CORP BERHAD
[6.2450] Nissho Iwai Australia Ltd v Malaysian International Shipping Corp Berhad [1989] HCA 32
A container of prawns was stolen from the wharf after it had been unloaded from the defendant’s ship. This
meant that there had been a breach of the fundamental obligation under the contract of carriage which was to
deliver the goods. The bill of lading (document containing the terms of carriage) excluded liability for “any
loss or damage to the goods”. The plaintiffs argued that this clause could not protect the shipping company
from complete failure to deliver the goods since this would defeat the whole object of the contract. The High
Court held that, provided the words of the clause were wide enough to include events that defeated the main
purposes of the contract, the clause could be effective to cover such breaches.
Exemption clauses rendered ineffective by statute

[6.2460] It is quite common for statutory provisions to render exemption clauses In contract law,
the prolific
ineffective in so far as they attempt to negate the effect of the statute. For example, s 64 of output of
the ACL renders ineffective any clause in a contract that attempts to negate the effect of legislatures,
courts and
terms of the consumer guarantees provided under the ACL and s 21 prohibits unfair commentators
contract terms, see Chapter 19. has produced a
disturbing degree
of complexity.
Other contractual clauses Rules and
qualifications
[6.2470] Apart from entire agreement clauses, parties should consider using the designed to give
precision exist in
following: such numbers as
to produce
• a definition clause to reduce the possibility of disagreement about the subject matter of uncertainty, cost
the contract eg: and delay in the
resolution of
“the vehicle” means the 2006 Honda Civic Vin No 123456 presently registered in NSW as disputes. Law
AB 12 CD. Reform
Commission of
• an address for service of notices clause so as to avoid the issue of whether notices Victoria, An
Australian
under the contract have been properly given eg: contact code
All notices under this contract to be given to the parties must be sent by email to their (Discussion
Paper No 27,
designated email addresses which are as follows …
1992)
• a clause that clearly defines the events which will give rise to termination of the
contract;
• a clause that covers what happens if performance of the contract is affected by
circumstances outside the control of the parties eg:
In the event that the singer becomes ill so as to not be capable of performing on the dates
set out in this contract, the contract between the parties shall be at an end as and from the
date that the promoter receives a medical certificate from the singer’s medical practitioner
certifying she is unable to perform.
297
• where the contract is interstate or international, a clause selecting the law governing
the contract and a clause selecting the method under which a dispute is to be dealt
with eg:
This contract shall be subject to the law of the State of Victoria and all disputes arising
under it or relating to it shall be submitted to the courts of the State of Victoria.
Variation of contract
[6.2480] Contracts may contain provision for variation of the terms. Common examples
are loan documents which contain provisions for increases in the interest rate to be paid on
the loan. If the contract does not contain a variation provision, then the parties may agree
later to vary the contract, but that variation must be supported by fresh consideration or be
done by deed as the agreement to vary is in itself a “mini-contract”.
If a statute requires a contract to be in writing, any variation of such a contract must also be
in writing. The doctrine of promissory estoppel (see [6.1180]) may also be relevant here,
particularly where one party leads another to believe that a contract has been varied.
WHITTET V STATE BANK OF NSW

[6.2490] Whittet v State Bank of NSW (1991) 24 NSWLR 146
Mrs Whittet agreed to give a mortgage to the bank to secure her husband’s overdraft. The transaction was
entered into on the basis that it was to secure a fixed sum and before she signed the document, her solicitor
was informed by the bank that it was to be so limited. The mortgage document in fact was for all monies due
by Mr Whittet.
Held: the bank was estopped from recovering more than the fixed amount.
6.15 THE DOCTRINE OF PRIVITY OF CONTRACT

[6.2500] A very basic rule of contract law is that only the parties to the contract can
acquire rights or liabilities under the contract. This rule is known as the doctrine of privity
of contract. It means that contracts are private arrangements that can only affect the people
who agree to them. Other people, known as third parties or strangers to the contract, cannot
incur obligations nor can they acquire any rights under the contract. The doctrine works
well in most instances but it can produce strange results where eg A and B enter into a
contract the main purpose of which is to grant a benefit to C. This is exactly what happened
in the leading case on the doctrine of privity of contract.
298
TWEDDLE V ATKINSON
[6.2510] Tweddle v Atkinson [1861] 121 ER 762
William Tweddle got engaged to Miss Guy. Their fathers entered into a contract under which each would pay
William £100 after the wedding. Mr Guy died before paying the money. So William sued the executor of
Mr Guy’s deceased estate (Mr Atkinson). The court held that William was not entitled to the money since he
was not a party to the contract that was breached.
According to the doctrine of privity, William’s father, John, could have sued Mr Guy since he was a party to
the contract. However, he would only be entitled to nominal damages (see [6.2740]) since he personally did
not suffer any loss as a result of the breach. In summary, William suffered a loss but could not sue. John could
sue but had not suffered any loss. It might be thought this type of problem is limited to family arrangements
but this is not the case as is shown by the following case that went to the High Court.
TRIDENT GENERAL INSURANCE CO LTD V MCNIECE BROS PTY LTD

[6.2520] Trident General Insurance Co Ltd v refused the claim on the basis that McNiece
McNiece Bros Pty Ltd (1985) 165 CLR 107 Brothers were not a party to the insurance contract.
Background Issues
Blue Circle Southern Cement Ltd commenced a The main issue was whether the doctrine of privity
construction project at one of its cement factories. It of contract precluded any claim by McNiece
faced the possibility that it might be sued by Brothers.
someone who was injured on the construction site. Decision
It took out an insurance policy with Trident that The majority of the High Court decided that
covered any liability of Blue Circle, its head McNiece was entitled to claim on the insurance
contractor, subcontractor or suppliers of materials policy even though he was not a party to the
that might arise if someone was injured on the site. contract.
Facts Implications
Hammond was working on the site when he was The implications of the case are far from clear. All
injured. He brought a claim against McNiece the judges acknowledged that the doctrine of privity
Brothers, which was the head contractor for the of contract would produce injustice in some cases.
project. When McNiece Brothers claimed to be However, there was no consensus as to the solution
indemnified under the insurance policy, Trident to this problem. Four judges were prepared to
299
accept, in differing ways, that the doctrine should be to new situations. It is quite another thing to confront
reconsidered. For example, Mason CJ and Wilson J the law head-on by the rejection of a rule which has
took the view (at 123) that it was: stood for a century or more.
the responsibility of [the High] court to reconsider in The case is frequently cited as an example of the
appropriate cases common law rules which operate need for joint majority judgments through which
unsatisfactorily and unjustly.
the development of the law by our highest court
The opposing view was represented by Dawson J, can be more clearly directed.
who declared (at 158) that:
[It] is one thing to expand the law or to change its
direction by the application of recognised principles
To admit a third [6.2530] To prevent the same problem arising again the Commonwealth Parliament
party’s right to
sue into the
passed s 48 of the Insurance Contracts Act 1984 (Cth), which states that beneficiaries under
common law, it insurance contracts can enforce the terms of the contract even if they are not parties to the
would be contract. Other statutes also have the effect of overcoming the privity doctrine in certain
necessary to
postulate a new contexts. For example, the Cheques and Payment Orders Act 1986 (Cth) confers rights on a
source of legal holder in due course to sue on the cheque. Queensland, the Northern Territory and Western
rights and
obligations Australia have all adopted legislation which abolishes the privity rule and enables third
arising parties to enforce contracts for their benefit (Conveyancing Act 1919 (NSW), s 36C;
independently of
contract and Property Law Act 1974 (Qld), s 55; Law of Property Act 2000 (NT), s 56; Property Law Act
equity and to 1969 (WA), s 11).
create a new set
of rules [6.2540] The courts have developed a limited number of exceptions to the doctrine of
prescribing the
availability of privity. These include:
the rights and • where a promise in a contract is made to two or more people jointly but the
the limits of the
obligations to consideration is provided by only one of them, the other promisees can still sue for
which the third breach of the contract (Coulls v Bagots Executor & Trustee Co Ltd (1967) 119 CLR
party promise
gives rise. 460);
(dissenting) in
Trident General
• where the third party can argue that the promise is held in trust for the third party;
Insurance Co • where one party promised the other to protect a third party and then refused to do so
Ltd v McNiece
Bros Pty Ltd and as a
[1988] HCA 44 • consequence became unjustly enriched (Trident Insurance case).
per Brennan J.
• under the rules relating to assignments or novation (see [6.2580])
• under certain rules relating to real property (see Chapter 11)
Apart from this, a third party may be able to rely on:
• the law of tort;
• whether the promisor has engaged in misleading or deceptive conduct.
300
HILL V VAN ERP

[6.2550]
A solicitor was instructed by a client to prepare a will in favour of the plaintiff. The solicitor failed to ensure
that the will was properly executed so that the will was invalid. When the client died, the plaintiff discovered
that she received no benefit under the will.
Held: The solicitor had been negligent in having the will signed and under the law of negligence owed a duty
of care to the beneficiary. (The fact that there was no contract between the plaintiff and the solicitor was
immaterial).
ACCOUNTING SYSTEMS 2000 (DEVELOPMENTS) PTY LTD V CCH

AUSTRALIA PTY LTD
[6.2560] Accounting Systems 2000 (Developments) Pty Ltd v CCH Australia Pty Ltd [1993] FCA 265
Accounting Systems (AS) entered into a contract with another company (CD) under which it assigned to it
copyright in a computer program. The contract contained a clause warranting that AS was entitled to do so and
that there was no claim or potential claim relating to the copyright outstanding against it. This statement was
misleading or deceptive because there was such a claim made.
CD licensed the program to CCH relying on the fact that CD was entitled to do this because it had the right to
use the program, When CCH found out that CD had no right to use the program, it sued AS for breach of s 52
of the TPA to recover money it had spent in anticipation of being able to use the program.
Held: The statement in the contract was misleading and deceptive and CCH, in relying on that statement, was
entitled to damages. The fact that CCH was not a party to the contract between AS and CD was not relevant
to its entitlement to damages under s 52 of the TPA.
6.16 CONTRACTS NEGOTIATED THROUGH AGENTS

[6.2570] In a contractual context, an agent is a person who is authorised to enter into
contracts on behalf of another person called the principal. The contract that results is
between the principal and the other party (called the third party) and the agent drops out of
the picture. Agency is discussed in Chapter 16.
301
It must be Under the law of agency, it is possible for a person to contract both personally and as an
accepted that, agent. This possibility has been exploited in connection with exclusion clauses in contracts
according to our
law, a person not for the carriage of goods. Such clauses usually provide that the shipping company is not
a party to a liable for any loss or damage to the goods and neither are any employees or subcontractors
contract may not
himself sue upon of the shipping company that may be involved in unloading, storing or transporting the
it so as directly goods. The clause also states that this clause is being negotiated on behalf of any such
to enforce its
obligations. For employees or subcontractors who might be involved.
my part, I find
no difficulty or The effect of such clauses is that the employees and subcontractors gain the protection of
embarrassment the exclusion clause should they be sued by the owner of the goods eg under the tort of
in this
conclusion. negligence (Lifesavers (A Asia) Ltd v Frigmobile Pty Ltd [1983] 1 NSWLR 431).
Indeed, I would
find it odd that a
person to whom
no promise was 6.17 ASSIGNMENT AND NOVATION
made could
himself in his [6.2580] An “assignment” is an arrangement under which a party to a contract (the
own right assignor) transfers some or all of the rights or benefits under that contract to a third party
enforce a
promise made to
(the assignee). “Novation” is a transaction whereby, with the consent of all parties
another. Coulls v concerned, a new contract is substituted for an existing one.
Bagot’s Executor
and Trustee Co Assignment and novation are discussed in detail in Chapter 7.
Ltd (1967) 119
CLR 460 at 478
per Barwick CJ.
6.18 ENDING THE CONTRACT
“Did you have a [6.2590] Once both parties to a contract have done everything they agreed to do under
contract with the the contract, their obligations to each other come to an end. Once this point is reached, it is
plaintiff?” “Yes,”
replied the said that the contract has become discharged through performance.
witness. “What
kind of a However, sometimes the obligations of one or both parties will be discharged at an earlier
contract was it?” point of time. The most common situations in which this occurs are:
“An oral one,”
replied the • discharge by agreement;
witness. “Will
you please • discharge by operation of law;

produce it? “
Court transcript, • discharge by frustration;
Gus Edwards,
Legal laughs: A
• discharge by breach.
joke for every
jury (Hein,
1993).
Discharge by performance
[6.2600] The most common way in which a contract becomes discharged is simply by
each party fully performing all their obligations under the contract. The general rule is that
contractual obligations must be performed exactly as agreed. A rather extreme example of
the court applying this general rule is found in the following case.
302
IN RE MOORE & CO AND LANDAUER & CO

[6.2610] In Re Moore & Co and Landauer & Co [1921] 2 KB 519
A contract for the sale of tinned fruit stated that they would be packed in boxes of 30 tins each. The seller
delivered the correct number of tins but they were packed in boxes of 24 tins each. The court held that the
seller had not properly performed their obligations under the contract and consequently the buyer was entitled
to reject the entire consignment.
Discharge by agreement
[6.2620] Obligations under a contract can be discharged by an agreement between the Counsel: Did
same parties. This agreement may be part of the original contract or it may be part of a you answer to
the questions put
subsequent agreement. The original contract may include a clause stating that the to you – tell
obligations of both parties will come to an end: anything or
things that you
• on the happening of a certain event (a condition subsequent) or are not sure of?
In fact not sure
• that neither party is obliged to perform their obligations under the contract unless a of but said
particular event occurs (a condition precedent). something to
make it look as
Another way that contractual obligations can become discharged is by a later agreement if you were?
That you knew
between the same parties. For this later agreement to effectively discharge the obligations things you didn’t
under the original contract, the later agreement must also meet the requirements of a know? Witness:
What are you
binding contract. This means that each party will either have to supply consideration or else talking about?
the agreement will have to be contained in a deed. Court transcript,
Law Society
• Where both parties have outstanding obligations, the agreement to release the other Journal (October
party from these obligations constitutes sufficient consideration on each side. 1983).
• Where only one party has outstanding obligations, they will have to provide some other
type of consideration in order to enforce the agreement or else make sure that the
agreement is contained in a deed.
The same principles apply where a later agreement is designed not only to discharge the
outstanding obligations under the original contract but also to replace these with different
obligations. However, complications can arise from the requirement that certain contracts,
such as contracts for the sale of land, have to be in writing to be enforceable. If the original
contract was not required to be in writing it can be discharged, substituted or varied orally.
If the original contract was required to be in writing it can be discharged orally but its
substitution or variation must be in writing.
Discharge by operation of law

[6.2630] In some situations the obligations of a party under a contract will come to an
end due to the operation of some rule of law. These situations include:
• merger;
303
• bankruptcy;
• fraudulent alteration of a written contract; and
• Limitation Acts.
Merger
Force Majeure – [6.2640] Merger refers to situations where the law treats one legal right as being
an irresistible assimilated by another similar right. The best-known example of this in a contractual
force that
prevents you context occurs when a person wins a court case based on a contractual right to payment.
from fulfilling The person now has a right to be paid under the court judgment. Their previous right to be
your contractual
obligations – paid under the contract is said to be merged with their right to be paid under the court
such as a storm, judgment. They can no longer sue under the contract but have to take legal action under the
flood, war or the
realisation that court judgment if they do not receive payment.
you could make
a much bigger
profit elsewhere. Bankruptcy
White and Jenks,
The offıcial [6.2650] Bankruptcy is a legal process that enables a person who is unable to pay all their
buyer’s debts to make a clean start. The process involves sale of the debtor’s assets and distribution
handbook
(Harriman
of the proceeds among their creditors. At the end of the process, the bankrupt person has no
House, 1992). further liability to those creditors. The dissolution of the company on a winding up also
discharges outstanding debts.
Material alterations to a written contract

[6.2660] Where it can be proved that one party to a written contract has fraudulently
altered the written contract in a significant manner, the law penalises this type of fraudulent
behaviour by refusing to allow the fraudulent party to enforce the contract. This means that
the other party is, in effect, freed of their outstanding obligations.
Limitation Acts
Act of God … [6.2670] For a variety of practical reasons, the law discourages people from waiting too
The late JA long before bringing legal action for breach of a contract or other types of actions. This
MacLachlan of
Harvard used to policy is found in the Limitation Acts that apply in each State and Territory. Generally, legal
define it, action based on a breach of a simple contract must be started within six years (three years in
impiously but
usefully, as “that the Northern Territory) of the day on which the cause of action arose. This is the first day on
which no which the person could have started legal action. In most cases it is the date on which the
reasonable God
would do”. Leff plaintiff first became aware that they would suffer some loss due to the contract having been
A, “The Leff breached. In the case of contracts contained in a deed, the limitation period is 12 years,
dictionary of
law: a fragment”
except for Victoria and South Australia (15 years) and Western Australia (20 years).
94 Yale Law Although expiry of the limitation period does not discharge the whole contract, it effectively
Journal 1855. removes the right to sue for breach of the contract, which is nearly the same thing.
Discharge by frustration
[6.2680] There are a variety of reasons why a person may not fully perform their
obligations under a contract. One of these could be that something unexpected has
304
happened since the contract was formed so that the person is completely unable to do what
they had previously promised. The early attitude of the courts to this situation was that such
bad luck was not an excuse that justified escaping the obligations imposed by the contract.
This approach lasted over 200 years in England but was changed in 1863 when the English
courts developed the doctrine that the obligations of both parties to a contract would be
discharged in certain circumstances.
TAYLOR V CALDWELL
[6.2690] Taylor v Caldwell (1863) 122 ER 309
The contract was one to hire a hall for a concert. After the contract was formed but before the night of the
concert, the hall burnt down without any fault of either party. The court decided that the contract was not
breached by the failure to provide a hall on the agreed night. Instead, the court held that the contract had
become discharged on the night of the fire The fire was an entirely unforeseen event beyond the control of
either party and its effect was to frustrate the purpose of the contract.
[6.2700] The doctrine of frustration operates to discharge both parties of all obligations
outstanding at the date of the frustrating event. It only applies where the contract makes no
provision for such an event. In Taylor v Caldwell the court limited the application of the
doctrine to circumstances where the event makes performance of the contract by one party
impossible. However, later cases have held the contract to be discharged by frustration even
where performance is not really impossible.
CODELFA CONSTRUCTION PTY LTD V STATE RAIL AUTHORITY (NSW)

[6.2710] Codelfa Construction Pty Ltd v State Rail Authority (NSW) [1982] HCA 24
The construction company won a tender to build an underground railway. In submitting the tender, it had
assumed that it would be able to work 24 hours a day, seven days a week on the project because this would
have been true if the State Rail Authority had done the job itself. However, after work began on the project,
local residents obtained a court injunction that prevented the construction company working at night and on
weekends. This meant that the project would cost more than the price quoted in the tender.
305
Codelfa argued that the contract became discharged due to frustration when the court injunction was granted.
The court held that although performance by Codelfa was not really impossible, the effect of the injunction
was to make their obligation “radically different” from those they assumed when they entered into the
contract. This was enough to frustrate the contract. This meant that Codelfa was entitled to claim payment for
the project at a higher rate based on the principle of quantum meruit, which is unavailable where the work
involves a breach of a contract.
DAVIS CONTRACTORS V FAREHAM UDC

[6.2720] Davis Contractors v Fareham UDC [1956] AC 696
The contract involved a construction project for the local council. The contractor argued that the contract
became frustrated due to the absence of skilled labour for the project. The English court held that the contract
was not frustrated in these circumstances. The court held that it is not sufficient that unexpected events caused
the obligations of one party to become more onerous or inconvenient or expensive. Lord Radcliffe said (at
729) that:
[I]t is not hardship or inconvenience or material loss itself which calls the principle of frustration
into play. There must be as well such a change in the significance of the obligation that the thing
undertaken would, if performed, be a different thing from that contracted for.
[6.2730] The doctrine of frustration cannot be applied where there is a specific provision
in the contract that covers the unexpected event, or where the event should have been
foreseen or where it is self-induced.
At common law, the effect of the doctrine of frustration is to cancel the obligations under
the contract as from a particular date – the date of the frustrating event. However, all rights
and liabilities that have accrued up to that date remain enforceable. This can sometimes
produce unfair outcomes. For example, payments that have already been made prior to the
date of frustration cannot generally be recovered and payments accrued at that date remain
payable unless the court believes the frustration of the contract has resulted in a total failure
of consideration.
To overcome the possibility of unfair outcomes, South Australia and New South Wales have
each passed a Frustrated Contracts Act (Frustrated Contracts Act 1978 (NSW); Frustrated
Contracts Act 1988 (SA)). These Acts allow a court to adjust the rights and liabilities of the
parties that have accrued before the frustrating event so that neither party is unfairly
prejudiced by the frustrating event.
306
6.19 REMEDIES FOR BREACH OF CONTRACT

[6.2740] Given the great variety of contracts varying from those that last a few seconds, No doubt there
are many simple
such as buying a newspaper, to those that last decades, such as leasing a farm, it is not contractual
surprising that there are many different ways in which a contract can be breached. However, undertakings,
any particular breach of contract can be classified as follows: sometimes
express but more
• actual breach or anticipatory breach; often because of
their very
• total breach or partial breach. simplicity … to
be implied, of
The remedies available to the innocent party depend on the type of breach. The main which it can be
remedies available are: predicated that
every breach of
• termination of the contract; such an
undertaking must
• damages. give rise to an
event which will
Contractual terms are generally classified as either conditions (major terms) or warranties deprive the party
in default of
(minor terms). In simplistic terms, a serious breach of contract (a breach of condition) substantially the
allows the innocent party to treat the contract as discharged as well as conferring a right to whole benefit
damages; whereas a minor breach of contract (a breach of warranty) simply gives rise to an which it was
intended that he
entitlement to damages. should obtain
from the
contract. And
Termination of the contract such a
stipulation,
unless the parties
Total breach have agreed that
breach of it shall
[6.2750] Perhaps the simplest way in which a contract can be breached is where one not entitle the
party indicates in advance that they do not intend to perform any of their obligations under non-defaulting
party to treat the
the contract. This breach would be classified as an anticipatory breach in that it is clear that contract as
the contract will be breached but the time for performance has not yet arrived. It would also repudiated, is a
“condition”.
be classified as an example of a total breach in that the party has indicated that it will not Hong Kong Fir
perform any of their obligations. Shipping Co Ltd
v Kawasaki
In this situation the innocent party has a choice. He or she can if they wish terminate the Kisen Kaisha
Ltd [1962] 2 QB
contract. All they need to do is inform the other party that they have made this decision. 26 at 69 per
Once this has happened the innocent party cannot change their mind. The effect of their Diplock LJ.
decision is that both parties are discharged from any outstanding obligations. If the innocent
party has already suffered some loss they are entitled to sue for damages as well as
terminating the contract.
Unfortunately it is common to describe the above situation as one in which the innocent
party has a right to rescind the contract due to repudiation by the other party. This
description is confusing because, in this context, the term “rescind” does not generally
mean, as it does in other contexts, a right to return the parties to their original position. It
simply means the right to terminate the contract prior to the obligations under the contract
being fully performed.
Another way in which a contract can be breached is by the failure of one party to perform
their obligations when the time for performance arrives. This would be classified as an
307
example of actual breach as opposed to anticipatory breach. If the failure involves all the
obligations under the contract (total breach), the same principle applies. The innocent party
can choose if they wish to terminate the contract and can also sue for damages if they have
already suffered some loss.
It is important to note that termination does not require an order of the court, but is a matter
entirely for the innocent party to act on. The only risk that a party runs in deciding to
terminate a contract, is that if the termination is wrongful, the other party may institute legal
proceedings for damages for wrongful termination and possibly a declaration by the court
that the contract is still in existence.
Partial breach
And it is the [6.2760] The position is more complicated, however, where the party in breach has (or, in
general intention the case of anticipatory breach, intends to) properly performed some of their obligations but
of the law that,
in giving not others. They may, for example, perform all their obligations but not by the agreed
damages for deadline. Alternatively, they may meet the deadline but not perform to the agreed standard.
breach of
contract, the If the actual or anticipatory breach of contract relates to some of a party’s obligations under
party
complaining the contract, the innocent party can sue for damages when they can show that the breach has
should, so far as caused them a loss. This is dealt with at [6.2780].
it can be done
by money, be However, the question remains whether, in the case of partial breach, the innocent party has
placed in the
same position as the right to terminate the contract and thus is relieved from performing their own
he would have obligations under the contract.
been in if the
contract had The general rule in the case of a partial breach is that the innocent party has no right to
been performed
… That is ruling terminate the contract and must therefore continue to perform their own obligations under
principle. It is a the contract. They merely have the right to sue for damages or, in exceptional cases, to seek
just principle.
Wertheim v another remedy. However, the general rule is subject to the exception that if the partial
Chicoutimi Pulp breach is a very serious one, then the innocent party can also choose to terminate the
Co [1911] AC
301 at 307 per contract in the same way as cases of total breach. The obvious problem that arises is how to
Lord Atkinson. decide if the breach in question is serious enough to allow the innocent party to terminate
the contract if they choose to do so.
The courts have developed two approaches to this problem. The first approach is to examine
the term of the contract that has been broken and decide whether this is a very important
term or not. The courts use the term condition to describe terms that are very important in
the context of the contract as a whole and therefore presumably give the innocent party a
right to terminate the contract in the event of a breach. Other terms are classified as
warranties. In Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW)
632, Jordan CJ explained (at 641) that:
The question whether a term in a contract is a condition or a warranty, that is, an essential or
non-essential promise depends upon the intention of the parties as appearing in or from the
contract.
Under this approach it does not matter whether the consequences of breaching the term
are serious or not. All that matters is whether the term that was breached was an
308
important one or not. Consequently, even trivial breaches of a condition allow the
innocent party to terminate the contract, but breach of a warranty does not, no matter
how dramatic the consequences might be to the innocent party. An example of a trivial
breach of a condition being held to allow the innocent party to terminate the contract is
found in the following case.
ASSOCIATED NEWSPAPERS LTD V BANCKS

[6.2770] Associated Newspapers Ltd v Bancks [1951] HCA 24
Bancks, the creator of the Ginger Meggs comic character, had a contract with Associated Newspapers to
produce a full page comic strip each week which would be published on the front page of the paper’s comic
strip section. It was moved without notice to the third page. It was held that the obligation that had been
breached was a condition which allowed Bancks to rescind the contract and contract with a competitor (at
[8]):
The plaintiff would not have employed the defendant unless it had been assured that the
defendant would perform his promise, and the defendant would not have made the promise
unless he was assured that his work would be published in a particular manner. Obviously it was
of prime importance to the defendant that there should be continuity of publication so that his
work should be kept continuously before the public, that his work should be published as a whole
and not mutilated, and that it should be published on the most conspicuous page of the comic
section.
TRAMWAYS ADVERTISING PTY LTD V LUNA PARK (NSW) LTD

[6.2780] Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632
The contract was an advertising contract under which Luna Park agreed to rent advertising space on three
trams in Sydney for a three-year period. Each tram carried a different advertisement for Luna Park, which was
an amusement park. One clause of the written contract stated that each of the three trams would be on the
tracks and thus in public view for at least eight hours each day. After two years, Luna Park sought to terminate
the contract on the basis that although each advertisement had been in public view for an average of eight
hours each day, it was not true that each sign had been in public view for eight hours everyday as was stated
in the clause. The court agreed with this outcome. It noted that it was unlikely that Luna Park could prove that
it had suffered any loss due to this breach but it decided that the clause was indeed a condition of the contract
which had been breached and therefore Luna Park was entitled to terminate the contract after two years and
thereby avoid paying the advertising fees for the third year.
309
As this case shows, breach of a condition gives the innocent party a choice whether to terminate the contract
early and sue for damages or to affirm the contract in which case the innocent party is obliged to continue with
their own obligations but can still sue for damages.
[6.2790] However, in some cases the nature of the breach may mean that further
performance of the contract becomes impossible. In this case, discharge is automatic.
The Tramways Advertising case highlights that even trivial breaches of a condition allow
the innocent party the choice of terminating the contract whereas very serious breaches of a
warranty give no such right.
The second approach is that rather than classifying the term of the contract itself as a
condition or warranty, the court looks at the seriousness of the consequences of the breach.
For example, a faulty component in a complex machine may be a less serious breach if
discovered in time, or a more serious breach if it causes significant damage. Terms which
fall into this category are called intermediate or innominate terms.
In Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26
Lord Diplock explained such terms in this way (at 70):
There are, however, many contractual undertakings of a more complex character which cannot
be categorised as being “conditions” or “warranties” … Of such undertakings all that can be
predicated is that some breaches will and others will not give rise to an event which will
deprive the party not in default of substantially the whole benefit which it was intended that he
should obtain from the contract; and the legal consequences of a breach of such an undertaking,
unless provided for expressly in the contract, depend upon the nature of the event to which the
breach gives rise and do not follow automatically from a prior classification of the undertaking
as a “condition” or a “warranty”.
In that case the obligation of seaworthiness was classified as innominate “because a
breach of the obligation might be trivial, making damages an adequate remedy, or grave,
in which event it should have effect as a breach of condition … nothing less than a
serious breach of an innominate term entitles the innocent party to treat the contract as at
an end.”
WICKMAN LTD V SCHULER AG

[6.2800] Wickman Ltd v Schuler AG [1974] AC 276
The contract appointed Wickman for 10 years as the sole distributor in England of large metal presses made
by Schuler in Germany. The presses were used by car manufacturers to make panels. A clause of the written
contract stated that Wickman would visit each car manufacturer in England every week. This clause was stated
to be a condition of the contract. Another clause stated that each party had the right to terminate the contract
if the other party failed to remedy a breach of the contract after 60 days of being informed in writing to do so.
Schuler attempted to terminate the contract on the basis that Wickman had failed to undertake the agreed visits
and that this term was a condition of the contract. The court held that the term was not a condition in the
310
technical legal sense. Rather it was an intermediate or innominate term. The consequences of breaching the
term were not serious enough to justify Schuler’s attempt to terminate the contract early. He could only have
done so if Wickman had failed to remedy the breach after being given 60 days’ notice to do so. Lord Simon
stated (at 264) that:
It has now been made explicit that there lies intermediate between conditions and warranties a
large innominate class of contractual terms (any breach of which does not give rise to a right in
the other party to terminate the contract, but only a material breach, immaterial breaches merely
giving rise, like breaches of warranty, to a right to claim damages).
Damages for breach of contract

[6.2810] The very
definition of a
The basic principle of contract law is that every breach of contract gives the innocent party good award is
that it gives
a right to claim compensation (damages) for the injury or loss they have suffered as a result dissatisfaction to
of the breach. These damages are aimed at putting the plaintiff in the position that he would both parties.
Goodman v
have been if the contract had been performed so that punitive damages cannot be awarded Sayers (1820) 2
for a breach of contract. It is also important to note that the compensation is limited to a loss Jac & W 249 at
by the plaintiff. If the defendant were to make a profit on his breach of contract and yet 259 per
Plumer MR.
cause no loss to the plaintiff, no damages would be payable. Damages are also awarded on
the basis of “once and for all”, that is, there is no right to return to court and claim further
losses after the claim has been dealt with by the court. The only exception to this is either if
there is a different claim or the breach continues after the original action. Thus:
• A sues B for breach of a condition of the contract and recovers damages; In contract,
damages are
• A can later sue B for breach of a separate warranty in the contract and recover damages awarded with the
for such breach; object of placing
the plaintiff in
• A promises to provide B with football jerseys at a certain price for two years. A fails to the position in
provide the jerseys at the end of the first year. B can sue for any loss he sustains at the which he would
have been had
end of the first year and bring a subsequent action for any loss from the end of the first the contract been
year to the end of the second year. performed – he
is entitled to
This right is in addition to any right that the innocent party may have to terminate the damages for loss
of bargain
contract that was discussed at [6.2720]. The general right to damages is, however, subject to (expectation
any valid exclusion or limitation clause in the contract. loss) and
damage suffered,
including
expenditure
Remoteness of loss incurred in
reliance upon the
[6.2820] The first problem that needs to be addressed is the concept of a “loss that is a contract (reliance
loss). Gates v
result of the breach”. A breach of contract can lead to a whole chain of events some of City Mutual life
which may be predictable and some of which may not. For example, if a taxi is late in Insurance
Society Ltd
arriving to take a person to the airport they might miss the plane. If they catch a later plane (1986) ATPR
they might have to pay a surcharge on the ticket; they might also get home to find that their 40-666 at 47,366
per Mason,
car has just been stolen from the airport car park. In the boot of the car was a valuable Wilson and
painting that they had purchased on the way to the airport. If the taxi had been on time they Dawson JJ.
could have avoided the surcharge, the theft of the car and the loss of the painting. In that
311
sense, the breach of contract by the taxi company caused all these losses. But is the taxi
company obliged to compensate the person for all these losses?
To address questions such as this, the courts have developed a rule concerning the
remoteness of the loss. According to this rule, known as the rule in Hadley v Baxendale,
compensation will not be awarded for losses that are too remote. The plaintiff of course
bears the legal burden of proving causation.
HADLEY V BAXENDALE
[6.2830] Hadley v Baxendale (1854) 156 ER 145
The contract involved the delivery of a broken crankshaft that was used to run a mill. The broken crankshaft
was to be used as a template for the manufacture of a new one. Under the contract, the crankshaft was
supposed to be delivered within 24 hours but, in fact, it took seven days. This was clearly a breach of the
contract. During these seven days the mill stood idle and Hadley claimed damages for breach of contract
equivalent to the profits lost during those seven days. Baxendale admitted the breach of contract but denied
liability for this amount on the basis that it was reasonable for him to assume that the mill had a replacement
crankshaft. The court held that the lost profits were not recoverable. Alderson B (at 151) stated that:
Where two parties have made a contract which one of them has broken, the damages which the
other party ought to receive in respect of such breach of contract should be such as may fairly
and reasonably be considered either arising naturally, that is, according to the usual course of
things, from such breach of contract itself, or such as may reasonably be supposed to have been
in the contemplation of both parties at the time they made the contract, as the probable result of
the breach of it.
Better break [6.2840] The rule in Hadley v Baxendale has been interpreted as containing two “limbs”.
your word than The first limb compensates the innocent party for losses that are reasonably foreseeable. The
do worse in
keeping it. Fuller second limb compensates the innocent party for a loss attributable to special circumstances
T, Gnomologia: known to the defendant at the time of contracting.
Adagies and
Proverbs (1732).
VICTORIA LAUNDRY (WINDSOR) LTD V NEWMAN INDUSTRIES LTD

[6.2850] Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528
312
The plaintiff purchased a boiler which was to be used in its dry cleaning and dying business. The defendant
knew the nature of the plaintiff’s business and the plaintiff had told the defendant that the boiler would be put
to use “in the shortest possible time”. When the plaintiff went to collect the boiler from the defendant, it found
it was damaged and refused to take it until it was fixed. This took five months. The plaintiff claimed that the
lack of the boiler meant that it was unable to undertake (a) general new business and (b) a number of lucrative
dyeing contracts for a government department. The court awarded damages for the general loss of business
because this might have been reasonably expected, but not for the government contracts because the defendant
did not know about them.
Difficulty in assessment
[6.2860] In some cases it will be difficult to assess damages with any precision. In such
cases, the award will merely be a rough estimate of the likely loss. In Howe v Teefy (1927)
27 (NSW) 301, Street CJ stated (at 306) that:
[The court] is not relieved from assessing the loss merely because the calculation is a difficult
one or because the circumstances do not admit of the damages being assessed with certainty.
The duty to mitigate

[6.2870] The innocent party has a duty to mitigate their losses. This means that they are
required to take all reasonable steps to minimise the amount of their loss. If they fail to do
so, they will not receive compensation for the portion of the loss that could have been
avoided by reasonable steps.
BURNS V MAN AUTOMOTIVE (AUST) PTY LTD

[6.2880] Burns v Man Automotive (Aust) Pty Ltd (1986) 161 CLR 653
The plaintiff was a haulier and the defendant was supplier of prime movers. The defendant arranged the sale
of a prime mover to a hire purchase company which in turn hired the prime mover to the plaintiff. At the time
of the transaction Man warranted that the engine of the prime mover had been reconditioned, when in fact it
had not. Furthermore it knew that the plaintiff was not well off and that he intended to use the prime mover for
interstate haulage. The prime mover kept breaking down, but although the plaintiff was unable to afford a
reconditioned engine, he was able to use the truck to carry goods in his home state of Queensland between
June 1978 (when he discovered the defect) and the end of 1979 when the truck was repossessed by the finance
company for lack of payments. The plaintiff claimed that he had to keep on incurring losses because he could
not afford either to fix the truck or replace it.
Held: While the plaintiff was entitled to the loss of profits from the date he entered into the hiring agreement
up to the date he discovered the defect (June 1978), he was not entitled to loss of profits from that date on.
While the majority of the High Court found that this loss was too remote, Gibbs CJ said that the plaintiff
should have mitigated his damages by terminating the agreement when he discovered the defect in the vehicle
313
and that it was unreasonable for him to have continued to use it after that date.
[6.2890] However, if the plaintiff has done something which has added to its losses it
may recover this from the defendant if in all the circumstances it has acted reasonably
There are various types of damages that are awarded by the courts.
Loss of profit
[6.2900] In the case of the sale of goods or real property the normal measure of damages
is the difference between the contract price and the replacement value, less the contract
price:
• A agrees to sell B a home unit in a block for $500,000. A defaults and B buys the unit
next door which is similar in all respects to that which B should have sold to A. B has
to pay $550,000 for the unit. B’s damages from A will amount to $50,000.
• A agrees to sell B a home unit in a block for $500,000. A defaults and B buys the unit
next door which is similar in all respects to that which B should have sold. B pays
$450,000 for the unit. B has sustained no loss.
• A buys a machine to print magazines from B. The machine is faulty. A is unable to print
magazines for X which terminates its contract with A. A may be able to sue X for the
loss of profits on the contract.
Loss of money spent in anticipation of the contract being

performed
MCRAE V COMMONWEALTH DISPOSALS COMMISSION

[6.2910] McRae v Commonwealth Disposals Commission (1951) HCA 79
The Commonwealth awarded a salvage contract to the plaintiff in relation to a tanker which was reputedly
aground on a reef in Papua New Guinea. The plaintiff equipped a vessel to carry out the contract and sent it
from Sydney to the area. In fact the tanker did not exist.
It was held that in the circumstances there was an implied promise in the salvage contract that the tanker was
in existence and that as this promise had been broken, the plaintiff was entitled to recover the costs of
equipping the vessel and sending the ship to the area.
314
Loss of a chance or opportunity
COMMONWEALTH OF AUSTRALIA V AMANN AVIATION PTY LTD

[6.2920] Commonwealth of Australia v Amann Aviation Pty Ltd [1991] HCA 54
Amman entered a contract with the Commonwealth to provide coastal surveillance flights over northern
Australia for three years Amman purchased certain aircraft to do this which needed to be modified to carry out
the contract. Amman began the flights but not all of its aircraft were ready to service the contract and none of
them complied with the required contract specifications. The Commonwealth terminated the contract, but did
so in a manner which was not provided for in the contract and therefore its termination was wrongful. Amman
accepted the termination, but then sued for damages. Amman claimed that it would not have made any profit
in carrying out the original contract, but would have done so if the contract was renewed and that the prospect
of it being renewed after three years ought to be taken into account in relation to the measure of damages.
Held (on this issue): because the company would have had the appropriate equipment and personnel in place,
the chances of renewal would have been strong, even though there was no obligation on the Commonwealth
to renew the contract. Accordingly, this chance was in reasonable contemplation of the parties in accordance
with the second limb of the rule in Hadley v Baxendale and should be taken into account in measuring the
damages.
Costs of rectifying defective work

[6.2930] This is subject to the principle that it must be reasonable to incur such costs.
RUXLEY ELECTRONICS LTD V FORSYTH

[6.2940] Ruxley Electronics Ltd v Forsyth [1995] 3 WLR 118
The defendant constructed a swimming pool for the plaintiff but at an incorrect depth. The plaintiff sued for
damages.
Held: that as the pool had been properly constructed it was unreasonable to demolish it and replace it with a
pool built to the required depth.
315
Damages for disappointment and distress

[6.2950] The general rule is that damages are not recoverable for any inconvenience or
mental distress that might flow from a breach of contract. However, this rule is now subject
to an exception where the main purpose of the contract is to provide relaxation and
enjoyment and this is not achieved.
BALTIC SHIPPING CO V DILLON

[6.2960] Baltic Shipping Co v Dillon (1993) 111 ALR 289
The contract was to provide a holiday on a cruise ship. The ship hit a reef while off the coast of New Zealand
and sank soon afterwards. Mrs Dillon was injured and sued Baltic Shipping The High Court awarded her
damages which included a refund of the cruise fare as well as $5000 for “disappointment and distress at the
loss of entertainment” on the basis that the contract had promised enjoyment and relaxation.
Nominal damages
[6.2970] Although every breach of contract confers the right, subject to any exemption
clause, to sue for damages, where no actual loss can be proved nominal damages – token
amounts that in effect acknowledge the breach – are awarded. In the Tramways Advertising
case (see [6.2780]), Luna Park was unable to prove the number of days Tramways failed to
display the advertisement as required by the contract. While it was able to terminate the
contract, it received nominal damages for the breach. In such cases the cost of the legal
action will outweigh the token amount received, particularly as the normal order for costs
being awarded to the successful party will not be granted if the case is considered to be
frivolous or vexatious.
Liquidated damages and penalties

[6.2980] The parties can provide in their agreement for the damages that are to be paid
on a subsequent breach. Such damages are known as liquidated damages (as opposed to the
unliquidated damages calculated and awarded by the court in a breach of contract action),
and provided that the amount specified is a genuine pre-estimate of actual loss and not a
penalty clause (where the sum specified is extravagant and unconscionable), it will be
enforced (O’Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359).
316
RINGROW PTY LTD V BP AUSTRALIA PTY LTD

[6.2990] Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71
Ringrow purchased a service station from BP and at the same time entered into another agreement with BP
that it would purchase BP petrol only, the contract of sale of the petrol station contained an option whereby if
Ringrow bought petrol from another company, BP would have the option of buying back the service station at
a market value as assessed by an independent valuer, but would not include any component for goodwill.
When Ringrow commenced to buy petrol from another supplier, BP exercised its option.
Ringrow argued that the option clause was void as a penalty because it required a transfer of property for less
than the damage actually suffered by BP ie that the true value of the property had to be looked at in light of
the goodwill which Ringrow had built up while operating the service station.
It was held that:
(1) There was nothing in the law relating to penalties that required a proportionality between the sum to be
paid and the loss suffered.
(2) That a penalty is a payment which is extravagant and unconscionable in comparison to the greatest loss
that could be incurred. In normal circumstances, a comparison is made between the amount of
unliquidated damages that could be recovered and the sum agreed to be paid on the breach. Thus here
a comparison between the price to be paid by BP (market value less goodwill) with the value of the
property (market value including goodwill) was appropriate. In this case, there was evidence that the
goodwill had hardly any value and the clause was therefore not penal.
Deposits and part-payment

[6.3000] If a sum has been paid as a deposit to “guarantee” performance, it is forfeited if
the person giving it does not perform. However, the deposit also acts as part-payment and
where the “deposit” is excessive (the cases suggest that, except in special circumstances, a
deposit in excess of 15 per cent is excessive) equity will grant relief against forfeiture and
order its return, leaving normal damages principles to settle the appropriate level of
compensation.
Contributory negligence
[6.3010] In Astley v Austrust Ltd [1999] HCA 6 the High Court held that the defence of
contributory negligence (which operates to reduce damages for negligence to the extent that
the plaintiff contributed to the damage: see Chapter 10) was not available to a law firm
which was negligent in the advice it gave to a trustee company. In addition to breaching its
tortious duty of care the law firm also breached its implied contractual duty to exercise
reasonable care. In the absence of agreements to the contrary the High Court held, contrary
317
When an to previous practice, that where a person sues in contract and in negligence, damages could
individual goes
into a
not be reduced pursuant to apportionment legislation. Legislation to overcome this effect of
supermarket Astley v Austrust has now come into effect in all States and Territories. This amended
today to look at apportionment legislation restores the position prior to Astley v Austrust to allow for the
a can of beans,
that can of beans reduction of damages for contributory negligence whether or not the action is framed in
has a lawyer, an contract or in tort.
advertising
department, a
package design Other remedies for breach of contract
department, a
marketing [6.3020] There are other remedies that are sometimes awarded in contractual disputes.
research
department, and These include:
a whole range of • specific performance;
other specialists
behind it all • injunction;
committed to
selling, all given • rectification;
the task of
telling us we • restitution.
should buy that
can of beans. As
individuals, we Specific performance
stand there on
our own … with [6.3030] Specific performance is an equitable remedy under which the court requires a
no buying agent,
no lawyer, no party to perform the obligations imposed by the contract. Being an equitable remedy, it is
marketing ordered at the courts discretion and will not be granted:
department, no
research group, • when damages would be an adequate remedy;
nothing. JS
Turner, “How to • where the court needs to constantly supervise the agreement;
serve consumers
and make a
• where it would cause undue hardship; or
profit” in • to enforce contracts of personal service.
Consumerism: A
new force in The only common situation in which the order is granted is in relation to contracts for the
society
(Lexington sale of land. For historical reasons the courts view each piece of land as unique such that
Books, 1976). compensation by way of damages would not be an adequate remedy for breach of such
contracts.
JC WILLIAMSON LTD V LUCKEY & MULHOLLAND

[6.3040] JC Williamson Ltd v Luckey & Mulholland [1931] HCA 15
JC Williamson Ltd made an oral agreement with Luckey and Mulholland allowing them to sell sweets in their
theatre for five years. The agreement had implied conditions that Luckey and Mulholland would ensure that
they would supply adequate staff to do this who would be uniformly dressed in a manner approved by
Williamson, that staff would be placed at appropriate locations within the theatre and that an adequate supply
318
of confectionery would be available to meet patrons’ requirements. Williamson repudiated the agreement. The
High Court held that specific performance of this contract was not available as it would require constant
supervision to ensure its terms were met.
Injunction
[6.3050] Injunctions to prohibit parties breaching their contractual obligations or,
conversely, compelling performance of contractual obligations (known as mandatory
injunctions) may also be granted. Injunctions are also an equitable remedy within the
discretion of the court and, as with specific performance, will not be granted if damages
would provide an adequate remedy or undue hardship would result.
LUMLEY V WAGNER
[6.3060] Lumley v Wagner (1852) 1 DeG M & G 604; 42 ER 687
Wagner was hired by Lumley to sing opera in his theatre for three months. The contract also prevented her
from singing elsewhere without Lumley’s consent. Wagner was offered an engagement at a rival theatre at a
higher fee. She threatened to break her contract. The court granted Lumley an injunction preventing Wagner
from singing at the rival’s theatre, although it would not compel her to sing for Lumley.
Rectification
[6.3070] Rectification is an order requiring correction of a written document where the
court is satisfied that it is an inaccurate record of the agreement reached between the parties.
It is important to note that this provides another exception to the parol evidence rule and in
fact may even defeat an “entire agreement” clause if the court is convinced that the written
document did not in fact represent the entire agreement. However, there is a heavy onus of
proof on the party seeking rectification that the written document does not reflect a common
intention.
MARALINGA PTY LTD V MAJOR ENTERPRISES PTY LTD

[6.3080] Maralinga Pty Ltd v Major Enterprises Pty Ltd [1973] HCA 23
At an auction sale of some real estate, the auctioneer stated that the seller would finance part of the sale price
by a mortgage over the land. The buyer then signed the contract to purchase the property, although there was
319
no reference to the terms announced by the auctioneer in the contract. The buyer believed that there was an
error in the contract as did the seller. The buyer sought rectification of the contract on the basis that part of the
true agreement between the parties was the auctioneer’s statement.
Held: Rectification would not be ordered since the written document did not in itself contain any mistake and
both parties were clear as to its contents.
Restitution
[6.3090] Restitution is a convenient label for a variety of situations in which the court
will order the return of property or the payment of money. Unlike an action for damages for
breach of contract, restitution is based on the idea that a person should return a benefit that
he or she has received and which the courts say is unjust that he or she should retain. The
type of contractual matters in which this doctrine usually applies are:
• where there has been a total failure of consideration;
• where money has been paid or property transferred under a void or unenforceable
contract;
• where money has been paid as a result of a mistake.
ROWLAND V DIVALL
[6.3100] Rowland v Divall (1923) 2 KB 500
The plaintiff purchased a motor vehicle from the defendant. There was an implied condition in the contract
that the defendant had a good title to the car. This was not the case since the vehicle had been stolen from its
true owner and had been sold to the defendant. Some four months later the true owner located the vehicle and
reclaimed. It was held that the buyer was entitled to recover the price he had paid for the car, even though he
had obtained four month’s use of it. There was, in the circumstances, a total failure of consideration.
DAVID SECURITIES PTY LTD V COMMONWEALTH BANK OF

AUSTRALIA
[6.3110] David Securities Pty Ltd v Commonwealth Bank of Australia [1992] HCA 48
A borrower paid money to the lender in addition to the interest on its loan under a clause in the mortgage that
was found to be void because of a provision in the Income Tax Assessment Act 1936 (Cth). The borrower
sought to have these payments deducted from its outstanding amount. It was held that there was no difference
320
between money paid under a mistake of fact or a mistake of law. The only relevant factor was whether the
payee was unjustly enriched and it was immaterial whether the mistake was due to compulsion or undue
influence.
However, a plaintiff will lose the right to recover where a payment is made voluntarily
which will include circumstance where the plaintiff is prepared to make the payment
without contesting the claim.
Quantum meruit
[6.3120] A person who has received the benefit of services rendered after a contract has
been terminated or where such services have been rendered on the basis that a contract was
to come into existence may be liable to pay a reasonable remuneration (quantum meruit) for
such services.
LEADING EDGE INVESTMENTS PTY LTD V TE KANAWA

[6.3130] Leading Edge Investments Pty Ltd v Te Kanawa (2007) Aust Cont Reps 90-250
A promoter had the idea of staging a series of concerts starring Dame Kiri Te Kanawa, a famous opera singer,
and John Farnham, the well-known pop star, together. He approached Dame Kiri’s agent and entered into
negotiations. The negotiations reached the stage where a formal contract was sent by the agent to the promoter
but there were disagreements about its content and it was never signed. In addition Dame Kiri had concerns
about John Farnham’s performance style and was angered by the fact that he did not turn up to an arranged
meeting with her in New Zealand. While the negotiations were proceeding the promoter incurred expenditure
including the preparation of promotional material and arranging of a helicopter flight for Dame Kiri to attend
a meeting to discuss the proposed schedule of concerts. Dame Kiri then advised that she did not wish to
proceed with the concert arrangement.
Held: While no contract existed, the parties had assumed that there would be a contract entered into. The
promoter had provided services which were beneficial to the project and in the interests of both parties and
had an expectation of payment for these services. Dame Kiri had withdrawn from the project without any fault
on the part of the promoter and therefore he was entitled to be paid a reasonable amount on a quantum meruit
basis.
321
QUESTIONS
1. “The principle that parties should ordinarily fulfill their contractual
obligations not only underpins the law of contract, but comprises a basic
assumption on which our society and its economy and well-being depend”:
Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007]
HCA 61 per Kirby J at [74].
Discuss this proposition.
2. What is “freedom of contract”? To what extent is it appropriate today?
What are the practical and legal limitations on the principle?
3. What are “standard form contracts”? What problems may they give rise to?
4. John has three cars – a blue car, a red car and a green car – which he
inherited from his father. He needs to sell them to pay debts owing under an
unsuccessful business venture.
John contacted Anita who he has been told is interested in buying the blue car.
Anita asks John to drive the car to her house so she can have a good look at it.
John drives the car to Anita’s premises for her to assess but before negotiations are
complete John gets a telephone call requiring him to go immediately to his
accountant’s office to sign some important documents. Anita asks John to sign a
document “giving me the right of first refusal to buy the car” before he leaves.
Because John is in such a hurry he simply signs the document at the bottom
without reading it. When he returns to Anita’s premises later in the day he learns
that the document he signed was a contract of sale of the blue car to Anita for
$10,000 which is considerably less than John expected to get for it.
John’s solicitor, Claire, is a keen car collector who is interested in buying John’s
red car. The red car has been valued at about $60,000 because it is a rare model.
Claire offers John $30,000 for it. Although John is very unhappy with this price he
reluctantly agrees to sell it to Claire at this price because Claire’s support will be
necessary to him in resolving his current financial difficulties and John does not
want to risk upsetting her.
John sells his green car to Nigel, a car dealer. They agree on a price of $30,000.
Nigel produces a 10 page written contract for John to sign. John tries to read the
contract but it is written in very legalistic language that he cannot really
understand. He advises Nigel that he needs to talk to his solicitor first. Nigel says
“Sure. Go ahead. But my offer to buy at $30,000 is open only until close of
business today”. Because John urgently needs the $30,000 to pay a debt he decides
to sign the contract. The next day Nigel advises that he is withdrawing from the
contract pursuant to a contractual term in fine print on the 9th page.
Advise John as to any legal action he may have against Anita, Claire and Nigel.
322
WEB REFERENCES
Australian Government Business Entry Point http://www.business.gov.au

Working with contracts http://www.treasury.gov.au
323
CHAPTER 7
Contracts in Business
Andrew Terry
THE BUSINESS CONTEXT

In Law in a changing society Wolfgang Friedmann spoke of the “pathetic contact” between
contract law as it is taught in the text books and contract law in the real world of business. There
is only one law of contract. The contract laws outlined in Chapter 6 apply to all contracts –
whether business to business (B2B), business to consumer (B2C) or private. Of course there is a
range of legislative provisions which have been enacted to redress the vulnerability of consumers
which are today enshrined primarily in the Australian Consumer Law although it must be
appreciated that the most powerful of these provisions – the prohibition of misleading conduct
(s 18) and unconscionable conduct (s 21) apply to all contracts – B2B and B2C – in trade or
commerce.
But despite the general application of the mass of contractual doctrine and principles and rules and
exceptions which have developed through the common law over the last few hundred years it
would be foolish, as Friedmann has pointed out, to assume that contracting in the robust
environment of business throws out the same challenges that it does in private or consumer
transactions. The reality is that a number of issues arise primarily in the commercial context and it
is the object of Part 1 of this chapter to address these issues. Part 2 outlines the nature of and
operation of several special types of contracts in business, including sale of goods, guarantees,
e-contracts, and insurance. The specialised nature of these contracts has led to the development of
specialised laws relating to their function and operation.
PART 1 – ISSUES IN BUSINESS CONTRACTING

[7.10] 7.1 A CONCLUDED AGREEMENT? ........................................................................................ 328
[7.10] The problem ......................................................................................................... 328
[7.20] The general principles ......................................................................................... 328
[7.30] Uncertainty, incompleteness and lack of contractual intent ........................... 329
[7.80] Conditional/subject to contracts ........................................................................ 332
[7.110] Memorandum of understanding ........................................................................ 333
[7.120] Heads of agreement ............................................................................................ 333
[7.150] Letters of comfort ................................................................................................. 335
325
[7.170] 7.2 NEGOTIATING THE AGREEMENT ................................................................................... 336

[7.180] Estoppel ................................................................................................................. 337
[7.200] Misleading or deceptive conduct ....................................................................... 338
[7.280] Without prejudice negotiations .......................................................................... 342
[7.300] Letters of intent .................................................................................................... 343
[7.320] Agreements to negotiate in good faith ............................................................. 344
[7.360] 7.3 THE TERMS OF THE AGREEMENT ................................................................................... 347
[7.360] The battle of the forms ........................................................................................ 347
[7.380] Incorporation by reference .................................................................................. 348
[7.400] Implied terms ....................................................................................................... 349
[7.410] Interpreting the contract ..................................................................................... 350
[7.420] 7.4 ADJUSTING THE BARGAIN .............................................................................................. 352
[7.420] Side letters ............................................................................................................ 352
[7.430] Variations ............................................................................................................... 352
[7.440] Waiver .................................................................................................................... 352
[7.450] 7.5 DEALING WITH THE CONTRACT ................................................................................... 353
[7.450] Assignment of contractual benefits .................................................................... 353
[7.460] Novation ............................................................................................................... 353
[7.470] Subcontracting ..................................................................................................... 354
[7.480] 7.6 WHEN IT ALL GOES WRONG .......................................................................................... 354
[7.480] Guarantees ............................................................................................................ 354
[7.490] Indemnities ........................................................................................................... 355
[7.500] Penalties ................................................................................................................ 355
[7.510] 7.7 STANDARDS OF BUSINESS CONDUCT ......................................................................... 356
[7.510] Commercial best practice ................................................................................... 356

[7.520] Misleading and unconscionable conduct .......................................................... 356
[7.530] An implied obligation of good faith in commercial contracts ......................... 357
[7.540] Fiduciary duties in commercial relationships ..................................................... 358
PART 2 – PARTICULAR BUSINESS CONTRACTS
[7.550] 7.8 SALE OF GOODS .............................................................................................................. 359
[7.560] 7.9 E-COMMERCE .................................................................................................................. 359
[7.570] Regulating the methods of e-commerce ........................................................... 360
[7.610] Regulating the practices of e-business in Australia ........................................... 362
[7.850] Regulating international e-business ................................................................... 375
[7.890] 7.10 GUARANTEES ................................................................................................................. 378
[7.890] Nature and function of a guarantee .................................................................. 378
326
Chapter 7 Contracts in Business
[7.900] The contract of guarantee ................................................................................... 379

[7.910] Guarantee v indemnity ........................................................................................ 380
[7.920] Creation of guarantee .......................................................................................... 380
[7.930] Liability of the guarantor ..................................................................................... 381
[7.940] Rights of the guarantor ....................................................................................... 381
[7.950] Discharge of the guarantor ................................................................................. 382
[7.970] Unfair guarantee contracts .................................................................................. 384
[7.990] Letters of credit .................................................................................................... 386
[7.1000] Letters of comfort ................................................................................................. 386
[7.1010] 7.11 COMMON LAW RESTRAINTS OF TRADE ..................................................................... 386
[7.1020] The common law test .......................................................................................... 387
[7.1030] Covenants cannot protect against mere competition ..................................... 388
[7.1050] Offending covenant can be severed .................................................................. 389
[7.1060] Agreements between employers and employees ............................................. 389
[7.1070] Agreements between independent contractors ............................................... 390
[7.1090] Sale of business agreements ............................................................................... 392
[7.1100] Agreements between partners ............................................................................ 393
[7.1110] Trading agreements between manufacturers and retailers ............................. 393
[7.1120] 7.12 INSURANCE CONTRACTS ............................................................................................. 394
[7.1130] The Insurance contract ........................................................................................ 394
[7.1140] Insurance legislation ............................................................................................ 394
[7.1150] Types of insurance ................................................................................................ 395
[7.1180] Special features of the insurance relationship ................................................... 396
[7.1250] Modifications to the duty of disclosure by the ICA .......................................... 401
[7.1320] Remedies of the insurer ....................................................................................... 404

[7.1370] 7.13 NEGOTIABLE INSTRUMENTS ....................................................................................... 407
[7.1380] The nature of negotiable instruments ................................................................ 407
[7.1400] Bills of exchange .................................................................................................. 408
[7.1540] Promissory notes .................................................................................................. 411
[7.1570] Cheques ................................................................................................................ 412
[7.1700] The bank-customer relationship ......................................................................... 417
[7.1730] Disputes with banks ............................................................................................. 418
[7.1740] Cybercrime ........................................................................................................... 419
[7.1750] 7.14 CONSUMER CREDIT TRANSACTIONS ......................................................................... 419
327
Part 1
Issues in Business Contracting

7.1 A CONCLUDED AGREEMENT?
The problem
[7.10] Standard form contracts are features of business as well as consumer contracts with
the qualification there may be the opportunity in the business context – particularly if the
parties enter the contract with something approaching equal bargaining power – to negotiate
changes to the terms. Indeed the problem of the “battle of the forms” (see [7.360]) reflects
the reality that business frequently contracts on its own standard terms which causes
problems when the respective terms are not compatible.
A common reality is nevertheless that business people often contract “casually” – coming to
some sort of consensus as to the big picture but leaving the detail for another day or
someone else: “my people will talk to your people”. The most common issue relating to
business contracts is probably whether there is indeed a contract in existence and in such
cases issues of uncertainty and incompleteness and contractual intent are frequently raised
and usually overlap.
I know that you The general principles

believe you
understand what [7.20] A useful summary of the principles on formation of contract was given by the
you think I said,
but I’m not sure NSW Court of Appeal in Mushroom Composters Pty Ltd v IS & DE Robertson Pty Ltd
you realise that [2015] NSWCA 1 – a case in which the question was whether there was a binding contract
what you heard
is not what I
between the supplier of straw and a mushroom composter. Sackville AJA (MacFarlan and
meant. Nixon Gleeson JJA agreeing) summarised the principles as follows (at [59]-[64]):
RM, quoted in
Australian First, in Australia the “objective” theory of contract has been accepted … in determining
Business whether a binding contract has been concluded, the law is concerned not with the parties’
(5 September subjective intentions … what matters is what each party by words and conduct would have led
1990).
a reasonable person in the position of the other party to believe …
Secondly, it is not necessary … to identify a precise offer or acceptance; nor is it necessary
to identify a precise time at which an offer or acceptance can be identified … The questions to
be asked are:
“in all the circumstances can an agreement be inferred? Has mutual assent been manifested?
What would a reasonable person in the position of the [plaintiff] and a reasonable person in
the position of the defendant think as to whether there was a concluded bargain?” Brambles
Holdings Ltd v Bathurst City Council [2001] NSWCA 61 (Heydon JA).
Thirdly, an agreement that is incomplete will not give rise to an enforceable contract … An
alleged contract will fail for incompleteness if, even though the parties have used clear
language, a term which is regarded as essential as a matter of law has not been agreed … If the
parties have not agreed on all essential terms, for example because they have left one such term
to be settled by future agreement, the contract is incomplete no matter what the parties
themselves may think … Moreover, if the parties have not reached consensus on the essential
terms of the contract, there will be no binding contract notwithstanding that one of the parties
has commenced work referable to the agreement … Depending on the circumstances,
328
non-contractual remedies, for example on restitutionary principles, may be available but the
contract itself is incomplete and therefore unenforceable.
Fourthly, for an agreement for the supply and sale of goods to constitute an enforceable
contract, the parties must agree as to price, although they may leave the price to be determined
by a third person or by an agreed mechanism. Thus, if a contract for the supply or sale of goods
expressly provides for the price to be agreed between the parties, there is no concluded
contract.
Uncertainty, incompleteness and lack of contractual intent

[7.30] Uncertainty, incompleteness and lack of contractual intent are factors which will
render a “contract” unenforceable. In the business context they frequently overlap. The
courts will nevertheless attempt to give effect to commercial agreements. The guiding
proposition is that of Lord Wright in Hillas & Co Ltd v Arcos Ltd [1932] All ER 494 (at
268):
Business people often record the most important agreement in crude and summary fashion,
modes of expression sufficient and clear to them in the course of the business may appear for
those unfamiliar with the business far from complete or precise. It is, accordingly, the duty of
the court to construe such documents fairly and broadly, without being too astute or subtle in
finding defects.
Uncertainty
[7.40] The role of the courts is to interpret and give effect to contracts and not to rewrite The business of
the law is to
them. Uncertainty will prevent the existence of a binding contract if the court cannot find a make sense of
“meeting of the minds” – consensus ad idem. In The Upper Hunter County District Council the confusion of
v Australian Chilling & Freezing Co Ltd [1968] HCA 8 Barwick CJ stated that (at [9]): what we call
human life – to
a contract of which there can be more than one possible meaning or which when construed can reduce it to
produce in its application more than one result is not therefore void for uncertainty. As long as order but at the
same time to
it is capable of a meaning, it will ultimately bear that meaning which the courts, or in an
give it
appropriate case, an arbitrator, decides is its proper construction: and the court or arbitrator will possibility,
decide its application. The question becomes one of construction, of ascertaining the intention scope, even
of the parties, and of applying it … So long as the language employed by the parties, to use dignity.
Lord Wright’s words in Scammell (G) & Nephew Ltd v Ouston (1941) AC 251 is not “so Archibald
MacLeish.
obscure and so incapable of any definite or precise meaning that the Court is unable to attribute
to the parties any particular contractual intention”, the contract cannot be held to be void or
uncertain or meaningless. In the search for that intention, no narrow or pedantic approach is
warranted, particularly in the case of commercial arrangements. Thus will uncertainty of
meaning, as distinct from absence of meaning or of intention, be resolved.
Incompleteness
[7.50] In Thorby v Goldberg [1964] HCA 41 the High Court approved the general
principle expressed by Sugerman J in the NSW Court of Appeal decision appealed from::
It is a first principle of the law of contracts that there can be no binding and enforceable
obligation unless the terms of the bargain, or at least its essential or critical terms, have been
agreed upon. So, there is no concluded contract where an essential or critical term is expressly
left to be settled by future agreement of the parties.
This proposition has received wide judicial support.
329
In the words of Viscount Dunedin in May & Butcher Ltd v R [1934] 2 KB 17 at 21, there
“must be a concluded bargain”:
a concluded contract is one which settles everything that is necessary to be settled and leaves
nothing to be settled by agreement between the parties. Of course it may leave something
which still has to be determined, but then that determination must be a determination which
does not depend upon the agreement between the parties. In the system of law in which I was
brought up, that was expressed by one of those brocards of which perhaps we have been too
fond, but which often express very neatly what is wanted: “Certum est quod certum reddi
potest.” Therefore, you may very well agree that a certain part of the contract of sale, such as
price, may be settled by some one else. As a matter of the general law of contract all the
essentials have to be settled. What are the essentials may vary according to the particular
contract under consideration. We are here dealing with sale, and undoubtedly price is one of the
essentials of sale, and if it is left still to be agreed between the parties, then there is no contract.
If the incompleteness relates to non-essential matters it is not necessarily fatal to the
court upholding a contract. The courts can imply terms to give “business efficacy” to the
broad agreement of the parties or fill the gaps by reference to past dealings or trade
custom.
Lack of contractual intent

“When I use a [7.60] An agreement will not be enforceable unless there is an intention to be bound, an
word” Humpty
Dumpty said in
intention to create a binding legal relationship. If, in the words of Lord Wright in Scammell
rather a scornful v Ouston [1941] 1 AC 251, “the parties never in intention nor even in appearance reached
tone, “it means an agreement” there is no contract. Contract law is nevertheless grounded in objective
just what I
choose it to theory and it is the objective appearance not the subjective intention of a party that is
mean – neither determinative. The clearest modern expression of objective theory is that of the High Court
more nor less.”
“The question in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52:
is,” said Alice, It is not the subjective beliefs or understandings of the parties about their rights and liabilities that
“whether you
can make words govern their contractual relations. What matters is what each party by words and conduct would
mean so many have led a reasonable person in the position of the other party to believe. References to the
different things.” common intention of the parties to a contract are to be understood as referring to what a reasonable
“The question person would understand by the language in which the parties have expressed their agreement. The
is,” said Humpty
meaning of the terms of a contractual document is to be determined by what a reasonable person
Dumpty, “which
is to be master – would have understood them to mean. That, normally, requires consideration not only of the text,
that’s all.” Lewis but also of the surrounding circumstances known to the parties, and the purpose and object of the
Carroll, Through transaction.
the Looking
Glass (1871) Ch The parties can expressly state their intention (“this agreement is intended to bind the
6.
parties”) or expressly renounce such intention (“this agreement is not entered into as a
formal or legal agreement but is only …”). In the cases that come before the courts on this
issue the intention is rarely expressly stated and must be determined having regard to the
principles discussed at [7.20]. It is determined objectively, by drawing inferences from what
they said and did in the course of their dealings. What would each party, by its words and
conduct, have led a reasonable person in the position of the other party to believe.
330
IN CONTEXT
General principles in determining whether an informal

agreement is intended to be binding
[7.70]
The mere fact that the parties contemplate the execution of a formal contract,
subsequent to an informal agreement, does not mean that the informal agreement is
not presently binding.
The fact that the parties contemplate the drawing up and execution of a formal
contract is a consideration which may point to the conclusion that no presently
binding agreement was intended until that formal contract is executed.
The existence of matters of importance in which the parties have not reached
consensus in their informal agreement will render it less likely that they intended
immediately to be bound before the execution of a formal document. Even where the
parties have agreed on the “major matters”, their subsequent conduct may indicate
that they did not intend to be bound until the other issues between them were resolved
in a formal document…
In order to determine in what areas the parties were, and were not, in agreement,
and what matters they considered necessary in order for an agreement to exist, it is
legitimate to examine their subsequent conduct. Where correspondence between the
parties after an informal agreement refers to important terms and conditions not
mentioned during that informal discussion, it may more readily be inferred that the
earlier discussion was simply a preliminary negotiation and not a binding agreement.
Depending on the size, importance and complexity of the subject matter, the less
formal the initial agreement, the less likely it will be that it was intended to be legally
binding and enforceable. Thus, an oral discussion which contemplates a subsequent
formal written agreement is less likely to have been intended to have been
immediately binding. He’s a
It is necessary in every case to consider the nature and importance of the businessman …
transaction which the parties contemplate. Where the agreement concerns a large I’ll make him an
offer he can’t
sum, or concerns a significant transaction, it is less likely to have been intended to be refuse. Mario
presently binding. Puzo.
Depending on the subject matter, where the parties have not used solicitors but
intended to do so for the drawing up of their formal agreement, that may also be a
factor which will point to the non-existence of a binding agreement until the
contemplated formalities have been agreed.
Where a binding agreement is said to have been formed as a result of
correspondence, it is necessary to look at that correspondence as a whole. It is wrong
to isolate any part of the correspondence from the rest in order to prove or disprove
the existence of a binding agreement. The same approach should be taken to the
analysis of words and phrases within the correspondence. Reference to an
“agreement” having been reached does not necessarily prove the existence of a
presently binding contract. Conversely, references to a “proposed agreement”, and
similar expressions, will not necessarily mean that no agreement presently exists. It is
a question of how the words are to be interpreted in their context, and in the light of
the correspondence, viewed as a whole.
Geebung Investments Pty Ltd v Vorga Group Investments (No 8) Pty Ltd (1995) 7
BPR 14 at 551 per Kirby P
331
Conditional/subject to contracts
[7.80] Contracts, particularly sale of land contracts, are frequently made subject to or
conditional on a contingency occurring or not occurring. Agreements may be made “subject
to solicitor’s approval” or “subject to finance” or “subject to contract” or subject to some
other contingency. Such clauses give rise to two particular questions:
1. What is the purpose of the clause? Is it intended to express the parties’ agreement
that there is no contract until the event occurs, or simply that there is no obligation
to perform?
2. What is the content of the clause? In other words, in what circumstances will the
condition be regarded as fulfilled?
Law is the key In relation to the first question, the authorities suggest that for contingencies other than
to everything.
Geia J,
“subject to contract” the intention does not prevent the formation of a contract and is
Australian relevant only in relation to its performance. A “subject to finance” clause is unlikely to
Financial impact on the formation of a contract but operates as a condition precedent to the obligation
Review (10 July
2015). to perform the contract. Whether or not the condition can be regarded as fulfilled is the
second question. When the formula is “subject to contract” the issue is more complex as the
contingencies if unfulfilled may prevent a contract arising or it may simply go to
performance. Masters v Cameron [1954] HCA 72 is the leading authority on the effect of
“subject to contract” clauses.
In relation to the second question the issue is that of what constitutes satisfaction of the
condition precedent. In Meehan v Jones [1982] HCA 52 for example the “subject to suitable
finance” clause was held not to act as an “insurance policy” to allow a party who had not
made reasonable efforts to obtain finance on reasonable terms.
MASTERS V CAMERON
[7.90] Masters v Cameron [1954] HCA 72
This case was discussed at [6.720]. The High Court held that “subject to contract” clauses could fall into three
categories:
1. The parties have reached final agreement on the terms of their bargain, intend to be immediately
bound, but want those terms to be set out in a more precise but not materially different form.
2. The parties have reached finality and do not intend to alter their agreement, but want to defer
performance of all or part of it until it has been incorporated into a formal document. And:
3. The parties do not intend to make a concluded bargain unless and until they sign a formal contract.
332
Since Masters v Cameron the courts have recognised a fourth category (see Helmos Enterprises Pty Ltd v
Jaylor Pty Ltd [2005] NSWCA 235):
4. The parties intend to be bound immediately but also expect to make a further contract in substitution of
the current agreement which may contain additional terms.
[7.100] In Helmos Enterprises Pty Ltd v Jaylor Pty Ltd [2005] NSWCA 235, it was stated
(at [56]) that:
… in a case where the parties have expressly or impliedly indicated that there will be a further
agreement, it is a question of construction whether the execution of a further contract is a
condition of the bargain or else is merely an expression of the desire of the parties as to how
their transaction will be completed.
It was recognised that even where the wording used by the parties indicates an intention
to be bound, the contract may still be void for uncertainty if the parties have left vital
matters to be agreed upon later. In other words, the parties may intend their agreement to
be immediately binding but it will fail if matters essential to the contract are not yet
decided (such as the identification of the all of the parties to the contract, the property
covered by the agreement or how the price will be determined).
The Court of Appeal in Helmos considered that the law should adopt a practical,
commercial approach in an attempt to uphold bargains made between business people
with extensive knowledge and appreciation of how the contract would operate. In this
case, the sale of two restaurants was not void merely because essential supply and
storage contracts were not yet completed.
The lesson for business is, as is so often the case, for the parties to specify, in clear and
unambiguous terms, the status of their agreement.
Memorandum of understanding
[7.110] A memorandum of understanding (MOU) is used as a preliminary step towards [T]he
gentleman’s
forming a binding agreement at a later stage. Its purpose is usually simply to demonstrate agreement,
intent in exploring a potential contractual relationship at a later stage or to record a broad reported to have
understanding. The parties must nevertheless appreciate that attaching the label been defined by
Mr Justice Viasey
“memorandum of understanding” to a document is not necessarily determinative of its legal as “an agreement
effect. The court will look at the relevant conduct of the parties and the terms of the which is not an
agreement, made
documentation and may determine that the documentation in fact enshrines an enforceable between two
agreement. The parties should, in clear and unambiguous language, clarify the actual legal persons, neither
of whom is a
status of their agreement. gentleman,
whereby each
expects the other
Heads of agreement to be strictly
[7.120] A Heads of agreement is a document which usually summarises the matters on bound without
himself being
which the parties have agreed and are intended to form the basis of later formal contract. In bound at all”.
Helmos Enterprises Pty Ltd v Jaylor Pty Ltd [2005] NSWCA 25, the NSW Court of Appeal Megarry RE, A
second
held that this arrangement was a fourth category to the Masters v Cameron categories. The miscellany at
court pointed out that the under the fourth category, if the future essential terms could not law (1933).
be added to the contract it would fail. The court also pointed out that the use of the words
333
“subject to contract” may not be as strong a determinant where the subject matter of the
contract is not land. In that case the parties had entered into negotiations to purchase a
restaurant. The court found that the particular agreement fell within the “fourth category”
under which the parties were bound by an agreement which they intended to be binding
while expecting to make a contract in substitution for it containing additional terms.
While the idea behind a “heads of agreement” may be not to create an enforceable
document, the court will always look at the relevant conduct of the parties and the terms of
the documentation to see if in fact these documents do amount to binding agreements. The
court may well be influenced in this regard by the idea that normally parties entering
commercial arrangements will do so on the basis that they should be legally bound by then.
However, as Kirby J pointed out in Geebung Investments Pty Ltd v Varga Group
Investments No 8 Pty Ltd (1995) 7 BPR 14 the Court will look at a number of factors in this
determination.
A document entitled “heads of agreement” may well constitute an enforceable agreement in
its own right, if the parties are seen to act in accordance with its provisions. The parties
should clearly clarify the legal status of the agreement in the document.
LIFESTYLE APPLIANCES LTD V AUTEL TV SERVICES LTD

[7.130] Lifestyle Appliances Ltd v Autel TV Services Ltd (2005) 8 NZBLC 99-588
The defendant wished to purchase the plaintiff’s retail appliance business. Both parties signed a heads of
agreement recording that the defendant would buy the plaintiff’s shares for NZ$1.8 million. The heads of
agreement stated that the parties would negotiate and sign a formal agreement for the sale. The parties then
discussed and renegotiated the original agreement so that there was a sale of assets rather than of shares. The
purchase price remained the same. The parties then undertook a stocktake and went into possession of the
business. The formal agreement was prepared several weeks later and was signed by the defendant as
purchaser. It contained a calculation of the final amount payable based on the financial position of the business
approximately at the date of possession.
The defendant then learnt that one of the suppliers to the business would not continue to supply it after it was
bought by the defendant. This had the effect of considerably reducing its value. The defendant then said that
it was withdrawing the offer made to purchase the business contained in the later document. The defendant
claimed that the heads of agreement document was not binding because it was subject to a formal agreement
being entered into.
It was held that the heads of agreement was binding. The parties acted on the basis that they had an agreement
because they had not only agreed on the price but the plaintiff had let the defendant take over the running of
the business and that the only basis that this could have been done was that both parties had recognised that
they had a legally binding agreement.
334
JINGALONG PTY LTD V TODD

[7.140] Jingalong Pty Ltd v Todd [2015] NSWCA 7
The principal issue in the appeal was whether a Heads of Agreement entered into by the parties constituted a
binding and enforceable contract. The Court of Appeal held that:
The context in which the Settlement Agreement came into existence suggests that the parties
intended to enter into a binding and immediate agreement. But there are more direct textual
indications that the Settlement Agreement, objectively assessed, was intended to bind the parties
immediately. The clearest indication is cl 8, which states that “These Heads of Agreement have
effect unless any later deed is entered into by the parties”. It is difficult to see what purpose cl 8
could have except to make it clear that the Settlement Agreement, notwithstanding its
handwritten form and lack of detail, was intended to bind the three parties. To apply the
classification stated by the High Court in Masters v Cameron, cl 8 demonstrates that the parties
reached finality in arranging the terms of their bargain and intended to be immediately bound to
the performance of those terms, even though they contemplated that a more formal deed might
subsequently be drawn up.
Letters of comfort
[7.150] The letter of comfort is typically encountered in situations involving groups of
related companies. They are often used in lieu of the holding company giving a formal
guarantee to a lender as this may have accounting implications for the holding company.
Where a subsidiary company within a group is seeking finance, the lender may require some
assurance from the holding company that the subsidiary will receive its support, if
necessary, in meeting its obligations under the loan arrangement.
It has generally been accepted that such letters of comfort do not amount to guarantees and
do not give rise to contractual relationships. This view was endorsed in Kleinwort Benson
Ltd v Malaysian Mining Corp [1988] 1 ALL ER 785, in which a lender sought to enforce a
letter of comfort against the holding company that had provided it. The letter contained a
statement that it was the policy of the parent company “to ensure that the business of Metals
[its subsidiary] is at all times in a position to meet its liabilities to you under the above
arrangements”. The English Court of Appeal concluded that in the circumstances in which
the letter was supplied and in the context of its other terms, the statement as to its policy
was not binding on the parent; it was too vague to constitute a contract.
Such letters have nevertheless been held in New South Wales to show an intention to enter
legal relations unless they clearly indicate that they are not intended to do so. In Banque
Brussels Lambert SA v Australian National Industries Limited (1989) 21 NSWLR 502, a
letter of comfort which stated that “it is our practice to ensure that our affiliate will at all
times be in a position to meet its financial obligations as they fall due” was enforced (at
523):
335
The whole thrust of the law today is to attempt to give proper effect to commercial transactions
… If the statements are appropriately promissory in character, courts should enforce them when
they are uttered in the course of business and there is no clear indication that they are not
intended to be legally enforceable.
Acquaintance. A In Gate Gourmet Australia Pty Ltd (in liquidation) v Gate Gourmet Holding AG [2004]
person whom we
know well
NSWSC 149 the court used the objective test to see if the document showed an intention to
enough to enter legal relations. In this case the court looked at both the commercial purpose of the
borrow from, but contract and the terms of the document itself which were clearly promissory.
not well enough
to lend to.
Ambrose Bierce,
These decisions stands as a warning, at least in the Australian context, that an intention to
The Devil’s create legal relations should be expressly denied in such commercial situations if the
Dictionary provider of the letter of comfort wishes to ensure that it does not amount to a guarantee, or
(1911).
at least a contractual obligation to ensure that the subsidiary should perform its obligations.
Misleading conduct and estoppel actions may also be available in appropriate cases.
AUSTRALIAN BRIDAL CENTRE PTY LTD V DAWES CORP PTY LTD

[7.160] Australian Bridal Centre Pty Ltd v Dawes Corp Pty Ltd [1991] ATPR 41-072
In the course of the purchase of the issued shares in a company an undertaking was given to the vendor
directors that their pre-existing guarantees of the company’s debts would be replaced by new guarantees from
the purchasers and that, in the meantime, they would protect the outgoing directors if a claim arose. The
undertakings were oral, the purchaser having said “don’t worry, we will cover you”, and, in relation to the
replacement of the guarantees by new ones, “it will be addressed in due course”. Cole J in the Supreme Court
of New South Wales held that the failure to honour the undertakings amounted to misleading or deceptive
conduct, and that the outgoing directors were entitled to be indemnified on the basis that “they were, in truth,
misled or deceived into a course of conduct they otherwise would not have adopted”.
7.2 NEGOTIATING THE AGREEMENT

[7.170] In the traditional contract model there is a clear line between negotiations which
lead to a contract being entered into and the contract itself. The negotiations traditionally
have not attracted any legal obligation in respect of them (see [6.1520] ff, [6.1930] ff) and it
is the contract itself which enshrines the contractual agreement and the associated
contractual obligation. The law in this area has nevertheless evolved significantly under the
influence of common law and statutory developments. The common law estoppel doctrine
may prevent one party from going back on her or his word. The statutory misleading or
deceptive conduct action under s 18 of the Australian Consumer Law (ACL) isa powerful,
effective and versatile action providing redress in respect of misleading representation in the
case of pre-contractual negotiations (s 18 is discussed in detail in Chapter 18). Note that
336
much of the case law on s 18 refers to s 52 of the Trade Practices Act 1974 (Cth) (TPA), the
predecessor of s 18. This case law is still relevant.
Estoppel Reason is the

life of the law,
[7.180] Estoppel is a flexible and effective doctrine the essence of which is that “if certain nay the common
requirements are met a person is precluded from taking a certain step or not permitted to law itself is
nothing else but
deny that a particular fact is true when it is actually false” (JW Carter, Cases and Materials reason; which is
on Contract Law in Australia (LexisNexis Butterworths, 6th ed, 2012) p 162). Estoppel can to be understood
of an artificial
arise in the context of a pre-existing contract or where there is no proven existing perfection of
relationship. Promissory estoppel (see [6.1160]) in effect prevents a party from going back reason, gotten by
long study,
on her or his word. A promise is not enforceable unless it is provided for consideration – ie observation, and
something valuable in the eyes of the law is given in return for it. However in the High experience, and
not of every
Trees case it was held that if a promise has been made with the expectation that it will be man’s natural
relied upon and it is indeed relied upon then the promisor cannot go back on her or his reason.
Sir Edward
promise if it would be inequitable to allow her or him to do so. The doctrine has been Coke, A
applied in Australia as both a “shield” allowing a party to defend an action or as a “sword” commentary
allowing a party to bring an action. Business people must be aware that it is possible that upon Littleton
(1628).
they will be held to their promises whether or not such promises can be contractually
enforced.
The leading cases on promissory estoppel are noted at [6.1170] ff. A recent NSW decision
nevertheless provides a constructive example of the influence of promissory estoppel in a
more modest fact situation.
WORKPLACE SAFETY AUSTRALIA V SIMPLE OHS SOLUTIONS PTY LTD

[7.190] Workplace Safety Australia v Simple OHS Solutions Pty Ltd [2015] NSWCA 84
Workplace Safety Australia Ltd (WSA) provided online subscription packages designed to assist businesses to
meet their obligations under occupational health and safety legislation. Under a Distribution Agreement,
Simple OHS Solutions Pty Ltd (Simple), agreed to act as the exclusive distributor of WSA’s subscription
packages. The primary issue was whether the distributor agreement was a franchise agreement subject to the
Franchising Code of Conduct (see Chapter 13). A subsidiary issue was whether WSA had the right to
terminate the agreement.
Under the agreement, Simple was obliged to pay WSA a Customer List Fee in quarterly instalments and to
subscribe 15 new customers per month. The agreement specified that if this minimum customer requirement
was not met for any six month period, WSA had the right to immediately terminate. The Director of WSA had
made two representations to Simple, one prior to the execution of the agreement and one shortly after, that
WSA did not expect Simple to make its sales targets initially but WSA nevertheless purported to terminate the
agreement within six months on the grounds of Simple’s failure to meet the minimum customer requirement
337
and non-payment of a quarterly instalment. The Court of Appeal held that WSA was estopped from
terminating the contract. The Court’s reasoning is summarised in the head note:
While a representation must be clear and unequivocal before it gives rise to a promissory
estoppel, a representation may support a promissory estoppel if it is reasonable for the
representee to interpret it in the manner for which the representee contends. In determining
whether conduct is reasonably capable of giving rise to a representation, regard must be had to
the context in which the conduct occurred and what the conduct would have conveyed to a
reasonable person in the position of the representee.
Although the representations by WSA’s Director did not specify the timeframe for the
representations, a reasonable person in Simple’s position was entitled to proceed on the
expectation that it would not be called on to meet its sales targets, and these targets would not be
enforced, in the early period of the agreement. In circumstances where no notice was given that
the targets would be enforced until four and a half months after the agreement was entered into,
when only 15 packages had been sold, it was unconscionable for WSA to depart from the
expectation it had induced by terminating the agreement for failure to sell 90 packages in the first
six months
Misleading or deceptive conduct

[7.200] The efficacy of s 18 of the ACL in respect of pre-contractual misrepresentation is
discussed in detail in Chapter 18. There are nevertheless some limitations on its application:
Establishing reliance
[7.210] The main limitation on the efficacy of the statutory action in the context of
contractual negotiations is the requirement that the loss or damage for which a remedy is
sought is “by conduct of another person in contravention of [s 18]” (s 236). The case law
clearly establishes that there must be a causal connection between the conduct and the loss;
the conduct (the representation in this context) must induce the contract: there must be a
proven reliance on it. The reliance element of course applies in every case where damages
are sought for misleading conduct but this element may be harder to establish in B2B as
opposed to B2C contexts.
If has never This requirement was clearly explained by Fisher J in Pappas v Soulac Pty Ltd [1983] FCA
been the law that 3:
in order for
conduct to The applicants will only be entitled to an award of damages under s 82 of the Act if they
contravene s 52, establish that they were induced by the representation … to enter into the … contract … The
it must be the
sole cause of the question in each instance is whether they acted upon the statements … In the sense of placing
consumer being reliance upon this conduct in entering into the contract. There must be a causal connection
misled or between the conduct and the loss for which they seek to be compensated.
deceived. 10th
Cantanae Pty The misleading conduct need not be the sole factor inducing the contract, but it must be
Ltd v Shoshana a significant factor. In the circumstances of commercial negotiations such reliance cannot
Pty Ltd [1987]
FCA 421 at [71] be assumed and there are many examples where the court has not accepted on the
per Gummow J. evidence that the misleading or deceptive statements induced the applicant to enter the
contract. Some of these cases are referred to in Terry A, “Misleading or deceptive
conduct in commercial negotiations” (1988) 16 ABLR 189 at 201-202 (footnotes omitted):
When experienced parties negotiate over a long period, when the applicant has made his own
enquiries, when the evidence discloses that because of “extreme optimism” or for “commercial
338
reasons” the applicant would not have acted differently even if the true facts had been fully
explained, when legal advice has been received as to the rights and obligations assumed by the
parties under the contract, when the misrepresentation is corrected prior to execution of the
contract or when no particular significance has been placed on the conduct complained of, the
court is unlikely to be satisfied that the applicant was materially influenced by the
misrepresentation. The applicant is not required to prove that the misleading or deceptive
conduct was the sole influence inducing him to enter the contract, but it must be a material
factor affecting the decision. Rumpe v Camrol Pty Ltd provides a straightforward example …
Morling J held that despite a contravention of s 52, damages could not be awarded as the
misrepresentation was not the cause of the applicant’s acting to his detriment:
It was incautious, not to say reckless, of the respondents to state in the newspaper
advertisement that the premises were licensed until 3 am. But I am satisfied on the whole of
the evidence that, although that statement clearly amounted to misleading conduct within the
meaning of s 52 … it played no part in the decision of the applicants to enter into the
agreement. By the time they signed the agreement they had been told, in effect, that they
should not rely upon the statement but should rely upon their own enquiries. Those
enquiries were made by them or on their behalf and the result of the enquiries was known
before the agreement was signed.
Disclaimers
[7.220] It is suggested in Chapter 18 that exemption clauses, disclaimers and other Whatever may
have been the
exclusionary devices will rarely be effective to prevent conduct being categorised as case 146 years
misleading or deceptive. However, a specific disclaimer which is carefully drafted to suit a ago, we are not
now free in the
particular transaction may be effective to prevent conduct being categorised as misleading twentieth century
or to preclude reliance on the conduct. For example, a prospective franchisee who to administer
that vague
separately signs an acknowledgement that reliance is not placed on any matters other than jurisprudence
expressly contained in the contractual documentation and who clearly understands the effect which is
sometimes
of the acknowledgement may find it difficult to satisfy a court that reliance was nevertheless attractively
placed on a representation made during negotiations. A cautious party will expressly ask the styled “justice as
between man
other party whether reliance is placed on matters not included in the contractual and man”. Boylis
documentation, and will record the clear understanding of the parties in relation to each v Bishop of
London [1913] 1
item. If, for example, a franchisee makes it clear that he or she is entering the agreement in Ch 127 at 140
reliance on a particular statement as to turnover but the franchisor simply intended this as per Hamilton LJ.
an optimistic theoretical possibility, the parties should resolve this issue prior to contracting
either by the prospective franchisor accepting clear responsibility for it or the prospective
franchisee, after careful consideration, disclaiming any reliance on this statement. The
possibility that this process may result in the contract not being signed is, eventually, much
less costly and traumatic than the parties fighting a long, expensive and debilitating
misleading or deceptive conduct action in the future. Franchisors, and other parties
contracting on their own self-serving standard forms, can also protect their own interests by
ensuring that the other party has obtained independent legal, commercial and financial
advice which lessens the opportunity to argue that reliance was placed primarily on the
franchisor’s representations.
339
Be circumspect The applicant’s negligence

Charlie. Frank
William Terry. [7.230] A further factor is relevant to the question of reliance. It is well established that
an unreasonable failure to take advantage of an opportunity to discover the true state of
affairs will not of itself prevent reliance upon misleading or deceptive conduct (Neilsen v
Hempston Holdings Pty Ltd [1986] FCA 100). However, as Hill J observed in Argy v Blunts
and Lane Cove Real Estate [1990] FCA 51 at [91]:
A case may perhaps be imagined where an applicant is so negligent in protecting his own
interests that there will be a finding of fact that the representation complained of was not in the
circumstances a real inducement to his entering into a contract. In such a case the element of
causation between misrepresentation and damage will have been severed by the intervention of
the negligence of the applicant.
When parties are And in Elders Trustee and Executor Co Ltd v E G Reeves Pty Ltd [1987] FCA 332 the
dealing at arm’s court held that s 18 is not designed for the benefit of persons who fail, in the circumstances
length in a
commercial of the case, to take reasonable care of their own interests.
situation in
which they have Section 137B of the Competition and Consumer Act 2010 (Cth) (CCA) nevertheless affects
conflicting the applicant’s entitlement to damages in such cases. The court may reduce the damages
interests it will
often be the case recoverable by a claimant for loss or damage caused by a contravention of s 18 to the extent
that one party to which the court thinks it just and equitable having regard to the claimant’s share in the
will be aware of
information responsibility for the loss or damage.
which, if known
to the other,
would take a “Robustness” expected in arm’s length commercial negotiations
different
negotiating [7.240] In General Newspapers Pty Ltd v Telstra Corp [1993] FCA 473 at [44]-[45]
stance. This does
not of itself Davies and Einfeld JJ said that s 18:
impose any
does not require arm’s length negotiations to be completely open or require full disclosure at all
obligation on the
first party to times. The particular facts of the case must be considered in the light of the ordinary incidents
bring the and character of commercial behaviour.
information to Thus, in the ordinary course of commercial dealings, a certain degree of “puffing” or
the attention of exaggeration is to be expected. Indeed, puffery is part of the ordinary stuff of commerce. So
the other party,
also is a certain degree of “put-off”, evasion or obfuscation by commercial people seeking to
and failure to do
so would not, resist disclosing information which is confidential. Discussions in commerce are so understood.
without more,
ordinarily be
Although the intrusion of s 18 into the traditional bargaining process is clearly
regarded as established by authority there are a number of judicial suggestions that in the case of arm’s
dishonesty or length commercial negotiations a more “robust” approach to s 18 is appropriate. In Halton
even sharp
practice. Lam v Pty Ltd v Stewart Bros Drilling Contractors Pty Ltd [1992] ATPR 41-158, Palmer AJ
Ausintel commented at 49,153:
Investments
Australia Pry In commercial dealings between parties negotiating at arm’s length in their own interests one
Ltd [1990] ATPR must guard against being too ready … to impose … obligations which would be quite contrary
40-990 at 50,880 to ordinary commercial expectations.
per Gleeson CJ.
However, as Burchett J expressly acknowledged in Poseidon Ltd v Adelaide Petroleum
NL [1991] FCA 663, “the bargaining process is not to be seen as a licence to mislead or
deceive”:
I do not think it has ever been suggested that s 52 strikes at the traditional secretiveness and
obliquity of the bargaining process. Traditional bargaining may be hard, without being in the
340
statutory sense misleading or deceptive. No one expects all the cards to be on the table. But the
bargaining process is not therefore to be seen as a licence to deceive.
This passage was referred to by Young J in Gaffıkin Marine Pty Ltd v Princes Street He occasionally
stumbled over
Marina Pty Ltd [1995] ATPR (Digest) 46-149 at 53,165 who, in relation to the comment the truth, but
that “traditional bargaining may be hard without being in the statutory sense misleading”, hastily picked
expressly noted that “when, however, statements go beyond that barrier, then there is danger himself up and
hurried on as if
of orders being made”. nothing had
happened.
Winston
Churchill.
SAMAHA V CORBETT COURT PTY LTD

[7.250] Samaha v Corbett Court Pty Ltd (2006) NSWSC 1441
If, as Ronald Reagan suggested, the nine most terrifying words in the English language are “I’m from the
government and I’m here to help” then the nine most enticing words in commercial negotiations could be “I’m
going to make you a very rich man”. Ronald Reagan’s proposition has never been legally tested but NSW
Supreme Court has recently held that the latter proposition did not attract legal liability. In Samaha the court
held that the statement “I’m going to make you a very rich man” made at the start of negotiations for a retail
lease was simply “casual talk or idle chit-chat”. It amounted to “mere puffery” which no one could say was
seriously relied on in making an important commercial decision. An associated statement – that the shopping
centre in which the retail site under consideration was leased was “going to be the hub of the area” – was
similarly treated. It was mere puffery which did not attract legal consequences.
In strict legal terms the court’s conclusion on these enticing statements is not binding. The plaintiff abandoned
reliance on them in the course of the trial so the court’s decision is obiter. The court’s opinion nevertheless
provides some comfort to those negotiating retail leases or franchise agreements or other commercial
relationships. Not every throwaway line attracts legal consequences – particularly if they are introductory
comments of a “puffing” nature made at the start of negotiations for the purpose of attracting the interest of the
other party. In the words of the leading case, Pappas v Soulac [1983] FCA 3, such statements become:
… irrelevant or of little, if any, significance when detailed information is subsequently given, to a potential purchaser
with commercial experience. To the extent that they are essentially puffery, it is proper to be reluctant to elevate them
to the status of potentially misleading conduct.
A certain robustness is expected in commercial regulations, particularly when both parties are commercially
experienced. Caution must nevertheless be exercised. While puffery does not constitute misleading conduct,
the line between “puffing” and “misleading” statements is not always clear. If such statements can reasonably
be understood as conveying a representation of fact, if not followed by detailed information, and if made to a
party without commercial experience they may attract liability.
341
[7.260] The above discussion has focused on misleading conduct under s 18 of the ACL
but the proposition that a certain level of “robustness” is to be expected in commercial
negotiations is of wider application and will be a relevant consideration in issues arising in
the context of unconscionability.
AUSTOTEL PTY LTD V FRANKLINS SELFSERVE PTY LTD

[7.270] Austotel Pty Ltd v Franklins Selfserve Pty Ltd (1989) 16 NSWLR 582
Protracted negotiations for the building and leasing of a supermarket were characterised by each party “trying
to put the other one in a corner yet reserving for himself the liberty to have an out”. When the prospective
tenant withdrew after the landlord had already committed itself to expensive redesign of the project at the
behest of the prospective tenant, the landlord sued. The court held that there was no contract and no estoppel:
each party was a “big player” well advanced by their lawyers. Estoppel is imbued with unconscionability,
which is more difficult to establish in this context. Kirby P, as he then was, stated that (at 585 and 586):
we are not dealing here with ordinary individuals invoking the protection of equity from the
unconscionable operation of a rigid rule of the common law. Nor are we dealing with parties
which were unequal in bargaining power. Nor were the parries lacking in advice either of a legal
character or of technical expertise … At least in circumstances such as the present, courts should
be careful to conserve relief so that they do not, in commercial matters, substitute lawyerly
conscience for the hard-headed decisions of business people
“Without prejudice” negotiations

Cleverness and [7.280] It is sometimes said, incorrectly, that if the words “without prejudice” are used in
commercial
negotiations, they will prevent a contract arising. The words “without prejudice” do not
morality do not
always march prevent a contract from coming into effect if the offer in connection with which the phrase
together. Justice
Lockhart,
was used was accepted. The main use of the phrase is by lawyers negotiating a settlement of
Business Review a legal claim. The idea behind it is that an offer made using these words should not be
Weekly (10 April treated as an admission of the validity of the other side’s claim.
1992).
The question of whether the words “without prejudice” in documents prepared in the
context of negotiations to settle a legal claim out of court have the effect of rebutting the
normal presumption was discussed in Tallerman & Co Pty Ltd v Nathan’s Merchandise
(Vic) Pty Ltd [1957] HCA 10 Dixon CJ and Fullagar J expressed the legal position in these
terms (at [17]):
It is, of course, clear that, if, during a dispute, an offer of a compromise is made “without
prejudice” and is accepted simpliciter, the fact that the offer was made without prejudice ceases to
have any significance. The commonsense view, and the view of the law, is that the offeror is
saying: “I make you this offer in the hope of avoiding legal proceedings between us. If you accept
it, we shall both be bound. But I make no admissions and, if you do not accept it, our legal position
342
remains unaffected.”
NEEDLEWORK WAREHOUSE PTY LTD V CHANSONETTE PTY LTD

[7.290] Needlework Warehouse Pty Ltd v Chansonette Pty Ltd [2006] FCA 1185
A lawyer representing one party wrote a letter to the lawyer for the other party headed “without prejudice save
as to costs” outlining a settlement proposal. After some further discussions between the lawyers the same
lawyer wrote a confirmatory letter to the other lawyer setting out the terms of settlement. Both letters
contained a condition that each party would enter into a deed of release in relation to the legal action which
was before the Federal Court. The lawyer for the other party faxed back an acceptance of the offer. The first
lawyer then replied that the agreement was not binding but was an agreement in principle only because the
terms of the Deed of Release still had to be agreed to.
It was held that the words “without prejudice as to costs” did not prevent the correspondence being used as
evidence of an agreement. There was in the circumstances a binding agreement between the parties. The terms
of what the Deed of Release should contain could be implied in the contract by virtue of the circumstances of
the case.
Letters of intent
[7.300] A letter of intent, as the name suggests, is a document that states that the author
intends to conclude a formal contract at a later stage. No binding contract exists before the
formal documentation eventuates, other than in exceptional circumstances. They were
described in Turriff Construction Ltd and Turriff Ltd v Regalia Knitting Mills Ltd (1971) 9
BLR 24 as:
no more than the expression in writing of a party’s present intention to enter into a contract at
a future date … and it has also been said that “save in exceptional circumstances it can have no
binding effect” and that it will create no liability in regard to that future contract.
A letter of intent provides a framework for parties to explore interests, capabilities,

possible interactions and availability of resources in relation to a potential connection
between the parties. Where work is commenced in advance of a contract being signed, or
indeed other expenses incurred such as preparatory work in preparing tenders or
estimates, or preliminary design work and work done to obtain necessary approvals or
consents, it is not uncommon for the party incurring the expense to request or be given a
“letter of intent” which, whether or not so described, may affirm a present intention on
the part of the owner to enter into a future contract. In Turriff Construction a request for
“an early Letter of Intent to cover … the intensive design work now commencing and for
the essential early orders of subcontractors” was held to have been a contractual offer
343
accepted by a letter from the owner simply confirming the intention to award the contract
and its principal terms, but making no reference to any preliminary expenditure by the
contractor.
In Coogee Esplanade Surf Motel Pty Ltd v Commonwealth of Australia (1976) 50 ALR
363 Moffitt P held that a letter of intent in that case was “what it promised to be”, namely a
letter of intention:
A memorandum Whatever precisely was the intent to be evidenced, it was the intent of one party … I think it is
is written not to clear that the intent to be stated was that of [the party] in exercise of its powers to acquire the
inform the
reader but to
property by agreement. This must indicate an intention to enter into an agreement, which is an
protect the essence of this method of acquisition. The need to provide a letter of intent, ie unilateral intent, is
writer. Dean inconsistent with there being then a contract to buy … The expression of intention to do an act by
Acheson. one party may, depending on the circumstances, induce a firm conclusion that the act will be done,
but it would do violence to such language … to interpret it as adding to the unilateral stated
intention a contractual promise by him and the other party.
[7.310] On the other hand in British Steel Corporation v Cleveland Bridge & Engineering
Co Ltd [1984] 1 All ER 504, a letter of intent was not considered to have created a binding
contract. Engineering contractors by a letter of intent requested a supplier to commence
manufacture “pending the preparation and issuing to you of the official form of
sub-contract”. The supplier quoted a price and commenced work. There were many
revisions of design, and negotiations as to modifications of price and as to the contract
conditions to be used. Eventually, all products were delivered and the supplier sued for the
price. The contractor counter-claimed for a much larger amount alleging damages for the
delay in delivery. It was held that a contract could from a letter of intent, and there might be
express or implied terms as to quality or the time for completion under such a contract.
Here, despite the work being completed, the negotiations had never reached agreement on
the matters of price or time for completion. The counter-claim had to be dismissed, as there
was no obligation to complete by any particular time. The supplier was entitled to be paid,
not on the basis of contract, but on the basis of restitution, as otherwise the owner would
have been unjustly enriched.
Cautious business people will not rely on the inherent uncertainty as to the effect of a letter
of intent and will clarify the nature and status of their agreement. The caution must also be
given that leasing another party to believe that you will act in a particular way may give rise
to an estoppel or to misleading or deceptive conduct.
Agreements to negotiate in good faith

[7.320] While it is clear law than an “agreement to agree” is unenforceable because of
uncertainty – the same consequence does not necessarily apply to an “agreement to
negotiate in good faith”. Such agreements have traditionally been regarded as unenforceable
on the same basis as an agreement to agree. In Walford v Miles [1992] 2 WLR 174,
Lord Ackner at 181 commented that:
A duty to negotiate in good faith is as unworkable in practice as it is inherently inconsistent with
the position of the negotiating party. It is here that the uncertainty lies. In my judgment, while
344
negotiations are in existence either party is entitled to withdraw from those negotiations, at any
time and for any reason. There can be no obligation to continue to negotiate until there is a “proper
reason” to withdraw.
However, a majority of the NSW Court of Appeal in Coal Cliff Collieries Pty Ltd v
Sijehama Pty Ltd (1991) 24 NSWLR 1 stated that an agreement to negotiate in good faith
may be enforceable in some circumstances but on the facts of that particular case the
promise to negotiate was, in the context of the overall arrangements, held to be too
uncertain to be enforceable. Buckley and Forder, “The enforceability of independent
agreements to negotiate in Australia” (2005) 19(2) CLQ 3, argue that such agreements
should in fact be enforced because:
1. Such agreements are being entered into more frequently by business people. A
recognition of such agreements would ensure that the time and effort spent in
proceeding with the negotiations will not be wasted.
2. Business people enter into agreements on the basis that they are binding. The law
needs to adapt to a situation where the parties are likely to enter complex
negotiations as a normal incidence of doing business.
3. Such a recognition would be consistent with other Australian legal developments
which go to enforce commercial morality, such as promissory estoppel and s 52 of
the TPA.
LAING O’ROURKE V TRANSPORT INFRASTRUCTURE

[7.330] Laing O’Rourke v Transport Infrastructure [2007] NSWSC 732
The parties were involved in the construction of an interchange at Chatswood NSW as part of the new
Chatswood to Epping railway line. The agreement contained a clause providing that in the event of any
dispute arising between them, that either party could notify the other for it to be referred to resolution at a
meeting of the CEO of each party. The meeting was to beheld within a stipulated time and those parties had to
“meet and undertake genuine good faith negotiations with a view to resolving the dispute”.
It was held that the words “good faith negotiations” offered no yardstick by which they could be judged and
accordingly the clause was void for uncertainty.
More recent authority nevertheless suggests that such a clause is not uncertain:
345
UNITED GROUP RAIL SERVICES LTD V RAIL CORPORATION NEW

SOUTH WALES
[7.340] United Group Rail Services Ltd v Rail Corporation New South Wales [2009] NSWCA 177
A dispute resolution clause in an engineering contract provided that any dispute had to be referred to a senior
representative of the principal and the contractor, who were required to meet and undertake genuine and good
faith negotiations with a view to resolving the dispute (with the dispute being referred to an ADR process if
not resolved). The New South Wales Court of Appeal held (at [71]) that:
As a matter of language, the phrase “genuine and good faith” in this context needs little
explication: it connotes an honest and genuine approach to the task. This task, rooted as it is in
the existing bargain, carries with it an honest and genuine commitment to the bargain (fidelity to
the bargain) and to the process of negotiation for the designated purpose.
The notion of fidelity to the bargain can be seen as founded, at least in part, on the
requirement of a party to do all things necessary to enable the other party to have the benefit of
the contract … The encompassing of fidelity to the bargain within the concept of good faith, at
least in the context at hand – the genuine and good faith negotiation of an existing dispute by
reference to an existing contract – does no violence to the language used here by the parties …
The parties have mutually agreed to bring an approach of genuineness and good faith to that
process of seeking resolution of any such disagreement. That agreement carried with it, in
ordinary language, a requirement to bring an honestly held and genuine belief about their mutual
rights and obligations and about the controversy to the negotiations, and to negotiate by reference
to such beliefs.
These are not empty obligations; nor do they represent empty rhetoric. An honest and genuine
approach to settling a contractual dispute, giving fidelity to the existing bargain, does constrain a
party. The constraint arises from the bargain the parties have willingly entered into. It requires the
honest and genuine assessment of rights and obligations and it requires that a party negotiate by
reference to such … A party would not be entitled to pretend to negotiate, having decided not to
settle what is recognised to be a good claim, in order to drive the other party into an expensive
arbitration that it believes the other party cannot afford. If a party recognises, without
qualification, that a claim or some material part of it is due, fidelity to the bargain may well
require its payment. That, however, is only to say that a party should perform what it knows,
without qualification, to be its obligations under a contract. Nothing … prevents a party, not
under such a clear appreciation of its position, from vindicating its position by self-interested
discussion as long as it is proceeding by reference to an honest and genuine assessment of its
rights and obligations.
The agreement was not to agree but simply to negotiate in good faith.
Speak the truth, [7.350] However a different result was reached in a more recent Queensland decision,
but leave
immediately
Baldwin v Icon Energy Ltd [2015] QSC 12, in which it was held that neither an agreement
after. Yugoslav to “use reasonable endeavours to negotiate” a gas supply agreement or an agreement to
proverb. “negotiate in good faith” had sufficiently certain legal content to be enforceable. Writing of
this decision Professor Duncan and Christensen (in “An agreement to negotiate a contract in
good faith – no legal content and too uncertain for enforcement” (2015) 30(3) APLB 37)
conclude that:
346
While the obligation “to use reasonable endeavours” is well known to Australian law and
actions by parties in attempting to meet this standard can be quantified for the purposes of
demonstrating breach, agreements to “negotiate in good faith” are more elusive of substance. It
seems clear that a bare agreement to “negotiate in good faith” without more, will not be enough
of itself to clothe an obligation with enforceability notwithstanding the substance of the
potential agreement may have sufficient description to be identifiable as a final product. What
was required was that the MOU needed to set out certain identifiable steps that could
benchmark the process of negotiation so that either party might be in a position to judge
whether the other had meaningfully engaged in negotiation. The addition of the obligation to
“use their reasonable endeavours to negotiate” a GSA did not supply the gap necessary to make
the MOU enforceable.
7.3 THE TERMS OF THE AGREEMENT

The battle of the forms
[7.360] There may be a particular problem arising from modern commercial practice A contract is a
where both parties may rely on standard forms – one party making an offer on its standard mutual promise.
Paley W, The
form with the other party accepting on its standard form with both forms containing principles of
different terms. If one party uses a form which does not prescribe that there is no contract moral and
political
unless it is subject to the terms contained in the form, it may be held to be an acceptance of philosophy
the terms put forward by the other party. This is known as the “last shot” approach. (1784).
However, the courts may look at both documents to see if they can be reconciled to form a
contract rather than applying the “last shot” doctrine. As Kirby P pointed out in Reese Bros
Plastics Ltd v Hamon-Sobelco Australia Pty Ltd (1988) 14 BCL 91 at 101:
The legal niceties will melt away in the practical realities of commerce. It is only where … a
dispute occurs that lawyers must retrospectively classify the arrangements. But they should do
so by adopting a commonsense and practical approach.
GOODMAN FIELDER CONSUMER FOODS LTD (FORMERLY MEADOW

LEA FOODS LTD) V COSPAK INTERNATIONAL PTY LTD
[7.370] Goodman Fielder Consumer Foods Ltd (formerly Meadow Lea Foods Ltd) v Cospak
International Pty Ltd [2004] NSWSC 704
Meadow Lea required glass bottles for its “Praise” dressing. Cospak was a supplier of glass bottles. After
negotiations Cospak sent Meadow Lea a letter setting out the terms of sale which contained (inter alia) (i) a
clause limiting liability under the TPA and Sale of Goods Acts (SOGAs) (as it was entitled to do) and (ii) a
clause which excluded liability “to the full extent permitted by law”. Meadow Lea sent an order form for the
bottles containing a term requiring that the goods would not be defective and would comply with certain of
the conditions implied under the Sale of Goods Act 1923 (NSW) and “any other statutory requirement”. When
347
Meadow Lea terminated the contract, it argued that the terms contained in its form represented the terms of
the contract in accordance with the “last shot” doctrine and Cospak was liable for failure to supply bottles in
accordance with those provisions. The Court held that the correct approach was to see if the two documents
could demonstrate that the parties had reached a broad agreement on material points, rather than analysing the
transaction on a pure offer and acceptance basis. As both documents dealt with the matter of what conditions
were to be implied under the Sale of Goods Act, they could stand together but the exclusion clause prevailed.
Incorporation by reference
Never promise [7.380] The contract may refer to other documents which are separate from the main
more than you contract. This “shorthand” may be used to save the preparation of a lengthy document.
can perform.
Publius Syrus Sometimes the additional document will be actually supplied, sometimes the contract itself
(1st century BC). will state that the additional terms are available only on request. If the parties acted in
accordance with those incorporated terms, they will form part of the contract on the basis
that both parties have assented to them. However, it must be emphasised that the terms can
only be incorporated in a contract before or at the time the contract is made and not later.
GOLDMAN SACHS JB WERE SERVICES PTY LTD V NICKOLICH

[7.390] Goldman Sachs JB Were Services Pty Ltd v Nickolich [2007] FCAFC 120
In May 2000 Goldman Sachs (G5) offered Nickolich (N) a position in its Canberra office. This was done by a
letter which confirmed a verbal offer which had been previously made and which set out details of the
employment. It also required that N sign the letter of acceptance. This letter stated that N would be expected
to comply with office memoranda and instructions which would be issued from time to time. At the time that
N received the letter, he had in his possession a document entitled Working With Us (WWU) which set out
various matters including a Code of Conduct. Certain provisions in the document required an employee to
sign attachments that the employee would abide by the policies set out in relation to the particular matter. Also
included in the document was a health and safety policy which contained the words “JB Were will take every
practicable step to provide and maintain a safe and healthy work environment for all people” N complained
that he was “frozen out” of certain transactions by other staff at the Canberra office and that GS had breached
this provision of the agreement. One of the issues was whether the WWU document formed part of the
employment agreement.
It was held (by majority) that the WWU document (while it also contained matters that were not contractual)
was clearly contractual and, in particular, that the term relied on was contractual in nature.
In relation to the aspirational rather than prosaic nature of the “Healthy Work Environment” document
provided, Black CJ held that (at [28]-[30]):
In contending that the trial judge was wrong in finding that there was a term of this nature the
appellant argued that the language was not contractual and that the statement was merely
348
aspirational. It was said that to construe these statements in WWU as contractual terms involved
giving a meaning to them that could not have been reasonably intended.
As I have noted, the test is objective. What matters is what the language used, in context,
would have led a reasonable person in the position of Mr Nikolich to believe. Context is very
relevant. Here, it is plain that in WWU the firm was holding itself out as having a commitment,
which it regarded as very important, to provide a caring and safe working environment based
upon mutual respect and concern. To repeat examples referred to earlier: “The JB Were culture
and ‘family’ approach means each person is able to work positively and is treated with respect
and courtesy” and “Although we are aggressive in the market place, we are not aggressive with
each other”.
The difficulty is that the statement in issue is not explicitly contractual in its language and
could be seen as merely aspirational. It appears in a document of mixed content and purposes
and, although these include contractual purposes, at least the primary repository of the
employment contract is unambiguously elsewhere. The context is, however, decisive. In the
context of WWU as a whole, if the statement that the firm “will take every practicable step to
provide and maintain a safe and healthy work environment for all people” were no more than an
aspirational representation, imposing no obligation on the maker, it would be seen as an exercise
in hypocrisy. The statement is a reflection of, and is central to, WWU’s expression of the
“culture” of the firm and its approach to its staff, and its aspirations about the approach its
employees will take to each other. The language used, taken in the context as a whole, points to
the statement embodying a contractual obligation and the trial judge was correct in holding that it
was a term of the contract.
Implied terms
[7.400] Terms can be implied into contracts in law as a necessary incident of the contract
or in fact on an ad hoc basis to give business efficacy to the contract.
An example of the former is the increasing judicial support at least in New South Wales, for
a term of good faith to be implied in law as a necessary incident of a commercial contract
(see [6.2150]). The more common implied term is that implied to give business efficacy to
the contract according to the test laid down by the Privy Council in BP Refinery
(Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 and subsequently
approved and applied in numerous High Court decisions. In Codelfa Construction Pty Ltd v
State Rail Authority of NSW [1982] HCA 24 Mason J restated the five conditions laid down
by the Privy Council (at [9]):
(1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the
contract, so that no term will be implied if the contract is effective without it; (3) it must be so
obvious that “it goes without saying”; (4) it must be capable of clear expression; (5) it must not
contradict any express term of the contract.
In cases where he contract is oral or partly oral or where it is apparent that the parties
have never attempted to reduce their agreement to complete written form, the implication
of terms is subject to less rigorous criteria. The test was stated by McHugh and
Gummow JJ in Byrne v Australian Airlines Ltd [1995] HCA 24 at [47]:
In such situations, the first task is to consider the evidence and find the relevant express terms.
Some terms may be inferred from the evidence of a course of dealing between the parties. It
may be apparent that the parties have not spelled out all the terms of their contract, but have left
some or most of them to be inferred or implied. Some terms may be implied by established
custom or usage, as described above. Other terms may satisfy the criterion of being so obvious
349
that they go without saying, in the sense that if the subject had been raised the parties to the
contract would have replied “of course”. If the contract has not been reduced to complete
written form, the question is whether the implication of the particular term is necessary for the
reasonable or effective operation of the contract in the circumstances of the case.
Interpreting the contract

[7.410] One of the most frequent practical problems arising out of commercial contracts
is that of interpreting the document. In Electricity Generation Corporation v Woodside
Energy Ltd [2014] HCA 7 the High Court stated (at [35]) that:
A little The meaning of the terms of a commercial contract is to be determined by what a reasonable
inaccuracy businessperson would have understood those terms to mean. That approach is not unfamiliar. As
sometimes saves reaffirmed, it will require consideration of the language used by the parties, the surrounding
tons of
explanation. circumstances known to them and the commercial purpose or objects to be secured by the contract.
Saki. Appreciation of the commercial purpose or objects is facilitated by an understanding “of the
genesis of the transaction, the background, the context [and] the market in which the parties are
operating”. As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a
court is entitled to approach the task of giving a commercial contract a businesslike interpretation
on the assumption “that the parties … intended to produce a commercial result”. A commercial
contract is to be construed so as to avoid it “making commercial nonsense or working commercial
inconvenience”.
The relevant principles are outlined in greater detailed by Graham J in Ku v Song [2007]
FCA 1189 at [49]-[55]:
It is not the subjective beliefs or understandings of the parties about their rights and liabilities
that govern their contractual relations. What matters is what each party by words and conduct
would have led a reasonable person in the position of the other party to believe. References to
the common intention of the parties to a contract are to be understood as referring to what a
reasonable person would understand by the language in which the parties have expressed their
agreement. The meaning of the terms of a contractual document is to be determined by what a
reasonable person would have understood them to mean. That, normally, requires consideration
not only of the text, but also of the surrounding circumstances known to the parties, and the
purpose and object of the transaction.
Actual beliefs and intentions are, generally speaking, irrelevant in the determination of the
legal rights and obligations flowing from a written agreement …

The primary duty of a court in construing a written contract is to endeavour to discover the
intention of the parties from the words of the instrument in which the contract is embodied. Of
course the whole of the instrument has to be considered, since the meaning of any one part of
it may be revealed by other parts, and the words of every clause must if possible be construed
so as to render them all harmonious one with another. If the words used are unambiguous the
court must give effect to them, notwithstanding that the result may appear capricious or
unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended
something different. The court has no power to remake or amend a contract for the purpose of
avoiding a result which is considered to be inconvenient or unjust. On the other hand, if the
language is open to two constructions, that will be preferred which will avoid consequences
which appear to be capricious, unreasonable, inconvenient or unjust, “even though the
construction adopted is not the most obvious, or the most grammatically accurate”, to use the
words from earlier authority … which, although spoken in relation to a will, are applicable to
the construction of written instruments generally. Further, it will be permissible to depart from
the ordinary meaning of the words of one provision so far as is necessary to avoid an
inconsistency between that provision and the rest of the instrument. Finally, the statement of
350
Lord Wright in Hillas and Co Limited v Arcos Limited ((1932) [1932] UKHL 2; 147 LT 503 at
514) that the court should construe commercial contracts “fairly and broadly, without being too
astute or subtle in finding defects”, should not be understood as limited to documents drawn by
businessmen for themselves and without legal assistance.
Where the language of a contract has a plain meaning evidence of surrounding
circumstances is not admissible to assist in the interpretation of the contract.
Subsequent conduct is not admissible as an aid to construction of a contract. As Lord Reid
said in Whitworth Street Estates Limited v Miller (1970) AC 583 at 603E (see also 615A):
Otherwise one might have the result that a contract meant one thing the day it was signed,
but by reason of subsequent events meant something different a month or a year later.
In seeking to ascertain the intention of the parties to a written contract extrinsic evidence
may not be resorted to except where such evidence may be called in aid in the interpretation of
the written instrument. Clearly enough, it is not to the point to make an independent
examination of extrinsic facts, even if they were within the knowledge of both parties, and upon
such evidence to conclude that a particular provision was or was not of importance to the
parties or to either of them. The question for determination is the intention of the parties as
disclosed by the contract into which they have entered.
The relevant principle in relation to resort being had on matters of construction to extrinsic
evidence is to be found in the judgment of Mason J, as his Honour then was, in Codelfa
Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24 at 352 as follows: The law is
simply
The true rule is that evidence of surrounding circumstances is admissible to assist in the expediency
interpretation of the contract if the language is ambiguous or susceptible of more than one wearing a long
meaning. But it is not admissible to contradict the language of the contract when it has a white dress.
plain meaning. Generally speaking facts existing when the contract was made will not be Quentin Crisp.
receivable as part of the surrounding circumstances as an aid to construction, unless they
were known to both parties, although, as we have seen, if the facts are notorious knowledge
of them will be presumed. It is here that a difficulty arises with respect to the evidence of
prior negotiations. Obviously the prior negotiations will tend to establish objective
background facts which were known to both parties and the subject matter of the contract.
To the extent to which they have this tendency they are admissible. But in so far as they
consist of statements and actions of the parties which are reflective of their actual intentions
and expectations they are not receivable. The point is that such statements and actions reveal
the terms of the contract which the parties intended or hoped to make. They are superseded
by, and merged in, the contract itself. The object of the parol evidence rule is to exclude
them, the prior oral agreement of the parties being inadmissible in aid of construction,
though admissible in an action for rectification. Consequently when the issue is which of
two or more possible meanings is to be given to a contractual provision we look, not to the
actual intentions, aspirations or expectations of the parties before or at the time of the
contract, except in so far as they are expressed in the contract, but to the objective
framework of facts within which the contract came into existence, and to the parties’
presumed intention in this setting. We do not take into account the actual intentions of the
parties and for the very good reason that an investigation of those matters would not only be
time consuming but it would also be unrewarding as it would tend to give too much weight
to these factors at the expense of the actual language of the written contract.
351
7.4 ADJUSTING THE BARGAIN

Side letters
[7.420] An agreement may be varied with the use of side agreements, or side letters,
which sit outside a written public agreement. Side letters are useful to vary an agreement
but cannot be used secretly to mislead or conceal the true nature of an agreement or
arrangement. Their operation was explained in Yulema Pty Ltd v Simmons [2015] NSWSC
640 (at [8]):
Because that’s The issue in these proceedings arises out of [an oral] side agreement made … just before ultimate
where the money consensus was reached for the [one party] to buy out the [other party’s] interests in the form of the
is. Willy Sutton 2009 Deed. This side agreement was a classic collateral contract, the consideration for which was
(when asked
why he robbed entry into the 2009 Deed itself.
banks).
Variations
[7.430] Contracts can always be varied by the agreement of the parties. If the variation is
for the benefit of both parties there is no problem with the required element of consideration
– the mutual promises operate for the benefit of both parties. However a variation may be
argued to be only for the benefit of one of the parties. In such a case there is no
consideration to support the variation and it may not be enforceable. For this reason
contractual variations are generally made by a “deed of variation” – a deed being a form of
contract that is valid and enforceable without the need for consideration.
Waiver
[7.440] A party with a contractual right always has the option of not insisting on the other
party strictly complying with an obligation. If rent is due on Monday, the landlord can
waive compliance with this obligation and indicate preparedness to receive the rent on
Friday. The waiver applies only in relation to the particular indulgence and does not apply
to other obligations or at other times. Business contracts generally remove any doubt in
relation to waiver and its effect by expressly providing for it in the written contract. If the
party granting the waiver seeks to go back on it the doctrine of promissory estoppel see
[7.180] will come to the aid of the other party.
Waiver of contractual rights is a relatively common commercial occurrence. One party may
decide not to insist on strict performance of the other party’s obligations under the contract
in order to accommodate the circumstances of the other party. In many cases this is a
sensible commercial alternative to initiating breach of contract proceedings. If the parties
wish to alter the terms of the original contract for their mutual benefit, this is done by an
agreement to vary the contract, which requires consideration and a written document. This
is in contrast to a waiver, which is for the benefit of one party only.
Waiver is so common that it is frequently formalised in the terms of the contract. A
franchise agreement may, for example, provide that:
No waiver by the Franchisor of a breach of this Agreement shall be effective unless in writing
and any waiver by the Franchisor of a breach of this Agreement shall not be deemed to be a
waiver of a subsequent breach of the same or of a different kind hereunder and no waiver by the
352
Franchisor of any breach under any other Franchise agreement to which the Franchisor is a
party shall be construed as or deemed to be a waiver under this Agreement.
However, the importance of the concept of waiver has been largely surpassed by the
development of the equitable doctrine of promissory estoppel discussed at [7.180].
7.5 DEALING WITH THE CONTRACT
Assignment of contractual benefits

[7.450] An assignment is an arrangement under which a party to a contract (the assignor)
transfers some or all of the rights or benefits under that contract to a third party (the
assignee). Unlike contractual rights, obligations under a contract cannot be assigned. Under
an equitable assignment of contractual benefits, there are no formalities of writing or notice.
The giving of notice nevertheless protects the assignee’s benefit in circumstances where it
may otherwise be defeated but the assignee must join the assignor as a party to any action
to enforce the right or benefit assigned.
Under the conveyancing or property law legislation of the States and Territories provision is
made for statutory assignments of contractual benefits which require writing and signing by
the assignor and notice to the other party to the contract. Under a statutory assignment the
assignment must be “absolute” (ie not by way of charge) and, except in Western Australia
be for all and not merely part of the benefit. The advantage of a statutory assignment is that
the assignee obtains legal title to the right assigned and can enforce it in her or his own
name. The statutory assignment is nevertheless, as with an equitable assignment, “subject to
equities”.
Contractual rights which have expressly been made non-assignable, or which are personal The common
law evolves not
in the sense that performance was intended to be by a particular party, cannot be assigned. merely by
Certain contractual rights also pass by operation of law – on death, to the executor or breeding new
principles but
administrator of the estate, and on bankruptcy, to the trustee in bankruptcy. also, when they
are fully grown,
Under the Franchising Code of Conduct the franchisee can assign, or transfer, the contract by burying their
– in layman’s terms “sell” the franchise – to a third party to operate subject to the ancestors. in
Hong Kong Fit
franchiser’s approval which cannot be unreasonably withheld (cl 25, see Chapter 13.7). Shipping Co Ltd
V Kawasaki
[1962] 1 All ER
Novation 474 at 487 per
Diplock JJ.
[7.460] Novation is a transaction whereby, with the consent of all parties concerned, a
new contract is substituted for an existing one. This may involve a new arrangement
between the same parties or substituting a different person for one of the parties. Novation
provides a mechanism under which both contractual rights and contractual obligations can
be transferred to a person who was not a party to the original contract.
In the franchising context discussed at [7.450] it is clearly not very satisfactory if on an
assignment the original franchisee remains liable for the contractual obligations. For this
353
reason there is more frequently a novation under which the original franchisee is released
and the incoming franchisee assumes all the rights and obligations under the franchise
agreement.
Subcontracting
The Court’s [7.470] A subcontract is “an agreement by a contractor and a third party for the
opinion will performance by the third party of some or all of the contractor’s obligations under the
accomplish the
seemingly contract with the principal” (Halsbury’s Law of Australia (Thomson Reuters, subscription
impossible feat service) at [65-745]). It is a personal legal relationship between the contractor and the
of leaving this
area of the law subcontractor which is distinct and separate from the legal relationship between the
more confused contractor and the principal.
than it found it.
William H Subcontracting is vicarious performance – “the promisor does not perform the contract
Rehnquist,
dissenting personally but instead performs it vicariously through a third party” (Carter on Contract
opinion in Roe v (LexisNexis, subscription service) at [29-160]). It is of course not subcontracting when a
Wade (1973) 410
US 133 at [173]. corporation performs its contractual obligations through its employees – but it is
subcontracting when the corporation contracts with third parties to perform the work.
Subcontracting is very common in some sectors – in particular the building sector. Most
building contracts will expressly deal with subcontracting and residual protection is
provided by legislation across Australia conferring rights to secure payment to subcontractors
(eg Building and Construction Industry Security of Payment Act 1999 (NSW)).
Whether subcontracting is permitted depends on:
• whether the contractor obtained the consent of the principal (which may be by express
agreement or subsequent ratification);
• the nature of the ordinary contract (ordinary commercial contracts between commercial
parties may be able to be subcontracted but contracts personal to the promisee – eg to
paint a portrait – cannot be); and
• the terms of the contract (which may provide expressly or impliedly that subcontracting
is not permitted).
In a subcontracting situation, the contractor remains liable under the contract with the
principal if the subcontractor’s performance is not in accordance with the contract.
7.6 WHEN IT ALL GOES WRONG
Guarantees
[7.480] Guarantees are discussed at [7.890] ff. A guarantee is a contract in which a
guarantor promises to answer to the person in whose favour the guarantee is given (“the
creditor”) for a debt or obligation of a principal debtor if the debtor defaults. Guarantees are
common in business, particularly in the context of smaller private companies where a
director’s guarantees are invariably required. The advantages of contracting business
through a corporate structure – limited liability and shareholders not liable for the
354
company’s debts – are often illusory in practice because of the lender’s insistence on
directors and/or major shareholders giving guarantees.
Indemnities
[7.490] It is very common in business contracts that one party is required to indemnify
the other party for losses arising in certain contingencies. Indemnities are discussed at
[7.910].
Penalties
[7.500] Damages for breach of contract are usually unliquidated – they are not specified
in the contract and are calculated by the Court in a breach of contract action. A contract may
nevertheless stipulate liquidated damages – the amount recoverable in the event of a breach.
If the liquidated damages clause is a genuine pre-estimation of loss it will be enforced even
if it does not equate to the actual loss. But if the liquidated damages clause bears no relation
to the probable loss it is a penalty clause and unenforceable. In Dunlop Pneumatic Tyre Co
Ltd v New Garage and Motor Co Ltd [1915] AC 79 a liquidated damage clause which
stipulated that damages of £5 were payable for each sale below a recommended price was
enforced:
It is just … one of those cases where it seems quite reasonable for parties to contract that they There is no such
should estimate that damage at a certain figure, and provided that figure is not extravagant there thing as a free
would seem no reason to suspect that it is not truly a bargain to assess damages, but … a penalty lunch.
Anonymous.
to be held in terrorem.
Such provisions are illegal today through contravening the resale price maintenance
provisions (s 48) of the CCA (see [22.1530]) but the underlying principles have been
applied and approved by the High Court in subsequent cases. The most recent opportunity
to apply them was in Paciocco v Australian and New Zealand Baking Group [2015]
FCAFC 50 – a class action representing over 43,000 ANZ customers alleging that various
bank fees were penalties and unlawful. The Federal Court held that the fee of $20 to $35
was much more than the late payments cost the bank, which was around 50 cents to
55.50 cents per late payment, and was, in law, a penalty. This decision was reversed on
appeal, the Full Court holding that it was not proven that the late payment fee was, in the
relevant sense, extravagant or unconscionable. Middleton J succinctly outlined the penalty
doctrine (at [400]):
The object and purpose of the penalty doctrine (controlling the use of extravagant or
unconscionable terms) must always be kept in mind when determining the ultimate issue of
whether a term is a penalty. Exceptions from freedom of contract, as the case law indicates,
require good reason to attract judicial intervention in setting aside commercial bargains. This
explains the high hurdle required in the case of a propounded penalty, such that it must be
found to be “extravagant and unconscionable”.
One starting point in considering whether a penalty has been imposed is to identify the
commercial interests that are sought to be protected by the bargain reached between the parties.
This can be achieved through a consideration of the language used by the parties, the
circumstances addressed by the bargain, and the objects that the bargain intended to secure. For
instance, even though a sum designated to be paid is not at all referable to any genuine
pre-estimate of loss, if the sum is referable to an additional benefit, or part of the bargain for
355
another right, and is not out of all proportion to the attainment of that benefit or right, then no
intervention of the Court is necessary or appropriate to disturb that commercial bargain.
7.7 STANDARDS OF BUSINESS CONDUCT

Commercial best practice
[7.510] In Paciocco v Australia and New Zealand Banking Group Limited [2015] FCAFC
50 at [293] Allsop CJ said:
Trickery and sharp practice impede commerce by decreasing trust and increasing risk. Good
faith and fair dealing promote commerce by supporting the central conception and basal
foundation of commerce: a requisite degree of trust. Business people understand these things.
The law, both common law and statutory, has today moved far from the classical contract
law of the nineteenth century when principles of freedom and sanctity of contract
dominated and the Latin maxim caveat emptor – let the buyer beware – reflected the
approach of the law to contracts.
Romanian tennis Goldwater and Ciro (in “Standard of behaviour in Commercial Contracting” (2003) 30
star Ilie Nastase
was once asked
ABLR 369 at 394) suggest that:
why he waited The principles of fairness, fair dealing and flexibility – hallmarks of relational contracting and
over a year to commercial best practice – are being embedded on general commercial transactions by the High
report the theft
of his wife’s Court and by Parliament. The law has increasingly responded to concerns arising out of the
credit card. disparate bargaining positions of the parties, information asymmetries, the circumstances
“Whoever had surrounding the signing of the contract and other issues involving an inquiry into the realities of
it,” he explained, the transaction and the transacting process. In particular the norms of truthful conduct imposed
“was spending
by [the legislative prohibition of misleading conduct], the standards of conduct imposed by
less than she
was”. Boone L, legislative and judicial attempts to proscribe unconscionability, and emerging notions of good
Quotable faith increasingly mirror the common honesty and decency which form part of the “occupational
business morality” of businessmen. Viewed from this perspective, the various standards of business
(Random House, behaviour that typify relational dealings have been given very broad doctrinal expression that
1992).
extends beyond relational boundaries. (References omitted).
Business parties must understand and accommodate the changing legal and regulatory
environments in which business operates. The changing environment is of course most
obvious in B2C contracts where a comprehensive regulatory regime, in particular the
ACL, has categorically changed the goalposts. But B2B contracts are not immune to the
sentiments expressed by Allsop CJ prefacing this section. The two most powerful provisions
of the ACL – the prohibitions of misleading and unconscionable conduct – apply to B2B
conduct in trade or commerce as well as to B2C conduct, and indeed dominate the case law
on these provisions. The “best practice” obligation of business in relations to B2B
contracting obviously goes beyond these broad ethical statutory obligations but they are a
significant starting point.
Misleading and unconscionable conduct

[7.520] Little more needs to be said in relation to the massive influence these legislative
prohibitions (under the ACL) have had on B2B conduct. A former Chairman of the
356
Australian Competition and Consumer Commission (ACCC) Graeme Samuel has

commented that “At its very heart, the [Australian Consumer Law] can still be encapsulated
in two basic commandments for business – thou shalt not engage in anticompetitive, harsh,
oppressive or unconscionable conduct; and thou shalt be honest”: [2004] TPLB 93 at 94).
The prohibitions on misleading and unconscionable conduct are central to these
commandments and establish an ethical framework for the conduct of Australian business.
They are discussed in Chapters 18 and 19.
An implied obligation of good faith in commercial contracts

[7.530] In Overlook v Foxtel [2002] NSWSC 17, Barrett J in the Supreme Court of New
South Wales stated that, “a term requiring the exercise of good faith in the performance” of
a commercial contract “is now in [NSW] a legal incident of every such contract”. Judicial
support in other jurisdictions is not as effusive and the Victorian Court of Appeal has
expressed reservations (Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL
Australia [2005] VSCA 228). The High Court has not yet addressed this issue. Most of the
good faith cases have arisen in the context of the franchising relationship and the mandating
of an obligation of good faith in such relationships under the 2014 Franchising Code of
Conduct (see Chapter 13) has provided a legislative solution to this issue. Business parties
must nevertheless appreciate that an obligation to act in good faith in negotiation,
performance and ending of contractual relationships is very much on the agenda and that
acting dishonestly, unreasonably and without regard to the other party’s interests is
potentially vulnerable.
In Paciocco v Australian and New Zealand Banking Group [2015] FCAFC 50 the implied
term of good faith was acknowledged by the Federal Court of Appeal in terms which give
comfort to those who support its introduction. Allsop CJ stated at [287] that:
[Good faith] is conception that has been recognised (though not by all courts in Australia) as an It is always the
implication or feature of Australian contract law attending the performance of the bargain and its best policy to
speak the truth –
construction and implied content … The usual content of the obligation of good faith that can be
unless, of
extracted from [the cases] is an obligation to act honestly and with a fidelity to the bargain; an course, you are
obligation not to act dishonestly and not to act to undermine the bargain entered or the substance of an exceptionally
the contractual benefit bargained for; and an obligation to act reasonably and with fair dealing good liar. Jerome
K Jerome.
having regard to the interests of the parties (which will, inevitably, at times conflict) and to the
provisions, aims and purposes of the contract, objectively ascertained.
None of these obligations requires the interests of a contracting party to be subordinated to those of
the other. It is good faith or fair dealing between the parties by reference to the bargain and its
terms that is called for, be they both commercial parties or business dealing with consumers …
The standard of fair dealing or reasonableness that is to be expected in any given case must
recognise the nature of the contract or relationship, the different interests of the parties and the lack
of necessity for parties to subordinate their own interests to those of the counterparty. That a
normative standard is introduced by good faith is clear. It will, however, not call for the same acts
from all contracting parties in all cases. The legal norm should not be confused with the factual
question of its satisfaction. The contractual and factual context (including the nature of the contract
or contextual relationship) is vital to understand what, in any case, is required to be done or not
done to satisfy the normative standard.
357
Fiduciary duties in commercial relationships

[7.540] In Shelanu Inc v Print Three Franchising Corporation (2003) 64 OR (3d) 533,
the Court of Appeal for Ontario quoted Paul Finn (now Finn J of the Federal Court of
Australia) at 555-556:
“Unconscionability” accepts that one party is entitled as of course to act self-interestedly in his
actions towards the other. Yet in deference to that other’s interests, it then proscribes
excessively self-interested or exploitative conduct.
“Good faith”, while permitting a party to act self-interestedly, nonetheless qualifies this by
positively requiring that party, in his decision and action, to have regard to the legitimate
interests herein of the other
The “fiduciary” standard for its part enjoins one party to act in the interests of the other – to
act selflessly and with undivided loyalty.
There is, in other words, a progression from the first to the third: from selfish behaviour to
selfless behaviour.
The duties imposed under the first two doctrines apply generally to all business conduct.
Fiduciary duties are more rigorous and operate in more limited contexts. The duties of a
fiduciary include the duty to act honestly, to disclose all material facts of which he or she
is aware whether asked about them or not, to avoid any conflict of interest and to not
make any unauthorised profit.
The law recognises a number of established categories of fiduciary relationships –

between partners, trustees and beneficiaries, principals and agents, solicitors and clients,
employers and employees, company directors and the company, joint venturers in some
situations. Fiduciary relationships can nevertheless be found outside the established
categories where the critical features is: “that the fiduciary undertakes or agrees to act for
or on behalf of or in the interest of another person in the exercise of a power or
discretion which will affect the interests of that other person in a legal or practical
sense”: Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64 at
[68]. From this power or discretion comes the duty to exercise it in the interest of the person
to whom it is owed.
The law never Commercial transactions which fall outside of the accepted traditional categories of
moves more
slowly than
fiduciary relationship generally do not give rise to fiduciary duties is as they are commercial
when it is in nature, and do not meet the criteria for characterisation as fiduciary in nature. In the
involved in Hospital Products case Deane J stated (at [8]) that:
putting its own
house in order. The express term of the contract … requiring the distributor to use its “best efforts” to build up
Editorial, Sydney the market for, and distribute, the products in Australia “to the common benefit” of both
Morning Herald
manufacturer and distributor [does] not, of itself, impose a general fiduciary duty on the
(4 February
1967). distributor to seek no profit or benefit for itself or to disregard its own interests where they
conflicted with the manufacturer’s.
Mason J commented in relation to cases where the contract provides the foundation for a
fiduciary relation that (at [70]):
In these situations it is the contractual foundation which is all important because it is the
contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if
it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent
358
with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the
contract in such a way as to alter the operation which the contract was intended to have
according to its true construction.
Although arms-length commercial transactions in business are unlikely to attract
fiduciary duties, it may be different if one party is acting for or on behalf of the other
party.
Part 2
Particular business contracts
7.8 SALE OF GOODS

[7.550] The contract for the sale of goods is Australia’s, and the world’s, most common Silicon Valley is
like an
contract. Each time goods are sold – whether a retailer selling a newspaper to a consumer or individual
a manufacturer selling an air conditioning plant to a developer – there is a contract for the running around
sale of goods. Fortunately, very few of these contracts give rise to disputation. in front of a
steamroller. You
can outrun the
The Sale of Goods Acts (SOGAs) of the states and territories (eg Sale of Goods Act 1923
steamroller on
(NSW)) were based on the Sale of Goods Act 1893 (UK) – the world’s first consumer any given day.
protection law as, inter alia, it implied terms of merchantable quality and fitness for purpose But if you ever
sit down you get
to protect the weaker party. Perhaps not unrealistically the protection given by the SOGAs squashed.
proved largely illusory as they allowed the implied terms to be overridden by express terms Boschert G,
president of
of the contract and it was virtually standard in consumer contracts, where the seller had the Boschert
bargaining power, to exclude them. This issue was addressed towards the end of last century Electronics.
when the SOGAs were amended to prevent the implied terms being excluded in consumer
contracts. Today the implied terms in consumer contracts – which were reproduced
nationally in the TPA – have been replaced by equivalent consumer guarantees under the
ACL (see Chapter 21) which extends protection to supplies (not simply sales) of services
(not simply goods).
This development does not render the SOGAs irrelevant – the rules relating to passing of
property (ownership) and risk are set out in the SOGAs and are discussed in Chapter 9.
7.9 E-COMMERCE
[7.560] The Chinese Government’s Department of Communications reports that:
In one single day, 11 November, 2014 China’s online retailer Alibaba shipped 278 million
orders, equating to sales over $9 billion. Of those sales, 43 per cent were placed on mobile
devices.
There can be little argument with the proposition that “the internet is a new and
ubiquitous tool for conducting business” (E Ball, “Section 92 and the Regulation of
E-Commerce: A casenote on Betfair Pty Ltd v Western Australia” [2008] 36(2) Federal Law
Review 265 at [265]). Online sales grew by 20% worldwide to $1.4 trillion in 2014.
359
Australia has recently been ranked the 10th best e-commerce market in the world (based on
nine variables) by the 2015 Global Retail E-Commerce Index. In the year to July 2015 it
was estimated that Australians spent $17.4 billion on online retail – an amount equivalent to
7.1% of spending at traditional bricks and mortar retailers (excluding cafes, restaurants and
takeaway food): NAB, NAB Online Retail Sales Index – July 2015 http://
www.business.nab.com.au/nab-online-retail-sales-index-july-2015.
In the new New modes of transacting business such as e-commerce nevertheless raise new legal issues.
digital economy,
things are
Common problems that have had to be faced by parties involved in e-commerce have been
changing hourly issues of confidence, protection of consumer rights, formation of contracts and privacy.
and you have to Many of these issues have already had to be faced by businesses in non-electronic
be very
adaptable, very transactions. There are nevertheless some particularly relevant laws that bear in a more
flexible. Kelly direct manner on e-commerce activities.
K, Big Think
Guy at Wired
magazine. Regulating the methods of e-commerce
[7.570] The most significant piece of legislation in the Australian context with regard to
e-business was enacted to ensure that parties dealing electronically should have confidence
in the legal enforceability of their transactions. This piece of legislation is the Electronic
Transactions Act 1999 (Cth) (ETA).
Electronic Transactions Act

[7.580] The ETA was introduced to promote and legitimise electronic transactions in both
the business world and the community generally. Versions of the Commonwealth Act have
been introduced into each State and Territory (eg Electronic Transactions Act 2000 (NSW)).
For ease of explanation, only the Commonwealth ETA is discussed here. The ETA is a
faithful adaptation of the United Nations Commission on International Trade Law
(UNCITRAL) Model Law on Electronic Commerce. The Model Law was developed in
1996 after lengthy international consultation to provide a template from which individual
countries might introduce internationally consistent national legislation.
The explanatory memorandum in relation to the ETA reiterated the stated purpose of
UNCITRAL’s Model Law:
The purpose of the Model Law is to offer national legislators a set of internationally acceptable
rules designed to remove a number of legal obstacles to the use of electronic communications
for the communication of legally significant information, creating a more secure environment
for electronic commerce.
In reflecting the stated purposes of the UNCITRAL Model Law, the ETA states in s 3 its
objects as being the provision of a regulatory framework that:
• recognises the importance of the “information economy”;
• facilitates the use of electronic transactions;
• promotes business and community confidence in the model; and
• enables businesses and communities to engage the government through electronic
communications (s 3(a) – (d)).
360

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Chapter 6 Contracts: Concepts of agreement

On 9 October 1906 the hearing opened. Mr Robertson decided to speak for

completely justiﬁed in forcibly resting Robertson’s attempts to leave the wharf

you out of your

The interpretation of exemption clauses

ALEX KAY PTY LTD V GENERAL MOTORS ACCEPTANCE CORP &

GOODMAN FIELDER CONSUMER FOODS LTD (FORMERLY MEADOW

SYDNEY CORPORATION V WEST [1965] HCA 68

NISSHO IWAI AUSTRALIA LTD V MALAYSIAN INTERNATIONAL

Exemption clauses rendered ineffective by statute

WHITTET V STATE BANK OF NSW

6.15 THE DOCTRINE OF PRIVITY OF CONTRACT

TRIDENT GENERAL INSURANCE CO LTD V MCNIECE BROS PTY LTD

HILL V VAN ERP

ACCOUNTING SYSTEMS 2000 (DEVELOPMENTS) PTY LTD V CCH

6.16 CONTRACTS NEGOTIATED THROUGH AGENTS

you please • discharge by operation of law;

IN RE MOORE & CO AND LANDAUER & CO

Discharge by operation of law

Material alterations to a written contract

CODELFA CONSTRUCTION PTY LTD V STATE RAIL AUTHORITY (NSW)

DAVIS CONTRACTORS V FAREHAM UDC

6.19 REMEDIES FOR BREACH OF CONTRACT

ASSOCIATED NEWSPAPERS LTD V BANCKS

TRAMWAYS ADVERTISING PTY LTD V LUNA PARK (NSW) LTD

WICKMAN LTD V SCHULER AG

Damages for breach of contract

VICTORIA LAUNDRY (WINDSOR) LTD V NEWMAN INDUSTRIES LTD

The duty to mitigate

BURNS V MAN AUTOMOTIVE (AUST) PTY LTD

Loss of money spent in anticipation of the contract being

MCRAE V COMMONWEALTH DISPOSALS COMMISSION

Loss of a chance or opportunity

COMMONWEALTH OF AUSTRALIA V AMANN AVIATION PTY LTD

Costs of rectifying defective work

RUXLEY ELECTRONICS LTD V FORSYTH

Damages for disappointment and distress

BALTIC SHIPPING CO V DILLON

Liquidated damages and penalties

RINGROW PTY LTD V BP AUSTRALIA PTY LTD

Deposits and part-payment

JC WILLIAMSON LTD V LUCKEY & MULHOLLAND

MARALINGA PTY LTD V MAJOR ENTERPRISES PTY LTD

DAVID SECURITIES PTY LTD V COMMONWEALTH BANK OF

LEADING EDGE INVESTMENTS PTY LTD V TE KANAWA

Australian Government Business Entry Point http://www.business.gov.au

THE BUSINESS CONTEXT

PART 1 – ISSUES IN BUSINESS CONTRACTING

[7.170] 7.2 NEGOTIATING THE AGREEMENT ................................................................................... 336

[7.510] Commercial best practice ................................................................................... 356

[7.900] The contract of guarantee ................................................................................... 379

[7.1320] Remedies of the insurer ....................................................................................... 404

Issues in Business Contracting

I know that you The general principles

Uncertainty, incompleteness and lack of contractual intent

Lack of contractual intent

General principles in determining whether an informal

LIFESTYLE APPLIANCES LTD V AUTEL TV SERVICES LTD

JINGALONG PTY LTD V TODD

AUSTRALIAN BRIDAL CENTRE PTY LTD V DAWES CORP PTY LTD

7.2 NEGOTIATING THE AGREEMENT

Estoppel Reason is the

WORKPLACE SAFETY AUSTRALIA V SIMPLE OHS SOLUTIONS PTY LTD