Topic 4: Contractual Terms

Read

The readings for this module are particularly onerous but this is the nature of the
beast of contractual law. It is recommended that you undertake them in
conjunction with the topic so that you can direct your studies appropriately and
apply your knowledge to the application questions throughout. This will help
solidify your comprehension.
The content for this topic is contained in the following chapters.
Principles Textbook
 Chapter 12: Identifying the Express Terms
 Chapter 13: Construing the Terms
 Chapter 14: Implied Terms
Cases Textbook
 Chapter 12: Identifying the Express Terms
 Chapter 13: Construing the Terms
 Chapter 14: Implied Terms.

Terms of a contract
The ‘terms of the contract’ refers to each clause of a written contract. If it is an
oral contract, it refers to each matter the parties have agreed. In this context,
‘term’ is synonymous with clause, stipulation, provision.
Other terms used are ‘covenant’ or ‘conditions’. These may be used
interchangeably with ‘term’ but are generally interpreted narrowly. Terms of a
contract are distinguishable from statements of fact, also known as
representations, which may be used to induce a party to a contract.
There are three types of terms that you need to be familiar with:
1. Express terms are terms expressly agreed to by the parties and are set
out in a contract.
2. Implied terms are those terms which are not contained in the contract but
are found to exist between the parties because they are implied in the
contract itself or because a statute mandates that they are implied.
3. Consumer guarantees under Australian Consumer Law are a set of rules
that apply to goods and services purchased by consumers.
Parties may come to argue over what is a term of the contract, particularly in the
case of contracted negotiations. Where these negotiations are reduced to writing
in a document setting out the terms, determining what the parties intended to be
a binding term of contract is informed by that document. The court will look at
the document narrowly and any argument that terms falling outside the written
document will be more difficult (not impossible) to make out.
Other contracts are formed over a series of correspondence, including but not
limited to emails, letters or verbal exchanges by telephone or in person. Some
contracts may be in part written and oral. If this is the case, the terms of the
contract are informed by the written document and supplemented by the oral
terms.
A contractual lawyer needs to identify the terms of the contract which can be
difficult, particularly in the case of implied terms because construction of the
contract and identification of terms often overlap. In this case, construction is an
element of the identification of terms.
To determine what written express terms will be incorporated into a contract we
must look at both written and oral terms. The ‘parol evidence rule’ is essential
to the identification of express terms but this will be discussed in the next
module.
Express terms

Read

Read [12.45]–[12.185] of the Principles Textbook

A party may rely on written terms which that party asserts should be
incorporated into the contract which may be derived from many sources.
Incorporation of written terms can occur by:
1. Signature - where the parties sign a document purporting to set out
contractual terms (note the exception).
2. Notice including;
a) exchange of an unsigned document (e.g. paid parking ticket issued
permitting the ticket holder to park in a parking spot as stipulated by the
terms of a ticket, including the display of that ticket)
b)signs (e.g. enter at your own risk) displayed which contain terms a
party may rely on
c)content on a website if the provider has taken reasonable steps to bring
the terms to the consumer’s attention prior to or upon the contract
formation.
 3. Reference - where the contract refers to another document purporting to
contain additional terms.
4. A course of dealings - See: Balmain New Ferry Co Ltd v
Robertson (1906) 4 CLR 379.

Notice

The test to be satisfied for incorporation by notice has two limbs which are:
1. Whether the displayed or delivered terms were available to the party prior
to the contract formation;
2. Whether reasonable steps were taken to inform the party intended to be
bound of the terms.
The party must have actual knowledge or been given reasonable notice of the
terms. Those terms must be readily available. Read Thornton v Shoe Lane
Parking extracted at [12.65] of the Cases Textbook.
If the terms are unusual, the party intending on relying on them must make
notice of them prominently (think bright flashing lights).

Pre-contractual statements

Read

Read [12.100]–[12.210] of the Principles Textbook.

If a pre-contractual statement is found to be a term of the contract, it is often
referred to as a warranty. In this sense, the word ‘warranty’ is synonymous with
‘term’ and should not be confused with warranty in the sense of a
manufacturer’s warranty to repair defective goods. The latter is a warranty but
may not be in the contractual sense of the word.
Determining whether a pre-contractual statement is a term of the contract is
difficult. You must look at the intention of the parties and prove that the parties
intended to be bound by that statement. This is to be objectively determined
considering various factors including the knowledge of each party.

Representation or term?

Read

Read sections [12.105] of the Principles Textbook and [12.110] of the Cases

Textbook.
A term is distinguishable from a representation in that the party making the
representation has the intention of guaranteeing its truth.
Subject to statute, a representation does not give rise to a claim for damages
unless that representation was made fraudulently or negligently whereas a
breach of a term gives rights to damages in all cases.

Note

A misrepresentation made in trade or commerce may be remediable pursuant to

s 81(1) of the Australian Consumer Law (ACL).
Pre-contractual statements are made during the negotiation at any stage.
Determining the type of statement will allow a party to determine what
remedies are available to them by it in contract, tort, or statute.
If a false claim it is found to be a term of the contract (referred to as a
warranty), then a remedy for the breach of contract will be available. Whereas
a mere representation even falsely made has no remedy in contract law.

The parol evidence rule

Read

Read [12.110]-[13.75] of the Principles Textbook and [12.115]-[13.40] of

the Cases Textbook.
The parol evidence rule only applies to written contracts. It is crucial in
preventing terms being incorporated from other sources when the parties have
reduced their agreement into writing and that document is intended to be a
complete record of the contract. The objective of the rule is to preserve the
contract in its original form.
If applied, the two parts of the rule take effect as:
1. Extrinsic evidence cannot be used to add, vary or contradict the language
of the contract. See: Goss v Lord Nugent (1833) 5 B & Ad 58, 64-5; 110
ER 713.
2. Limits evidence which can be used to explain the meaning of the terms of
a written contract.

Surrounding circumstances

Read
Read [13.15]-[13.25] of the Principles Textbook and ch 13 of the Cases
Textbook.
The ‘true rule’ per Mason J in Codelfa Construction Pty Ltd v State Rail
Authority of New South Wales (1982) 149 CLR 337, 352 dictates whether the
courts may look behind the contract and consider the surrounding circumstances
in which that contract was made.
The true rule distinguishes the Australian approach to surrounding
circumstances from the United Kingdom’s approach which is broader.
See: Investors Compensation Scheme Ltd v West Bromwich Building
Society [1998] 1 WLR 896 [912-13], although the disconnect between the two
has been the subject of much judicial consideration.
From the readings, you will glean that there is much ambiguity around the
judicial position on surrounding circumstances, particularly between lower
courts and that of the High Court. However, until the High Court overturns the
‘true rule’, the lower courts are bound by it.
Contract drafters may try to limit the scope for a court to consider surrounding
circumstances by stating the intention and commercial purpose of the contract
in its recitals.
 Collateral contracts

A statement made during negotiations that does not form part of the terms
of the main contract

Example

Salesperson: Buy this perfume! If you buy the perfume today, I can
throw in this lipstick for free!
Customer: Well, I don’t just want the perfume, but if I get lipstick too,
then it’s worth buying the perfume.
In this illustration you can see:
Main contract: Sale of perfume
 Collateral contract: Assignment of lipstick in exchange for agreement to
buy perfume.
Collateral contracts still need to satisfy the usual requirements of contract
formation: agreement, consideration, certainty and intention to create
legal relations.
Collateral contracts must involve a promise, distinguishable from sales
talk, opinions and representations (e.g. ‘This is my favourite!’; ‘That goes
so well with your skin tone.’; ‘I think if you use this, you’ll notice a big
improvement.’)
In addition to the usual requirements for contract formation, consideration
for a collateral contract is entry into the main contract.
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 *

Implied terms

Read

Read Chapter 14 of the Principles Textbook.

The three main reasons terms may be implied into a contract are:

 to make the contract work

 the nature or class of the contract
 statute compels the implication

Your studies in this subject concentrate on the first two reasons as the
third reason is more properly covered in your studies of commercial law.

Term implied to make a contract work

If a term is implied to make the contract work, it is known as a term

implied in fact originating from The Moorcock (1989) (1889) 14 PD 64.
In that case, a ship owner engaged wharfingers to discharge a ship at the
jetty which extended into the River Thames, where the ship must
necessarily ground at low water. The river-bed adjacent to the jetty was
not controlled by the wharfingers and no assessment has been made
whether it was fit for the ship. On grounding, the ship suffered damage
because of the adjacent river-bed.
The shipowners claimed for breach of an implied term of contract that the
wharfingers warranted that the river-bed was safe because you could not
use the jetty without grounding in the low water.
There was no evidence that the wharfingers took reasonable care to
ascertain the ship’s safe grounding on the river-bed. The ship owners
successfully made out the breach of the implied warranty that the
wharfingers had taken reasonable steps to ensure the safe grounding of
the ship without suffering damage.
The common law established a series of terms that are always implied
into commonly occurring classes of contracts unless they are excluded by
the express terms of the contract; or unjust or unreasonable given the
responsibilities in the contract.

Nature or class of the contract

The below table sets out classes of contract and the implied terms derived
from common law authorities.
 Terms are implied by courts by determining two limbs:

1. The class of contractual relationship to which the term would

apply.
2. Whether the term is appropriate for all contracts in that type
or class of contract.

To satisfy the second requirement the ‘test of necessity’ is used.

Test of necessity
The test of necessity is that the court finds that implying the term is necessary in
the sense that if it were not ‘the enjoyment of the rights conferred by the
contract would be or could be rendered nugatory, worthless, or, perhaps, be
seriously undermined’: See Byrne v Australian Airlines, (1995) 185 CLR 411,
450.
The test of necessity was considered in Liverpool City Council v Irwin [1977]
AC 239. In that case, express terms of the tenancy agreement provided for the
tenant’s obligations, but none for the landlord. The court found it necessary to
imply that the landlord had the obligation to reasonable care of the common
areas, however this did not obviate the tenant’s obligation to also take
reasonable care of the same areas. E.g. a tenant cannot trash the stairwell to the
building and rely on the implied term discussed to compel the landlord to rectify
it.

Terms implied by custom

Read

Read [14.80] of the Principles Textbook and [14.60] of the Cases Textbook.

A term may be implied into a contract to incorporate a relevant custom in a
particular market, trade or locality.
The term must be notorious in the particular trade or industry. See: Con-Stan
Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia)
Ltd (1986) 160 CLR 226, 237-8.
In this case, the High Court deduced four rules in the context of insurance
contracts where a custom was alleged between insurance brokers and insureds
as follows:
Rule 1: The custom must be current
The existence of a custom justifying the implication of a term of contract is a
question of fact at the time of contract. The finding of a custom on the facts of
the particular case means there is little to be gained by referring ... to the
practices of the London marine market in the last century, notwithstanding that
those practices formed the basis for the implication, in contracts of marine
insurance, of a term similar to the first of the terms alternatively contended for
in this case.
Rule 2: The custom must be well known and generally agreed to
There must be evidence that the custom relied on is so well known and
acquiesced (agreed tacitly) in that everyone making a contract in that situation
can reasonably be presumed to have imported that term into the contract.
However, it is not necessary that the custom be universally accepted.
Rule 3: The custom must not be contrary to the express terms of the agreement
A term will not be implied into a contract on the basis of custom where it is
contrary to the express terms of the agreement. But an entire agreement clause
does not exclude this implied term by custom. One explanation of this principle
is that, in so far as it relates to written contracts, it is simply an application of
the Parol Evidence Rule, by which extrinsic evidence is generally inadmissible
to add to, vary or contradict the express terms of a contract which has been
reduced to writing. A more fundamental explanation is that the presumed
intention of the parties, on which the importation of the custom rests, must yield
to their actual intention as embodied in the express terms of the contract,
regardless of whether the contract is written or oral. It has sometimes been said
that the implication of a term into a contract does not depend on the parties'
intention, actual or presumed, but on broader considerations.
But these statements are directed to situations in which the courts have been
asked to imply terms amounting to rules of law applicable to all contracts of a
particular class. The present case is of a different kind in which it may be
necessary to speak of presumed intention. In matters of this kind, that phrase
means no more than that the general notoriety of the custom makes it reasonable
to assume that the parties contracted on the basis of the custom, and that it is
therefore reasonable to import such a term into the contract.
Rule 4: Not knowing about a custom does not release you from it
A person may be bound by a custom notwithstanding the fact that he had no
knowledge of it. The result is that in modern times nothing turns on the
presence or absence of actual knowledge of the custom; that matter will stand or
fall with the resolution of the issue of the degree of notoriety which the custom
has achieved.
 

Implied duty of good faith

Read

Read [14.85]-[14.160] of the Principles Textbook and [14.70]-[14.195] of

the Cases Textbook.
In the context of contract law, the duty of good faith is a duty requiring
adherence to the principles of fairness and reasonableness when contracting
with another party.
The duty of good faith in contract law has also been the subject of much judicial
deliberation over the last 30 years. If implied, the duty of good faith
supplements express contractual terms prohibiting unfair conduct in the
performance and enforcement of contractual obligations.
To date, the High Court has not implied an independent duty of good faith in the
performance of contracts: See Royal Botanic Gardens and Domain Trust v
South Sydney City Council [2002] HCA 5, [45], [63], [76], [94].
Below are some examples where lower courts have held an implied term of
good faith existed:
 in a construction contract: Renard Constructions (ME) Pty Ltd v Minister
for Public Works (1982) 26 NSWLR 234
 in a development agreement between a franchisor and franchisee: Burger
King Corporation v Hungry Jack’s Pty Ltd [2001] NSWCA 187
 in a franchise agreement: Horizons Pty Ltd v McDonalds Australia
Ltd [2000] VSC 310
 a process contract: Dockpride Pty Ltd v Subiaco Redevelopment
Authority [2005] WASC 211.

However, other judgments express doubts as to whether an implied duty to act

in good faith should be inferred: Service Station Association Ltd v Berg Bennett
& Associates Pty Ltd (1993) 45 FCR 84, 95-8 and Central Exchange Ltd v
Anaconda Nickel Ltd (2002) 26 WAR 33, 52.
In Esso Australian Resources Pty Ltd v Southern Pacific Petroleum NL [2005]
VSCA 228, [25], Buchanan JA said;
I am reluctant to conclude that commercial contracts are a class of contracts
carrying an implied term of good faith as a legal incident, so that an obligation
of good faith applies indiscriminately to all the rights and power conferred by a
commercial contract. It may, however, be appropriate in a particular case to
import such an obligation to protect a vulnerable party from exploitive
[sic] conduct which subverts the original purpose for which the contract was
made. Implication in this fashion is perhaps ad hoc implication meeting the
tests laid down in BP Refinery (Westernport) Pty Ltd v Shire of Hastings, rather
than implication as a matter of law creating a legal incident of contracts of a
certain type.’
In Royal Botanic Gardens and Domain Trust v South Sydney Council (2002)
186 ALR 289, 301, 327, six High Court judges left open the question of whether
there was such an implied term. Kirby J, at 312, also left the question open but
did opine that…
Such an implied term appears to conflict with fundamental notions of caveat
emptor that are inherent (statute and equitable intervention apart) in common
law conceptions of economic freedom’ and that ‘[i]t also appears to be
inconsistent with the law as it has developed in this country in respect of the
introduction of implied terms into written contracts which the parties have
omitted to include’.
Consumer guarantees
Consumer guarantees are not based in contract law. Therefore, there is no need
to prove a contract, and the remedies are statutory, not dependent on contractual
rights.
They cannot be excluded even if parties purport to exclude it in their express
terms. However, it only applies to transactions in ‘trade or commerce’ and
applies to ‘consumers’’.
Note the limitations on the application of consumer guarantees under the The
Australian Consumer Law (Cth) (‘ACL’).
Consumer guarantees are set out at ss 51-62 of the ACL and relate to:
 ownership
 quality
 fitness
 correspondence
 conformity
 repairs and spare parts
 express warranties
These are applicable to goods and services, including care and skill, fitness and
time expended.
Terms implied by the Sale of Goods Act 1923 (NSW)
There are five consumer guarantee matters under the Sale of Goods Act
1923 (NSW), otherwise referred to as the SGA.
Follow the link above and find the relevant section for each of the following
matters:
 ownership
 correspondence
 fitness
 quality
 sample.

Consistency

The court cannot imply a term that contradicts the express terms of a contract.
Courts do not want to interfere with parties’ freedom to contract.
The court cannot imply a term if:
1. It is impossible to give effect to both the express terms and the
implied term;
2. The implied term expresses a contrary intention from the express
terms; or
3. The matters which would be addressed by the implied term are
dealt with sufficiently in the express terms.

Topic 5: Construction principles and restitution

 
Read

Required reading
In your Principles textbook:
 Chapter 13: Construing the terms
 Chapter 10: Restitution
In your Cases texbook:
 Chapter 13: Construing the terms
 Chapter 10: Restitution

Construction
‘Construction’ is a term of art used to describe the process of ascertaining the
objective intention of the parties when they have expressed the terms of a
contract in written form. In this sense, the word ‘construction’ does not relate to
‘building’, but to the verb ‘construe’ as in ‘one construes a contract’ or ‘in
construing the contract’.
The main idea here is that the court is always trying to find the objective
common intention of the parties. There are a number of categories and rules to
learn, but they all relate back to the main idea of objective intention.
It is an objective test, meaning it is not subjective to the party’s understanding
of that intention but rather what a reasonable person in the promisee would
place on them.
This is based on the presumption that the parties meant what they said.
Why don’t the courts just ask the parties for their actual intentions? Because, at
the time of contract formation, the parties only knew the other’s intention by
what they said or wrote, and on those grounds, they agreed to be bound. It
would be unfair to bind a party to another party’s actual but unstated intention.
Where parties have expressed their actual intentions clearly on all the important
aspects of the agreement and kept those intentions, disputes are unlikely to
arise. In establishing the rules of construction, the case law emerges from
situations where those intentions have not been expressed clearly, the intention
is silent on an important feature of an express term or the party has changed
their intention.

Ambiguity

The ambiguity of a contact may be patent or latent. A patent ambiguity arises if

the language used obviously has more than one meaning, or is intrinsically of
doubtful meaning, or has no generally accepted meaning. A latent ambiguity is
established by extrinsic facts that cast doubt on what would otherwise have a
clear meaning.
Latent ambiguity is demonstrated neatly in Raffles v Wichelhouse, illustrated
here:
Raffles v Wichelhouse
Latent ambiguity is neatly demonstrated in Raffles v Wichelhaus (1864) 159 ER
375. In this case, the parties agreed that goods would be shipped out of Bombay
harbour by the ship called ‘Peerless’.
Oral evidence indicated that there were two ships by that name in Bombay
harbour at the time. The recognition of latent ambiguities serves as a warning
that the words of a contract will not necessarily carry their plain or ordinary
meaning.
An ambiguity will only arise if there is genuine uncertainty about the meaning
of the words used. Ambiguity will not arise simply because the words used do
not mean what one of the parties hoped they would mean: Hope v RCA
Photophone of Australia Pty Ltd (1937) 59 CLR 348.
Secondly, extrinsic evidence is admissible to identify the subject matter of the
contract in circumstances where the description of the subject matter is
uncertain or ambiguous.

Test of objectivity

Read

Read [13.50]-[13.70] of your Principles Textbook and [13.25]-[13.37] of

the Cases Textbook.
The test of objectivity looks at what a reasonable person in the same situation
would infer from an expression of intention.
Determining the objective common intention of the parties requires the court to
look at the objective intention of each party even if that results in a finding
inconsistent with the actual intention of one or both parties.

 The purposive approach

Read

Read [13.67]–[13.70] of the Principles Textbook and [13.37] of the Cases

Textbook.
The case law indicates that a court may look to the purpose of a clause (or
term) or the main purpose of the contract in whole to find its true
construction.
For example, in Glynn v Margetson & Co [1893] AC 351, the purpose of
the contract was delivery of perishable goods. The contract included a
‘deviation clause’, allowing the carrier to deviate from the course.
However, the carrier’s deviation was so extensive that the goods did
perish. Application of the deviation clause to exclude the carrier’s liability
resulting from deviation would have defeated the main purpose of the
 contract. The main purpose rule is subject to the usual restrictions for
rules on construction – it will not apply if parties have expressly agreed to
the contrary.

Uncommercial result or absurdity

In interpreting the terms of a contract, the Court will favour an

interpretation that does not result in unreasonable or uncommercial
consequences: See Australia Broadcasting Commission v Australian
Performing Right Association Ltd (1973) 129 CLR 99, 108 (Gibbs CJ).
Likewise, if the construction has an absurd result if construed using the
plain or literal meaning.

Exclusion clauses

Read

Read [13.75]-[13.115] of the Principles Textbook.

Exclusion clauses, also known as ‘exemption’, ‘exception’ or ‘limitation’

clauses are terms of a contract that seek to exclude or limit the liability of
the defendant to the plaintiff in the event that the defendant causes loss to
the plaintiff.
Exclusion clauses reallocate, qualify or limit the risk of one party
benefited by the clause (‘proferens’).
The limitation of liability covered by the exclusion clause is not
necessarily confined to breaches of contract and can include torts, statute
etc.

Function of exclusion clauses

Exclusion clauses have two legal functions:

1. As a defence (complete or partial) against breach, e.g. ‘no liability for
damage due to negligence’.
 2. To define the obligations of the parties, e.g. ‘only liable for damage that
could have been avoided by due diligence’ – the party fulfils its
obligations by exercising due diligence.
Courts have traditionally adopted a hostile approach to the construction of
exclusion clauses, favouring consumers and these common law protections are
now codified in statute.
At common law the principle of freedom to contract and common law
assumptions about fully negotiated terms have been subject to abuse by parties
in strong bargaining positions. These abuses led to unfair results, so courts
gradually built up a set of secondary construction rules to undermine the effect
of harsh exclusion clauses, while still (theoretically) giving effect to the express
terms.
Today, with the intervention of statutes to protect parties in weak bargaining
positions (particularly consumers), these secondary rules of construction are not
so important in reaching a just result. But they do still apply, so you will need to
know them; even though today they should be applied using a commercial
approach. See: Darlington Futures Ltd v Delco Aust Pty Ltd (1986) 161 CLR
500 as extracted at [13.60] of the Cases textbook.

Contra proferentum

The Latin maxim ‘contra proferentum’ is deeply rooted in the origins of

contract law protections. It simply means that the court should construct the
ambiguous term against the party who proffered the ambiguous term. It is a rule
of last resort which will only be called upon once all other construction methods
have been exhausted.
An exclusion clause will be construed under the contra proferentum where it is
ambiguous: Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR
500, 510 extracted at [13.60] of the Cases textbook.
In that contract, the relevant clauses were:
 Clause 6: Darlington not responsible for loss from any trading activity
undertaken ‘on behalf of [Delco] whether pursuant to the Agreement or
not’;
 Clause 7: ‘in respect of any claim arising out of … the relationship
established by the Agreement,’ Darlington’s liability was limited to $100.
Darlington caused losses for Delco through unauthorised trading, Darlington
was liable for the losses because clause 6 did not apply; Darlington was not
trading on behalf of Delco. However, Darlington was only liable to the amount
of $100, because clause 7 applied as the claim arose out of the relationship
between Darlington and Delco.
Restitution

Read

Read Chapter 10 of the Principles Textbook and Chapter 10 of the Cases

Textbook.
In topic 3, we discussed the doctrine of equitable estoppel which supplements
the common law, preventing harm due to a party’s detrimental reliance on the
inconsistent conduct of another party. In these circumstances, estoppel prevents
or compensates harm which are not ordinarily remediable in contract law.
Likewise, restitution is a remedy available when other contractual remedies are
unavailable or as an alternative. We discuss restitution here rather than at the
end of the subject because those remedies relate to contractual breaches whereas
these remedies are also available when the contract formation is defective in
some way.
Restitution and unjust enrichment
Restitution is a remedy based on unjust enrichment. It restores the plaintiff to
the position he or she would have been in before the loss. When ordered, the
defendant must repay the plaintiff fairly and justly for a benefit received at the
plaintiff’s expense: See Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221
as extracted at [10.20] of your Cases Textbook.
The three essential elements of unjust enrichment are:
1.
1. The defendant was enriched by receiving a benefit.
2. The benefit was gained at the plaintiff’s expense.
3. It would be unjust to allow the defendant to retain the benefit.

Examples of where restitution applies

 In the case of anticipatory benefits which do not materialise.

 When a contract is unenforceable because the contract was not reduced to
writing as required by statute. See for example s 45 of the Builders
Licensing Act 1971 (NSW) and Pavey & Matthews v Paul as extracted
at [10.20] of your Cases Textbook.
 When a contract is void because one party lacks capacity to contract:
See Borthwick v Carruthers (1787) 1 Term Tep 634
  When a contract is void for uncertainty or incompleteness in the contract
terms: See Brenner v First Artists’ Management Pty Ltd [1993] 2 VR 221
as extracted at [10.25] of the Cases Textbook.
 When a contract is void for illegality: see Kiriri Cotton Co Ltd v
Dewanie [1960] AC 192
 Where there are benefits for a contract which has been terminated for
breach: Mann v Paterson Constructions Pty Ltd [2019] HCA 32 as
extracted at [10.87] of your Cases Textbook.
 Where there are benefits for a contract terminated for frustration:
See Codelfa Constructions Pty Ltd v State Rail Authority of New South
Wales (1982) 149 CLR 337 extracted at [15.35] of your Cases Textbook.
 Where there are benefits where the contractual purpose fails completely
though the contract remains valid: see Roxborough v Rothmans of Pall
Mall Australia Ltd [2001] HCA 68 as extracted at [10.55] of the Cases
Textbook.

Restitutionary remedies

The two most common restitutionary remedies sought are:

1. To recover money paid.
2. To recover reumeration for services rendered (sometimes referred to as a
claim for quantum meruit meaning 'the amount earned').
The second remedy is a common law remedy which is distinct from the
principle remedy being compensatory damages because it is gain-based. It
relates to the equitable remedies of account for profits and disgorgement.
Restitution for party in breach
A party who is in breach may be able to claim restitutionary damages if services
or a benefit has been freely accepted. For example, in Sumpter v Hedges [1898]
1 QB 673, a builder ran out of money and failed to complete building two
houses and stables as required by the contract. The owner subsequently
completed the work and used materials left on site. The court found that the
builder was entitled to restitution because the use of the materials was freely
accepted whereas the incomplete works was not freely accepted.

Defences

Read

Read [10.15] of the Cases Textbook.

The range of defences for claims against restitution has been broadly stated and
largely undefined as equity and justice requires firstly in Moses v
Macfarlan (1760) 2 Burr 1005 and followed in Australian Financial Services
and Leasing Pty Ltd v Hills Industries Ltd (2014) 253 CLR 560 at 5-6.
In Ford v Perpetual Trustees Victoria Ltd (2009) 75 NSWLR 42, the NSW
Court of Appeal found it unjust to order restitution notwithstanding no
recognised defence was available.
The Cases Textbook discusses cases where the following defences were raised:
 the claim arises out of an illegal transaction: see [42.60]
 the claim arises when the plaintiff received good consideration for the
mistaken payment of money: see [10.40] and [10.47]
 the defendant detrimentally changes his or her position in faith of receipt
of a mistaken payment: see [10.40]
 the mistaken payment was made in voluntary settlement of an honest
claim: see [10.40].

Topic 6: Capacity and privity

 

Read

From the Principles Textbook.

 Chapter 8: Capacity
 Chapter 11: Privity
From the Cases Textbook
 Chapter 11: Privity.

Capacity

Read

Read Chapter 8: Capacity in your Principles textbook.

There is a rebuttable presumption that a person who enters into a contract has
the full capacity to do so.
There are certain persons and classes of persons who lack the capacity to enter
into a contract with the consequence (normally) that resulting contracts will be
unenforceable. Lack of capacity now often stems from a fear of vulnerability to
exploitation. This area has become more complex as a result of statutory
developments at a state level (calls for national law reform have not yet met
with success) which result in a variety of different rules.

Contractual capacity of minors

A minor is a person who is under the age of 18 years old. Both the common law
and statute operate to restrict the capacity of minors to contract. The existing
mix of common law and multiple different state legislative rules in relation to
the capacity of minors has rendered the assessment of the contractual capacity
of minors exceedingly complex.
The general rule at common law is that a contract made by a minor is voidable.
There are, however, a number of exceptions (some of which now have statutory
force).

Contracts for necessities

Beneficial contracts of employment

The effect of minority at common law

Contracts not falling within either of the above exceptions are voidable.
Confusingly, the courts treat ‘voidable’ in this context differently from voidable
as normally understood in contract.
Where the contract results in the minor permanently acquiring property (e.g.
land) or involves ongoing obligations (e.g. partnerships) then the contract is
binding unless and until avoided by the minor – the minor remains bound by
any obligations that arise prior to that point.
All other contracts entered into by a minor are not binding unless ratified
(taking positive steps to affirm) by a minor when they become an adult.
Minority in New South Wales
In 1969, the NSW Law Reform Commission recommended that the age of
majority be lowered from 21 to 18. This recommendation was implemented by
the Minors (Property and Contracts) Act 1970 (NSW).
The Act provides a comprehensive code for making contracts with minors
having the effect that if the contract is inconsistent with the code, it will not
bind the minor.
Section 6(1) defines ‘civil act’ to include a contract and stated acts connected
with contract law.
Section 19 of the Act states that a minor participating in a civil act for his or her
benefit at the time, the civil act is presumptively binding on the minor.
The civil act may be contested based on misrepresentation or mistake. Section
18 allows a court to consider the minor’s immaturity when determining if the
civil act is binding.
Under s 26 of the Act, the Supreme Court may grant capacity to a minor to
participate in any ‘civil act’ if it will benefit the minor and will be binding on
the minor.
Section 27 of the Act permits the Local Court to make an order to approve a
contract or disposition of property proposed to be made by or to a minor.
The catch to both of the above orders is that it must be to the benefit of the
minor.
Minority’s liability and repudiation
The reading discusses a minor’s liability and whether it is based upon contract
or restitution. It also discusses the effect of a minor’s repudiation of a contract.

Mental disability (including intoxication)

The validity of a contract may be challenged if an individual lacked capacity to

understand the nature of the transaction either on a temporary (drug use or
intoxication) or permanent basis (brain injury, intellectual impairment) and the
other party was aware of the fact.
In other words, a contract is voidable at the option of a party who, as a result of
mental disorder or intoxication, is unable to understand the nature of the
contract being made – provided that the other party knew, or ought to have
known, of that person’s disability.
The party seeking to withdraw from the contract has the onus of proving both
these requirements that
a) that they were suffering from such a disability; and
b) that the other party was or ought to have been aware of it.
The mental capacity to make a voluntary settlement, by deed, is that required to
make a valid will, rather than the capacity required to make a contract for
consideration: Crago v McIntyre (1976) 1 NSWLR 729.
It is not essential that the resulting contract be 'unfair' (although this might
provide some evidence of lack of understanding).
A creditor may claim from his estate the price of necessaries supplied to a
mentally disabled person: Rhodes v Rhodes (1890) 44 Ch D 94)

Corporations capacity to contract

Section 124 of the Corporations Act 2001 (Cth) gives a company the same legal
capacity as ‘an individual’ including the power to make an agreement and s 125
effectively provides that the performance of an act, including entry into an
agreement by a company will not be invalid merely because it is beyond the
power of the company’s constitution.
Under s 127(2) a company may make a contract either by using its common
seal; or s 126 a company may make a contract through an agent acting on its
behalf. Section 126 empowers a person acting on behalf of the company with its
express or implied authority to ‘make, vary, ratify or discharge a contract’.
A contract made by a promoter of a company on behalf of the company but
before it has been formed is not enforceable at common law but is enforceable
now under s 131(1) of the Corporations Act 2001 (Cth) provided that the
company, once formed, ratifies that pre-registration contract within an agreed
time or, if no time is set, a reasonable time.
Under s 131(2), if the company does not form or ratify the contract the
individual responsible for making the contract on its behalf may also be liable.
An unincorporated association has no legal personality and therefore lacks
contractual capacity. Thus a contract that purports to be with the association
will be void. However, if the contract intends to be with members of the
association then there can be a valid contract with those persons.

Bankrupts

In general bankruptcy does not affect contractual capacity of a person but

affects the operation of contracts made by a person who is at that time, or
subsequently becomes bankrupt.
Upon bankruptcy, contracts previously entered into do not come to an end. Post-
bankruptcy, a bankrupt can continue to incur contractual obligations subject to
the trustee’s right to intervene and disclaim.

Married women’s contractual capacity

The common law was that a married woman lacked contractual capacity and
that her contracts were void because she had no legal personality separate to
that of her husband. The position at law was mitigated by the position at equity
and the development of the doctrine of the married woman’s separate estate.
The doctrine of privity

Read

Read Chapter 11: Privity in the Principles textbook and Chapter 11: Privity in

the Cases textbook.
The privity of contract doctrine generally states that only parties to a contract
are legally bound by it, and only the parties are entitled to enforce it. It cannot
impose benefit or burden on a non-party.
You may recall the decision of Dunlop Pneumatic Tyre Co Ltd v Selfridge &
Co Ltd [1915] AC 847 (see [11.10] of your Cases textbook) considered in
earlier topics. In that case, Dunlop sought to establish and enforce a resale price
maintenance scheme. Dunlop sold tyres to Dew & Co (a tyre dealer) which then
sold to Selfridge on condition that Selfridge would not sell below the list price.
Selfridge failed to comply with the condition and Dunlop sued for breach of
contract.
The court held that although the promise made by Selfridge to Dew (not to sell
below list price) was made for the benefit of Dunlop, Dunlop was not entitled to
enforce the contract against Selfridge because it was not a party to the contract.
In Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR
107, the majority of the High Court held that a company intended to benefit by a
policy of insurance, even though not a party to the contract of insurance and
having provided no consideration for it, could recover from the insurance
company the indemnity promised in the policy.
The doctrine developed both through cases where it was argued that third party
beneficiaries failed because they were not promises, and cases where third party
beneficiaries failed because they had provided no consideration.
The matter was also considered by Windeyer J in Coulls v Bagot’s Executor
and Trustee Co Ltd (1967) 119 CLR 460. It has been argued on this basis that
consideration and privity are thus different ways of stating the one rule,
although the weight of authority supports two separate but inter-related
principles (see [11.10] of the Cases textbook).
Exceptions
Agency is not an exception to privity where the agent enters into a contract on
behalf of a principal. However, in the situation where there is an undisclosed
principal, the agent or the undisclosed principal but not both can sue and be
sued on the contract. Undisclosed principals are discussed in Teheran-Europe
Co Ltd v S T Belton (Tractors) Ltd [1968] 2 QB 545.
A trustee holds property on trust for beneficiaries. A trustee contracts as
principal for the benefit of the trust. In such a case the third party beneficiary
cannot directly exercise remedies as they are not a party to the contract, but
may, by proceedings in equity, compel the trustee to enforce the contract.

Assignment of contractual rights

Read

Read [11.37] of the Principles Textbook.

A person who is not privy to a contract may acquire rights under that contract
through assignment. The area is complex and is only a broad overview is given
in your readings.
Subcontracting and assignment
Assignment provides a means of circumventing privity of contract. A
contractual right is a ‘chose in action’ and can be assigned voluntarily in equity
or by statutory procedure, but not at common law. An assignment of a chose in
action is a transfer of property, the assignee gains no better title than the
assignor: Mangles v Dixon (1852) UK.
Voluntary assignment of contractual liability cannot be effected without the
consent of the party who would benefit from due performance.
Involuntary assignments of contractual rights and liabilities operate in three
circumstances:
1. Death of a contracting party
2. Bankruptcy of a contracting party
 3. Where a party is a trustee, upon the court making an order vesting trust
property in a new trustee or in a beneficiary absolutely entitled to the
property

The concept of novation

Read

Read [11.37] and [19.35] of the Principles Textbook.

Novation is the substitution of a new contract for an old one. The new
agreement extinguishes the rights and obligations that were in effect under the
old agreement.
A novation ordinarily arises when a new individual assumes an obligation to
pay that was incurred by the original party to the contract. It is distinguishable
from the situation that occurs when another individual makes a guarantee that a
debtor will pay what he or she owes to a creditor. In the case of a novation, the
original debtor is totally released from the obligation, which is transferred to
someone else. The nature of the transaction is dependent upon the agreement
between the parties.
A novation also takes place when the original parties continue their obligation
to one another, but a new agreement is substituted for the old one.

Topic 7: Unconscionable conduct

 

Read

Required reading
Read the following chapters from the Principles Textbook
 Chapter 36: Unconscionable Dealing
 Chapter 38: Unconscionable Conduct under Statute
 Chapter 16: Unfair Contract Terms
Read the following chapters from the Cases Textbook
 Chapter 36: Unconscionable Dealing
 Chapter 38: Unconscionable Conduct under Statute
 Chapter 16: Unfair Contract Terms
Unconscionable conduct

Read

Read Chapter 36: Unconscionable dealing of the Principles Textbook.

Unconscionable dealings and unconscionable conduct goes to the conduct of the
parties, where one party has taken advantage of another’s special disadvantage
in circumstance which existence and effect he or she knew ‘knew or ought to
have known’:  See Thorne v Kennedy (2017) 263 CLR 85, 103 [38] as extracted
at [35.20] of your Cases textbook.
The principal circumstances that can give rise to this situation are misleading or
deceptive conduct, the abuse by one party of a dominant position they occupy in
relation to the other (as in duress, undue influence and unconscionable dealings
or conduct), mistake and illegality. The remedy for unconscionable dealing is
rescission of the contract.
Unconscionable dealing or conduct deals with transactions between dominant
and weaker parties. It therefore overlaps with duress and undue influence.
Unconscionable conduct is prohibited both in equity and, more recently, by
statute.

Conveyancing Act 1919 (NSW)

Historically, the doctrine of unconscionable dealing came about to protect

‘expectant heirs’, who were expected to inherit property after someone’s death.
Expectant heirs could sell their ‘reversionary interest’ in property for less than
its worth. The courts afforded expectant heirs protection on the basis that the
sale price was not representative of the true value of the property.
These protections have since been codified into statute by state and territory
conveyancing acts. In New South Wales, s 37C of the Conveyancing Act
1919 (NSW) provides:
Acquisitions of reversions at an under value
 (1) No acquisition made in good faith, without fraud or unfair dealing, of
any reversionary interest in real or personal property for money or
money’s worth, shall be liable to be opened or set aside merely on the
ground of under value.
In this subsection reversionary interest includes an expectancy or
possibility.
  (2) This section does not affect the jurisdiction of the court to set aside or
modify unconscionable bargains.

Voidable contracts and vitiating factors

Where an agreement is concluded in one or more of the relevant situations, the

apparent contract may be rendered voidable, void or unenforceable, and this
will usually mean that one party will be able to ‘avoid’ the contract by electing
to bring it to an end or have it declared void. The factors that give rise to a
situation where a contract is void, voidable or unenforceable are collectively
described as ‘vitiating factors’.
Although we look at vitiating factors in more detail in the next topic, it is
important to understand what a vitiating factor is, how it affects a contract and
what the implications of the parties’ conduct have upon these factors.
A voidable contract is one that is operative and binding, but which the
innocent party, that is the party who is the victim of the ‘vitiating’ conduct, can
choose to bring to an end, that is described as ‘avoiding’ the contract or
rescinding the contract.
However, unless and until they do so, the contract will bind the parties and
create legal rights and obligations. Recession of a contract by the innocent party
will terminate it ab initio (i.e. from the beginning). This means that the parties
are returned to the position they occupied immediately before the contract was
made; and this involves them returning to each other any property transferred or
money paid before rescission. Because this is the effect of rescission, it can only
happen where the parties can be substantially returned to their original position.
A void contract is one that never operates. It is, from the outset, totally
ineffective and creates no contractual rights or obligations. It is therefore not
necessary for the innocent party to rescind a void contract, as it never
commenced operation because there is no agreement to rescind.
An unenforceable contract is a contract that one, or both, of the parties cannot
enforce by taking legal action. However, it may still be operative to transfer
ownership in property and this may give rise to enforceable non-contractual
rights.
The doctrine of unconscionable dealings
The two elements of the doctrine of unconscionable dealings are special
disability and knowledge of that special disability. These will be discussed
below as illustrated by case law.

Special disadvantage

Read

Read [36.35]-[36.60] of your Principles Textbook.

The modern application of unconscionable dealings was the issue in Blomley v
Ryan (1956) 99 CLR 362 extracted at [36.10] of the Cases Textbook, which you
will recall from Topic 6.
The plaintiff, Mr Blomley brought an action for specific performance or
damages arising out of a contract where the defendant Mr Ryan agreed to sell
Mr Blomley grazing property for 25,000 pounds. Mr Ryan was 78 years old
suffering the effects of prolonged and excessive consumption of alcohol. The
High Court set aside the contract on the grounds of unconscionable dealing.
Commercial Bank of Australia v Amadio (1983) 151 CLR 447
Another well-known case that demonstrates unconscionable dealings due to
special disadvantage is that of Commercial Bank of Australia v Amadio (1983)
151 CLR 447.

Emotional dependence

Read

Louth v Diprose (1992) 174 CLR 621 as extracted at [36.35] of the Cases

Textbook.
This case considered the issue of unconscionable conduct relating to the transfer
of property by Mr Diprose to Ms Louth upon whom he was 'emotionally
dependent'.
Mr Diprose was infatuated with Ms Louth. He showered her with gifts and
proposed to her but she refused. Ms Louth told Mr Diprose she was going to be
evicted and if that occurred she would kill herself. In response, Mr Diprose
agreed to buy her a house. She insisted he purchase it in her name, which he
did. Years later, when their relationship deteriorated, Mr Diprose asked Ms
Louth to transfer the house into his name. She refused and he brought
proceedings seeking to recover the house.
Equity intervened to prevent Mr Diprose’s victimisation. In the circumstances,
the High Court held that it would be unconscionable for Ms Louth to keep the
house.
The court found that Ms Louth has spun a story creating an 'atmosphere of
crisis' to induce Mr Diprose into an improvident transaction.

Knowledge

Read

Read [36.65]-[36.95] of the Principles Textbook.

The second element of the doctrine requires the defendant to know that the
plaintiff suffered a special disadvantage and that the defendant failed to take
steps to protect the plaintiff, resulting in unconscionable contact, justifying the
court to set aside the unconscionable transaction.
If both elements of unconscionable dealing are made out, the rebuttable
presumption is that the transaction is unfair.

Statutory prohibition of unconscionable conduct

Read

Read Chapter 38: Unconscionable conduct under statute of the Principles

Textbook.
Part 2-2 of the Australian Consumer Law ('ACL') prohibits unconscionable
conduct of persons and corporations in trade or commerce, replacing ss 51AA,
51AB and 51AC of the Trade Practices Act 1974 (Cth) ('TPA').
It is supplemented in New South Wales, by the Contracts Review Act
1980 (NSW) which provides remedies for unjust contracts.

ACCC v Samton Holdings

In Australian Competition and Consumer Commission (ACCC) v Samton
Holdings Pty Ltd [2002] FCAFC 4, the Full Court narrowed the statutory scope
of unconscionable conduct pursuant to the TPA (now the ACL).
In this case, the lessee of a lunch bar overlooked exercising the option to renew
the lease of seven years. The lessee had paid a substantial price for the business
at a time when the lease was shortly to expire. The lessor refused to renew the
lease unless the lessee paid it $70,000.
The Full Court of the Federal Court upheld the primary judge's decision that the
lessor's conduct was not unconscionable under the unwritten law of the states
and territories. The lessee was not in a position of special weakness or
vulnerability as required by that unwritten law. Any disadvantage it suffered
was attributable to its own fault.
Four types of unconscionability
The court stated at [47] that the four classes of cases attracting the application of
the language of unconscionability are:
1. Exploitation of vulnerability or weakness
2. Abuse of position of trust or confidence
3. Insistence upon rights in circumstances which make that harsh or
oppressive
4. Inequitable denial of legal obligations

Three standards
The types of cases above are said to be broadly supported by three standards:
Contract Review Act 1980 (NSW)

Read

Read [38.75]–[38.100] of the Principles Textbook.

Section 7 of the Contract Review Act 1980 (NSW) empowers the court to grant
relief for unjust contracts (in part or whole) if the court considers it just and to
avoid an unjust consequence.
Unjust contracts are not defined by the Act but s 4 states that ‘unjust’ includes
‘unconscionable, harsh or oppressive’. Successive cases under this legislation
feature a degree of procedural unfairness.
Interestingly, a defendant’s lack of knowledge of the injustice does not preclude
a claim for relief under this Act.

Unfair Contract Terms (UCTs)

Read

Read Chapter 16 of the Principles Textbook and Chapter 16 of the Cases

Textbook.
The general law of contract does not regulate the fairness of a contract, leaving
parties to contract however they see fit.
However, there are statutory provisions to protect parties from unfair contracts
and providing consumer guarantees.
Parts 2-3 of the ACL contains provisions to protect consumers and small
businesses in respect of unfair terms in standard form consumer contracts.
Section 23(1) Three requirements for a term of contract to be void
Section 23(1) provides that a term of a contract is void if three requirements are
satisfied:
 the contract must be a ‘consumer contract’ or a ‘small business contract’
 the contract must be a standard form contract
 the term must be ‘unfair’

Section 23(2) Contract is still binding if the unfair term can be severed
Section 23(2) provides that if the contract can operate without the unfair term,
the contract continues to bind the parties. In this instance, the unfair term is
severed from the remainder of the contract and the remainder of the contract
remains enforceable (for severability, see s 4L of the CC Act).
Section 23(3) Definition of a ‘consumer contract’
Section 23(3) defines a ‘consumer contract’ as a contract for the supply of
goods or services or the grant of an interest in land, to an individual, whose
acquisition of the goods, services or land is ‘wholly or predominantly for
personal, domestic or household use or consumption’.
Section 23(4) Definition of a ‘small business contract’
Section 23(4) defines a small business contract as a contract for a supply of
goods or services, or a sale or grant of an interest in land and at the time the
contract is entered into, at least one party to the contract is a business that
employs fewer than 20 persons; and either of the following applies:
 (i)the upfront price payable under the contract does not exceed $300,000;
 (ii)the contract has a duration of more than 12 months and the upfront
price payable under the contract does not exceed $1,000,000.

Section 24(1) Three conditions determining unfairness of a term

Pursuant to s 24(1), a term is unfair if the following three matters are satisfied:
1. the term would cause ‘significant imbalance’ in the parties’ rights and
obligations under the contract;
2. the term is not reasonably necessary in order to protect the legitimate
interests of the party who would be advantaged by the term; and
3. the term would cause detriment to a party if the term were to be applied
or relied upon.

Section 24(2) Things a court must take into account

Section 24(2) provides that in determining whether a term is unfair, a court may
take into account such matters as it thinks relevant, but it must take into account
the extent to which the term is ‘transparent’ (defined in s 24(3)) and the contract
as a whole.
 
Section 25 Examples
Section 25 provides examples of the kinds of terms that maybe unfair, but those
examples are expressed not to limit the broad definition of unfair
terms provided for in s 24.
Remedies
There are numerous remedies available to a party to a standard form consumer
contract which contains an unfair term. The party may obtain a declaration that
a term is unfair (s 250), an injunction to prevent reliance on or application of the
term that has been declared unfair (s 232), and compensation for any loss
suffered by reason of the unfair term (s 237).
The Australian Securities and Investments Commission Act 2001 (Cth) (‘ASIC
Act’) contains like provisions.
Here is a great resource to assist in determining what are ‘unfair terms’ in
respect of contracts published by the Australian Consumer Competition
Commission (‘ACCC’).
After seven years of effort, UCTs provisions will be incorporated into
the Insurance Contracts Act 1984 (Cth), regulating UCTs in insurance contracts
effective on 5 April 2021.
The effect of an unfair term is that it will be void (i.e. have no effect).
A consumer may rely on the UCT as a defence to enforcement action.

Remedies under the ACL

The remedies under the ACL include the following.