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Simone Degeling
James Edelman
James Goudkamp
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permission should be sought in writing from the current Commonwealth Government agency
with the relevant policy responsibility
This is an essential text for students and practitioners interested in torts and
commercial law. The distinguished contributors address the cutting edge issues of
the day throughout the common law world and they ‘share the goal of rationality’.
Inevitably the exercise has a holy grail quality but it is a magnificent and welcome
addition to the development of our jurisprudence.
Lord Grabiner QC, Barrister, One Essex Court
This distinguished collection of essays by leading scholars and judges from the
common law world is devoted to the conjunction of tort law, commercial law and
legislation. All the contributors are committed, but each in a different way, to the
idea of a rational tort law. The result is a monument to the breadth, diversity,
and acuity of contemporary tort scholarship. Readers will find much to admire, to
learn from, and to disagree with.
Professor Ernest J Weinrib, Cecil A Wright Professor of Law,
University of Toronto
Praise for Equity in Commercial Law and
Unjust Enrichment in Commercial Law
Many of the pieces in the book entail scholarship of this kind; dense and well-
referenced discussion which trusts and commercial practitioners will certainly find
useful.
Professor Charles Mitchell (University College London)
writing in the Law Quarterly Review
The vigorous debates which rage throughout the book about the role of equity
in commerce are…not simply historic and abstract, but concrete, salient and
imminently important…There can be no doubt that this book refines and redefines
the debate about fusion in commercial law and beyond. It is fascinating throughout
not least because of the difficulty and intensity of the controversies that it addresses.
Associate Professor Kit Barker (University of Queensland)
writing in the Modern Law Review
This is clearly a book which is rich in ideas and debate from the protagonists in
the developing story of unjust enrichment. It deserves a prominent place on the
academic’s bookshelf.
Amy Goymour (Cambridge) writing in the Law Quarterly Review
Preface
Simone Degeling
James Edelman
James Goudkamp
26 September 2016
Table of Contributors
The Hon Chief Justice James Allsop AO is Chief Justice of the Federal Court of Australia.
The Hon Chief Justice Tom Bathurst AC is Chief Justice of the Supreme Court of New
South Wales.
Dr Andrew Bell SC is a barrister at Eleven Wentworth Chambers, Sydney and Adjunct Professor
of Law at the University of Sydney.
Professor Andrew Burrows QC (Hon) FBA is Professor of the Law of England at the University
of Oxford and Fellow of All Souls College.
Professor Mindy Chen-Wishart is Professor of the Law of Contract and Associate Dean of
Taught Graduates at the University of Oxford, Tutorial Fellow in Law at Merton College and
fractional Professor of Law at the National University of Singapore.
Professor Hugh Collins FBA is the Vinerian Professor of English Law at the University of
Oxford and Fellow of All Souls College.
The Hon Justice James Edelman is a Justice of the Federal Court of Australia, Adjunct Professor
of Law at the University of Queensland and Conjoint Professor of Law at UNSW Law.
Professor Joshua Getzler is Professor of Law and Legal History at the University of Oxford,
Tutorial Fellow in Law at St Hugh’s College and Conjoint Professor of Law at UNSW Law.
The Rt Hon The Lord Hope of Craighead KT is a former Lord of Appeal in Ordinary and
former Deputy President of the Supreme Court of the United Kingdom.
The Hon Justice Susan Kiefel AC is a Justice of the High Court of Australia.
Professor Ben McFarlane is Professor of Law at University College London and Honorary
Senior Fellow, Melbourne Law School.
Professor David R Percy QC is Borden Ladner Gervais Professor of Energy Law and Policy at
the University of Alberta.
The Hon Justice Andrew Phang is a Judge of Appeal of the Supreme Court of Singapore.
Professor Robert Stevens is the Herbert Smith Freehills Professor of English Private Law at the
University of Oxford and Professorial Fellow of Lady Margaret Hall.
Prefacevii
Table of Contributorsix
Table of Casesxiii
Table of Statutesxxxvii
Table of Conventionsxli
Index493
Table of Cases
A & J Inglis v John Buttery & Co (1878) 3 App Cas 552 (HL)................................. 177, 187
Aberdeen City Council v Stewart Milne Group Ltd [2011] UKSC 56;
[2012] SLT 205.............................................................................................................. 149
Abrahams v Bunn (1768) 4 Burr 2251; 98 ER 173 (KB)................................................... 125
Abrahams v Performing Right Society Ltd [1995] ICR 1028 (CA).................................. 306
Abu Dhabi National Tanker Co v Product Star Shipping Company Ltd
(The “Product Star”) (No 2) [1993] 1 Lloyd’s LR 397 (CA)........................................ 48
ACN 074971109 Pty Ltd (as Trustee for the Argot Unit Trust) v
National Mutual Life Association of Australasia Ltd [2008] VSCA 247;
(2008) 21 VR 351...........................................................................................362, 374, 379
Adams, Re (1878) 9 Ch D 307 (CA)................................................................................... 306
Admantine Energy (Kenya) Ltd v Bowleven (Kenya) Ltd [2016] EWHC 130 (Comm)........... 1
Agip Spa v Navigazione Alita Italia Spa [1984] 1 Lloyd’s Rep 353 (CA).................. 185, 227
Agricultural and Rural Finance Pty Ltd v Gardiner [2008] HCA 57;
(2008) 238 CLR 570.............................................................................................. 3, 26-35
Agricultural Land Management Ltd v Jackson (No 2) [2014] WASC 102;
(2014) 285 FLR 121...................................................................................................... 302
AHA General Construction Inc v New York City Housing Authority, 92 NY 2d 20;
699 NE 2d 368 (1998)................................................................................................... 412
AIB Group (UK) Plc v Mark Redler & Co Solicitors [2013] EWCA Civ 45;
[2013] PNLR 19...............................................................................................14, 298, 302
AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58;
[2015] AC 150...................................................14, 297, 298-300, 303, 304, 306, 308, 311
Air Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 (SC)........ 207
Air New Zealand Ltd v Leibler (unreported, Supreme Court of Victoria,
19 November 1996)...................................................................................................... 185
Airport Industrial GP Ltd v Heathrow Airport Ltd [2015] EWHC 3753 (Ch)............... 129
Akai Pty Ltd v People’s Insurance Company Ltd (1996) 188 CLR 418............................ 434
AL Challis Ltd v British Gas Trading Ltd [2016] EWHC 513 (QB Comm).................... 129
Alameddine v Glenworth Valley Horse Riding Pty Ltd [2015] NSWCA 219;
(2015) 324 ALR 355.............................................................................................. 405, 421
Alan Estates Ltd v WG Stores Ltd [1982] Ch 511 (CA)...................................................... 88
Aldabe Fermin v Standard Chartered Bank [2010] SGHC 119; [2010] 3 SLR 722......... 283
Alderslade v Hendon Laundry Ltd [1945] KB 189.................................................... 411, 420
Alec Lobb (Garages) Ltd v Total Oil (Great Britain) Ltd [1983] 1 WLR 87 (CA)............. 81
Allen v Pink (1838) 4 M & W 140; 150 ER 1376............................................................... 180
Alliance Bank Ltd v Broom (1864) 2 Dr & Sm 289; 62 ER 631........................................ 102
Alliance Concrete Singapore Pte Ltd v Comfort Resources Pte Ltd [2009] SGCA 34;
[2009] 4 SLR(R)............................................................................................................ 275
AMA (New Town) v Law [2013] CSIH 61; 2013 SC 608...................................426, 328, 329
Amann Aviation Pty Ltd v The Commonwealth (1988) 100 ALR 267 (FCA)......335, 337, 338,
340-346, 349, 352-354, 357
Amann Aviation Pty Ltd v The Commonwealth (1990) 22 FCR 527..............335, 337, 338,
340-346, 349, 352-354, 357
Amantilla Ltd v Telefusion plc (1987) 9 Con LR 139........................................................ 305
xiv Contract in Commercial Law
AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170...........................464, 470, 476, 477
Anaconda Nickel Ltd v Edensor Nominees Pty Ltd [2004] VSCA 16;
(2004) 8 VR 38...................................................................................................... 362, 367
Anderson Ltd v Daniel [1924] 1 KB 138 (CA).................................................................. 449
André et Cie v Cook Industries Ltd [1987] 2 Lloyd’s Law Reports 463 (CA).................... 13
Andrews v Australia and New Zealand Banking Group Ltd [2011] FCA 1376;
(2011) 211 FCR 53.........................................................................................459, 460, 464
Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30;
(2012) 247 CLR 205.................................................................21, 113, 409, 457-463, 465,
468, 472, 475-479, 481, 483,
484, 485, 486-492
Angullia v Estate & Trust Agencies (1927) Ltd [1938] AC 624 (PC)........................ 308, 309
Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987)
162 CLR 549 (HCA)..................................................................................................... 117
Antons Trawling Co Ltd v Smith [2003] 2 NZLR 23 (CA)........................................... 75, 79
Archbold’s (Freightage) Ltd v S Spanglett Ltd [1961] 1 QB 374 (CA)............................. 438
Archer Capital 4A Ltd as trustee for the Archer Capital Trust 4A v
Sage Group plc [2015] FCA 960.................................................................................. 133
Ardlethan Options Ltd v Easdown (1915) 20 CLR 285 (HCA)........................................ 306
Arfaras v Vosnakis [2016] NSWCA 65............................................................................... 372
Arnold v Britton [2015] UKSC 36; [2015] AC 1619..........................................7, 8, 128, 149
Ashmore v Corp of Lloyd’s (No 2) [1992] 2 Lloyd’s Rep 620 (Com Ct)......................... 162
Ashmore Benson Peace & Co Ltd v AV Dawson Ltd [1973] 1 WLR 828 (CA)........ 449, 452
Ashton v Pratt [2015] NSWCA 12; (2015) 88 NSWLR 281.................73, 360, 366, 367, 371
Ashworth v Royal National Theatre [2014] 4 All ER 238 (QB)................................ 287, 291
Associated Japanese Bank (International) Ltd v Credit du Nord SA [1989]
1 WLR 255 (QB)........................................................................................................... 163
Associated Pan Malaysia Cement Sdn Bhd v Syarikat Teknikal and
Kejuruteraan Sdn Bhd [1990] 3 MLJ 287...................................................................... 35
AstraZeneca UK Ltd v Albermarle International Corporation [2011]
EWHC 1574 (Comm); [2011] 2 CLC 252................................................................... 426
Athenæum Life Assurance Society, Re (1858) 4 K & J 549; 70 ER 229............................. 306
Attorney-General v Blake [2001] 1 AC 268 (HL).............................................................. 467
Attorney-General v Colchester Corporation [1955] 2 QB 207 (QBD)............................ 320
Attorney-General (NSW) v Perpetual Trustee Co (Ltd) (1940)
63 CLR 209 (HCA)........................................................................................106, 112, 115
Attorney-General for England and Wales v R [2002] 2 NZLR 91 (CA)............................ 75
Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10;
[2009] 1 WLR 1988....................................................................7, 127, 129, 130, 144-146,
148-152, 157, 162, 164, 165
AusNet Transmission Group Pty Ltd v Federal Comr of Taxation [2015] HCA 25;
(2015) 255 CLR 439...................................................................................................... 108
Austin v United Dominions Corporation Ltd [1984] 2 NSWLR 612.............................. 409
Austotel Pty Ltd v Franklins Selfserve Pty Ltd (1989) 16 NSWLR 582 (CA).................. 362
Australia and New Zealand Banking Group Ltd v Paciocco [2015] FCAFC 78;
(2015) 321 ALR 5.......................................................................................................... 113
Australian Competition and Consumer Commission v CG Berbatis Holdings
Pty Ltd [2003] HCA 18; (2003) 214 CLR 51............................................................... 477
Australian Competition and Consumer Commission v Chrisco Hampers Australia
Limited [2015] FCA 1204............................................................................................... 23
Australian Financial Services Ltd v Hills Industries Ltd (2014) 253 CLR 560................. 377
Australian Mutual Provident Society v Chaplin (1978) 18 ALR 385....................... 110, 111
Australian Securities and Investments Commission v Citigroup Global
Markets Australia Pty Limited (ACN 113 114 832) (No 4) [2007] FCA 963;
(2007) 160 FCR 35................................................................................................ 111, 420
Table of Cases xv
Cape Lambert Resources Ltd v MCC Australia Sanjin Mining Pty Ltd [2013]
WASCA 66......................................................................................................................... 6
Carmichael v National Power plc [1999] ICR 1226 (HL)................................................... 46
Casey’s Patents, Re [1892] 1 Ch 104 (CA)......................................................................... 100
Cator v Croydon Canal Co (1843) 4 Y & C Ex 593; 160 ER 1149.............384, 386, 397, 402
Cavanagh v Secretary of State for Work and Pensions [2016] EWHC 1136 (QB).......... 129
Cavendish Square Holdings BV v Makdessi [2015] UKSC 67;
[2015] 3 WLR 1373, on appeal from [2013] EWCA Civ 1539;
[2014] 2 All ER (Comm).................................................. 20, 21, 113, 363, 368, 459, 460,
464-466, 469, 470, 472, 476, 482,
484, 485, 486, 488, 490, 491
CCC Films (London) Ltd v Impact Quadrant Films Ltd [1985]
1 QB 16 (QBD)............................................................................................................. 338
Central London Property Trust Ltd v High Trees House Ltd [1947]
KB 130 (KBD)......................................................................................4, 74, 367, 368, 369
Central London Property Trust Ltd v High Trees House Ltd [1956]
1 All ER 256 (KB)............................................................................................................ 90
Chalke v Inland Revenue Commissioners [2009] EWHC 952 (Ch);
[2009] 3 CMLR 14................................................................................................ 305, 309
Chaplin v Hicks [1911] 2 KB 786 (CA)..............................................................334, 341, 348
Chappel v Somers & Blake [2003] EWHC 1644 (Ch); [2004] Ch 19............................... 308
Chappell & Co Ltd v Nestlé Co Ltd [1960] AC 87 (HL)..................................................... 94
Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38;
[2009] 1 AC 1101.......................................................9, 126, 128, 134, 135, 138, 149, 168,
176, 183, 187, 188, 197, 198, 200-202,
206, 209-212, 214, 216-221, 224-226
Chase Manhattan Bank v AXA Reinsurance UK plc, 752 NYS 2d 17;
300 AD 2d 16 (Supreme Court 2002).......................................................................... 430
Chatenay v Brazilian Submarine Telegraph Co [1891] 1 QB 79 (CA)............................. 107
Cheah Peng Hock v Luzhou Bio-Chem Technology Ltd [2013] SGHC 32;
[2013] 2 SLR 577........................................................................................................... 289
Cherry Tree Investments Ltd v Landmain Ltd [2012] EWCA Civ 736;
[2013] Ch 305............................................................................................................... 150
Chiam Heng Hsien v Jurong Town Corp [1985] SGCA 5; [1985-1986] SLR(R) 92....... 283
Chow Yoong Hong v Choong Fah Rubber Manufactory [1962] AC 209 (PC)............... 115
Chunna Mal-Ram v Mool Chand (1928) 55 IA 154 (PC).................................................. 35
Church Commissioners for England v Abbey National plc
1994 SC 651............................................................................................315, 324, 327, 328
Chye Lian Huat Sawmill Co v Hean Nerng Industrial Pte Ltd [2002]
SGHC 300; [2003] 2 SLR(R) 23................................................................................... 283
Ciofalo v Vic Tanney Gyms, 10 NY 2d 294........................................................................ 412
Citibank NA v Allan R Plapinger, 66 NY 2d 90; 485 NE 2d 974 (1985)................... 412, 413
Citicorp Australia Ltd v Hendry (1985) 4 NSWLR 1.........................................470, 471, 477
City and Westminster Properties (1934) Ltd v Mudd [1959] Ch 129 (Ch)....................... 96
Clark v Clark [2006] EWHC 275 (Ch); [2006] 1 FCR 421............................................... 362
Clark v Macourt [2013] HCA 56; (2013) 253 CLR 1................................................ 374, 473
Clarke v Commissioner of Taxation [2009] HCA 33; (2009) 240 CLR 272.................... 455
Clarke v Earl of Dunraven (The Santanita) [1897] AC 59 (HL)........................................ 95
Clarkson v Davies [1923] AC 100 (PC)............................................................................. 306
Clough v Bond (1838) 3 My & Cr 490; 40 ER 1016.......................................................... 300
Club Cape Schanck Resort Co Ltd v Cape Country Club Pty Ltd (2001)
3 VR 526 (CA)....................................................................................................... 194, 224
Cobbe v Yeoman’s Row Management Ltd [2008] UKHL 55;
[2008] 1 WLR 1752.........................................................361, 362, 364, 366, 370-374, 378
Cochrane v Moore (1890) 25 QBD 57 (CA)....................................................................... 62
xviii Contract in Commercial Law
FAI General Insurance Company Limited v Australian Hospital Care Pty Ltd [2001]
HCA 38; (2001) 204 CLR 641.............................................................................. 485, 486
Fales v Canada Permanent Trustee Co (1976) 70 DLR (3d) 257 (Can SC)..................... 300
Federal Commerce & Navigation Co Ltd v Molena Alpha Inc (The “Nanfri”)
[1979] AC 757 (HL)...................................................................................................... 117
Ferguson v Gibson (1872) LR 14 Eq 379........................................................................... 307
FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45;
[2015] AC 250............................................................................................................... 306
Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943]
AC 32 (HL)...................................................................................................................... 93
Field v Zien [1963] SCR 632............................................................................................... 273
Financings Ltd v Baldock [1963] 2 QB 104....................................................................... 270
Table of Cases xxi
G & C Kreglinger v New Patagonia Meat and Cold Storage Company Limited [1914]
AC 25 (HL).................................................................................................................... 482
Gallie v Lee [1971] AC 1004 (HL)...................................................................................... 171
Garcia v National Australia Bank Ltd [1998] HCA 48; (1998) 194 CLR 395.................. 477
Gardner v Coutts & Co [1968] 1 WLR 173 (Ch)...................................................... 163, 164
Garland v Consumers’ Gas Co [2004] 1 SCR 629............................................................. 232
Garrard v Frankel (1862) 54 ER 961 (Ch); 30 Beav 445........................................... 184, 228
Gateway Realty Ltd v Arton Holdings Ltd (1991) 106 NSR (2d) 180 (SC TD)
(“Gateway SC”); affd (1992) 112 NSR (2d) 180 (CA) (“Gateway CA”).................... 243
Gay Choon Ing v Loh Sze Ti Terence Peter [2009] SGCA 3; [2009] 2 SLR(R) 332........ 77, 80
GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd [2003]
FCA 50..................................................................................................................... 37, 117
General Reinsurance Australia Ltd v HIH Casualty and General Insurance Ltd
(in liq) [2009] NSWCA 22; (2009) 15 ANZ Ins Cas 61-796....................................... 115
George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983]
QB 284 (CA)..........................................................................................................409-411
George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] 2 AC 803 (HL).......... 411
George (Porky) Jacobs Enterprises Ltd v City of Regina [1964] SCR 326....................... 232
Germanotta v Germanotta [2012] QSC 116..................................................................... 373
Geys v Société Générale, London Branch [2012] UKSC 63;
[2013] 1 AC 523..............................................................257, 279, 280-287, 291, 422, 423
xxii Contract in Commercial Law
Giap Hon v Westcomb Securities Pte Ltd [2009] SGCA 19; [2009] 3 SLR(R) 518......... 189
Gibaud v Great Eastern Railway Co [1921] 2 KB 426....................................................... 411
Gibbons Holdings Ltd v Wholesale Distributors Ltd [2008] 1 NZSC 109...................... 171
Gibbs v Mercantile Mutual Insurance (Australia) Ltd [2003] HCA 39,
(2003) 214 CLR 604...................................................................................................... 115
Gillespie Bros & Co v Cheney, Eggar & Co [1896] 2 QB 59 (QBD)................................. 181
Gillespie Bros & Co Ltd v Roy Bowles Transport Ltd [1973] QB 400.............................. 411
Gillett v Holt [2001] Ch 210 (CA)..................................................................................... 377
Giumelli v Giumelli (1999) 196 CLR 101 (HCA)..............................................370-372, 375
GKN (Cwmbran) Ltd v TI Lloyd [1972] ICR 214............................................................ 281
Glaholm v Hays (1841) 2 M & G 257; 133 ER 743............................................................ 266
Glebe Island Terminals Pty Ltd v Continental Seagram Pty Ltd (1993)
40 NSWLR 206 (CA).................................................................................................... 421
Glencore Grain Ltd v Flacker Shipping Ltd (The “Happy Day”) [2002]
EWCA Civ 1068; [2002] 2 Lloyd’s Rep 487........................................................... 31, 119
Glencore Grain Rotterdam BV v Lebanese Organisation for International
Commerce [1997] 4 All ER 514 (CA)............................................................................ 13
Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd [2016] EWCA Civ 396......... 129
Glynn v Margetson & Co [1893] AC 351........................................................................... 410
Goldcorp’s Exchange Ltd, Re [1995] 1 AC 74 (PC)........................................................... 366
Golden Key Ltd, Re [2009] EWCA Civ 636....................................................................... 132
Golding’s Case (1586) 2 Leo 71; 74 ER 367......................................................................... 64
Gorringe v Irwell India Rubber and Gutta Percha Works (1886)
34 Ch D 128 (CA)................................................................................................. 382, 383
Gould v Curtis [1913] 3 KB 84 (CA)................................................................................. 115
Graham v The Royal National Agricultural and Industrial Association of
Queensland [1989] 1 Qd R 624 (SC)........................................................................... 421
Gravesham Borough Council v British Railways Board [1987] Ch 379 (Ch D).............. 320
Gray v Thames Trains Ltd [2009] UKHL 33; [2009] AC 1339................................... 18, 446
Great Peace Shipping Ltd v Tsavliris (International) Ltd [2002] EWCA Civ 1407;
[2003] QB 679............................................................................................................... 139
Greater Vancouver Sewerage and Drainage District v Wastech Services Ltd 2016
BCSC 68; 2016 CarswellBC 94..................................................................................... 254
Grey v Inland Revenue Commissioners [1960] AC 1 (HL).............................................. 385
Grocon Constructors (Victoria) Pty Ltd v APN DF2 Project 2 Pty Ltd [2015]
VSCA 190...................................................................................................................... 133
Gross v Sweet 49 NY 2d 102............................................................................................... 412
Grosvenor Developments (Scotland) plc v Argyll Stores Ltd 1987
SLT (Sh Ct) 134.................................................................................315, 317, 327, 328
Grosvenor Developments (Scotland) plc v Argyll Stores Ltd 1987 SLT 738 (IH).........315, 317,
324, 327, 328, 328
Grove Developments Ltd v Balfour Beatty Regional Construction Ltd [2016]
EWHC 168 (QBD, TCC).............................................................................................. 129
Guarantee Co of North America v Gordon Capital Corp [1999]
3 SCR 423.............................................................................................................. 413, 415
Gunton v Richmond-upon-Thames LBC [1981] Ch 448 (CA)........................279, 282, 283
Gwynne v Heaton (1778) 1 BCC 1; 28 ER 949.................................................................. 123
Hamsard 3147 Ltd (t/a Mini Mode Childrenswear) v Boots UK Ltd [2013]
EWHC 3251 (Pat)........................................................................................................... 52
Hang Seng Finance Ltd v Lin Kwok Man [1991] 2 HKC 613........................................... 273
Harding v Harding (1886) 17 QBD 442 (QB)........................................................... 394, 395
Harding v Wealands [2006] UKHL 32; [2007] 2 AC 1...................................................... 186
Hardy v Martin (1783) 1 Cox Eq 26; 29 ER 1046.............................................................. 481
Hardy v Motor Insurers Bureau [1964] 2 QB 745 (CA)................................................... 442
Hare v Murphy Brothers Ltd [1973] ICR 331................................................................... 281
Harling v Eddy [1951] 2 KB 739 (CA)................................................................................. 96
Harris v Pepperell (1867-68) LR 5 Eq 1 (Ch)............................................................ 184, 228
Hart v MacDonald (1910) 10 CLR 417 (HCA)................................................................. 154
Harter v Harter (1873) LR 3 P&D 11................................................................................. 189
Hartog v Colin & Shields [1939] 3 All ER 566 (KB)..........................................127, 172, 222
Harvela Investments Ltd v Royal Trust Co of Canada (CI) Ltd [1986] AC 207 (HL)..... 101
Hawkes v Saunders (1782) 1 Cowp 289; 98 ER 1091.......................................................... 65
Hawkins v Clayton (1988) 164 CLR 539 (HCA)............................................................... 155
Haydon v South Eastern District of the Workers’ Education Association (1972)
7 ITR 318....................................................................................................................... 284
Hayfin Opal Luxco 3 SARL v Windermere VII Cmbs Plc [2016] EWHC 782 (Ch)........ 129
Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 (HL)............................ 373
Heisler v Anglo-Dal Ltd [1954] 1 WLR 1273 (CA)............................................................. 13
Henjo Investments v Collins Marrickville (1988) 39 FCR 546......................................... 416
Henkle v Royal Exchange Assurance Co (1749) 1 Ves Sen 317; 27 ER 1055.................... 124
Henry v Henry [2010] UKPC 3; [2010] 1 All ER 988....................................................... 374
Herbert v Doyle [2010] EWCA Civ 1095; [2011] 1 EGLR 119......................................... 362
Hewett v Foster (1843) 6 Beav 259; 49 ER 825.................................................................. 300
Hickman v Haynes (1875) LR 10 CP 598.......................................................................... 368
Hickman v Turn and Wave Ltd [2011] NZCA 100; [2011] 3 NZLR 318......................... 144
Highland and Universal Properties Ltd v Safeway Properties Ltd 2000
SC 297..................................................................................................... 314, 319, 322-331
HIH Casualty & General Insurance Ltd v Chase Manhattan Bank [2001]
1 All ER (Comm) 719................................................................................................... 430
HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003]
UKHL 6; [2003] 2 Lloyd’s Rep 61...................................................................43, 430, 431
Hill v CA Parsons & Co Ltd [1972] Ch 305............................................................... 284, 291
Hirji Mulji v Cheong Yue Steamship Co Ltd [1926] AC 497 (PC (Hong Kong))............ 117
Hodgkinson v Simms [1994] 3 SCR 377........................................................................... 253
Holman v Johnson (1775) 1 Cowp 341; 98 ER 1120........................................................ 453
Homburg Houtimport BV v Agrosin Private Ltd (“The Starsin”) [2004]
1 AC 715 (HL)............................................................................................................... 174
Honda Canada Inc v Keays [2008] SCC 39; [2008] 2 SCR 362........................................ 247
Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962]
2 QB 26 (CA).................................................................................... 13, 14, 116, 131, 257,
258, 260-267, 269-274
Hooper v Brodrick (1840) 11 Sim 47; 59 ER 791.............................................................. 320
Hope v Premierspace (Europe) Ltd [1999] BPIR 695....................................................... 305
Hopgood v Brown [1955] 1 WLR 213 (CA)...................................................................... 364
Horkulak v Cantor Fitzgerald International [2004] EWCA Civ 1287;
[2005] ICR 402................................................................................................................ 48
Horsley v Cox (1868–69) LR 4 Ch App 92 (CA)............................................................... 307
Hospital Products Ltd v United States Surgical Corp (1984)
156 CLR 41 (HCA)............................................................................................... 109, 110
Hospitality Group Pty Ltd v Australian Rugby Union Ltd [2001] FCA 1040;
(2001) 110 FCR 157...................................................................................................... 467
Hounga v Allen [2014] UKSC 47; [2014] ICR 847...................... 18, 440, 443, 445, 446, 448
xxiv Contract in Commercial Law
Jacobs v Batavia & General Plantations Trust Ltd [1924] 2 Ch 329 (CA)........................ 180
JC Williamson Ltd v Lukey [1931] HCA 15; (1931) 45 CLR 282..................................... 470
Je Maintiendrai v Quaglia (1980) 26 SASR 101................................................................ 369
Jeancharm Ltd v Barnet Football Club [2003] EWCA Civ 58.......................................... 470
Jennings v Rice [2002] EWCA Civ 159; [2003] 1 FCR 501............................................... 374
Jenyns v Public Curator (1953) 90 CLR 113 (HCA)......................................................... 112
Jerome Francis v The Municipal Councillors of Kuala Lumpur [1962]
1 WLR 1411............................................................................................280, 281, 283, 284
Jervis v Harris [1996] Ch 195 (CA)................................................................................... 305
Jet Holding Ltd v Cooper Cameron (Singapore) Pte Ltd [2006] SGCA 20;
[2006] 3 SLR(R).................................................................................................... 275, 278
Jetivia SA v Bilta (UK) Ltd [2015] UKSC 23; [2015] 2 WLR 1168............ 437, 440, 444-446
Jeune v Queens Cross Properties Ltd [1974] Ch 97 (Ch D)............................................. 320
Jobson v Johnson [1989] 1 WLR 1026 (CA)....................................................................... 21
John v James [1991] FSR 397 (Ch D)................................................................................ 306
John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd [2010]
HCA 19; (2010) 241 CLR 1.................................................................................. 109, 110
Johnson v City of New York, 191 App Div 205, affd 231 NY 564..................................... 412
Johnson v Unisys Ltd [2001] UKHL 13; [2003] 1 AC 518.......................................... 37, 289
Jones, Re (1881) 18 Ch D 109 (CA)................................................................................... 307
Jones v Dowle (1841) 9 M & W 19; 152 ER 9.................................................................... 311
Jorden v Money (1854) 5 HL Cas 185................................................................................ 364
Jorian Properties Ltd v Zellenrath (1984) 46 OR (2d) 775............................................... 273
Table of Cases xxv
Kalisch-Jarcho, Inc v City of New York, 58 NY 2d 377; 448 NE 2d 413 (1983)............... 412
Karp, Matter of v Hults, 12 AD 2d 718, affd 9 NY 2d 857................................................ 412
Kation Pty Ltd v Lamru Pty Ltd [2009] NSWCA 145; (2009) 257 ALR 336................... 311
K D Morris & Sons Pty Ltd (in Liq) v Bank of Queensland Ltd (1980) 146 CLR 165....... 486
Kekewich v Manning (1851) 1 De G M&G 176; 42 ER 519.......................................391-396
Kellaway v Johnson (1842) 5 Beav 319; 49 ER 601 324..................................................... 300
Kelly v Solari (1841) 9 M & W 54; 152 ER 24...................................................................... 93
Kennedy v Panama, New Zealand, and Australian Royal Mail Co (1867)
LR 2 QB 580.................................................................................................................. 122
Kham and Nate’s Shoes No 2 Inc v First Bank of Whiting 908 F (2d) 1351
(7th Cir 1990)............................................................................................................... 243
Khan v Tyne & Wear Passenger Transport Executive [2015] UKUT 43 (LC).......... 304, 309
Kinane v Mackie-Conteh [2005] EWCA Civ 45; [2005] WTLR 345................................ 370
Knights v Wiffen (1869-70) LR 5 QB 660 (QBD)..................................................... 365, 366
Knott v Cottee (1852) 16 Beav 77; 51 ER 705.................................................................... 300
Kookmin Bank v Rainy Sky SA [2011] UKSC 50; [2011] 1 WLR 2900........................... 178
Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007]
HCA 61; (2007) 233 CLR 115.......................................................................116, 117, 272
Korda v Australian Executor Trustees (SA) Ltd [2015] HCA 6........................................ 138
Krawchuk v Ulrychova (1996) 40 Alta LR (3d) 196.......................................................... 273
Kudos Catering (UK) Limited v Manchester Central Convention Complex Limited
[2013] EWCA (Civ) 38; [2013] 2 Lloyd’s Rep 270...................................................... 426
L Albert & Son v Armstrong Rubber Co (1949) 178 F 2d 182 (2d Cir)................... 338, 340
Lady Shelburne v Earl of Inchiquin (1784) 1 BCC 338; 28 ER 1166................................ 124
Lahoud v Lahoud [2009] NSWSC 623.............................................................................. 341
Lake River v Carborundum Co 769 F2d 1284 (1985)....................................................... 474
Lampleigh v Brathwait (1615) Hob 105; 80 ER 255.......................................................... 100
Lancelot Shadwell v Cayley Shadwell [1860] 142 ER 62..................................................... 95
Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989)
166 CLR 623 (HCA)..................................................................................................... 120
Leading Edge Events Australia Pty Ltd v Kiri Te Kanawa [2007] NSWSC 228................ 363
Leda Holding Pty Ltd v Oraka Pty Ltd [1998] ANZ ConvR 582;
(1998) ATPR 41-601..................................................................................................... 432
Legione v Hateley (1983) 152 CLR 406 (HCA)........................................................... 73, 368
Lehndorff Canadian Pension Properties Ltd v Davis Management Ltd (1989)
59 DLR (4th) 1.............................................................................................................. 273
Les Laboratoires Servier v Apotex Inc [2014] UKSC 55; [2015] AC 430.................437, 442,
443, 445, 446
L’Estrange v F Graucob Ltd [1934] 2 KB 394 (KB)....................................408, 410, 418, 429
Leung Yee v Ng Yiu Ming [2001] 1 HKC 342.................................................................... 273
Levison v Patent Steam Carpet Cleaning Co Ltd [1978] QB 69....................................... 411
Lewis v Kation Pty Ltd [2006] NSWSC 480...................................................................... 311
Libertarian Investments Ltd v Hall [2013] HKCFA 93; (2013) 16 HKCFAR 681....... 300, 303
Lidl UK GmbH v Hertford Foods Ltd [2001] EWCA Civ 938......................................... 275
Life Insurance Co of Australia Ltd v Phillips (1925) 36 CLR 60 (HCA).......................... 107
Lion Nathan Australia Pty Ltd v Cooper Brewery Ltd [2006] FCAFC 144;
(2006) 156 FCR 1.............................................................................................................. 6
Lister & Co v Stubbs (1890) 45 Ch D 1 (CA).................................................................... 306
xxvi Contract in Commercial Law
M & J Polymers Ltd v Imerys Minerals Ltd [2008] EWHC 344 (Comm);
[2008] 1 Lloyd’s Rep 541...................................................................................... 272, 485
McCracken v Smith [2015] EWCA Civ 380; [2015] PIQR P19........................................ 446
McGreavy, Re [1950] Ch 269 (CA).................................................................................... 305
McGuinness v Norwich & Peterborough Building Society [2011] EWCA Civ 1286;
[2012] 2 All ER (Comm).............................................................................................. 305
McInerney v MacDonald [1992] 2 SCR 138...................................................................... 252
Mackay v Dick (1881) 6 App Cas 251 (HL)......................................................................... 11
Mackenzie v Coulson (1869) LR 8 EQ 368 (Ch)............................................................... 181
Mackenzie v Rees (1941) 65 CLR 1.................................................................................... 294
McKercher v The Renovation Store Ltd [2015] ABQB 748................................................ 23
Macquarie International Health Clinic Pty Ltd v Sydney South West Area
Heath Service [2010] NSWCA 268................................................................................ 11
McRae v Commonwealth Disposals Commission (1951) 84 CLR
377 (HCA)......................................................................................................338, 344, 353
Maggbury Pty Ltd v Hafele Aust Pty Ltd [2001] HCA 70; (2001) 210 CLR 181............. 130
Magnum Photo Supplies Ltd v Viko New Zealand Ltd [1999] 1 NZLR 395 (CA).......... 228
Magnus v Queensland National Bank (1888) 37 Ch D 466 (CA).................................... 300
Mahmoud and Ispahani, Re [1921] 2 KB 716 (CA).......................................................... 440
Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184;
(2014) 89 NSWLR 633..............................................................................6, 133, 168, 176
Makdessi v Cavendish Square Holdings BV [2013] EWCA Civ 1539 (Comm);
[2014] 2 All ER 125....................................................................................................... 465
Malec v JC Hutton Pty Ltd (1990) 169 CLR 638 (HCA)........... 334, 342, 344, 347, 352, 357
Malik v Bank of Credit and Commerce International SA [1998]
AC 20 (HL).......................................................................................................42, 288-290
Mannai Investment Co Ltd v Eagle Star Life Assurance Ltd [1997]
AC 749 (HL).......................................................................................................... 149, 170
Manning v English [2010] EWHC 153 (Ch); [2010] Bus LR D89................................... 306
Manor Asset Ltd v Demolition Services Ltd (Rev 1) [2016] EWHC 222
(QB TCC)..................................................................................................................... 129
Manwood and Burston’s Case (1587) 2 Leo 203; 74 ER 479.............................................. 66
Marac Life Assurance v Comr of Inland Revenue [1986] 1 NZLR 694 (CA).................. 115
Mariner International Hotels Ltd v Atlas Ltd (2007) 10 HKCFAR 1............................... 273
Marks and Spencer plc v BNP Paribas Securities Services Trust Company
(Jersey) Limited [2014] EWCA Civ 603; [2014] 2 P & CR DG 16..........144, 148, 149, 151,
156, 157, 159, 164, 166
Marks and Spencer plc v BNP Paribas Securities Services Trust Company
(Jersey) Limited [2015] UKSC 72; [2015] 3 WLR 1843............. 128, 129, 144, 148, 149,
151, 156, 157, 159, 164, 166
Marley v Rawlings [2014] UKSC 2; [2015] AC 129.................................................. 189, 190
Table of Cases xxvii
Marussia Communications Ireland Ltd v Manor Grand Prix Racing Ltd [2016]
EWHC 809 (Ch)........................................................................................................... 129
Massingberd’s Settlement, Re (1890) 63 LT 296 (CA)...................................................... 300
Masterton Homes Pty Ltd v Palm Assets Pty Ltd [2009] NSWCA 234;
(2009) 261 ALR 382.......................................................................................................... 6
MBF Investments Pty Ltd v Nolan [2011] VSCA 114........................................................... 6
Melanson v Dominion of Canada General Insurance Co [1934] 2 DLR 459.................. 294
Mendelssohn v Normand [1970] 1 QB 177 (CA)............................................................... 96
Mercantile Bank of Sydney v Taylor [1893] AC 317 (PC)................................................ 179
Mersey Steel & Iron Co Ltd v Naylor Benzon & Co (1884) 9 App Cas 434 (HL)............ 116
Metro-Goldwyn Mayer Pty Ltd v Greenham [1966] 2 NSWLR 717................................ 489
Metropolitan Bank v Heiron (1880) 5 Ex D 319 (CA)..................................................... 306
Metropolitan Electric Supply Co Ltd v Ginder [1901] 2 Ch 799 (Ch D)........................ 153
Metropolitan Salvage and Towage Ltd v Seamar Trading and Commerce Inc [2009]
EWCA Civ 531; [2010] 1 All ER (Comm) 1................................................................ 157
Micklethwait v Micklethwait (1857) 1 De G & J 504; 44 ER 818...................................... 307
Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd
(t/a Medirest) [2013] EWCA Civ 200...............................................................41, 53, 250
Miller v Miller [2011] HCA 9; (2011) 242 CLR 446....................................19, 435, 443, 448
Miller v Race (1758) 1 Burr 452; 97 ER 398........................................................................ 93
Mineralogy Pty Ltd v Sino Iron Pty Ltd (No 6) [2015] FCA 825..............360, 462, 476, 484
Minister of Health v Bellotti [1944] 1 KB 298 (CA)......................................................... 368
M’Intyre v Belcher (1863) 14 CBNS 654; 143 ER 602...................................................... 154
Mobil Oil Australia Ltd v Wellcome International Pty Ltd (1998) 81 FCR 475.............. 374
Moncrieff v Jamieson [2007] UKHL 42; [2007] 1 WLR 2620.......................................... 325
Moorgate Mercantile Co Ltd v Twitchings [1976] QB 225 (CA)..................................... 365
Morse v Tucker (1846) 5 Hare 79; 67 ER 835.................................................................... 304
Mortimer v Shortall (1842) 2 Dr & War 363..................................................................... 124
Moschi v Lep Air Services Ltd [1973] AC 331................................................................... 294
Mosely v Virgin (1796) 3 Ves Jun 184; 30 ER 959.............................................................. 124
Mosvolds Rederi A/S v Food Corp of India (The “Damodar General TJ Park”
and “King Theras”) [1986] 2 Lloyd’s Rep 68 (Comm Ct)...........................159-161, 163
Motivate Publishing v Hello Ltd [2015] EWHC 1554 (Ch)............................................. 360
Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2014] NSWCA 323............. 6
Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37;
(2015) 256 CLR 104...........................................................................................6, 176, 416
MSC Mediterranean Shipping Co SA v Cottonex Anstalt [2015]
EWHC 283 (Comm); [2015] 1 Lloyd’s Rep 359...........................................292, 306, 486
MSC Mediterranean Shipping Co SA v Cottonex Anstalt [2016] EWCA Civ 789............ 11
Murray v Earl of Stair (1823) 2 B & C 82.......................................................................... 460
Murray v Leisureplay Plc [2005] EWCA Civ 963; [2005] IRLR 946................................. 465
MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2016]
EWCA Civ 553.........................................................................................................98-100
Nant-y-Glo & Blaina Ironworks Co v Grave (1878) 12 Ch D 738 (Ch D)...................... 310
National Bank of New Zealand Ltd v Walpole & Patterson Ltd [1975] 2 NZLR 7.......... 303
National Mutual Life Association of Australasia Ltd v Federal Comr of
Taxation (Cth) (1959) 102 CLR 29 (HCA)................................................................. 115
National Westminster Bank Plc v Utrecht-America Finance Co [2001]
EWCA Civ 658; [2001] 3 All ER 733............................................................................ 421
Nelson v Greening & Sykes (Builders) Ltd [2007] EWCA Civ 1358;
[2008] 1 EGLR 59......................................................................................................... 384
Nelson v Nelson (1995) 184 CLR 538 (HCA).............................. 19, 438, 439, 446, 447, 452
New Zealand Shipping Co Ltd v AM Satterthwaite Co Ltd
(The Eurymedon) [1975] AC 154 (PC)......................................................................... 95
xxviii Contract in Commercial Law
Oak Mall Greenock Ltd v McDonald’s Restaurants Ltd [2003] ScotCS 135 (OH)......... 329
Obee v Bishop (1859) 1 De G, F & J 137; 45 ER 311......................................................... 307
Ocean Pride Maritime Limited Partnership v Qingdao Ocean Shipping Co [2007]
EWHC 2796; [2008] 2 All ER 330.................................................................................. 31
O’Connor v S P Bray Ltd (1936) 36 SR (NSW) 248 (Full Ct)............................................ 34
Okachi (Hong Kong) Co Ltd v Nominee (Holding) Ltd [2005] 3 HKC 408................... 273
Okachi (Hong Kong) Co Ltd v Nominee (Holding) Ltd [2006] HKCU 1932................. 273
Okachi (Hong Kong) Co Ltd v Nominee (Holding) Ltd [2007] HKCU 1942................. 273
Omak Maritime Ltd v Mamola Challenger Shipping Co Ltd [2010] EWHC 2026
(Comm); [2011] Bus LR 212................................................................................ 336, 375
Omega Air Inc v CAE Australia Pty Ltd [2015] NSWSC 802........................................... 417
Oriental Steamship Co v Taylor [1893] 2 QB 518 (CA)........................................... 146, 150
Osbaston v Garton (1587) Cro Eliz 91; 78 ER 350.............................................................. 66
OV v Members of the Board of Wesley Mission Council [2010] NSWCA 155;
(2010) 79 NSWLR 606................................................................................................. 108
Overgate Centre Ltd v William Low Supermarkets Ltd 1995 SLT 1181 (OH)........ 327, 328
Owners SP 62930 v Kell & Rigby Pty Ltd [2009] NSWSC 1342....................................... 417
Qantas Airways Ltd v Rolls-Royce plc [2010] FCA 1481...................................407, 432, 433
QBE Insurance (Australia) Ltd v SLE Worldwide Australia Pty [2005]
NSWSC 776; 13 ANZ Ins Cas 61–654......................................................................... 307
R (Best) v Chief Land Registrar [2015] EWCA Civ 17; [2016] QB 23............................. 443
R (on the application of Menston Action Group) v Bradford MDC [2016]
EWHC 127 (QB)........................................................................................................... 129
Raffles v Wichelhaus (1864) 2 H & C 906; 159 ER 375 (Ex).................................... 122, 371
Rainy Sky SA v Kookmin Bank [2011] UKSC 50; [2011] 1 WLR 2900.................7, 56, 127,
128, 427
Ramrod Investments Ltd v Matsumoto Shipyards Ltd (1990) 47 BCLR (2d) 86............ 273
Rann v Hughes (1778) 7 TR 350; 101 ER 1014................................................................... 68
RCR Tomlinson Ltd v Russell [2015] WASCA 154....................................................... 9, 133
xxx Contract in Commercial Law
RDC Concrete Pte Ltd v Sato Kogyo (S) Pte Ltd [2007] SGCA 39;
[2007] 4 SLR 413...................................................................... 14, 262, 267, 269, 270-274
Reading v R [1949] 2 KB 232 (CA).................................................................................... 306
Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976]
1 WLR 989 (HL)............................................................................................130-133, 138
Redman v Permanent Trustee Company of New South Wales Ltd (1916)
22 CLR 84 (HCA)......................................................................................................... 384
Reeve v Palmer (1858) 5 CB (NS) 84; 141 ER 33...................................................... 309, 311
Regency Villas Title Ltd v Diamond Resorts (Europe) Ltd [2015]
EWHC 3564 (Ch)......................................................................................................... 129
Regreen Asset Holdings Pty Ltd v Castricum Brothers Australia Pty Ltd [2015]
VSCA 286.......................................................................................................146, 150, 162
Reichman v Beveridge [2006] EWCA Civ 1659; [2007] Bus LR 412................................ 292
Reigate v Union Manufacturing Co (Ramsbottom) Ltd [1918] 1 KB 592 (CA)............. 162
Reinsurance Australia Corporation Limited v HIH Casualty & General Insurance
Limited (in liq) [2003] FCA 56; (2003) 254 ALR 29........................................... 430, 432
Repatriation Commission v Tsourounakis [2007] FCAFC 29......................................... 376
Retail Park Investments Ltd v The Royal Bank of Scotland (No 2)
1996 SC 227....................................................................................317, 327, 328, 329, 330
Reversion Fund & Insurance Co Ltd v Maison Cosway Ltd [1913]
1 KB 364 (CA)............................................................................................................... 307
Reynell v Sprye (1852) 1 De GM & G 660; 42 ER 710...................................................... 147
Reynette-James decd , In re [1976] 1 WLR 161 (Ch D).................................................... 189
Richardson v Richardson (1867) LR 3 Eq 686................................................................... 396
Riches v Hobgen [1985] 2 Qd R 292...........................................................371, 372, 374, 375
Ringrow Pty Ltd v BP Australia Pty Limited [2005] HCA 71;
(2005) 224 CLR 656.......................................................................418, 464, 468, 469, 488
Riverlate Properties Ltd v Paul [1975] Ch 133 (CA)................................................. 185, 228
Roadshow Entertainment Pty Ltd v (ACN 053 006 269) Pty Ltd Receiver
and Manager Appointed (1997) 42 NSWLR 462........................................................ 277
Robb v James [2014] NZCA 42.......................................................................................... 203
Roberts v Gill & Co [2010] UKSC 22; [2011] 1 AC 240................................................... 385
Roberts & Co Ltd v Leicestershire County Council [1961] Ch 555 (Ch D)............ 184, 185
Robinson v Harman (1848) 1 Ex Rep 850; 154 ER 363...................... 14, 334, 336, 337, 346,
349, 350, 355, 357, 471
Robophone Facilities Ltd v Blank [1966] 1 WLR 1428 (CA)..................................... 22, 463
Rose v Pim [1953] 2 QB 450 (CA)...............................168, 194-198, 204, 213, 223, 224, 225
Rosenblatt (A Firm) v Man Oil Group SA (13 April 2016, QBD).................................... 129
Ross v Ratcliff (1988) 91 FLR 66 (HCA)........................................................................... 438
Rowena Nominees Pty Ltd, Re; Ex p Conlan [2006] WASC 69;
(2006) 199 FLR 415.............................................................................................. 302, 306
Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002]
HCA 5; (2002) 240 CLR 45.......................................................................................... 130
Royal Brunei Airlines Sdn v Tan [1995] 2 AC 378 (PC)..................................................... 41
Russell v The Trustees of the Roman Catholic Church for the Archdiocese of
Sydney [2008] NSWCA 217......................................................................................... 289
Russo v Westpac Banking Corporation [2015] FCCA 1086............................................. 289
Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65;
(2007) 69 NSWLR 603............................................... 6, 131, 133-135, 168, 202-204, 224
Sotiros Shipping Inc and Aeco Maritime SA v Sameiet Solholt (“The Solholt”) [1983]
1 Lloyd’s Rep 605.......................................................................................................... 292
Soulsbury v Soulsbury [2007] EWCA Civ 969; [2008] 2 WLR 874.................................. 102
South Sydney District Rugby League Football Club Ltd v News Ltd [2000] FCA 1541;
(2000) 177 ALR 611...................................................................................................... 110
Spark’s Trusts, Re [1904] 1 Ch 451 (Ch).................................................................... 395, 396
Specialist Diagnostic Services Pty Ltd (formerly Symbion Pathology Pty Ltd) v
Healthscope Pty Ltd [2012] VSCA 175; (2012) 41 VR 1............................................. 156
Spectrum v Digital Plus [2005] UKHL 41; [2005] 2 AC 680.................................... 172, 485
Sports Connection Private Limited v Deuter Sports GmbH [2009] SGCA 22;
[2009] 3 SLR(R)............................................................................................................ 272
Squib v Wyn (1717) 1 P Wms 378; 24 ER 432................................................................... 385
St John Shipping Corp v Joseph Rank Ltd [1957] 1 QB 267 (QBD).......................440, 442,
447, 453
St Maximus Shipping Co Ltd v AP Moller-Maersk A/S [2014] EWHC 1643
(Comm)........................................................................................................................ 211
Stage Club Ltd v Millers Hotels Pty Ltd (1981) 150 CLR 535 (HCA)................................ 28
Standard Chartered Bank v Dorchester LNG (2) Ltd [2014] EWCA Civ 1382;
[2015] 1 Lloyd’s Rep 97................................................................................................ 304
State Trading Corp of India Ltd v M Golodetz Ltd [1989] 2 Lloyd’s Rep 277.........274, 275,
276, 278
Steel Wing Company, Ltd, Re [1921] 1 Ch 349 (Ch)........................................................ 385
Stevensdrake Ltd v Hunt [2016] EWHC 342 (Ch)............................................................ 129
Stewart v Kennedy (1890) 17 R 1............................................................................... 314, 324
Stilk v Myrick (1809) 2 Camp 317; 170 ER 1168............................................................ 4, 71
Stones v Cooke (1834) 7 Sim 22; 58 ER 745...................................................................... 307
Stratton Finance Pty Limited v Webb [2014] FCAFC 110;
(2014) 314 ALR 166...........................................................................................6, 176, 484
Streetscape Projects (Australia) Pty Ltd v City of Sydney [2013] NSWCA 2;
(2013) 85 NSWLR 196................................................................................................. 111
Strover v Strover [2005] EWHC 860 (Ch); [2005] WTLR 1245....................................... 360
Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd [2010] WASCA 222;
(2010) 41 WAR 318......................................................................................................... 11
Suisse-Atlantique Société d’Armement Maritime SA v NV Rotterdamsche
Kolen Centrale [1967] 1 AC 361 (HL)..........................................................406, 426, 427
Sullivan v Moody [2001] HCA 59; (2001) 207 CLR 562.................................................. 443
Sullivan v Sullivan [2006] NSWCA 312............................................................................. 374
Sunny Metal & Engineering Pte Ltd v Ng Khim Ming Eric [2006] SGHC 222;
[2007] 1 SLR (R) 853...................................................................................................... 77
Sutcliffe v Lloyd [2007] EWCA Civ 153; [2007] 2 EGLR 13......................360, 363, 366, 367
Sutherland v Jatkar [2014] FCA 532; (2014) 222 FCR 601............................................... 305
Suzlon Energy Ltd v Bangad [2014] FCA 1105................................................................. 306
Symonds, Ex p (1786) 1 Cox’s Eq Cas 200; 29 ER 1128 (LC)........................................... 124
Synergy Protection Agency Pty Ltd v North Sydney Leagues’ Club Limited [2009]
NSWCA 140...................................................................................................................... 6
Sze Hai Tong Bank Ltd v Rambler Cycle Co Ltd [1959] AC 576...................................... 411
Tanwar Enterprises Pty Ltd v Cauchi [2003] HCA 57; (2003) 217 CLR 315................... 477
Target Holdings Ltd v Redferns [1996] AC 421 (HL).........................................14, 297, 298,
302-304, 306, 308, 311
Tartsinis v Navona Management Company [2015] EWHC 57 (Comm).................168, 204,
211, 212, 218
Taylor v Johnson (1983) 151 CLR 422 (HCA).......................................................... 185, 205
Taylor v Oakes, Roncoroni & Co (1922) 127 LT 267 (CA)................................................. 13
Taylor v Taylor (1875) LR 20 Eq 155.................................................................................. 307
Table of Cases xxxiii
Trollope & Colls Ltd v North West Metropolitan Regional Hospital Board [1973]
1 WLR 601 (HL)........................................................................................................... 161
Truex v Toll [2009] EWHC 396 (Ch); [2009] 1 WLR 2121.............................................. 304
Trump International Golf Club Scotland Ltd v The Scottish Ministers (Scotland)
[2015] UKSC 74; [2016] WLR 85................................................................................ 128
TSB Bank Plc v Camfield [1995] 1 WLR 430 (CA)............................................................. 22
Tullett Prebon (Singapore) v Chua Leong Chuan Simon [2005] SGHC 150;
[2005] 4 SLR(R) 344..................................................................................................... 283
Tweddle v Atkinson (1861) 1 B & S 393; 121 ER 762.......................................................... 72
Uglow v Uglow [2004] EWCA Civ 987; [2004] WTLR 1183............................................ 373
Union Pacific Railway Co v Chicago, Rock Island and Pacific Railway Co
163 US 564 (1896)........................................................................................................ 320
United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904 (HL)......... 330
United States of America v Motor Trucks Ltd [1924] AC 196 (PC)................................. 190
Universal Management, Re [1983] NZLR 462................................................................... 485
Upton-on-Severn RDC v Powell [1942] 1 All ER 220 (CA)............................................... 95
Uvedale v Halfpenny (1723) 2 P Wms 151; 24 ER 677; 2 Eq Cas Abr 718 pl 4;
22 ER 604 (Ch, MR)..................................................................................................... 134
Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102 (HCA).............................. 22
Vandepitte v Preferred Accident Insurance Corpn of New York [1933] AC 70............... 401
Vandervell’s Trusts (No 2), Re [1974] Ch 269 (CA)............................................................ 93
Vantage Navigation Corp v Suhail and Saud Bahwan Building Materials
(The Alev) [1989] 1 Lloyd’s Rep 138 (QB).................................................................... 79
Vassis, Re; Ex p Leung (1986) 9 FCR 518............................................305, 306, 307, 309, 310
Vestergaard Frandsen A/S v Bestnet Europe Ltd [2013] UKSC 31;
[2013] 1 WLR 1556....................................................................................................... 156
Vine v National Dock Labour Board [1956] 1 QB 658..............................280, 283, 248, 286
Vine v National Dock Labour Board [1957] AC 488.................................280, 283, 284, 286
Visionhire Ltd v Britel Fund Trustees 1997 SLT 883 (IH)................................................ 330
Vizcaya Partners Ltd v Picard [2016] UKPC 5.................................................................. 129
Vodafone Pacific Ltd & Ors v Mobile Innovations Ltd [2004] NSWCA 15..................... 486
Voyle v Hughes (1854) 2 Sm&G 18; 65 ER 283................................................................. 393
Wee Kim San Lawrence Bernard v Robinson & Co (Singapore) Pte Ltd [2014]
SGCA 43; [2014] 4 SLR 357......................................................................................... 290
Wentworth v Rogers [2003] NSWSC 472.......................................................................... 307
Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669 (HL)................. 93
Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45;
(2011) 86 ALJR 1................................................................................................6, 175, 484
Westerton, Re [1919] 2 Ch 104 (Ch D)................................................................................ 18
Westland Savings Bank v Hancock [1987] 2 NZLR 21 (HC)........................................... 203
Whistler International Ltd v Kawasaki Kisen Kaisha Ltd (The “Hill Harmony”)
[2001] 1 AC 638 (HL)................................................................................................... 118
White v Jones [1995] 2 AC 207 (HL)................................................................................... 77
White v Shortall [2006] NSWSC 1379............................................................................... 309
White and Carter (Councils) Ltd v McGregor [1962] AC 413 (HL)................285, 286, 292,
306, 426
Whiten v Pilot Insurance Co 2002 SCC 18; [2002] 1 SCR 595................................... 12, 248
Wickstead v Browne (1992) 30 NSWLR 1......................................................................... 307
Wilkinson v Lloyd (1845) 7 QB 27; 115 ER 398................................................................ 299
William Banes’s Case (1611) 9 Co Rep 93b; 77 ER 869...................................................... 66
Williams v Roffey Bros & Nicholls (Contractors) Ltd [1990] 2 WLR 1153 (CA)............. 95
Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1 (CA)......... 4, 32, 71-75,
79, 96, 97
Williams Bros v Ed T Agius Ltd [1914] AC 510 (HL);.............................................. 374, 473
Wills v Trustees Executers & Agency Co Ltd (1900) 25 VLR 391..................................... 300
Wilson v Amerada Hess Corp 773 A 2d 1121 (NJ 2001).................................................. 244
Wilson v Darling Island Stevedoring and Lighterage Co Ltd (1956)
95 CLR 43 (HCA)........................................................................................................... 72
Wilson (Paal) & Co A/S v Partenreederei Hannah Blumenthal (The Hannah
Bluementhal) [1983] 1 AC 854 (HL)........................................................................... 228
Winter v Commonwealth of Australia (1992) 112 ACTR 10 (SC)..................................... 18
Woolwich Equitable Building Society v Inland Revenue Commissioners [1991]
3 WLR 790 (CA)........................................................................................................... 305
Woolwich Equitable Building Society v Inland Revenue Commissioners [1993]
AC 70 (HL).................................................................................................................... 436
Yam Seng Pte v International Trade Corporation Ltd [2013] EWHC 111 (QB);
[2013] 1 All ER (Comm) 1321..................................................11, 38-41, 51, 55, 58, 239,
240, 241, 245, 249, 250
Yanez v Canac Kitchens (2004) 45 CCEL (3d) 7 (Ont Sup Ct)................................ 246, 253
Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978)
139 CLR 410 (HCA)......................................................................................439, 441, 447
Yarrabee Chicken Company Pty Ltd v Steggles Ltd [2010] FCA 394............................... 362
Yaxley v Gotts [2000] Ch 162 (CA).................................................................................... 370
Yearworth v North Bristol NHS Trust [2009] EWCA Civ 37; [2010] QB 1..................... 373
Young v Lalic [2006] NSWSC 18........................................................................................ 372
Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15;
(2003) 212 CLR 484................................................................................................ 15, 302
Zhu v Treasurer of New South Wales [2004] HCA 56; (2004) 218 CLR 530........... 130, 132
Table of Statutes
Sale of Goods Act 1893: 264, 266 Wills Act 1837: 190
Introduction
James Edelman, James Goudkamp,
and Simone Degeling
Some time ago, a conference of extraordinary jurists and scholars was held in
order to discuss issues concerning contracts. Those issues included termination,
the duties of buyers and sellers, formalities and good faith. There was vigorous
debate. A book was written that addressed these issues at a high level of
principle. That book was not the present volume. It was Justinian’s Institutes.
However, a millennia and a half later, many of the same deep, structural issues
concerning contract law remain. The chapters in this volume, which derive from
a conference held in 2015, therefore reflect significant thought on foundational
issues that have been debated for hundreds of years.
Although the Roman jurists debated and considered many issues of contract
law that remain difficult today, they did not take the most significant step in
rationalising the law of contract as a unitary body. Roman law had a law of
contracts with different principles applying to different categories of contract.
Thus, Justinian’s Institutes provides that contracts “fall into four species, for
contract is concluded either by delivery, by a form of words, by writing or
by consent …”.1 Towards the end of the Empire, the Romans came close to
developing a unified law of contract. But the goal was never quite realised. In
England, the goal was achieved in the 19th century. One significant step was the
reforming legislation which curtailed, and then abolished, the forms of action.
Another was the decisions by judges to remove important contract issues
from juries, which allowed the law of contract to be specified by legal rules
to a greater extent than was previously the case. The emergence of a unified
law of contract was not solely the product of legislative and judicial reforms.
The judicial development of the law was heavily influenced by jurists, although
often without attribution. These jurists were not just the English writers such as
Addison, Anson, Chitty, Mayne, and Pollock. There was also a strong influence
from Continental writers, particularly Pothier whose work had been translated
in 1806 by Evans,2 and United States authors such as Benjamin, Story and Kent.
The structure of this book remains true to the existence of a law of contract,
not contracts. The concern is with principles and rules that inform contract as
a whole. But there are pressures on this unitary understanding. Some of those
1 J.3.13.2.
2 Robert Pothier, A Treatise on the Law of Obligations, or Contracts (tr by William Evans,
A Strahan 1806).
1
2 Contract in Commercial Law
3 See eg Peter McDonald Eggers, Simon Picken and Patrick Foss, Good Faith and Insurance
Contracts (3rd ed, Lloyd’s List 2010); Malcolm Clarke, The Law of Insurance Contracts (6th ed,
Informa Law 2009).
4 See eg Michael Bridge, Sale of Goods (3rd ed, OUP 2014); John Adams and Hector Macqueen,
Atiyah’s Sale of Goods (12th ed, OUP 2010).
5 Chris Willett, Fairness in Consumer Contracts: The Case of Unfair Terms (Ashgate Publishing
2007).
6 Hugh Beale (ed), Chitty on Contracts (32nd ed, Sweet & Maxwell 2015).
7 Influenced, for example, by the requirements of the Australian Consumer Law. See Competition
and Consumer Act 2010 (Cth) Sch 2.
8 Corporations Act 2001 (Cth) Pts 7.7–7.7A and 7.9.
9 [2016] UKSC 42; [2016] 3 WLR 399 [170].
10 Simone Degeling and James Edelman (eds), Equity in Commercial Law (Lawbook Co 2005);
Simone Degeling and James Edelman (eds), Unjust Enrichment in Commercial Law (Lawbook
Co 2008); Simone Degeling, James Edelman and James Goudkamp (eds), Torts in Commercial
Law (Lawbook Co 2011).
Ch 1 Introduction 3
to the nature of the law of contract. The first chapter focuses on the relational
contract and directs attention to the matter we have discussed above concerning
the fragmentation of contract and the role of context. The second focuses upon
when contractual rights can be waived.
Part B commences with an analysis by Professor Hugh Collins of the
relational contract. He considers two main questions. First, what does the idea
of a relational contract mean? Second, if the notion of relational contract applies
to a contract, does it have particular legal implications for the transaction,
such as an expansion of mandatory or supplementary duties of disclosure and
obligations to perform in good faith? Collins proposes a concept of relational
contracts that emphasises the economic significance of indeterminate implicit
obligations and which supports the development of a contextual approach to
interpretation and the insertion of implied obligations of co-operation and
mutual trust and confidence.
Chief Justice Bathurst then directs attention to the doctrine of waiver
as explained by the High Court in Agricultural and Rural Finance Pty Ltd v
Gardiner.11 The question in that case was whether a party to a contract of
indemnity had waived a punctual payment condition. Bathurst begins his
analysis by observing the difficulty created by the tendency to use the language
of “waiver” to mean a variety of different things. Bathurst then makes a series of
claims regarding Gardiner. First, he contends that there is now some doubt as to
whether waiver, in the sense of forbearance, exists as an independent principle.
The Chief Justice observes that waiver in this sense might have been subsumed
within the doctrines of estoppel, election or variation. Second, his Honour
argues that waiver, in the sense of a unilateral release, has been extinguished
or fundamentally altered to such an extent that it is indistinguishable from
election.12 Third, the Chief Justice asserts that, pursuant to Gardiner, “the law
of election and unilateral release will not recognise the modification of terms
that can be exercised indefinitely.”13 Fourth, and following from his three
previous claims, the Chief Justice suggests that the law may have arrived at
an overly restrictive understanding of the concept of waiver. More expansive
regimes have been embraced in a number of other common law jurisdictions.
His conclusion is that there may be:14
“good reasons why, when contracts are modified by unilateral release in
regards to rights that can be exercised indefinitely, and election is incapable of
operating, courts should either: find consideration in the form of a ‘practical
benefit’ more easily, or deem evidence of consensus of the modification, absent
duress or fraud, as sufficient.”
Formation
Part C of this book turns to questions regarding formation. In many instances
these questions of formation are routine and simply assumed by the parties.
But deep questions lurk below the surface. For instance, the basic contractual
agreement is bilateral. It is the engine of commerce involving the acceptance
by one party of an offer made by the other. But deeds can be unilateral, and
binding even without the promisee’s knowledge of the promise. Are deeds
contracts? Letters of credit are binding without any reciprocal promise. Are
they contracts? Can contracts therefore be formed unilaterally without conduct
by the promisee?
The doctrine of consideration lies at the heart of this issue. That doctrine
is founded on some notion of reciprocity such that in order to attract
contractual enforceability, the promisee should have given “something
of value in the eye of the law”15 in exchange for the promise. Long ago,
Lord Mansfield deprecated the concept.16 Although judicial doubts about
the doctrine of consideration lay dormant for some time in Australia, question
marks have hovered over it, at least since Trident General Insurance Co Ltd
v McNiece Bros Pty Ltd17 was decided nearly 30 years. The developments in
relation to estoppel since Lord Denning’s stunning extempore decision in
Central London Property Trust Ltd v High Trees House Ltd18 have led many
scholars to question the purpose of a doctrine that can be evaded so easily.
In England and Canada, questions surrounding consideration are further
complicated by its emasculation by (in the case of England) the Contracts
(Rights of Third Parties) Act 1999 and (in the case of Canada) the Supreme
Court’s decisions in cases such as London Drugs v Kuehne & Nagel International
Ltd19 and Fraser River Pile & Dredge Ltd v Can-Dive Services Ltd.20
Consideration is addressed by Justice Kiefel in her chapter in this volume.
Her Honour focuses on understanding its historical origins. In her excursus,
Kiefel traces the doctrine’s origins to the Roman law principle ex nudo pacto
non oritur actio (“no right of action arises out of a naked promise”). She then
tracks its development in medieval law noting the influences in this regard
of civilian law, especially the latter’s concept of causa, that is, the notion
that for an agreement to be enforceable it must be based on a lawful cause.
Kiefel emphasises that a proper appreciation of the doctrine of consideration
requires that attention be given to related rules and their history. She singles
out for special mention in this regard the principle that an agreement will
be enforceable only if there was an intention to create legal relations. Her
Honour observes that that rule is allied with the doctrine of consideration
in so far as both doctrines express anxiety regarding gratuitous promises.
Kiefel then addresses the authorities concerned with variation of prior
agreements. She canvasses the retreat, exemplified by the English Court of
Appeal’s judgment in Williams v Roffey Bros & Nicholls (Contractors) Ltd,21
from the strictures of the decision in Stilk v Myrick.22 Finally, Kiefel traces the
rise of the doctrine of promissory estoppel and explains how that doctrine
intersects with the law governing consideration. Her Honour regards the
rules regarding promissory estoppel as one of the reasons for the apparent
decline in the number of cases in which the absence of consideration
is alleged.
The doctrine of consideration is also addressed by Professor Chen-Wishart.
She explores the ongoing controversy in this area through the lens of the
report of the 1937 Law Revision Committee.23 The Committee proposed
the “prun[ing] away from the doctrine those aspects of it which can create
hardship or cause unnecessary inconvenience”24 thus recommending partial
repeal rather than wholesale abolition of the doctrine. The focus of the
Committee was to identify the following types of promise, which it argued
should be binding without consideration: (i) promises in writing; (ii) promises
that induce foreseeable reliance; (iii) promises to do what one is already bound
to do; (iv) promises to accept part payments in discharge of the whole debt;
(v) promises for past consideration; and (vi) promises to keep offers open for
a definite period. Emphasising the need for a temporal connection between
one party’s performance and the other’s later promise to pay,25 Chen-Wishart
suggests that rather than dispensing with the doctrine of consideration, the
common law should accommodate past consideration on a principled basis.
If a promise is later made, there is, she argues, no difficulty in finding that the
performance and the promise are sufficiently linked for the performance to
constitute consideration for that promise.
23 Law Revision Committee, Sixth Interim Report (Statute of Frauds and the Doctrine of
Consideration) (Cmd 5499, 1937).
24 Law Revision Committee (n 25) para 27.
25 Referring to Pao On v Lau Yiu Long [1980] AC 614 (PC) 630.
26 Thomas Bathurst, “Book Launch: The Interpretation of Contracts in Australia”, 29 November
2011, http://www.austlii.edu.au/au/journals/NSWJSchol/2011/41.pdf.
27 See eg Kim Lewison, The Interpretation of Contracts (5th ed, Sweet & Maxwell 2013);
Kim Lewison and David Hughes, The Interpretation of Contracts in Australia (Thomson
Reuters 2011); Gerard McMeel, The Construction of Contracts (2nd ed, OUP 2011); Joshua
Thomson, Leigh Warnick and Kenneth Martin, Commercial Contract Clauses: Principles and
Interpretation (Thomson Reuters 2012); JW Carter, The Construction of Commercial Contracts
(Hart Publishing 2013).
6 Contract in Commercial Law
28 Getzler, p 130.
29 Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45; (2011) 86 ALJR 1.
30 Cape Lambert Resources Ltd v MCC Australia Sanjin Mining Pty Ltd [2013] WASCA 66 [107].
See also Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd [2014]
WASCA 164.
31 Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 (HCA) 352.
32 Anthony Mason, “Opening Address” (2009) 25 JCL 1, 3.
33 Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65; (2007) 69 NSWLR 603 [107]–[109]
(Tobias JA, with whom Mason P and Campbell JA agreed); Synergy Protection Agency Pty Ltd v
North Sydney Leagues’ Club Limited [2009] NSWCA 140 [22] (Allsop P, with whom Tobias and
Basten JJA agreed); Masterton Homes Pty Ltd v Palm Assets Pty Ltd [2009] NSWCA 234; (2009)
261 ALR 382 [1]–[3] (Allsop P, with whom Basten JA agreed), [113] (Campbell JA).
34 MBF Investments Pty Ltd v Nolan [2011] VSCA 114 [198]–[203] (the Court).
35 Lion Nathan Australia Pty Ltd v Cooper Brewery Ltd [2006] FCAFC 144; (2006) 156 FCR 1 [45]–[52]
(Weinberg J), 22 [100] (Kenny J), 48 [238] (Lander J).
36 Electricity Generation Corporation t/as Verve Energy v Woodside [2014] HCA 9; (2014) 88
ALJR 473.
37 Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184; (2014) 89 NSWLR 633.
38 Stratton Finance Pty Limited v Webb [2014] FCAFC 110; (2014) 314 ALR 166.
39 Wambo Coal Pty Ltd v Sumiseki Materials Co Ltd [2014] NSWCA 326; (2014) 290 FLR 18; Newey
v Westpac Banking Corporation [2014] NSWCA 319; Mount Bruce Mining Pty Ltd v Wright
Prospecting Pty Ltd [2014] NSWCA 323; CPSU, the Community and Public Sector Union v State of
Victoria (Department of Justice) [2014] FWCFB 6153. Cf Technomin Australia Pty Ltd v XStrata
Nickel Australasia Operations Pty Ltd [2014] WASCA 164.
40 The issue was not decided in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015]
HCA 37; (2015) 256 CLR 104.
41 Stevens, p 176.
42 Getzler, p 133.
Ch 1 Introduction 7
intentions. There are two difficulties which must be confronted. The first is the
concept of intention and the second is the notion of common sense.
As for intention, this word has caused numerous problems in the law of
contract. The language of “intention” in the law of contract became prominent
in the modern law as a result of Pothier’s treatise on The Law of Contracts.46
Prior to the end of the 18th century the operation of contract, within the highly
formal structure of the forms of action, was objective. But Pothier, influenced by
Rousseau, propounded a Will theory of contract. He saw contract as concerned
with the true (ie subjective) intentions of the parties. The will theory of contract
had powerful supporters. Aside from Pothier, another version of it was adopted
in post-Napoleonic Germany by von Savigny, who was strongly influenced by
Kant. The work of Pothier crossed the channel when his treatise was translated
into English by Sir William Evans in 1806. The Will theory very nearly caught
on in English law. There remain traces of it in the law relating to mistake in
contract. But unlike in France, it did not generally prevail in England. Neither
did it take root in Australia or the United States.
The second difficulty with Lord Neuberger’s formulation in Arnold v Britton
is the use of “common sense”. His Lordship emphasised that commercial
common sense “is only relevant to the extent of how matters would or could
have been perceived by the parties, or by reasonable people in the position
of the parties …”.47 Lord Neuberger cautioned against undervaluing “the
importance of the language of the provision which is to be constructed”48
and invoking “commercial common sense retrospectively”.49 These objective
approaches are laudable, but it is questionable whether the use of “common
sense” or “commercial common sense” is likely to assist. Many of the cases where
“commercial common sense” is invoked are cases where the “sense” is far from
common. Different judges reach different conclusions. No expert evidence
about commercial expectations is given. The judges are not law merchants.
There are also difficult questions that arise in relation to judicial methodology
as well as contract theory. The application of commercial common sense,
in the absence of a law merchant, arguably involves a controversial judicial
deployment of public policy or a submersion of articulated principle by
reference to the apparently attractive call for common sense. The issue
has been raised particularly acutely in the context of the United Kingdom
Supreme Court’s recent jurisprudence on the illegality doctrine, to which we
return below.50
Closely associated with issues of interpretation are questions of rectification.
The broader the operation of interpretation principles, the less scope there is
for the doctrine of rectification. In other words, the greater the amount of
red ink that can be spilled in the interpretation of an agreement, the less will
be the need to resort to the technique of rectifying the agreement. Professor
Burrows has suggested that there may be no role left for rectification in England
following Lord Hoffmann’s exposition of the principles governing construction
46 Pothier (n 2).
47 Arnold (n 45) [19].
48 Arnold (n 45) [17].
49 Arnold (n 45) [19].
50 See the text accompanying nn 108–31.
Ch 1 Introduction 9
to illustrate the need for a subjective approach. One example that he gives is
as follows:61
“C leases a building to D. The executed lease places the obligation to pay rates
on C. The actual intention of each party was that D was to pay the rates. This
is verified by internal company minutes and memoranda, but there were no
communications between the parties prior to execution of the lease to show
that there was an outward expression of accord on the point. D pays the
first two instalments of rates but then realises that the lease obliges C to pay.
C seeks rectification of the lease.”
English and Australian law, for different reasons, would deny rectification
in this example. McLauchlan sees this result, which is a contract that neither
party intended, as unjust. He also argues that the decision in Frederick E Rose
(London) Ltd v William H Pim Junior & Co Ltd62 might have to be justified
on a more limited basis: that the mistake of the parties was concerned with
assumptions that they had made: it was a mistake about the contract not
a mistake in the contract. He observes that even those jurists, such as Lord
Hoffmann, who favour an objective approach to rectification, are forced to
concede that “unilateral mistake rectification” is solely concerned with the
subjective intentions of the parties.
A different approach is supported by Professor Stevens. He begins by setting
out the three competing views of rectification. The first is that the courts rectify
instruments that are suggested to have been made in pursuance of a contract.
This understanding, Stevens argues, involves taking one’s eye off the ball. What
matters, he argues, are the parties’ rights, and they are unaffected by whatever
the courts say that they are doing to instruments, which “are merely pieces of
paper.” The second is the view, exemplified by McLauchlan’s argument, that
courts rectify the parties’ objective agreement so that it conforms to their
subjective intentions. Stevens rejects this view as an unjustified departure of
the objective theory of contract which is based upon the nature of language.
The approach to rectification that Stevens embraces is one that is subjective
but only in the sense that it involves partial rescission of an express or implied
contract term. The term rescinded, Stevens claims, is the term of the parties’
agreement that their written terms are the entire agreement. What we are left
with, when the doctrine of rectification is enlivened, he argues, is the agreement
that the parties have entered by their (objective) words or conduct, absent their
reduction of it to a single written document. The account illuminates potentially
close connections between the law of rectification and that governing vitiating
factors. The idea is that defects in intention that permit a contract to be set
aside ought also to permit rectification.
A controversial aspect of the law of contract is the operation of the
principle of good faith. In this area of contract law, as in many others, much
may depend upon terminology. On one view, the phrase “good faith” might not
describe a single positive duty at all but, instead, is a principle seen in various
manifestations of particular duties. That view is apparent in the decision of
the New South Wales Court of Appeal in Macquarie International Health Clinic
61 McLauchlan, p 202.
62 [1953] 2 QB 450 (CA).
Ch 1 Introduction 11
Pty Ltd v Sydney South West Area Heath Service.63 On this way of understanding
the concept of good faith, a duty of good faith cannot sensibly be implied
indiscriminately into commercial contracts. Another view is that a duty of good
faith is not merely a principle but a rule which requires that powers that affect
another contracting party be exercised in a manner that is both honest and
reasonable in all the circumstances. Such implications concerning both honesty
and reasonableness in the exercise of powers permeate many areas of law in
addition to contract law, including property law, administrative law, the law of
trusts, and insolvency law. Such an approach already exists in various areas
of contract discretion including the well-recognised example of the obligation
to co-operate to achieve contractual objectives.64
Jurisdictions are also divided about whether good faith is an obligation
imposed by law or as a matter of construction of the parties’ intention. In
England, in Yam Seng Pte v International Trade Corporation Ltd65 Leggatt J held
that “there is nothing novel or foreign to English law in recognising an implied
duty of good faith in the performance of contracts”.66 On the other hand, a
more recent decision of the Court of Appeal saw good faith as a threat to the
express or implied terms agreed by the parties suggesting that there is a “real
danger that if a general principle of good faith were established it would be
invoked as often to undermine as to support the terms in which the parties have
reached agreement”.67 Another way of expressing the difference in approach
might be to say that those who see good faith as a genuine implication from the
terms of the parties’ agreement often use the label as a principle to describe a
number of different specific implied rules. In contrast, those who see good faith
as an imposed term are concerned to avoid imposing upon the parties any term
other than those to which they have manifested their agreement. For instance,
the view that good faith is a general principle derived from the terms which the
parties have agreed led to the New South Wales Court of Appeal in the leading
Australian decision in Macquarie International Health Clinic68 to treat the
obligation of good faith as encompassing at least the three rules: namely,
(i) an obligation on the parties to co-operate in achieving the contractual
objects; (ii) compliance with honest standards of conduct; and (iii) compliance
with standards of conduct that are reasonable having regard to the interests of
the parties. On the other hand, the view that good faith is an imposed rule might
have led Pullin JA (with whom Newnes JA agreed) in the Western Australian
Court of Appeal in Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd69 to suggest
that the natural and ordinary meaning of good faith required only that parties
deal with each other honestly.
where money had been paid out from it without authority. In contrast, the
solicitors argued that they should be liable to compensate the lender only for
the loss it suffered in a damages-like measure for breach of trust. That loss was
considerably less than the amount paid out because the lender had obtained
hopelessly inadequate security and the borrower was bankrupt. The Supreme
Court found in favour of the solicitors. Tettenborn supports this conclusion,
arguing that to allow the lender to recover more than it lost is neither legally
correct nor a just result. It is likely, however, that Australian courts would take a
different approach.93 Most importantly, the decision illustrates the importance
of a clear understanding of the difference between debt and damages.
A primary remedy in the contract law setting is that of specific performance.
In Cooperative Insurance Society Ltd v Argyll Stores (Holdings) Ltd,94 a decision
of the House of Lords that has been relied upon many times in Australia,95 Lord
Hoffmann considered some of the most basic principles concerning the award
of specific relief following a threatened breach of contract. He observed that the
principles in common law and civilian systems might not be so different from
each other despite the civilian position in countries like France or Germany
that a plaintiff is prima facie entitled to specific performance. Delivering the
decision of the House of Lords, Lord Hoffmann refused to order specific
performance to require a business to continue to be run via a so-called “keep
open” clause. However, very shortly after that decision was delivered, the Inner
House of the Scottish Court of Session took a civilian approach to a similar
case and reached the opposite conclusion.96 Lord Penrose granted a decree of
specific implement (the Scottish equivalent of specific performance) of the
“keep open” clause.97
Lord Hope of Craighead, in Chapter 14, considers the Scottish remedy of
specific implement. He does so alongside the common law remedy of specific
performance. The basic rule in the Scots law of obligations is that a party has a
right to sue for implement of the contract, and that party cannot be compelled
to resort to the alternative action in damages. By contrast, the starting point in
the common law is that the remedy to which a plaintiff is entitled as of right is
that of damages. Specific performance, an equitable remedy, depends upon the
adequacy of common law remedies.98 The availability of specific performance
is subject to further discretionary considerations grouped by Hope as follows:
(i) the difficulty, waste of time and expense of litigation that would result
from supervision of the order for specific performance by the court; (ii) the
93 Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15; (2003) 212 CLR 484. See WMC
Gummow, “Three Cases of Misapplication of a Solicitor’s Trust Account” (2015) 41 ABR 5.
94 [1998] AC 1 (HL).
95 See eg Patrick Stevedores v MUA (1998) 195 CLR 1 (HCA); Waterways Authority of New South
Wales v Coal & Allies (Operations) Pty Limited [2007] NSWCA 276; Port Kennedy Resorts Pty Ltd
v Huat [2000] WASCA 328.
96 Highland and Universal Properties Ltd v Safeway Properties Ltd 2000 SC 297.
97 Lord Hope notes that the judgement of Lord Penrose is not reported, but that the case went
on appeal to the Inner House of the Court of Session. For reasons were given for its decision on
1 February 2000 to affirm the decision of the Lord Ordinary, subject only to a minor change to
the wording of his order: Highland and Universal Properties Ltd v Safeway Properties Ltd 2000
SC 297; 2000 SLT 414.
98 Dougan v Ley (1946) 71 CLR 142 (HCA) 150 (Dixon J), 153 (Williams J).
16 Contract in Commercial Law
undesirable effect of the order on the party against whom it was made; and
(iii) the public interest in bringing litigation to an end and the undesirability of
judges being required to make an order which lacks precision under the threat
of imprisonment. Given its nature as the ordinary remedy to which a party
to the contract is entitled, specific implement does not have to accommodate
itself to these concerns. It is informed by the normative position that there is
no difficulty in a defendant being held to his contract if the performance of
the obligation is what he has undertaken to do. Therefore, these discretionary
considerations that are necessary in the implementation of specific performance
are irrelevant. Given the different starting points of the civilian Scots law and
English common law, Hope suggests that the differences between these two
remedies of performance are likely to grow.
Moving from specific performance to damages for breach, Dr Winterton
addresses the question of whether a promisee who is unable to prove that
he or she would have made a net profit from the contract’s performance can
nevertheless recover reasonable expenditure incurred, but not recouped, in
preparing for such performance. In Australia, the leading decision on this
issue is Commonwealth v Amann Aviation Pty Ltd.99 Winterton considers
this decision in detail. He concludes that some reasoning in the decision is
difficult to justify. He argues that there should not be any “legal presumption”
that an innocent party would recoup expenditure incurred prior to a
repudiation and that in calculating damages there should be a discount to
reflect countervailing contingencies which are proved. Winterton also contends
that if the promisee cannot establish with sufficient certainty that he or she
would have recouped its reasonably wasted expenditure, then the law might
develop rules of contribution to attribute to the wrongdoer responsibility for a
proportionate share of some or all of the wasted expenditure. As to the result of
the case, he argues that the dissent of McHugh J should be preferred.
106 The doctrine has been described as posing an “intractable” problem (Jane Swanton, “Plaintiff a
Wrongdoer: Joint Complicity in an Illegal Enterprise as a Defence to Negligence” (1981) 9 Syd
LR 304, 331); a “vexed issue” (Winter v Commonwealth of Australia (1992) 112 ACTR 10 (SC)
22); and a “conundrum” (Charles Debattista, “Ex Turpi Causa Returns to the English Law of
Torts: Taking Advantage of a Wrong Way Out” (1984) 13 Anglo-American LR 15, 27).
107 For contemporaneous conspectuses of the law in this regard, see James Goudkamp, “A Long,
Hard Look at Gray v Thames Trains Ltd” in Paul Davies and Justine Pila (eds), The Jurisprudence
of Lord Hoffmann (Hart Publishing 2015) ch 4; James Goudkamp, “The Doctrine of Illegality:
A Private Law Hydra” (2015) 6 UKSCY 254.
108 Gray v Thames Trains Ltd [2009] UKHL 33; [2009] AC 1339.
109 Cross v Kirkby, The Times, 5 April, 2000 (CA).
110 Tinsley v Milligan [1994] 1 AC 340 (HL).
111 Hounga v Allen [2014] UKSC 47; [2014] ICR 847.
112 Hounga (n 111) [54].
113 Jonathan Mance, “Ex Turpi Causa – When Latin Avoids Liability” (2014) 18 Edin LR 175, 192.
114 Jonathan Sumption, “Reflections on the Law of Illegality” (2012) 20 RLR 1, 8–12.
115 The Law Commission had previously investigated the illegality doctrine extensively: see,
especially, Law Commission, The Illegality Defence (No 320, 2010).
116 Bilta (UK) Ltd (in liq) v Nazir (No 2) [2015] UKSC 23; [2016] AC 1 [15].
117 Patel (n 9) (discussed in James Goudkamp, “The End of an Era? Illegality in Private Law in the
Supreme Court” (2017) 133 LQR 14).
Ch 1 Introduction 19
The case concerned a payment of £620,000 from Mr Patel to Mr Mirza for the
purpose of betting on movements in the price of shares. Mr Mirza was expected
to do so using inside information. However, Mr Mirza did not obtain the inside
information and the intended bet did not take place. Mr Mirza refused to
repay the money. The Supreme Court unanimously allowed Mr Patel’s claim.
Although Patel clarifies the legal position to a degree, uncertainty remains in
the United Kingdom. Several shades of approach were taken even within the
majority discretionary approach in Patel.118 Furthermore, there may be doubt
about whether the decision extends beyond the context of unjust enrichment.
In contrast with the position in the United Kingdom, a détente appears to
have been reached in Australia. Whereas it is unclear whether the approach
preferred in Patel applies across private law, at common law a uniform
approach to illegality across the law of trusts,119 the law of torts,120 the law of
unjust enrichment121 as well as the law of contract122 has been developed.123
The Australian rule, in essence, is that the application of the illegality doctrine
depends upon the “policy” of the statutory or common law rule that the plaintiff
violated. The concern is one of coherence of the law and the doctrine will apply
if an intention to render private law rights of the plaintiff ineffective can be
discerned. As Deane and Gummow JJ put it in Nelson v Nelson, which is the
decision that pioneered this approach, “if the illegality consists in the violation
of a statute, courts will give or refuse relief depending upon the fundamental
purpose of the statute.”124 The High Court’s understanding of the law of illegality
has been supported by some writers125 but criticised by others.126 It might be
doubted whether the Australian approach would have produced the same
conclusion reached by the unanimous Supreme Court on the facts in Patel.
A conspiracy to commit insider dealing, the turpitude in issue in Patel, was an
offence under s 52 of the Criminal Justice Act 1993 (UK). The state had wide
powers to confiscate, under the Proceeds of Crime Act 2002 (UK), the benefit
obtained from that offence, which would include the payment to Mr Mirza.
A different result might have been reached by application of the Australian
approach based on a stultification of the statutory confiscation scheme if the
proceeds were repaid to Mr Patel.
Burrows argues in his chapter for the policy-based approach embraced by
the majority in Patel. He contrasts it with the rule-based reliance approach, with
which it vied for supremacy, the latter test having been passionately argued for
127 See also Andrew Burrows, A Restatement of the English Law of Unjust Enrichment (OUP 2012) s 28.
128 [1993] 2 SCR 159.
129 See pp 6–7.
130 Graham Virgo, “Judicial Discretion in the UK Supreme Court” (2015) 6 UKSCY 233.
131 [2015] UKSC 67; [2015] 3 WLR 1373, on appeal from [2013] EWCA Civ 1539; [2014] 2 All ER
(Comm) 125.
Ch 1 Introduction 21
a legitimate interest in doing so. In contrast, only a few years earlier, the High
Court of Australia in Andrews v Australia and New Zealand Banking Group
Ltd132 held that the doctrine applied even in cases where no breach of contract
had occurred.
In view of the decisions in Makdessi and Andrews, at least three major
distinctions exist between English and Australian law concerning penalties. The
first is that Australian law, unlike English law, does not insist upon a breach of
contract before a clause will be struck down as penal. Second, in Australia a
clause will be struck down as penal only to the extent that it is extravagant or
unconscionable. Conversely, a majority of the court in Makdessi who addressed
this issue flatly denied this possibility (and rejected the contrary Court of
Appeal authority in Jobson v Johnson133). Third, it appeared that Australian
law did not recognise the “legitimate interest” test, preferring instead the more
traditional dichotomy in the context of contractual clauses between a clause
which is penal because it is disproportionate to any actual loss that could be
suffered and extravagant and unconscionable, and one which is compensatory.
However, as this book was going to press, the High Court of Australia handed
down another decision on the law of penalties. In that case, Paciocco v Australia
and New Zealand Banking Group Limited,134 a majority held that late fees which
were payable by customers to banks were not penalties. A heavy focus of the
court, like the decision below in the Full Federal Court in the same case,135 was
upon the legitimate interests that the bank sought to protect.
The first of these differences (whether the penalty doctrine is subject to
a breach limitation), despite the force of the English denial of the Australian
approach, may prove to be insubstantial. The Australian approach means that
a clause in a unilateral undertaking, such as a performance bond or letter of
credit, can be scrutinised to determine whether it is a penalty. But it would
seem unlikely that the English approach would uphold a clause which, in form,
was not conditional upon breach but in substance had that effect. For instance,
imagine a clause which provided that a builder was entitled to payment of
$5 million for minor works if completion occurred by 1 December 2016 but
only $250,000 if completion occurred after that date and by 1 January 2017. If
there were no real loss to the owner if completion were delayed until 1 January
2017, it is very unlikely that the $5 million payment clause would be upheld.
Although Lords Neuberger and Sumption (with whom Lord Carnwath agreed)
said that the application of the penalty rule can still turn on questions of
drafting,136 they also said that “the classification of terms for the purpose of the
penalty rule depends on the substance of the term and not on its form or on
the label which the parties have chosen to attach to it” and that the intention as
expressed in the agreement is never conclusive and may be overruled or ignored
if the court considers that even its clear expression does not represent “the real
nature of the transaction” or what “in truth” it is taken to be.137
The second difference may run deeper. The Justices of the United Kingdom
Supreme Court who denied the possibility of a penalty being only partially
unenforceable did so on the ground that to proceed otherwise would involve
rewriting the terms of the contract. Although the Supreme Court did not say
so, this conclusion is also consistent with the refusal of English courts (but
not Australian courts) to allow partial rescission.138 But there may be much
more to be said in a dialogue between these courts about the notion of
partial unenforceability or partial rescission. After all, many well-established
remedies could be characterised as partial enforcement: almost every case of
specific performance involves partial enforcement of a bargain, that is to say,
performance of obligations other than the obligation concerning the date
of performance.
Any difference in approach of these courts to the law of penalties, as well
as the potential difference in application, will (or should) depend upon the
rationale for the doctrine. Identification of that rationale has proved elusive.
Diplock LJ remarked in one leading penalties cases that he had made “no
attempt, where so many others have failed, to rationalise this common law
rule”.139 The chapter by Mr Tiverios seeks to fill this extremely significant gap.
Tiverios argues that the penalties doctrine serves the purpose of ensuring that
where the purpose of one right is to provide security for the performance of
a primary stipulation, it would be a penalty if the right were formulated to
go beyond that purpose. This construction-based approach has a close fit
with Australian law. It explains why the doctrine is not limited to clauses
that operate upon breach. It explains why the doctrine only strikes down
clauses to the extent to which they go beyond their purpose. And it explains
the “legitimate interest” criterion as one which is concerned with the extent
to which security is legitimate. However, there remains deeper questions of
why the doctrine of penalties should have this rationale and why the law
should control the provision of monetary security for performance in this
way. Tiverios sees the answer to these questions as lying in the function
of damages as a monetised form of the primary right. A competing view of
damages, which might explain the English but not the Australian approach,
is that remedies for breach of contract are a legally imposed regime designed,
as far as is reasonable, to eradicate the consequences of the breach. Parties
can agree to restrict or waive their rights to damages under that regime but
they cannot agree to increase them. Hence, if contractual terms attempt to
increase the damages by providing for an extravagant amount, rather than
to quantify it (by liquidated damages or, in cases such as a fiduciary contract,
profit stripping clauses), then the clause must be void.
Another instance, like the doctrine of penalties, where the law restrains the
extent to which a law of contract can represent the manifested agreement of
the parties is the rules concerning exclusion clauses. These rules are addressed
in the chapter by Dr Bell, and comprise the fifth issue addressed in Part F of
the book. Bell’s analysis begins with the law as it stood 140 years ago with the
138 Compare the decisions in TSB Bank Plc v Camfield [1995] 1 WLR 430 (CA) with Vadasz v Pioneer
Concrete (SA) Pty Ltd (1995) 184 CLR 102 (HCA).
139 Robophone Facilities Ltd v Blank [1966] 1 WLR 1428 (CA) 1446.
Ch 1 Introduction 23
following siren call for freedom of contract sounded by Sir George Jessel as
Master of the Rolls:140
“If there is one thing which more than another public policy requires it is
that men of full age and competent understanding shall have the utmost
liberty of contracting, and that their contracts when entered into freely
and voluntarily shall be held sacred and shall be enforced by Courts
of justice …”
Bell explains the struggle that ensued in the courts over the next century
concerning exclusion clauses. On one side were those judges who adhered to
the principle of freedom of contract. On the other were those, for whom Lord
Denning became their leader, who saw the principle as a fiction, disguising
terms which were imposed by the “big man” upon the “little man” who had
no choice but to accept them. Bell traces the rise of post-war consumer
legislation and explains how the common law and statute developed
together as the erosion of freedom of contract occurred in Australia, Canada,
England, and transnationally. Bell’s chapter will be a useful reminder as all
of these jurisdictions enter the next stage in this evolution. The statutes in
issue are open-textured legislation which create boundaries of permissible
agreement but which leave those boundaries undefined, other than in the
most general terms such as “unfair”, “unconscionable”, or “unjust”. The next
era in the courts will involve techniques for interpreting these open-textured
provisions.141
Conclusion
In 2012, the Australian Federal Attorney General introduced a project to
consider the codification of contract law.142 In one respect, this project was
laudable. A codified law of contract would provide a neat, and potentially
principled, antidote to the increased contextual fragmentation of contract
law.143 But many Australian scholars saw the project as a threat to the tradition
of careful evolution of underlying principle that has been the power of the
common law. Impassioned pleas of festina lente were made.144 Some English
scholars, too, expressed similar remarks in response to suggestions that English
contract law should be codified.145 Whether or not a principled foundation
140 Printing and Numerical and Registering Co v Sampson (1875) LR 19 Eq 462 (Ch D) 465.
141 Plevin v Paragon Personal Finance Ltd [2014] UKSC 61; [2014] 1 WLR 4222; Australian
Competition and Consumer Commission v Chrisco Hampers Australia Limited [2015] FCA 1204;
McKercher v The Renovation Store Ltd [2015] ABQB 748.
142 Commonwealth Attorney-General’s Department, Improving Australia’s Law and Justice
Framework: A Discussion Paper Exploring the Scope for Reforming Australian Contract Law (2012).
143 Hugh Collins, The European Civil Code: The Way Forward (CUP 2008).
144 See eg Warren Swain, “Contract Codification in Australia: Is it Necessary, Desirable and
Possible?” (2014) 36 Syd LR 131; cf Luke Nottage, “The Government’s Proposed Review of
Australia’s Contract Law: An Interim Positive Response” in Mary Keyes and Therese Wilson
(eds), Codifying Contract Law: International and Consumer Law Perspectives (Ashgate Publishing
2014) ch 7.
145 Andrew Burrows, “Legislative Reform of Remedies for Breach of Contract: The English
Perspective” (1997) 1 Edin LR 155, 156.
24 Contract in Commercial Law
On April Fools’ Day in 2010 the British online retailer, GameStation, added a
new clause to its standard terms and conditions for customers. The clause read:1
“By placing an order via this Web site on the first day of the fourth month of
the year 2010 Anno Domini, you agree to grant Us a non transferable option
to claim, for now and for ever more, your immortal soul. Should We wish
to exercise this option, you agree to surrender your immortal soul, and any
claim you may have on it, within 5 (five) working days of receiving written
notification from gamestation.co.uk or one of its duly authorised minions.”
Luckily, customers were given the option of clicking a link to nullify that
particular sub-clause. Worryingly, although unsurprisingly, 7,500 customers
nonetheless voluntarily surrendered their souls.2 Only 12% of customers opted
to nullify the sub-clause.3 Fortunately for those thousands, GameStation later
notified its customers that it had been informed by its HR department that the
clause was “not playing fair” and so it was releasing them from their part of the
soul bargain.4 The question posed in this chapter is whether such a release was
effective. Have the customers of GameStation, according to Australian contract
law, as it currently stands, got their sold souls back?
Of course, in posing such a question, the reader must ignore the obvious,
although impractical, possibility of customers and GameStation entering into a
deed. My chapter will instead focus on whether a solution can be found within
the bounds of mainstream contractual principles. Existential thoughts like
“you cannot sell what does not exist” must also be suspended. Additionally,
* I express my thanks to my researcher, Miss Madeline Hall, for her assistance in the preparation
of this chapter.
1 Steven Rares, “Striking the Modern Balance Between Freedom of Contract and Consumer
Rights” (2014) 28 CLQ 7.
2 Catharine Smith, “7,500 Online Shoppers Accidentally Sold Their Souls to GameStation”
Huffington Post (17 June 2010) www.huffingtonpost.com/2010/04/17/gamestation-grabs-souls-
o_n_541549.html.
3 Smith (n 2).
4 Shane Richmond, ‘“GameStation Collects Customers” Souls in April Fools Gag” The Telegraph
(17 April 2010).
25
26 Contract in Commercial Law
any legal arguments that may prevent the contract from ever validly having
been formed must temporarily be ignored; for instance, due to arguments
of unconscionability, issues of public policy or proper notice of the terms.5
Ignoring these and assuming the contract was validly formed, the question is:
What general law principles will successfully operate here, as an exception to
the rule of contract, that usually you are bound to what you bargained for?
What rules will allow those poor unassuming customers to get their sold
souls back?
This chapter will specifically focus on the doctrine of waiver and how
it was analysed in the High Court’s 2008 decision of Agricultural and Rural
Finance v Gardiner.6 It will be shown that although the principles that led
to the outcome in Gardiner may not always be what is desirable in each
individual circumstance, the High Court’s limitations on the doctrine of
waiver are justified in the current conceptual framework of consideration-
based contractual theory.
5 Note that these arguments may not be as easy to make out as appears. For instance the doctrine
of frustration is not applicable, as the impossibility of the contract is not relevant where the
promisor assumed the risk of the event in question, see N Seddon, R Bigwood and M Ellinghaus,
Cheshire and Fifoot Law of Contract (10th ed, LexisNexis Butterworths 2012) para 19.11 and the
cases quoted therein. Claims of unconscionability (whether at common law or statute) would
also require some work, given the absence of factors affecting the formation of the contract (such
as duress). It is the content of the contract alone which would have to be relied upon to make out
unconscionability. As unreasonable as the term is, depending on the manner of acceptance (by
hyperlink or scroll box) a court may easily consider reasonably conspicuous notice of the term
to have been given. For an interesting discussion of international case law on such an issue, see
Simon Blount, Electronic Contracts (2nd ed, LexisNexis Butterworths 2015) para 7.9.
6 Agricultural and Rural Finance Pty Limited v Bruce Walter Gardiner [2008] HCA 57; (2008) 238
CLR 570 (“Gardiner”).
Ch 2 Getting Your Sold Soul Back: The Limitations and Justifications of Waiver 27
7 Gardiner (n 6) [51]. For an old but pithy summary of the different sense of the word “waiver” and
the reason for so much confusion, see John Ewart, Waiver Distributed among the Departments:
Election, Estoppel, Contract, Release (Harvard University Press 1917) 23.
8 Gardiner (n 6) [46].
9 Gardiner (n 6) [145].
10 Gardiner (n 6) [58]–[59].
11 Gardiner (n 6) [65].
12 Gardiner (n 6) [37].
28 Contract in Commercial Law
13 Consider Stage Club Ltd v Millers Hotels Pty Ltd (1981) 150 CLR 535 (HCA), where the presence
of a debt on the balance sheet was held to be acknowledgement of the debt.
14 Gardiner (n 6) [59]
15 Gardiner (n 6) [59].
16 Gardiner (n 6) [71], [164].
17 Gardiner (n 6) [77].
18 Gardiner (n 6) [80]–[87].
Ch 2 Getting Your Sold Soul Back: The Limitations and Justifications of Waiver 29
release.19 This is for two reasons. First, Mr Gardiner’s submissions on this type
of waiver focused on the hallmark of unilateral release – the fact that the term
waived was wholly to the benefit of one party.20 Second, the primary case relied
upon by Mr Gardiner appeared to be The Commonwealth v Verwayen,21 which
may be described as an instance of unilateral release.22
So how did the majority deal with the submission of unilateral release?23
Significantly, the majority sought to confine the outcome in Verwayen to the
unique adversarial litigious circumstances that had operated there.24 The
majority emphasised that for any doctrine of waiver to operate there had to
be an underlying, reason or justification for its operation, otherwise the rule
would do nothing more than state a conclusion. Thus, although the Judgment
does not expressly say waiver can only ever be in the form of an estoppel,
election or variation by consideration, and acknowledged that there were cases
where the term was historically used in some other sense,25 it is hard to imagine
a situation where waiver in any other sense (such as unilateral release) would
be accepted by the court. As the Judgment makes clear, absent the forgoing
of a right, consideration, or detrimental reliance, what reason is there to
bind someone to a representation of modifying a contract?26 Until a litigant
can identify an additional reason, it would appear therefore that waiver has
essentially been limited in Gardiner to those three formulations.
Even more notably however, is the fact that in the Judgment the majority
emphasised that even if a principle of unilateral release were allowed to exist
and operate beyond the context of adversarial litigation, then the relevant
19 By referring to “unilateral” release or waiver throughout this chapter, I intend to include within
it instances of “pure waiver”. According to Sean Wilken and Karim Ghaly, The Law of Waiver,
Variation and Estoppel (3rd ed, OUP 2012) para 4.36 the distinction between the two is:
“The [unilateral] waiver of a term wholly for X’s benefit cannot affect Y’s performance of the
contract. … [Whereas an instance of] pure waiver releases Y from future performance under
the contract and does have such an effect.” Arguably this distinction is specious. The waiver of
a term wholly in X’s benefit, may easily affect some aspect of Y’s performance of the contract.
For example, in the sold soul scenario, the alleged waiver of the option to claim the soul affects
customers’ future performance – they no longer are required to give up their soul. This is part of
Y’s (the consumer’s) performance of the contract as much as any other term. Another illustration
would be where X waives a condition precedent to Y’s performance, where the condition is
wholly within X’s favour. The waiver of the condition precedent in a very real sense affects Y’s
performance of the contract. Moreover, even if the distinction is valid, it is so slight that drawing
such distinctions could be accused of amounting to the unnecessary (and unhelpful) splitting of
hairs. Quite whether the High Court intended references to unilateral release to be interpreted
as including or excluding instances of pure waiver is not clear as they expressly eschewed such
distinctions, see Gardiner (n 6) [54]. It is relatively clear however, for the reasons explained
below, that the type of waiver the High Court was dealing with when discussing the submissions
of waiver as “abandonment or renunciation” did mean (as this chapter has taken it to mean)
unilateral release at least in the limited form (not including pure waiver).
20 Gardiner (n 6) [88], [92]–[93].
21 The Commonwealth v Verwayen (1990) 170 CLR 394 (HCA).
22 Verwayen (n 21) 423 (Brennan J).
23 Compare cases such as DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 where
there was abandonment in the true sense.
24 Gardiner (n 6) [62], [89].
25 Gardiner (n 6) [52]. A similar conclusion was reached almost a hundred years earlier, where
Ewart stated that waiver “is, in itself not a department”: Ewart (n 7) 4–5.
26 Gardiner (n 6) [95].
30 Contract in Commercial Law
abandonment can only occur at the time the right in question can be
insisted upon.27
This statement is of some moment because academics generally consider
that the defining conceptual distinction between unilateral waiver and election
is the fact that election is reactive, in that it occurs after a breach of a contract,
whilst unilateral release is proactive, encompassing pre-emptive releases before
any breach has occurred.28 By erasing this distinction and requiring unilateral
release, like election, to only occur at the time the right can be insisted upon, the
Judgment for all intents and purposes has morphed unilateral release into the
doctrine of election.29 Accordingly, if it has survived Gardiner, unilateral release
may become a type of election, where the inconsistency is between choosing to
have or not have a right solely within one party’s benefit.
Such a categorisation, while fundamentally changing the nature of unilateral
release, would tidy up the conceptual messiness of waiver, without butchering
the historical cases in which, as the majority had to admit, unilateral release was
recognised as a separate instance of waiver.30
However, it is not at all clear that this is what the majority intended, given
how eager they seemed to be to quell unilateral release altogether.31 Either way,
it would appear two things are clear from the Judgment in Gardiner. First,
either the Judgment has had the effect of removing the doctrine altogether or
severely limiting it to aspects similar to the doctrine of election.
To that extent, the court’s judgment, on a conceptual level, further entrenches
the consideration theory of our contract law. Contractual variations will only
be recognised if supported by consideration or, absent consideration, by the
operation of the doctrine of estoppel or election. In such a schema, there is little
room for instances of unilateral release, which are fundamentally uncommercial
actions where a party generously releases someone from performance of a term
for nothing. Unsurprisingly, a doctrine predicated on tit-for-tat will not readily
accommodate that.
The second thing that is clear in Gardiner is stated expressly at the end of
the Judgment. That is, whatever the other reasons are, that people may dream
up to justify binding someone to a modified contract, a general principle of
unfairness is insufficient.32
27 Gardiner (n 6) [91] (see the hypothetical reference, “If an analysis … were to be made …”), [93].
28 Wilken and Ghaly (n 19) para 4.36.
29 It is interesting to note that Wilken and Ghaly identify pure waiver as a prospective version
of waiver by election which operates retrospectively following a breach, see Wilken and Ghaly
(n 19) para 4.28 (note above at n 19 I have subsumed pure waiver within my conception of
unilateral waiver). See also Qiao Liu, “Rethinking Election: A General Theory” (2013) 35 Syd LR
599, 606, where the author notes “A unilateral waiver seems to bear a high degree of resemblance
to an election …”.
30 Gardiner (n 6) [52] 32.
31 Gardiner (n 6) [89]–[90].
32 Gardiner (n 6) [98]–[100].
Ch 2 Getting Your Sold Soul Back: The Limitations and Justifications of Waiver 31
the majority expressed the view that a principle of unfairness should not be
adopted as sufficient to justify the doctrine of waiver. This was considered
necessary in order to maintain “coherence of legal principle” and ensure that the
exceptions to the general rule of contract and consideration are not expanded
to the point of disproving, rather than proving the rule.33
As alluded to earlier, Kirby J, in dissent, was prepared to accept a residual
category of waiver where it would otherwise be “manifestly unfair” to
the beneficiary of the wavier to not grant relief.34 He referred to such a
doctrine as “unilateral ‘waiver’” and cited cases from around the world, in
support of it.35
In proposing such a framework for waiver, Kirby J rejected that this was
postulating a “residual category” of the doctrine. He stated instead it was an
attempt to identify “the unifying features of earlier instances or examples
where courts have accepted [unilateral release] …”.36 He rejected the possibility
that cases on statutes of limitations like Verwayen could form a “special
legal category”.37 Rather he considered such a decision must be “an example,
or occasion, of the application of a broader principle of law still awaiting
expression”.38 For now, he couched such a broader principle in terms of
“manifest unfairness”.39
Kirby J’s comments do appear to be sparring with what appears to be the
effect of the majority’s reasoning. That is, a confining of unilateral release cases
to the pages of history or the highly unusual and unique circumstances seen
in Verwayen. It is noticeable that the cases of unilateral release referred to by
Kirby J from the United Kingdom, New Zealand, Canada, the United States
and South Africa are somewhat avoided and glossed over in the majority’s
decision.40 However, there may not be as much of a difference between Kirby J
and the majority as first seems. Noticeably, Kirby J describes the cases from
around the world as showing that waiver would operate where, without any
relevant disability or disqualification, a party consciously waives a breach so
as to preclude a later change of mind. There is something about this that again
sounds familiar with the doctrine of election. Perhaps, like the majority, Kirby J
is moulding instances of unilateral release into a subgroup of election. In this
light, it is noteworthy that one of the leading cases cited by Kirby J from the
United Kingdom speaks about unilateral waiver but was ultimately determined
by the doctrine of election.41
42 Even the more contentious conceptions of consideration as extending to “practical” rather than
just legal benefits would be of little assistance in this scenario, particularly given its unilateral
nature. At present the scope of Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991]
1 QB 1 (CA), the source of the idea that “practical” benefits can act as consideration, appears
limited to circumstances where performance of an existing duty for something more than
contractually agreed to is said to be in return for avoiding the problems associated with non-
performance of what had been contractually agreed to, see Slipper v Berry Buddle Wilkins
Lawyers [2015] NSWSC 810 [45]; the variation may be described as “a bargain stimulating the
promise to complete performance”, Kevin Teeven, “Consensual Path to Abolition of Preexisting
Duty Rule” (1999) 34 Val U L Rev 43, 56. However, it is difficult to apply this reasoning to a
unilateral term (where an option to a soul is given for nothing) and when the effect of the
variation is not performance for something more but non-performance for nothing. Would
the benefit of keeping a good relationship with customers (because GameStation had given up
the option over customers’ souls, which may endear customers to GameStation), be a sufficient
“practical” benefit to GameStation to make the variation giving up the option to customers souls
as binding? For an example of how far consideration can be stretched, see the Canadian case of
Delaney v Cascade River Holidays Ltd (1983) 44 BCLR 24 (CA). In that case it was held that the
consideration for waiving liability of a rafting trip was permission to enter the van taking the
person to the rafting venture. For an overview of the application and limitations placed on Roffey
in the UK, see Wilken and Ghaly (n 19) paras 2.24–2.25.
43 Seddon, Bigwood and Ellinghaus (n 5) para 22.8; John Cartwright, Formation and Variation of
Contracts: the Agreement, Formalities, Consideration and Promissory Estoppel (Sweet & Maxwell
2014) para 9.09.
Ch 2 Getting Your Sold Soul Back: The Limitations and Justifications of Waiver 33
44 Jeremy Stoljar, “The Categories of Waiver” (2013) 87 ALJ 482, 488; Liu (n 29) 606, “It might be
said that, unlike an election, such a waiver does not have to be effected in the face of inconsistent
options. But the waiving party does have a choice between waiving and not waiving, two
evidently inconsistent courses of action”.
45 Gardiner (n 6) [58].
46 A similar distinction between waiver in the sense of abandoning a right and election was made
by Ewart (n 7) 13.
47 Gardiner (n 6) [93].
34 Contract in Commercial Law
does identify the remaining confusion and limitations of our current law on
waiver, particularly in the sense of election and unilateral release.
48 Gardiner (n 6) [95].
49 Sargent v ASI Developments Limited (1974) 131 CLR 634 (HCA) 647 quoting Jordan CJ in
O’Connor v S P Bray Ltd (1936) 36 SR (NSW) 248 (Full Ct) 260–01.
50 See Wilken and Ghaly (n 19) paras 5.03–5.05 which supports the notion that waiver by election
is conceptually geared to past performance, whilst the doctrine of unilateral waiver concerns
future performance.
Ch 2 Getting Your Sold Soul Back: The Limitations and Justifications of Waiver 35
party, ceases to be so. In such situations, why can’t one party unilaterally
release the other from a term in a contract which has no definitive time period
for being exercised?
Imagine shareholders to a company that undertake they will subscribe to
shares in proportion to the number they currently hold in the company for
any future capital raising. Can that term of the contract be informally waived
before any capital raising? Or what about the software licensing agreements you
blindly agree to as you set up a new computer? What if they include an ongoing
subscription to all future updates, which may encompass whole new services,
or breaches of the customer’s perceived right to privacy? Can subscription for
future updates be waived? In fact, imagine any contract concerning long term
options or that bestows an unfettered discretion on one party. In any of these
scenarios, waiver, in the sense of unilateral release as formulated by the majority
in Gardiner, will struggle to handle the situation where one party wishes to
release the other from a term with no expiry date on it. Problems could also
arise in the ongoing administration of long term contracts. It is common in such
contracts, particularly export contracts for primary products such as minerals,
for parties to seek, from time to time, a variation of their contractual obligations
for delivery or relief from pricing provisions having regard to economic
circumstances not envisaged at the time the contract was entered into. Absent
estoppel or a variation involving consideration, the contractual status of such
variations, as a matter of Australian law, may well be productive of uncertainty.
This limitation on the rules of election is understandable given the basis
of that doctrine. Yet, is there something wrong with our rules of unilateral
release that in those cases the law is incapable of reflecting reality? Or is it
acceptable to demand technical and formal consideration changes hands
before acknowledging the fact that one party has changed its mind? Should we
adopt more relaxed notions of consideration so this requirement is more easily
satisfied? Or should we do away with consideration as a formality for varying
or modifying contracts altogether?
Before dismissing these questions out of hand, it is important to remember
that many common law jurisdictions have totally abolished the requirement of
consideration for waiver to effect contractual variations. In India and Malaysia,
provided there is a voluntary, conscious and affirmative act, a promisee
may dispense with the performance of a promise by the promisor without
consideration.51 This has been possible in India since 1872, which makes it
difficult to argue that changing our rules of waiver would lead to the erosion of
civilisation as we know it. Similarly, the United States’ Uniform Commercial Code
also stipulates that an agreement modifying a contract needs no consideration
to be binding.52 Significantly enough, these jurisdictions also constitute some of
our important trading partners.
51 Indian Contracts Act 1872 (Ind) s 63; Contracts Act 1950 (Malaysia) s 64; Pan Ah Ba v Nanyang
Construction Sdn Bhd [1969] 2 MLJ 181, 183 (Federal Court of Malaysia); Associated Pan
Malaysia Cement Sdn Bhd v Syarikat Teknikal and Kejuruteraan Sdn Bhd [1990] 3 MLJ 287
(Federal Court of Malaysia); Chunna Mal-Ram v Mool Chand (1928) 55 IA 154 (PC).
52 Uniform Commercial Code (US) s 2-209 (1). This section has been enacted in many states
including Arizona, California, Florida, Idaho, Illinois, Kansas, Kentucky, Maine, Michigan,
North Carolina, North Dakota, Ohio, Rhode Island and Washington.
36 Contract in Commercial Law
Is a Relational Contract
a Legal Concept?
Hugh Collins*
* I am grateful to David Campbell, Mindy Chen-Wishart, George Leggatt, Jim Malcomson, Stuart
Macaulay and Bill Whitford for comments on earlier drafts of this chapter.
1 RC Bird, “Employment as a Relational Contract” (2005) 8 U Pa J of Lab & Emp L 149; M Boyle,
“The Relational Principle of Trust and Confidence” (2007) 27 OJLS 633; M Freedland, The Personal
Employment Contract (OUP 2003) 88; D Brodie, “How Relational is the Employment Contract?”
(2011) 40 ILJ 232; J Levin, “Multilateral Contracting and the Employment Relationship” (2002) 117
Q J Econ 1075.
2 Johnson v Unisys Ltd [2001] UKHL 13; [2003] 1 AC 518 [20]; approved in Braganza v BP Shipping
Ltd [2015] UKSC 17; [2015] 4 All ER 639 [54], [61] (Lords Hodge and Kerr).
3 See eg VP Goldberg, “Relational Exchange: Economics and Complex Contracts” (1980) 23 Am
Behav Sci 337; CJ Goetz and RE Scott, “Principles of Relational Contracts” (1981) 67 Va L Rev
1089; RE Speidel, “Relational Contract Theory: The Characteristics and Challenges of Relational
Contracts” (2000) 94 Nw U L Rev 823; L Mulcahy and C Andrews, “Baird Textile Holdings v Marks
& Spencer plc Judgment” in R Hunter, C McGlynn and E Rackley (eds), Feminist Judgments: From
Theory to Practice (Hart Publishing 2010) 193; C Mitchell, Contract Law and Contract Practice:
Bridging the Gap Between Legal Reasoning and Commercial Expectation (Hart Publishing 2013)
ch 6; D Campbell, “Good Faith and the Ubiquity of the ‘Relational’ Contract” (2014) 77 MLR 475.
4 Scattered examples include: Dymocks Franchise Systems (NSW) Pty Ltd v Bilgola Enterprises Ltd
(1999) 8 TCLR 612 [236] (Hammond J) (retail business format franchise; New Zealand High
Court applying the law of New South Wales affirmed on other grounds in Dymocks Franchise
Systems (NSW) Pty Ltd v John Todd and Alicia B Todd Bilgola Enterprises Ltd and Lambton Quay
Books Ltd [2002] UKPC 50; [2002] 2 All ER (Comm) 849; Flyn v Breccia [2015] IEHC 547
(agreement between shareholders for acquisition of shares in a business); Bobux Marketing Ltd
v Raynor Marketing Ltd [2001] NZCA 348; [2002] 1 NZLR 506 [42]–[45] (Thomas J dissenting)
(distribution agreement); GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd
[2003] FCA 50 [351] (Finn J) (software development).
37
38 Contract in Commercial Law
the English High Court has adopted the label of “relational contract” in its
reasoning. The types of commercial contracts concerned a distributorship for
a product,5 a joint venture to exploit the digital form of educational materials,6
and a long-term service contract made by a private business to provide a county
police authority with a car disposal and destruction service.7 What significance
should be attached to this recent development in the judicial use of the phrase
“relational contract”?
It is possible that this usage of the label of “relational contract” is a passing
fad that will soon be forgotten. Even if it persists, it may turn out that the label
has little practical significance. But what importance might it have? What would
be the consequence of recognising the idea of a relational contract as a legal
concept? It might become a tight legal category of nominate contracts, like a sale
of goods or a contract of employment, to which automatic legal consequences
will be attached whenever the category is applicable to a particular transaction.
In the case of the sale of goods, for instance, it is a legal concept because it offers
a description of a determinate class of transactions,8 and applies particular and
specialised legal rules to transactions within that class such as implied terms
regarding title and quality of the goods.9 But the label of a relational contract
might merely supply a looser concept that steers legal reasoning in particular
directions, such as encouraging a more contextual approach to interpretation
or a greater disposition to accept the existence of obligations to perform in
good faith, without actually mandating any particular rules that should be
applicable to the contract. In this looser form of legal concept, it may be hard
to identify whether the label of relational contract directs legal reasoning or
merely summarises a result.
No doubt there are good reasons to be sceptical about the prospects for the
creation of a new legal concept. Leaving aside the tendency of lawyers the world
over to prefer to recycle old concepts rather than to invent new ones to deal
with novel social and economic phenomena, there are some more immediate
difficulties that this proposed new legal concept needs to address. The two most
obvious problems are the lack of a clear definition or paradigm of a relational
contract and considerable uncertainty about what legal consequences might
flow from the application of the classification to a particular contract. With
respect to the descriptive paradigm of a relational contract, though there is
widespread agreement that it involves a long-term business relationship, it is
unclear for instance whether such a relationship requires a long-term contract
that binds the parties together over a substantial period of time. There is also
scepticism about whether it makes sense to speak of a class of relational contracts
as opposed to recognising that ‘relationality’ or perhaps more precisely “trust”
is a feature of all contracts, though this dimension may vary between types
5 Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111; [2013] All ER
(Comm) 1321 (QB).
6 Bristol Groundschool Ltd v Intelligent Data Capture Ltd [2014] EWHC 2145 (Ch).
7 D&G Cars Ltd v Essex Police Authority [2015] EWHC 226 (QB).
8 Sale of Goods Act 1979, s 2(1): A contract of sale of goods is a contract by which the seller transfers
or agrees to transfer the property in goods to the buyer for a money consideration, called the
price.
9 Sale of Goods Act 1979, ss 12–15.
Ch 3 Is a Relational Contract a Legal Concept? 39
how the chassis and parts of vehicles could be exchanged without detection
so that an apparently almost new car could be created out of older parts. As
a result of a tip-off, it was discovered that the car that had been sent to be
crushed was a different one, albeit with the correct transferred registration
and chassis numbers, and that the claimant was using the condemned car for
its own business. On discovering this disobedience or carelessness in carrying
out instructions, the police authority removed the franchise and excluded
the contractor from bidding for a new one. The claimant argued that this
termination was a fundamental breach of contract and sought damages of
about £1 million. Conversely, the defendant insisted that it had merely accepted
the claimant’s repudiatory breach of contract.
Dove J described this contract as “a relational contract par excellence”.17 It
was a long-term contract and relationship; the court stressed the need for the
contractor to act with integrity and honesty in carrying out the instructions of
the police authority, which itself was acting on behalf of the public in dealing
with these cars. In addition, the cars were never the property of the contractor,
but were owned by the registered owner or had been confiscated by a legal
process, so the contractor had to take care of the cars, especially if it was required
eventually to return a vehicle to its owner. In this case, the implied term was
described not as one of good faith but rather as a term that the parties would
act with honesty and integrity in operating the contract.18 Dove J explained
his use of different language as setting a standard that was not merely about
dishonest behaviour but concerned conduct that was inconsistent with the
maintenance of the long-term relationship.19 It is noticeable that some of the
language used to describe the implied term in this case invoked the implied
term found in contracts of employment, namely the obligation on employers
(and employees) not to act, without good reason, in a manner likely to destroy
mutual trust and confidence between the parties.20 The court concluded on
the facts that there had been a serious breach of the express term in relation to
following the disposal instructions of the defendant and a breach of the implied
term of honesty and integrity, even if it were the case that the conduct of the
contractor had not been deliberately dishonest and fraudulent.21
22 HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6; [2003]
2 Lloyd’s Rep 61; Bhasin v Hyrnew 2014 SCC 71; 2014 3 SCR 494.
44 Contract in Commercial Law
be more properly classified as ones that are implied by law into all contracts of
this type.23
23 For the contrast between terms implied in fact and terms implied by law and how these
classifications can be manipulated see: E Peden, “Policy Concerns Behind Implications of Terms
in Law” (2001) 117 LQR 459; H Collins, “Implied Terms: The Foundation in Good Faith and Fair
Dealing” (2014) 67 CLP 297, 301–09.
24 IR Macneil, “Contracts: Adjustment of Long-term Economic Relations under Classical,
Neoclassical, and Relational Contract Law” (1978) 72 Nw U L Rev 854.
25 The variations are expertly charted in D Campbell, “Ian Macneil and the Relational Theory of
Contract” in D Campbell (ed), The Relational Theory of Contract: Selected Works of Ian Macneil
(Sweet & Maxwell 2001) 3.
26 IR Macneil, The New Social Contract (Yale UP 1980); similar views can be found in earlier
sociological studies of contracts: S Macaulay, “Non-Contractual Relations in Business: A
Preliminary Study” (1963) 28 Am Soc Rev 45; M Granovetter, “Economic Action and Social
Structure: The Problem of Embeddedness” (1985) 91 Am J Soc 481.
Ch 3 Is a Relational Contract a Legal Concept? 45
was essential to investigate the whole context and the implicit norms extremely
thoroughly in order to understand properly all the normative dimensions of
the transaction.27 In contrast, such an extensive contextual exercise was mostly
unnecessary for a complete understanding of simple discrete transactions such
as the purchase of a newspaper at a kiosk.28 Those points created the impression
that in Macneil’s view, there exists an identifiable category of contracts that
could be described as “relational contracts”, in which the appropriate legal
method, unlike the normal method applicable for discrete contracts, should
involve extensive examination of the implicit expectations of the parties. But
eventually, in response to criticism,29 it became apparent that such a sharp
conceptual distinction was not what Macneil intended to say: he argued that the
context of an exchange matters for an understanding of all contracts, because
they are normally embedded in prior social relations. His claim was rather
that the focus of traditional contract law on the original express agreement
between the parties might function reasonably successfully when applied to
relatively short-term, discrete transactions, but in more complex, long-term,
transactions that require co-operation and perhaps flexibility, to understand
the expectations of the parties and how the transaction was supposed to
function, the focus must be much broader and embrace the entire relationship
between the parties as it has developed.30
Although Macneil does not ultimately support the claim that there is a
class of contracts that can properly be described as relational, he does suggest
that at the relational end of a spectrum of types of contractual relationships,
the classical approach to the analysis of contracts will prove defective, because
it fails to examine the unexpressed expectations of the parties and their
implicit undertakings. Macneil frequently offers the example of a contract
of employment as one that usually lies at the relational end, because both
employer and employee will have expectations that go beyond the formal
exchange of work for wages, such as the expectation that the employee will
work hard and be loyal to the interests of the employer. Those expectations will
usually be protected by terms implied by law in the contract of employment.31
It seems that Macneil would favour interpretative techniques or implied
terms that protect implicit expectations of this kind in other types of
commercial transactions at the relational end of the spectrum. Macneil does
not automatically classify long-term contracts as relational contracts, though
the two categories overlap and are frequently confused.32 It is certainly more
likely in long-term contracts such as employment and business franchises
that the formal agreement will prove incomplete in its planning for future
27 IR MacNeil, “Relational Contract Theory: Challenges and Queries” (2000) 94 Nw U L Rev 877,
881; IR Macneil, quoted in Campbell (ed), The Relational Theory of Contract (n 25) 368.
28 IR Macneil, “Relational Contract: What We Do and Do Not Know” (1985) Wis L Rev 483.
29 See eg D Campbell, “The Relational Constitution of the Discrete Contract” in D Campbell and
P Vincent-Jones (eds), Contract and Economic Organisation: Socio-Legal Initiatives (Dartmouth
Publishing Co Ltd 1996) 40.
30 Macneil (n 24) 890.
31 British Telecommunications plc v Ticehurst [1992] ICR 383 (CA).
32 See eg Total Gas Marketing Ltd v Arco British Ltd [1998] 2 Lloyd’s Rep 209 (QB) (Lord Steyn);
E McKendrick, “The Regulation of Long-Term Contracts in English Law” in J Beatson and
D Friedman (eds), Good Faith and Fault in Contract Law (OUP 1995) 305.
46 Contract in Commercial Law
contingencies and that it will be appropriate for a court to flesh out the
agreement by reference to implicit understandings and expectations. Ultimately,
however, Macneil fails to provide a description or paradigm of relational
contracts: the category consists rather of those kinds of transactions where it is
appropriate to embark upon a deeper investigation of the context in order to
ascertain properly the implicit obligations and understandings that inform the
contractual undertakings.
between a preferred supplier and a retail chain in Baird Textile Holdings Ltd v
Marks & Spencer plc,37 a case to which we will return in a moment.
The importance of the pay-offs from long-term business relationships as
a self-enforcing mechanism may also explain why, in the event of defective or
tardy delivery of goods, businesses typically prefer to grant a discount on future
orders from the injured party rather than offer immediate compensation.38
This behaviour fits into a more general observed pattern of the avoidance
of litigation whenever a long-term business relation needs to be preserved,39
because the long-term pay-offs from future business deals are greater than any
short-term gain from an insistence on contractual rights.
The economic model of relational incentive contracts stresses the special
importance of these contracts as a business framework in those instances
where it may not be possible to measure and verify accurately whether the
performance of the parties reaches the expected standards under the contract. If
the contract requires “best efforts”, “good faith”, or “innovation” in performance,
or confers a discretionary power to address future contingencies or reward
good performance, it is not easy for the parties or a court to assess whether the
expected standard has been met or the power exercised appropriately. Where
there are long-term pay-offs from meeting expectations as far as possible,
either in the form of anticipated future business deals or perhaps in receipt of a
discretionary bonus payment, this relational incentive quality of the agreement
is likely to avoid the need to litigate.40
Where a legal dispute does arise, this economic theory might be interpreted
as suggesting that a court should strive to ensure that the pay-offs are preserved
in order to serve the goal of the reduction of litigation and the maintenance of
the expected benefits from continuation of the business relationship. A court
might seek to imply terms that will sustain a relational contract even when
the long-term pay-offs are relatively small and may not invariably be enough
to provide a sufficient incentive to perform according to expectations. For
instance, a legal analysis might need to interpret the obligations of the parties
under a binding contract in such a way that the legal duties do not permit one
party to frustrate that logic of long-term pay-offs. That analysis applies neatly
to Yam Seng: by permitting stores in ordinary shopping malls to sell the product
for less than the price in the duty free outlets, the action was bound to frustrate
the commercial operation of the distributorship in duty-free shops before long
by disrupting the pay-offs for the distributor. In cases where the performance
expectation has probably been satisfied but the other party has declined to
41 See eg Equitable Life Assurance Co Ltd v Hyman [2002] 1 AC 408 (HL); Abu Dhabi National
Tanker Co v Product Star Shipping Company Ltd (The “Product Star”) (No 2) [1993] 1 Lloyd’s LR
397 (CA); Horkulak v Cantor Fitzgerald International [2004] EWCA Civ 1287; [2005] ICR 402;
Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116; [2008] 1
Lloyd’s Rep 558; cf H Collins, “Discretionary Powers in Contracts” in D Campbell, H Collins and
J Wightman (eds), Implicit Dimensions of Contract: Discrete, Relational, and Network Contracts
(Hart Publishing 2003) 219.
42 [2001] EWCA Civ 274; [2002] 1 All ER (Comm) 737.
43 This seems to have been the gist of the claim for breach of an implied duty of good faith in
Bhasin v Hyrnew (n 22).
44 D Charney, “Non-legal Sanctions in Commercial Relationships” (1990) 104 Harv L Rev 373;
Collins, Regulating Contracts (n 10) 120.
Ch 3 Is a Relational Contract a Legal Concept? 49
45 RH Coase, “The Nature of the Firm” (1937) 4 Economica, New Series 386; OE Williamson,
The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting (Free Press: A
Division of Macmillan Inc 1985).
46 See eg D Campbell and D Harris, “Flexibility in Long-term Contractual Relationships: The Role
of Co-operation” (1993) 20 JLS 166, 167: “The parties are not aiming at utility-maximization
directly through performance of specified obligations; rather, they are aiming at utility-
maximization indirectly through long-term co-operative behaviour manifested in trust and not
in reliance on obligations specified in advance”.
47 Goetz and Scott (n 3) 1091.
50 Contract in Commercial Law
In Yam Seng Pte Ltd v International Trade Corporation Ltd,50 Leggatt J identified
franchises, joint ventures, and distributorships as examples of contracts where
greater duties of co-operation and good faith arise. Commercial agents should
be added to the list.51 From the perspective of institutional economics, the
reason why these contracts require as normal incidents greater duties of loyalty
and co-operation than normal commercial contracts is not because they are
long-term and not because the parties may have invested substantially in the
project, though both of these features are likely to be present, but because
the contract establishes a quasi-integrated system of relations of production
with intensified contradictory pressures simultaneously both to co-operate
and to compete in order to overcome problems of adaptation to foreseen and
unforeseen contingencies. The economic logic of the relational contract is that
both parties will be better off if they co-operate to maximise the size of the pie,
such as sales in a franchise or distribution network, but simultaneously they
still need to compete to obtain a greater slice of the profits arising from their
labours. Each party needs to be co-operative and loyal to the general aim of the
networked business enterprise, whilst ensuring that it obtains a fair share of
the rewards. These expectations of loyalty and co-operation within relational
contracts must fall short of those applicable to organisations, however, for both
parties to remain residual profit-takers with antagonistic interests. Loyalty
is owed, not each other, but rather to the relational contract itself as the
embodiment of an independent business operation.52
This concept of a relational contract arguably fits the transactions in the
trilogy of cases. The distribution agreement in Yam Seng53 made no attempt
to specify all the details of the performance required from both parties, so
they would have to adjust the relationship according to the circumstances
pertaining in the different retail locations. As well as the problem of greater
discounts in ordinary shopping malls than those available at the airports,
the supplier also discovered to its surprise that it required a special license
to sell the fragrances in China and that it, as the manufacturer rather than
the distributor, would have to acquire that license at considerable cost, an
unexpressed obligation that it failed to fulfil. Similarly, the joint venture in
the Bristol Groundschool54 case could not specify exactly what was required
to turn the product into a digital form successfully, though clearly the parties
would have to co-operate and disclose relevant information. In D&G Cars v
Essex Police,55 in some respects there is almost vertical integration arising from
the contractor’s strict obligation to comply with the instructions of the police
authority, breach of which on even a single occasion might destroy the mutual
trust and confidence that was necessary for that relationship to continue. At
the same time, however, the contractor earned its remuneration by disposing
of the cars at a profit or by making insurance claims, so that it was acting
primarily on its own account.
56 See eg Hamsard 3147 Ltd (t/a Mini Mode Childrenswear) v Boots UK Ltd [2013] EWHC 3251
(Pat).
Ch 3 Is a Relational Contract a Legal Concept? 53
Commitment
Another factor often used to describe a relational contract is what Leggatt J
referred to as a “substantial commitment” by both parties to the contract.
However, this feature does not figure significantly in the social science literature
59 B Klein, “Fisher – General Motors and the Nature of the Firm” (2000) 43 JLE 105.
60 Goetz and Scott ((n 3) 1102) illustrate the kinds of protections available by reference to restrictive
covenants not to compete and guarantees to buy back investments in plant and machinery. This
problem of strategic behaviour is addressed in the EU by Council Directive 86/653/EEC.
61 G Baker, R Gibbons and KJ Murphy, “Relational Contracts and the Theory of the Firm” (2002)
117 Q J Econ 39.
Ch 3 Is a Relational Contract a Legal Concept? 55
62 S Macaulay, “The Real and the Paper Deal: Empirical Pictures of Relationships, Complexity and
the Urge for Transparent Simple Rules” in Campbell, Collins and Wightman (n 41) 51.
63 Macneil, The New Social Contract (n 26).
64 Yam Seng (n 5) [134]; cf Mitchell (n 3) ch 2.
65 The Moorcock (1889) 14 PD 64 (CA); cf Collins (n 23) 304–06.
56 Contract in Commercial Law
66 Rainy Sky SA v Kookmin Bank [2011] UKSC 50; [2011] 1 WLR 2900 [21] (Lord Clarke).
67 R Brownsword, “After Investors: Interpretation, Expectation and the Implicit Dimension of the
‘New Contextualism’” in Campbell, Collins and Wightman (n 41) 103.
68 For a survey and critique of this approach see eg H Beale, “Relational Values in English Contract
Law” in D Campbell, L Mulcahy and S Wheeler (eds), Changing Concepts of Contract: Essays in
Honour of Ian Macneil (Palgrave Macmillan 2013) 116.
69 RE Scott, “The Case for Formalism in Relational Contract” (2000) 94 Nw U L Rev 847; Morgan,
“In Defence of Baird Textiles” in Campbell, Mulcahy and Wheeler (eds) (n 68) 166.
Ch 3 Is a Relational Contract a Legal Concept? 57
For the second dimension, the relevant implied obligations can be loosely
gathered together under the heading of a duty of co-operation for the
purpose of achieving the long-term goals of the business relationship. Each
project or type of relational contract may require particular instances of this
general implied obligation for the purpose of supporting the co-operative
goal. In contracts of employment, this duty to co-operate is described as an
obligation “to serve the employer faithfully with a view to promoting those
commercial interests for which he is employed”.72 In a distributorship such as
the one involved in Yam Seng, in the view of the court, co-operation required
honesty in communications, some disclosure of vital information, and a degree
of loyalty to the project in the sense of avoiding actions that would defeat its
business objectives. In a franchise operation, the duty of loyalty might comprise
a duty not to undermine the business reputation of the franchise business or,
as in Shell UK Ltd v Lostock Garage Ltd,73 a duty not to favour in-house retail
outlets and large franchisees with large rebates whilst refusing them to small
independent franchisees with little bargaining power, thereby forcing them to
run their businesses at a loss, though only Bridge LJ accepted the existence of
an implied duty of loyalty in that case.
For the third dimension of interpretation of a relational contract, which
tries to protect the trust on which the long-term relationship must be based,
the appropriate implied term will include honesty in communications, but
beyond that it is likely to include a duty of fair dealing and the avoidance of
actions that are calculated to destroy mutual trust and confidence. As we have
already noted, such obligations are not designed to impose moral standards
on the parties to relational contracts. The aim is rather to provide support
for what is a business necessity in these contracts, which is a measure of trust
and fair dealing. In the employment context, it is evident that once there has
been a complete breakdown of mutual trust and confidence, there is no way
back to an efficient and effective employment relationship. Where successful
performance of a commercial contract requires intense co-operation to a
degree analogous with employment within a business, it is understandable that
once suspicions of dishonesty, cheating, and opportunism begin to poison a
relationship, there may be no way of retrieving the situation and proceeding
with the project together. Even a single act of misconduct that has no adverse
financial or reputational consequences for the other party may be sufficient to
destroy mutual trust and confidence and prevent any workable continuation of
the relational contract. In both Bristol Groundschool and D&G Cars, once the
trickery had been exposed, the other party was not prepared to continue the
relationship even though the long-term pay-offs might have been unaffected.
Sometimes this breach of trust may be described as an act of disloyalty, not
really meaning disloyalty to the other party, but rather disloyalty to the project
by conduct such as helping a competitor that is almost certainly bound to
frustrate the objectives of the long-term business relationship.
72 Secretary of State for Employment v ASLEF (No 2) [1972] 2 QB 455 (CA) (Buckley LJ).
73 [1976] 1 WLR 1187 (CA). For other examples of obligations of loyalty in networks see eg Seven
Eleven Corporation of SA (PTY)Ltd v Cancun Trading No 150 CC, Case No 108/2004, 24 March
2005; Dymocks (n 4); Bohner (n 52).
Ch 3 Is a Relational Contract a Legal Concept? 59
Conclusion
Is the phrase “relational contract” now a legal concept? Although it is at an
incipient stage, the building blocks of a legal concept of a relational contract
seem to be in place. I have proposed a paradigm description of the three principal
features of a relational contract that include a long-term business relationship
in which indeterminate implicit expectations and obligations are essential to its
successful performance. With respect to the legal consequences that flow from
the application of the concept, my analysis supports what was described at the
outset as a loose legal concept that points towards an approach rather than
dictating particular rules. Under this looser legal concept, for relational contracts
courts should pursue a more contextual approach towards interpretation. This
approach should, in addition to taking full account of the express terms of the
contract, give equal weight to the dimensions of supporting the long-term pay-
offs of the business relationship and preserving the necessary trust within the
relationship. That task should usually be accomplished by implied terms that
seek to articulate obligations of co-operation in support of the long-term pay-
offs and obligations of mutual trust and confidence to preserve the necessary
trust between the parties. Notice that these legal consequences do not include
necessarily a requirement of good faith in performance, whether optional or
mandatory, though certainly conduct that may be described as bad faith might
be challenged as behaviour that undermines co-operation or is calculated to
destroy mutual trust and confidence.
4
The title of this chapter might suggest that it will be very short. On one view,
no more need be said than that the requirement that consideration, in the sense
of a quid pro quo,1 be given for an informal promise before that promise will
be enforced is one known only to the common law. No true comparison with
the requirements for enforceability of a contract found in other legal systems
is therefore possible.
Consideration has been described as “one of the central and most
characteristic features of the English law of contract; and also one of its most
problematic”.2 The continental lawyer is said to usually perceive it as “one of the
strange and idiosyncratic features which have the effect of turning the English
common law into such an ungodly and impenetrable jumble”.3 Criticism
of consideration is not confined to continental lawyers. Many common law
lawyers have even foretold its demise, yet it remains today.
It is not my purpose to discuss the vexed question of whether the doctrine
of consideration is necessary to our law of contract. I will not be looking to a
future with or without the doctrine. The comparative perspectives to which I
wish to draw attention require, in the first instance, an examination of the past.
History allows a comparison with continental law ideas. When consideration
made its first appearance in the common law, as a requirement of the action
of assumpsit, it reflected continental ideas relating to the enforceability of
promises. In the development of the law of contract, the common law continued
to borrow ideas from the continent. If it had taken the path of civilian law,
and focused on, as a singular requirement, the intention of the promisor to
be bound, which was an entirely possible path of development at one point,
the doctrine of consideration might have been relegated to being a matter
* Justice of the High Court of Australia. My thanks to Professor Horst Lücke and Dr Birke Häcker
for their most helpful suggestions. Any errors are entirely mine.
1 Australian Woollen Mills Pty Ltd v The Commonwealth (1954) 92 CLR 424 (HCA) 456–57, 461.
2 Reinhard Zimmermann, The Law of Obligations – Roman Foundations of the Civilian Tradition
(Clarendon Press 1996) 554.
3 Zimmermann (n 2) 505.
61
62 Contract in Commercial Law
4 KCT Sutton, “Promises and Consideration” in PD Finn (ed), Essays on Contract (Law Book
Company of Australasia 1987) 50.
5 Arthur T von Mehren, “Civil-Law Analogues to Consideration: An Exercise in Comparative
Analysis” (1959) 72 Harv LR 1009, 1016–17.
6 Cochrane v Moore (1890) 25 QBD 57 (CA) 75.
7 Marcel Mauss, The Gift: The Form and Reason for Exchange in Archaic Societies (WD Halls tr,
Routledge 1990) 4.
Ch 4 The Doctrine of Consideration in Contract 63
the idea of a truly free gift is unreal; usually obligation and self-interest are
involved and both the giver and the recipient understand this to be the case.
This may be seen as reflected in 19th century decisions of French courts8 in
which subscribers of money to a public cause were held to their word on the
ground that their purpose was not to make a gift but a contractual promise. This
was to be inferred from the advantage that they sought to gain in the increase in
their social standing by their display of ostentatious generosity. Civilian courts
will enforce a promise which appears to be in the nature of a gift if the promise
was made for a reasonable purpose, the promisor intended to be bound by it
and it would be unfair to permit reliance on a lack of form.
8 Referred to in K Zweigert and H Kötz, An Introduction to Comparative Law (Tony Weir tr 3rd ed,
OUP 1998) 395–96.
9 Zimmermann (n 2) 555.
10 Thomas Edward Scrutton, The Influence of the Roman Law on the Law of England (CUP 1885)
100.
11 TFT Plucknett and JL Barton (eds), St German’s Doctor and Student (Selden Society 1974) 229.
12 See eg Zimmerman (n 2) 554.
13 AWB Simpson, A History of the Common Law of Contract: The Rise of the Action of Assumpsit
(2nd ed, Clarendon Press 1987) 327.
14 KW Ryan, “Equity and the Doctrine of Consideration” (1964) 2 Adel LR 189, 190–91.
64 Contract in Commercial Law
the feoffor’s testament. A major change occurred with the emergence of the
doctrine of implied uses. In the 15th century, it became common for a feoffor
to convey land to feoffees to be held to the feoffor’s use until he gave them
further directions. In the meantime the feoffor could remain in possession and
enjoy the profits of the land. This practice led to the law implying a use in the
feoffor’s favour. Initially, under this rule of implied uses, the presumption of a
resulting use arose in clear and determinable circumstances, but a shift occurred
when it was decided that whenever a man conveyed land to feoffees without an
express declaration of a use, the use resulted to the feoffor. As the existence
of a resulting use was thus no longer ascertainable merely by examining who
was in possession and who derived economic benefit from the land, this made
it necessary to have some test by which it could be determined whether a
feoffment to uses was intended in the absence of a declaration of uses. The test
which was applied was whether or not consideration existed for the feoffment.
If the feoffees gave no consideration for the feoffment, there was a presumption
of a resulting use to the feoffor. The term “consideration” was an expression
for any reason which was deemed sufficient to rebut the presumption that a
resulting use was intended.
It has been suggested that the later extension of this notion of consideration
into the action of assumpsit may have been encouraged by the publication
of St German’s Doctor and Student, which helped familiarise common law
lawyers with canonist theories of promissory liability of alien origin.15 One of
the promises which was there said to be binding in conscience was a promise
“upon consideration”. Consideration there was used in two senses.16 “Upon
consideration” was used in the sense of “after deliberation”, which conveys that
a promise deliberately made is morally binding. “Consideration” also meant
the presupposition of the transaction, the reason for it. A promise made for a
reason is also morally binding.
In the action of assumpsit, the undertaking or promise was the assumpsit,
and the trespass was the breach of the undertaking or promise. The action
permitted the enforcement of an undertaking or promise where there was no
debt involved. In Golding’s Case, the Solicitor General stated the requirements
of the action as being, “[i]n every action upon the case upon a promise,
there are three things considerable, consideration, promise and breach
of promise …”.17 The last two matters were matters for the jury, but judges
sometimes reserved the question concerning consideration – whether the
promise was worthy of enforcement – for themselves as a means of control
over the action.18
The meaning of consideration at this time may be understood, in part, by
the way in which an action was pleaded. The consideration for the promise
appears in that part of the pleading which contained “the matter of
inducement”. It preceded the averment (or proof) of the promise. It was the
factual background to, and the explanation of, the reasons for the promise.19
The promise or undertaking was at the heart of the action. The defence to such
an action was pleaded as “non-assumpsit”.
The idea of the common law at this time, then, was that the legal effect of
the promise should depend upon the factors which motivated the making of it.
Consideration meant any good reason for making the promise.20 The promise
was legally enforceable because it was itself regarded as intrinsically valid to
create an obligation and a breach of it as morally reprehensible.21 This reflected
the philosophies of the natural law of the continent and canon law. In the 16th
century, references to principles of common sense morality were explicit.22
Lord Mansfield attempted to retain morality as a basis for the enforcement
of promises during the 18th century. In Hawkes v Saunders his Lordship said:
“Where a man is under a moral obligation, which no Court of Law or
Equity can inforce, and promises, the honesty and rectitude of the thing
is a consideration. … [T]he ties of conscience upon an upright mind are a
sufficient consideration.”23
The rejection of such notions in the 19th century decision of Eastwood v
Kenyon24 has been regarded as pivotal to consideration remaining as doctrine.25
Such rejection may also have retarded the development of doctrines such as
that of good faith.
Notions of quid pro quo were not a strong influence in the development of
the action of assumpsit.26 The influence of commerce was not yet apparent.
The law merchant had not required consideration for enforceable contracts
and in 16th century England commercial matters were dealt with by courts
mainly through an action on the bond, not an action on an informal promise.27
Consideration might be found not only in the payment of money or other
benefit as a quid pro quo, but also in a promise to return lost property or a
promise made on account of marriage. For example, there would be good
reason for promising to return a dog which had been found, because it would
be the defendant’s duty to do so.28
The first reported case to mention consideration29 was in 1557 and involved
a promise made in the expectation of marriage. It may be that if 16th century
notions of consideration had still been applied in the 20th century, Mrs Cohen
might have succeeded in her action in the High Court of Australia in 1929.30
Mrs Cohen brought an action against her husband claiming the sum of £275,
being the arrears of a dress allowance which she alleged he had promised, before
20 See eg Simpson (n 13) 320–21; David Ibbetson, A Historical Introduction to the Law of Obligations
(OUP 1999) 142.
21 Hein Kötz and Axel Flessner, European Contract Law (Tony Weir tr, Clarendon Press 1997) vol 1,
53.
22 Simpson (n 13) 444–45.
23 Hawkes v Saunders (1782) 1 Cowp 289, 290; 98 ER 1091, 1091.
24 Eastwood v Kenyon (1840) 11 Ad & E 438, 450; 113 ER 482, 486.
25 AWB Simpson, “Innovation in Nineteenth Century Contract Law” (1975) 91 LQR 247, 262–63.
26 Simpson (n 13) 424–26.
27 Simpson (n 13) 487.
28 Simpson (n 13) 439, referring to Ireland v Higgins (1587) Cro Eliz 125; 78 ER 383.
29 Joscelin v Sheltons Case (1557) 3 Leo 4; 74 ER 503.
30 Cohen v Cohen (1929) 42 CLR 91 (HCA).
66 Contract in Commercial Law
their marriage, to pay her. Dixon J held the statement of claim to be deficient,
for it did not allege consideration.31 The anticipated marriage was insufficient
to support an enforceable agreement (the other basis upon which Mrs Cohen
failed was that there was no intention to be legally bound by the promise, a
requirement about which more will be said later).
From the early days of assumpsit to the present, “consideration” has been
the crucial test of enforceability for informal contracts. In the words of a
16th century common law judge, it was sufficient to maintain an action upon
an assumpsit that there be “a moving cause or consideration precedent; for
which cause or consideration the promise was made …”.32 However, the
concept was not originally conceived of as a single principle but as a kind of
list of a number of generalised factual circumstances which had prompted
the promisor to make the promise. Some were sufficient, others were not. A
service performed in the past (a past consideration) did not support a promise
to pay for it, leaving the promise unenforceable.33 When such a past service
had been performed at the promisor’s request (requested consideration)
the promisor had to pay.34 Professor Simpson mentions examples: marriage
(which supported a promise of financial support), money paid (or other
recompense) and natural love and affection (less fully recognised in
assumpsit than in the law of uses).35 Other sufficient considerations were
benefits bestowed on third parties (rather than the promisor themself)
which supported a promise to pay for them,36 delivery of goods sold which
supported a promise to pay,37 granting an extension of time to a debtor in
exchange for another’s (the promisor’s) guarantee (forbearance).38 Mutual
promises exchanged at the same time were enforceable even if, as in wagers,
the element of bargain was lacking.39 The list is long and there would be no
point in trying to give a complete account. Some of the examples may strike
a 21st century reader as strange; they had their origin in evasive efforts made
by pleaders to avoid the objection that an older action, like debt or covenant,
rather than the then modern assumpsit, was the appropriate remedy.
The 19th century saw many attempts to encapsulate all forms of consideration
in just one formula.40 In Dunlop Pneumatic Tyre Co Ltd v Selfridge and Co Ltd,
Lord Dunedin adopted a formula which had been proposed by Sir Frederick
Pollock, “[a]n act or forbearance of one party, or the promise thereof, is the
price for which the promise of the other is bought, and the promise thus given
for value is enforceable.”41
This was an attempt to bring unilateral and bilateral contracts under the one
formula. Pollock himself expressed doubt about the inclusion in the formula of
the latter (after all the most common type). In a letter to Holmes of 16 October
1908 he stated, “[h]ave you ever found any logical reason why mutual promises
are sufficient consideration for one another…? I have not.”42 This issue has in
fact generated much controversy. Even the tightest definition of consideration
still leaves a good deal of uncertainty.
rule comparable to causa in the action of assumpsit49 and that for a long time
the common law explained consideration by reference to a formula borrowed
from natural law lawyers of the continent.50 As with causa, consideration was
the motive or reason for a promise and it rendered the promise enforceable.
A promisor’s subjective motive becomes the objective reason for enforcing
the promise.
they find that there was a good reason for the making of the promise which
is also a good reason for holding the defendant liable then they can with
more confidence award damages for breach, the consideration making it
more plausible to say both that there was a promise and that it was seriously
intended.”55
the doctrine has been regarded as “peculiarly obscure”, it is said that it may be
found in the texts of Pufendorf and Pothier.62
Professor Williston does not seem to have been in any doubt. He said63 that it
is a concept of civilian jurisprudence and should be excised from the common
law as alien and unnecessary, given the requirement of consideration. Another
way of looking at the matter might be to ask whether consideration is necessary,
given the requirement of intention to be legally bound.
It is sometimes the case that what appears to be the same principle adopted
by different legal systems may be different in its application, and this holds
true here. The common law not only does not accord the same primacy to the
intention to be bound as does the civil law, it does not give it the same breadth
of operation.
A leading case in Germany, referred to by Zweigert and Kötz,64 involved a
carrier (A), who had an urgent delivery to make, but no available driver, so A
asked another carrier (B) if he could supply a substitute. The driver supplied
by B was inexperienced and damaged A’s truck. German law would treat the
resulting claim for damages as flowing from a breach of contract, under the law
of obligations. B’s defence, that he was only helping out in an emergency out
of sympathy and had no intention of assuming a legal obligation, was rejected.
B’s subjective intentions were irrelevant. The question was whether A “in all the
circumstances must in good faith and in the light of good commercial practice
have concluded that such an intention existed” on the part of B. That must be so
it was held, because B must have realised that A was relying on the provision of a
competent driver for otherwise A would suffer loss. The holding reflects a broad
operation of implied intention that would not be seen in the common law.
66 PDV Marsh, Comparative Contract Law: England, France, Germany (Gower 1994) 104–06.
67 Stilk v Myrick (1809) 2 Camp 317; 170 ER 1168.
68 Zweigert and Kötz (n 8) 393.
69 [1991] 1 QB 1 (CA).
70 Williams (n 69) 19.
71 Zweigert and Kötz (n 8) 391.
72 Contract in Commercial Law
to find promises enforceable. The same may be said about advantages. The
observation has not been restricted to modern common law judges. It has been
suggested that the requirements of consideration in the action of assumpsit
were not always viewed strictly and that sometimes they were dispensed with
altogether.72
The approach in Williams v Roffey invites comparison with civilian law. The
finding implicit in it was that there was a perfectly understandable reason for
the extra payment, much as the old action of assumpsit would have approached
the matter of consideration. It may be taken to be accepted by the Court of
Appeal that there was clearly a serious intention on the part of the defendant in
making the promise. In circumstances such as these, where a party had, to his
detriment, under-quoted, civilian law would probably regard the offer of further
payment as an expression of good faith and fair dealing in the performance of
the contract.
The consequences of the difference in approach to consideration are also
evident in the context of the common law doctrine of privity. Civilian lawyers
would also ask why a promise benefiting a third party should not be enforced.73
It may be understandable why a contract should not burden a third party, but
why should a benefit to a third party offend?74 In German law, third parties
may claim performance of a contract which is said to have a “protective effect”
for them. In Australia, some statutes provide a general exception to the privity
rule.75 Otherwise, it is necessary to resort to equity to provide a trust for the
third party of the benefit of the contractual promise.
In Trident General Insurance Co Ltd v McNiece Bros Pty Ltd,76 it was observed
that the early common law permitted third parties to enforce contracts made
for their benefit. However, the law became unsettled and remained so for nearly
200 years before 1861, when Tweddle v Atkinson77 settled the matter.78 The two
rules which came to be accepted were that only a party to a contract can sue
upon it and consideration must move from the promisor.79
These principles were invoked in Trident v McNiece against a subcontractor
who sought the benefit of a definition of “the insured” as including
subcontractors of the principal insured. After reviewing the history and policy
behind the principles, the question was stated by Mason CJ and Wilson J as
“[s]hould it be a sufficient foundation for the existence of a third party
entitlement to sue on the contract that there is a contractual intention to benefit
a third party?”80 It was held that it was.81 This is conformable with the general
approach of civilian law to contracts.
by Lord Denning in Central London Property Trust Ltd v High Trees House
Ltd.89 However, Professor Sutton submitted90 that it is of greater antiquity. He
said that promises which were not bargained for, but which induced action
in reliance on them by the promise, were the original basis for the action in
assumpsit. If this is so, it would provide a most satisfactory conclusion to this
chapter. I could conclude by saying that, in seeking to deal with the problems
created by the modern notion of consideration, common law courts have gone
back to where it all began.
However, there is another viewpoint. Professor Simpson91 accepted that a
theory of induced reliance, with its different implications, is to be found in
St German’s Doctor and Student alongside the theory of consideration, but he
did not consider that it was reflected in what came to be applied as consideration.
He said that what is done on the strength of the promise is induced by the
promise, but it is not the motive for it. Induced injurious reliance as a ground
for actionability would have been presented not as an aspect of the doctrine of
consideration in assumpsit, but as an alternative to it.
Future Prospects
A number of courts have taken the decision of the English Court of Appeal in
Williams v Roffey to mean that agreements which purport to modify the terms
of already existing contracts may be valid even if they fail the consideration
test, a view which seems to have found favour with text writers. Legislative
measures such as the American Uniform Commercial Code have adopted a
similar approach and do not require consideration for an agreement modifying
an existing contract. The United Nations Convention on Contracts for the
International Sale of Goods,92 which has been enacted in Australian States and
Territories, has been regarded as dispensing with consideration in this context.93
The doctrine of consideration is of such ancient origin that it is almost
part of the common law lawyer’s sense of identity. As Windeyer J observed
in Coulls v Bagot’s Executor and Trustee Co Ltd, “[w]hether we like them or
not, the rules relating to consideration seem to me a stubborn part of our law.
They cannot be displaced by courts by head-on collision.”94 Even Lord Denning
said “[t]he doctrine of consideration is too firmly fixed to be overthrown by
a side-wind”.95 Nevertheless, the number of cases relying upon an absence
of consideration appears to be in decline, perhaps because of the emergence of
the doctrine of promissory estoppel. There are even echoes of Lord Mansfield’s
idea that consideration is really a matter of evidence – for example, in cases
such as Antons Trawling Co Ltd v Smith it was said that “[t]he importance of
consideration is as a valuable signal that the parties intend to be bound by their
agreement, rather than an end in itself ”.96 And it has been suggested that the
Williams v Roffey approach might be applied beyond contracts of variation.97
International bodies in which civilian thinking predominates hardly
favour a doctrine such as consideration. The members of the Commission
on European Contract Law 1994 (the Lando Commission),98 proposed that
the intention to create legal relations should become the sole test of liability
and that both causa (French law) and consideration (common law) should be
abolished.99 However, neither the UNIDROIT Principles nor the Principles of
European Contract Law, which do not require consideration, enact law but
rather provide guidance (“soft law”) to what might become law in the future.
Like the American Restatements, though probably to a lesser extent, they may
have some influence on court decisions.
An observer who looks at the doctrine of consideration from a comparative
perspective cannot help but think that its future cannot be assured, but then of
course this has been said before.
Reforming Consideration:
No Greener Pastures
Mindy Chen-Wishart
Introduction
The most basic proposition of the common law of contract is that contractual
liability is only incurred when a promise forms part of an interlocking exchange
in which each party’s promise or performance is the agreed equivalent and
inducing cause of the other’s. This is the doctrine of consideration and its
pedigree is impeccable.1 And yet, the literature on the consideration doctrine
is conspicuous in the depth and intensity of the hostility towards it.2 Professor
Cartwright observes that: “[w]ithin the law of contract, consideration is
probably the most criticised doctrine”.3
Lawyers are critical by nurture (and perhaps by nature); it is more difficult
to respond constructively to an identified problem. The report of the 1937
1 Peter Benson, “The Idea of Consideration”’ (2011) 61 U Tor LJ 241; see also Arthur T von
Mehren, “Civil-Law Analogues to Consideration: An Exercise in Comparative Analysis” (1959)
72 Harv LR 1009; JH Baker, The Reports of Sir John Spelman, (Selden Society 1978) vol 2, 94 SS
ch 9; JH Baker, “Origins of the ‘Doctrine’ of Consideration, 1535–1585” in Morris S Arnold et
al (eds), On the Laws and Customs of England (University of North Carolina Press 1981) 336–
58; AW Brian Simpson, A History of the Common Law of Contract: The Rise in the Action of
Assumpsit (Clarendon 1987) 319; David J Ibbetson, “Consideration and the Theory of Contract
in the Sixteenth Century Common Law” in John Barton (ed), Towards a General Law of Contract
(Duncker & Humblot 1990) 67–124; David J Ibbetson, A Historical Introduction to the Law of
Obligations (Oxford University Press 1999) chs 2, 7, 11–12; Daniel Markovits, “Contract and
Collaboration” (2004) 113 Yale LJ 1417.
2 See eg White v Jones [1995] 2 AC 207 (HL) 262–63; PS Atiyah, Essays on Contract (Clarendon
Press, 1986) ch 8; see also Gay Choon Ing v Loh Sze Ti Terence Peter [2009] SGCA 3; [2009] 2
SLR(R) 332 (Singapore Court of Appeal (SCA)) [92]–[118] whereof Phang JA, obiter, appended
a “coda on the doctrine of consideration” in the nature of an essay on the need for reform and
the potential use of doctrines such as promissory estoppel, economic duress, undue influence
and unconscionability in filling the gap that would be left by abolishing the doctrine of
consideration; see commentary in Mindy Chen-Wishart, “Consideration and Serious Intention”
(2009) Sing J Legal Stud 434; Phang JA had also been a critic of the consideration doctrine sitting
in the High Court in Sunny Metal & Engineering Pte Ltd v Ng Khim Ming Eric [2006] SGHC 222;
[2007] 1 SLR (R) 853 (Singapore High Court (SHC)) [28]–[30] (again obiter).
3 John Cartwright, Formation and Variation of Contract (Sweet and Maxwell, 2014) para [8.40];
see eg Lord Wright, “Ought the Doctrine of Consideration to be Abolished from the Common
Law?” (1936) 49 Harv LR 1225.
77
78 Contract in Commercial Law
4 Law Revision Committee, Sixth Interim Report (Statute of Frauds and the Doctrine of
Consideration) (1937, Cmd 5449) [26]–[40], [50] (Sixth Interim Report); see also Ontario Law
Reform Committee, Report on Amendment of the Law of Contract (Ministry of the Attorney
General 1987) ch 2.
5 Sixth Interim Report (n 4) [27].
6 Sixth Interim Report (n 4) [50].
7 Sixth Interim Report (n 4) [28].
Ch 5 Reforming Consideration: No Greener Pastures 79
binding obligation, but it does not follow from this that consideration should
be accepted as the sole test of such intention. This intention ought to be
provable by other and equally persuasive evidence such as, for example, the
fact that the promisor has put his promise in writing. We agree with this view,
and we therefore recommend that consideration should not be required in
those cases in which the promise is in writing.” 14
The idea that consideration merely functions as evidence of serious intention
is clearly wrong as a matter of law and of fact. While the presence of consideration
may coincidentally perform evidentiary, cautionary and channelling functions,
it may also contradict them in spectacular fashion. Absent consideration, the
law will not enforce a promise even if the promisor solemnly declares in front
of witnesses and in writing that she intends to be bound. Gratuitous promises
are not necessarily more difficult to prove or more likely to be fabricated than
bargains. Conversely, bargains made orally may be very difficult to prove and
nominal consideration is easily denied. Further, the limitations on human
rationality apply to both gratuitous and bargain promises; bargains may be
rashly made, or made on standard forms, without negotiation and with only
the most cursory understanding of their content, while gifts may be calculated
and heavily negotiated.
Further, Fuller’s thesis is based on a flawed understanding of the historical
evolution of the consideration doctrine. The enforcement of sealed promises in
a debt action long predates and rests on different theoretical foundations from
the writ of assumpsit (from which the modern contract action evolved):
“Before the law attained the sophistication of enforcing executory contracts,
it enforced promises by interpreting them as symbolic transfers when
accompanied by formalities signifying the crossing of a boundary between
promise and ‘deed’”.15
In short, promises plus formalities are enforced as executed transfers of things,
and can tell us nothing about the function of consideration, which enforces
promises as promise.
1.4 The civil law does not enforce all seriously intended
promises
The oft-made claim is that abolishing consideration would bring English law
into line with continental European civilian legal systems.22 In truth, civil law
draws essentially the same line between gratuitous and reciprocal undertakings.23
18 PS Atiyah, “Economic Duress and the Overborne Will” (1982) 98 LQR 197.
19 Mindy Chen-Wishart, “Undue Influence: Beyond Impaired Consent and Wrong-Doing,
Towards a Relational Analysis” in A Burrows and A Rodger (eds), Mapping the Law: Essays in
Honour of Peter Birks (Oxford 2006) 201; Mindy Chen-Wishart, “Undue Influence: Vindicating
Relationships of Influence” (2006) 59 CLP 231.
20 Alec Lobb (Garages) Ltd v Total Oil (Great Britain) Ltd [1983] 1 WLR 87 (CA) 94–95.
21 Cartwright (n 3) [8.42].
22 Lord Wright (n 3) 1226; AG Chloros, “The Doctrine of Consideration and the Reform of the Law
of Contract” (1968) 17 ICLQ 137, 164ff; Andrew Burrows, Understanding the Law of Obligations
(OUP 1998) 196–98; Beatson, Burrows, Cartwright (n 12) 129.
23 See von Mehren (n 1); John P Dawson, Gifts and Promises: Continental and American Law
Compared (Yale University Press 1980); Hein Kötz, European Contract Law: Volume One (Tony
Wier (tr), OUP 1997) ch 4.
82 Contract in Commercial Law
24 §§ 320–326 German Civil Code (BGB); Art 1102 French Civil Code (Code civil).
25 Reinhard Zimmermann, The Law of Obligations: Roman Foundations of the Civilian Tradition
(OUP 1996) 504–05.
26 Meaning some interest (tangible or intangible) that has already been reduced to an ownership
that the gift can divest and transfer; gratuitous services are excluded: see Dawson (n 22)
54–68. This is due to the need to prevent frustration of relatives’ inalienable right to succeed by
depletion of the estate by lifetime gifts.
27 See Dawson (n 23) 69.
28 Art 931 French Civil Code (Code civil); § 518 German Civil Code (BGB).
29 § 530(1) German Civil Code (BGB); Arts 953, 955 French Civil Code (Code civil).
30 § 519 German Civil Code (BGB).
31 See further Dawson (n 23) 53.
32 Dawson (n 23) 196.
33 See below 4.2.5.
34 Kötz (n 23) 58, 71–73, 77.
35 Kötz (n 23) 66.
Ch 5 Reforming Consideration: No Greener Pastures 83
diligence required of the promisor in his own performance are much reduced.
In most of the situations that have led to litigation (promises to supply free
transportation or medical care), a promise would usually add little to the
duties that the enterprise itself would generate. So I conclude that our law
has suffered no real loss by withholding from ties that bind so lightly the
descriptive title contract …”36
43 Brudner (n 15) 22: “the decision of the autonomous will to commit itself to a course of action
can enjoy no moral privilege over its subsequent decision to change its mind, for both decisions
are particular and equally valid expressions of the will”.
44 Fried (n 38) 14.
45 Fried (n 38) 14.
46 Ian R Macneil, “Values in Contract: Internal and External” (1983) 78 Nw UL Rev 340, 356–58,
395.
47 Dori Kimel, “Personal Autonomy and Change of Mind in Promise and in Contract” in Gregory
Klass, George Letsas and Prince Saprai (eds), Philosophical Foundations of Contract Law (OUP
2014) 96, 100.
48 Morris R Cohen, “The Basis of Contract” (1933) 46 Harv LR 553, 573.
Ch 5 Reforming Consideration: No Greener Pastures 85
people.49 The private domain is the natural home of gratuitous promises and
transfers; they are particularly good at building valuable trusting relationships
by engendering feelings of personal obligation and gratitude.50 Their value
is primarily as tangible expressions of the parties’ relationship (friendship,
love, comradeship, gratitude, respect, benevolence or generosity), and only
secondarily in the commodity promised. They create and consolidate ties
between individuals, and among members of society more broadly and create
the sort of society in which human beings thrive and sensibly want to live.
In this context, the enforceability of gratuitous promises by an outside force
could undermine their valuable trust building function. The risk that trust
will be betrayed is constitutive of the attitude of trust. The elimination of risk
(by resorting to law) can undermine trust or prevent it from occurring at all.
Unenforceability allows promisors to demonstrate their trustworthiness and
promisees to demonstrate their trust. Conversely, enforceability introduces a
new motive, which masks the signalling function of performance, and changes
its personal, social, and cultural significance.51 It could become unclear to both
parties whether an undertaking made in a spirit of love, friendship, affection,
or the like, is also performed for those reasons, or only to discharge a legal
obligation under the threat of legal sanction.
We need to preserve a private sphere where the law does not intrude – where
we do not have to be on guard, can experiment, act aspirationally and
spontaneously, and make or break gratuitous promises as expressions of our
commitments.52 The unenforceability of gratuitous promises “helps to define
and construct the legal understanding of intimacy, and to mark the dignity
and specialness of intimate relations”53 that distinguishes them from the
economic transactions between strangers. Preserving the expressive functions
of gratuitous undertakings and maintaining a private sphere free from legal
involvement also helps to explain why gratuitous promises, which are typically
made in the private domain, are ordinarily unenforceable.
Moreover, enforcement against an unwilling gratuitous promisor will
normally contradict the constitutive nature of the parties’ relationship.
That is, even if the promisor is morally obliged to perform, the promisee is
morally obliged (for example, as a friend, family member, romantic partner,
work colleague) to release, forgive or otherwise accommodate the repenting
promisor.54 To take account of this, we would need to recalibrate the excuses for
breach if gratuitous promises were to be enforceable. We saw that continental
prescribing doctors).60 Even so, the law should treat as gratuitous (and so
unenforceable) that which purports to be a gratuitous promise. It is autonomy
enhancing to allow individuals to mimic the valuable social form of gratuitous
promise in the private domain. This creates or reinforces relationships that
bring out the best in human interactions, such as good will, concern, flexibility,
accommodation, and common purpose. Moreover, legal enforcement in this
area may be too heavy-handed an approach for micromanaging the fine lines
between geniality and commercial inducement, and may compromise the
valuable social relations yielded by gratuitous undertakings.
60 Dana Katz, Arthur L Caplan, Jon F Merz, “All Gifts Large and Small: Toward an Understanding
of the Ethics of Pharmaceutical Industry Gift-Giving” (2003) 3 Am J Bioeth 39.
61 Sixth Interim Report (n 4) [28].
62 Sixth Interim Report (n 4) [30].
63 Sixth Interim Report (n 4).
88 Contract in Commercial Law
will be no easier to determine than consideration. Parties will often have given
the matter no thought and there will be neither discernible (ie objective) nor
concordant intentions on whether the arrangement entered is legally binding.
That leaves courts to imply or deem such an intention. On the other hand,
a clear finding of intention to be legally bound will be insufficient in the
absence of both writing and consideration; the intention of the parties will
still be frustrated.
64 Although the Land Registration Act 2002 (UK) s 91 provides that a document in electronic form
which purports to effect certain dispositions relating to registered land for which a deed would
otherwise be required is to be regarded as a deed if it fulfils certain requirements.
65 This happens “as soon as there are acts or words sufficient to shew that it is intended by the party
to be executed as his deed”: Xenos v Wickham (1867) LR 2 HL 296, 312 (Blackburn J); reaffirmed
in Alan Estates Ltd v WG Stores Ltd [1982] Ch 511 (CA) 526.
66 Sixth Interim Report (n 4) [40], [50(8)].
Ch 5 Reforming Consideration: No Greener Pastures 89
67 Lon L Fuller and William R Perdue, “The Reliance Interest in Contract Damages: 1” (1936) 46
Yale LJ 52, 60, 70
68 Fuller and Perdue (n 67) 55, 74.
69 Fuller and Perdue (n 67) 62, 74.
70 Fuller and Perdue (n 67) 62.
71 C & P Haulage v Middleton [1983] 1 WLR 1461 (CA).
90 Contract in Commercial Law
77 He may not be able to because the claimant cannot resume his original position.
78 Waltons Stores (Interstate) v Maher (1988) 164 CLR 387 (HCA) stresses that the aim is not to
enforce the promise, but, rather, to avoid the detriment occasioned by the promisee’s reliance
on the promise, although sometimes this will result in the full enforcement of the promise as in
Walton Stores itself.
79 Andrew Robertson, “Reliance and Expectation in the Estoppel Remedies” (1998) 18 LS 360,
argues that the expectation was awarded in Walton Stores v Maher because that is the only way of
fully protecting the promisee’s reliance interest (which includes the loss of opportunity to make
other contracts) where the reliance comprises demolishing one’s own building and erecting
another to the promisor’s specifications.
80 [2007] EWCA Civ 1329; [2008] 1 WLR 643 (CA), holding that a claimant’s “reliance” can be
satisfied by making part-payment, that reliance makes it inequitable for the defendant to resile
from his promise, and the effect is to extinguish the defendant’s original rights. See further below
at 3.2.3.2.
81 See eg Alexander Trukhtanov, “Foakes v Beer: Reform at Common Law at the Expense of Equity”
(2008) 124 LQR 364; Luke Pearce, “Foakes v Beer and Promissory Estoppel: A Step Too Far”
(2008) 19 King’s LJ 630; David Capper, “The Extinctive Effect of Promissory Estoppel” (2008) 37
CLWR 105. And see below 3.2.3.2.
82 Although there is room to expand the operation of promissory estoppel from a shield to a sword
(ie from relieving promises to adding promises) so long as the remedy is distinguishable from
that purchased by the giving of consideration.
83 Mindy Chen-Wishart, “In Defence of Consideration” (2013) 13 OUCLJ 209.
84 See text corresponding to nn 37–42.
92 Contract in Commercial Law
85 Joseph Raz, “Promises in Morality and Law” (1982) 95 Harv LR 916, 934.
86 Contract therefore presents a much sparer and more formal conception of community than
is common to many promises in the private domain, prompting Dori Kimel, From Promise
to Contract: Towards a Liberal Theory of Contract (Hart Publishing Limited 2003) to draw
the distinction between “promise” and “contract”, and Daniel Markovits, “Contract and
Collaboration” (2004) 113 Yale LJ 1417 to do so between “co-operation” and mere “collaboration”.
87 Immanuel Kant, Ground Work of the Metaphysics of Morals, (H J Paton tr, Harper 1991) 427–30.
88 Alvin W Gouldner, “The Norm of Reciprocity: A Preliminary Statement” (1960) 25 Am Sociol
Rev 161.
Ch 5 Reforming Consideration: No Greener Pastures 93
reciprocity,89 both positive (people help those who have helped them) and
negative (people take revenge taken on those who have injured them).90 Even
Fried concedes that contract law’s central concern “is the situation where we
facilitate each other’s projects, where the gain is reciprocal”.91 Conversely, lack
of reciprocity (unless it is explicable by altruism, generosity or beneficence)
generates tensions that threaten social stability, a core concern of state action.
Given power disparities, natural egoistic motivations will seek benefits without
returning them. The reciprocity norm facilitates a pattern of interaction that
inhibits exploitative relations and resulting social instability.92 Thus, explicit
reciprocity describes the basic structure of what counts as just and prescribes
the basic rule of engagement that justifies state support between parties in the
market domain where trust and social sanctions cannot be assumed.
The justice of exchange is embedded in other private law rules. Less than
full expectation remedies are available via a deed or promissory estoppel where
consideration may be absent. A third party who acquires contested property is
protected only if she is a bone fide purchaser for value, rather than a donee.93
A causative mistake is enough to trigger the restitution of a non-contractual
enrichment, but much higher thresholds must be crossed for the return of
(or to set aside) reciprocated (contractual) transfers.94 The transactions of a
bankrupt can be set aside if it is not part of an exchange.95 Restitution for total
failure of consideration96 allows a transferor to escape a bad bargain because
the transferee should not get something for nothing. Lastly, where one party
pays for or contributes to the purchase of property in the name of another, the
law presumes that the contributor did not intend a gift and raises a resulting
trust in her favour.97 At the core of all these rules is the idea of reciprocity,
that one is presumed not to give away something for nothing. Dismantling
the requirement of consideration would grate against these rules and trigger
potentially radical but uncertain knock-on effects.
89 See eg Vincy Fon and Francesco Parisi, “Revenge and Retaliation” in Francesco Parisi and
Vernon L Smith (eds), The Law and Economics of Irrational Behavior (Stanford University Press
2005) 141, 143; Robert A Prentice, “Law & Gratuitous Promises” (2007) U Ill L Rev 881.
90 Ernst Fehr and Simon Gächter, “Fairness and Retaliation: The Economics of Reciprocity” (2000)
14 J Econ Perspect 159.
91 Fried (n 38) 13.
92 Gouldner (n 88) 174.
93 Miller v Race (1758) 1 Burr 452; 97 ER 398; Pilcher v Rawlins (1871–1872) LR 7 Ch App 259
(CA).
94 cf Kelly v Solari (1841) 9 M & W 54; 152 ER 24; Bell v Lever Brothers [1932] AC 161 (HL).
95 Insolvency Act 1986 (UK) s 238(4)(a).
96 Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 (HL).
97 Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669 (HL); Re Vandervell’s Trusts
(No 2) [1974] Ch 269 (CA).
98 See Fuller and Perdue (n 67) 56–57; Eisenberg, “Donative Promises” (n 12) 3.
94 Contract in Commercial Law
to enforce it, what she has done to earn it. It is the reciprocity manifest in the
consideration requirement that provides the best justification for the claimant’s
right to enforce the promise. Correlatively, the defendant should be liable to
perform her promise because she has received the consideration she asked of
the claimant. The doctrine of consideration looks at both sides and explains the
expectation measure of contractual remedies.
the facts. The real and substantive value of the wrappers emerges if we see it as
residing in Nestlé’s overall marketing strategy, rather in the wrappers themselves.
3.2.3 Failure to find consideration consistent with common sense and business
expediency
The last problem arises from a too rigid conception of value in certain
circumstances so that judicial conclusions may fail to track common sense
123 The cost saved deducted from the promisor’s expectation would then be the lower amount of the
original contract.
124 Chen-Wishart (n 120).
125 Sixth Interim Report (n 4) [36] (emphasis added).
126 Sixth Interim Report (n 4) [50(3)], [33]–[35].
127 [1995] 1 WLR 474 (CA).
128 (1884) 9 App Cas 605 (HL).
129 [2007] EWCA Civ 1329; [2008] 1 WLR 643 [42].
130 Collier (n 129) [42].
131 Collier (n 129) [19]. Neither Collier’s continuing to make the payments that he was already
making, nor his “wild speculation” that he could otherwise have pursued the other creditors
amounted “to anything rendering it unconscionable on the part of the creditor now to pursue
Mr Collier for the full amount of the debt”.
132 Collier (n 129) [36].
98 Contract in Commercial Law
to D&C Builders Ltd v Rees133 yet all three judges there applied Foakes v Beer
rather than promissory estoppel. Moreover, actual part-payment in Rees did
not extinguish the original debt; the pressure that Mrs Rees brought to bear
on the builders to induce their agreement to accept part payment meant that
it would not have been inequitable for them to go back on their promise. In
Collier v P&MJ Wright (Holdings) Ltd, Longmore LJ gave less than enthusiastic
support for Arden LJ’s position. His Lordship said that if this position
were sustained, courts should be slow to find a promise to forgo rights in the
first place.134
The preferable solution is to deploy the same collateral unilateral device
that I have already proposed to deal with promises of “more for the same”.
Accordingly, the promisor makes a unilateral offer to discharge the whole debt
only if the promisee makes the stipulated part-performance.135 The “practical
benefit” to the promisor is in actually receiving part-payment over the mere
right to sue; “a bird in the hand is worth two in the bush”.136 Again, this accurately
reflects the promisor’s motivation in promising to accept part payment. Again,
it would protect the promisor’s position; if the promisee fails to make the part-
payment, the new promise is not binding and the full amount remains due.
This is entirely consistent with the result if not the reasoning of Arden LJ’s
position. It is also consistent with the LRC’s recommendation. For, despite its
declaration that it is “more logical and more convenient to recommend that
the greater obligation can be discharged either by a promise to pay a lesser
sum or by actual payment of it”,137 the LRC adds that “if the new agreement
is not performed then the original obligation shall revive”.138 Applying the
collateral unilateral approach suggested above to enforce both (i) promises to
pay more and (ii) promises to accept less would eliminate the incoherence of
a divergent approach in the current law. It would also avoid the distortions
that Collier v P&MJ Wright (Holdings) Ltd brings to the doctrine of promissory
estoppel, and the assault that the LRC’s recommendation would wrought on
the consideration doctrine.
Indeed, this analysis was adopted in MWB Business Exchange Centres Ltd v
Rock Advertising Ltd.139 In that case, MWB operated and managed office space
where Rock was a licensee. Rock incurred arrears of license fees and other
charges, whereupon the parties agreed an oral variation to re-schedule the debt
and Rock paid £3,500 on the same day in accordance with the revised schedule.
MWB’s argument that the variation lacked consideration was rejected. The
Court of Appeal held that Williams v Roffey’s acceptance of ‘practical benefit’
as good consideration for promises to pay more, must logically also be good
consideration for promises to accept less,140 as in this case. There were several
practical benefits to MWB from its agreement to re-schedule Rock’s debt. First,
MWB would retain Rock as a licensee beyond the contractual term.141 This
would clearly amount to legal benefit. More significantly, the second recognized
benefit to MWB was that it would recover £3,500 immediately and have
a greater chance of recovering the rest of the arrears.142 If this part payment
of debt counts as practical benefit, then it must be sufficient on its own to
support the promise to accept later repayment. This is difficult to square with
the Court’s insistence143 that the case is distinguishable from Pinnel’s case,144
Foakes v Beer145 and In re Selectmove.146
In reaching the conclusion that part payment may be consideration for a
promise to accept it in discharge of the whole debt, Mary Arden LJ adopted
the terminology of “collateral unilateral contract” argued in this article.147 Her
Ladyship said:148
“my provisional view (in the absence of argument) is that Rock’s acceptance
of MWB’s promise gave rise to a “collateral unilateral contract,” meaning
that, collaterally to the licence, for so long as Rock was entitled to and did
occupy the unit and paid the licence fee as renegotiated, MWB would be
bound on payment of the initial £3,500 to accept the deferral of the arrears
in accordance with the variation agreement…. [I]t was not suggested by
either party that Rock could take the benefit of the variation agreement
without performing its side of the bargain, or that MWB could withdraw from
the variation agreement so long as Rock was complying with it.”
While McCombe LJ preferred not to base his concurrence with the outcome
on this basis,149 and Kitchin LJ preferred to express no view on it,150 the latter
nevertheless added that the “variation agreement thereupon became binding
upon MWB and it would remain binding for so long as Rock continued to
make payments in accordance with the revised payment schedule.”151
159 The Editorial Committee of the Modern Law Review, “The Law Revision Committee’s Sixth
Interim Report” [1937] 1 MLR 97, 101.
160 Sixth Interim Report (n 4) [27].
161 Sixth Interim Report (n 4) [50(6)].
162 Sixth Interim Report (n 4) [38].
163 Sixth Interim Report (n 4) [38]; see also Law Commission, Working Paper 60: Firm Offers (1975)
[20].
164 Franklin M Schultz, “The Firm Offer Puzzle: A Study of Business Practice in the Construction
Industry” (1952) 19 U Chi L Rev 237.
165 Sixth Interim Report (n 4) [38].
166 Sixth Interim Report (n 4) [6].
167 Sixth Interim Report (n 4) [50(6)].
168 Beale, Chitty (n 76) [2.208]–[2.210], [2.212], [2.126].
169 Beale, Chitty (n 76) [2.020].
170 Harvela Investments Ltd v Royal Trust Co of Canada (CI) Ltd [1986] AC 207 (HL).
102 Contract in Commercial Law
tenderer submitting a bid that satisfies the objectively definable criterion (such
as the lowest or highest price) specified by the other party.
The same analysis was deployed in Blackpool and Fylde Aero Club Ltd v
Blackpool BC171 where an invitation to tender was sent by a local authority to
seven selected parties stating that tenders submitted after a specified deadline
would not be considered. It was held that the local authority was contractually
bound to consider (though not to accept) the claimant’s tender. Consideration
was provided when the claimant sent a conforming tender by the specified
time. Again, a “lock out” agreement172 was recognised in principle in Walford
v Miles173 where the promisee’s consideration was the provision of a letter
of comfort from the promisee’s bank sought by the promisor. A “lock out”
agreement protects the promisee’s expenditure of money and time to “assess
what he is prepared to offer for its purchase or whether he wishes to make
any offer at all”, without taking the risk that the promisor “may have already
disposed of it or, alternatively, may be so advanced in negotiations with a third
party as to be unwilling or for all practical purposes unable, to negotiate with”
the promisee.174
By analogy, an enforceable firm offer would protect the promisee from
the risk that, having spent time and perhaps money to determine whether to
accept the substantive offer or otherwise relied on the availability of the offer,
the promisor might revoke the offer within the stipulated time period. But
what is the consideration? There is no problem if the promisee has paid a sum
of money, or given some promise (such as to apply for a loan to finance the
main contract) or completed some stipulated action (as in Walford itself). But,
on the current law, the promisee’s reliance on the promise to her detriment
does not, by itself, amount to consideration, unless the promisor requested that
detriment, expressly or impliedly.175
The answer, then, lies in that proviso. Accordingly, a firm offer would be
binding if a court finds that (i) the promisee has relied on the promise and
(ii) that reliance was impliedly requested by the promisor. It is entirely realistic
to say that a promisor makes a firm offer for a stipulated period to increase
its chances of concluding the main contract by encouraging the promisee to
invest resources in assessing the offer, or by putting itself in the position to
accept the offer. The promisee need not do anything, but if she has acted in
reliance on the promise such that her position may, or would be prejudiced if
the promisor revokes, then the promisor cannot revoke. This is either because
the promisee has given consideration by completing the impliedly requested
acts, or because her commencement of performance bars the promisor from
revoking its unilateral offer.176
171 [1990] 1 WLR 1195 (CA). No decision was reached on the quantum of damages.
172 Beale, Chitty (n 76) [2.122].
173 Beale, Chitty (n 76) [2.122].
174 Walford v Miles [1992] 2 AC 128 (HL) 139.
175 Eg Alliance Bank Ltd v Broom (1864) 2 Dr & Sm 289; 62 ER 631 where forbearance to sue was
found to have been impliedly requested and hence good consideration.
176 Errington v Errington [1952] 1 KB 290; Soulsbury v Soulsbury [2007] EWCA Civ 969; [2008]
2 WLR 874 [50]; Daulia Ltd v Four Millbank Nominees Ltd [1978] Ch 231.
Ch 5 Reforming Consideration: No Greener Pastures 103
Conclusion
Serious intention to be bound is necessary for contractual liability, but it is
not sufficient. A party’s reliance cannot justify the imposition of contractual
liability on the relied-upon party unless the reliance is on the latter’s promise
and is expressly or impliedly requested by the latter as the price of the promise.
The basis of contractual liability at common law is a voluntary exchange as
the mark of mutually respectful dealing that tracks the reciprocity instinct,
keeps the law out of the domain of gratuitous promises, and preserves scope
for change of mind as constitutive of valuable autonomy.
The problems identified by the LRC (ie not enforcing all seriously intended
promises, not protecting all foreseeable reliance) are either not problems; or are
already, and better, dealt with by alternative, carefully circumscribed doctrines
(ie the deed and promissory estoppel); or can be largely resolved within the
orthodox framework by realigning the scope of valuable consideration with
reality (ie one-sided contract variations and firm offers). There is no need and
no justification for dispensing with consideration or jumping to a different
basis of contractual liability. The LRC’s recommendations promise no greener
pastures. We are better off tending and refining the patch we have tilled for
hundreds of years. Evolution and not revolution has always been the common
law way.
6
Contracts lie at the heart of commercial law. This is not the place to discuss the
legitimacy of the notion of a lex mercatoria,2 but to the extent that one can be
said to exist, at least by reference to certain fundamental principles, lying at its
foundation is the notion of the bargain and its enforcement.
How contracts are understood, how they are given meaning and how they
are given operation are questions of technique and legal policy of the highest
importance. Often those processes of understanding, meaning and operation
take place through interpretation and construction, fact-finding, and rule-
application; but sometimes (and often at points of particular importance) there
is something more happening – some evaluation or evaluative process – that has
a close relationship with the process of ascription of meaning, and with fact-
finding, but is something different, something further, something less precise
and not amenable to logical expression or definition. It is sometimes hidden or
disguised by phrases such as “construction” or “construction in a broad sense”,
or by mere assertion with the suppression of any necessary premises, or by
constructing a rule of application with a meaningless or concealed circuitous
1 Or as the artist Grayson Perry might put it (see Map of Nowhere (blue) 2008): “The sadness of the
excessively logical”.
2 The debate as to the existence and nature of a new modern lex mercatoria is a fascinating one,
see for example: LY Fortier, “The New, New Lex Mercatoria, or, Back to the Future” (2001)
17 Arbitration Int 121; H van Houtte, The Law of International Trade (2nd ed, Sweet & Maxwell
2002) 24–28; G Petrochilos, Procedural Law in International Arbitration (OUP 2004) chs 1–3;
JH Dalhuisen, “Legal Orders and Their Manifestation: The Operation of the International
Commercial and Financial Legal Order and Its Lex Mercatoria” (2006) 24 Berkeley J Int’l L 129;
R Michaels, “The True Lex Mercatoria: Law Beyond the State” (2007) 14 Ind J Global Legal Stud
447; M Pryles, “Application of the Lex Mercatoria in International Commercial Arbitration”
(2008) 31 UNSWLJ 319; S Güçer, “Lex Mercatoria in International Arbitration” (2009) 1 Ankara
B Rev 30; KP Berger, The Creeping Codification of the New Lex Mercatoria (2nd ed, Kluwer Law
International 2010); LE Trakman, “The Twenty-First-Century Law Merchant” (2011) 48 ABLJ
775; G Cuniberti, “Three Theories of Lex Mercatoria” (2013) 52 Col JTL 369; JH Dalhuisen,
Dalhuisen on Transnational Comparative, Commercial, Financial and Trade Law (5th ed, Hart
Publishing 2013) vol 1; K Winnick, “International Commercial Arbitration, Anticipatory
Repudiation, and the Lex Mercatoria” (2014) 15 Cardozo J Conflict Resol 847; VM Johnson,
“Codification of the Lex Mercatoria: Friend or Foe?” (2015) 21 Law & Bus Rev Am 151.
105
106 Contract in Commercial Law
3 WMC Gummow, “The Selection of the Major Premise” (2013) 2 CJICL 47, 59.
4 A-G (NSW) v Perpetual Trustee Co (Ltd) (1940) 63 CLR 209 (HCA).
5 A-G (NSW) (n 4) 226–27 (emphasis added).
Ch 6 Characterisation: Its Place in Contractual Analysis and Related Enquiries 107
6 WMC Gummow, Change and Continuity: Statute, Equity, and Federalism (OUP 1999) 18–19.
7 Gummow (n 6) 18–19.
8 (1925) 36 CLR 60 (HCA) 78.
9 [1891] 1 QB 79 (CA) 85.
108 Contract in Commercial Law
not illusory”’.10 That criticism, however, was directed to the distinction insofar
as it related to the giving of legal effect or legal meaning: the “notions of
meaning and construction [being] interdependent”;11 and it was directed in
particular towards the over-complexity the distinction caused in the domain of
the categorisation of questions of fact or law.12 Yet the conceptual distinction
between interpretation and construction may be useful to assist in clarity of
thought in legal theory and understanding legal function.13 This is especially so
the further construction (being the identification of legal effect) moves from
the meaning identified.
The distinction does not fully capture what I want to discuss; both
“interpretation” and “construction” in this context relate to the ascription of
meaning and effect to words. I wish to discuss a wider question that takes as its
foundation the ascription of meaning to the contract, but is focused upon the
evaluation and categorisation of circumstances or relationships by reference
to values.
The process was also analysed by Professor Stone in his explanation
of the limits of logical deduction in the expression and development of
the common law.14 He expressed the strong view that insistence of some to
describe the judicial process as the operation solely of syllogistic logic, or as
the ascription of meaning (by the synonymous processes of interpretation
and construction), is likely to hide what is going on. Stone referred to legal
categories of meaningless reference, of concealed circuitous reference and
indeterminate reference. Some examples, a few of which I will return to, are:
the “substance of the contract” for the purposes of frustration or repudiation
(akin to the notion of “jurisdictional error” in public law); the distinction
between capital and income15 (all being categories of meaningless reference);
and duty of care, causation and the imposition of the conclusion of unjust
enrichment or of the obligation to give restitution (categories of concealed
circuitous or indeterminate reference).
I would like to begin with the fiduciary relationship. It is a key component of
the organisation of commercial life. That is because its key ingredients – trust,
reliance and joint venture – lie at the heart of many commercial relationships.
10 Collector of Customs v Agfa-Gevaert Ltd (1996) 186 CLR 389 (HCA) 396–97.
11 Collector of Customs (n 10) 397.
12 See Collector of Customs v Pozzolanic Enterprises Pty Ltd (1993) 43 FCR 280 (FCA) 287; criticised
in OV v Members of the Board of Wesley Mission Council [2010] NSWCA 155; (2010) 79 NSWLR
606 [29]–[31] (Basten JA and Handley AJA).
13 See OV v Members of the Board of Wesley Mission Council [2010] NSWCA 155; (2010) 79 NSWLR
606 [8] (Allsop P); JM Perillo (ed), Corbin on Contracts: Volume 5 Interpretation of Contracts (Lexis
Law Publishing 1998) para [24.3]; American Law Institute, Restatement (Second) of Contracts
(1979) [2000]; and see EW Patterson, “The Interpretation and Construction of Contracts”
(1964) 64 Col LR 833. The language of “construction” and “interpretation” is sometimes used
in a way that sees the two words as synonymous and sometimes with construction being the
process of ascription of meaning and interpretation as something wider. I will maintain the
usage used by Isaacs J in Life Insurance (n 8).
14 J Stone, Legal System and Lawyers’ Reasonings (Stevens & Son 1964) ch 7; J Stone, The Province
and Function of Law: A Study in Jurisprudence (Associated General Publications Pty Ltd 1946)
ch 7 (see in particular 171–91).
15 AusNet Transmission Group Pty Ltd v Federal Comr of Taxation [2015] HCA 25; (2015) 255 CLR
439 [14]; Hallstroms Pty Ltd v Federal Comr of Taxation (1946) 72 CLR 634 (HCA) 646.
Ch 6 Characterisation: Its Place in Contractual Analysis and Related Enquiries 109
16 Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 (HCA) 96–97; accepted by
the High Court in John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd [2010] HCA 19;
(2010) 241 CLR 1 [86]–[87] as the guiding statement of principle.
110 Contract in Commercial Law
21 ASIC v Citigroup Global Markets Australia Pty Ltd (No 4) [2007] FCA 963; (2007) 160 FCR 35.
22 Streetscape Projects (Australia) Pty Ltd v City of Sydney [2013] NSWCA 2; (2013) 85 NSWLR 196
[100]; see also P Finn, “Fiduciary Reflections” (2014) 88 ALJ 127, 143–44.
23 Competition and Consumer Act 2010 (Cth) sch 2 Australian Consumer Law, ss 21, 22; Australian
Securities and Investments Commission Act 2001 (Cth) ss 12CB, 12CC.
112 Contract in Commercial Law
28 Cavendish Square Holding BV v Talal El Makdessi; ParkingEye Limited v Beavis [2015] UKSC 67;
[2015] 3 WLR 1373.
29 Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30; (2012) 247 CLR 205.
30 Australia and New Zealand Banking Group Ltd v Paciocco [2015] FCAFC 78; (2015) 321 ALR 584;
Special Leave to appeal to the High Court was granted on 11 September 2015: [2015] HCATrans
229, with the appeal heard on 4-5 February 2016: [2016] HCATrans 9 and [2016] HCATrans
10 (the appeal was dismissed on 27 July 2016: Paciocco v Australia and New Zealand Banking
Group Limited [2016] HCA 28).
114 Contract in Commercial Law
35 Joseph v Law Integrity Insurance Co Ltd [1912] 2 Ch 581 (CA); Gould v Curtis [1913] 3 KB 84
(CA); National Mutual Life Association of Australasia Ltd v Federal Comr of Taxation (Cth)
(1959) 102 CLR 29 (HCA); Marac Life Assurance v Comr of Inland Revenue [1986] 1 NZLR 694
(CA); Cutten and Harvey v Sun Alliance Life Assurance Ltd (1986) 4 ANZ Ins Cas 60-742; NM
Superannuation Pty Ltd v Young [1993] FCA 138; (1993) 41 FCR 182; see generally JL Allsop,
“Some Thoughts on the Notion of Life Insurance” (1992) 5 Ins LJ 123.
36 Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986)
160 CLR 226 (HCA) 242–43; Gibbs v Mercantile Mutual Insurance (Australia) Ltd [2003] HCA
39; (2003) 214 CLR 604 [121]–[131], [185]–[200].
37 General Reinsurance Australia Ltd v HIH Casualty and General Insurance Ltd (in liq) [2009]
NSWCA 22 [73]–[75]; (2009) 15 ANZ Ins Cas 61-796.
38 National Mutual Life Association (n 35) 42.
39 Chow Yoong Hong v Choong Fah Rubber Manufactory [1962] AC 209 (PC) 216–17.
40 A-G (NSW) (n 4).
41 (1938) 38 SR (NSW) 632 (SC) 641–42 (emphasis added).
116 Contract in Commercial Law
entered into the contract unless he had been assured of strict or substantial
performance of the promise … and that this ought to have been apparent to
the promisor.”
Again, it looks like construction (that is, ascription of meaning), but there
is something more; it is an evaluation of importance based, of course, on what
is the meaning of the contract, but in the context of the general nature of the
contract as a whole, which inevitably brings a range of contextual values to
bear. As the plurality42 said in Koompahtoo,43 in describing the process as one
of construction, it is the intention of the parties, expressed in their language
understood in the context of the relationship and the commercial purpose it
served, that determines essentiality.
The leaning of the courts towards construing terms as intermediate
rather than as essential is informed by the values of justice and fairness in
the avoidance of termination on technical or unmeritorious grounds.44 This
illuminates the process of assessing what is serious and what is not as one being
based significantly on values. As the plurality recognised in Koompahtoo,45 the
sufficiency of seriousness, indicated by metaphor in “going to the root of the
contract”, leads to a “conclusory description” that:
“takes account of the nature of the contract and the relationship it creates, the
nature of the term, the kind and degree of the breach, and the consequences
of the breach for the other party. … [T]he adequacy of damages as a remedy
may be a material factor in deciding whether the breach goes to the root of the
contract.”
It can be accepted that this process rests primarily upon a construction of
the contract. But clearly it involves more than ascription of meaning; it involves
an assessment of the fairness and commercial justice in what has happened, set
against what the parties have agreed, in their commercial milieu.46 As Buckley LJ
said in Decro-Wall47 (cited in Koompahtoo48), seeking to capture what great
common lawyers49 had been saying for a century: “Will the consequences of
the breach be such as it would be unfair to the injured party to hold him to his
contract and leave him to his remedy in damages …?”
The test has been variously expressed: “root of the contract”, “unfair”, “fair
carrying out of the bargain as a whole” and “in a vital respect”. The “tests” thus
expressed have been criticised as circular and empty.50 I do not agree. The
tests really reduce to one variously expressed concept, which for Australia can
be seen in Koompahtoo51 and Ankar.52 However it is expressed, the essential
element is the deprivation of a benefit or an entitlement, or the imposition of a
burden, sufficiently serious as to change the character of the grant to, or of the
obligations or entitlements of, the other party to the contract to such a degree
that it can be said to be a commercially different bargain.53
The test is not definitional; it is based on a characterisation of the seriousness
of the breach, by understanding the nature and commercial operation of
the contract as a whole and coming to an evaluation of the seriousness of the
breach by reference to all the circumstances and to commercial fairness. This
relevance of commercial fairness or justice is echoed in the cognate enquiry as
to frustration. In Hirji Mulji v Cheong Yue Steamship Co Ltd,54 Lord Sumner said
that frustration was “a device, by which the rules as to absolute contracts are
reconciled with a special exception which justice demands”.55
The following can be seen to be relevant considerations in the assessment
of seriousness of breach: the adequacy of damages and the ability to quantify
damages; any apparent injustice, including unjust enrichment of the innocent
party, should that party terminate; the possibility of forfeiture by the party
in breach; the uncertainty or not surrounding future compliance with the
contract; the history of the standard of contractual compliance hitherto; the
expressed or otherwise evident attitude of the party in breach to its obligations;
the ability of either party to cure the breach; and, perhaps, the extent to which
the behaviour of the party in breach comports with standards of good faith and
fair dealing. These matters may not be exhaustive, but they may, in any given
case, assist in an assessment of a breach as whether of sufficient seriousness or
not to warrant termination. This is characterisation; a search for some more
particularly expressed positive rule is both pointless and likely to engender
complexity and confusion. This is what Viscount Haldane was referring to
in the context of the related evaluative enquiry concerning frustration when
he said in Bank Line Ltd v Arthur Capel & Co, “whether frustration has taken
place … depends on the circumstances to which the principle is to be applied,
rather than on abstract considerations”.56
The significance and importance of broader considerations, such as the
nature of the commerce involved, to the court’s assessment of serious breach
may be briefly illustrated by reference to the House of Lords’ decision in The
“Nanfri”.57 There, a dispute had arisen between owners and charterers over the
permissibility of certain deductions from time charter hire and over the validity
of the owners’ actions in declaring that it would not allow certain forms of
bills of lading (freight pre-paid bills) to be signed. The focus of the judgment,
as it concerned the owners’ conduct, was upon the assessment of seriousness
of breach – a question which was answered by reference to broad commercial
considerations such as the nature of the parties’ trading relationship, the
commercial purpose of the contract, and the potential impact of the breach
upon future commercial relations of the parties. Lord Wilberforce referred
directly to the fact that had the threatened breach occurred, “the charters would
have become useless for the purpose for which they were granted”, a number of
“pending transactions” would be affected which would mean that the charterers
“might have lost the whole benefit” of the bargain, there was a likelihood that
the charterers would become black-listed from future contracts, and finally
that, when viewed as a whole, the owners’ response was “disproportionate to
the intended effect”. 58 It was by reference to these assessments that his Lordship
concluded that the breach “went to the root of the contract” and was therefore
an action amounting to repudiation. This same approach was adopted by Lord
Fraser of Tullybelton, who focused upon the fact that the owners’ threat, if
carried out, “would have been ruinous to [the charterer’s] trade”59 and their
reputation “would be very seriously damaged” such that they would “probably
have been unable to obtain business for the vessels”.60 Again, it was because of
these considerations that his Honour concluded that the breach went to the
“root of the contract” and was repudiatory.
Characterisation, and the process involved in evaluating the seriousness
of a departure from a contractual standard or in assessing the essentiality or
otherwise of terms, is framed by an understanding of the context (including
commercial context) and imperatives of a given contract or type of contract. It is
from that understanding that the relevant values are drawn. That understanding
is also essential to the proper interpretation and construction of the contract
(in the sense of ascription of meaning). That is because understanding the
values and imperatives is crucial to any decision about what the parties meant
by the words they used. Examples of masterly understanding of the commercial
nature and imperatives of particular types of contract can be seen in the opening
paragraph of Lord Bingham’s speech in The “Hill Harmony”61 describing how
time charters work, or by Lord Hobhouse in the same case describing the
different commercial imperatives of a time charter and voyage charter,62 or
by Lord Mustill in The “Gregos”63 describing the commercial pressures in the
business of shipping and how they affect time and voyage charters.
Another task, similar in nature, was undertaken by the House of Lords in The
“Achilleas”64 in qualifying recovery under Hadley v Baxendale.65 Lord Hoffman
Or as Gaudron J said in Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty
Ltd: “[t]here is no very precise formulation of the necessary import of conduct
before it will be characteri[s]ed as repudiatory.”72
If I may be forgiven a bad pun at this stage of the discussion, the root or
essence of what I wish to say is that the search for rules that express, in value-free
language, positive law in the field of regulating dynamic human social activity
such as agreements, is fraught with inadequacy, and, if pushed relentlessly, likely
to lead to over-complexity and incoherence. The parties’ meaning, expressed in
the written words they have used, is central but it rarely exhausts the universe
of discourse of relevant legal reasoning. Usually there is something more. It
may be that this can be seen as the necessary open texture in many legal rules.73
I have called the process characterisation. It is the evaluation of circum
stances to draw a conclusion, often a taxonomical conclusion, and often one
that is contestable, about broadly expressed principles anchored in the honest
and fair undertaking of business. That process always calls upon a body of
values, private and public, that inform the logical and intuitive reasoning
process involved. It is rooted in or founded on ascription of meaning and
the positive legal rules attending the relevant subject. It is not a process detached
from an ordered legal framework and method. But, it is an evaluative process
governed and guided by the context and relevant values attending the question
and the contractual milieu in question.
If the process is hidden or if there is a refusal to recognise its existence,
values and attending norms fall away, meaningless ever-more precise positive
tests of ever-ascending particularity are framed, leading to complexity, and bare
assertion is met by bare counter assertion.
Modern commercial law, as a part of a global commercial community, rests
on principle and values (in particular, the values of honest fair dealing) rather
than minute rule making. A system based on principle and values requires clear
recognition and enunciation of the process of evaluation or characterisation – a
process based on the ascription of meaning of the parties and, where called for,
the evaluation or characterisation of relationships and conduct by reference to
the organised values that conform with, or inform, the relevant principle. That
process will take its place in the legal framework of relevant and related rules.
Its separate existence as a conceptual process should, however, be recognised in
order that the values being brought to bear can be understood.
Interpretation, Evidence,
and the Discovery of
Contractual Intention
Joshua Getzler*
* I thank Joe Campbell, Paul Davies, James Edelman, David Jackson, Mark Leeming, and Caitlin
Moustaka for helping me clarify some matters arising in this paper. All errors and misinterpretations
remain mine alone.
1 Lord Dyson MR, “The Contribution of Construction Cases to the Development of the Common
Law” (Keating Lecture, Assembly Hall, Church House Conference Centre, 25 March 2015)
https://www.judiciary.gov.uk/wp-content/uploads/2015/03/keating-lecture.pdf.
2 In this chapter I follow Anglo-Commonwealth usage and use “construction” and “interpretation”
as virtual synonyms, that is, denoting the court’s search for the legally effective meaning of an
agreement typically embodied in a text whose meaning must be extracted using canons drawn
simultaneously from party practice, social context, and legal norms. By contrast, American
common lawyers since Arthur Corbin in the 1930s or earlier have seen the process of discovering
contractual meaning as divided into two consecutive and distinct stages: first, ‘interpretation’,
connoting a search for linguistic meaning as postulated by parties within their socio-linguistic
communities, and secondly, ‘construction’, whereby the courts as public agents act to assign
legal effect to the linguistic data emerging from the interpretative process (see LB Solum, “The
Interpretation-Construction Distinction” (2010) 27 Const Comm 95). Inevitably these two stages
have mutual feedback effects, as where the court must offer construction rules as to what counts
as a valid interpretation of contractual intentionality, thus reducing the practical differences
between American and Anglo-Commonwealth practices.
3 Dyson (n 1) 11.
121
122 Contract in Commercial Law
4 JH Langbein, RL Lerner and BP Smith, History of the Common Law: The Development of Anglo-
American Legal Institutions (Aspen Publishers 2009) 85–204, 345–412.
5 See further C MacMillan, Mistakes in Contract Law (Hart Publishing, 2010) 69–82;
PA Hamburger, “The Development of the Nineteenth-Century Consensus Theory of Contract”
(1987) 7 LHR 241.
6 (1856) 5 HLC 673; 10 ER 1065 (HL).
7 (1864) 2 H & C 906; 159 ER 375 (Ex).
8 (1867) LR 2 QB 580.
9 (1871) LR 6 QB 597.
10 (1878) LR 3 App Cas 459 (HL).
Ch 7 Interpretation, Evidence, and the Discovery of Contractual Intention 123
11 MacMillan (n 5) 181–215.
12 See further M Lobban, “Contractual Fraud in Law and Equity, c1750-1850” (1997) 17 OJLS 441;
MRT Macnair, The Law of Proof in Early Modern Equity (Duncker & Humblot 1999).
13 The foundational cases are Earl of Chesterfield v Janssen (1750-51) 2 Ves Sen 125, 155–56; 28 ER
82, 100; 1 Atk 301, 351–52; 26 ER 191, 224–25 (Lord Hardwicke C); Gwynne v Heaton (1778) 1
BCC 1, 9–11; 28 ER 949, 953–54 (Lord Thurlow C). Full details of pre-Judicature authority are found
in E Sugden, A Practical Treatise on the Law of Vendors and Purchasers of Estates (11th ed, S Sweet
1846) 61–153; WW Kerr, A Treatise on the Law and Practice of Injunctions in Equity (W Maxwell
1867) 466–567; for a modern treatment see JD Heydon, MJ Leeming and P Turner, Meagher
Gummow and Lehane’s Equity: Doctrines and Remedies (5th ed, LexisNexis Butterworths 2015)
925–46.
124 Contract in Commercial Law
earlier known, so bringing the form of the contract into line with the substance
of discovered common intentions; thus rectification could be seen as a sub-set
of equitable specific performance.14
The rectification jurisdiction was explained by Lord Thurlow C and
distinguished from construction in the foundational case of Lady Shelburne v
Earl of Inchiquin:15
“Now, the moment you impeach a deed for fraud, you must either deny
the effect of fraud on the deed, or you cannot but be under the necessity of
admitting evidence to prove it. So if two persons intrust a third person to draw
up minutes of their intention, and such person does not draw them according
to such intention, that case might be relieved; for that would be a kind of fraud.
It must be an essential ingredient to any relief under this head, that it should
be on an accident16 perfectly distinct from the sense of the instrument. – So on
the head of ambiguity; if there be a latent ambiguity, it must be explained by
parol evidence; for though the words do not, prima facie, import an ambiguity,
yet if such ambiguity can be made to appear from parol evidence, it must be
admitted to explain it, as well as to raise it: but if words have in themselves a
positive precise sense, I have no idea of its being possible to change them, and I
take it to be an established rule that words cannot be changed in that manner.”
The Chancery judges admitted that it might be very hard to prove by parol
evidence an informal common intention in the teeth of denial of any mistake
by one of the parties,17 but proof there must have been as rectification was
commonly sought and commonly granted. One pathway to rectification was
to take discovery of the draftsman’s instructions; it was not enough for one
side simply to assert that the written agreement did not capture what the
parties had earlier agreed informally.18 If the written contract was sound but
the equity court nonetheless felt that there had been some sharp practice not
amounting to grounds for rescission, it might simply refuse its aid to either
party, for example by refusing an order for specific performance leaving the
party seeking enforcement to damages, which might turn out to be minimal. A
court of equity might also discipline unworthy litigants with orders for costs.
Lord Mansfield is a key figure in the development of contract interpretation
in many parts. He was long a leading counsel in the Court of Chancery and took
14 Simpson v Vaughan (1739) 2 Atk 31; 26 ER 415 (LC) (a joint bond reformed into a joint and
several bond since it was clear that no survivorship was intended); similar result in Ex parte
Symonds (1786) 1 Cox’s Eq Cas 200; 29 ER 1128 (LC); Baker v Paine (1750) 1 Ves Sen 456; 27 ER
1140 (LC) (payment of commission on gross profit reformed to a proportion of wholesale costs);
Townshend v Stangroom (1801) 6 Ves Jun 328; 31 ER 1076 (LC) (verbal agreement regarding
boundaries of land differed from deed of lease – Lord Eldon C refused rectification, but also
denied specific performance of the conveyance, leaving the lessor to common law damages).
15 (1784) 1 BCC 338, 351; 28 ER 1166, 1172 (Lord Thurlow C).
16 “Accident” is here used in the sense of mistake, using the parlance of older law and equity.
17 The locus classicus is Henkle v Royal Exchange Assurance Co (1749) 1 Ves Sen 317; 27 ER 1055
(Lord Hardwicke C); the high standard of proof is stressed in a series of cases including Burt
v Barlow (1792) 3 BCC 451; 29 ER 638 (LC); Mosely v Virgin (1796) 3 Ves Jun 184; 30 ER 959
(Lord Loughborough C); Fowler v Fowler (1859) 4 De Gex & J 250, 264–65, 273–74; 45 ER 97,
103, 106–07 (Lord Chelmsford C), summarizing earlier authorities.
18 Mortimer v Shortall (1842) 2 Dr & War 363, 370 (Sir Edward Sugden); for modern restatement
of this rule see Frederick E Rose (London) Ltd v William H Pim Junior & Co Ltd [1953] 2 QB 450;
Equuscorp Pty Ltd v Glengallan Investments [2004] HCA 55; (2004) 218 CLR 471.
Ch 7 Interpretation, Evidence, and the Discovery of Contractual Intention 125
equitable procedures with him to the Court of King’s Bench, where he presided
from 1756 to 1788; he could thus bridge the equitable and legal styles.19 One
of his innovations was to strive to get party witness into court, arguing that
partiality to one’s cause went to credit not capacity, and it was better to have
party testimony tested though cross-examination than excluded.20 It would
take a century for this principle fully to be established. Lord Mansfield strove to
curb counsels’ practice of sniping at evidence ad hoc by raising a welter of prior
exclusionary cases. The cure for this forensic anarchy was to develop a science
of evidentiary rules:
“The uncertainty of the law of evidence is owing to mistaken notes, which
have turned particular cases into general rules. Now the whole of the law
of evidence consists in applying general rules to particular cases, for almost
all evidence is admissible or inadmissible according to the circumstances of
the case.”21
Lord Mansfield also introduced expert commercial witness and special
juries of merchants to supply business norms as evidence of the implicit
rules by which merchants contracted.22 This was particularly important in
insurance and maritime law,23 and also led to recognition of bills of exchange
and commercial paper, though Lord Mansfield famously failed to extend
mercantile custom to general contract when he sought to convert contractual
consideration into a test for enforcing seriously meant promises.24 When
it was objected that his experts “speak not as to facts, but as to opinion”,
Lord Mansfield replied, “[i]n matters of science no other witnesses can be
called … The question then depends on the evidence of those who understand
such matters”.25
In our post-fusion world of “free proof ” judges have the broadest latitude
to admit and decide fact, without juries to instruct or rules of permissible
pleading and admissibility of evidence to observe; and common law institutions
such as contract are adjudicated with every possible type of evidence before
the judge. This is the real meaning of fusion – deciding common law claims
using equitable modes of proof.26 The turmoil in judicial theories of contract
interpretation today is in large part a struggle to re-establish filters on the flow
of admissible fact regarding intentionality.
approach allowing the widest possible matrix of fact to inform objective contract
interpretation as a matter of law, but still ruling pre-contractual negotiation to
be inadmissible evidence in determining what the parties as a question of fact
might have meant by their final contractual agreement.34 This inadmissibility
has been widely accepted, and justified on the basis that the general context of
party negotiation may successfully be metered by the court through taking of
evidence, whilst the tenor of immediate pre-contractual negotiations known
only to the parties are too subjective and various to be evidenced with any
precision. The subjective beliefs of the actors in pre-contractual negotiation
may be excluded for purposes of interpretation, but these beliefs may be
probative in controversies over formation. There are two main categories where
the courts will admit extrinsic evidence capable of undermining the standing
of an objectively proven written agreement as a record of the parties’ wills.
The first case is where strong extrinsic evidence demonstrates that both sides
objectively seemed to mean something different in their agreement than that
recorded in the contract, in which case equitable rectification may be ordered
(the parties must perform their original mutual agreement and the written
terms are varied by order of the court). In the second category of case, if it is
proven that one side knew or suspected that the other was making a serious
mistake about the terms of the concluded contract, then the contract may not
be enforced on its objective terms; either equitable relief for unilateral mistake
may be ordered (the contract is undone), or a non est factum finding may be
made (such that the contract is found to be void ab initio).35
To add another layer of complexity, courts may also look at the course of
dealings between parties when deciding business necessity or efficacy or common
sense or reasonable expectations in the construction of terms, or in some cases,
through implication of added terms.36 Moreover courts must look at the course
of negotiation between the parties when deciding collateral warranties and the
operation of estoppels. All of this adds to the tension surrounding the doctrine
that general context, but not pre-contractual negotiations, may be admitted in
evidence to help the court determine the meaning of a contractual relationship.
The judges have offered a myriad of formulae to capture and tame the deep
tensions lurking in admission of evidence to aid contractual interpretation.
Lord Dyson in his lecture quoted Lord Clarke’s important contribution to
interpretation theory in Rainy Sky SA v Kookmin Bank, which really shrouds
the problem of evidence by focusing on commercial policy:
34 Dyson (n 1) 12. This problem is explored in PS Davies, “The Meaning of Commercial Contracts”
in PS Davies and J Pila (eds), The Jurisprudence of Lord Hoffmann (Hart Publishing 2015) 215–40.
35 This is one possible interpretation of Hartog v Colin & Shields [1939] 3 All ER 566 (KB), a
common-law case where an objective view of the context of negotiation showed that there
was no legally probative offer made on the terms enunciated by the offeror but rather a
misstatement of a key term knowingly snapped up by the offeree; the offeree could not insist on
the misstated contract as he was objectively aware from participation in the immediate course
of negotiation that no such terms were intended. Interestingly Singleton J in this case described
the verbal mistake using the antique language of “accident”, perhaps to distinguish it from
misrepresentation; cf Shelburne (n 15).
36 Equitable Life Assurance Society v Hyman [2000] UKHL 39; [2002] 1 AC 408, 459 (Lord Steyn);
Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10; [2009] WLR 1988, 1993–95
[17]–[27] (Lord Hoffmann).
128 Contract in Commercial Law
“If there are two possible constructions, the court is entitled to prefer the
construction which is consistent with business common sense and reject
the other.”37
Though Lord Clarke’s contribution in Rainy Sky has been admired, cited
and followed, his interpretative claim may no longer be safe in light of recent
decisions at the highest tier of English courts. A harbinger of this development
was Lord Grabiner, who in a comment on interpretation after Chartbrook warned
against use of the notion of business efficacy as a charter for curial rewriting of
explicit contractual terms, whilst conceding that such a notion may go towards
court construction of what the parties conventionally intended by their choice
of words.38 Such an approach has now emerged in the 2015 Supreme Court case
of Arnold v Britton.39 In that case a contract term required a lessee to pay a part of
the lessor’s expenses as a fixed annual sum with a high inflation accelerator. Lord
Carnwath would have read down the clause based on a test of business efficacy.
According to Lord Carnwath, in a period with low inflation or even deflation
the regular acceleration of a fixed sum would be so “commercially improbable”
that no “reasonable observer” would have interpreted the payment clause thus
without very clear words; the better interpretation was to see the formula for an
accelerated fixed sum as a maximum or cap on a reasonable part contribution
to expenses. This approach aligns with the doctrine enunciated in Rainy Sky.
But the majority led by Lord Neuberger rejected this approach, on the basis
that interpretation that was “necessary to give business efficacy to the contract”
was ultimately a search for the parties’ objective intentions at formation and
nothing more. Only if the implications for business efficacy of a particular
contract interpretation were impossible would it then become necessary to find
a different meaning; the impossibility of itself would demonstrate that some
other objective interpretation of party intentions was mandated. In the absence
of such necessity the court’s power of interpretation could not be wielded to
rewrite a contract with hindsight along more reasonable lines, just because it
turned out badly for one of the parties who had lacked the foresight to write
in better terms. The majority did not find the payment term in this particular
contract sufficiently ambiguous to admit a “necessary” court remoulding; the
term requiring a rising recurrent fixed payment was certainly amenable to an
objective and unambiguous interpretation and was not impossible to enforce.
Lord Carnwath in his dissenting judgment in Arnold observed ruefully:
“In an unusual case such as this, little direct help is to be gained from authorities
on other contracts in other contexts. As Tolstoy said of unhappy families, every
ill-drafted contract is ill-drafted ‘in its own way’.”40
It seems that the appellate courts themselves increasingly resemble unhappy
families when it comes to contract interpretation. The whole area was rehearsed
again by the Supreme Court in December 2015, in the case of Marks and
Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited.41
This case turned on whether a term could be implied into a lease permitting a
42 Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10; [2009] 1 WLR 1988, 1994 [21].
43 Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd (sub nom South Australia Asset
Management Corporation v York Montague Ltd) [1997] AC 191 (HL) 212.
44 [2015] UKSC 74; [2016] WLR 85, 98 [35].
45 Decisions following Marks and Spencer in the first weeks since the Supreme Court’s decision
include Cavanagh v Secretary of State for Work and Pensions [2016] EWHC 1136 (QB); Phoenix
Developments (JPJ) Ltd v Lancashire CC [2016] UKUT 38 (LC); Iceland Foods Ltd v Aldi Stores Ltd
(6 May 2016, ChD); Rosenblatt (A Firm) v Man Oil Group SA (13 April 2016, QBD); Marussia
Communications Ireland Ltd v Manor Grand Prix Racing Ltd [2016] EWHC 809 (Ch); Globe Motors
Inc v TRW Lucas Varity Electric Steering Ltd [2016] EWCA Civ 396; PM Law Ltd v Motorplus Ltd
[2016] EWHC 193 (QB); Vizcaya Partners Ltd v Picard [2016] UKPC 5; Grove Developments Ltd v
Balfour Beatty Regional Construction Ltd [2016] EWHC 168 (QBD, TCC); R (on the application of
Menston Action Group) v Bradford MDC [2016] EWHC 127 (QB); Admantine Energy (Kenya) Ltd v
Bowleven (Kenya) Ltd [2016] EWHC 130 (Comm); Hallman Holding Ltd v Webster [2016] UKPC 3;
Re Beppler & Jacobson Ltd [2016] EWHC 20 (Ch); C & S Associates UK Ltd v Enterprise Insurance Co
Plc [2015] EWHC 3757 (Comm); Airport Industrial GP Ltd v Heathrow Airport Ltd [2015] EWHC
3753 (Ch); Regency Villas Title Ltd v Diamond Resorts (Europe) Ltd [2015] EWHC 3564 (Ch); Hayfin
Opal Luxco 3 SARL v Windermere VII Cmbs Plc [2016] EWHC 782 (Ch); AL Challis Ltd v British Gas
Trading Ltd [2016] EWHC 513 (QB Comm); Europa Plus SCA SIF & Anor v Anthracite Investments
(Ireland) Plc [2016] EWHC 437 (QB Comm); Stevensdrake Ltd v Hunt [2016] EWHC 342 (Ch);
Walter Lilly & Co Ltd v Clin [2016] EWHC 357 (QB TCC); Manor Asset Ltd v Demolition Services
Ltd (Rev 1) [2016] EWHC 222 (QB TCC); TOC Investments Corporation v Beppler & Jacobson Ltd
[2016] EWHC 20 (Ch Comp); Cosmetic Warriors Ltd v Gerrie [2015] EWHC 3718 (Ch).
130 Contract in Commercial Law
have bowed down before the new dispensation. Lord Carnwath in Marks
and Spencer agreed with the result decided by the majority, but preferred the
approach laid down by Lord Hoffmann in the 2009 Privy Council case of Attorney
General of Belize v Belize Telecom Ltd. Lord Carnwath accordingly conceived of
implication of terms as a pursuit of the meaning of the contract as made by the
parties, and not an augmentation of the contract ex post or a setting of default
terms by construction of the court to make the deal work better. It may be that
since Lord Carnwath saw interpretation in very wide terms in the Arnold case, he
could bring implication inside the category of interpretation of party wills and
still retain a broad judicial power to make reasonable contracts out of poorly
framed agreements. Lord Neuberger by contrast saw the process of interpretation
more narrowly, and would therefore wish to take implication of terms away from
party intention, thereby arming the court with a wide policy discretion to give
effect to agreements by augmentation.
46 See eg Maggbury Pty Ltd v Hafele Aust Pty Ltd [2001] HCA 70; (2001) 210 CLR 181, 188 [11].
47 Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 (HCA) 352, and
more generally at 345–53 (Mason J); Zhu v Treasurer of New South Wales [2004] HCA 56; (2004)
218 CLR 530, 559 [82] per curiam; International Air Transport Association v Ansett Australia
Holdings Ltd [2008] HCA 3; (2008) 234 CLR 151, 160 [8] (Gleeson CJ). In Royal Botanic Gardens
and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 240 CLR 45, 62–63 [39]
the High Court stated that any differences between ICS and Codelfa Construction were as yet
unresolved, and until the correct approach had been suitably aired in the High Court, the latter
case should be followed in Australia.
48 Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 (HL) 995–96.
Ch 7 Interpretation, Evidence, and the Discovery of Contractual Intention 131
49 Eg Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65; (2007) 69 NSWLR 603, 656 [265]
(Campbell JA); Byrnes v Kendle [2011] HCA 26; (2011) 243 CLR 253, 285 [99] (Heydon and
Crennan JJ).
50 Prenn v Simmonds [1971] 1 WLR 1381 (HL) 1385.
51 Lord Wilberforce’s approach was adumbrated by Diplock LJ in Hong Kong Fir Shipping Co Ltd v
Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 (CA).
52 See further M Bridge, “Reardon Smith Lines Ltd v Yngva Hanseh-Tangen, The Diana Prosperity
(1976)” in Mitchell and Mitchell (eds) (n 24) 321–49.
53 Codelfa (n 47) 346.
132 Contract in Commercial Law
54 [2014] HCA 7; (2014) 251 CLR 640, 656–57 [35] (punctuation modified).
55 Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989, 995–96; [1976] 3 All ER 570,
574.
56 [2009] EWCA Civ 636 [28].
57 Zhu v Treasurer of New South Wales [2004] HCA 56; (2004) 218 CLR 530, 559 [82] (Gleeson CJ,
Gummow, Kirby, Callinan and Heydon JJ).
Ch 7 Interpretation, Evidence, and the Discovery of Contractual Intention 133
admitted to assist construction. This is partly a battle over the authority of non-
ratio High Court utterances within the federal and State structure of Australian
courts. But abstracting from these precedential questions, it is hard not to side
on the substantial question with the New South Wales Court of Appeal’s view in
Mainteck Services Pty Ltd v Stein Heurtey,58 that ambiguity is not entirely a quality
of semantics on the page, but rather involves application of words to conduct;
thus ambiguity is initially established by context and then falls to be resolved by
context, and the so-called gateway requirement is a linguistic detour that adds
nothing helpful to the process. This approach would bring Australian law back
into alignment with the English interpretation of the Reardon Smith principle.59
It is not yet clear where Australian law will settle. In Grocon Constructors
(Victoria) Pty Ltd v APN DF2 Project 2 Pty Ltd60 the Victorian Court of Appeal
sidestepped the Mainteck controversy by noting High Court statements insisting
that unambiguous contractual language be enforced literally by the court – and
then effortlessly finding an ambiguity. By contrast, in Todd v Alterra at Lloyds
Ltd, a decision of the Full Court of the Federal Court, Beach J refused to duck the
issue. After quoting the key Mason J passage according priority to plain meaning
over context in Codelfa, Beach J went on to observe:
“Mason J’s approach would not deny the proposition that before reaching
such a conclusion you can consider context. By first considering context, you
may conclude that there is no one plain meaning. Context can therefore be
used to perform two functions. It can enable you to assess whether there is
a plain meaning. And if one concludes that there is no plain meaning, it can
assist in resolving the latent textual imprecision.”61
Mason J’s revered formulation in Codelfa is thus capable of bearing a more
relaxed interpretation where ambiguity is itself judged in context; and in any
case there is no magic in words and interpretative canons may be revised as
suits each generation of courts.62
The equitable doctrine of rectification sits separately from the doctrines
of construction and implication of terms, as we have seen. The contours of
rectification are set out in Campbell JA’s scholarly judgment in Ryledar Pty Ltd
v Euphoric Pty Ltd.63 In Ryledar Campbell JA noted how rectification required
58 [2014] NSWCA 184; (2014) 310 ALR 113, 130–34 [69]–[86] (Leeming JA; Ward and Emmett JJA
concurring).
59 See Cherry Tree Investments Pty Ltd v Landmain Ltd [2012] EWCA Civ 736; [2013] Ch 305.
60 [2015] VSCA 190.
61 [2016] FCAFC 15 [75]. There is a striking echo here of Lord Thurlow C’s classical equitable
reasoning in the 1784 case of Shelburne, quoted above (text accompanying n 15).
62 The “gateway” debate is detailed in P Radan, “Construction of Private Legal Documents”
http://sydney.edu.au/lec/subjects/understanding_legal_language/Summer%202015-16/
Construction%20of%20Private%20Legal%20Documents%20(Jan%202016).doc.
63 Ryledar (n 49) 655–68 [258]–[316]. The interpretative principles in this case seem to be used
extensively in Australian courts up to the present: see eg RCR Tomlinson Ltd v Russell [2015]
WASCA 154 [48]–[54], esp [53]: “The parties’ common intention refers to the actual subjective
intention of the parties. However, in order to constitute a common intention the intention
of the parties must have been disclosed in some way, although not necessarily by a direct
communication, that gives rise to an outward expression of accord between them” (citing key
passages of Ryledar); also Archer Capital 4A Ltd as trustee for the Archer Capital Trust 4A v Sage
Group plc [2015] FCA 960 [128].
134 Contract in Commercial Law
64 Ryledar (n 49) 666 [309], quoting J Story, Commentaries on Equity Jurisprudence as Administered
in England and America (13th ed by M Bigelow, Little, Brown & Co 1886) 168–69, [154]–[155].
For an early judicial example of this reasoning: Uvedale v Halfpenny (1723) 2 P Wms 151; 24 ER
677; 2 Eq Cas Abr 718 pl 4; 22 ER 604 (Ch, MR).
65 Lord Hoffmann’s analysis of the test for common intention in Chartbrook (n 27) 1125–1128
[59]–[65] surveys the field and comes down for a test of objective ascertainment, seemingly
on the basis that because both sides mutually observe each other’s intention that makes the
intention independent of each one’s subjectivity. This is clever but difficult, and led the court in
Daventry to exclude actual or subjective intentions from their assessment of the pre-contractual
situation; for criticism see Meagher Gummow and Lehane (n 13) 934 [27.070].
Ch 7 Interpretation, Evidence, and the Discovery of Contractual Intention 135
experienced chess player, can sometimes see what another surgeon, or chess
player, is seeking to do, in a way that an inexperienced person cannot. What
matters for present purposes is that for a negotiating party to perform actions
or say words from which the other party can gather his or her intention is
itself a form of communication. Negotiation of any contract takes place in
a context in which various facts are known or assumed by the negotiating
parties. Sometimes, for example, if a contract is negotiated in a context where
there are well understood business practices and conventions, and nothing is
said about those practices and conventions not applying, it can be legitimate to
conclude that both parties to the contract intended to act in accordance with
those practices and conventions, even if they did not expressly communicate
to each other that they intended to act in accordance with those practices and
conventions. This view of what is needed before an intention is a common
intention, accords, it seems to me, with the Australian case law … .”66
negotiator’s acts which had contributed to the mistaken beliefs of the other
side. The contrary argument is that the personnel on the transferee side were
quite incompetent in not seeing the plain meaning of the written contract
proffered to them by the transferor’s lawyer, and their neglect should bind
their principal. Against that the transferee personnel had been led to believe,
and apart from the written contract had never been told otherwise, that
the contract embodied the prior agreement. It would punish their mistake
and reward the other side for that mistake to uphold the objective contract.
A welter of critical commentary has emerged in the wake of this decision,
notably by each of the judges who participated in the decision, which possibly
sets a new precedent in judicial frankness.68 Lord Hoffmann criticised the
majority judges in Daventry for confusing rectification of an agreement
for common mistake in recordation from varying the terms of an agreement for
unilateral mistake where the parties have not truly agreed;69 but that really only
restates the different interpretations of the facts of the case put forward by the
majority and the dissentient; the majority found a prior objective agreement,
and the dissentient judge did not.
If we stand back from the stream of authority and take an overview, we
find in Australian law four types of shared contractual intention identified by
the courts, each operating in distinct legal fashion, moving across a spectrum
of objectivity/subjectivity. There is (1) counterfactual implication; (2) factual
presumption; (3) outwardly evidenced mutual accord; and (4) subjective intent
known or suspected without outward manifestation. These four categories,
each with their own forensics, correlate respectively with (1) implication of
terms; (2) general construction of extant terms; (3) rectification for common
mistake; and (4) rectification for unilateral mistake. This structured taxonomy
may have helped the Australian courts avoid some of the arcane debate over
the nature of “objective” intentionality found in recent English discourse. The
better view is that all measurement of intentionality is “inter-subjective”; we
compare the mind state of the person being assessed with our own expectations
of intentionality had we been in that other person’s position. This insight
was captured in this passage from the 2004 decision of Toll (FGCT) Pty Ltd v
Alphapharm Pty Ltd where the High Court affirmed the objective approach in
general construction:
68 See eg Sir Nicholas Patten, “Does the Law need to be Rectified? Chartbrook Revisited” (2013)
Chancery Bar Association Annual Lecture http://www.chba.org.uk/for-members/library/
annual-lectures/does-the-law-need-to-be-rectified-chartbrook-revisited; Lord Toulson, “Does
Rectification Require Rectifying?” (2013) TECBAR Annual Lecture https://www.supremecourt.
uk/docs/speech-131031.pdf; Sir Terence Etherton, “Contract Formation and the Fog of
Rectification” (2015) 68 CLP 367; Lord Neuberger, “Reflections on the ICLR Top Fifteen Cases”
(2015) lecture to the ICLR https://www.supremecourt.uk/docs/speech-151006.pdf; Lord
Hoffmann, “Rectification and Other Mistakes” (2015) lecture to COMBAR https://app.pelorous.
com/media_manager/public/260/Lord%20Hoffmann%20Lecture%203.11.15.pdf. The storm
over Daventry is further dissected by PS Davies, “Rectifying the Course of Rectification” (2012)
75 MLR 387; PS Davies, “Rectification Versus Interpretation: The Nature and Scope of the
Equitable Jurisdiction” (2016) 75 CLJ 62; see also D McLauchlan, “Refining Rectification” (2014)
130 LQR 83; J Ruddell, “Common Intention and Rectification for Common Mistake” [2014]
LMCLQ 48.
69 Hoffmann (n 68) 9–16.
Ch 7 Interpretation, Evidence, and the Discovery of Contractual Intention 137
“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.”70
Interestingly the reasonable observer is here not a fully detached third party
but stands in the place of the party receiving a legally causative communication.
The inter-subjective insight this example supplies may not simply be a question
of evidence or appraisal; it may be that inter-subjectivity is constitutive of
intention, in that it is impossible to experience or appraise intentionality
without comparing one’s mind to the minds of others; the will only operates,
only recognises itself, when it engages with other wills and receives recognition
from other wills. A fully private subjective will expressed internally (“I must
practise piano today at four pm when I have a spare moment”) can be explicated
as dialogue within the self, a transaction or moment of recognition between
inter-temporal motivational states or successive identities within the person.71
The inter-subjective interpretation of intentionality has been explored in
many voices by philosophers ancient and modern;72 perhaps one of the most
useful analyses for lawyers was developed in the mid-18th century by Adam
Smith in his celebrated Theory of Moral Sentiments. Smith begins by deploying
moral psychology as a forensic device to uncover the content of other minds:
“As we have no immediate experience of what other men feel, we can form
no idea of the manner in which they are affected, but by conceiving what we
ourselves should feel in the like situation.”73
Smith went on to describe how this inter-subjectivity was ultimately the
ground not only of our knowledge of others, but our moral regard for them, or
as Smith labelled it, our sympathy:
“That this is the source of our fellow-feeling for the misery of others, that it is
by changing places in fancy with the sufferer, that we come either to conceive
or to be affected by what he feels, may be demonstrated by many obvious
observations, if it should not be thought sufficiently evident of itself. When we
see a stroke aimed and just ready to fall upon the leg or arm of another person,
we naturally shrink and draw back our own leg or our own arm; and when it
does fall, we feel it in some measure, and are hurt by it as well as the sufferer.
The mob, when they are gazing at a dancer on the slack rope, naturally writhe
and twist and balance their own bodies, as they see him do, and as they feel
that they themselves must do if in his situation.”74
Smith next introduced the heuristic device of the Impartial Spectator, a
postulated third party observer who allowed individuals to understand their
70 [2004] HCA 52; (2004) 219 CLR 165, 179 [40] (Gleeson CJ, Gummow, Hayne, Callinan and
Heydon JJ) (emphasis added); see further Phoenix Commercial Enterprises v City of Canada Bay
[2010] NSWCA 64 [148]–[166] (Campbell JA).
71 See G Ainslie, Picoeconomics: The Strategic Interaction of Successive Motivational States Within the
Person (CUP 1992).
72 Eg G Ryle, “The Thinking of Thoughts: What is le Penseur Doing?” in Collected Papers, Volume 2
(Hutchinson 1971) 480–96.
73 A Smith, The Theory of Moral Sentiments (A Millar 1759) i.1.1, 9.
74 Smith (n 73) i.1.1, 10.
138 Contract in Commercial Law
75 See J Getzler, “Law, Self-interest, and the Smithian Conscience” in M Del Mar and M Lobban
(eds), Law, Theory and History: New Essays on a Neglected Dialogue (Hart Publishing 2016) ch 14.
Modern contract theorists endlessly quote Smith’s purported observation, taken from the
Lectures on Jurisprudence (RE Meek, DD Raphael and PG Stein (eds), Clarendon Press 1978)
472, that “a promise is your declaration of your desire that the person for whom you promise
should depend on you for the performance of it”. But this seems a naïve and bowdlerized version
of his views, relayed at second hand from student notes, and cannot be taken as the essence of
his highly psychologised vision of voluntary legal relations expressed in his earlier works.
76 Byrnes (n 49).
77 (1920) 28 CLR 178 (HCA) 181.
78 Byrnes (n 49) 276–77 [61]–[65] (Gummow and Hayne JJ). See further C Karaka, “Secret
Intentions and Slippery Words: Byrnes v Kendle” (2012) 34 SLR 599.
79 See further Karaka (n 78).
80 [2015] HCA 6; MJR Crawford, “Inferences and Intentions in the Law of Trusts” (2015) 9 J Eq 290.
Ch 7 Interpretation, Evidence, and the Discovery of Contractual Intention 139
v Holt it was held that a manifested trust intention, even when communicated
to trustees and beneficiaries and to the tax authorities, but based on a
misunderstanding by the settlor of the legal and practical consequences of
the ensuing trust, could be undone ex post through the operation of a revived
doctrine of mistake in equity.81 Such an equity is no longer available, at least
in English law, in the case of bilateral contracts.82 This suggests that the clear
endorsement of the contractual model of objective intention in Byrnes must be
adapted in the case of the express trust.
These trusts considerations are interesting, but for our purposes subsidiary.
A most important aspect of the Byrnes decision was the careful analysis by
Heydon and Crennan JJ of the foundations of the objective formation and
interpretation rules in contract, and the impact of mistakes in disrupting
bilateral agreement. Even if these comments were obiter dicta they compel
attention.
The justices wrote:
“Contractual construction depends on finding the meaning of the language
of the contract – the intention which the parties expressed, not the subjective
intentions which they may have had, but did not express. A contract means
what a reasonable person having all the background knowledge of the
‘surrounding circumstances’ available to the parties would have understood
them to be using the language in the contract to mean. But evidence of pre-
contractual negotiations between the parties is inadmissible for the purpose
of drawing inferences about what the contract meant unless it demonstrates
knowledge of ‘surrounding circumstances’.
…
One reason why the examination of surrounding circumstances in order
to decide what the words mean does not permit examination of pre-
contractual negotiations is that the latter material is often appealed to purely
to show what the words were intended to mean, which is impermissible …
These conclusions flow from the objective theory of contractual obligation.
Contractual obligation does not depend on actual mental agreement.
Mr Justice Holmes said:
‘[P]arties may be bound by a contract to things which neither of them
intended, and when one does not know of the other’s assent. … [T]he
making of a contract depends not on the agreement of two minds in one
intention, but on the agreement of two sets of external signs, – not on the
parties’ having meant the same thing but on their having said the same thing.’
[Holmes, “The Path of the Law” (1897) 10 Harv LR 457 at 463-464 (emphasis
in original).]
In consequence the actual state of mind of either party is only relevant in
limited circumstances, for example, where one party relies on the common
law defences of non est factum or duress; where misrepresentation is alleged;
where one party is under a mistake and the other knows it; where the contract
is liable to be set aside by reason of equitable doctrines of undue influence,
81 [2013] UKSC 26; [2013] 2 AC 108; see further M Ashdown, Trustee Decision Making: The Rule in
Re Hastings-Bass (OUP 2015).
82 Great Peace Shipping Ltd v Tsavliris (International) Ltd [2002] EWCA Civ 1407; [2003] QB 679.
140 Contract in Commercial Law
at work in contract, tort, and even in crime where the jury preserved an
informal element. Holmes argued that the law used moral language such as
breach of promise, trespass, fault or mens rea, almost with its tongue in its
cheek. The modern law’s seeming reference to inner motivations and moral
responsibility was merely the conceptual relic of law in times past, a throw-
back to more primitive forms of culpability and organised vengeance. The
success of the rule of law under a modern unified state was to remove self-help
and vengeance and replace these anarchic resorts to coercion with orderly,
morally neutral laws. The neutrality of the law inhered in treating all subjects
alike even when they were not, even when some actors were guilty of knowing
transgression and some were unaware of the quality of their actions and could
not help themselves. The law channelled and constrained behaviour by setting
up signposts that all actors were to be taken to be capable of following, like
driving on the left or right, or keeping a promise that was signalled to others by
objective conduct. Mala in se, moral transgression, was thus to be transformed
and gradually absorbed into the master category of mala prohibita, acts
controlled by positive laws that bound all as a precondition of belonging to the
legal state. Holmes’ vision of the separation of law and morals was captured
in one typically aphoristic sentence of his discussion of negligence liability:
“For it can hardly be supposed that a man’s responsibility for the conse
quences of his acts varies as the remedy happens to fall on one side or the
other of the penumbra which separates trespass [connoting strict liability]
from the action on the case [connoting fault liability].”87
In a similar vein Holmes saw contract as a device for bilateral assumption of
risk with the secondary remedial obligations as the legal insurance mechanism;
contractual promises did not subject the will of one person to the moral demands
of another, and promise-keeping or -breaking at law were not moral acts.88
This suggests that the courts are right to maintain objectivity as the basic test for
the formation and construction of contracts, not only as a convenient method of
proof and an accurate guide to the moral psychology of agreement, but also as a
theory preserving liberty and protecting the authority of the law by not investing
it with too much moral freight.89 Holmes would also agree that conceptual
definition can proceed more surely if we have some awareness of the deeper
historical sources of our concepts, and do not confine ourselves to the task of
reconciling the most recent precedents. The latter task is better performed if we
attend to the former.
87 OW Holmes Jr, The Common Law (Boston 1881; M De Wolfe Howe (ed), Little, Brown and
Co 1963) 65–66 and M De Wolfe Howe, “Introduction”, xx-xxvii; HLA Hart, “Diamonds and
String: Holmes and the Common Law” in Essays in Jurisprudence and Philosophy (OUP 1983)
278–85; MJ Horwitz, “The Legacy of 1776 in Legal and Economic Thought” (1976) 19 J L &
Econ 621, 626ff.
88 Holmes (n 87) 235–36.
89 For a similar argument regarding civilian tradition, see JQ Whitman, “Long Live the Hatred of
Roman Law!” (2003) 2 Rechtsgeschichte 40.
8
Introduction
The implication of terms in fact can be understood as an exercise in gap filling
in the sense that it deals with issues the contracting parties might have resolved
by express provision, but have not. If the identification of terms implied in fact
is an exercise in gap filling then it is dependent on the application of a set of
rules which stipulate the kinds of gaps that will be filled and how those gaps are
to be filled. The rule-based approach to the implication of terms is exemplified
by the test set out Lord Simon of Glaisdale, giving the reasons of the majority
of the Privy Council in BP Refinery (Westernport) Pty Ltd v Shire of Hastings:
“Their Lordships do not think it necessary to review exhaustively the
authorities on the implication of a term in a contract which the parties have
not thought fit to express. In their view, for a term to be implied, the following
conditions (which may overlap) must be satisfied: (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.”1
The idea that the implication of terms in fact is an exercise in gap filling
involving the application of a set of rules is in tension with the view that the
identification of implied terms is an interpretative activity. If implied terms can
be or are identified through a process of interpretation, broadly understood,
then there are no real gaps in relation to the issues in question because the
answers are there to be found. The notion that implication in fact is an exercise
in interpretation is not a new idea. In Codelfa Construction Pty Ltd v State
Rail Authority of NSW, for example, Mason J said that the implication of a
term concerns the “meaning and effect” of a contract and is “an exercise in
interpretation”, though not “an orthodox interpretation of the language of a
143
144 Contract in Commercial Law
has also been mixed. The Belize Telecom approach to the implication of terms
has been criticised as excessively permissive, providing greater scope for the
courts to alter bargains.12 It has also been criticised for mischaracterising the
nature of the exercise involved in the implication of terms, and for providing a
formulation that is less helpful than a rule-based approach.13 Its defenders have
welcomed the decision as one that has provided a “doctrinally coherent and
workable” basis for implication,14 and has “simplified the law of implied terms
and put it on a sounder conceptual footing”.15
This chapter seeks to reconcile those two different understandings of terms
implied in fact. The essence of the argument is that there is an identifiable process
of reasoning by which it is determined that a contractual instrument must be
taken to mean that a term is implied. If we trace that process of reasoning, we
see that it affirms core elements of the traditional approach but also helps us
to refine it, pointing towards a formulation that is both more precise and more
comprehensive. Most significantly, it requires greater attention to be paid to
the purposes of contractual provisions, and what is necessary to prevent those
contractual purposes being defeated. This chapter will show that necessity to
avoid defeating subsidiary contractual purposes is an important, so far largely
unacknowledged, basis for the implication of terms in fact. More broadly,
the three paths of reasoning identified below suggest that the foundations of
implied terms are logic (the implication is a logical inference from the language
of the express terms), efficacy (a particular term is needed to make the contract
work and represents a singularly apt solution to the problem in question) and
purpose (a particular term is needed to prevent a contractual purpose from being
defeated and represents a singularly apt solution to the problem in question).
12 Paul S Davies, “Recent Developments in the Law of Implied Terms” [2010] LMCLQ 140.
13 Wayne Courtney and JW Carter, “Implied Terms: What Is the Role of Construction?” (2014)
31 JCL 151; JW Carter and Wayne Courtney, “Implied Terms in Contracts: Australian Law”
(2015) 43 ABLR 246; JW Carter and Wayne Courtney, “Belize Telecom: A Reply to Professor
McLauchlan” [2015] LMCLQ 245.
14 Richard Hooley, “Implied Terms after Belize Telecom” (2014) 73 CLJ 315, 315.
15 McLauchlan (n 8) 240.
16 Belize Telecom (n 3) [16].
17 Belize Telecom (n 3) [18].
18 Belize Telecom (n 3) [21].
146 Contract in Commercial Law
Objectivity
A significant feature of the Belize Telecom approach is that the court’s concern is
not to identify the manifested intentions of the parties,22 but rather to identify
what the instrument must reasonably be understood to mean.23 Focusing
on the meaning of the instrument rather than the intentions of the parties
(whether manifested, presumed or imputed) has three closely related benefits.24
First, orientating the objective inquiry in this way has the practical advantage
of making it clear that the court need not speculate as to what the parties might
have thought about the issue or how they might have reacted to particular
contingencies or solutions. Paul Davies has criticised Lord Hoffmann’s
approach because it suggests – wrongly in Davies’ view – that the subjective
intentions of a party are now irrelevant.25 But the parties’ subjective intentions
are surely irrelevant on any view.26 Evidence of the parties’ “actual intentions
and expectations” or “declarations of subjective intent” would be inadmissible
on a question of implication,27 save perhaps in exceptional circumstances
such as where the parties were united in rejecting a term that might otherwise
have been implied.28 Ex post speculation by the parties themselves would be
unhelpful because no one can reliably say how he or she would have reacted
ex ante to questions about a risk that has now eventuated.29 Any such evidence
or speculation is also irrelevant to the criteria that are taken into account in an
implication case. Davies suggests that the subjective intentions of the parties
are relevant to the officious bystander test,30 but that test is concerned with the
obviousness of the proposed solution, not with the likely reaction of the parties
in light of their actual intentions.31
Secondly, focusing on what the instrument must mean renders irrelevant
any concerns as to the limits of what the parties themselves might have thought
ex ante. Since the court is not concerned to identify the intentions of the parties,
the court need not be at all concerned that the parties did not contemplate the
contingency that has arisen or the solution that is proposed. The objectivity of
the Belize Telecom approach therefore nullifies any criticism stemming from
the idea that the parties are unlikely to have formed any relevant intention
in relation to the problem in question.32 The allocation of risk is not made
directly by the contracting parties, but is simply the applicative meaning of the
instrument to which they have assented.
Thirdly, this approach allows us to move beyond the idea that implied
terms represent the intentions of the contracting parties, and helpfully renders
irrelevant any debate as to what might or might not have actually been intended.
Adam Kramer has argued that reference to intention in the law of implied terms
is not fictional because communication necessarily involves a shorthand form
of expression which is deciphered by pragmatic inference.33 Under this process
a speaker can intend not only more than he or she says, but more than he or
she brought to mind. Kramer’s example is that a person booking a hotel room
may properly be taken to intend the room to include a bed, even if the bed is
not brought to mind. The example illustrates the point because “hotel room”
is the description of the subject matter, and we can reasonably take contracting
parties to intend the subject matter to have certain essential characteristics, even
if those characteristics are not brought to mind by the parties.34 But that does
29 This is well accepted in other contexts, see eg Reynell v Sprye (1852) 1 De GM & G 660; 42 ER
710, 728–29 (Cranworth LJ).
30 Davies (n 12) 142.
31 Edwin Peel, Treitel’s Law of Contract (14th ed, Sweet & Maxwell 2015) para 6.035 notes that in
Luxor (Eastborne) Ltd v Cooper [1941] AC 108 (HL) 117–18 Viscount Simon LC almost appeared
to take a subjective approach when he observed that, if the agent had suggested at the time of
engagement that the vendor was obliged to contract with a buyer introduced by the agent, “I am
by no means satisfied that the vendor would acquiesce”, but went on to conclude that “upon a
true construction of the express contract in this case” the agent takes the risk that the vendor
might not be willing to contract with the buyer introduced by the agent.
32 For discussion of this point in a different context see Andrew Robertson, “The Basis of the
Remoteness Rule in Contract” (2008) 28 LS 172, 176–78 and Lord Hoffmann, “The Achilleas:
Custom and Practice or Foreseeability?” (2010) 14 Edin LR 47, 60.
33 Adam Kramer, “Implication in Fact as an Instance of Contractual Interpretation” (2004) 63 CLJ
384, 385.
34 The same applies to Wittgenstein’s famous example of gaming with dice being implicitly
excluded (without being brought to mind) from an instruction to “Show the children a game”
(Ludwig Wittgenstein, Philosophical Investigations (GEM Anscombe tr, 3rd ed, Macmillan 1972)
33), and Stephen Smith’s example of the inclusion of a key in the sale of a car, see Stephen A
Smith, Contract Theory (OUP 2004) 306.
148 Contract in Commercial Law
not take us very far. The fact that the parties have implicit intentions which
are not brought to mind about certain things – such as essential characteristics
of the subject matter – does not mean that they have implicit intentions that are
not brought to mind about everything. As we move beyond the fundamentals,
it becomes increasingly difficult to say whether something did or did not
go without saying. But under the Belize Telecom approach, it is unnecessary to
do so.
A focus on the meaning of the instrument renders entirely irrelevant any
speculation or debate about what might or might not in a subjective sense
go without saying in a particular situation. The Belize Telecom approach does
involve the application of interpretative principles “to interpolate or extrapolate
from what is expressed”, but we cannot say that to do this “is to find out what was
intended even if it was not consciously considered”.35 To determine the meaning
of a contractual instrument is not necessarily to determine what the parties to
that instrument intended; a fortiori where the meaning in question relates to
matters that are not the subject of express stipulations.36 At a more theoretical
level, then, we can see that the focus of the Belize Telecom approach on the
meaning of the instrument points towards a justification for the implication
of terms that does not depend on spurious references to the intentions of the
contracting parties. Contracting parties are bound by an implied term because
the term represents the meaning of an instrument to which the parties have
manifested their assent.
issues on which there are gaps in the express terms.39 It can be distinguished
from the interpretation of express terms, which is concerned with ambiguity,
vagueness and interpretative dissonance between first blush meanings and
ostensible contractual purposes.40 Even where the wrong words may have been
used, there is a basic difference between dealing with a situation in which words
bear directly on the issue in question and a situation in which they do not. As
Bingham MR has famously said:
“The courts’ usual role in contractual interpretation is, by resolving
ambiguities or reconciling apparent inconsistencies, to attribute the true
meaning to the language in which the parties themselves have expressed their
contract. The implication of contract terms involves a different and altogether
more ambitious undertaking: the interpolation of terms to deal with matters
for which, ex hypothesi, the parties themselves have made no provision. It
is because the implication of terms is so potentially intrusive that the law
imposes strict constraints on the exercise of this extraordinary power.”41
Interpretation and implication, do, however, overlap in two respects.
First, there is necessarily an area of overlap because the law of implied terms
sometimes deals with the effect of gaps in particular express terms, while
the interpretation of express terms may also involve filling gaps in particular
provisions.42 In some instances a particular gap can be filled either by reading
words into an express term or by implying an additional term.43 Secondly, at a
much broader level, some interpretation cases and some implied terms cases are
concerned with essentially the same set of issues: namely, identifying the relevant
contractual purpose and determining what is required to give effect to that
purpose. The resolution of those issues must, however, involve the application
of a different technique if there is an express provision dealing or potentially
dealing with the issue at hand. Lord Hoffmann has said extra judicially that
the only difference between implication and interpretation “is that when we
imply a term we are engaged in interpreting the meaning of the contract as
39 Hugh Collins, “Implied Terms: The Foundation in Good Faith and Fair Dealing” (2014) 67
CLP 297, 312 suggests that a “sharper distinction between interpretation and implied terms …
contrasts a lack of specificity or precision in the contract with an omission to protect against
a particular risk”. But not all implied terms cases involve an omission to protect against a
particular risk, or even a question concerning the allocation of risk, see eg BP Refinery (n 1) and
Belize Telecom (n 3).
40 Drawing on Richard H Fallon, “Three Symmetries between Textualist and Purposivist Theories
of Statutory Interpretation – and the Irreducible Roles of Values and Judgment within Both”
(2014) 99 Corn LR 685, esp 698. Well known examples of interpretative dissonance in contract
interpretation include Fitzgerald v Masters (1956) 95 CLR 420 (HCA), Mannai Investment Co
Ltd v Eagle Star Life Assurance Ltd [1997] AC 749 (HL), Chartbrook Ltd v Persimmon Homes Ltd
[2009] UKHL 38: [2009] AC 1101.
41 Philips Electronique Grand Public SA v British Sky Broadcasting [1995] EMLR 472 (CA) 481,
quoted with approval in Marks and Spencer (n 5) [29] (Lord Neuberger).
42 See McLauchlan (n 8) 206–11.
43 See eg C Itoh Co Ltd v Copanhia de Navegaçao Lloyd Brasileiro (The “Rio Assu”) (No 2) [1999]
1 Lloyd’s Rep 115 (CA). See also Arnold v Britton [2015] UKSC 36; [2015] AC 1619 [113]–[115]
and McLauchlan (n 8) 210–11 (both discussing Aberdeen City Council v Stewart Milne Group
Ltd [2011] UKSC 56; [2012] SLT 205) and Elisabeth Peden, Good Faith in the Performance of
Contracts (LexisNexis Butterworths 2003) para 6.21, discussing BP Refinery (n 1).
150 Contract in Commercial Law
44 Lord Hoffmann, “The Intolerable Wrestle with Words and Meaning” (1997) 114 S Afr LJ 656,
662.
45 Richard H Fallon, “The Meaning of Legal “Meaning” and Its Implications for Theories of Legal
Interpretation” (2015) 82 U Chi L Rev 1235, 1238.
46 See McLauchlan (n 8) 206–11.
47 Francis Lieber, Legal and Political Hermeneutics (Little and Brown 1839) 56.
48 Eg BP Refinery (n 1); Regreen Asset Holdings Pty Ltd (n 26); Crema v Cenkos Securities plc [2010]
EWCA Civ 1444; [2011] 1 WLR 2066 [50] (Aikens CJ): “[T]he question of implied terms …
must be considered in the light of the expert evidence on “market practice”, so that the court
can put itself in the position of the “reasonable addressee” of the contract …”. The fact that a
document is addressed to third parties may limit the use that can be made of such background
material, Belize Telecom (n 3) [36]–[37]; cf Cherry Tree Investments Ltd v Landmain Ltd [2012]
EWCA Civ 736; [2013] Ch 305.
49 [1893] 2 QB 518 (CA) 526.
50 Oriental Steamship Co (n 49) 526.
Ch 8 The Foundations of Implied Terms: Logic, Efficacy and Purpose 151
identified and indicates that the solution is to govern the problem. In most
implied terms cases the latter question is the more difficult. Typically there is
an answer which is either the obvious solution or can, with some reflection, be
seen as the singularly apt solution to the problem.51 The difficult issue for the
court or legal adviser is whether the obvious or singular solution governs the
problem or the risk lies where it falls according to the express terms. How does
one determine whether the contract “means” that the obvious or singular (but
unarticulated) solution should govern the problem?
This difficulty is illustrated by the facts of Belize Telecom itself. The articles
of association of a partially privatised telecommunications company were
structured so as to facilitate a sharing of control between the Government
and private investors, with power given to different classes of shareholders
to elect and remove directors. The Government was issued a special share
which operated as an instrument of control. The holders of a majority of
C class shares were entitled to elect and remove up to four directors. But the
articles of association provided that, if the holder of the special share was also
the holder of C class shares representing 37.5% or more of the issued share
capital of the company, then the holder of the special share was “entitled …
to appoint two of the directors designated ‘C’ directors and by like notice to
remove any director so appointed and appoint another in his or her place”.52
The problem was that if the holder of the special share exercised the power
to appoint two of the designated C directors but subsequently ceased to hold
the requisite proportion of the issued share capital, there was no mechanism
for removal of those two directors. That is what occurred. There is little
doubt that the articles of association should have provided that any directors
appointed by the special shareholder should be removed automatically upon
its ceasing to hold the requisite number of C class shares. It is less clear,
however, whether the articles of association could reasonably be understood
to mean that there was to be an automatic removal, or whether there was
simply a gap in relation to this issue.53 The answer was that the articles of
association must have meant that the obvious solution was to govern the
problem because that implication was required to give effect to the purpose
of the relevant provisions of the instrument:
“[T]he implication is required to avoid defeating what appears to have been
the overriding purpose of the machinery of appointment and removal of
directors, namely to ensure that the board reflects the appropriate shareholder
interests in accordance with the scheme laid out in the articles.”54
51 See Belize Telecom (n 3) [25] and the discussion below, text accompanying nn 111–134.
52 Belize Telecom (n 3) [5].
53 Conversely, one could ask why the lease in Marks and Spencer (n 5) could not be understood to
mean that the landlord was obliged to repay the portion of advance rent representing the period
following the break date, since it was clear that the lease should have imposed such an obligation.
It was the obvious solution to the windfall problem created by the possibility of termination of
the lease pursuant to a break clause part way through a rent quarter. But it was not compelled
by the dictates of logic, the need for workability or the need to avoid defeating a contractual
purpose.
54 Belize Telecom (n 3) [32].
152 Contract in Commercial Law
61 Cf McLauchlan (n 8) 209.
62 Eg JW Carter, The Construction of Commercial Contracts (Hart Publishing, 2013) para 3.23;
Carter and Courtney (n 13) 253–54; McLauchlan (n 8) 208–09; Brambles Holdings Ltd (n 36)
164 (“implications contained in the express words”).
63 See below (nn 80 and 134).
64 [2004] UKHL 54; [2004] 1 WLR 3251.
65 Sirius International Insurance Co (Publ) (n 64) [25].
66 Sirius International Insurance Co (Publ) (n 64) [25].
67 Metropolitan Electric Supply Co Ltd v Ginder [1901] 2 Ch 799 (Ch D).
154 Contract in Commercial Law
the dairy was a logical inference from the fact that the price was to be paid, but
only by a method that required the operation of the dairy.
75 Kim Lewison, The Interpretation of Contracts (5th ed, Sweet & Maxwell 2011) para 6.08.
76 [1976] 1 WLR 1187 (CA).
77 Shell UK Ltd (n 76) 1197 (Denning MR), 1200 (Ormrod LJ to similar effect).
78 BP Refinery (n 1) 282–83. As McHugh and Gummow JJ noted in Byrne v Australian Airlines
Ltd (1995) 185 CLR 410 (HCA) 441 the statement of the Privy Council has been approved and
applied in numerous decisions of the High Court of Australia, including Secured Income Real
Estate (Aust) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 (HCA) 599, 605–06;
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337
(HCA) 347, 404 and Commonwealth Bank v Barker [2014] HCA 32; (2014) 253 CLR 169 [21],
[62], [90].
79 Hawkins v Clayton (1988) 164 CLR 539 (HCA) 573 (Deane J), approved and applied in Byrne
(n 78) 422–23 (Brennan CJ, Dawson and Toohey JJ), 442, 446 (McHugh and Gummow JJ).
80 Shell UK Ltd (n 76).
81 See eg Hooley (n 14) 322. See also Sembcorp Marine Ltd (n 10) [86]: “The efficacy of a contract
or a transaction invariably straddles a spectrum. Many contracts might, to some degree, be
efficacious and inefficacious at the same time”.
156 Contract in Commercial Law
Belize Telecom
If, under the Belize Telecom approach, the only question involved in the
implication of terms in fact is what a reasonable person would take the
instrument to mean, then it is difficult to justify necessity to make a contract
workable as a strict requirement. Such a rule would only be justified if a
reasonable person would never understand an instrument to include a term by
implication unless it met that requirement. Lord Hoffmann did not consider
that to be the case. He said that, in considering what the instrument would have
meant to a reasonable person, one must assume that person would take into
account the practical consequences of an interpretation one way or another,
and whether a particular construction “would frustrate the apparent business
82 Vestergaard Frandsen A/S v Bestnet Europe Ltd [2013] UKSC 31; [2013] 1 WLR 1556 [31].
83 Marks and Spencer (n 5) [21].
84 Lord Neuberger observed in Marks and Spencer (n 5) [21] that: “[N]ecessity for business efficacy
involves a value judgment”.
85 Drawing on Collins, “Objectivity and Committed Contextualism” (n 23) 201.
86 Another way of putting this is to say that the implication is necessary to give business efficacy
to a particular clause of a contract, see Specialist Diagnostic Services Pty Ltd (formerly Symbion
Pathology Pty Ltd) v Healthscope Pty Ltd [2012] VSCA 175; (2012) 41 VR 1 [95].
Ch 8 The Foundations of Implied Terms: Logic, Efficacy and Purpose 157
purpose of the parties”.87 The significance of the word “necessary”, he said, is that
it is not enough that the implied term expresses what it would be reasonable
for the parties to agree to.88 The court must be satisfied that the implied term
expresses what the contract means. But Lord Hoffmann rejected the idea that
necessity was a strict requirement on the ground that it must be subordinate to
the ascertainment of meaning:
“It is frequently the case that a contract may work perfectly well in the sense
that both parties can perform their express obligations, but the consequences
would contradict what a reasonable person would understand the contract
to mean. Lord Steyn made this point in the Equitable Life case (at 459) when
he said that in that case an implication was necessary ‘to give effect to the
reasonable expectations of the parties.’”89
While it may have been possible to justify the term implied in Belize Telecom
on the basis that it was necessary to give business efficacy to the articles of
association, Lord Hoffmann justified the implication on the basis that it was
required to give effect to a particular purpose, which was to ensure that the
composition of the board reflected shareholder interests:
“[T]he implication is required to avoid defeating what appears to have been
the overriding purpose of the machinery of appointment and removal of
directors, namely to ensure that the board reflects the appropriate shareholder
interests in accordance with the scheme laid out in the articles.”90
The reasoning in Belize Telecom therefore supports the notion that a
reasonable addressee will be compelled to conclude that a term is implied if
such a term is necessary to give effect to a contractual purpose. That view is also
supported by the principle adopted by the English Court of Appeal that a term
is not to be considered unnecessary simply by showing that a contract would
work without it, but “may be implied if it is necessary to achieve the parties’
objective in entering into the agreement”.91
a guaranteed rate, while policies issued from 1988 onwards did not offer that
option. In each case the annuity provided was determined by reference to a
base sum, which included bonuses representing the policy-holder’s share of
the Society’s surplus investment returns during the life of the policy. Article 65
provided that the surplus was to be apportioned between policy holders
“on such principles, and by such methods, as [the directors] may from time
to time determine”.93 When the market rate for annuities fell below the rate
guaranteed for the pre-1988 policies, the Society adopted a practice of paying
a smaller final bonus to those policyholders taking the guaranteed annuity.
This was done in order to take account of the extra cost of providing an
annuity at above-market rates, and thus to ensure that the surplus investment
returns were distributed equitably between those with guaranteed annual rate
policies and those without the guarantee. The relevant issue was whether an
implied term prevented the Society from declaring a differential final bonus
and thereby depriving the annuity rate guarantee of substantial effect.
Lord Steyn, giving the main speech, held that the test to be applied for the
implication of a term was “a standard of strict necessity”.94 But “necessity” here
clearly did not mean necessary to make the contract workable overall. As Hugh
Collins notes, “[T]he contract could function perfectly well as a tax efficient
investment vehicle and pensions device without the implied term”.95 Lord Steyn
said that it was “essential to give effect to the reasonable expectations of the
parties”.96 This formulation had previously been advanced by Lord Steyn in
extrajudicial writing and must mean, as Lewison suggests, that “the contract
would not work in the way that the parties might reasonably have expected
it to”.97 While the law of contract undoubtedly should generally give effect to
the reasonable expectations of parties to a commercial transaction, “reasonable
expectations” is particularly unhelpful as a standard to be applied in implied
terms cases.98 It must be assumed that Lord Steyn did not mean to contradict
the longstanding rule that a term will not be implied merely on the basis that
it is reasonable.99 In Liverpool City Council v Irwin the House of Lords firmly
rejected the notion advanced by Lord Denning MR that the reasonableness
100 [1977] AC 239 (HL) 253–54 (Lord Wilberforce), 258 (Lord Cross), 265 (Lord Edmund-Davies).
101 Liverpool City Council (n 100) 266 (emphasis in original). See also Marks and Spencer (n 5) [23].
102 Marks and Spencer (n 5), see esp [21], [33], [49].
103 Equitable Life (n 92) 459 (emphasis added).
104 [1986] 2 Lloyd’s Rep 68 (Comm Ct).
160 Contract in Commercial Law
Calcutta). In order to avoid defeating the purpose of the Sandheads clause the
charterparties must be taken to mean that notice could be given elsewhere than
at Sandheads.108 If the owner is expressly permitted to effect transhipment at a
point closer to Calcutta than Sandheads, then the owner must also be permitted
to give notice of readiness from that location unless the risk of congestion in
Calcutta was to shift to the owner if it chose to exercise that liberty.
Obviousness
The reader of a contractual instrument is compelled to conclude that it must by
implication include a particular provision if there is a gap that needs to be filled
and a singular means of filling it. The obviousness requirement is concerned
with the second of those elements. If several equally compelling solutions are
available then it cannot be said that the contract must mean that any one of
them was adopted.109 It has been held on numerous occasions that a term will
not be implied if there are multiple ways of solving the problem in question.110
This proved decisive in Trollope & Colls Ltd v North West Metropolitan Regional
Hospital Board.111 It must “be shown either that there was only one contractual
solution or that one of several possible solutions would without doubt have
been preferred”.112 In Codelfa Construction Mason J similarly held that it was an
“insurmountable problem in saying that ‘it goes without saying’” that multiple
solutions were available:
“This is not a case in which an obvious provision was overlooked by the
parties and omitted from the contract. Rather it was a case in which the
parties made a common assumption which masked the need to explore what
provision should be made to cover the event which occurred. In ordinary
circumstances negotiation about the matter might have yielded any one of
a number of alternative propositions, each being regarded as a reasonable
solution.”113
The obviousness requirement was introduced by MacKinnon LJ in Shirlaw
v Southern Foundries (1926) Ltd as an alternative to, and perhaps a check on,
the business efficacy test.114 MacKinnon LJ famously held that the term must
be so obvious that it goes without saying so that if an officious bystander were
to suggest it to the parties when they were making their bargain, “they would
108 One of the arbitrators held (Mosvolds Rederi A/S (n 94) 71) the term “was derivable by necessary
implication from the express terms of the contract, read in light of the subject matter and the
purpose of the Sandheads clause”.
109 Cf Courtney and Carter, “Implied Terms: What Is the Role of Construction?” (n 13) 154, “[I]f a
term is necessary to give business efficacy to a contract it is difficult to see why it also has to be
an obvious term …”.
110 Lewison (n 75) 302–03.
111 [1973] 1 WLR 601 (HL) 609–10 (Lord Pearson, with whom Lord Guest and Lord Diplock
agreed), 614 (Lord Cross).
112 Philips Electronique Grand Public SA (n 41) 474–75 (Bingham LJ).
113 (1982) 149 CLR 337 (HCA) 355–56.
114 [1939] 2 KB 206 (CA). Andrew Phang, “Implied Terms, Business Efficacy and the Officious
Bystander – A Modern History” [1998] JBL 1, 13ff discusses the test and its origin in a lecture
referred to in MacKinnon LJ’s judgment.
162 Contract in Commercial Law
115 [1939] 2 KB 206 (CA) 227. Phang ((n 114) 21) notes that the bystander test had been introduced
by Scrutton LJ in Reigate v Union Manufacturing Co (Ramsbottom) Ltd [1918] 1 KB 592 (CA)
605 as an elaboration of the business efficacy test.
116 Codelfa Construction (n 2) 375.
117 Peden (n 43) paras 4.6–4.10.
118 Hoffmann (n 44) 662; Belize Telecom (n 3) [25].
119 Peden (n 43) para 4.6. For a recent example, see Regreen Asset Holdings Pty Ltd (n 26) [65] where
the primary judge had held that “In my opinion a reasonable bystander would, at the time of the
making of the … Agreement, have said ‘oh, of course!’”
120 Belize Telecom (n 3) [25].
121 [1992] 2 Lloyd’s Rep 620 (Com Ct) 628. The case is discussed by Peden (n 43) para 4.8, who also
takes issue with the reasoning on this point.
122 Ashmore (n 121) 628.
123 Peden (n 43) para 4.8 has also questioned whether complexity should bar an implied term that
is sufficiently precise.
124 Belize Telecom (n 3) [25].
Ch 8 The Foundations of Implied Terms: Logic, Efficacy and Purpose 163
125 Sembcorp Marine Ltd v PPL Holdings Pte Ltd (n 10) [88]–[91].
126 Most recently in Marks and Spencer (n 5) [21]. In Australian law it is clear that “the ‘obviousness’”
of the term to be implied “is not a freestanding [condition] justifying implication”, TMA Australia
Pty Ltd v Indect Electronics & Distribution GmbH [2015] NSWCA 343 [103] (Meagher JA, with
whom Macfarlan JA and Bergin CJ agreed).
127 See eg the long list of cases cited in HG Beale (ed), Chitty on Contracts (32nd ed, Sweet & Maxwell
2015) para 14.005 fn 20.
128 See eg C Itoh Co Ltd (n 43).
129 [1989] 1 WLR 255 (QB).
130 Associated Japanese Bank (International) Ltd (n 129) 263 (emphasis added).
131 [1968] 1 WLR 173 (Ch).
life time and if not then on his death.132 This was a statement of the contractual
purpose. In order to avoid defeating that purpose or “general scheme”, it was
necessary to imply a term that the owner should not be entitled to give the
property away without offering it to the option holder on the terms agreed.
Conclusion
Where a contract has been reduced to writing the “default position” is that no
terms will be implied.145 The well-established reluctance to imply terms justifies
a preference for the imperative version of Lord Hoffmann’s formulation: a
term will be implied only if it spells out what the instrument must mean to
a reasonable person. That imperative formulation points us towards the
processes of reasoning by which terms are implied. The cases reveal a limited
set of reasons that compel the conclusion that a term is implied. A term implied
in fact spells out what a contract must mean: first, as a logical implication
from the express terms; secondly, because an implication is necessary to make
the contract workable and the term represents an obvious or singularly apt
solution to that problem; or, thirdly, because an implication is necessary to
avoid defeating an identifiable contractual purpose and the term represents
an obvious or singularly apt solution to that problem. The criteria in this
formulation are broad and their application at times involves difficult questions
of judgement, but given the highly fact-specific nature of the enterprise it is
difficult to see how greater certainty could be achieved. If legal advisers are to
have a fair chance of predicting outcomes, however, then what must be achieved
is the articulation of a framework for analysis that can be applied by judges and
legal advisers in common.
Introduction
One of the pieces of advice that Peter Birks once gave me concerns the
writing of legal articles. His advice was that the writer is not producing a
mystery novel. The reader should not have to wait until the end when, with a
miraculous twist, the answer is produced. We should learn “whodunnit” on
the first page.
In that spirit, here is the solution which we will reach at the end of this
chapter. First, the meaning of words in general, and of rights creating words
in particular, is determined by their objective meaning, not the subjective
intentions of the person uttering them. Secondly, in contract law it is only ever
justifiable to enforce an actual objectively manifested agreement, contained in
a communicated offer and acceptance.1 The non-conformity of the agreement
as so manifested with the subjective intentions of both parties, or of one party
when this is known by the counterparty, may provide a good reason for denying
enforcement. It never provides a sufficient reason for enforcing the parties’
subjective intentions without more. Thirdly, the parol evidence rule is best
understood as an implied “entire agreement” clause, so that the terms of a single
document form an exclusive code for determining the obligations entered into.
Fourthly, rectification involves partial rescission. The (implied) agreement that
the reduction of an agreement to a single document means that it contains the
entire bargain between the parties is set aside, replaced by the agreement that
there would be if the parties had not so reduced their bargain. In conformity
with the second proposition, it is never justified through rectification to give
1 Contra D McLauchlan, “The ‘Drastic’ Remedy of Rectification for Unilateral Mistake” (2008)
124 LQR 608, 610.
167
168 Contract in Commercial Law
Vows
I hate marking. I hate it so much that, unlike many of my colleagues, I cannot
joke about it. Every script that I mark places a weight upon me that I find hard
to bear.
When presented each summer with a pile of exams to mark, I have a
number of tricks to try and induce myself to perform the task. So, I resolve that
I will only be allowed a cup of tea, a small piece of chocolate, and a look at the
newspaper once I have managed to mark five papers. I can only break for lunch
once I have finished one-fifth of the total. And so on.
I weaken every time. My future self chafes at the restrictions I have imposed.
Boredom and despair at my ability to teach anyone anything set in. I find
myself doing less awful tasks, such as de-scaling the kettle, or re-grouting the
bathroom. The marking is always done, in the end but not without more pain
than is necessary. Summer marking that coincides with major international
football tournaments is especially problematic.
It is sufficient to make a vow to form a resolution in one’s mind. Com
munication to another is unnecessary. Its meaning is similarly determined
by the intention of the person at the time of making it. Whether a reasonable
person would think I was making such a vow, which judging by my subsequent
behaviour they may not, is neither here nor there. The vow is a product of my
willing it into being.
2 Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] 1 AC 1101 [57] (Lord
Hoffmann); Lord Hoffmann, “The Intolerable Wrestle with Words and Meanings” (1997) 56 S
Afr LJ 656. Chartbrook Ltd v Persimmon Homes Ltd was applied, albeit reluctantly, in Daventry
District Council v Daventry and District Housing Ltd [2011] EWCA Civ 1153; [2012] 1 WLR
1333 and Tartsinis v Navona Management Company [2015] EWHC 57 (Comm) (Leggatt J). See
also Lord Denning’s earlier expression of the same view in Rose v Pim [1953] 2 QB 450 (CA)
461. The position I am adopting here is contrary to the important and large body of work by
Professor David McLauchlan. For representative pieces see McLauchlan, “The ‘Drastic’ Remedy
of Rectification for Unilateral Mistake” (n 1); D McLauchlan, “Commonsense Principles of
Interpretation and Rectification” (2010) 126 LQR 7; D McLauchlan, “Refining Rectification”
(2014) 130 LQR 83.
3 Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65; (2007) 69 NSWLR 603 [316] (Campbell
JA) but see [315] requiring such common intention to have been communicated. See also
Mainteck Services Pty Ltd v Stein Heutey SA [2014] NSWCA 184; (2014) 89 NSWLR 633 [121]
(Leeming JA) for “objective intention”.
Ch 9 The Meaning of Words and the Intentions of Persons 169
Objectivity
Under the malign influence of the will theory of contracting, many writers see
promises as created by the will of the promisor, or in the context of a contract,
the combination of wills of the promisor and promisee together. If this were
correct, the existence and content of a promise ought to be determined by the
intentions of the parties just as it is with a vow. Although this subjective theory
of promises clearly does not fit with the positive law as it is, it has persisted from
the 19th century until the present day.5 It is not just theorists who think in this
way. Sir Christopher Staughton, writing extra-judicially, has stated that: “Rule
One is that the task of the judge when interpreting a written contract is to find
the intention of the parties”.6 Many hundreds of examples of judicial statements
of this kind could be produced. Is it true, and perhaps more importantly, ought
it to be true?
As we all know, both in determining whether there is a contract and
in settling its content, the common law adopts an objective approach; what
is actually intended not being determinative of the contract’s existence or
4 See also M Kirby, “Towards a Grand Theory of Interpretation: The Case of Statutes and
Contracts” (2003) 24 Stat L Rev 95.
5 Eg FC von Savigny, System des Heutigen Römischen Rechts (Berlin,1840); C Fried, Contract as
Promise (Harvard University Press 1981) 12–13, 60–63, TM Scanlon, “Promises and Contracts”
in P Benson (ed), The Theory of Contract Law: New Essays (CUP 2001) 86, 104.
6 C Staughton, “How Do the Courts Interpret Commercial Contracts?” (1999) 58 CLJ 303, 304.
170 Contract in Commercial Law
meaning. How can this be squared with the proposition that we are concerned
with discovering the intentions of the parties?
Two tactics are commonly employed to explain the law’s divergence from
the theory. Neither is persuasive. The first tactic is that the law uses objective
standards for evidentiary reasons: it promotes certainty and prevents fraud.7
Certainty alone is never very persuasive as a justification for a rule departing
from what justice would otherwise require. A rule stipulating for the slaughter
of all first born children may be very certain, but that isn’t much to its credit.
The second tactic is that because the promisee will have relied upon the
promise, or that there is at least a risk that she will have done so, this provides
a good reason for departure from what was actually intended.8 Why apply such a
rule in contexts where not only can it be shown that no reliance has taken place,
but that no such reliance ever could take place? The terms of a will in a sealed
box are interpreted objectively, just as much as the terms of a contract and these
are interpreted objectively.
However, unlike a vow, we cannot make a promise on our own in a darkened
room. I cannot simply will a promise into existence however much I try. Even
if two parties intend precisely the same promise from one to another to exist,
that alone is not a promise. Promises and contracts are actions in the world.
They are acts of communication, indeed they are the archetypal example of
speech acts, and their effect is to create rights (whether moral or legal). Both
the existence and the content of a promise are determined objectively because
the existence and content of communicated words are determined objectively.9
Lord Nicholls, writing extra-judicially, has claimed that in “everyday life we
seek to identify what a speaker or writer actually intended by the words he
has used … [but] the law proceeds on a different footing”.10 This claim about
everyday life is wrong.11 The law’s approach to interpretation is, in this respect,
identical to our approach to the meaning of words outside the law. If I say
“I offer to buy your black cat for £100” those words do not mean “I offer to sell
my white dog for £30” even if that is the meaning I had intended to convey. The
meaning of words is not determined by the speaker’s subjective intentions.
However, for an act to impose obligations upon me it must be my doing;
I must be responsible for it. If a fraudster impersonates me and forges my
signature on a contractual document, I am not bound even if the promisee
believes that the promise was mine, and any reasonable person in his shoes
would have believed the same. It is not the case however that I am responsible
only for the consequences of my actions that I intend. If I negligently knock
over a Ming vase, I am responsible for its destruction, and in law must pay for it,
regardless of the fact that that result was not what I intended. The same is true
of words. The promise must be mine, in the sense that I am responsible for it,
but it is a mistake to think that I am only responsible for those things I intend.
7 Fried (n 5) 62–63; E Peel, Treitel on the Law of Contract (13th ed, Sweet & Maxwell 2012) [1-002].
8 Fried (n 5) 62–63; PS Atiyah, An Introduction to the Law of Contract (5th ed, OUP 1995) 82.
9 See T Endicott, “Objectivity, Subjectivity and Incomplete Agreements” in J Horder (ed), Oxford
Essays in Jurisprudence (4th series, OUP 2000).
10 Lord Nicholls, “My Kingdom for a Horse: the Meaning of Words” (2005) 121 LQR 577, 579.
11 Cf Lord Hoffmann in Mannai Investment Co Ltd v Eagle Star Life Assurance [1997] AC 749 (HL):
“I propose to begin by examining the way we interpret utterances in everyday life”.
Ch 9 The Meaning of Words and the Intentions of Persons 171
The narrow doctrine of non est factum is a nice illustration of the point in
a contractual context. If a celebrity is asked to sign his autograph and it is later
discovered that the document is in fact a contract for the sale of his home,
he may plead that the document is not his. If however someone is careless in
signing a document, such as someone who signs a document containing blanks
that are later filled in otherwise than in accordance with his instructions, he
may be bound.12
That words have objective meanings, and that their meaning is not
determined by our intentions, is reflected in the law in many contexts outside
of contract law. If, for example, I publish an article stating that Justice Edelman
is an axe murderer, I commit the tort of libel. I will not be able to resist the
claim by proving that what I had intended to say he is a fine golf player. Just so
long as I am responsible for the publication, I commit the tort.
This objective approach to meaning is followed in the context of wills, trust
deeds, statutes, and court orders. The law is not departing from our approach
in everyday life, but applying it.
Now, the reader may be becoming slightly impatient with the claims made
so far. If it is accepted that the meaning of words and consequently promises
is not determined by the intention of the person speaking, isn’t it determined
by what a reasonable person would with hindsight conclude they intended?
That we are neither searching for what was actually intended nor what
a reasonable person would now think they intended is shown by the law’s
traditional rule “excluding” from consideration in interpreting an agreement
the parties’ subsequently conduct.13 If our concern were to determine what
the parties themselves subjectively intended their agreement to mean, how
they operated it subsequent to their agreement would be extremely strong
probative evidence of this fact, and its exclusion would make no sense. If
however we are interested in discovering what the words they used mean,
what they subjectively thought they meant is usually neither here nor there
(unless rarely perhaps they are in a specialist market and their subjective
understandings provide evidence of what the words mean generally in the
context in which they are used). This exclusionary rule also shows us that the
justification for the objective approach is not based upon either the actual or
potential reliance of the promise, as meaning is not fixed by the subsequent
reliance of the parties’ on a particular understanding. Subsequent events,
whatever they may be, cannot determine the meaning of the words at the
time spoken.
Although the traditional rule lives on in England and Australia, it has been
abandoned in other common law jurisdictions such as New Zealand,14 Canada,
and Singapore.15 This change is wholly unjustifiable, and it is to be hoped that
the Australian High Court’s resistance to adopting fashionable innovation
elsewhere prevails. It is mistaken to describe the traditional approach as one
adopting an “exclusionary rule”. This is not a self-denying ordinance for purpose
of policy, but rather a rule based upon the fact that what happens subsequently
is legally irrelevant to what has been done at that time.
An example.
D Bank takes a fixed charge over all receivables due to C Ltd. It is a term of
the agreement creating the charge that all payments are to be made into a
blocked account with the bank. From the start the account is never operated
as a blocked account, C Ltd freely withdrawing all monies paid in for its own
use in the ordinary course of business.
In England, which has held out against such modern day innovations as a
Personal Property Security Law, the question arises whether the charge is fixed
or floating? We know from Spectrum v Digital Plus16 that the meaning of the
agreement is determined at the time of contracting. Subsequent conduct may
be relevant to the questions of whether the agreement has been varied, or an
obligation waived, or even whether the document representing the deal is in fact
a sham, but it is not relevant to its construction. Further, that the subsequent
conduct may be admitted for these other purposes shows that our approach to
construction cannot be based upon either the need for commercial certainty
or a desire to restrict admissible material in order to expedite court hearings.
The reason for the exclusionary rule is not a pragmatic one, but rather how and
when the parties’ rights were created.
Subjectivity
It may be objected that there are occasions when the courts look to the parties’
subjective states of mind in finding the existence of a contract.17 The wholly
objective approach defended so far is, amongst contract lawyers, most closely
associated with Oliver Wendell Holmes.18 The orthodoxy that is nowadays usually
taught is that this 19th century view is wrong, or at least not the whole truth.
If one party subjectively makes a mistake as to the terms of the deal, and
the counterparty knows of that mistake, there is often said to be no binding
agreement.19 A famous example is the so-called “snapping up” case of Hartog
v Collin Shields.20 The defendant offered to sell Argentine hare skins at a price
quoted “per pound”. This was a mistake. It was intended to offer them “per
piece” and there were about three hare skins to the pound. As the plaintiff
buyer knew that the defendant was making a mistake, he could not enforce the
contract at the low price stated in the offer.
This rule is usually said to show that the question of agreement is not a
wholly objective one, but that it also contains subjective elements.21 However,
that this is not so may be shown by considering what the position would have
been if the market had moved dramatically, so that the deal had become a good
one for the seller. Could the buyer have withdrawn his statement that he agreed
to buy, and insisted that there was no agreement? The answer is surely no. There
was objectively a bargain, but one that only the seller could enforce. Why could
the buyer not rely upon the agreement? Because the seller’s subjective consent
to the bargain was vitiated. This is a case where there is a contract, but where
one party’s subjective mistake when known by the other allows escape from the
deal by one party.
The subjective intentions of one22 or both23 of the parties may be used where
they are not in accord with the agreement made to set aside or refuse to enforce
what has been objectively done, but they cannot themselves be enforced because
they are not an agreement. Further, this non-conformity may not be relied upon
by the party who is not in error.
The following example is important.24
What if Company A thinks it has agreed to lease premises at a particular
rent to Company B, and Company B thinks the same. Companies cannot
of course have states of mind, but they can have the states of mind of real-
world people attributed to them, and we may have very good and compelling
evidence as to what those states of mind are. These subjective intentions may
be shown through the minutes and memorandum of both companies, and
the Chief Executive Officers may both testify that that is what they themselves
thought. Is that, in and of itself, an agreement? The answer, as we should all
learn in our first days studying contract law, is no. An agreement must be
done. Without offer and acceptance between the parties, the mere meeting of
minds is not an agreement. The requirement of an offer and acceptance, both
of which must be done and neither of which it is sufficient to intend, shows
that a mere meeting of minds is not in itself a contract. Their minds may be
in agreement, but they have not made a contract. The claim that a “meeting
of minds or consensus ad idem is not necessary for contract formation it is
surely sufficient”25 is wrong.
On this view, the rule that cross offers on identical terms are not a contract
is readily explicable.26 Such cross offers may, and usually will, indicate a
concurrent subjective intention to contract on identical terms, but that is not in
itself a contract. We need an acceptance not because that is objective evidence
of what is subjectively intended, but because acceptance is an integral part to
the making of a contact. The rule is not therefore justified by the requirements
of certainty,27 indeed the opposite rule would be equally certain, but rather by
the fact that an agreement is not found simply through the subjective meeting
of minds.
22 Unilateral mistakes.
23 Common mistakes.
24 Compare the example of D McLauchlan in “The Many Versions of Rectification for Common
Mistake” at ch 10 of this book.
25 McLauchlan, “The ‘Drastic’ Remedy of Rectification for Unilateral Mistake” (n 1) 610.
26 Tinn v Hoffmann (1879) 29 LT 271.
27 Peel (n 7) [2.049].
174 Contract in Commercial Law
Interpretation
What I have said so far is, I would suggest, entirely consistent with both
Australian law and at least the statements of principle set out in Investors
Compensation Scheme Ltd v West Bromwich Building Society [ICS] by Lord
Hoffmann.28 So his first principle is said to be:29
“(1) Interpretation is the ascertainment of the meaning which the document
would convey to a reasonable person having all the background
knowledge which would reasonably have been available to the parties in
the situation in which they were at the time of the contract.”
Notice that we are looking to ascertain the meaning which would be conveyed,
not the meaning that was intended to be conveyed.
An example is the decision in Homburg Houtimport BV v Agrosin Private
Ltd (“The Starsin”).30 A Bill of Lading was signed on its face by a port agent as
“‘Agent for [the Charterer] of the vessel”. The reverse of the Bill contained a
clause stating:
“33 IDENTITY OF CARRIER The Contract evidenced by this Bill of Lading
is between the Merchant and the Owner of the vessel named herein (or
substitute) and it is therefore agreed that said Shipowner only shall be
liable for any damage or loss due to any breach or non-performance of
any obligation arising out of the contract of carriage, whether or not
relating to the vessel’s seaworthiness.”
The House of Lords refused to give effect to this demise clause, preferring the
meaning that would be placed on the face of the Bill by a reasonable person
to whom the document was addressed. We may note in passing that it is
meaningless in a case such as The Starsin to ask “what was it that the promisor
intended”, or “what would the promisor have been reasonably expected to
intend”, as the issue was “who is the promisor”?
This does not mean that the promise’s meaning is to be determined by a
rigid literalism, anymore than this is true of the use of words generally.31 As
Lord Hoffman said in ICS, “[m]any people, including politicians, celebrities
and Mrs Malaprop, mangle meanings and syntax but nevertheless communicate
tolerably clearly what they are using the words to mean. If anyone is doing
violence to natural meanings, it is they rather than their listener”.32 When John
Prescott, the then United Kingdom Deputy Prime Minister, told the House of
Commons that it was government policy to “reduce – and probably eliminate –
the homeless”,33 the background circumstances give the words a meaning
different from their literal one. This is nothing to do with what Prescott himself
subjectively intended. Even if he had actually intended that the homeless be
slaughtered, that is not the meaning his words conveyed.
Today, at least in New South Wales, the answer is now provided by Leeming
JA’s superb, and unanswerable, judgment in Mainteck Services Pty Ltd v Stein
Heurtey SA.38 There is neither any principled reason for ignoring context, nor
any pragmatic concerns that require its exclusion in any case.
The final part of the story so far is the High Court’s decision in Mount Bruce
Mining Pty Ltd v Wright Prospecting Pty Ltd.39 The High Court emphasised that
statements made by judges in leave applications had no precedential value. The
question of whether background circumstances could be admitted to show
whether a term was capable of more than one construction was expressly left
open.40
Lord Hoffman’s third principle is expressed as follows:41
“(3)
The law excludes from the admissible background the previous
negotiations of the parties and their declarations of subjective intent.
They are admissible only in an action for rectification. The law makes
this distinction for reasons of practical policy and, in this respect only,
legal interpretation differs from the way we would interpret utterances
in ordinary life. The boundaries of this exception are in some respects
unclear. But this is not the occasion on which to explore them.”
The continuation of this (much criticised) rule was recognised, albeit in obiter
dicta, by the House of Lords in Chartbrook Ltd v Persimmon Homes Ltd.42 Unlike
the exclusion of subsequent conduct, all context at the time of utterance is
capable of informing the meaning of words used. This rule is hard to justify
in principle. However, some second order justifications can be given. It does
promote certainty. Assignees may not know or be able to know the content of
these negotiations. It may reduce the cost of advice and litigation in trawling
negotiations, but as this evidence is relevant and admissible for other purposes,
the force of this argument is limited.
However, the primary reason for the exclusion is that it is almost always
irrelevant. If our task were to discover what was intended or what a reasonable
person would understand the parties to have intended, then just as with
their subsequent conduct, their prior negotiations would often be of great
probative value. In trying to ascertain the meaning of words, it is much more
rarely so.
There is no doubt, however, that this rule can give rise to counter-intuitive
results. For example:
D, a shipbuilder, negotiates to repair P’s ship. D proposes as a term:
“The plating of the hull to be repaired, but if any new plating is required
the same to be paid for extra.”
P objects to the italicised words, saying contract must cover all work to make
the vessel A1 at Lloyd’s. D agrees to the deletion of the italicised words. Did the
38 [2014] NSWCA 184; (2014) 89 NSWLR 633. See also Stratton Finance Pty Ltd v Webb [2014]
FCAFC 110; (2014) 245 IR 223.
39 [2015] HCA 37; (2015) 89 ALJR 990.
40 Mount Bruce Mining (n 39) [49] (French CJ, Nettle and Gordon JJ), [113] (Kiefel and Keane JJ),
[118] (Bell and Gageler JJ).
41 ICS (n 28) 913.
42 Chartbrook (n 2).
Ch 9 The Meaning of Words and the Intentions of Persons 177
contract cover the cost of the additional plating, or did this have to be paid for
as an extra?
In A&J Inglis v John Buttery & Co it was held that the prior negotiations were
inadmissible in answering this question, but clearly this was context directly
relevant to the meaning of the words employed.43
We can use evidence of prior negotiations for purposes of rectification and
estoppel by convention so as to have a document or agreement amended. A
cynic might argue that admissibility for these purposes undermines whatever
force there is in the inadmissibility rule for purposes of interpretation. The
truth may be that admission for purposes of interpretation misleads more than
it assists. Because it may strongly indicate what the parties themselves intended,
the malign temptation is to give effect to this, rather than to the meaning of
the words used. As background evidence of meaning, prior negotiations will
rarely be strong evidence. Whether the danger that a judge may misuse this
information is sufficiently hazardous that we must prevent her from using it at
all, is a question concerning the competence of the judiciary that I dare not try
and answer.
Lord Hoffman’s fourth principle is expressed as follows:44
“(4) The meaning which a document (or any other utterance) would convey
to a reasonable man is not the same thing as the meaning of its words.
The meaning of words is a matter of dictionaries and grammars; the
meaning of the document is what the parties using those words against
the relevant background would reasonably have been understood to
mean. The background may not merely enable the reasonable man to
choose between the possible meanings of words which are ambiguous
but even (as occasionally happens in ordinary life) to conclude that the
parties must, for whatever reason, have used the wrong words or syntax.”
This wide approach means there is much less need for the doctrine of
rectification today. But it could not lead to the inclusion of an entire clause
omitted in error (eg a time-bar clause) or the exclusion of an entire clause that
should not be there.
The “rule” that words should be given their “natural and ordinary meaning”
reflects the common sense proposition (that we do not easily accept) that people
make linguistic mistakes, particularly in formal documents. On the other hand,
if one would nevertheless conclude from the background that something must
have gone wrong with the language, the law does not require judges to attribute
to the parties an intention which they plainly could not have had. Lord Diplock
made this point more vigorously when he said in The Antaios Compania Neviera
SA v Salen Rederierna AB:45
“if detailed semantic and syntactical analysis of words in a commercial
contract is going to lead to a conclusion that flouts business commonsense, it
must be made to yield to business commonsense.”
Is this a purposive approach?
A difficult example:
C is entitled to a refund under a shipbuilding contract if the contract is
terminated, or if there is an “insolvency event”. Such an event occurred,
and C claimed under a guarantee given by D bank in support of the refund
obligation. The guarantee referred to “all sums due under the [shipbuilding]
contract” but only referred to a refund on “termination”. No commercially
discernible reason for guarantee to be limited in this way, so as to not cover the
counterparties insolvency, could be discerned.
A majority of the English Court of Appeal held that the bank was not liable under
the guarantee,46 but that decision was overturned by the Supreme Court.47 This
is a difficult decision where reasonable people will disagree as to the weight to
be given to the plain words on the one hand, and commercial context on the
other. No approach can make these difficulties of judgment disappear.
Vitiating Factors
An agreement may be set aside for a number of reasons related to defects
in the subjective intentions of one or both parties. Where there has been a
misrepresentation, duress, or undue influence, the party whose consent was,
as a result, defective has the power to avoid the contract. If one subscribes to
the view that promises arise by virtue of, or are at least dependent upon, our
subjective intention to subject ourselves to such obligations, then the true
position in all of these cases would be that there is no promise at all. The defect
in the intention should mean that there is no promise. Any putative contract
ought as a result be void, not merely voidable.
This does not align with the positive law. A party subject to duress, or acting
under undue influence, or to whom a misrepresentation has been made by the
counter party has the power to avoid the contract. It is not the case that no
promise has been made: there has been a promise regardless of any defects in
the promisor’s subjective consent. The reason why the contract can be set aside
is quite separate from what a promise is.
It may be objected that there are occasions when a contract is rendered
void as a result of a vitiating error, such as mistake, and not just voidable. One
common example that is incorrectly relied upon for this proposition (a mistake
as to the terms of a deal, known to the other side) is discussed above. Another
is the case of common fundamental mistake:
A agrees to buy B’s horse, Dobbin, currently in his stables in East Oxford.
Unbeknownst to either party, at the time of the agreement the stables had
burnt to the ground and Dobbin had been killed.
Under s 6 of the Sale of Goods Act 1979 (UK), a contract for the sale of specific
goods is void if the goods have perished at the time of contracting without the
knowledge of the seller.
However, if we change the story, the oddity of concluding that no agreement
was entered into because of the mistake becomes apparent. If the contract
stipulated that title to Dobbin was to pass the following week upon delivery,
and the fire had taken place after the contract but before delivery, the contract
would have been frustrated. We could not, however, say that no contract had
ever been entered into; clearly there had.
The better view is that there is an agreement in both cases, but that promises,
like words generally, are not absolute. They run out. To take a rather over
discussed example, if parents ask a babysitter to teach their young child a game
whilst they are at the cinema, the word “game” cannot in context be interpreted
to include knife throwing or playing “chicken” on a busy road. In the abstract
the word “game” can include these things, but not in these circumstances. Again
this has nothing to do with what the parties themselves subjectively intended, it
matters not a jot whether the parents thought about these possibilities.
In the law, the limits of what has been promised are inevitably a matter of
interpretation. Promises do not cover all unforeseeable eventualities, such as
the non-existence of the subject matter. Agreements to buy and sell in such a
situation are no less real, but they do not bind. It does not matter that the parties
never considered this situation, nor does it matter that they never considered
this situation’s possibility.
That the contract in the common mistake case is not absolutely void may
be shown by reflecting upon the fate of terms other than the promises to
buy and sell. If the contract for the sale of Dobbin contains a jurisdiction or
arbitration clause these are binding, which they should not be if the contract
were indeed void because no agreement had been reached. Rather, all that is no
longer binding are the parties’ primary obligations to buy and sell, and this is
because the promises do not cover the situation where the subject matter of the
agreement does not exist. This is so regardless of whether its destruction takes
place 10 minutes before or 10 minutes after the agreement is concluded.
Parol Evidence
It is unfortunate that the parol evidence rule has fallen so far out of favour, as
understanding it is essential in order to understand the doctrine of rectification
which would be unnecessary without it.48 Indeed, that at my own university we
teach the doctrine of rectification but omit the parol evidence rule from our
contract course is a source of personal embarrassment.
The exclusion of the rule from some books or courses on contract probably
comes from its name which is wholly misleading. First, the evidence excluded
which falls outside of a document which is intended to include the parties’
entire agreement is not limited to parol (ie oral) evidence but also applies to all
other evidence, which may be in writing, outside of the document.49 Therefore it
is better to speak of evidence extrinsic to the written agreement being excluded.
Secondly, the parol evidence rule is not a rule of evidence but a rule
of construction. Books on evidence that still include it within their scope
quickly explain that it should not really be included.50 The rule as traditionally
48 Cf G McMeel, “Interpretation and Mistake in Contract Law: ‘The Fox Knows Many Things …’”
[2006] LMCLQ 49, 66–69.
49 Eg Mercantile Bank of Sydney v Taylor [1893] AC 317 (PC).
50 C Tapper, Cross & Tapper on Evidence (12th ed, OUP 2010).
180 Contract in Commercial Law
formulated states that evidence cannot be admitted (or even if admitted cannot
be used) to add to, vary or contradict a written instrument.51 The rule forms
part of the law of merger, which is of more general application outside of the
law of contract (eg court orders). Once it has been shown that the parties have
agreed to be bound to the terms of a contract wholly embodied in a written
instrument, each is bound by its terms although one may not know what they
are,52 and even though the content of prior negotiations may be inconsistent
with the terms contained in the document. The refusal to admit such extrinsic
evidence as relevant arises from the fact that it is wholly pointless to admit it
as it is irrelevant once the court has concluded that the document was agreed
to contain all the terms of the contract. The rule that such extrinsic evidence is
irrelevant follows as a matter of logic from what the parties have agreed to be
bound by. Such an agreement is determined by the ordinary rules of objective
interpretation. If, as a matter of fact, the parties had at an earlier point in their
negotiations reached an agreement on different terms from that embodied
in the subsequent written contract, this earlier agreement is replaced, and
consideration provided by each side’s promise is to be bound solely by the terms
in the written agreement. Giving effect to different terms from those contained
in the written agreement would be contrary to the agreement the parties have
reached. Properly understood, therefore, the “parol evidence” rule is not, as
it is sometimes portrayed, a rigid rule based upon a now unfashionable love
of certainty which will lead to the frustration of the parties’ actual intentions.
Rather the effect of the rule is to enforce, not frustrate, the intentions of the
parties as objectively manifested.
Although it has been claimed that there are a large number of exceptions
to the rule, and that these exceptions have swallowed it up,53 the better view is
that the logic of the rule is irresistible and that the so-called “exceptions” are
nothing of the sort.54 For example, as a matter of logic, the rule only applies to
the contents of the contract, and not to its validity. Only if it has been genuinely
agreed that the document is agreed to embody the parties’ entire agreement
does it logically follow that extrinsic evidence of other terms is irrelevant. This
limitation is not, therefore, an exception to the rule.
Further, the most important anterior question to the rule’s application
is whether, as a matter of construction, the written instrument is intended
to contain all of the terms agreed to. So, in Allen v Pink,55 a buyer received a
memorandum from the seller which said, “[b]ought of G Pink a horse for the
sum of £7 2s 6d.” As the document was meant as a memorandum evidencing
the agreement which had been entered into, and not as containing the entire
terms of the agreement, evidence of an oral warranty that the horse would go
quietly to harness was admitted. Again, this is obviously not an exception.
51 Bank of Australia v Palmer [1897] AC 540 (PC) 545 (Lord Morris); Jacobs v Batavia & General
Plantation Trust [1924] 1 Ch 287 (Ch) 295 (PO Lawrence J); Jacobs v Batavia & General
Plantations Trust Ltd [1924] 2 Ch 329 (CA).
52 Parker v South Eastern Rly Co (1877) 2 CPD 416 (CA) 421.
53 McMeel (n 48) 66–67.
54 Law Commission of England and Wales, Law of Contract – The Parol Evidence Rule (Report
number 154, 1986) para 2.31.
55 (1838) 4 M & W 140; 150 ER 1376.
Ch 9 The Meaning of Words and the Intentions of Persons 181
Similarly this rule about what the agreement is needs to be kept distinct from
the question as to whether the parties can rely upon extrinsic evidence as an aid
to interpretation of a contract. If all that has been agreed is that no terms other
than those embodied in the written document have been (or are any longer)
agreed to, leading extrinsic evidence to interpret terms within the document is
not inconsistent with the agreement. Indeed such contextual evidence may be
indispensable. In recent times, the courts have become much less restrictive in
admitting such evidence.56 In principle, there is no tension between this and the
parol evidence rule.
The parol evidence rule is not dictated by public policy, or the needs of
commercial certainty, or in order to make the court’s task easier by restricting
the relevant material. Rather, it arises because of the agreement itself. It is a
form of implied entire agreement clause. Consequently, there is no need to
“liberalise” the parol evidence rule.
Where a contract is reduced to writing there is a “presumption” that the
parties intended it to include all of the terms of the contract.57 This “presump
tion” is merely a presumption of fact, and reflects the court’s readiness to draw
inferences as a result of common background practice. This is to be contrasted
with a true presumption of law (eg the presumption that a person’s death can
be presumed from his absence for seven years). The “presumption” that when a
contract is reduced to writing it is intended to include all its terms is inevitably
rebuttable. However, it does reflect the social fact that laymen, in particular
commercial parties, attach great significance to the reduction of a contract into
writing, so that the “presumption” will in practice be difficult to rebut.
Today it is very common for parties to include a clause in written contracts
stating that the document represents their “entire agreement”. Such express
clauses will also deprive pre-contractual statements of the contractual force they
might otherwise have.58 The extent of such a clause’s operation is, inevitably, a
matter of construction. In many cases, the entire agreement clause adds nothing
to the conclusion that the court would have reached without its inclusion. Such
a clause removes any doubts that the parties, by reducing their agreement to a
single document, intended it, and nothing else, to represent their agreement.
The parol evidence rule is equivalent to the implication of an entire agreement
clause into a contract.
Rectification
What is it that we rectify? Three views may be distinguished: the traditional,
the radical, and the correct. The traditional view is that courts do not rectify
contracts but rather the instruments that purport to have been made in
pursuance of contracts.59 This is a curious claim however as instruments
are merely pieces of paper. They are not themselves the parties’ rights and
obligations. Altering pieces of paper on its face does nothing.
56 ICS Ltd v West Bromwich Building Society [1998] 1 WLR 896 liberalises the use of such evidence.
See McMeel (n 48).
57 Gillespie Bros & Co v Cheney, Eggar & Co [1896] 2 QB 59 (QBD) 62.
58 Inntrepreneur Pub Co (GL) v East Crown Ltd [2000] 2 Lloyd’s Rep 611 (Ch D) 614 (Lightman J).
59 Mackenzie v Coulson (1869) LR 8 EQ 368 (Ch) 375 (James VC).
182 Contract in Commercial Law
The radical view is that the courts rectify the parties’ objectively manifested
agreement in order to make it conform with their subjective intentions where
they differ. This view may be naturally arrived at if one believes that the common
law adopts a rigidly objective approach for pragmatic or policy reasons, with
equity then playing its traditional softening role as a court of conscience of
giving effect to the intentions of the parties. It is also radically mistaken. If it were
true why would the doctrine be dependent upon the existence of any agreement
at all? Why not just cut to the chase and enforce the parties’ shared subjective
intentions whenever these could be proven? If we return to the example of the
two companies who independently think they have entered into a lease on the
same terms, why not just give effect to their subjective intentions? The truth is
that equity is no more in the business of enforcing uncommunicated intentions,
even where they are shared, than is the common law.
If there is a communicated exchange of offer and acceptance on some terms
between the two parties (as eg with the two companies that both intend a lease),
can that alone be enough to justify enforcing their shared common subjective
intentions where they differ? The answer is no. It does not matter how close (or
far away) those communications are to what they subjectively intend. There is
no contract on the basis of those intentions, and subjective intentions can be no
substitute for the communication of offer and acceptance.
It is one of the curiosities of the law that although many people claim that
the parol evidence rule is no more, nobody would make the same claim about
the doctrine of rectification. Yet if we had no parol evidence rule we would have
no need for the doctrine of rectification. Rectification operates by way of partial
rescission. If all that it did was amend the document itself it would be of no
legal significance. Instead, the agreement that the document alone represents
the parties’ agreement is rescinded. What we are left with is the bargain that
there would have been if it had not been agreed that the document alone
contained their entire agreement. Rectification is akin to specific performance
because it is that agreement that we are enforcing. Much confusion is created
by thinking that the doctrine of rectification exists in order to give effect to the
parties’ intentions. Again, this is a more subtle form of the error of thinking
that contracts should represent what the parties’ intended.
Lord Nicholls extra judicially suggested that the parol evidence rule could
be easily circumvented by pleading rectification, thereby bringing before the
court evidence of what the parties’ subjectively intended. This would be correct
if the parol evidence rule were a rule of evidence, as this would undermine its
entire purpose. But, as we have seen, it is not. Rectification seeks to partially
avoid what has been objectively agreed. Rectification sets aside the agreement
that this document, and this document alone, contains the parties’ agreement.
It is a form of partial rescission. What we are left with is the agreement that
the parties have entered into absent their reduction of it to a single agreement.
This means that the court may give effect to terms, such as a limitation clause,
that have been omitted from a document but which have been agreed to. That
does not require, as was once thought, an agreement anterior in time to the
final document. This may be impossible to find as there may be no scintilla
of time before the finalising of the document when an agreement was made.
It does, however, require there to be an agreement to be given effect to. Again,
Ch 9 The Meaning of Words and the Intentions of Persons 183
subjective intentions may be used for the purpose of setting aside an agreement
in whole or in part, but those intentions are not the agreement. The evidence
relevant to the question of whether one or more of the parties was making a
mistake is simply not the same as the evidence relevant to the meaning of the
words used. No rule is being circumvented here.
I shall not seek to set out all the circumstances where rectification is
possible, but rather to set out what its consequences are. In each case, we are
not concerned to give effect to the parties’ intentions but to their agreement.
Some examples:
(a) A and B agree to the sale of feveroles. Their agreement, when reduced to
writing, states that there is an agreement for the sale of ordinary horsebeans.
Both mistakenly believe that feveroles and ordinary horsebeans are the
same. B now seeks to rectify the contract so that “feveroles” replaces
“ordinary horsebeans”.
The parties have made a common mistake as to whether the document
contains the terms of their agreement. Rectification should be awarded.
Although the written contract was consistent with their actual intentions
(for ordinary horsebeans), this is of no relevance. The document does
not accord with their actual agreement, and so the agreement that this
document and this document alone embodies their agreement can be
set aside. A contract for the sale of ordinary horsebeans becomes, after
rectification, a contract for the sale of feveroles.
(b) A and B agree to the sale of ordinary horsebeans. Their agreement, when
reduced to writing, states that there is an agreement for the sale of
ordinary horsebeans. Both independently mistakenly believe that feveroles
and horsebeans are the same. B now seeks to rectify the contract so that
“feveroles” replaces “ordinary horsebeans”.
Again, here the finalised written document accords with the parties’
agreement irrespective of the document. That this did not accord with
their actual subjective intentions is irrelevant, and no rectification will be
awarded.60 No agreement for the sale of feveroles was ever entered into, and
rectification cannot alter this fact.
(c) A and B agree to the sale of feveroles. Their agreement, when reduced to
writing, states that there is an agreement for the sale of ordinary horsebeans.
A mistakenly believes that ordinary horsebeans and feveroles are the same.
B knows that feveroles are top quality horsebeans. A seeks rectification so
that “feveroles” replaces “ordinary horsebeans”.
Again, there should be rectification, and it does not matter that there is no
common intention that what is sold is feveroles. The (unilateral) mistake
that A makes, if known to B, entitles A to rescind the agreement, leaving the
agreement that there would have been if they had not reduced it to writing.
60 Frederick E Rose (London) Ltd v William H Pim Junior & Co Ltd [1953] 2 QB 450 (CA); IBM
United Kingdom Pensions Trust Ltd v IBM United Kingdom Holdings Ltd [2012] EWHC 2766
(Ch); Chartbrook (n 2) [57] (Lord Hoffmann); Lord Hoffmann, “The Intolerable Wrestle With
Words and Meanings” (n 2).
184 Contract in Commercial Law
Once we see that rectification is akin to recession, and that what is set aside is the
agreement that the document alone entirely constitutes their agreement, then
we can see that the same kinds of defects in intention that permit a contract to
be set aside ought to permit rectification. Common mistakes, mistakes made
by one party known of by the other, duress and undue influence all ought in
principle to suffice, and operate in the same way as they do when it is sought to
set aside agreements generally on the same basis. In all cases there is no warrant
for doing anything other than enforcing an actual agreement made through a
communicated offer and acceptance.
Enforcing Mistakes
In reviewing the case law concerning rectification for unilateral mistake,
Professor McLauchlan argued that “the object of rectification for unilateral
mistake ought to be essentially no different than rectification for common
mistake – namely, to ensure that the written contract reflects the true
bargain between the parties as determined by ordinary principles of contract
formation”61 and that the case law was consistent with this proposition. In
principle this is correct, but the judges at least seem to be applying a different
rule. Since 1960, Snell’s Equity has contained the following statement:62
“By what appears to be a species of equitable estoppel, if one party to a
transaction knows that the instrument contains a mistake in his favour but
does nothing to correct it, he (and those claiming under him) will be precluded
from resisting rectification on the ground that the mistake is unilateral and
not common.”
This principle was subsequently applied by Pennycuick J in Roberts & Co Ltd
v Leicestershire County Council.63 Roberts & Co had tendered for a building
contract which it thought required its services for 18 months. The Council
knew this, but tendered a contract for 30 months which Roberts & Co signed.
Pennycuick J held that, as the Council knew that Roberts & Co were mistaken
about the length of the contract but nevertheless let them go ahead and sign it,
Roberts & Co was entitled to have it rectified.
This seems wrong in principle,64 and inconsistent with earlier authority.65
That one party was making a mistake as to the terms of the bargain, and that
was known to the other party, ought to be grounds for setting the bargain
aside altogether. It should not be grounds for enforcing an agreement that
was never made. There never was any offer and acceptance of a contract for
18 months. If the Council had not wished for this drastic result, they should
consent to rectification on the terms as understood by the counterparty, but the
counterparty should not be able to enforce an agreement that has never been
made. Rectification should not be used to give rise to results fundamentally in
conflict with basic contract doctrine. If the agreement between the Council
and Roberts & Co had not been reduced to writing, it would not have been
susceptible to rectification, and it would not have been thought that a contract
on the terms as mistakenly understood by Roberts & Co, but never accepted by
the Council, could have been enforced.
The approach of Pennycuick J in Roberts & Co Ltd v Leicestershire County
Council has subsequently been endorsed in England in a series of cases,66 and
adopted by the Supreme Court of Victoria in Air New Zealand Ltd v Leibler.67
It may be that we consider that the sharp practice of which the Council was
guilty should be sufficient for a claim for damages for wrongdoing in Australia
under what is now Pt 3-5 of the Australian Consumer Law (previously found
in the Trade Practices Act 1974 (Cth), Pt VA). Further, one party’s mistake as
to the terms, known by the counterparty, should be sufficient to enable the
mistaken party to get the agreement set aside. If, however, the counterparty
never objectively manifested agreement to be bound by the terms the mistaken
party thinks has been agreed to, there is no contract on those terms.
Legislation
If the propositions concerning the meaning of words used by individuals in
voluntarily creating duties, rights, powers, liabilities and immunities under
contracts is correct, then a fortiori the same should apply to legislative
enactments. Courts frequently speak of the process of interpreting a statute
as one of searching for the legislature’s intent.68 This is a mistake. This is not
because it is meaningless to speak of a legal construct, such as a legislature or
a corporation, as having an intention. Although it is the case that only natural
persons can form an intention, we may perfectly rationally attribute those
intentions to a non-natural entity. So, just as the act of Geoff Hurst in kicking
a ball in a net may be attributed as a goal to a team, England, that itself can
only “act” through human agents, we can speak of companies, legislatures, or
even entire nations having intentions through the attribution of the intentions
of the human agents who make up the corporate entity. This process of
attribution may be more complex where we have a group, some of whom may
have different intentions from others, but the law can solve problems such as
these with a rule. It is not the artificiality or the difficulty of the exercise that is
the problem in searching for legislative intent. Rather it is its irrelevance.
So, even if we could ask all of the United Kingdom Parliament’s 650
Members of Parliament and 774 members of the House of Lords for their
view on the correct interpretation of a statutory provision, and all were in
agreement, this on its own would be of no more probative value than asking
several hundred random members of the public what they thought the words
66 Riverlate Properties Ltd v Paul [1975] Ch 133 (CA); Thomas Bates & Son v Wyndhams Lingeries
Ltd [1981] 1 WLR 505 (CA) (referred to with apparent approval in Taylor v Johnson (1983) 151
CLR 422 (HCA) 433); Agip Spa v Navigazione Alita Italia Spa [1984] 1 Lloyd’s Rep 353 (CA);
Commissioner for New Towns v Cooper (Great Britain) Ltd [1995] Ch 259 (CA).
67 Supreme Court of Victoria, 19 November 1996.
68 Eg Pepper v Hart [1993] AC 593 (HL) 643 (Lord Browne-Wilkinson).
186 Contract in Commercial Law
meant. It may show what a reasonable person may think, but the words mean
what the words mean, not what members of the legislature intend. Even if
they all accorded on the meaning of the words used, this would be equally
irrelevant as not part of the context in which the words were communicated.
If we had the private diaries of Alexander Hamilton written at the time of the
drafting of the United States Constitution this may be of interest to a historian,
but not to a lawyer. By sharp contrast, the Federalist papers are appropriate
communicated context, as published at the relevant time.
The position is no different in cases where the legislative provision is
ambiguous or obscure than where it is clear and precise. What is intended
by anyone is not determinative of meaning, and consequently of what has
been done. Legislation is enacted. The word “Act” of Parliament reflects that
its existence and content is determined by what has been done, not by what
anyone intended to be done.
In this light, we may see that the rule against the admission of statements
made in Parliament during the passing of a Bill was not a rule of evidence at
all. The problem is not that the material may not have been reported accurately,
nor that it may be ambiguous, nor that the costs of searching outweighed the
potential costs, nor that the Bill of Rights precluded courts from questioning
parliamentary debates, nor that it undermines legal certainty, nor that it
undermines the separation of powers, nor does it depend on rejection of the
very idea of Parliamentary intent. Rather, admitting clear and unambiguous
evidence of Parliamentary intent would rarely tell the court anything it needed
to know. It is not a rule of evidence at all but rather a rule of construction.
However, just as with the interpretation of a contract, the context in which
legislation is passed is relevant to its meaning. This enables us to both justify
the modern rule, in Australia contained in legislative rules69 in the United
Kingdom in the House of Lords decision of Pepper v Hart,70 that such context
is admissible and to understand its limited importance. If it were the case that
our purpose is to ascertain the collective intention of the legislature, admitting
statements by ministers in charge of promulgating Bills appears to be a poor
method of ascertaining this. Ministers may be the mouthpiece of government,
but they are not the mouthpiece of the legislature. However, just as with any
other material that provides the background to an Act, a white paper, or Law
Commission report, or its preamble, or statements made in the passing of
legislation may be evidence of its context.
A clear and appropriate case was the decision of the House of Lords in
Harding v Wealands.71 This concerned the true construction of the Private
International Law (Miscellaneous Provisions) Act 1995 (UK). This Act repealed
the conflict of law “double actionability” rule in the law of torts, and provided
that the law to govern claims in torts was the lex loci actus. Issues of procedure
were to be governed by the lex fori. Did matters of “procedure” include the
appropriate remedy, in particular the quantification of damages? During
the Report stage in the House of Lords an amendment to the then Bill had
Trusts
If what I have said so far is accepted, then the same principles of interpretation
and rectification should apply in the law of trusts. A trust can no more be
created by subjectively intending its creation than can a contract. A trust is
irreducibly obligational. A trustee is obliged to another not to use a right or
rights for his own benefit. Such an obligation can only be created by some
action in the world. This is clearly the case where a settlor conveys a right to
another to hold on trust, but is also the case where one party intends to make
himself a trustee for another. There must be a declaration of trust, express or
implied. Secret intentions are not trusts.
In the superb decision of the High Court of Australia in Byrnes v Kendel,72
this objective approach to the existence of a trust was affirmed. As Heydon
and Crennan JJ state, “[a]s with contracts, subjective intention is only relevant
in relation to trusts when the transaction is open to some challenge or some
application for modification”.73
Where a trust deed is rectified (as opposed to when a trust is avoided)
what should, indeed must, be given effect to is another objectively manifested
declaration of trust. Just as the question of interpretation is dealt with in the
same manner as for contracts, the question of rectification should be as well.
On its face, the law in England as stated in the Court of Appeal’s decision
in Day v Day74 contradicts the principles stated above, and expressly rejects
the application of the approach in Chartbrook to the rectification of voluntary
settlements.
In this case, Mrs Day executed a power of attorney in favour of her solicitor.
While she was abroad and in exercise of this power, the solicitor executed a
conveyance of Mrs Day’s home to Mrs Day and one of her sons as joint tenants.
Mrs Day died leaving her assets to her six children in equal shares. It was clear
that she considered that she was the sole owner of the house, and had never
intended the conveyance to her son. Rectification of the conveyance to the son
was sought so that he held his interest in the property on trust for her.
The Chancellor stated:
“What is relevant in such a case is the subjective intention of the settlor. It
is not a legal requirement for rectification of a voluntary settlement that
there is any outward expression or objective communication of the settlor’s
intention equivalent to the need to show an outward expression of accord
for rectification of a contract for mutual mistake … In Chartbrook Ltd v
Persimmon Homes Ltd [2009] AC 1101 the House of Lords agreed with Lord
Hoffmann’s (obiter) explanation of an objective test for rectification for
mutual mistake in the case of a contract so as to bring the final document into
line with the parties’ prior consensus objectively ascertained. Nothing he said
there touched upon the requirements for rectification for unilateral mistake in
a non-contract case. Although, as I have said, there is no legal requirement of
an outward expression or objective communication of the settlor’s intention
in such a case, it will plainly be difficult as a matter of evidence to discharge
the burden of proving that there was a mistake in the absence of an outward
expression of intention.”75
This confuses the question of whether a transaction is invalid with the issue
of what is left once it has been invalidated. If, as could be shown, Mrs Day’s
subjective intentions did not accord with the objectively manifested transaction
carried out on her behalf, this provided a good reason for setting aside the
transaction between herself and her son. Unlike in the case of a contract, where
the transaction is gratuitous there is no requirement that the defendant knew
or ought to have known of the transferor’s mistake.
However, if the transaction between mother and son could be set aside
because of her mistake, could it be “rectified” so as to give rise to a trust in her
favour? Clearly not. Not only did she never outwardly manifest any intention
to create such a trust, she did not even subjectively intend to create one. This
should not have been understood as a case of rectification at all, as Mrs Day
neither manifested an intention to carry out nor subjectively intended any
transaction at all. The correct analysis is that if the transaction between them
is set aside because of her mistake, the right transferred to the son is held on
trust for the mother. There was no possibility of the right to the land revesting
automatically back in the mother at law (as would have happened if what had
been conveyed had been a chattel). Legal title to the land was determined by
the entry on the land register which had been altered in the son’s favour. Rather
the invalidation of the transaction between the two of them inter se obliged the
son not to use the right for his own benefit, and to re-convey it to the mother
at her demand: a trust.
In true cases of rectification (of which Day v Day was not an example) the
rectification of a document embodying a declaration of trust can only give
rise to another express trust on different terms if the latter is also objectively
manifested. Equity is no more in the business of enforcing wholly subjective
intentions than is the common law.
Wills
Wills in the United Kingdom are different because of legislation.76 Most
Australian States have enacted legislation following the British change. First,
the interpretation of wills appears to require that the court look for the actual
intentions of the testator, albeit only when certain conditions are satisfied.
Section 21 of the Administration of Justice Act 1982 (UK) provides (emphasis
added):
“(1) This section applies to a will –
a) in so far as any part of it is meaningless;
b) in so far as the language used in any part of it is ambiguous on the face
of it;
c) in so far as evidence, other than evidence of the testator’s intention,
shows that the language used in any part of it is ambiguous in the light
of surrounding circumstances.
(2) In so far as this section applies to a will extrinsic evidence, including evidence
of the testator’s intention, may be admitted to assist in its interpretation.”
If the conditions of subs 21(1) are satisfied, then such matters as the notes
the testator made in drawing up the will would be admissible, even if never
communicated to another.77 The terms of the Succession Act 2006 (NSW) s 32
is in similar terms.
At common law, it had always been assumed that it was impossible to rectify
a will.78 In Marley v Rawlings Lord Neuberger giving judgment for the Supreme
Court stated:79
“As at present advised, I would none the less have been minded to hold that it
was, as a matter of common law, open to a judge to rectify a will in the same
way as any other document: no convincing reason for the absence of such a
power has been advanced.”
The reason for the law’s assumption was for precisely the same reason: it is
impossible to rectify a statute. The court cannot give effect to bequests that are
merely intended but never embodied in a will. If it could do that, why could
it not simply give effect to the testator’s intentions in the absence of any will
at all? If the document embodying the will is set aside, there is no will. Unlike
a contract, where the rectification of the formal agreement does not leave no
contract at all, it was never possible for the courts to give effect to an informal
bequest that was not embodied in the formal will. Only intentions embodied in
a will can be given effect to on death. The setting aside of the will would result
in dispositions according to the position before the will was ever entered into,
either under an earlier will or, if none, on an intestacy basis.
76 Following the Law Reform Committee Report, Interpretation of Wills (Report no 19, cmd 5301,
1973).
77 Marley v Rawlings [2014] UKSC 2; [2015] AC 129 [26] (Lord Neuberger).
78 Harter v Harter (1873) LR 3 P&D 11 (Hannen P). See also In re Reynette-James decd [1976]
1 WLR 161 (Ch D) (Templeman J).
79 Marley v Rawlings [2014] UKSC 2; [2015] AC 129 [28].
190 Contract in Commercial Law
80 Craddock Brothers v Hunt [1923] 2 Ch 136 (CA); United States of America v Motor Trucks Ltd
[1924] AC 196 (PC).
Ch 9 The Meaning of Words and the Intentions of Persons 191
Conclusion
Another lesson on legal writing that Peter Birks taught was that each academic
contribution must be self-contained.81 It should not be expected that the
reader has already read and understood arguments and explanations expressed
elsewhere. In order to comply with this injunction we have had to encompass
not just the law of rectification on contracts, trusts and wills, but more generally
how words are to be interpreted and the importance of reducing agreements to
single documents.
That the law of interpretation and rectification as it is understood in
England and Australia is not inevitable, and how these issues are interrelated,
is perhaps most easily illustrated by the principles of interpretation set out in
the proposed (and now abandoned) Common European Sales Law. Article 58
provided:
“General rules on interpretation of contracts
1. A contract is to be interpreted according to the common intention of the
parties even if this differs from the normal meaning of the expressions
used in it.
2. Where one party intended an expression used in the contract to have a
particular meaning, and at the time of the conclusion of the contract the
other party was aware, or could be expected to have been aware, of that
intention, the expression is to be interpreted in the way intended by the
first party.
3. Unless otherwise provided in paragraphs 1 and 2, the contract is to be
interpreted according to the meaning which a reasonable person would
give to it.”
This provision clearly adopts an approach to interpretation that fits more
closely with the Civilian tradition than with that of the common law, but that
is no objection to it. All of us could point to favourite examples of the common
law that make no sense. Rather, the objection is that this rule is inconsistent
both with how rights can be conferred, and with how to correctly interpret
words in general and promises in particular. Any approach that starts with the
proposition that contractual rights and their meaning are to be ascertained
by looking at the subjective intentions of the parties is simply wrong. Indeed,
in the vast majority of contractual disputes, the parties did not foresee the
problem that has arisen, let alone have any actual intentions as to how it should
be resolved.
Why then has this rule, which is in conflict with everyday life, found favour?
The only answer that can be given is an appeal to history. In the first half of
the 19th century the “will theory” of contract pioneered by Frederich Carl
von Savigny, that promises are a product of will, and contracts the result of
a meeting of minds, held sway. This theory, whilst having some influence in
England, has always had a more significant hold on the law in continental
Europe. If a contract were or could be a product of our combined wills, then
81 He also said that footnotes should be for references and nothing else, otherwise the reader would
be distracted by looking up and down. If it is worth saying, say it in the text. This is a rule that is
very hard to stick to.
192 Contract in Commercial Law
like a vow its existence and content would be similarly determined by what was
intended.
No parol evidence rule, and no doctrine of rectification appears in the
Common European Sales Law, as is inevitable in a world where we are in the
business of giving effect to subjective intentions, and not objective agreements.
We cannot fudge these profound differences as comparatists are so often
tempted to do.
Today, there are no serious subscribers to the will theory. We are bound
by those agreements for which we are responsible and which we have made,
not those we merely intend. It is not narrow partisanship to suppose that the
common law rule is superior to that which is proposed to replace it, and that
those jurisdictions that have either in whole or part abandoned it are making
a mistake.
10
Introduction
One could be forgiven for thinking that the equitable jurisdiction to rectify
a written contract on the ground of common mistake would be one of the
more straightforward areas of equity jurisprudence. Originally conceived as a
qualification to the common law parol evidence rule, rectification is available
to prevent a contracting party behaving unconscionably by seeking to enforce
a written contract that, by mistake, failed to record accurately the common
intention of the parties at the time the document was executed. However, an
analysis of recent case law and commentaries on the subject reveals that the
law has become extraordinarily complex and highly contentious. As Toulson LJ
pointed out in Daventry DC v Daventry & District Housing Ltd (“Daventry”),1
there are “some real difficulties in the present state of the law about rectification”.
Indeed, so much so that his Lordship and several other judges have taken to
speaking extra-judicially about these difficulties and suggesting their own
solutions.2 Despite the dry nature of the subject, this is not too surprising since
rectification claims are a regular feature of modern commercial litigation that
193
194 Contract in Commercial Law
they have to preside over. They would all agree with the view expressed by
Lord Neuberger of Abbotsbury MR in Daventry that “it is plainly right that
the applicable principles should be as clear and predictable in their application
as possible”3 yet, as the Chancellor of the High Court of England and Wales,
Sir Terence Etherton, then said in his recent extra-judicial comment, the law
is now “marred by uncertainty and complexity and needs the attention of the
Supreme Court”.4
The aim of this chapter is to illustrate this uncertainty and complexity, in
what I hope is the simplest way possible, through a series of examples and to
suggest what I consider to be the best way forward. I have already published
articles on this subject, expressing views from which I have yet to see good
reason to resile,5 and consequently I will only repeat those views and the
supporting arguments to the extent that is necessary.
Example One
It is well established that rectification is a remedy solely designed to correct
mistakes made by contracting parties in the expression of their agreement.
The mistake must relate to the terms of the contract. This may be brought
about by a mistaken belief that the contract contains (or omits) a particular
term or, in appropriate cases, a mistake as to the meaning of words chosen
to give effect to the common intention. Rectification will not lie where
there is a mistake in underlying assumptions or a mistake as to the benefits
or consequences of implementing the common intention, as opposed to a
mistake in reducing that intention to writing. The courts will not, under the
guise of rectification, rewrite a document to reflect the agreement that the
parties probably would have made if they had been better informed. There
has to be an agreement or common intention, whether actual or objective,
that is not reflected in the written contract before it is sensible to talk about
rectifying the document.
The classical illustration of this distinction was long thought to be the well-
known case of Frederick E Rose (London) Ltd v William H Pim Junior & Co
Ltd (“Rose v Pim”).6 Even in Australia, where historically the courts have taken
a more liberal view of the requirements for rectification than their English
counterparts, the denial of relief in that case has never to my knowledge been
questioned. This is so despite their viewing rectification as primarily concerned
to implement the actual mutual intention of the parties, their criticisms of the
contrary opinion in Denning LJ’s judgment,7 and their rejection of the need for
3 Daventry (n 1) [194].
4 Etherton (n 2) 368.
5 D McLauchlan, “The ‘Drastic’ Remedy of Rectification for Unilateral Mistake” (2008) 124 LQR
608; D McLauchlan, “Refining Rectification” (2014) 130 LQR 83. Cf PS Davies, “The Meaning of
Commercial Contracts” in PS Davies and J Pila (eds), The Jurisprudence of Lord Hoffmann (Hart
2015) 238 (suggesting that my approach “should not be adopted”).
6 [1953] 2 QB 450 (CA).
7 See eg Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd (1995) 41 NSWLR 329
(CA) 336; Club Cape Schanck Resort Co Ltd v Cape Country Club Pty Ltd (2001) 3 VR 526 (CA)
[7]–[11].
Ch 10 The Many Versions of Rectification for Common Mistake 195
8 It is not altogether clear why this feature of the facts should have made a difference since it does
not appear that rectification of the contract between the plaintiff and the defendant would, in
the particular circumstances of the litigation, have adversely affected the third parties. However,
that is not an issue that need detain us here.
9 Rose v Pim (n 6) 461.
10 G Williams, “Mistake and Rectification in Contract” (1954) 17 MLR 154, 154–55.
196 Contract in Commercial Law
11 See Rose v Pim (n 6) 458 (Singleton LJ), 462 (Denning LJ, “an erroneous assumption underlying
the contract”) and 463 (Morris LJ, “[t]he parties had throughout a clear common intention and
purpose of buying and selling horsebeans”). Cf J Ruddell, “Common Intention and Rectification
for Common Mistake” [2014] LMCLQ 48, 50 who explains Rose v Pim as a case where
“rectification was refused where both the written instrument and the prior oral agreement were
for the purchase of horsebeans, even though both parties intended to buy and sell ‘feveroles’.
Importantly, the parties did not intend to contract for feveroles. They were simply mistaken as
to the nature of horsebeans, believing them to be feveroles.” It is difficult to see how the parties
“intended to buy and sell ‘feveroles’” but “did not intend to contract for feveroles” (emphasis in
original). It would be better to say that they intended to buy and sell horsebeans in the mistaken
belief that they were the same as feveroles.
12 See generally D Hodge, Rectification: The Modern Law and Practice Governing Claims for
Rectification for Mistake (Sweet & Maxwell 2010) paras 3.02–3.20.
13 Lewison (n 2). Lewison’s view is endorsed by Hodge (n 12) para 3.38.
14 Lewison (n 2) para 49.
15 Lewison (n 2) para 51.
Ch 10 The Many Versions of Rectification for Common Mistake 197
Pim by the Court of Appeal in Joscelyne v Nissen16 where, in the course of ruling
that the former case “does not assert or reinstate the view that an antecedent
complete concluded contract is required for rectification”, the court said that
the explanation for the decision to deny rectification was that “there was no
communication between [the parties] to the effect that when they should speak
of horsebeans that was to be their private label for the other commodity”.17
A broader question is also raised by Lewison’s analysis. If the parties were
using the word “horsebeans” as their private code for “feveroles”, would not
the latter be the actual meaning of the contract so that there was no mistake at
all and no need for rectification of the contract? This raises questions that go
beyond the scope of this chapter concerning the general rule excluding evidence
of prior negotiations as an aid to interpretation and the exception for the so-
called “private dictionary” principle as explained by Lord Hoffmann (with the
agreement of all of their Lordships) in Chartbrook Ltd v Persimmon Homes Ltd
(“Chartbrook”).18 His Lordship restricted the application of the principle to
situations where evidence is sought to be adduced “that the parties habitually
used words in an unconventional sense in order to support an argument that
words in a contract should bear a similar unconventional meaning”. Suffice it
to observe here that, if in the Rose v Pim scenario the parties did indeed mean
“feveroles” when they used the word “horsebeans” and the private dictionary
principle did not apply, Lord Hoffmann would allow rectification for common
mistake on the somewhat artificial basis that the parties “mistakenly thought
their words bore a different meaning”.19
16 [1970] 2 QB 86 (CA).
17 Joscelyne (n 16) 97.
18 [2009] UKHL 38; [2009] 1 AC 1101 [45].
19 Chartbrook (n 18) [46].
20 Leggatt (n 2) 464.
21 Patten (n 2).
22 Chartbrook (n 18) [60].
23 Patten (n 2) para 14.
198 Contract in Commercial Law
Example Two
Let us move on now to situations where the alleged common mistake does
relate to the terms of the contract and start with an example where most would
consider that there is no doubt that rectification can be granted.
Claimant (C) and Defendant (D) form an actual and objective consensus that
their proposed contract shall include Term A. In other words, their actual
intention is the same and this is manifested in communications passing
between them or, as commonly expressed, “crossing the line”. However, Term
A is either omitted from their later written contract or, properly interpreted,
it does not have the meaning that C and D actually and objectively intended.
This is essentially the same as the first of four scenarios discussed by
Etherton LJ in Daventry: “the parties subjectively and objectively (that is to
say in their communications passing between them – or ‘crossing the line’) are
in agreement but the formal documentation as executed fails to give effect to
that prior agreement”.26 His Lordship’s view was that “[t]he documentation
should be rectified to bring it into line (retrospectively) with their prior accord”
and that “[s]ubject to such matters as delay and prejudice to any third party
interests, there is no good reason not to do so”.27 However, while no-one would
dispute this conclusion, not all agree as to the principle to be applied. They
would draw a distinction between situations where the consensus reached prior
to the written contract amounts to a binding contract and those where it does
not. Thus James Ruddell28 argues that it is “fundamental”29 that the availability
of rectification depends on whether the remedy is being sought on the basis
that the written instrument fails to record the terms of a prior contract. If
it is, the instrument should be rectified unless there is proof of an objective
intention to vary the prior contract. This is so regardless of whether it is a case
of common or unilateral mistake. On the other hand, when there is no prior
contract, the correct approach is “radically different”.30 Here “the question is
whether there is conduct on the part of the defendant sufficiently objectionable
(or unconscionable) to justify rectification”.31 In the case of unilateral mistake
the claimant must establish that “the defendant either had knowledge of the
claimant’s mistake or deliberately induced that mistake”.32 If, however,
the alleged mistake is common, it must be shown that the defendant shared the
claimant’s actual (subjective) intention when the written contract was executed
but subsequently invokes the terms as written. In essence, therefore, the
argument is that when rectification is claimed on the basis of a prior contract
an objective approach should be adopted but in all other cases a subjective
approach is required. Importantly, on this analysis, rectification ought not to
have been entertained on the facts of either Chartbrook or Daventry because
in each case the objective prior accord was not a binding contract and the
defendant both intended to contract on the terms as written and did not know
of the claimant’s mistake.
The author gives the following example:33
“C intended to sell her car to D for £10,000 and made an offer on those terms;
D accepted the offer but misinterpreted it, intending to pay only $10,000; a
written instrument was created with both C and D intending and believing
that it simply recorded the oral contract; the written instrument provided for
$10,000 (that is, the currency intended by D, but not that intended by and
previously agreed with C).”
He concludes that rectification should be granted because:34
“if no written instrument had been created, D would have been contractually
bound to pay £10,000 in accordance with the terms of the parties’ oral contract
(not $10,000). If neither party intended to vary that agreement, why should
C not be entitled to rely on the earlier contract? If there is communication
between the forming of the first oral contract and the written instrument
that is inconsistent with the former but consistent with the latter, it will be
necessary to determine whether that communication meant that it was
intended objectively that the instrument would vary the original contract.”
28 Ruddell (n 11).
29 Ruddell (n 11) 49.
30 Ruddell (n 11) 60.
31 Ruddell (n 11) 49.
32 Ruddell (n 11) 49.
33 Ruddell (n 11) 59-60.
34 Ruddell (n 11) 60.
200 Contract in Commercial Law
I agree that rectification is available in this case, but why should it not also
be available if a court were to conclude that, due to, say, the informality of C’s
initial communication and the parties’ contemplation that both would later
sign a written agreement, C did not make a contractual offer, but D had led C
reasonably to believe that a price in pounds sterling was on the table? According
to Ruddell, the reason is that:35
“when there is no prior contract, either party is free to walk away from
negotiations at any point until the signing of the written instrument. It is a
significant inroad into freedom of contract to hold a party to an objective
accord formed during negotiations but to which he or she never agreed to
be bound. In this situation, rectification has the effect of imposing on both
parties a contract they never made.”
The argument is premised on the view that there is no “true agreement” between
the parties that rectification seeks to give effect to “because, by definition, the
only agreement between the parties of any legal effect is that contained in the
instrument”.36
On this view, the House of Lords’ analysis of the law of rectification for
common mistake in Chartbrook was wrong. It will be recalled that in this case
Lord Hoffmann, with whom all of their Lordships agreed, after overturning
the rulings of the lower courts that the plain meaning of a payment formula
contained in a property development agreement obliged Persimmon to pay
Chartbrook nearly £3.6m more than Persimmon contended was due, said that
he would have been prepared to uphold Persimmon’s claim for rectification
on the ground of common mistake if their argument as to the meaning of the
clause in question had been rejected. In his Lordship’s view, the jurisdiction
to rectify a written contract hinges on whether an objective observer would
conclude that the document failed to reflect the parties’ prior consensus,
regardless of whether that consensus gave rise to a binding contract.37 Even
if one party (in this case, Chartbrook) believed that the document reflected
the prior consensus and intended to contract in accordance with the terms
as written, that party will be deemed to be mistaken if the document does
not reflect that prior consensus. Thus, on the facts, his Lordship ruled that
an objective consensus had been reached in the correspondence between
the parties several months before the final contract was signed. A reasonable
person who read that correspondence “in the light of the background known
to the parties would have taken them to have been intending [Persimmon’s
understanding]”.38 And, since there was no evidence of later discussions from
which an intention to depart from the consensus might have been inferred, it
followed that, assuming Persimmon’s interpretation of the contract was wrong,
“both parties were mistaken in thinking that it reflected their prior consensus
and Persimmon was entitled to rectification”.39
Example Three
Let us now assume that proof of a continuing common intention not reflected
in the parties’ written contract suffices for rectification, regardless of whether
that intention gave rise to a binding contract. The question then arises: what is
meant by “common intention”? Is it actual (subjective) intention or objective
intention, ie the intention that a reasonable observer would attribute to the
parties? If it is the former, must the actual intention be accompanied by an
outward expression of accord? If not, must the intention be disclosed in some
manner by each party to the other before it can count as a common intention, or
does it suffice that it is otherwise proven that the parties’ intention was the same
at the time of the contract? If, however, the law’s concern is with objectively
40 Eg I agree with his view (at 65) that rectification should be available where the parties’ actual
common intention is not recorded in their written contract, regardless of whether there was
an outward expression of accord. However, I disagree with his acceptance throughout the
article of the orthodox view that rectification on the ground of unilateral mistake can only
be justified where there is a finding of blameworthy conduct on the part of the defendant.
See McLauchlan, “The ‘Drastic’ Remedy of Rectification for Unilateral Mistake” (n 5).
202 Contract in Commercial Law
determined intention, does this mean that the parties’ actual intention is
irrelevant? Indeed, does this mean that a party who actually intended what
the written contract provides for could obtain rectification to bring it into line
with an earlier “objective” consensus? My third example below raises some of
these issues.
C leases a building to D. The executed lease places the obligation to pay rates
on C. The actual intention of each party was that D was to pay the rates. This
is verified by internal company minutes and memoranda, but there were no
communications between the parties prior to execution of the lease to show
that there was an outward expression of accord on the point. D pays the first
two instalments of rates but then realises that the lease obliges C to pay. C
seeks rectification of the lease.
According to the leading English authorities, C cannot obtain rectification
in the absence of communication between the parties sufficient to give rise
to an objective consensus or, as it is usually put, an outward expression of
accord. Although there is support for the view that the latter should be treated
“more as an evidential factor rather than a strict legal requirement in all cases
of rectification”,41 so that C would prima facie be entitled to relief in the above
example, this view must now be taken to have been rejected. More fundament
ally, of course, under the ruling in Chartbrook that the relevant “common
continuing intention” is not the parties’ subjective intention but their objective
intention, a contracting party may be deemed to be mistaken even though it
intended to contract on the exact terms contained in the written contract. This
so-called “clarification” of the law prompted Etherton LJ in Daventry to observe
that “the requirements of ‘an outward expression of accord’ and ‘common
continuing intention’ are not separate conditions, but two sides of the same
coin, since an uncommunicated inward intention is irrelevant”.42
This view would not be accepted in Australia where the leading modern
authorities hold that “the common intention that is required to grant
rectification is subjective”43 and that there is no need for an outward expression
of accord on the subject matter of the common intention. Nevertheless, the
result in the above example would be the same. C’s rectification claim would
fail because it is not sufficient for the parties’ actual intention to be the same
at the time the written contract is executed. In order to count as a common
intention their identical subjective intentions must be sufficiently disclosed to
one another: their intentions must “have been disclosed by each to the other in
such circumstances that [those] intentions are not only identical in content, but
known, and known to be known, to each other”.44 It is only “unconscientious
for a party to a contract to seek to apply the contract inconsistently with what
he or she knows to be the common intention of the parties at the time that the
41 Munt v Beasley [2006] EWCA Civ 370 [36] (Mummery LJ, with whom Scott Baker LJ and
Sir Charles Mantell agreed). This view is endorsed by Toulson (n 2).
42 Daventry (n 1) [80].
43 Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65; (2007) 69 NSWLR 603 [316] (Campbell JA,
with whom Mason P and Tobias JA agreed). See also Newey v Westpac Banking Corp [2014]
NSWCA 319 [175].
44 Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; (2009) 76 NSWLR 603 [430]
(Campbell JA, with whom Allsop P and Giles JA agreed).
Ch 10 The Many Versions of Rectification for Common Mistake 203
written contract was entered”.45 Thus, in the leading case of Ryledar Pty Ltd v
Euphoric Pty Ltd,46 Campbell JA concluded his analysis by posing the following
rhetorical question:
“If two negotiating parties each had a particular intention about the
agreement they would enter, and their intentions were identical, but
that intention was disclosed by neither of them, and they later entered a
document that did not accord with that intention, what would be the
injustice or unconscientiousness in either of them enforcing the document
according to its terms?”
My reaction to this situation is exactly the opposite. It seems to me to be
quite unjust to allow a party to hold the other party to a contract that the
evidence irrefutably establishes neither party intended. And it is interesting to
note that in New Zealand the law is different. The leading case is the decision
of Tipping J in Westland Savings Bank v Hancock47 where his Honour stated the
relevant requirement for rectification as follows:48
“That while there need be no formal communication of the common
intention by each party to the other or outward expression of accord, it
must be objectively apparent from the words or actions of each party that
each party held and continued to hold an intention on the point in question
corresponding with the same intention held by each other party.”
This statement makes no reference to a requirement that each party know
of the other’s intention. It apparently suffices that there is reliable objective
evidence to support a finding of fact that the parties’ actual intentions at the
time of entering into the written contract were the same. Indeed, in holding
that this requirement was satisfied on the facts his Honour focussed solely on
whether the words and actions of each party, whether before or subsequent to
the contract, demonstrated their respective intentions.49 Nothing in his analysis
45 Franklins v Metcash Trading (n 44) [444]. In JD Heydon, MJ Leeming and PG Turner (eds),
Meagher, Gummow & Lehane’s Equity: Doctrines & Remedies (5th ed, LexisNexis Butterworths
2014) para 27.050, the Australian position is summarised in the following difficult passage: “the
central question is whether each party communicated that party’s actual intentions to the other
so as to make their intentions common and agreed … Where the instrument is to be corrected
to match the intentions of A and B, to establish a common intention it must be shown that
(a) A held the relevant intention and B knew or reasonably believed that A held that intention;
and (b) B held the same intention and A knew or reasonably believed that B held that same
intention. This is ‘objective’ to a limited extent: there is no common intention unless both parties
actually hold the same intention; objectivity enters the scene only to say it is enough, when
deciding whether the parties communicated their intentions to one another, that each of them
reasonably believes that the other – who in fact holds the relevant intention – does hold that
intention. It follows that there will be no rectification to an ‘agreement’ which embodies an
intention which one or both parties did not hold and did not, in some manner, communicate to
one another” (emphasis in original). This very odd view only meets the criterion of intelligibility
if the words “ought to have known” are substituted for “reasonably believed”.
46 Ryledar (n 43) [315].
47 [1987] 2 NZLR 21 (HC). Despite being only a High Court decision his Honour’s analysis of the
law has been widely adopted, including recently by the Court of Appeal in Robb v James [2014]
NZCA 42 [21].
48 Westland Savings Bank (n 47) 30.
49 Westland Savings Bank (n 47) 30.
204 Contract in Commercial Law
of the facts hinted at the need for any kind of communication between the
parties of those intentions. In other words, it sufficed that each party’s intention
was objectively verified.50
My solution
How should the differences of opinion highlighted above be resolved? Many
commentators would view the critical issue as being whether the common
intention required for rectification is the objective common intention (so that
there must be an outward expression of accord) or the subjective common
intention.51 However, as I hope to demonstrate, that is a little too simplistic.
Several points need to be made at this stage.
First, viewed from an historical perspective, the notion that in the present
context equity is unconcerned with the actual intentions of the parties seems
quite wrong. As the Australian courts have taken some pains to point out, the
rationale for granting rectification is the prevention of the unconscientious
conduct involved in a party seeking to enforce a written contract that fails to
reflect the actual common intention of the parties.
Secondly, as I have discussed in more detail elsewhere,52 the need for an
outward expression of accord, and the perceived concomitant notion that
rectification is solely concerned with the parties’ objective intention,53 arose out
of the unsatisfactory reasoning in the decisions of the English Court of Appeal
in Joscelyne v Nissen54 and Rose v Pim.55 In the former, the court rightly rejected
the view expressed by Denning LJ in the latter case, and in earlier authority,
that rectification for common mistake was not available unless there was a
prior concluded contract between the parties. It approved,56 inter alia, the view
of Simonds J in Crane v Hegeman-Harris Co Inc57 that “it is sufficient to find
a common continuing intention in regard to a particular provision or aspect
of the agreement”. Nevertheless, it also held that, in addition to “convincing
proof ” that the written contract failed to record the parties’ common intention,
there must be “some outward expression of accord” before rectification can be
granted.58 It is clear that this was said in deference to the view of Denning LJ in
Rose v Pim that:59
50 In Ryledar (n 43) [287] Campbell JA suggested that Tipping J left open “the question of to whom
‘it must be objectively apparent’ – the other party or parties to the negotiation, or the Court at
the time of the hearing”. However, a close reading of the judgment reveals that it is the latter. It
appears that his Honour did not have in mind that each party’s intention must be apparent to
the other party or parties.
51 See eg Davies (n 5) 234 (“the crucial area of debate”).
52 McLauchlan, “Refining Rectification” (n 5).
53 But cf the view of Leggatt J in Tartsinis v Navona Management Co [2015] EWHC 57 (Comm) [89]
that, despite the requirement of an outward expression of accord, the availability of rectification
for common mistake depends upon proof of an actual mistake by both parties. See further text
following n 84.
54 Joscelyne (n 14).
55 Rose v Pim (n 6).
56 Joscelyne (n 14) 95.
57 [1939] 1 All ER 662 (Ch) 664.
58 Joscelyne (n 14) 98.
59 Rose v Pim (n 6) 462 (emphasis in original).
Ch 10 The Many Versions of Rectification for Common Mistake 205
60 [1950] 1 KB 671 (CA) 691 (“[O]nce a contract has been made, that is to say, once the parties,
whatever their inmost states of mind, have to all outward appearances agreed with sufficient
certainty in the same terms on the same subject matter, then the contract is good unless and until
it is set aside for failure of some condition on which the existence of the contract depends, or for
fraud, or on some equitable ground. Neither party can rely on his own mistake to say it was a
nullity from the beginning, no matter that it was a mistake which to his mind was fundamental,
and no matter that the other party knew that he was under a mistake”). See also Taylor v Johnson
(1983) 151 CLR 422 (HCA) 428–30 and Byrnes v Kendle [2011] HCA 26; (2011) 243 CLR 253
[59].
61 (1871) LR 6 QB 597 (QBD) 607.
62 Because the issue of interpretation is resolved against me, perhaps due to the perceived
inadmissibility of evidence of prior negotiations.
206 Contract in Commercial Law
the contract.63 In such circumstances the claimant does not believe, let alone
reasonably believe, that the other party intends to contract on different terms.
An opposite view
In his excellent and very readable book, Principles of Contractual Interpretation,
Richard Calnan takes an entirely different view.64 Although recognising that
“the law is in a state of flux”,65 he approves the objective approach adopted
by the House of Lords in Chartbrook and argues that “[r]ectification – like
interpretation – should be concerned with the objective common intention of
the parties”.66 This is because:67
“in the case of a contract, what the court is required to do is to establish the
parties’ common intention. An intention is not really held in common merely
because of the coincidence that each party subjectively and independently
believes the same thing. It is only held in common if there has been a meeting
of minds, and that is only possible through external manifestation of their
individual subjective intentions. So, by its nature, a common intention must
be established objectively – by reference to what has passed between the
parties.”
The author goes on to suggest that there is little difference between require
ments of objective common intention and “subjective common intention that
has been externally manifested” because:68
“[i]n both cases, what needs to be established is the appearance of consensus,
based on what has passed between the parties. In theory, the subjective
approach also requires that there is an actual meeting of minds; but, since this
can only be proved by what has passed between the parties, it is not at all clear
that in practice this requirement adds anything material to the requirement of
objective consensus.”
As will be readily apparent, I disagree that actual intentions can only
be proved by what has passed between the parties and therefore that relief
is necessarily based on what the objective observer would conclude from
an outward expression of accord. The difference between our approaches
can be demonstrated by our responses to two examples given by Calnan. The
first states:69
63 See eg Crossco No 4 Unlimited v Jolan Ltd [2011] EWHC 803 (Ch) [253] where Morgan J, in
the course of explaining that he had “some difficulty with Lord Hoffmann’s description of the
principles as to rectification for common mistake” in Chartbrook, said that “[t]he law as stated
by Lord Hoffmann appears to mean that a court can rectify a contract even though one party
to the contract (even the party seeking rectification) fully intended, subjectively, to be bound by
that contract, if the court is able to find that the final expression of consensus in the contract as
executed differs from an earlier expression of consensus in a communication passing during the
negotiations between the parties” (emphasis added).
64 R Calnan, Principles of Contractual Interpretation (OUP 2013).
65 Calnan (n 64) para 9.02.
66 Calnan (n 64) para 9.51.
67 Calnan (n 64) para 9.49.
68 Calnan (n 64) para 9.50.
69 Calnan (n 64) para 9.39.
Ch 10 The Many Versions of Rectification for Common Mistake 207
“A and B agree on the terms of their contract, and they are then put into
writing. The document reflects the parties’ common subjective understanding
of the agreement, but not their objective common intention. Should the
writing be rectified?”
Calnan initially states that either answer is possible but his later preference for
the objective approach suggests that he believes rectification should be granted.
I, on the other hand, would emphatically deny the possibility of such relief.
Indeed, this example calls into question what is meant by “objective” common
intention. Calnan appears to favour “detached objectivity”, under which the
question is whether an objective observer would have inferred that the parties
had reached a consensus on the matter in question, whereas I favour “promisee
objectivity”, which denies the very possibility of an objective common intention
in the above example. Claimants cannot establish that they were led reasonably
to believe that the contract contained terms other than the written terms when
they actually intended to contract on the latter terms.
Calnan’s second example raises the opposite scenario:70
“A and B agree on the terms of their contract, and they are then put into
writing. The document reflects the parties’ objective common intention, but
does not reflect their subjective common understanding of the agreement.”
The author again initially states that either view is possible but it is clear that he
prefers what he calls “the common law approach”, namely, rectification is not
available because the contract reflects the objective common intention of the
parties. I, on the other hand, would allow rectification. I would do so regardless
of whether there has been some outward expression of the subjective agreement
or each party’s intention is disclosed in some manner because, in my view, a
court ought never to enforce an agreement that is contrary to the actual mutual
intention of the parties. And again, because I adhere to “promisee objectivity”,
I find it difficult to accept that the contract reflects the parties’ objective
common intention. Claimants cannot establish that they reasonably believed
that the document accurately reflected the terms of the bargain when they, and
the defendants, actually intended something else. Calnan, on the other hand,
suggests that the latter view gives rise to “a curious result”:71
“If the contract had not been put into writing, it would have been the objective
common intention of the parties which would have determined what the
contract meant. But if the contract is then put into writing, should it be possible
for one of the parties to go back to the parties’ subjective common intention?”
I see no such curious result. I would argue that, in the case of an alleged oral
contract, a clearly proven actual mutual intention should prevail, as it did in,
for example, Air Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd.72 To me, it is
more curious that a court would uphold a contract and give it a meaning that is
contrary to the actual intention of both sides. And, even if the arguments in this
paper are wrong, the courts have well-established weapons in their armoury,
such as estoppel by convention, to avoid such a result.
Example Four
Let us now consider some examples where the parties’ actual intentions
differ but there was a prior objective consensus. The first of these is relatively
uncontentious:
C and D hold different actual intentions as to the meaning of an important
term of their contract. C intends meaning x. D intends meaning y. The
communications passing between them prior to signing the written contract
support the conclusion that, objectively, meaning y was their common
continuing intention and the written contract provides for this meaning.
This is similar to the second of four scenarios highlighted by Etherton LJ, with
whose analysis Lord Neuberger agreed,73 in Daventry:74
“the parties never subjectively had the same intention, but the communications
crossing the line show that objectively there was a common continuing
intention at all relevant times prior to the execution of the final documentation,
and the formal documentation reflected those prior communications. In that
situation, whether or not rectified, one or other of the parties will be bound by
a contract which they did not subjectively intend to enter into. It is right that
the claimant should not be entitled to rectification to bring the documentation
into line with a subjective intention and belief that was never communicated
to the defendant and to which the defendant never agreed.”
The conclusion here is correct, but I suggest that it would be better to say
that rectification is unavailable simply because there is no common mistake.
The defendant is not mistaken because it intends to contract on the terms as
written. This is a classic scenario where only one party, the claimant, has made
a mistake. The defendant has not in any relevant legal sense made a mistake
because it believes, and has been led reasonably to believe, that the claimant has
agreed to the terms as written.
Example Five
In this example the facts are the same except that the written contract does not
reflect the prior objective consensus.
C and D hold different actual intentions as to the meaning of an important
term of their contract. C intends meaning x. D intends meaning y. The
communications passing between them prior to signing the written contract
support the conclusion that, objectively, meaning x was their common
continuing intention. However, the written contract provides for D’s intended
meaning y.
In my view, this example, like example four, is better categorised as involving
unilateral, not common, mistake. In example four (where the document does
give effect to the objective prior accord) C has made a unilateral mistake but
rectification should be denied because D can establish that it believed and
73 Daventry (n 1) [227].
74 Daventry (n 1) [86].
Ch 10 The Many Versions of Rectification for Common Mistake 209
reasonably believed that the claimant agreed to the terms as written. Whereas,
in example five (where the document fails to give effect to the objective prior
accord), C has also made a unilateral mistake but rectification should be granted
if D led C reasonably to believe that C’s understanding was agreed to. The two
scenarios are at heart no different except that in example five rectification is
required to give effect to C’s understanding.
Nevertheless, many disagree that the remedy should be available in the
latter situation. After all, they say, D intends to enter into a contract having
meaning y and that is exactly what the final written agreement provides for.
C should only obtain relief if D knew of, or deliberately induced, the mistake
and unconscientiously sought to take advantage of it. My view, however, is
that since the purpose of rectification is to “put right” the written contract and
ensure that the true bargain is enforced, not to punish nefarious behaviour, it
is wrong to focus on the required state of mind and conduct of the defendant
rather than on the simpler and more principled question as to whether in
all the circumstances that conduct led the claimant reasonably to believe that
the terms he or she intended had been accepted by the defendant. I have yet
to see any satisfactory reason why the law should distinguish between (a)
the situation where the actual and objective intentions of C and D are the
same but wrongly recorded in their written contract and (b) the situation
where the facts are the same except that D, without communication with C,
changes her mind after perusing the final draft. It simply should not matter
whether or not D can successfully plead innocence to a charge of wicked
conduct. Suppose that the parties to an agreement for sale and purchase of
land exchanged several drafts prepared by the vendor which clearly provided
that the price was “exclusive of GST” but that the final version contains a
typing error which has the effect that the price is now “inclusive of GST”.
The purchaser notices the change but says nothing to the vendor. If the
vendor later seeks to have the contract rectified, surely it should not matter
whether (a) the purchaser, realising that there has been a mistake with serious
financial consequences for the vendor, deliberately stood back and sought
to take advantage of it75 or whether (b) the purchaser was entirely innocent,
being either genuinely confused about the difference between “inclusive” and
“exclusive” of GST or assuming (wrongly) that the transaction had no GST
implications. In either situation, the court might be entitled to conclude that,
despite the purchaser intending the price to be GST inclusive, the contract
should be rectified because the purchaser ought to have drawn attention to
the change and the vendor was reasonably entitled to assume that the deal
that had always been on the table remained on the table.
Of course, example five is essentially the situation that occurred in
Chartbrook where, as we have seen,76 rectification would have been granted
on the ground of common mistake if Persimmon’s interpretation argument
had failed, notwithstanding that Chartbrook intended all along to contract
in accordance with its, assumed to be correct, interpretation. An objective
consensus had been reached on the point in issue prior to the written contract
75 See eg Eldamos Investments Ltd v Force Location Ltd (1995) 17 NZTC 12,196 (HC).
76 Text following n 36.
210 Contract in Commercial Law
being signed and it was held that the requisite common mistake was that both
parties mistakenly thought that the document recorded the prior consensus.
This view is difficult to accept because, in reality, the parties were at cross-
purposes. Only one party, Persimmon, made a legally relevant mistake in the
usual subjective sense of that word, in this case a false belief as to what the terms
of the written contract provided for. On this view, the question that arose was
whether or not Persimmon could obtain rectification for unilateral mistake.
The lower courts thought not because Chartbrook did not know of, and had not
in bad faith sought to take advantage of, Persimmon’s mistake. Consequently,
the latter could not satisfy what were thought to be the requirements for
taking the drastic and exceptional step of ordering rectification where there
is mere unilateral mistake. However, as I have already indicated, in principle
rectification for unilateral mistake ought not to be so restricted and could easily
have been justified on the facts of Chartbrook. It seems clear that Chartbrook
ought to have been aware from the offers that preceded the drafting of the
written contract that Persimmon had a different understanding of the term in
question. Furthermore, as a result of the various communications between the
parties, including Chartbrook’s agreement in principle to the offers made by
Persimmon, the latter were led reasonably to believe that their understanding
of the term was assented to by Chartbrook. Of course, this is essentially the
same as Lord Hoffmann’s conclusion that the written contract failed to reflect
the earlier objective consensus, but the reasoning is different because it does
not rest on a finding of mistake by Chartbrook and its focus is the existence, at
the time of the written contract, of a consensus that Persimmon was reasonably
entitled to believe, and did believe, was being confirmed in that document.
Support for the above analysis is to be found in the judgment of Toulson LJ
in Daventry. His Lordship questioned the correctness of the Chartbrook
principle and therefore whether, given that the principle was strictly obiter, the
court ought to follow it. Although he eventually decided to do so for various
reasons,77 it seems clear that, had he not been constrained by authority, he would
have adopted the alternative principle I have been advocating. In particular,
he would have ruled that (a) the facts of both Chartbrook and Daventry were
better categorised as involving unilateral mistake on the part of the claimant,
(b) rectification for unilateral mistake might be granted where the mistaken
party was reasonably entitled to believe that its understanding of the contractual
terms was accepted by the other party, (c) the facts of Chartbrook satisfied the
latter requirement (the mistaken party, Persimmon, “was led reasonably to
believe that its version of the price formula was accepted”78), and (d) so too did
the special facts of Daventry. Importantly, his Lordship said:79
“Notwithstanding the immense respect due to Lord Hoffmann and other
members of the House of Lords, I have difficulty in accepting it as a general
principle that a mistake by both parties as to whether a written contract
conformed with a prior non-binding agreement, objectively construed, gives
rise to a claim for rectification. Take a simple example. A and B reach what they
77 Daventry (n 1) [180]–[182].
78 Daventry (n 1) [174].
79 Daventry (n 1) [176]–[177].
Ch 10 The Many Versions of Rectification for Common Mistake 211
80 Toulson (n 2).
81 [1994] CLC 561 (CA).
82 Toulson (n 2) 13.
83 Toulson (n 2) 13.
84 [2015] EWHC 57 (Comm). See also: Morgan J’s observations in Crossco (n 63); Morgan (n 2) 16;
and the reservations of Hamblen J in St Maximus Shipping Co Ltd v AP Moller-Maersk A/S [2014]
EWHC 1643 (Comm) [60]–[62].
212 Contract in Commercial Law
where the objective approach of the common law results in a document being
interpreted in a way that does not reflect the actual intentions of its makers”;85
the requirement of an outward expression of accord only makes it clear that “a
mere coincidence of uncommunicated subjective intentions is not enough” and
“does not detract from the principle that rectification for [common] mistake
depends upon proving that both parties actually were mistaken about the effect
of the instrument”;86 it is difficult to see any equity in the “much more strongly
objective test”87 in Chartbrook of allowing “a party to obtain rectification of a
document to reflect a view of what had been agreed that the party himself did
not actually have, just because a reasonable observer would have taken this to
be his view”88 or of “imposing the view that a hypothetical reasonable observer
would have formed of what had been agreed on a party who did not have that
understanding of what had been agreed and whose understanding is reflected
in the proper interpretation of the final document”;89 in the latter situations
“rectification is not serving to avoid the injustice that would otherwise be caused
when the objective principle of interpretation leads to a result which fails to
reflect the parties’ real intention”;90 and, perhaps most tellingly, the Chartbrook
approach converts what is truly a unilateral mistake into a common mistake
and enables the well-established principles contained in “a distinct body of case
law” that place strict limitations on the availability of rectification for unilateral
mistake to be bypassed.91
It remains to note, however, that it will not necessarily be artificial or wrong
in every case to posit a mistake on the part of a party whose intention was
to contract in accordance with the terms as written. Let us take the following
scenario that is broadly based on the facts, at least as analysed by Hoffmann LJ
in his dissenting judgment in Britoil.92 Suppose that C and D sign a non-
binding heads of agreement containing a term that, in accordance with C’s
understanding, plainly means x but which D understands as meaning y. Later
the parties enter into a formal and more detailed “definitive agreement” that
both parties intend “should reflect the meaning of the heads of agreement,
whatever that might be”.93 However, as drafted, the agreement means y, which D
still intends, whereas C still intends x. It is plausible to find a common mistake
85 Tartsinis (n 84) [87]. Cf PT Berlian Laju Tanker TBK v Nuse Shipping Ltd (The Aktor) [2008]
EWHC 1330 (Comm); [2008] 2 Lloyd’s Rep 246 [38] where Christopher Clarke J said that “[t]he
court is not concerned with what the parties thought they had agreed or what they thought their
agreement meant – a subjective inquiry” (emphasis in original).
86 Tartsinis (n 84) [89]. See also Leggatt (n 2) 464 (distinguishing between cases where “the parties
merely happen to have coincident intentions” and those where “they have a shared intention” and
arguing that “a shared intention is the only form of actual intention which the law has reason to
enforce”.
87 Tartsinis (n 84) [89].
88 Tartsinis (n 84) [91]. This appears to be a logical corollary of Lord Hoffmann’s objective approach
but it is questionable whether his Lordship would have entertained upholding the rectification
claim if Persimmon intended to contract in accordance with Chartbrook’s actual intention.
89 Tartsinis (n 84) [91]. This view was recently endorsed by Cooke J in LSREF III Wight Ltd v
Millvalley Ltd [2016] EWHC 466 (Comm) [70].
90 Tartsinis (n 84) [92].
91 Tartsinis (n 84) [93].
92 Britoil (n 81).
93 Britoil (n 81) 577.
Ch 10 The Many Versions of Rectification for Common Mistake 213
Example Six
My final example is Etherton LJ’s seemingly simple fourth scenario in Daventry
where:96
“[T]here was objectively a prior accord (whether or not a subjective common
intention), and one of the parties then objectively changed their mind, that is
to say objectively made apparent to the other party that they intended to enter
into the transaction on different terms.”
His Lordship’s conclusion was as follows:97
“Leaving aside rectification for unilateral mistake (the requirements for which
are quite different), it is right that, if the documentation as executed gives
effect to the objectively indicated change of mind, a claim for rectification
to give effect to the earlier prior accord should be refused. Once again, to do
otherwise would force on the defendant a contract which they never intended
to make on the basis of the claimant’s uncommunicated subjective intention
to enter into a contract on the basis of the original accord notwithstanding the
defendant’s objectively communicated change of mind.”
I agree with this conclusion because the claimant, in view of the communication
from the defendant prior to entry into the written contract, cannot reasonably
believe that the defendant intends to abide by the original accord and, by
signing the contract without objection, the claimant leads the defendant
reasonably to believe that it assents to the different terms. The objection to
allowing rectification is not so much that it “would force on the defendant
a contract which they never intended to make on the basis of the claimant’s
uncommunicated subjective intention to enter into a contract on the basis of
the original accord”,98 but rather that the defendant reasonably believes that the
claimant has agreed to be bound by the terms as written. Without this latter
conclusion the correct answer might have to be that no binding contract at all
was formed due to the lack of actual or objective consensus on a material term.
Etherton LJ’s scenario is not, however, as simple as it appears to be at first
sight. This is illustrated by the decision in Daventry itself where not only were
different views expressed as to the test to be applied in determining whether
the defendant had objectively made it apparent to the claimant that it intended
to enter into the transaction on terms different from the objective prior accord
but the judges who agreed on the same test were divided as to whether it was
satisfied on the facts. Much of the argument causes one’s head to spin and, as
I have discussed in more detail elsewhere,99 it illustrates just how much, in the
aftermath of Chartbrook, the law of rectification has become inordinately, in
fact ridiculously, complex.
It will be recalled that the case concerned an agreement by Daventry
District Council (DDC) to transfer its housing stock and housing staff to
Daventry & District Housing Ltd (DDH), a specially-formed registered social
landlord. An important part of the negotiations concerned who would pay
the deficit of £2.4m in the pension scheme that transferring staff belonged
to. The trial judge, Vos J,100 found that, although an objective accord that
DDH would pay the deficit had been reached in the course of the parties’
negotiations, that accord had not continued until execution of the contract.
An exchange of e-mails between the parties and their solicitors leading up to
the inclusion of a clause unambiguously providing that DDC were to pay the
deficit (cl 14.10.3) gave rise to a new objective accord. However, a majority
of the Court of Appeal (Toulson LJ and Lord Neuberger MR) allowed
DDC’s Appeal. Rectification was granted on the ground that, applying the
objective approach endorsed by the House of Lords in Chartbrook, there was
a common mistake. Etherton LJ dissented, holding that, although there was a
prior accord as in Chartbrook, the subsequent discussions and conduct would
have suggested to an objective observer that there was an intention to depart
from that accord.
Toulson LJ disagreed with Vos J that there had been a change in the parties’
objective common intention as a result of the communications between their
solicitors in the days immediately preceding execution. His Lordship thought
that in determining whether the common intention had continued it was
“necessary to look carefully at all the facts to see whether a reasonable person
would have understood himself to be involved in the negotiation of a different
deal from the one originally agreed”101 and he concluded that an intention to
vary the earlier accord had not been demonstrated. However, Lord Neuberger,
while agreeing that rectification was available, preferred the approach of Vos J
(and Etherton LJ). The question was whether DDH had objectively manifested
an intention to depart from the earlier accord, not whether the exchange of
emails showed an intention to vary that accord. His Lordship saw the difference
as being that the former question “simply requires one to assess whether the
hypothetical reasonable observer would have concluded that DDH was resiling
from the prior accord to the extent of contending that DDC, rather than DDH,
was to meet the liability to fund the pension deficit”, whereas under the latter
“the reasonable observer would also have to consider whether DDC’s reaction
amounted to agreeing to DDH’s change to the prior accord”.102 In other words,
it “requires one to assess DDC’s reaction to DDH’s alleged resiling from the
prior accord, and in particular whether the reasonable observer would have
thought that DDC was agreeing to what DDH proposed”.103 Nevertheless, while
preferring the former approach, his Lordship did not reach the same conclusion
as Vos J and Etherton LJ. In his view, it was “self-evidently insufficient for a
defendant to defeat a rectification claim simply by establishing that the terms of
the provision which he put forward clearly departed from the prior accord”104
and in this case “the hypothetical observer would not have concluded that DDH
was signalling a departure from the prior accord”.105 Rather, given the factual
and commercial context in which cl 14.10.3 was proposed, “the observer would
have believed that DDH was making a mistake”.106
Etherton LJ disagreed. He accepted Vos J’s finding that DDH had objectively
indicated to DDC an intention with regard to the payment of the deficit
that was different from the prior accord. Since cl 14.10.3 had been proposed
immediately prior to formation of the contract, “it was DDC’s oversight,
rather than any equity arising from mutual mistake, which was the cause of its
misfortune”.107 In other words, “[i]t was sufficient … to defeat DDC’s claim for
rectification for mutual mistake, that DDH was outwardly clearly indicating its
own interpretation and intention, which were at variance with those of DDC,
[and that] DDC did not challenge the clause, and indeed, expressly assented to
it”.108 There was no basis for changing the terms of the contract “so as to give
effect to the uncommunicated subjective intention of DDC to adhere to the
original objective provision for DDH to pay the £2.4m notwithstanding the
clear terms of the draft clause 14.10.3 to the contrary”.109
His Lordship later added a postscript to his judgment in which, inter alia,
he questioned the legitimacy of Lord Neuberger’s conclusion that the objective
observer would have inferred, not that DDH had signalled its intention to depart
from the prior accord, but rather that DDH had made a mistake. This inference
had not been the subject of argument. Furthermore, it raised “questions of
principle as to the relevance of any such mistake on the application of the
objective test”.110 He concluded that in the circumstances of the present case,
“where the communication from the defendant is unambiguously inconsistent
with the prior (objective) accord and the documentation as executed reflects
that unambiguous communication”,111 Lord Neuberger’s application of the
objective test was in principle incorrect.
The reasons given by Etherton LJ in support of this view demonstrate just
how acutely difficult the modern law of rectification has become. Thus, his
Lordship began by doubting whether “the objective test can properly involve
speculation as to the motives or the competencies of the parties” because “[t]hat
is certainly no function of the objective test for the purpose of interpreting an
He does not expressly say that rectification would prima facie be available in
such circumstances but the impression created is that it would be.126
reasonably to believe that A intends to sell for X. We do not say that B mistakenly
believes that A actually intends to sell for X but A is nevertheless bound by her
objectively apparent intention. B has not in any relevant sense made a mistake.
(Of course, if B knows or ought to know of A’s actual intention, there is no
contract because there is neither actual nor objective consensus.) Turning now
to the second scenario where the contract for X is later embodied in a written
document stipulating a sale for X, the reason that A cannot obtain rectification
is that she cannot show that the document fails to record the parties’ common
intention, whether actual or objective. B intends to buy for X and there is no
question of B having led A reasonably to believe that B was agreeing to buy
for Y. In the third scenario, where the document records a sale for Y, as we
have seen130 it may be plausible, although artificial, to find a common mistake
here that justifies rectification on the basis that both A and B intended no
departure from the earlier contract. However, the reality is that only one party
is mistaken, on this occasion B (because A intends what the document provides
for), but B can obtain rectification because he was led reasonably to believe, and
still so believed at the time the document was executed, that the sale was for X.
Sir Terence then proceeded to consider the question whether the position
should be different if the objective consensus between A and B “was ‘subject to
contract’ and B at all times up to the formal written contract for Y reasonably
believed the agreement was for X”.131 He said:132
“There are reasonable arguments either way. On the one hand, those who
favour a unilateral mistake analysis would argue that it is wrong in principle
to favour an antecedent non-contractual consensus for X over a subsequent
written contract for Y which gave effect to the defendant’s actual intention
at the time the contract was made. Others, who favour a common mistake
approach, would say it is inconsistent to have different provisions in the
antecedent non-contractual consensus and the later written contract if there
has been no change in the intention and belief of the parties as to the contract
terms, let alone any communication or outward manifestation of any such
change, prior to the written contract itself. The latter position was precisely
the situation in Chartbrook since there was no suggestion in that case that
Persimmon at any stage prior to the formal contract knew or ought to have
known that Chartbrook did not intend to contract in accordance with the
‘subject to contract’ consensus. On the approach of the majority, Daventry was
the same type of situation.
For my part, I think it is right that in this type of factual scenario the focus
is not on the subjective state of mind of the mistaken party at the time of the
written contract but rather it is on the prior objectively ascertained consensus
which never changed and to which both parties objectively always continued
to adhere. That approach, that is to say one of rectification for a common
mistake, seems to me to be more consistent with an analysis which looks at
the problem through the prism of the contract formation rules. Certainly, it
does not seem to me to be so egregious an error of principle or policy that the
unanimous approach of the appellate committee in Chartbrook on the point
should be overturned.”
My main problem with this analysis concerns the initial description of the
stance of those who favour a unilateral mistake analysis. As will be abundantly
clear by now, I favour such an analysis but would not argue that “it is wrong
in principle to favour an antecedent non-contractual consensus for X over a
subsequent written contract for Y which gave effect to the defendant’s actual
intention at the time the contract was made”.133
than in accordance with the subjective intention of the claimant even though
that conflicts with the express literal terms of the contract”.142 Moreover,
“[t]he effect of the estoppel is, analytically, to turn a unilateral mistake into
a common mistake: the estoppel operates to preclude the defendant from
denying that (i) there was a consensus in the terms intended by the claimant
and (ii) there was a common mistake that the written agreement gave effect
to that consensus”.143 As a result, “there is coherence between the contract
formation principles, rectification for common mistake and rectification for
unilateral mistake”.144 Fourthly, different considerations arise where there is
mere constructive knowledge of the mistake. If the claimant (the party now
seeking to enforce the terms as written) ought to have known that the defendant
did not intend to accept the stated terms, “[o]ur jurisprudence currently
holds that there is no contract in such a case”.145 This is said to be “a fair and
principled outcome” and one that, “it is strongly arguable, is consistent with
the usual detached objectivity approach of our law to contract formation and
interpretation”.146 However, a distinction is drawn between cases where the
claimant merely ought to have known that a mistake has been made and those
where he also ought to have known the actual term intended by the defendant.
Where both elements are present, “it may be said that, on a detached objectivity
approach, there should be a contract on the term subjectively intended by the
defendant”.147 Interestingly, it is acknowledged that this “would be going even
further in favour of the mistaken party than Blackburn J in Smith v Hughes”,148
presumably because the latter’s “promisee objectivity” approach would require
a finding, not simply that the claimant ought to have known the intended term,
but that the defendant was led reasonably to believe that the claimant agreed
to that term. However, the judge said that the answer to this point is that in
practice most such cases will fall within the second and third categories of
actual knowledge149 in Baden,150 so that the claimant would be bound by an
estoppel in any event.
A number of issues are raised by the judge’s analysis. For example, what
precisely is the difference between “detached” and “promisee” objectivity?
Does the former represent the principle underlying the law of contract
formation? Is it satisfactory to treat all instances where rectification of a
contract is available as being based on common mistake? However, a discussion
of these and other issues would unduly lengthen this already too long chapter.
I will simply repeat the observations that concluded my commentary when
Sir Terence delivered his challenging lecture at UCL. In noting the common
ground between us that the starting point for determining the availability of
rectification is the principles of contract formation, but suggesting that we
have somewhat different views about what those principles are, I gave the
following example.
Suppose that our chairman, Ben McFarlane, sends me a formal offer to sell me
his Rolls Royce for £10,000. He meant to say £100,000 but inexplicably left off
a zero. I immediately accept the offer.
Sir Terence’s position is that if I ought to have appreciated that Ben intended to
contract on different terms there is prima facie no contract. I agree with that.
But, if I actually know that Ben made a mistake and I behave dishonourably
and seek to take advantage of it, Ben can get rectification and enforce a contract
for £100,000. This is where I have difficulties. Yes, I have been naughty, but
should I have the contract that Ben intended foisted on me because of that?
Normally, the law’s response to wrongful conduct is simply that the resulting
transaction or gain cannot be enforced by the wrongdoer, but rectification in
my example will punish me. What if Ben’s car has been in a few accidents and is
worth at most £50,000? And what if I did not actually know that Ben had made
a mistake but I ought to have known and I ought to have known his intended
price? Should I be under an obligation, as Sir Terence suggests, to pay £100,000
for the car in that situation too? Surely not!
Document rectification
In Hoffmann’s view, rectification for common mistake is unconcerned with
whether the written contract fails to reflect the subjective or actual intention of
the parties. Such intention is entirely irrelevant. Indeed, the jurisdiction is not
about mistake as to terms at all. Rather the question to be decided is whether
the document accurately recorded the parties’ prior objective agreement and,
if it does not, then, in the absence of evidence indicating an intention to depart
from that agreement, they will be taken to be mistaken regardless of what
one or both actually intended. This was the law clearly stated by Denning LJ
in Rose v Pim and reaffirmed by the House of Lords in Chartbrook. So, cadit
quaestio. Any different view is heresy. Indeed, Hoffmann is incredulous as to
how the lower courts in Chartbrook could have thought that the actual intention
of the respondent to contract on the basis of the terms contained in the final
document was relevant to the question whether Persimmon was entitled to
rectification on the ground of common mistake.
A full response to this line of argument would take up more space than is
available here, but several points need to be made. First, his view would not
be shared by the courts in other common law jurisdictions. In Australia, for
example, there is unanimous agreement that rectification is concerned with
subjective intention152 and Rose v Pim has primarily been treated as illustrative
of the type of mistake – a mistake as to terms as opposed to a mistake in
underlying assumption – required before rectification can be granted.153
Hoffmann, on the other hand, said that he had not been able “to find a case
at any level”154 which denied rectification of a written contract on the basis
that a previous objective agreement in different terms did not accord with the
parties’ subjective intentions. However, if he had looked beyond the shores
of the United Kingdom he would have found that precisely this ruling was
made by the New South Wales Court of Appeal in Ryledar Pty Ltd v Euphoric
Pty Ltd.155
Secondly, Hoffmann argues that, when Russell LJ in Joscelyne v Nissen156
endorsed the view of Simonds J in Crane v Hegeman-Harris Co Inc157 that “it
is sufficient to find a common continuing intention in regard to a particular
provision or aspect of the agreement”, Russell LJ was referring to objective
intention. That is not my reading of the case. For example, his Lordship cited
with apparent approval Harman LJ’s statement in Earl v Hector Whaling158
that although there was in that case no oral agreement “[t]here was a common
intention and that is enough”.159 It is true that Russell LJ, in accepting the
view of Simonds J that a common continuing intention sufficed and rejecting
Denning LJ’s view in Rose v Pim that a complete concluded contract (apart
from formalities) is necessary, added “the qualification that some outward
expression of accord is required”.160 But why would this qualification – which
in any event, when read in context, seems to have been regarded as enabling
the claimant to satisfy “the strong burden of proof that lies on the shoulders
152 Ryledar (n 43) [266], [316]. See also Codelfa Construction Pty Ltd v State Rail Authority of NSW
(1982) 149 CLR 337 (HCA) 346; Newey v Westpac (n 43).
153 See eg Club Cape (n 7) [39] where Phillips JA said that “[i]n Rose v Pim the parties were mistaken
as to the effect of their words, but there was no disconformity between the words employed and
what was held to be their common intention – so rectification was not available”. In other words,
as discussed earlier, the parties intended to buy and sell horsebeans in the mistaken belief that
horsebeans were the same as feveroles.
154 Hoffmann (n 2) para 16.
155 Ryledar (n 43).
156 Joscelyne (n 16).
157 Crane (n 57) 664.
158 [1961] 1 Lloyd’s Rep 459 (CA) 470.
159 Joscelyne (n 16) 97.
160 Joscelyne (n 16) 98.
Ch 10 The Many Versions of Rectification for Common Mistake 225
This comment does not accurately describe what, in my view, any posited
mistake by Chartbrook would have to be. Their mistake would not be about
whether the final written contract was in accordance with what they thought
had been agreed. Chartbrook could not possibly be mistaken as to what they
were thinking. Unless their overriding intention was that the written contract
was to give effect without change to the earlier objective agreement alleged
by Persimmon (unlikely on the facts), in which case they might be relevantly
mistaken,166 the only mistake they could have made was in thinking that the
document contained the term or had the meaning that they intended.167 The
existence of mistake requires a finding of fact that a false belief was held on a
particular matter that influenced a course of conduct and, on the basis of the
undisturbed findings of fact in Chartbrook, the terms of the written contract
implemented what was the respondent’s intention all along in relation to the
matter in dispute. As Hobhouse LJ pointed out in Britoil plc v Hunt Overseas
Oil Inc,168 “there must be a reality to the allegation of common mistake. It is a
factual allegation, not a question of law.”
Fifthly, Hoffmann discusses at some length the difficulty, noted earlier,
that Toulson LJ had in Daventry “in accepting it as a general principle that a
mistake by both parties as to whether a written contract conformed with a
prior non-binding agreement, objectively construed, gives rise to a claim for
rectification”.169 It will be recalled that Toulson LJ gave a “simple” example
involving parties A and B who reach a non-binding agreement which A believes
means x and B believes means y. Objectively construed, the agreement means
x but a later written contract that is intended to give effect to the agreement
provides y. His Lordship questioned whether it is right to allow A to obtain
rectification pursuant to the Chartbrook principle and thus “hold B to a contract
which he never intended to make and never misled A into believing that he
intended to make”.170 Not surprisingly, Hoffmann disagrees:171
“The answer, in my view, is because A [sic, B] promised that the contract would
contain such an undertaking. If it had been a simple contract with no further
document in contemplation, [B] would under the principle in Smith v Hughes
have been bound by that obligation, whatever his subjective thoughts on the
matter. Why should he be better off because there was a mistake in recording
that agreement in a subsequent document? … [I]f a party satisfies the burden
of proving that the parties had definitely agreed that their agreement should
contain certain terms and they have been left out, why should he be denied the
benefit of his agreement because the other party subjectively thought there
had been no mistake?”
Some might question the relevance of B’s non-binding promise, but the point
I wish to make is that nothing in my writings necessarily disputes Hoffmann’s
conclusion. The whole point of my “unified theory” is to allow A to obtain
rectification, despite the fact that B intends the terms as written and hence
is prima facie not mistaken, where, in accordance with the Smith v Hughes
principle, A has been led reasonably to believe that B accepts A’s understanding.
Contract rectification
Rectification for unilateral mistake is renamed “contract rectification” because
its rationale is entirely different from “document rectification”. It rectifies
contracts, not documents. “It creates a contract different from that which the
parties objectively agreed”.172 Unlike document rectification, it is “entirely
about subjective states of mind”.173 It involves a mistake as to the terms of the
contract as opposed to a mistake about whether the document reflects the
prior agreement. “It is based upon a different equitable principle, namely the
overarching principle of good faith which has generated specific rules imposing
upon parties negotiating a contract specific obligations of good faith”,174 such as
the obligations to refrain from making misrepresentations or exercising undue
influence. As a result, my attempt to formulate a unified theory is “doomed”175
to failure.
I have difficulties with this argument too. First, Hoffmann does not say that
the mistaken party is entitled to rectification whenever it is established that the
other party knew of the mistake and sought to take advantage of it. He accepts
that it is “an exceptional order” that “is not necessarily made even where there is
jurisdiction to do so”.176 We are not told what kind of cases are exceptional. Does
it depend on the level of egregiousness of the non-mistaken party’s behaviour?
Must the latter be aware of the precise term intended by the mistaken party?
Secondly, the specific obligations of good faith mentioned above that are
allegedly, and dubiously, generated by an “overarching principle of good faith”
in contract negotiations177 are instances where breach will justify a decision by
the innocent party to resile from the contract, not to enforce a different one.
It is one thing to grant relief from an apparent contract induced by known
unilateral mistake as to the terms, quite another to impose a different contract
intended by the mistaken party which the guilty party may have given no
indication that it was prepared to enter into. It would be more accurate therefore
if Hoffmann’s “contract rectification” were called “contract imposition” because
it may impose on the guilty party a contract that it did not make and did not
intend to make. “Rectification” assumes the existence of a prior agreement or
common intention not reflected in the written contract, so that the document
needs to be “rectified”. It does not make an agreement for the parties. I would
concede that sometimes an appropriate solution might be to give the guilty
party the option of submitting to rescission or accepting rectification, as
arguably sanctioned by a line of old equity cases178 but those cases were, rather
unnecessarily, discredited in Riverlate Properties Ltd v Paul.179
Thirdly, Hoffmann downplays the significance of the subjective element in
Blackburn J’s version of the objective principle which requires not only that a
reasonable person would believe that the promisor was assenting to the terms
proposed by the other party but also that “that other party upon that belief
enters into the contract with him”.180 Although it is well established that these
words require a consideration of the promisee’s knowledge and beliefs when
determining whether a contract has been formed,181 Hoffmann treats them as
suggesting that “as in a plea of misrepresentation or estoppel, the other party
has to adduce evidence that he relied upon the words being given an objective
meaning” and then says:182
“But I know of no case in which such evidence was required. The court simply
determines the objective meaning of what passed between the parties or
the document which they signed. The parties are assumed to have taken the
contract at its objective meaning. If one party wishes to allege that the other
party knew that something different was intended, the onus is upon him to
allege and prove it.”
It is true that ordinarily a court will be entitled to assume that a promisee’s
subjective understanding corresponded with the way in which a reasonable
person would have understood the transaction unless the promisor introduces
evidence to the contrary. But, in principle, once this evidential onus is satisfied,
the formal burden should be on the promisee to establish that it believed and
reasonably believed that the promisor was assenting to its understanding
of the terms. I cannot be sure, but it appears that Hoffmann accepts Lord
Denning’s view that, once the parties are to all outward appearances agreed, a
binding contract is formed unless the promisor establishes a basis for equitable
intervention. He might well therefore disagree with the observation by Lord
Phillips of Worth Matravers in Shogun Finance Ltd v Hudson183 that, in the light
of Blackburn J’s statement of the objective principle, “the task of ascertaining
178 Garrard v Frankel (1862) 30 Beav 445; Harris v Pepperell (1867-68) LR 5 Eq 1 (Ch); Paget v
Marshall (1884) 28 Ch D 255 (Ch).
179 [1975] Ch 133 (CA).
180 Hoffmann (n 2) para 9.
181 See eg Wilson (Paal) & Co A/S v Partenreederei Hannah Blumenthal (The Hannah Bluementhal)
[1983] 1 AC 854 (HL) 915–17, 924; Magnum Photo Supplies Ltd v Viko New Zealand Ltd [1999]
1 NZLR 395 (CA) 401.
182 Hoffmann (n 2) para 9.
183 [2003] UKHL 62; [2004] 1 AC 919 [123].
Ch 10 The Many Versions of Rectification for Common Mistake 229
whether the parties have reached agreement as to the terms of a contract can
involve quite a complex amalgam of the objective and the subjective”.
Conclusion
A resolution of the difficulties currently besetting the law of rectification
that is satisfactory to everyone is likely to prove impossible to achieve. As
will be obvious from a reading of this chapter, conflicting and firmly held
opinions have been expressed on a wide range of issues that go to the very
nature and purpose of the remedy. If I were to hazard a guess as to likely future
developments, it would be that there will be a return to the pre-Chartbrook
position under which (a) rectification for common mistake will require a
finding that the written contract fails to reflect the parties’ actual common
intention, (b) for this purpose, despite my argument to the contrary, the mere
fact that their actual intentions coincide does not suffice, and (c) a common
intention is an intention that, as a result of communications between the
parties, they knew or ought to have known each other to share. However,
I would not wager too much money on this outcome, particularly in view of
the fact that there are probably as many advocates of the Chartbrook position
as there are detractors.
11
Introduction
In November 2014, after a lengthy period of gestation, the Supreme Court
of Canada handed down its unanimous reasons for judgment in Bhasin v
Hrynew.1 The judgment is notable in two major respects. As a matter of judicial
technique, the court chose to frame the new rule as an authoritative statement
of general principle rather than to advance the development of the law of
contracts through the more familiar process of inductive analogy from the
existing body of precedent. As a matter of substance, it imposes a new principle
of good faith and honest performance of contracts that is not based on the
agreement of the parties.
The bulk of this chapter will be devoted to the substance of this decision,
through an examination of the new principle and its implications. However, it
is initially important to consider the technique of legal reasoning adopted by
the court. Just a generation ago, the style of reasoning in Bhasin would have
been unrecognisable in Canadian private law and it has particularly important
implications in the area of contract law.
The change in the technique of legal reasoning of the Supreme Court of
Canada in the law of private obligations has been startling. In 1975, Professor
Gerald Fridman considered the role of the court in the development of private
law on its centenary. He reviewed this remit as “almost, though not quite, like
giving a dog a virtually meatless bone on which to chew. The net result is to whet
the appetite without providing any substance to satisfy what has been aroused.
Or, if you prefer, salivation without salvation”.2 While giving due credit to the
significant contributions that the court had already made to the development
231
232 Contract in Commercial Law
of the law of unjust enrichment3 and recognising some innovations in the law
of torts, he was particularly critical of the court’s performance in the law of
contracts. He commented unfavourably on the inability of the court to re-
evaluate the old doctrines of contract and to provide insights into developments
that had occurred in the English courts.4 He called provocatively for the
Supreme Court to set the tone for lower courts by addressing emerging private
law problems boldly and imaginatively.5
As the Supreme Court approaches its sesquicentennial, it is fascinating
to note how much its approach to private law has changed. In place of the
mechanical application of English precedents that marked much of its
decision-making in its first hundred years, the court has boldly staked new
ground in private law, most notably in the fields of unjust enrichment and
fiduciary relationships. In these areas and others,6 the court has departed from
its previously cautious approach and set the law on new courses by issuing
ambitious statements of general principle. This process leaves to future courts
the task of working out the detailed implications of broadly stated doctrine.
The new directions adopted by the court in unjust enrichment and fiduciary
relationships became well known, even notorious, in other Commonwealth
countries. In Pettkus v Becker,7 Dickson J provided the first and best known
example of a different approach through his formulation of the three elements
that are required to establish an unjust enrichment. The requirements of
enrichment, a corresponding deprivation and the absence of any juristic reason
for the enrichment8 were problematic in the law of restitution, but they also
marked a sea change in the court’s style of reasoning. Dickson J did not justify
the three requirements by a close analysis of the existing law, but they appeared
to result from an innovative and personal synthesis of equitable and common
law principles. In particular, the reference to an absence of juristic reason for
the enrichment had little connection to the existing law and has been described
as “distinctly civilian in appearance”.9 In 2004, when the Supreme Court
redefined the three requirements in Garland v Consumers’ Gas Co,10 it did so
in equally idiosyncratic terms. As Professor John McCamus stated, “it invented
a novel analysis of the ‘juristic reason’ aspect of the tripartite Pettkus test”,11 by
requiring the plaintiff to establish the absence of any juristic reason for the
transfer. The requirement for the plaintiff to prove a negative by ruling out any
3 Fridman (n 2) 154–55, focusing mainly upon Deglman v Guaranty Trust Co of Canada [1954]
3 DLR 785 (SCC) and three cases decided in the 1960s: Eadie v Township of Brantford [1967] SCR
573; George (Porky) Jacobs Enterprises Ltd v City of Regina [1964] SCR 326; County of Carleton v
City of Ottawa [1965] SCR 663.
4 Fridman (n 2) 149–50.
5 Fridman (n 2) 159.
6 The law of torts also provides examples of the changed approach of the Supreme Court. The
main developments are conveniently summarised in R Brown, “Rethinking Privacy: Exclusivity,
Private Relation and Tort Law” (2006) 43 Alta L Rev 589.
7 [1980] 2 SCR 834.
8 Pettkus (n 7) 848.
9 M McInnis, The Canadian Law of Unjust Enrichment and Restitution (LexisNexis Canada 2014)
21.
10 [2004] 1 SCR 629.
11 JD McCamus, “Forty Years of Restitution: A Retrospective” (2011) 50 Can Bus LJ 474, 490.
Ch 11 The Emergence of Good Faith as a Principle of Contract Performance 233
possible juristic reason for the transfer bore little resemblance to the existing
common law.12 The court’s unanimous reframing of the requirements of unjust
enrichment amounted to another institutional declaration of broad principles
that was not closely linked to precedent.
The tendency of the Supreme Court of Canada to restate the law in the
form of novel principles was also exemplified in Frame v Smith.13 In that
decision, Wilson J distilled the ingredients of a fiduciary relationship into three
requirements that focused on (1) the existence of discretion; (2) the unilateral
exercise of power so as to affect the interests of the beneficiary; and (3) the
vulnerability of the beneficiary.14 Although this statement of principle was
described as a “rough and ready guide”15 and appeared in a dissenting judgment,
it soon became the guiding framework for lower courts.16
The attempt to define the requirements of a fiduciary relationship
occupied the court in numerous decisions over the next two decades.17 For the
purposes of this chapter, these judgments in unjust enrichment and fiduciary
relationships are notable only as examples of a particular judicial technique.
In extra-judicial writing, McLachlin CJ has described this technique as an
example of universalism, the quest for “broad, general principles underlying
the imposition of responsibility and the corresponding rights of recovery”.18 By
its very nature universalism is a top-down style of reasoning, which is neither
characteristic of the common law, nor of the approach taken by the court in its
first century. Richard Posner has described this style of reasoning as follows:
“In top-down reasoning, the judge or other legal analyst invents or adopts
a theory about an area of law … and uses it to organise, criticise, accept or
reject, explain or explain away, distinguish or amplify the existing decisions to
make them conform to the theory and generate an outcome in each new case
as it arises that will be consistent with the theory … In bottom-up reasoning,
which encompasses such familiar lawyers’ techniques as ‘plain meaning’
and ‘reasoning by analogy’, one starts with the words of a statute or other
enactment, or with a case or a mass of cases, and moves from there – but
doesn’t move far.”19
In contrast to other areas of private law, the Canadian law of contracts
continued to develop incrementally in a bottom-up manner in recent decades.
Even when the Supreme Court began to modernise the doctrine of privity in a
trilogy of cases in the 1990s, it did so through the familiar process of inductive
analogy. The court emphasised in those cases that it was taking only small and
incremental steps from the existing body of case law.20 It was thus notable when
the Supreme Court of Canada decided to extend the top-down approach from
other areas of private law when it addressed the issue of good faith in contracts
in Bhasin. The approach took the form of two propositions. First, good faith
contractual performance is a general organising principle of the common
law of contract. Second, as a particular instance of this organising principle,
there is a common law duty to act honestly in the performance of contractual
obligations.
This landmark decision caused shockwaves in Canada and attracted
attention in other Commonwealth countries, where both the top down
approach and the nature of the good faith duty created by Bhasin are at odds
with present trends. Because of the significant level of debate on the role of
good faith in the common law world, section 2 of this chapter will analyse
the Bhasin decision. Section 3 will provide an initial assessment of the new
Canadian doctrine. Section 4 will contrast the Canadian position with the
different approaches to good faith that are taken in England and Australia. A
concluding section 5 will set out a preliminary analysis of the possible impact
of the new duty of good faith in Canada.
Bhasin v Hrynew
The nature of the dispute
The case involved Canadian American Financial Corp (Can-Am), which
marketed education savings plans to investors through individual dealers known
as enrolment directors. Bhasin had been a successful enrolment director for
Can-Am since 1989. Under his last dealership agreement, signed in 1998, Bhasin
was obliged to sell Can-Am investment products exclusively and owed a fiduciary
duty to Can-Am. Can-Am owned all of its dealers’ client lists and maintained
responsibility for branding and for policies that applied to all enrolment directors.
It was also a term of the agreement that Bhasin would not dispose of his dealership
without Can-Am’s consent, which could not be unreasonably withheld. The
agreement extended for a term of three years and was automatically renewed
unless either party gave six months’ notice to the contrary.
Hrynew was also a Can-Am enrolment director. He had proposed a merger
of his business with Bhasin on a number of occasions, but Bhasin was not
interested. In 1999, the Alberta Securities Commission began to question
whether the conduct of Can-Am’s enrolment directors met the requirements
of provincial securities legislation. The Commission required Can-Am to
appoint a single provincial trading officer (PTO) to ensure that its enrolment
directors were acting in compliance with securities laws. Can-Am appointed
20 See the Supreme Court of Canada trilogy of London Drugs Ltd v Kuehne & Nagel International
Ltd [1992] 3 SCR 299; Edgeworth Construction Ltd v ND Lea & Associates Ltd [1993] 3 SCR 206;
Fraser River Pile & Dredge Ltd v Can-Dive Services Ltd [1999] 3 SCR 108.
Ch 11 The Emergence of Good Faith as a Principle of Contract Performance 235
Hrynew to that position, but Bhasin and another enrolment director objected
to allowing Hrynew, a competitor, to review the confidential business records
of their dealerships.
Bhasin’s refusal to allow Hrynew to audit his records led Can-Am to provide
the required six months’ notice that the dealership agreement would not
be renewed when it reached its termination date in 2001. As a result of the
non-renewal, Bhasin lost the value of his business. Under normal principles,
it would have been difficult to contest this straightforward exercise of an
unfettered right not to renew the agreement, unless Can-Am’s conduct fell
within one of the established principles of contract law that allowed relief, such
as misrepresentation or estoppel.
Two major factors took this case out of the ordinary mould. The first
involved Can-Am’s conduct in appointing Hrynew as PTO. Can-Am tried to
overcome Bhasin’s objections to this appointment on the basis that the Securities
Commission had rejected the use of an outsider in this position and on the
assurance that Hrynew was obliged to treat all information confidentially. Both
of these assertions were untrue.21 The second involved Hrynew’s persistent
attempts to take over Bhasin’s business through a merger. Unknown to Bhasin,
Can-Am had presented the Securities Commission with a new structure for
its Alberta operations which clearly showed Bhasin working for Hrynew’s
agency. When Bhasin first questioned a Can-Am representative with respect to
a possible forced merger, the representative equivocated and did not tell him
the truth that, as far as Can-Am was concerned, the merger was then a “done
deal”.22 These factors led the trial judge to find that Can-Am had exercised its
rights under the non-renewal clause in a dishonest and misleading manner and
for an improper purpose.23 However, the judgment encountered difficulties
when it came to explaining how these factors could create a contractual liability
on the part of Can-Am.
The trial judge found that the dealership agreement did not create a
relationship in which good faith was required, because it was neither a franchise
agreement nor an employment contract. It was a commercial contract that was
similar to a franchise agreement, which would have been governed by a duty
of fair dealing under provincial law, but it lacked some essential elements of a
franchise. It was not a contract of employment, aspects of which can attract the
requirement of good faith performance in Canadian law, but it contained some
elements akin to employment. However, the agreement was closely related to
these established categories and, according to the trial judgment, this allowed
the court by analogy to imply a term as a matter of law that required good faith
performance on the part of Can-Am.24 Alternatively, the trial judge was willing
to imply a term of good faith performance in fact so as to give business efficacy
to the agreement.25
The Court of Appeal gave short shrift to these reasons. It found that there
is no general duty to perform contracts in good faith and that the dealership
agreement was not an employment contract.26 The trial judge’s decision to
imply a term of good faith performance did not satisfy the normal tests for
the implication of a term and, even if it did, it was barred by an entire contract
clause, which declared that there were no representations, terms and conditions
other than those expressly contained in the dealership agreement.27
the existing law is found to be wanting and where the development may occur
incrementally in a way that is consistent with the structure of the common law
of contract and gives due weight to the importance of private ordering and
certainty in commercial affairs”.32
The court found that the Bhasin case did not fall into any of the existing
categories. However, it chose not to find liability in the conventional inductive
manner, which might have pointed to a close relationship with an existing case
of liability or a small extension of an existing principle. Instead, the court held
that there was a common law duty of honesty in contractual performance that,
in its view, flowed directly from the organising principle of good faith. The duty
of honest performance requires the parties not to lie or to knowingly mislead
each other about matters directly linked to the performance of the contract.
The duty of honest performance does not arise from the parties’ intentions
or from an implied term of the contract, but is imposed by the court as a
minimum standard of conduct. In Bhasin, the breach of this duty resulted from
the defendant’s failure to be honest in exercising the non-renewal clause and its
general dishonesty in the performance of the contract.33
In order to gain some appreciation of the type of conduct that will amount
to dishonesty, it is important to outline the facts which the court found to
constitute breaches of the duty of honest performance. The breaches occurred
in two ways. The first involved Can-Am’s comments relating to the company’s
position on a forced merger of the agencies owned by Bhasin and Hrynew and
on the renewal of Bhasin’s dealership agreement. Can-Am consistently failed to
deal honestly on these matters and, when questioned about its intentions with
respect to the merger in August 2000, Can-Am equivocated and failed to tell
Bhasin the truth that the merger was in fact a “done deal”.34 The second instance
of dishonesty arose from Can-Am’s untruthful statements that the Securities
Commission would not allow the appointment of an independent PTO and
that Hrynew was bound by a duty of confidentiality in any audit of the agencies
owned by Bhasin and others.
The court found that, as a result of these breaches, Bhasin suffered damages
that were assessed on the basis of the finding at trial that, but for Can-Am’s
dishonesty, Bhasin would have acted so as to “retain the value in his agency”,
rather than see it effectively turned over to Hrynew as a result of the nonrenewal
of the dealership agreement.35 The court skirted the problem created by Bhasin’s
inability to dispose of his dealership without Can-Am’s consent by pointing out
that in assessing damages, the trial judge had taken into account the difficulties
created by Can-Am’s “almost absolute controls” on its directors and the fact
that it owned their books of business.36 Although it is difficult to imagine how
Bhasin might have been able to sell his dealership to a third party, the court
adopted the finding of the trial judge that, notwithstanding these difficulties,
its value around the time of non-renewal was $87,000.37
32 Bhasin (n 1) [66].
33 Bhasin (n 1) [94], [108].
34 Bhasin (n 1) [100].
35 Bhasin (n 1) [109].
36 Bhasin (n 1) [109].
37 Bhasin (n 1) [110].
238 Contract in Commercial Law
38 The decision attracted an unusual interest in mainstream media. See Jacquie McNish, “Supreme
Court of Canada Ruling Makes Honesty the Law for Businesses” The Globe and Mail (Toronto,
14 November 2014) www.theglobeandmail.com/report-on-business/supreme-court-of-canada-
ruling-makes-honesty-the-law-for-businesses/article21583597/; Adrian Myers, “Supreme Court
Ruling on Contracts Will Spark More Lawsuits – and that’s okay” The Globe and Mail (Toronto,
17 November 2014) www.theglobeandmail.com/report-on-business/streetwise/supreme-court-
ruling-on-contracts-will-spark-more-lawsuits-and-thats-okay/article21612816/.
39 See eg E Leaderman “The SCC has Blown Wide Open the Grounds for a Contractual Dispute”
(2015) 34 (35) The Lawyers Weekly, http://www.lawyersweekly.ca/articles/2304; J Young, “Justice
Beneath the Palms: Bhasin v Hrynew and the Role of Good Faith in Canadian Contract Law”
(2016) 79 Sask L Rev 79; S O’Byrne and R Cohen, “The Contractual Principle of Good Faith and
the Duty of Honesty in Bhasin v Hrynew” (2015) 53:1 Alta LR 1; N Finkelstein, B Kain, C Spurn,
S C O’Neill and J H Nasseri, “Honour Among Businesspeople: The Duty of Good Faith and
Contracts in the Energy Sector” (2015) 53:2 Alta LR 349.
40 H Collins, The Law of Contract (4th ed, LexisNexis UK 2003) 6.
Ch 11 The Emergence of Good Faith as a Principle of Contract Performance 239
41 Walton’s Stores (Intrastate) Ltd v Maher [1988] HCA 7; 62 ALJR 110, 129, 138, described by
Mr Justice Steyn, “The Role of Good Faith and Fair Dealing in Contract Law: A Hair-Shirt
Philosophy?” (1991) 6 Denning LJ 131, 134.
42 Bhasin (n 1) [42].
43 Bhasin (n 1) [29].
44 Bhasin (n 1) [103].
45 Bhasin (n 1) [69]. This reference is supported by the court’s statement at [60] that the growth
of relational contracts call for a basic element of honesty and performance but that even in a
transactional exchange dishonest conduct will fly in the face of the parties’ expectations.
46 [2013] EWHC 111 (QB); [2013] 1 All ER (Comm) 1321 (“Yam Seng”). For more in-depth
analysis of Yam Seng see O’Byrne and Cohen (n 18).
240 Contract in Commercial Law
expectations of loyalty which are not legislated for in the express terms of the
contract but are implicit in the parties’ understanding and necessary to give
business efficacy to the arrangements. Examples of such relational contracts
might include some joint venture agreements, franchise agreements and long-
term distributorship agreements.”47
The reference to a relational contract in Bhasin was much more oblique, but
the dealership agreement clearly fits the typical description of a relational
contract. A relational contract is contrasted with a contract that arises out of a
single exchange transaction, such as the cash sale of a bulk generic good, when
there may be no further contact between the buyer and seller once the sale is
complete.48 The key distinction is that in the single transaction contract, the
parties can be expected to identify and allocate the risks of non-performance at
the time of contracting.49 In contrast, in a long-term relational contract there are
barriers to identifying and allocating the unforeseeable risks that might emerge
over the life of the contract and to drafting the complex adaptations that might
be necessary to address even foreseeable contingencies.50 Thus, when Bhasin and
Can-Am entered their first agreement in 1989, neither of them could reasonably
have foreseen the investigation by the Alberta Securities Commission that arose
a decade later or the possible appointment of a competitor with the power to
audit Bhasin’s business. They certainly could not have foreseen that a merger
between the agencies of Bhasin and his competitor might emerge as a possible
resolution of the investigation. Although the parties could not realistically have
made provision for this type of risk at the time of contracting, under the theory
of relational contracts they would be expected to deal honestly with each other
when they confronted the issues with the Securities Commission that emerged
in 1999.51
The existence of a relational transaction was not central to the decision
in Bhasin. The court merely mentioned the difference between a relational
contract and a single transaction contract and pointed out that a duty of good
faith might have different implications in the former. However, in its brief
comment, the court relied on two articles which argue that the duty of good
faith is particularly appropriate in relational contracts,52 although both English
courts and senior academic commentators are reluctant to apply any special
treatment to relational contracts.53
Despite the lingering controversy, the brief reference of the Supreme Court
of Canada reveals a kernel of truth. Courts are more willing to find a duty of
good faith in a relational contract and it is safe to conclude that the long-term
nature of the relationship was an important factor in the Bhasin decision. In
other cases, such as Yam Seng, the classification of the contract as relational was
pivotal. It is unfortunate that the Supreme Court did not expand its discussion
of the role of good faith in relational contracts. A more definitive treatment
might well have limited the potential scope of the good faith principle and
provided a degree of certainty that is only hinted at in the judgment.
58 Hudson’s Bay Co v OMERS Realty Corp [2015] ONSC 4671; [2015] OJ No 4098 fn 6, [32].
59 H Collins, “Is a Relational Contract a Legal Concept?”, ch 3, p 37 above. The focus only on
honest performance is maintained by one distinguished commentator, A Swan, “The Obligation
to Perform in Good Faith: Comment on Bhasin v Hrynew” (2015) 56 Can Bus LJ 395, 395, who
purports to distil the essence of good faith in the instruction “Just don’t tell lies!”
Ch 11 The Emergence of Good Faith as a Principle of Contract Performance 243
to “use their best efforts” to lease the former department store.60 However, if the
best efforts clause had not existed, the original department store lease would
have allowed the owner to leave the premises vacant or to refuse to assign them
to a third party. In the case itself, Kelly J at trial found as an alternative ground
of decision that the owner of the shopping centre was in breach of an obligation
to exercise its discretion to sublet the premises in a reasonable manner and in
good faith. The Nova Scotia Court of Appeal affirmed the decision only on the
ground that the owner had failed to use its best efforts to lease the premises
and did not comment on the applicability of a duty of good faith performance.
If this case were to recur today, and if there were no best efforts clause, Bhasin
leaves open the question whether there might be a breach of the duty of good
faith where the contract entitled the owner to take actions which advanced its
own interests and “had the effect of literally destroying the viability of ” the
neighbouring mall by leaving its flagship premises vacant for a very lengthy
period.61
The judgment in Bhasin is unhelpful on this point. It recognises that the
parties can define the scope of honest (and good faith) performance as long as
they respect its core requirements, but provides little further guidance except
by stating that the governing principle is similar to that found in §1-302(b)
of the UCC set out above. The court thus signals that both future litigation
and contractual drafting in Canada are likely to be guided by the American
experience in the interpretation of the UCC. The reference to the UCC invites
counsel to embark on a daunting quest into American case law that is unlikely
to yield very consistent results. A useful recent summary by Shannon O’Byrne
and Ronnie Cohen shows considerable tension in the American case law.62 In
one influential and well-known decision, the Seventh Circuit Court of Appeals
emphasised the primacy of the words of the contract. Judge Easterbrook
stated trenchantly that “[f]irms that have negotiated contracts are entitled
to enforce them to the letter, even to the great discomfort of their trading
partners, without being mulcted for lack of ‘good faith’”.63 This approach bears
considerable similarity to the literal interpretation taken by the Alberta Court
of Appeal in Bhasin (CA) and so decisively rejected by the Supreme Court
of Canada. In the American decision, the court also applied the terms of the
contract literally when it upheld the right of a bank to terminate a client’s line
of credit upon five days’ notice and found that this right was not fettered by a
duty of good faith.
This line of authority strongly suggests that the landlord’s decision to refuse
consent to an assignment in the example set out above will be upheld where the
contract states that consent may be arbitrarily withheld. However, the fidelity
to the text of the contract shown by Judge Easterbrook has been criticised.64
Other cases that deal with the contractual duty of good faith outside the UCC
60 Gateway Realty Ltd v Arton Holdings Ltd (1991) 106 NSR (2d) 180 (SC TD) [80] (“Gateway SC”),
affd (1992) 112 NSR (2d) 180 (CA) (“Gateway CA”).
61 Gateway SC (n 60) [15].
62 O’Byrne and Cohen (n 18) 27–30.
63 Kham and Nate’s Shoes No 2 Inc v First Bank of Whiting 908 F (2d) 1351, 1357 (7th Cir 1990),
cited in O’Byrne and Cohen (n 18) 28.
64 For a summary, see O’Byrne and Cohen (n 18) 28–29.
244 Contract in Commercial Law
65 Wilson v Amerada Hess Corp 773 A 2d 1121, 1126–27 (NJ 2001), citing Sons of Thunder Inc v
Borden Inc 690 A (2d) 575, 586 (NJ 1997), discussed by O’Byrne and Cohen (n 18) 29.
66 Bhasin (n 1) [33].
67 (1889) 14 App Cas 337 (HL), affirmed in Bruno Appliance and Furniture, Inc v Hryniak [2014]
SCC 8; [2014] 1 SCR 126 [18]–[19].
68 Bruno (n 67) [19].
69 Bruno (n 67) [21].
Ch 11 The Emergence of Good Faith as a Principle of Contract Performance 245
about its intentions to merge the businesses of Bhasin and Hrynew, its official
“equivocated” even though the merger was a “done deal”.70 It is true that any
fraudulent misrepresentation would result only in tortious damages, but that
would have made no difference to the court’s ultimate award of damages based
on the value of the business lost as a result of Can-Am’s dishonest performance.
The court also pointed out that the duty of honest performance had an
advantage over promissory estoppel and estoppel by representation because it
does not require any intention on the part of the defendant that its representation
be relied upon and there is no uncertainty over the question whether it can
provide the basis for a cause of action. These limitations also seem irrelevant to
the actual decision in Bhasin. Can-Am could hardly argue that it did not intend
Bhasin to rely on the representation that it was not planning to merge his
business with that of Hrynew and Bhasin could readily have used the statement
as a shield rather than a sword.
The principle of good faith performance undoubtedly has theoretical
advantages over existing doctrines, but it seems that they are not advantages
which would have made any difference to the result of the case.
70 Bhasin (n 1) [100]. At [101] the court affirms that the statement that the Securities Commission
had rejected a Can-Am proposal to appoint a third party as PTO was “not truthful” and the
assurances that Hrynew was bound by duty of confidentiality were also “lies”.
71 Bhasin (n 1) [32].
72 Bhasin (n 1) [82]–[85].
73 Yam Seng (n 46) [124].
74 Yam Seng (n 46) [124].
75 Bhasin (n 1) [32].
246 Contract in Commercial Law
good faith. The Bhasin decision recognises the existence of the doctrine of good
faith in both Québec and the United States, but does not ask the more important
question whether the doctrines in each of those jurisdictions are the same. It
cannot credibly be assumed that the good faith principle in Québec yields the
same results as in the United States and that those results differ from those
reached in the courts of common law Canada. In any event, the decision does
not achieve the goal of uniformity even with Québec because it adopts a more
limited principle of good faith. The judgment in Bhasin restricts good faith to
contractual performance, while the Québec version applies to the formation of
contracts and contract negotiations,76 so that there is at most partial uniformity
between Québec and common law Canada.
76 See for example Bhasin (n 1) [80] and Art 1375, Code Civil du Québec. A discussion of Art 1375
can be found in Bhasin (n 1) [83]. The civilian and common law approaches are contrasted
in Paul André Crépeau Centre for Private and Comparative Law, “Good Faith” www.mcgill.ca/
centrecrepeau/projects/terminology/guide/good-faith.
77 Bhasin (n 1) [57]–[58].
78 [1997] 3 SCR 701.
Ch 11 The Emergence of Good Faith as a Principle of Contract Performance 247
the obligation arose from the parties’ intentions. In Wallace, an employer had
terminated the contract of an employee without providing reasonable notice.
From the moment of dismissal up to the beginning of the trial, the employer
made the “decision to play hardball”79 by arguing that it had dismissed the
employee for cause. This totally unfounded allegation caused the employee
a great deal of distress and led others to assume that he had been guilty of
wrongdoing.80 The employee’s action to recover contractual damages for mental
distress encountered the obstacle that under the existing Canadian law, mental
distress damages were permitted only where the distress was a foreseeable result
of the actual breach (which consisted of a failure to provide reasonable notice
of termination) or if the actual breach was accompanied by the breach of a
separate legal duty arising in contract or tort. In this case, it was argued that the
requirement of breach of a separate duty was satisfied because the employer
had failed to exercise its power of dismissal in good faith.
The majority of the court rejected the argument that there was any
contractual duty to exercise good faith in discharging the employee.81 Instead,
it took the unprecedented step of stating that where there is bad faith in the
manner of dismissal that caused mental distress, the court has discretion to
extend the required period of reasonable notice. Although the bad faith nature
of the dismissal did not amount to an actionable wrong, “employers ought
to be held to an obligation of good faith and fair dealing in the manner of
dismissal, the breach of which will be compensated for by adding to the length
of the notice period”.82
The court’s decision essentially created a free standing obligation of good
faith. The obligation does not arise from a contractual or tortious duty, but
may give rise to damages for mental distress if accompanied by the contractual
breach of failing to give reasonable notice of termination.83 This highly unusual
use of a good faith principle with no link to a tortious or contractual duty
lasted approximately a decade and was highly influential in the Canadian law of
wrongful dismissal, where it was argued in several hundred trial decisions that
a wrongfully dismissed employee was entitled to a “Wallace Bump Up” in the
assessment of damages.84 In a dissenting judgment in Wallace, McLachlin J had
pointed out its analytical weakness when she commented that any obligation
to avoid bad faith dismissal could only be grounded in an “implied contractual
term to act in good faith in dismissing an employee”.85 In 2008, the majority
of the court heeded this dissent when it found that any decision to award
damages resulting from the manner of dismissal must begin by asking “[W]hat
did the contract promise”?86 Although the court did not do so expressly, its
2008 decision clearly based the award of damages for bad faith dismissal on the
breach of an implied term which required “the employer to act in good faith
when exercising the right to dismiss an employee under a contract of indefinite
duration”.87
The Supreme Court also relied on the absence of good faith in the award
of contractual damages in Whiten v Pilot Insurance Co,88 where an insurance
company maliciously and vindictively denied coverage under a fire insurance
policy.89 The court restored the original jury award of $1 million in punitive
damages for the combination of a breach of contract (the failure to pay a valid
claim) and an independent wrong in the form of the breach of an implied
obligation of good faith and fair dealing.90
It could be argued that the impact of the trilogy of cases should not be
overestimated and that they were in substance, if not in form, examples of the
implication of a term of good faith. However, this would be misleading. Wallace
explicitly avoided grounding the duty of good faith in a contractual term. The
court clearly imposed the duty of good faith as a matter of policy, because of
the power imbalance between employers and employees and in recognition
of the fact that for most people “work is one of the defining features of their
lives”.91 The subsequent decision in Keays, which based the duty of good faith
on an implied term of the contract, brought “Wallace-damages” within the
fold of the common law of contracts, but only in order to overcome a serious
flaw in the original judgment. It is difficult to accept that the duty of good
faith was genuinely implied in fact in Keays, for there was little evidence that
such a term reflected the intention of the employer in entering the contract.
If it was implied in fact, then it could easily be defeated by the insertion of
an entire agreement clause in future employment contracts, but the language
of the court in both Keays and Wallace suggests that the employer’s duty to
act in good faith in dismissing employees was an imperative upon which
future courts would probably insist. The judgment in Whiten was much more
conventionally anchored in the insurer’s implied duty of good faith and fair
dealing.92 This provided a ready solution to the Canadian requirement that an
award of punitive damages must be based on a separate actionable wrong in
addition to a breach of contract. In Whiten, the insurer’s failure to pay a well-
founded claim constituted the main breach and the implied duty of good faith
provided a convenient source of the separate actionable wrong. The court’s
willingness to award punitive damages on the dubious basis of a double breach
of contract provides a further example of its determination to deter serious bad
faith in the performance of contracts. Against this background, Bhasin’s explicit
recognition of an independent duty of good faith may allow the court to openly
address the types of conduct that arose in the trilogy without the need to tie
itself in contractual knots.
The judgment in Yam Seng makes a case for the adoption of a duty of
good faith and fair dealing in much the same way as Bhasin, but the cases
differ in two important respects. First, in Yam Seng the court found that the
duty of good faith existed as a matter of intention, as an implied term of the
agreement, rather than as an obligation imposed by law. Second, the absence
of good faith was not central to the finding of liability on the part of ITC.
The court concluded that ITC was in breach of contract because of late
delivery and a failure to make products available when promised and liable
for misrepresentation as it had induced Yam Seng to enter the agreement
through false representations. The existence of bad faith affected the case only
indirectly and was not necessary for the decision. The court found that bad
faith supported the finding that ITC had repudiated the agreement,99 but it also
justified this finding on the straightforward ground that ITC had committed a
serious breach of the exclusivity clause in the agreement.100
Yam Seng is an interesting judgment, but Leggatt J’s enthusiasm for the good
faith doctrine has not been reciprocated by higher courts. In Mid-Essex Hospital
Services NHS Trust v Compass Group UK and Ireland Ltd,101 the Court of Appeal
reversed a trial judgment that, among other reasons, had found an implied duty
to act in good faith in a contract to provide catering and cleaning services to a
hospital. The trial judge had found that the duty obliged the Hospital Trust not
to exercise certain powers “in an arbitrary, capricious and irrational manner”.102
Not surprisingly, the Court of Appeal commented on Yam Seng, which had
been decided only about six weeks earlier and might be considered to support
the contractor’s position, but scrupulously avoided endorsing its adoption of a
broad duty of good faith. Remarkably, the Court of Appeal ignored Leggatt J’s
detailed justification of a contractual duty of good faith and focused only on
his statement that there is no general doctrine of “good faith” in English law.103
It concluded, in a marked departure from Leggatt J’s analysis, that “if the parties
wish to impose such a duty they must do so expressly”.104 The selective omission
of any reference to the justifications for a duty of good faith performance
suggests little enthusiasm for the doctrine formulated in Yam Seng. A similar
lack of enthusiasm is reflected in other senior English decisions, most notably
in the comments of Lord Ackner in Walford v Miles105 and the rejection by the
Court of Appeal of any special treatment for relational contracts.106
Conclusion
The development of a doctrine of good faith in common law jurisdictions
invariably provokes strong reactions. Traditionalists have been described as
viewing good faith as a “contagious disease of alien origin”113 or in treating it
as “an embarrassing social disease”.114 In Canada, the adoption of a doctrine of
good faith performance in Bhasin has now shifted the debate from a theoretical
to a practical level, which requires lawyers to deal with its implications in a
practical way with less emphasis on vivid rhetoric.
the application of the fiduciary principle and may also create different practical
results.123 The different technique may partly explain why “the Australian
approach to fiduciary obligations is less intrusive on the law of negligence and
contract than that which has developed in Canada”.124
The Canadian experience with the impact of the adoption of a freestanding
duty of good faith as a component of contractual damages in Wallace125
certainly showed an expansionary effect. One trial judge noted in 2004 that
despite the fact that the judgment cautioned against the routine use of the
Wallace principle “several hundred Canadian trial decisions have considered
the question of whether ‘Wallace damages’ should be awarded” and “very few
wrongful dismissal statements of claim fail to include a ‘Wallace claim’”.126
The judgment noted that some plaintiffs and their counsel did not appear to
appreciate that the “Wallace bump up” does not occur automatically in every
dismissal.127
There is evidence that Bhasin has had an immediate impact on contract
litigation, if not on the results of contract cases. A survey showed that in the
11 months following the original decision, Bhasin had been considered in 85
reported decisions across Canada.128 An assessment of the 41 cases that were
decided at the trial level in Ontario and the eight appellate decisions from
across Canada suggests that Bhasin has not yet made a significant change in
the way that courts decide cases. In the 49 cases considered, the courts found
a breach of the duty of good faith in only five instances. Three of those cases
involved categories of recovery that were established before Bhasin and in the
remaining two decisions, the good faith principle played only a supplementary
role. This suggests that the common law doctrines continue to do their job and
that Bhasin has not had a revolutionary effect.
However, the impact of Bhasin cannot be measured by the number of
citations alone, as they reflect only the tip of the iceberg. There are undoubtedly
many more cases in which the duty of good faith performance has been pleaded,
which suggest that Bhasin so far is more of an annoyance in litigation than a
game changer. It is difficult to assess its impact in practice, but two minor cases
illustrate how Bhasin can have an impact on the resolution of disputes. Data
& Scientific Inc v Oracle Corp involved a motion to strike pleadings in a case
in which Oracle had terminated a long-term relationship without notice. The
plaintiff had been a business partner of Oracle since 1994 under a series of
annual contracts that were renewable at Oracle’s sole discretion. The plaintiff
123 See especially the comparative analysis in Duggan (n 17) 457–59 of Hodgkinson v Simms [1994]
3 SCR 377.
124 S Hepburn, Principles of Equity and Trusts (4th ed, The Federation Press 2009) 138. A more down
to earth assessment of the consequences of the Canadian approach was provided by Sir Anthony
Mason CJ who is said to have commented that “in Canada there are three types of persons: those
who have been held to be fiduciaries; those who are about to become fiduciaries; and judges”,
quoted in PA Keane, “The 2009 W A Lee Lecture in Equity: The Conscience of Equity” (2010)
10 QUT LJ 106, 107.
125 Wallace (n 78).
126 Yanez (n 84) [12].
127 Yanez (n 84) [16].
128 B Berg and M Maodus, “Bhasin Anniversary: You Gotta Have Faith?” (Blake, Cassels & Graydon
LLP 2015) www.blakes.com/English/Resources/Bulletins/Pages/Details.aspx?BulletinID=2206.
254 Contract in Commercial Law
was invited to apply for renewal in 2014, but Oracle refused the application.
Although there was no indication of any dishonest conduct on the part
of Oracle, the court found that it was not obvious that the plaintiff ’s claim
that discretionary contractual powers must be exercised reasonably had no
chance of success. Ominously, the court relied on the statement in Bhasin
that good faith can be invoked in “widely varying contexts” and that this calls
for “a highly context-specific understanding of ” the requirements of honesty
and reasonableness in performance.129 A recent decision gives an interesting
glimpse of the possible impact of Bhasin in arbitration proceedings. In a long-
term contract relating to the transportation of waste in the greater Vancouver
region, the regional authority was required to provide an annual estimate of
the waste to be allocated to a contractor in order to allow the contractor to plan
its operations. In 2011, the regional authority materially reduced its allocation
of waste to the contractor, which significantly reduced the compensation that
the contractor would receive. Despite finding that the regional authority was
honest and reasonable in setting the 2011 allocation, the arbitrator decided
that it had breached its duty of good faith by disregarding the contractor’s
legitimate contractual expectations. Although the British Columbia court gave
leave to appeal the arbitration award,130 both this case and the Data & Scientific
Inc decision are examples of contracts in which it would have been very difficult
to create arguments in favour of liability prior to the Bhasin decision. They
give no indication of any change in the direction of Canadian courts, but they
emphasise the inevitable temptation to use good faith as an argument of last
resort. They strongly suggest that Canadian courts must pay great heed to the
careful approach to the construction of contracts urged by the court in Bhasin.
While Canada has chosen a new path, most Commonwealth courts apply the
existing range of contract doctrines and accord no separate role to the principle
of good faith. This approach has the advantage of respecting the traditional
notion of freedom of contract and employing techniques that are well-known
to common law judges and lawyers. However, the weakness of the common
law is its tendency to deal with good faith only indirectly through devices
that do not explicitly confront the issues at stake. The adoption of an express
principle of good faith forces courts to examine closely the types of conduct
that they wish to discourage rather than, for example, dealing with a difficult
case through the implication of a term or the manipulative interpretation of
the contract which may well not truly reflect the parties’ intentions. In practice,
the adoption of a duty of good faith is unlikely to change the results of many
decided cases. The theoretical change wrought by the Bhasin decision may
be confined to three classes of practical effects. First, it may be more difficult
129 Data & Scientific Inc v Oracle Corp [2015] ONSC 4178; 127 OR (3d) 149, discussed in
DW McGrath, M O’Brien, and J Sealy-Harrington “Termination of Contracts-Good Faith
Implications” (Blake, Cassels & Graydon LLP 2015) www.blakes.com/English/Resources/
Bulletins/Pages/Details.aspx?BulletinID=2243.
130 Greater Vancouver Sewerage and Drainage District v Wastech Services Ltd 2016 BCSC 68; 2016
CarswellBC 94, discussed in J McArthur and T Posyniak, “Appeal Puts Faith to the Test: Court
Grants Appeal From Arbitral Award on Scope of Contractual Duty of Honest Performance”
(Blake, Cassels & Graydon LLP 2016) www.blakes.com/English/Resources/Bulletins/Pages/
Details.aspx?BulletinID=2268.
Ch 11 The Emergence of Good Faith as a Principle of Contract Performance 255
for the parties to draft a contract which excludes or limits a duty that is now
recognised as one that is judicially imposed. Second, courts may begin to treat
long-term relational contracts differently from single transaction contracts.
Third, the decision presents litigants with a guarded and so far irresistible
invitation to expand good faith arguments beyond the traditional relationships
and categories recognised in common law. However, it is likely that in practice
the changes wrought by Bhasin will be ones of form rather than substance.
12
Introduction
The topic of discharge by breach of contract constitutes one of the thorniest
areas of the common law of contract. The present chapter is a wide-ranging one.
It first explores the nature of a breach of contract before considering the relevant
historical origins which might explain the different approaches in ascertaining
whether or not the innocent party can elect to treat itself as discharged from
a contract as a result of the other party’s breach, focussing on the “condition-
warranty approach” and “Hongkong Fir approach”. The chapter then analyses
the aforementioned approaches on doctrinal, theoretical as well as practical
levels. Finally, it explores more specific aspects of the topic, including the legal
effect of a breach of contract committed by both parties; whether termination
of a contract of employment is “elective” or “automatic” (focussing on the UK
Supreme Court decision of Geys v Société Générale, London Branch);2 as well as
the breach of the implied term of mutual trust and confidence.
1 The undisputed expert in this particular area of the common law of contract in the Commonwealth
is undoubtedly Professor JW Carter. See also the “Preface” to John E Stannard and David
Capper, Termination for Breach of Contract (OUP 2014) v. His seminal work in the area, Breach
of Contract (based on his doctoral thesis in the University of Cambridge), was first published
by the Law Book Co Ltd, Sydney in 1984. The second edition was published under the imprints
of both Law Book Co Ltd as well as Sweet & Maxwell, London in 1991. The third (and latest
edition) has (appropriately in our view) been renamed Carter’s Breach of Contract (LexisNexis
Butterworths 2011). A United Kingdom edition of this latest edition was also published
by Hart Publishing in 2012. And see generally, Andrew Phang, “The Legal Scholarship of
Professor JW Carter: An Appreciation” (2014) 28 CLQ 23. The authors would like to dedicate this
chapter to Professor Carter. They would also like to express their gratitude to Professor Carter
and Professor Michael G Bridge for their very helpful comments and suggestions. However, all
errors and infelicities in language are theirs alone. Also, all views expressed in this chapter are the
personal views of the authors only and do not reflect the views of either the Supreme Court of
Singapore or the Singapore Management University.
2 [2012] UKSC 63; [2013] 1 AC 523.
257
258 Contract in Commercial Law
3 See Andrew Phang, “Mass Call 2008 – Speech by Justice Andrew Phang Boon Leong”
(Supreme Court of Singapore, 5 January 2008) www.supremecourt.gov.sg/data/doc/
ManageHighlights/866/Mass%20Call%202008%20-%20Speech%20by%20Justice%20
Andrew%20Phang.pdf.
4 Indeed, it may be said that the entire methodology of the common law itself is historical and,
hence, backward-looking in nature.
Ch 12 Encounters with History, Theory and Doctrine 259
always be entitled to damages, subject to the relevant common law rules. This
is as important from a practical perspective as it is from a theoretical one. Put
simply, if the innocent party is not entitled to elect to treat itself as discharged
from the contract, then that party will itself be in breach of contract. Hence, it
is of the first importance for both parties to know when the innocent party is
legally justified in electing to treat the contract as discharged as a result of the
other party’s breach of contract. A review of the modern law on this particular
issue demonstrates that this is indeed a very difficult area of the common law
of contract. Without delving into the theoretical conundrums as well as the
historical and doctrinal difficulties, it might be apposite to first state what the
tests appear to be – at least in the context of Commonwealth contract law. It
is important to also note, however, that these tests are by no means applied in
a uniform manner across the various Commonwealth jurisdictions. It suffices
for present purposes to note that there are two main tests for ascertaining when
the innocent party is justified from a legal standpoint in electing to treat the
contract as discharged in the event of a breach by the other party.
contract”.16 However, as has been pointed out, the Hongkong Fir approach
actually operates in situations where there is clearly no repudiation.17 Criticisms
of uncertainty and inefficiency centre on the inability of ascertaining the
remedial consequences at the time of breach. The Hongkong Fir approach is
thus said to introduce an unwarranted degree of uncertainty into the doctrine
of breach, as well as inefficiency, since the inefficient promisor may be rewarded
by arguing for a lesser consequence as a result of this uncertainty. These
arguments are ultimately not persuasive since some extent of uncertainty is
to be expected in the law. Instead, the correct question to ask may be whether
the uncertainty is justified by the flexibility the doctrine affords the law. In that
regard, it may be useful to consider the theoretical and historical underpinnings
of both the Hongkong Fir approach and the condition-warranty approach, and
evaluate whether the former performs a role in addition to the latter.
16 RE McGarvie, “The Common Law Discharge of Contracts upon Breach” (1963-1964) 4 MULR
254, 260.
17 Carter (n 6) 237.
18 The inquiry would, in the nature of things, be (potentially at least) somewhat different in the
case of an anticipatory breach. Still, in most cases, it would probably be the case that the actual
consequences would be known by the time the case itself goes to trial. See also the Singapore
Court of Appeal decision of The STX Mumbai [2015] SGCA 35; [2015] 5 SLR 1 [69].
19 [2007] SGCA 39; [2007] 4 SLR 413 [102] (emphasis in the original text).
20 RDC Concrete (n 19) [103] (emphasis in the original text).
Ch 12 Encounters with History, Theory and Doctrine 263
21 And see Stannard and Capper (n 1) 32 and JW Carter, “Discharge as the Basis for Termination
for Breach of Contract” (2012) 128 LQR 283, 287.
22 Carter (n 21) 287.
23 (1777) 1 H Bl 273; 96 ER 767. See also Stannard and Capper (n 1) 34–35 as well as James Oldham,
“Detecting Non-Fiction: Sleuthing among Manuscript Case Reports for What was Really Said”
in Chantal Stebbings (ed), Law Reporting in Britain (The Hambledon Press 1995) 145–50.
264 Contract in Commercial Law
24 Morton J Horwitz, “The Historical Foundations of Modern Contract Law” (1973–1974) 87 Harv
LR 917.
25 Boone (n 23).
26 Boone (n 23).
27 Donal Nolan, “Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd, The Hongkong Fir
(1961)” in Charles Mitchell and Paul Mitchell (eds), Landmark Cases in the Law of Contract
(Hart Publishing 2008) 270. However, there are also views that Chalmers in fact misunderstood
the law and morphed the law into what we know today as the condition-warranty approach: see
JW Carter and C Hodgekiss, “Conditions and Warranties: Forebears and Descendants” (1977) 79
8 SLR 31.
28 Bentsen (n 5).
29 Bentsen (n 5) 278–79 (Lord Esher MR), 280–84 (Bowen LJ), 284–85 (Kay LJ).
30 See, in particular, the references to construction of the contract (Bentsen (n 5) 278
(Lord Esher MR), 280–81 (Bowen LJ), 284 (Kay LJ)) and (perhaps more importantly) the
reference to a breach of warranty (Bentsen (n 5) 280–81, 284 (Bowen LJ), 284–85 (Kay LJ)).
See also Stannard and Capper (n 1) 36.
Ch 12 Encounters with History, Theory and Doctrine 265
the effect of a breach of contract which has, ex hypothesi, been executed in part)
(“Principle Two”), in order to constitute what we now know as the condition-
warranty approach. This argument is not only persuasive as well as interesting,
but also (and perhaps more importantly) demonstrates that the Hongkong Fir
approach had been neither marginalised nor rejected, but had simply been
transformed or morphed into an entirely different concept altogether.31 In
particular, it no longer focussed upon the actual nature and consequences
of the breach. However, this did not mean that the nature and consequences of
the breach were no longer relevant (let alone eradicated from the legal equation
altogether). Put simply, the Hongkong Fir approach was embodied in Principle
Two. However, when it was combined with Principle One, it then became
transformed into the condition-warranty approach. To reiterate a point just
made, the nature and consequences of the breach were still relevant, albeit in a
different way. As the focus was now on the parties’ intentions as to the relative
importance of terms, the inquiry was, necessarily, upon whether or not they
were of the view that a particular term was so important that any breach
(regardless of the actual nature and consequences of the breach) would entitle
the innocent party to elect to treat the contract as discharged simply because
it was assumed that a breach of that term would result in the innocent party
being deprived of substantially the entire benefit of the contract that it was
intended to receive. As Professor Bridge perceptively (and succinctly) put it,
“[t]he basic choice was between an a priori and an ex post facto inquiry”32 – the
former referring to the condition-warranty approach and the latter to the
Hongkong Fir approach. Looked at in this light, the Hongkong Fir approach – in
its original incarnation – then went into a kind of legal hibernation until it was
resurrected by Lord Diplock in the Hongkong Fir case – at which point we were
presented with two approaches, viz, the condition-warranty approach and the
(recently resurrected) Hongkong Fir approach.
Assuming, then, that we accept that the provisions in the Sale of Goods
Act reflected the then existing common law, there is a sense in which those
provisions had (by endorsing the condition-warranty approach only)
“stereotyped the common law”;33 indeed, Lord Diplock went so far as to
note that such “stereotyping” had resulted in a “deleterious influence” on
the development of the law of contract in this particular sphere.34 This last-
mentioned observation is not perhaps surprising in view of the learned Law
Lord’s own pronouncements in the Hongkong Fir case itself35 – which he in
fact characterised in the same lecture as a “breakthrough”.36 That breakthrough
was that, with the Hongkong Fir approach, courts were “no longer limited to
the primary obligations of each party to perform the contract according to
its terms and the right of the other party to such performance”.37 Instead, “[i]t
31 Michael G Bridge, “Discharge for Breach of the Contract of Sale of Goods” (1983) 28 McGill LJ
867, 872–85.
32 Bridge (n 31) 880.
33 Lord Diplock (n 11) 374.
34 Lord Diplock (n 11) 374.
35 Hongkong Fir (n 7).
36 Lord Diplock (n 11) 376.
37 Lord Diplock (n 11) 377.
266 Contract in Commercial Law
extended to the secondary rights and obligations of each party that arise when
primary obligations are not performed”.38
To summarise the historical narrative thus far, it would appear that what
was in substance what we now know as the Hongkong Fir approach was the
original approach adopted by the courts in an era when the focus was on the
effects or the nature and consequences of the breach (which was due, in part
at least, to the focus of the courts on the substantive fairness of transactions, as
opposed to the more modern (and objective) will theory of contracts (which
focusses on the intentions of the contracting parties)). Indeed, in the 1876
decision of Bettini v Gye, Blackburn J seems to have suggested that the default
rule, in the absence of the parties’ express stipulation as to the status of a term,
was for the court:
“[T]o look to the whole contract, … see whether the particular stipulation
goes to the root of the matter, so that a failure to perform it would render the
performance of the rest of the contract by the plaintiff a thing different in
substance from what the defendant has stipulated for; or whether it merely
partially affects it and may be compensated for in damages.”39
By the time the Sale of Goods Act was enacted in 1893, the relevant case
law had in fact developed in a manner which centred on an examination
of the importance the contracting parties placed on the terms concerned.
Put simply, by 1893, the case law appeared to embody the (quite different)
condition-warranty approach and it was this particular approach that was
incorporated into the Sale of Goods Act – thus marginalising, as it were, the
Hongkong Fir approach until it was resurrected once again by Lord Diplock
in the Hongkong Fir case40 itself. Indeed, as we have already noted above,
if Professor Bridge’s thesis is correct, the Hongkong Fir approach was, in
fact, not so much marginalised as subsumed within a legal structure which
deprived it of its relationship to the actual circumstances of the case and
located it, instead, within a legal structure that focussed on the contracting
parties’ agreement as to which terms would be assumed by them to result in
a breach which deprived the innocent party of substantially the entire benefit
of the contract that it was intended that that party should have. Viewed in
this light, the condition-warranty approach can be said to be predicated
upon finding out what the parties intended to accomplish through the
contract.41 The way this is done is through a construction of the contract,
and the parties’ intentions can be deciphered either expressly or impliedly.
Where however there is a gap in the parties’ intentions, the courts apply
the Hongkong Fir approach as a default rule. The Hongkong Fir approach
is premised on the parties’ intentions, except that the emphasis is on the
imputed (and reasonable) intentions of the parties, as opposed to their
agreed intentions. The Hongkong Fir approach can be grounded on the court’s
perception of what the parties’ intentions ought to be, taking into account
considerations of reasonableness in the circumstances and the context of the
contract. Within this rationale there can be flexibility, but such flexibility is
encapsulated by the larger premise that rests upon the imputed intentions of
the parties.
42 Andrew Phang, “Recent Developments in Singapore Contract Law – The Search for Principle”
(2011) 28 JCL 3, 11.
43 In the following portion of this chapter, we draw heavily upon Andrew Phang, “Doctrine and
Fairness in the Law of Contract” in Jessica Young and Rebecca Lee (eds), The Common Law
Lecture Series 2008–2009 (Faculty of Law, The University of Hong Kong 2010) 41–61.
44 RDC Concrete (n 19).
45 RDC Concrete (n 19) [113].
268 Contract in Commercial Law
CIRCUMSTANCES IN WHICH
TERMINATION IS LEGALLY RELATIONSHIP TO OTHER
SITUATION JUSTIFIED SITUATIONS
I Express Reference to the Right to Terminate and What will Entitle the Innocent Party to
Terminate the Contract
II No Express Reference to the Right to Terminate and What will Entitle the Innocent
Party to Terminate the Contract
(3)(b) Hongkong Fir Approach – Party in Should be applied only after the
breach has committed a breach, the Condition-Warranty Approach in
consequences of which will deprive Situation (3)(a) and if the term
the innocent party of substantially breached is not found to be a
the whole benefit which it was condition.
intended that the innocent party
should obtain from the contract. Situation (1) is not relevant.
Situation (2) is not relevant.
Ch 12 Encounters with History, Theory and Doctrine 269
Returning to Table 12.1,48 it will be seen that there are no (general) difficulties
with Heading I, which concerns a situation in which there is express reference
to the right to terminate the contract and what will entitle the innocent party
to terminate the contract. Indeed, the relative straightforwardness means
that Heading I comprises (and is, in fact, coterminous with) Situation 1.49
Termination of the contract under Situation 1 might result in a different
measure of damages as opposed to termination of the contract under
Situation 3.50 The precise relationship between an express contractual
power to terminate on the one hand and the general common law right
to terminate for breach of contract on the other hand has also been the
subject of discussion.51 It should also be observed – for reasons that will be
clear in a moment52 – that the corollary of Heading 1 (read together with
Situation 1) is where the term concerned states expressly the opposite (viz,
that the breach of that term will never entitle the innocent party to terminate
the contract).
Difficulties arise, however, in relation to Heading II (where there is no
express reference to the right to terminate the contract and what will entitle
the innocent party to terminate the contract). Under this broad heading are
three situations which are set out in the above table (as Situations 2, 3(a)
and 3(b), respectively). Situation 2 is relatively straightforward as there is a
complete renunciation by the party in breach of the contract itself.53 Where,
however, there has not been such a complete rejection of the contract (which
is, presumably, indeed the situation in most cases), complications arise. In
this regard, there are two alternative tests. To recapitulate, the condition-
warranty approach (which is illustrated by Situation 3(a) in RDC Concrete)
focusses on the nature of the term breached and was described as such in RDC
Concrete.54 In contrast, Situation 3(b) describes the Hongkong Fir approach
which focusses, instead, on the consequences of the breach and was described
in RDC Concrete along those terms.55 As was further explained, these two
tests might yield the same result, although this would depend upon the
precise fact situation concerned.56 Where, however, the tests yield a different
result, the very important issue arises as to which test (that is Situation 3(a)
or Situation 3(b)) is to prevail. The court held that the condition-warranty
approach57 in Situation 3(a) should be applied before the Hongkong Fir
approach58 in Situation 3(b); indeed, the Hongkong Fir approach should only
be applied if the term breached is found not to be a condition under the
condition-warranty approach.59
The Court of Appeal raised an interesting point concerning the interaction
between the condition-warranty approach and the Hongkong Fir approach
when it considered the two ways (or situations) in which a “warranty” can
arise. The first is where the court itself finds that the term concerned is not
a “condition” (this would be pursuant to Situation 3 in RDC Concrete).
The second is where the parties themselves expressly designate the term
concerned as a “warranty” (this would be the converse of Situation 1 in RDC
Concrete).60 To give effect to the first situation (as has been suggested by one
writer61) would be to deny any “legal space” to the Hongkong Fir approach
62 See eg Reynolds (n 59) (where it is argued that the focus should be on the nature of the breach,
rather than the nature of the term broken); GH Treitel, Doctrine and Discretion in the Law
of Contract: An Inaugural Lecture delivered before the University of Oxford on 7 March 1980
(Clarendon Press 1981) 6 (where it is pointed out that the law relating to discharge by breach was
focussed, originally, on the seriousness of the breach (which is, in substance, the Hongkong Fir
approach), although it later developed to focus on the nature of the term (which is the condition-
warranty approach); and Nolan (n 27) 270−76, 294.
63 Reference may also be made to the English High Court decision of M & J Polymers Ltd v Imerys
Minerals Ltd [2008] EWHC 344 (Comm); [2008] 1 Lloyd’s Rep 541, 547.
64 [2009] SGCA 22; [2009] 3 SLR(R) 883.
65 Sports Connection (n 64) [57] (emphasis in the original text).
66 Text to n 42.
67 [2007] HCA 61; (2007) 233 CLR 115; noted in Kanaga Dharmananda and Anthony Papamatheos,
“Termination and the Third Term: Discharge and Repudiation” (2008) 124 LQR 373 as well as in
PG Turner, “The Hongkong Fir Docks in Australia” [2008] LMCLQ 432.
68 Koompahtoo (n 67) [53], [70].
69 Cf Kirby J who, whilst arriving at the same result as the majority, was nevertheless of the view
that the Hongkong Fir approach ought not to be part of Australian law (Koompahtoo (n 67)
[103]−[116]) – a somewhat controversial view which, however, does not represent Singapore law
and has received a mixed reception in the commentaries cited above (n 67).
Ch 12 Encounters with History, Theory and Doctrine 273
issue (centring on the relationship between the two main approaches).70 The
position in Hong Kong is also not unambiguously clear, where, however, at
least two decisions appear to have adopted (in substance) the approach in
the RDC Concrete case71 – although it should also be mentioned that in one
decision, the appellate court did not appear (unambiguously at least) to have
adopted the same approach.72
70 The Canadian courts appear to have endorsed the Hongkong Fir approach. See eg the Alberta
Supreme Court decision of Dow Chemical of Canada Limited v R V Industries Ltd (1979)
9 Alta LR (2d) 129; the Ontario Court of Appeal decision of Jorian Properties Ltd v Zellenrath
(1984) 46 OR (2d) 775; the Ontario High Court of Justice decision of First City Capital Ltd v
Petrosar Ltd (1987) 61 OR (2d) 193; the British Columbia Court of Appeal decision of Lehndorff
Canadian Pension Properties Ltd v Davis Management Ltd (1989) 59 DLR (4th) 1; the Alberta
Court of Appeal decision of First City Trust Co v Triple Five Corp Ltd (1989) 57 DLR (4th)
554; the British Columbia Court of Appeal decision of Ramrod Investments Ltd v Matsumoto
Shipyards Ltd (1990) 47 BCLR (2d) 86; and the Alberta Provincial Court decision of Krawchuk
v Ulrychova (1996) 40 Alta LR (3d) 196 (and cf the Supreme Court of Canada decision of Field
v Zien [1963] SCR 632 as well as the Ontario Court of Appeal decision of 968703 Ontario Ltd v
Vernon (2002) 58 OR (3d) 215). It should be noted that, on occasion at least, the Hongkong Fir
approach appears to have been applied (in substance at least) in toto. See eg the Jorian Properties
case, above, in which, on another possible interpretation, it could be argued that Blair JA
appeared to conflate the Hongkong Fir approach and the condition-warranty approach inasmuch
as the learned judge, whilst emphasising the observations of Diplock LJ in Hongkong Fir (n 7),
also focussed on the issue as to whether or not the term concerned was (in the final analysis) a
“condition”. Indeed, the majority of the court appeared to adopt a similar approach, although
they differed from Blair JA, insofar as the final result was concerned, based on a difference in
view with respect to the application of the law to the facts at hand. On another note, Stratton JA
did, in the First City Trust case (above, especially at [49] (and cited in the Ramrod Investments
case and in the Krawchuk case)), suggest (as Carter and Goh did (n 59)) that the Hongkong Fir
approach would apply only if it could not be ascertained whether the parties intended the term
concerned to be a “condition” or a “warranty”. See also generally DM McRae, “Repudiation of
Contracts in Canadian Law” (1978) 56 Can Bar R 233.
71 See the Hong Kong Court of Final Appeal decision of Mariner International Hotels Ltd v Atlas Ltd
(2007) 10 HKCFAR 1 (where the Hongkong Fir approach was rejected and the requirement of
practical completion of the hotel concerned was held to be a condition precedent to completion
of the purchase instead) and the Hong Kong Court of First Instance decision of Okachi (Hong
Kong) Co Ltd v Nominee (Holding) Ltd [2005] 3 HKC 408 (relying, in the main, on the leading
House of Lords decision of Bunge Corporation (n 9)).
72 See the Hong Kong Court of Appeal decision of Okachi (Hong Kong) Co Ltd v Nominee (Holding)
Ltd [2006] HKCU 1932 (and for related proceedings – with regard to an application for leave to
appeal to the Hong Kong Court of Final Appeal – see the Hong Kong Court of Appeal decision
of Okachi (Hong Kong) Co Ltd v Nominee (Holding) Ltd [2007] HKCU 1942). Reference may
also be made to the Hong Kong Court of Final Instance decisions of Samsung Hong Kong Ltd
v Keen Time Trading Ltd [1998] HKLRD 341 (where the Hongkong Fir approach was held not
to apply in the light of s 15 of the Hong Kong Sale of Goods Ordinance (Cap 26)) and Secretary
for Justice v Yu’s Tin Sing Enterprises Co Ltd [2008] HKCU 1391 (which involved, inter alia, a
situation that fell within the rubric of Situation 1 under RDC Concrete (n 19) and where the
court (correctly, in our view) did not (consistently with the approach adopted in RDC Concrete)
need to consider either of the two main approaches); the Hong Kong District Court decision of
Hang Seng Finance Ltd v Lin Kwok Man [1991] 2 HKC 613 (relating to another situation that
apparently fell within the rubric of Situation 1 under RDC Concrete (n 19)); as well as the Hong
Kong Court of Appeal decisions of Leung Yee v Ng Yiu Ming [2001] 1 HKC 342 (where both
approaches were referred to) and Creatiles Building Materials Co Ltd v To’s Universe Construction
Co Ltd [2003] 2 HKLRD 309 (where the Hongkong Fir approach was applied). See also generally
Stephen Hall, Law of Contract in Hong Kong – Cases and Commentary (4th ed, LexisNexis 2015)
ch 10.
274 Contract in Commercial Law
“The fact that in the present case both parties had committed breaches before
one of them elected to treat the contract as repudiated appears to me to make
no difference whatever; nor the fact that (assumedly) both had been breaches
of condition. If A is entitled to treat B as having wrongfully repudiated the
contract between them and does so, then it does not avail B to point to A’s past
breaches of contract, whatever their nature. A breach by A would only assist B
if it was still continuing when A purported to treat B as having repudiated
the contract and if the effect of A’s subsisting breach was such as to preclude
A from claiming that B had committed a repudiatory breach. In other words,
B would have to show that A, being in breach of an obligation in the nature
of a condition precedent, was therefore not entitled to rely on B’s breach as a
repudiation.”79
The approach taken in Golodetz has been applied in other cases. In the
English Court of Appeal decision of Lidl UK GmbH v Hertford Foods Ltd,80
the seller agreed to supply 1,036,800 units of corned beef to the buyer. After
delivering 11,700 units, the seller failed to make further deliveries due to a
shortage of raw materials. The buyer refused to make payment for the delivered
corned beef by relying on a clause in the contract that allowed it to off-set any
losses suffered as a result of the seller’s delay in providing corned beef from the
outstanding sums payable. The seller purported to terminate the contract on
the grounds of the buyer’s non-payment. The English Court of Appeal held
that the seller’s own breach did not prevent it from suing for termination by
relying on the principle enunciated by Kerr LJ in Golodetz. However, on the
facts, the seller could not terminate the contract as the buyer’s breach was not
sufficiently serious.
Two Singapore Court of Appeal decisions have also followed this approach.
In Jet Holding Ltd v Cooper Cameron (Singapore) Pte Ltd,81 one of the issues raised
was whether the first defendant, Cameron, could claim an indemnity from the
second defendant, Stork, for the latter’s breach of contract in not conducting a
proper dimensional inspection of the Riser Box, when it was also in breach of
contract. Cameron had itself breached an implied term to exercise reasonable
care by failing to provide Stork with the dimensional drawings of the Riser Box.
The Court held that the implied term of the contract breached by Cooper was
not a condition precedent. In other words, Cameron’s breach did not prevent
Stork from carrying out its contractual obligations. When Stork failed to carry
out those obligations, Cameron could sue for breach notwithstanding the fact
that it was itself in breach.
Similarly, in the Singapore Court of Appeal decision of Alliance Concrete
Singapore Pte Ltd v Comfort Resources Pte Ltd,82 the appellant buyer contracted
to purchase sand from the respondent seller on terms that the buyer was
supposed to order a specified minimum amount of sand from the seller every
79 [1989] 2 Lloyd’s Rep 277, 286 (first and third emphases added; second emphasis in the original
text).
80 [2001] EWCA Civ 938.
81 [2006] SGCA 20; [2006] 3 SLR(R) 769.
82 [2009] SGCA 34; [2009] 4 SLR(R) 602, noted by Tham Chee Ho, “Discharge of a Contract where
Both Parties are in Breach: Alliance Concrete Singapore Pte Ltd v Comfort Resources Pte Ltd [2009]
4 SLR(R) 602” (2010) 22 SAcLJ 729.
276 Contract in Commercial Law
month and to make payment within 60 days of delivery. The buyer repeatedly
failed to order the minimum amount of sand for several months and made
payment late. The seller thus stopped the supply of sand to the buyer so as to
pressurise it to pay the outstanding invoices. When the buyer still refused to pay,
the seller informed the buyer that it treated the contract as repudiated by its
conduct and purported to accept the repudiation. The buyer refuted the seller’s
allegations and instead claimed that the seller had repudiated the contract by
withholding deliveries. One of the issues that arose was whether the seller was
precluded from suing the buyer because it was in breach for failing to make the
agreed deliveries. The court held that it was not so precluded. Again, applying
Kerr LJ’s approach in Golodetz, it held that the seller’s breach was not related to
the buyer’s breach occasioned by non-payment and under-ordering. In other
words, the seller was not in breach of an obligation in the nature of a condition
precedent. However, although the seller was not precluded for suing for breach,
it could not terminate as the buyer’s breach were found to be non-serious.
It has also been pointed out that “the order in which the breaches occur
is not necessarily decisive” in determining whether a party can terminate for
breach.83 In the Singapore cases, the party suing for termination breached the
contract after the initial breach. However, in Golodetz, the breaches occurred
simultaneously. In neither instance was the order of breach determinative by
itself. As a matter of principle, this must be correct since the question is whether
one party’s breach precluded the other from performing. Where the party suing
for termination breached the contract first, the question is whether his breach
prevented the other party from performing the contract. This is not dependent
on the order of the breaches even though the question is brought about by the
fact that the party suing had breached the contract first. In contrast, where
the party suing for termination breached the contract after the initial breach, the
question of whether his breach was that of a condition precedent does not even
arise since, by the order of the breaches, his breach could not have prevented
the other party from performing.
Lord Edmund-Davies and Lord Russell agreed, held that there was an implied
term in the arbitration agreement that obliged both parties to “join in applying
to the arbitrator for appropriate directions to put an end to the delay”.86 In the
event, Lord Diplock found that both parties were in breach of this implied term
by failing to apply for directions, such that “neither can rely upon the other’s
breach as giving him a right to treat the primary obligations of each to continue
with the reference as brought to an end”.87
It has been pointed out that there are two possible interpretations of
Lord Diplock’s speech.88 The first is that both Bremer and South India’s serious
breaches precluded each from suing for termination. The fact of serious
breach, while not expressly found by the House of Lords, can be inferred. The
second interpretation is that the facts that were said to justify termination in
Bremer were due to each party’s respective breaches. Thus, Bremer’s allegation
that South India’s conduct had caused serious delays was also caused by its
own failure to seek further directions. Courtney argues that “fairness” in this
case may dictate that “one party cannot point to the other’s breach when it is
equally in breach of the same obligation”.89 In apparent support of the second
interpretation, Lord Brandon in The Hannah Blumenthal later explained
Bremer in the following terms:
“What Lord Diplock was saying was that, since the delay concerned was the
consequence of breaches on the part of both the claimant and the respondent
of their mutual obligation owed to one another, neither could rely on the
other’s conduct as amounting to repudiation.”90
It is suggested that this second interpretation is the better one for several
reasons. First, it has the weight of authority behind it. Apart from the
explanation in The Hannah Blumenthal, which Lord Diplock had agreed with,
Tomlinson J in Internet Trading Clubs Ltd v Freeserve (Investments) Ltd also
said that Lord Diplock in Bremer was “dealing with the special and limited case
where the first party’s breach consists of a failure to perform a duty to avoid the
consequences of the second party’s breach”.91 In addition, as has been pointed
out,92 there have been several Australian decisions favouring termination in
spite of a serious breach. For example, in Roadshow Entertainment Pty Ltd v
(ACN 053 006 269) Pty Ltd Receiver and Manager Appointed,93 the New South
Wales Court of Appeal held unanimously that a party in breach of an essential
but independent term could terminate for the other party’s serious breach. The
emphasis on “independence” is a clear endorsement of the Golodetz approach,
which the court also cited with approval.
Secondly, and more importantly, the possibility of termination accords with
principle. It is difficult to see why the fact of serious breach by itself should
the contract, the “winner being an accident of fate”.99 This, however, does not
appear material. Parties will have to consider other commercial considerations
before deciding to terminate in any event, and whether to rush to the finish line,
so to speak, will form just part of the decision-making process. It is far more
important that the law of termination maintains its coherence and not admits
of unwarranted punitive elements. It therefore would conduce towards clarity
if the dependence of breaches is taken as the sole criterion for deciding whether,
in principle, a party’s own breach precludes it from suing for termination. The
seriousness of the breach should matter only insofar as it affects the criterion of
dependence, or if it furnishes the other party with a right to termination which,
if taken first, necessarily precludes the other party from suing for termination
in his own right.
105 However, it is also important to note that the common law rules we are presently considering
with regard to the termination of employment contracts would, of course, be subject to the
relevant statutory provisions (which will differ from jurisdiction to jurisdiction, embodying (as
most such pieces of legislation do) the social mores of the country concerned).
106 Geys (n 2).
107 [1956] 1 QB 658, 674 (emphasis added).
108 Vine (n 107) 674.
109 [1957] AC 488.
110 Vine v National Dock (n 109) 500 and 503–04, respectively.
111 [1962] 1 WLR 1411.
Ch 12 Encounters with History, Theory and Doctrine 281
law that the courts will not grant specific performance of contracts of service.
Special circumstances will be required before such a declaration is made and its
making will normally be in the discretion of the court.”112
In Francis, the Board held that, unlike the fact situation in Vine, there were no
special circumstances in the instant case justifying the grant of a declaration.
What is interesting is the fact that the Board, whilst appearing to lean in favour
of the doctrine of automatic termination, nevertheless appeared to suggest
that in “rare” instances, the (general) doctrine of elective termination might
obtain instead. This appears to adopt a kind of hybrid approach and also
suggests that the general doctrine (of elective termination) has now become
the exception – at least insofar as contracts of employment are concerned.
Put simply, there appears to be a presumption that the doctrine of automatic
termination ought to apply (subject to exceptional circumstances which require
a result to the contrary).
Subsequent decisions – in the English context at least – demonstrated that
the law was in a state of flux. In short, there were cases that supported automatic
termination,113 and those that supported elective termination.114 Nevertheless,
these decisions also acknowledged (correctly, in our view) the practical as well
as legal realities that arise from a situation in which the employee’s employment
is wrongfully terminated. There is, for instance, the need for the employee
concerned to mitigate his or her loss.115 On a practical level, it has also been
acknowledged that the employee cannot generally sue for specific performance
of the contract of employment.116 However, it could perhaps be argued that
there is nothing in these last-mentioned points which detracts, in principle,
from the proposition that the general rule of elective termination still applies.
In this regard, it is instructive to consider the observations by Blanchard J in the
New Zealand Supreme Court decision of Paper Reclaim.117 The learned judge
pointed out that the difficulty with automatic termination as a general statement
of law is that it might result in the employment contract coming to an end
even though the repudiatory breach was unknown to the innocent party. He
referred to Megarry V-C’s view in Thomas Marshall that the limitation of that
party’s range of remedies should not “invade the substance of the contract”.118
Moreover, the limitation of automatic termination was obvious when it was the
employee who repudiated, since in this case the employer would be prevented
by the termination from obtaining an injunction to restrain breach of a
restrictive covenant.119 The correct position of law appeared to be confirmed
in Gunton v Richmond-upon-Thames LBC, where Buckley LJ accepted that a
contract may only be ended by repudiation on the one side, and acceptance of
the repudiation, on the other. This applied to employment contracts as much
as it did to general contracts. However, Buckley LJ also alluded to the practical
realities that the employee would not generally be able to reject the repudiation,
a result that the court should easily infer to be the case. The consequence
of this statement is that, while elective termination applied in principle,
automatic termination would, for all intents and purposes, be in practice the
doctrine applied.
In both the Malaysian and Singapore contexts, there has also been some
consideration of this particular issue. In the Malaysian High Court decision
of Dato’ Abdullah bin Ahmad v Syarikat Permodalan Kebangsaan Bhd,120 for
example, NH Chan J undertook a comprehensive analysis of the then existing
English decisions on the issue and held in favour of the doctrine of elective
termination.121 Not surprisingly, perhaps, the learned judge relied, in the
main, upon the Thomas Marshall case122 as well as the Gunton case.123 It is also
significant to note that Chan J, whilst acknowledging that contracts of personal
service would not normally be specifically enforced, pointed to the fact that
there could nevertheless be a situation where a declaration by the court that
the contract of employment is still subsisting is necessary in order to enable the
employee to restrain the employer from committing the breach of an express
or negative implied undertaking. In the Dato’ Abdullah bin Ahmad case124
itself, Chan J held that there was an implied negative agreement on the part
of the employer company not to appoint someone else (which it in fact did)
as executive chairman and managing director in place of the plaintiff until the
expiration of the plaintiff ’s period of employment. He therefore granted an
injunction in favour of the plaintiff in order to enforce the performance of
that implied negative agreement (and which restrained the second defendant
who had been appointed in the plaintiff ’s stead from exercising the powers and
duties of the office of executive chairman and managing director). However,
If the elective doctrine had applied, the Bank’s repudiatory breach in either
November or December 2007 would have to be accepted by Geys in order for
the contract to be terminated. However, if the automatic doctrine applied,
then the employment contract would have been automatically terminated
in November or December 2007, without any further input from Geys. The
practical significance of the choice between the doctrines of elective and
automatic termination, and the consequent termination date, was that Geys
would have been paid a much higher bonus had the termination taken place
in 2008.
There were two main judgments in relation to the choice between the
elective and automatic termination doctrines: Lord Wilson’s in the majority
and Lord Sumption’s in dissent. There were three reasons for the majority’s
preference of the elective doctrine. The first may be termed the manifest fairness
of the doctrine. Thus, Lord Wilson rejected the automatic doctrine as it would
“reward the wrongful repudiator of a contract of employment with a date
of termination which he has chosen”, which, in the scheme of things, would
certainly be “most beneficial to him and, correspondingly, most detrimental to
the other, innocent, party to it”.142 Lord Hope likewise held that the innocent
party retained the ability to judge whether it was in his interests to keep the
contract alive under the elective doctrine, whereas he would not have this control
under the automatic doctrine.143 The second reason was the lack of coherent
support for the automatic doctrine. Lord Wilson disapproved of the “readily
inferred acceptance” explanation advanced in Gunton as being inconsistent
with general contractual principles. What is required is real acceptance, which is
a conscious intention to bring the contract to an end. Such an intention should
not be too readily inferred so as to render irrelevant the general contractual
requirement of a conscious acceptance. Lord Wilson also rejected as “circular”
the explanation that a contract is automatically terminated by either party’s
unilateral repudiation simply because the contract is not capable of specific
performance. That explanation also had the effect of the remedy dictating
the extent of the right, whereas the correct order ought to be the other way
around. The third reason was the inconsistency within the law of termination
occasioned by the automatic doctrine. As Lord Wilson explained, the automatic
doctrine arguably only works with an express dismissal or resignation. Where
the repudiatory breach did not consist of such overt conduct, the elective
doctrine works better. Yet, this inconsistent approach cannot be explained by
principle or practicality.
Lord Sumption was the sole dissenter. He dismissed the manifest fairness
point by saying that the law should not reflect moral indignation about
the Bank’s conduct. He also pointed out that if an employer adhered to
established practices in terminating an employment contract, it may in effect
terminate at a time of its choosing. In this sense, the elective doctrine offers
no greater protection than the automatic doctrine. As a point of principle,
Lord Sumption said that the right to treat the contract as subsisting has never
been absolute. Relying in particular on White and Carter (Councils) Ltd v
McGregor,144 he gave particular weight to the rule that an innocent party could
not treat a repudiated contract as alive unless it could perform its contractual
obligations without the other party’s co-operation, or it could compel the
other party to perform via specific performance.145 This principle, according
to Lord Sumption, was particularly applicable to employment contracts as
they require the co-operation of the employer to be carried out. For him,
cases such as Vine146 establish “a long, authoritative, and broadly consistent
consensus in favour of the principle that an unaccepted repudiation of a
contract of employment which terminated the relationship also brought the
contract to an end, in law as well as in fact”.147 The elective doctrine is therefore
not as strongly supported by authority as the majority thought it to be. As
such, Lord Sumption found it “difficult to see why the law should recognise
such a right” if the employment contract cannot in practice be performed
or enforced,148 and that the employee, in reality, cannot treat the contract as
subsisting. The employee therefore cannot sue for his wages once dismissed,
since there is no longer a contractual obligation to pay the wages.
While it may be tempting to frame the elective and automatic doctrines
as a reflection of principle and practice respectively, the two views articulated
in Geys were ultimately reasoned on principle. The reason for Lord Wilson’s
and Lord Sumption’s differing opinions was due to each learned judge’s
understanding of the law.149 While Lord Wilson adopted a more orthodox view
of the law of repudiation, Lord Sumption read the important case of White
and Carter as standing for the broad proposition that a repudiatory breach
need not be accepted to be effective, if the performance of the contract requires
the cooperation of the repudiating party. However, as Professor Burrows has
argued, White and Carter was really concerned with whether a plaintiff could
sue in debt where the contract had been repudiated, but before the innocent
party had commenced performance of his promised services.150 The case
established that the innocent party could perform his services and then claim
the debt pursuant to the contract. While this principle is subject to limited
exceptions where the plaintiff has “no legitimate interest” in keeping the
contract alive,151 the case cannot be taken to stand for any broader principle than
that. The fact that employees cannot claim wages as a salary after the employer’s
repudiation cannot therefore be taken as an embodiment of any broader
principle in the specific context of employment law. Instead, that outcome in
employment law can be explained by other means, none of which supports the
automatic doctrine.152
Suggested approach
While the UK Supreme Court has undoubtedly decided the issue under English
law, what, then, should be the approach which we think ought best be adopted
by other courts? In our view, this is not an “either/or” situation such that one
ought either to choose the doctrine of elective termination or the doctrine of
automatic termination. Indeed, David Cabrelli and Rebecca Zahn have observed
that the majority in Geys did not adopt a “genuine form of the elective theory”
insofar as the decision does not make it any easier for the employee to keep the
employment contract alive via specific performance.156 The choice between
the elective and automatic theory will involve a degree of overlap inasmuch as the
practical realities dictate a certain manner in which the concept is to be effected.
In short, we would suggest that both approaches are too blunt and neither
affords the courts sufficient flexibility to deal with real-life scenarios as
they occur. Whichever approach is adopted, there must be the possibility of
exceptional situations (depending, of course, on the precise facts concerned).
In this last-mentioned regard, one approach would be to commence with a
presumption that the (general) doctrine of elective termination ought to apply
153 David Cabrelli and Rebecca Zahn, “The Elective and Automatic Theories of Termination in the
Common Law of the Contract of Employment: Conundrum Resolved?” (2013) 76 MLR 1106,
1117–18.
154 Cabrelli and Zahn (n 153) 1118.
155 Ian Smith, “Rich Pickings” (2013) 163 NLJ 57. See also the more recent case of Ashworth v Royal
National Theatre [2014] 4 All ER 238 (QB), where specific performance in the context of an
employment contract was once again refused.
156 David Cabrelli and Rebecca Zahn, “The Elective and Automatic Theories of Termination at
Common Law: Resolving the Conundrum” (2012) 41 ILJ 346, 356.
288 Contract in Commercial Law
narrower doctrine than the doctrine of good faith and is the natural corollary
of an implied duty of faithful service (of which there is little dispute in the
common law).
brought about by the employer’s breach of this implied term, as was raised in
Eastwood v Magnox Electric plc.172
The Court of Appeal clarified that losses of such a different nature that
flow from the breach of an implied term of mutual trust and confidence are
different from those flowing from premature termination. They are therefore
recoverable in principle although their occurrence will still need to be proved
on the facts. An example of a case with such facts is the Hong Kong Court
of Appeal decision of Semana Bachicha v Poon Shiu Man.173 In that case, a
domestic helper was forced to leave her employment after just six months due
to an oppressive work regime. The domestic helper was held to be entitled to
damages for wrongful dismissal, and damages for any additional pecuniary
loss caused by the employer’s breach of the implied term of mutual trust and
confidence. This recognises that a given set of facts might constitute both a
breach of the implied term requiring reasonable notice to be given to lawfully
terminate the employment contract, as well as a breach of the implied term of
mutual trust and confidence, thereby giving rise to simultaneous but separate
entitlements to damages.
A perhaps more interesting question is whether the breach of an implied
term of trust and confidence should result in specific performance. It has been
argued that, when taken together with the renewed approval of the elective
doctrine in Geys, the recognition of the legal obligation of mutual trust and
confidence greatly advances the occasions on which specific performance of
an employment contract should be awarded.174 Specific performance could be
seen to accord fuller recognition of the employees’ interest in the relationship.
Thus, in Hill v CA Parsons Ltd,175 the plaintiff ’s action for specific performance
was successful as the majority of the English Court of Appeal accepted that
he wanted to end his working life in honourable service and derived much
social and psychological benefit from being gainfully employed. The key
impediment to specific performance, as was recently pointed out in Ashworth
v Royal National Theatre,176 is that the loss of confidence would naturally
preclude specific performance. Yet, perhaps an argument could be made that
the denial of specific performance is akin to the denial of important social and
psychological benefits integral in the employment contract, which would go
against the main thrust of a legal obligation of mutual trust and confidence.177
issues have already been dealt with by the existing literature, we propose to only
flag them for a brief consideration.
Turning briefly, therefore, to the first topic, the issue concerned relates to
claims for a fixed sum in general and the House of Lords decision of White and
Carter (Councils) Ltd v McGregor.178 In particular, it was held (albeit by a bare
majority of three to two) in White and Carter that, where there is a claim for a
fixed sum (as opposed to a claim for unliquidated damages), there is no duty179
on the part of the plaintiff to mitigate its loss. However, this could possibly
lead to unjust and unfair (and even bizarre) results. This perhaps explains the
qualification by Lord Reid in that decision in which the learned Law Lord (who
was in the majority) observed, in essence, that the plaintiff could not refuse to
mitigate its loss and insist on continuing with its performance in order to claim
the fixed sum agreed upon by the parties where (i) it (the plaintiff) required
the co-operation of the other party (viz, the defendant) or (ii) it (the plaintiff)
had no legitimate interest in continuing such performance.180 The former
qualification (at (i) above) is easy to understand and is, indeed, entirely logical
as well as commonsensical; more than that, it recognises the very practical
178 White (n 144). And see generally JW Carter, Andrew Phang and Sock-Yong Phang, “Performance
Following Repudiation: Legal and Economic Interests” (1999) 15 JCL 97 (and the literature
cited therein); Qiao Liu, Anticipatory Breach (Hart Publishing 2011); as well as Stannard and
Capper (n 1) paras 12.12‒12.34. Recent case law includes the English Court of Appeal decision
in Reichman v Beveridge [2006] EWCA Civ 1659; [2007] Bus LR 412 and the English High Court
decision in Isabella Shipowner SA v Shagang Shipping Co Ltd (The Aquafaith) [2012] EWHC
1077 (Comm); [2012] 2 Lloyd’s Rep 61 (this latter decision was noted in David Winterton,
“Reconsidering White & Carter v McGregor” [2013] LMCLQ 5). See also Jonathan Morgan,
“Smuggling Mitigation into White & Carter v McGregor: Time to Come Clean?” [2015] LMCLQ
575 (which also focusses on the recent English High Court decision in MSC Mediterranean
Shipping Co SA v Cottonex Anstalt [2015] EWHC 283 (Comm); [2015] 1 Lloyd’s Rep 359).
179 There is some controversy as to whether or not a “duty” as such is (legally) imposed on the
plaintiff, or whether the so-called “duty” to mitigate is merely a principle centring on causation
instead. In this last-mentioned sense, whilst there is no “duty” on the part of the plaintiff to
mitigate its loss as such, nevertheless, to the extent that the plaintiff has not mitigated its loss, the
defendant will be considered, to that extent, to not have caused the plaintiff ’s loss (and therefore
not be responsible for that loss as such). And see, in this last-mentioned regard, the decision
of the English Court of Appeal in Sotiros Shipping Inc and Aeco Maritime SA v Sameiet Solholt
(“The Solholt”) [1983] 1 Lloyd’s Rep 605, where Sir John Donaldson MR observed (at 608) thus
(emphasis added):
“A plaintiff is under no duty to mitigate his loss, despite the habitual use by the lawyers of the phrase
‘duty to mitigate’. He is completely free to act as he judges to be in his best interests. On the other hand,
a defendant is not liable for all loss suffered by the plaintiff in consequence of his so acting. A defendant
is only liable for such part of the plaintiff ’s loss as is properly to be regarded as caused by the defendant’s
breach of duty.”
However, as the present authors have observed (see Andrew BL Phang and Goh Yihan,
Contract Law in Singapore (Wolters Kluwer Law & Business 2012) paras 1525–26 (emphasis in
the original text)):
“The learned Master of the Rolls thus views the concept of mitigation as turning on the issue of
causation as opposed to that of duty … It is, however, respectfully submitted that the effect is, in
substance, the same, and that it may well be a semantic difference more than anything else. Indeed,
Scrutton LJ appeared to imply as much in Payzu, Ltd v Saunders, when he observed thus [see [1919]
2 KB 581 (CA) 589 (emphasis added)]:
Whether it be more correct to say that a plaintiff must minimise his damages, or to say that he
can recover no more than he would have suffered if he had acted reasonably, because any further
damages do not reasonably flow from the defendant’s breach, the result is the same.”
180 White (n 144) 430−31.
Ch 12 Encounters with History, Theory and Doctrine 293
nature of the law itself. Put simply, where the plaintiff requires the co-operation
of the defendant in completing its performance (in order to receive the fixed or
agreed sum) and that co-operation is not forthcoming from the defendant, it
follows that the plaintiff will be unable to complete his part of the bargain and,
that being the case, will not be entitled to claim the fixed sum (which is given
in return for full and complete performance by the plaintiff of his contractual
obligations).
However, the second qualification (at (ii) above) is far more problematic.
It is, in essence, an attempt to achieve a just and fair result by balancing the
need to respect the sanctity of contract on the one hand and the avoidance
of waste on the other.181 However, as Professors Stannard and Capper – in
their lucid yet nuanced survey of the relevant case law as well as arguments
in this particular regard – point out, it is notoriously difficult to define (on
a normative level) what precisely constitutes a “legitimate interest”. A number
of other concepts have been utilised (for example, “unreasonable”) but, like
the authors just mentioned, we are of the view that we are no nearer to a clear
as well as workable legal criterion as such. All we can state is that much will
depend on the precise facts as well as context concerned. Admittedly, this is
not very helpful but, in our view, this is the best that can be laid down – at least
at this particular stage of development of this specific issue in the law relating
to anticipatory breach. Indeed, if the concern is (as we have alluded to above)
with achieving a just and fair result, then why could the court in White and
Carter not have simply adopted the approach followed by the minority in that
particular decision – holding that there was indeed a duty to mitigate. However,
we also acknowledge that such an approach, whilst practical, also runs into
conceptual difficulties inasmuch as it would (as we have already noted above)
be odd to insist that there is a duty on the part of the plaintiff to mitigate its
loss in a situation where the claim is in fact for a fixed or agreed sum and not for
unliquidated damages as such. In such a situation, it bears reiterating that the
claim is merely dependent on complete (or at least substantial) performance
on the part of the plaintiff – in return for which the fixed or agreed sum is
consideration. In other words, there is no room, in such a situation, for the
application of the doctrine of mitigation – at least on a conceptual or theoretical
level.
We would, however, also add that perhaps more conceptual as well as
practical clarity might ensue from the recent renewed interest (at least in the
context of Commonwealth jurisdictions) of the concept of good faith. As we
have already noted above, the concept (and, a fortiori, the doctrine) of good faith
is still in a state of flux.182 That having been said, it seems to us that a persuasive
argument can be made for utilising the concept of good faith as a basis in
ascertaining whether or not the plaintiff had a “legitimate interest” in insisting
upon continuing performance; put another way, if it can be demonstrated that
the plaintiff, in so doing, was indeed acting in bad faith, then it could not be said
that it had a “legitimate interest” in so acting. However, we also acknowledge
181 Qiao Liu, “The White and Carter Principle: A Restatement” (2011) 74 MLR 171 and
Stannard and Capper (n 1) para 12.23.
182 Text to nn 164−66.
294 Contract in Commercial Law
that all the difficulties we have mentioned above (in particular, the uncertainty
that results from the application of the concept of good faith) would also apply
in such a context as well.
Turning now to the second topic, as already mentioned, this was only
recently raised for decision in the Singapore Court of Appeal in the case of The
STX Mumbai.183 This particular topic may be simply stated as follows: does the
doctrine of anticipatory breach apply not only to executory contracts but also
to executed contracts (in the sense of being already executed by the innocent
party)? With the exception of a few state jurisdictions, the general consensus
in the United States of America appears to answer the question just posed in
the negative.184 However, as the court in The STX Mumbai observed,185 both the
relevant English case law186 as well as academic authorities187 suggest a contrary
legal position, that is, that the doctrine of anticipatory breach ought to apply to
executed contracts as well.
Whilst English law accepts that the doctrine of anticipatory breach could
apply to an executed contract, there has been no real explanation why this should
be the case beyond a statement in a case with a partially executed contract that
“it would be very strange and hardly workable” if the innocent party had to
wait until the time for performance had arrived.188 The Singapore Court of
Appeal in The STX Mumbai offered two justificatory accounts for applying the
doctrine of anticipatory breach to executed contracts. The first is based on an
extrapolation of the traditional analysis by redefining the implied promise: the
defendant impliedly promised that it would not “act in such a manner so as
to render the plaintiff ’s performance of its obligation towards completion of
the contract an exercise in futility”.189 Thus, if the defendant announced that
it would not be performing its obligations before the time for performance, it
would necessarily have rendered the plaintiff ’s performance, whether already or
to be performed, an exercise in futility since the plaintiff would not be receiving
its part of the contractual bargain. The Singapore Court of Appeal’s reasoning
also resolves an intuitive problem with the view that anticipatory breach does
not apply to executed contracts. It noted the injustice as well as illogicality
that would ensue if a plaintiff who had performed all its obligations under the
contract were to be placed ‘in a worse position compared to a situation in which
it (the plaintiff) had yet (although it was able and willing) to perform all its
obligations under the same contract.’190
However, the Singapore Court of Appeal also acknowledged that an
Concluding Observations
The law relating to discharge by breach of contract is, as we have pointed out
at the outset of the present chapter, an extremely thorny and often frustrating
one. However, its importance in the practical sphere cannot be gainsaid. We
cannot pretend to have even come close to resolving the many conundrums
which afflict so very many aspects of this area of the common law of contract.
We hope, however, to have demonstrated – on a more general level – how
important historical as well as theoretical analysis is and that a strictly
doctrinal analysis (especially in areas of law such as this) is insufficient in and
of itself. On a more specific level, we hope to have raised sufficient legal food
for thought – particularly with respect to the very practical issue as to how
the condition-warranty approach and the Hongkong Fir approach might be
integrated in a manner that aids the court in determining when an innocent
party would be entitled to elect to treat the contract concerned as discharged.
There were, of course, other important issues raised as well. What is clear is that,
in order to attempt a resolution of the various issues, a comparative approach
is also imperative. Ultimately, while theoretical explanations of breach and its
related issues need to be coherent, the ability of the law to respond to real-life
practical situations must never be lost. Far from being an exercise in philosophy,
the law has real consequences that must always be kept in mind. As we have
attempted to demonstrate, there needs to be a degree of flexibility built into the
law so that real problems can be solved by the application of legal principles.
This bears out the four attributes that one of the present authors has said a law
student should possess.
Ultimately, the law of contract across the common law world has – particularly
over the last few decades – become a rich and varied one. This is extremely
encouraging as it furnishes courts with much to draw upon – especially when
seeking to resolve the thorny issues that have been canvassed in the present
chapter.
191 See Yihan Goh and Man Yip, “Rationalising Anticipatory Breach in Executed Contracts” (2016)
75 CLJ 18.
13
Introduction
“My Lords, my clients have no merits, but they are right.” These words,
according to legal urban legend, were used many years ago by the then Kenneth
Diplock KC to open a large but delicate commercial case. They would have
been equally appropriate in the mouth of counsel for the losing claimants in
Target Holdings Ltd v Redferns1 and AIB Group (UK) plc v Mark Redler & Co,2
whose clients’ deserts were, to say the least, decidedly doubtful. Of course, if
undeserving clients with a technical case are indeed right, they must win. But
were they right in Target and Mark Redler? This is the subject of this chapter.
To recapitulate, Target involved a breach of trust committed by solicitors
acting for mortgage lenders and also for their borrowers, the buyers of a
Birmingham building site. Having received the loan money from the lenders
on trust to pay it to the site vendors in exchange for a valid mortgage, they
instead paid it to third parties3 and omitted to get anything at all in return for
it. However, as matters turned out the lenders actually received the necessary
mortgage paperwork a month later, thus getting the exact security they had
bargained for. But the lenders’ joy was not to last: they had all along been the
dupes of a mortgage valuation fraud, and when the borrowers collapsed they
got less than half their money back. On these facts, they sought to make their
solicitors account in equity for their total damage (that is, the total amount
of the loan, less only the sale proceeds). It was true that their claim was less
than deserving. Their solicitors’ bungle had in essence not cost them a penny
piece, since they would still have lost their money even if everything had gone
like clockwork. But this was, they said with engaging simplicity, irrelevant.
What they were seeking was the reconstitution of a trust fund (in other words,
the loan monies) admittedly disbursed in breach of trust: and whatever the
position might have been had they sought unliquidated damages at common
297
298 Contract in Commercial Law
law, in this kind of claim the question whether the fund might or might not have
been lost by some other means was beside the point. This argument succeeded
at first instance, and by a majority on appeal.4 But it failed in the House of
Lords, who on these assumed facts held that a nil award was appropriate. Lord
Browne-Wilkinson, giving the leading judgment, accepted the general rule that
a defaulting trustee had to restore the trust fund without reference to what
might otherwise have happened to it. But he declined to apply it there. First,
he said, the rule requiring restoration of the trust fund did not apply once the
purpose of the trust had been fulfilled and (as here) the only trust left to restore
would be a spectral bare trust existing solely to receive and pay out any monies
restored to the erstwhile beneficiaries. In such a case the proper solution was
to short-circuit the trust and order payment direct to the beneficiary, who
could recover only what he had actually lost.5 Secondly (he said), even if the
defendants’ liability was to restore the value of the trust assets wrongly paid
away, any award made could (he thought) take account of knowledge that, in
hindsight, those assets would have been lost in any case.6
Target possessed one curiosity, namely that the purpose of the trust (payment
balanced by receipt of the security documents) was ultimately fulfilled. Despite
Lord Browne-Wilkinson’s unorthodox approach to the question of loss, this
made it a case which could, just, be reconciled with equitable orthodoxy by
postulating that when the transaction was completed as expected, the trustees
could be regarded as having notionally restored to the trust fund what they had
misguidedly removed from it a few days earlier.7
The same escape, however, was not to hand in the later decision in Mark
Redler.8 About £3.3 million of loan monies entrusted by lenders to solicitors
in a residential remortgage were released at the right time, and in the main
to the right person. But some £270,000 that ought to have gone to discharge
a previous second mortgage was by mistake paid to the borrowers instead. As
had happened in Target, here too the security had been seriously overvalued
(whether fraudulently or not was unclear). The borrowers went bankrupt, and
the lenders lost in total some £2 million. A claim for unliquidated damages for
negligence would have yielded some £270,000, the amount of the undischarged
mortgage which owing to the solicitors’ negligence now outranked the lenders’
security. But, as in Target, the lenders sought to stand on equitable technicality by
demanding an accounting in equity of the whole sum released, less only the sale
proceeds.9 Here the escape in Target was not available, since owing to the failure
to discharge the second mortgage there was no possibility of arguing that the
trust had been completely performed.10 The case thus directly raised the issue
of whether Lord Browne-Wilkinson had been right in Target to decide that the
trustee’s duty to account should reflect matters which would have caused the
loss of the trust property anyway. Lord Toulson, delivering the most substantial
opinion, said that this had indeed been correct. The object of ordering a trustee
who had wrongfully disbursed assets to reconstitute the trust fund was, he said,
essentially to ensure that the beneficiaries’ interests did not suffer: in so far
as those interests would have been damnified in any case, it followed that the
amount of any restitution had to be reduced.11 His Lordship also added, with
some superficial plausibility, that where what was alleged was essentially legal
malpractice it was desirable that the measure of recovery for breach of trust
should not be wildly discrepant from that available in contract or tort.12 Lord
Reed gave a separate opinion saying much the same thing, though slightly less
incisively: the other three justices simply agreed with both.
10 The solicitors had argued that their only breach of trust had encompassed the misdirected
£270,000. But the Court of Appeal held that there had been a single breach of trust in relation to
the whole sum entrusted (see Mark Redler (n 9)), and no appeal was taken from this holding.
11 See Mark Redler (n 2) [64]–[66].
12 Mark Redler (n 2) [71].
13 P Birks, “Equity in the Modern Law: An Exercise in Taxonomy” (1996) 26 UWALR 1, 45–48;
C Mitchell, “Stewardship of Property and Liability to Account” [2014] Conv 211; Carn (n 7);
A Shaw-Mellors, “Equitable Compensation for Breach of Trust: Still Missing the Target?” [2015]
JBL 165.
14 See the articles referred to in n 32 below.
15 It might just be argued that even at common law the claimants could have recovered in full from
the solicitors had they framed their case as one brought on the basis of failure of consideration,
despite the loss they would otherwise have made: cf Wilkinson v Lloyd (1845) 7 QB 27; 115 ER
398. But that must wait for further discussion elsewhere.
300 Contract in Commercial Law
16 The point has been made repeatedly. Two of the clearest expositions are C Mitchell, “Equitable
Compensation for Breach of Fiduciary Duty” (2013) 66 CLP 307, 322ff and the earlier Millett
(n 7) 225–26. See too R Meagher, JD Heydon and M Leeming, Meagher, Gummow & Lehane’s
Equity: Doctrine and Remedies (4th ed, LexisNexis 2002) para 2.155; AIB Group (UK) plc v Mark
Redler & Co [2014] UKSC 58; [2014] 3 WLR 1367 [53]–[57] (Lord Toulson) and the pithy
comment of Sir Peter Millett (by then Millett NPJ) in Libertarian Investments Ltd v Hall [2013]
HKCFA 93; (2013) 16 HKCFAR 681 [167]: “an account”, he said, “is not a remedy for a wrong”.
17 Clough v Bond (1838) 3 My & Cr 490; 40 ER 1016, 496–97 (Lord Cottenham); Mark Redler (n 16)
[52]–[54] (Lord Toulson); Libertarian Investments (n 16) [166]–[172] (Lord Millett NPJ).
18 For example, Hewett v Foster (1843) 6 Beav 259; 49 ER 825; Shepherd v Mouls (1845) 4 Hare 500;
67 ER 746.
19 Kellaway v Johnson (1842) 5 Beav 319; 49 ER 601 324; Knott v Cottee (1852) 16 Beav 77; 51 ER
705 79–80; Re Salmon (1889) 42 Ch D 351 (CA) 357; Re Massingberd’s Settlement (1890) 63 LT
296 (CA).
20 Wills v Trustees Executers & Agency Co Ltd (1900) 25 VLR 391; Fales v Canada Permanent Trustee
Co (1976) 70 DLR (3d) 257 (Can SC).
21 See eg Clough (n 17) (monies stolen by co-trustee: defendant trustee liable, since not without
fault).
22 “[W]e are not at liberty to speculate whether the same result might not have followed whether
the bank had been guilty of that default or not” – Magnus v Queensland National Bank (1888) 37
Ch D 466 (CA) (Lord Halsbury). See too Caffrey v Darby (1801) 6 Ves Jun 489; 31 ER 1159, 496
(Lord Eldon); Cocker v Quayle (1830) 1 Russ & M 535; 39 ER 206.
23 Clough (n 17) 496–97 (Lord Cottenham); see too Re Dawson [1966] 2 NSWR 211 (foreign
currency wrongly paid away: liability to replace it, despite loss being greatly increased by
unforeseeable devaluation of home currency).
24 Target (n 1) 434 (Lord Browne-Wilkinson); see too Australian Special Opportunity Fund LP v
Equity Trustees Wealth Services Ltd [2015] NSWCA 294 [155]–[156] (Bathurst CJ).
Ch 13 Of Debts, Damages and Errant Trustees 301
25 Such as arguments that if the assets had remained in the trust the beneficiary personally would
have had to pay tax on them. See Bartlett v Barclays Bank Trust Co Ltd (No 2) [1980] Ch 515
(Ch D); also Re Bell’s Indenture [1980] 1 WLR 1217 (Ch D).
26 On this similarity see Millett J in Bristol & West Building Society v Mothew [1998] Ch 1 (CA) 17
(“Although the remedy which equity makes available for breach of the equitable duty of skill and
care is equitable compensation rather than damages, this is merely the product of history and
in this context is in my opinion a distinction without a difference. Equitable compensation for
breach of the duty of skill and care resembles common law damages in that it is awarded by way
of compensation to the plaintiff for his loss. There is no reason in principle why the common
law rules of causation, remoteness of damage and measure of damages should not be applied
by analogy in such a case. It should not be confused with equitable compensation for breach
of fiduciary duty, which may be awarded in lieu of rescission or specific restitution.”); also the
instructive Singapore decision in Then Khek Koon v Arjun Permanand Samtani [2012] SGHC 17;
[2014] 1 SLR 245 [108] (Vinodh J).
27 [2013] HKCFA 94; (2013) 16 HKCFAR 681 [168].
28 In other words, if the transaction had proceeded to fruition as everyone expected it would,
without reference to any error by the trustee. See Canson Enterprises Ltd v Boughton & Co [1991]
3 SCR 534, 556 (McLachlin J); also compare Litton NPJ in Libertarian Investments (n 16) [168]
(“This approach to equitable relief treats the defendant as if he had carried out his fiduciary
duties” (emphasis added)).
302 Contract in Commercial Law
position of beneficiaries. But now return to Target and Mark Redler. It is one
thing to ignore arguments that the trust would have lost the assets concerned in
any event owing to the actions of some third party, or some other outside event.
But it is quite another to extend this disregard to the subsequent would-be
actions of the trustee himself where those actions (a) would have been legitimate
and even required by the trust, and (b) would in the ordinary course of events
have been precisely what was expected to happen. In such a case it is entirely
artificial, and certainly not mandated by the authorities, to insist on ignoring
all this and taking as a comparator for the purposes of restoration the situation
that would have obtained had the trustee stopped the whole transaction in its
tracks a moment before the unjustified payment and then kept the funds locked
away in the trust. And this is exactly the point in Target and Mark Redler. In
Target the defendants, had they executed their trust as required and expected,
would have disbursed the trust monies in exchange for mortgage documents.
The obvious remedy for their default was to make them restore the position
that would have obtained had they done exactly that. So too in Mark Redler,
where part of the loan monies were misdirected to the borrower rather than the
second mortgagee. Granted that the solicitor-trustees had to make restitution
to the trust estate, the question still remains: was the position to be restored
that which would have applied if the whole of the mortgage monies had been
paid to the right people, or if no monies had been paid to anyone? The same
comment applies: the sensible comparator can only be the former.
Moreover, this is also consistent with at least two of the later leading
Commonwealth cases. One was the important Australian decision in Youyang
Pty Ltd v Minter Ellison Morris Fletcher.29 There, plaintiffs (to oversimplify
slightly) entrusted solicitors with a large investment fund and instructed them
to transfer it to an investment company against a bank CD in their favour. The
solicitors paid the money over but got no CD: later, the investment company
collapsed and the plaintiffs’ money disappeared. To an action for the amount
lost, the solicitors pleaded that after the initial transfer but before the collapse of
the investment company they had been authorised to maintain the investment
despite the lack of the CD. The New South Wales Court of Appeal30 held that
this was a good plea: this was largely on the basis of Target, but the case could
equally well have been decided on the basis that the solicitors were not bound
to restore the trust fund in so far as the monies would not have been in it even
if they had done as they were told. The case was reversed in the High Court on
the basis that in fact no later authorisation had been given:31 but no suggestion
was made that had the authorisation been made the result should have been
any different from that reached in the Court of Appeal.32
The other was the Hong Kong cases of Libertarian Investments Ltd v Hall.33
In that case, the defendant fell to be treated as though he were a trustee who
had failed to account for certain securities which he held on behalf of the
claimant.34 The securities were volatile, and had the trust been properly
carried out a large block of them would have been sold off at a particular point
in time – well before the action was brought. In deciding on the valuation
of these shares for the purposes of an accounting action, the Court of Final
Appeal reckoned the value of that particular block of shares as at the time at
which they should have been sold. This is, it is suggested, entirely consistent
with the thesis being put forward here: the proper way of reckoning a trustee’s
restorative liability is to assume that the trust had been properly executed, and
to order compensation accordingly.35
by-product of the trustee’s liability, rather than the gist of the action. It followed
the attempt by the House of Lords in Target and the Supreme Court in Mark
Redler to limit the claimants’ recovery by reference to the amount by which they
were worse off, or to talk in terms of causal relations between breach of trust
and loss suffered, were logically misconceived.
This is a formidable argument, though (as will appear below) it is suggested
that it is ultimately unsound. Before saying why this is, however, it is as well to
make clear what is meant by the common law debt-damages distinction. For
the purposes of this chapter, the divide will be regarded as equivalent to that
between liquidated and unliquidated pecuniary liabilities, with debt placed in
the former category and damages in the latter. Admittedly the correspondence
is not exact,39 and usage varies.40 Nevertheless it will suffice for the purposes
of argument. Unliquidated liabilities, of which damages are a subset, include
cases where the amount of the plaintiff ’s entitlement is not a matter of simple
calculation at the time it becomes payable, but involves either substantial
discretion or the application of some more or less complex legal principle by
the court, for example (in the damages context) the rules as to quantification
and as to what counts as recoverable loss.41 They cover, as well as damages,
non-wrong-based compensation liabilities42 and claims for fees whose amount
is explicitly subject to court control,43 not to mention a few other specialised
claims.44 Liquidated liabilities, typified by debt claims, comprise by contrast
obligations to pay sums immediately calculable, albeit possibly with some little
complexity. They include stipulated contractual payments (the agreed price
of goods or services,45 or the amount of an abstract payment obligation);46
contractual duties to pay a reasonable sum (plus possibly quantum meruit
39 Thus liquidated claims such as demurrage can share features with unliquidated claims, for
example the unavailability of common law interest (at least in England): see President of India
v Lips Maritime Corp [1988] AC 395 (HL). And occasionally “debt” has been extended to cover
unliquidated claims: see eg Morse v Tucker (1846) 5 Hare 79; 67 ER 835 and Bisset v Burgess
(1856) 23 Beav 278; 53 ER 109 (provision in a will for payment of “debts” out of particular
property). But these mismatches are relatively minor.
40 Indeed, Lloyd LJ in Phillips & Co v Bath Housing Co-operative Ltd [2012] EWCA Civ 1591; [2013]
1 WLR 1479 pertinently observed [39]–[41] that what counted as a liquidated claim was not
always a term of art and might well vary according to the (especially legislative) context. See
too Halsbury’s Laws of England, vol 29 (Re-issue 2014) para 306; also generally N Andrews and
others, Contractual Duties: Performance, Breach, Termination and Remedies (Sweet & Maxwell
2012) ch 19.
41 “The phrase ‘liquidated claim’ connotes a claim for a specific sum or, alternatively, for a sum
which can be readily and precisely ascertained. … A claim for damages in tort is by definition
not a liquidated claim. The assessment of damages in tort involves the application of a set of
common law rules to the particular circumstances of the case. The application of those rules may
be relatively straightforward in some instances, but that does not make the claim a liquidated
one.” (Jackson J in Dŵr Cymru Cyf v Carmarthenshire County Council [2004] EWHC 2991
(TCC) [49]).
42 Dŵr Cymru (n 41) [54]); Khan v Tyne & Wear Passenger Transport Executive [2015] UKUT 43
(LC).
43 As with a lawyer’s untaxed bill of costs: Truex v Toll [2009] EWHC 396 (Ch); [2009] 1 WLR 2121.
44 Such as salvage and general average: The Potoi Chau [1984] AC 226 (PC) 237 (Lord Diplock).
45 H Beale, Chitty on Contracts (31st ed, Sweet & Maxwell 2013), vol 1, para 26.008.
46 Standard Chartered Bank v Dorchester LNG (2) Ltd [2014] EWCA Civ 1382; [2015] 1 Lloyd’s Rep
97 [38] (Moore-Bick LJ).
Ch 13 Of Debts, Damages and Errant Trustees 305
58 MSC Mediterranean Shipping Co SA v Cottonex Anstalt [2015] EWHC 283 (Comm); [2015] 1 Lloyd’s
Rep 359. Similarly with mitigation: see White & Carter (Councils) Ltd v McGregor [1962] AC 413 (HL)
and Abrahams v Performing Right Society Ltd [1995] ICR 1028 (CA) 1037 (Hutchinson LJ).
59 For instance, by allowing a claim for an agreed deposit: see Dewar v Mintoft [1912] 2 KB 373
(KBD) and Firodi Shipping Ltd v Griffon Shipping LLC (“The mv Griffon”) [2013] EWCA Civ
1567; [2014] 1 CLC 1.
60 For recent examples see Manning v English [2010] EWHC 153 (Ch); [2010] Bus LR D89 (partnership
account claim unliquidated and not subject to rule) and Barnett v Creggy [2014] EWHC 3080 (Ch);
[2015] PNLR 13 (claim for mispayment of trust funds liquidated and subject to it).
61 See eg Darjan Estate Co plc v Hurley [2012] EWHC 189 (Ch); [2012] 1 WLR 1782 (rent under
equitable lease liquidated and capable of founding bankruptcy petition). Similarly with claims in
equity for filched funds, though whether these are liquidated for these purposes is controversial:
compare Re Vassis (n 48) 526–27 (liquidated) with Hope (n 48) (unliquidated).
62 Implicit in Re Buick Sales Ltd [1926] NZLR 24 (SC) (discussing the assignability of equitable
claims against a company director).
63 Indeed, in Re Blencowe (1866) LR 1 Ch App 393 (CA) 394, the term “equitable debt” was used,
with no hint of incongruity, to refer to a claim for compensation for wilful default (in the context
of bankruptcy law).
64 See eg Re Blencowe (n 63) (equitable claim outside the then bankruptcy legislation, which was
limited to legal debts); Re Adams (1878) 9 Ch D 307 (CA) and Foster v Reeves [1892] 2 QB
255 (CA) (rent under a mere equitable lease); Dick v Swinton (1813) 1 V & B 371; 35 ER 145,
Bosanquet v Wray (1815) 6 Taunt 597; 128 ER 1167, Thompson v Norris (1852) 5 De G & Sm
686; 64 ER 1299 (intra-partnership claims); Terrell v Hutton (1854) 4 HLC 1091; 10 ER 790; Re
Athenæum Life Assurance Society (1858) 4 K & J 549; 70 ER 229 (claims by shareholders based on
a company constitution before the enactment of what is now the Companies Act 2006 (UK) s 33).
65 Notably in connection with claims to secret profits before FHR European Ventures LLP v Cedar
Capital Partners LLC [2014] UKSC 45; [2015] AC 250: see Metropolitan Bank v Heiron (1880) 5
Ex D 319 (CA) Lister & Co v Stubbs (1890) 45 Ch D 1 (CA) Clarkson v Davies [1923] AC 100 (PC)
Reading v R [1949] 2 KB 232 (CA) John v James [1991] FSR 397 (Ch D) 439; Ardlethan Options Ltd
v Easdown (1915) 20 CLR 285 (HCA) 292, Suzlon Energy Ltd v Bangad [2014] FCA 1105 [75]. But
there were other examples too: eg Re Rowena Nominees Pty Ltd (n 32) [59] (personal claim against
trustees of investment scheme not entitling plaintiff to interest in trust property).
Ch 13 Of Debts, Damages and Errant Trustees 307
amount to an action in tort.66 Indeed, it is probably most accurate to say that the
term “equitable debt” was not used as a term of art at all.67 All this means that,
while Professor Charles Mitchell is correct to state that “[t]he courts have said
that substitutive performance claims resemble claims for ‘an equitable debt’”,68
the significance of this may well be rather limited. Of the two statements cited in
support of the “equitable debt” analysis, that in Ex p Adamson69 was in the context
of a polite fiction aimed at allowing fraud claims to be proved in bankruptcy
in the teeth of the restrictive rules in the then bankruptcy code,70 while that in
Re Smith Fleming & Co71 was making the simple point that, in the absence of
traceable trust property, the only claim against an errant trustee had to be an in
personam one. Neither had anything to do with the difference with liquidated and
unliquidated claims.
But let us put this point to one side. The phrase “we do this at common law
but that in equity” is not of itself a respectable argument;72 and it is perfectly
possible that the common law distinction between liquidated and unliquidated
claims, even though not in fact used by equity lawyers with any consistency, is
66 More important than it might first seem, in the late nineteenth century. At a time of unregulated
markets characterised by rampant fraud, the then bankruptcy laws denied proof of claims “in
the nature of unliquidated damages arising otherwise than by reason of a contract or promise”:
Bankruptcy Act 1869 (32 & 33 Vict, cap 71) (UK) s 31 (since repealed). To circumvent this, a series
of decisions allowed victims to prove against bankrupt fraudsters by somewhat implausibly
characterising breach of trust as an equitable (or even contractual) debt. See eg ex p Adamson
(n 37) referred to below; Flitcroft’s Case (1882) 21 Ch D 519 (CA) 527 (Bacon V-C); Re Smith
Fleming (n 37) 311 (James LJ). Note, too, the shady company promotion case of Emma Silver
Mining Co v Grant (1880) 17 Ch D 122 (Ch D) 130 (Jessel MR).
67 Other representative examples of liabilities which have at one time or another been called
“equitable debts” include the following: claims for income due from trust funds (Horsley v Cox
(1868–69) LR 4 Ch App 92 (CA); Webb v Stenton (1883) 11 QBD 518 (CA)); a life tenant’s duty
to make good waste (Micklethwait v Micklethwait (1857) 1 De G & J 504; 44 ER 818); claims
by and against estates in general (eg Stones v Cooke (1834) 7 Sim 22; 58 ER 745, Taylor v Taylor
(1875) LR 20 Eq 155: also Wentworth v Rogers [2003] NSWSC 472); claims for compensation
for breach of trust or breach of fiduciary duty (Obee v Bishop (1859) 1 De G, F & J 137; 45 ER
311, 142; Re Blencowe (n 63); Huggons v Tweed (1879) 10 Ch D 359 (CA); Wickstead v Browne
(1992) 30 NSWLR 1, 15 (Handley JA)); claims arising by subrogation or some similar doctrine
(eg Reversion Fund & Insurance Co Ltd v Maison Cosway Ltd [1913] 1 KB 364 (CA)); claims
depending on equitable assignments (Re London & Birmingham Flint Glass & Alkali Co Ltd
(1859) 1 De G, F & J 257; 45 ER 357; Tony Lee Motors Ltd v M S Macdonald & Son (1974) Ltd
[1981] 2 NZLR 281, 286); promises to settle property (ex p Campbell) (1809) 16 Ves Jun 244;
33 ER 977; Thompson v Thompson (1821) 9 Price 464; 147 ER 152); a surety’s right to be pre-
indemnified (Ferguson v Gibson (1872) LR 14 Eq 379); not to mention insurance contribution
claims (QBE Insurance (Australia) Ltd v SLE Worldwide Australia Pty [2005] NSWSC 776; [10]13
ANZ Ins Cas 61–654). It is hard not to sympathise with Jessel MR’s dismissive characterisation
of the whole thing as an “inaccurate phrase” – Re Jones (1881) 18 Ch D 109 (CA) 120.
68 See Mitchell, “Stewardship of Property and Liability to Account” (n 13) 223.
69 Ex p Adamson (n 37) 819.
70 See n 66 above. Adamson’s case does not seem to have involved any abstraction of property held
on trust: it was a simple financing fraud. See too the more modern decision of the Federal Court
of Australia in Re Vassis (n 48) 526–27, holding a claim for defalcations by a solicitor-trustee to
be a debt and hence liquidated so as to be able to found a petition under s 44 of the Bankruptcy
Act 1966 (Cth).
71 Re Smith Fleming (n 37) 311 (James LJ).
72 See A Burrows, “We Do this at Common Law but that in Equity” (2002) 22 OJLS 1 (admittedly
in another context).
308 Contract in Commercial Law
nevertheless one that ought to be applied by them to throw light on the liability
of a trustee who fails to deal properly with trust property. The question then
is this: is it right to argue that the liquidated–unliquidated distinction reflects
the difference between the common form and wilful default forms of account
claims against a trustee, with the common form account corresponding to a
liquidated claim and a wilful default claim to an unliquidated one? Put another
way, can it be said that because the trustee’s liability is not dependent on the
loss suffered by the beneficiary, does not require proof of wrongdoing and
is based on the reconstitution of an ongoing trust fund, it must therefore be
regarded as a liquidated or debt liability artificially fixed at the value of the
assets unaccounted for? It is respectfully suggested that the answer is No.
First, we can deal with the fact that the amount of personal loss to the
beneficiary suing, or for that matter the entire lack of any loss to him, does not
represent the measure of the trustee’s liability. This is true;73 but it has to be
seen in context. It reflects the fact that a suit seeking reinstatement of the trust
property is brought for the benefit of all beneficiaries, not necessarily those
suing.74 It does not mean that a claim for reinstatement of the trust fund is not
a claim for loss, but rather that the beneficiary’s claim to surcharge the trustee
is essentially one brought in respect of third party losses, in this case the loss
suffered by a notional “trust estate”.75 Such third-party loss claims are nothing
very unusual in the context of the law of obligations as a whole,76 and there
is certainly no reason to regard them as being anything other than ordinary
unliquidated claims, albeit of a special type.
Secondly, what of the “no wrong” argument? This is the argument that
unlike (say) a liability in tort, or a liability in a trustee for wilful default
in failing to preserve the trust property, a trustee’s liability to make up the
value of assets found missing on the taking of accounts does not require the
claimant to plead or prove any breach of duty on the trustee’s part.77 It is this
factor which, the argument goes, shows that what we have here is in essence a
debt or liquidated liability. But this contention also, it is suggested, collapses
under stress. To begin with, while the fact that a liability does not depend
on a breach of duty by the defendant may prevent it being styled a liability
in damages,78 this does not mean that it must therefore be an unliquidated
obligation in the nature of a debt. On the contrary: there are plenty of examples
of such liabilities which are nevertheless unliquidated – for instance, a duty
73 Witness Bartlett (n 25) and Re Bell’s Indenture (n 25), holding that any tax saved by the beneficiary
is out of account.
74 Target (n 1) 434 (Lord Browne-Wilkinson); see too Mark Redler (n 16) [100] (Lord Reed) and
Australian Special Opportunity (n 24) [155]–[156] (Bathurst CJ); see also n 17 above.
75 Nocton v Lord Ashburton [1914] AC 932 (HL) 952, 958 (Viscount Haldane); Target (n 1) 434
(Lord Browne-Wilkinson).
76 For example, bailees suing for bailors’ losses (eg The Winkfield [1902] P 42 (CA) and The Jag
Shakti [1986] AC 337 (PC)), or personal representatives suing negligent solicitors for prejudice
to legatees (see Chappel v Somers & Blake [2003] EWHC 1644 (Ch); [2004] Ch 19).
77 Mitchell, “Stewardship of Property and Liability to Account” (n 13) 223–24, citing Bacon v Clark
(1837) 3 My & C 294; 40 ER 938, 298–99 and Angullia v Estate & Trust Agencies (1927) Ltd [1938]
AC 624 (PC).
78 Cf The Trident [1939] 1 KB 748 (CA) 756 (Mackinnon LJ) (statutory liability to compensate for
damage independent of breach of duty).
Ch 13 Of Debts, Damages and Errant Trustees 309
79 Khan (n 42). For that matter, it never seems to have been seriously suggested that the claim in
Burmah Oil Company (Burma Trading) Ltd v Lord Advocate [1965] AC 75 (HL) was a claim in
debt (though the issue of classification never in fact arose).
80 See Chalke (n 51) [157]; Re Vassis (n 48) 527–28; Biggerstaff (n 51) 105 (same re money paid
where failure of consideration). But these are possibly controversial: see above.
81 This was the point being made by Lord Cottenham in Bacon (n 77) 298–99 and Lord Romer in
Angullia (n 77) 637 (see note above).
82 This is true whether the bailor sues in detinue (see Reeve v Palmer (1858) 5 CB (NS) 84; 141 ER
33, 93 and Ballet v Mingay [1943] KB 281 (CA); N Palmer, Bailment (3rd ed, Sweet & Maxwell
2009) para 10.30ff) or for breach of bailment (Port Swettenham Authority v TW Wu & Co Sdn
Bhd [1979] AC 580 (PC)).
83 True, it was held in Hunter v Moss [1994] 1 WLR 452 (CA) that there could be a declaration of
trust of fungibles which left the interests of trustee and beneficiary interchangeable (and see too
White v Shortall [2006] NSWSC 1379). But that is a special case, and it does not alter the point
in the text.
84 Admittedly, this will normally be a harmless breach. But not necessarily so. It may matter if, for
example, the trustee invests the dividends wrongly taken in an appreciating asset. The beneficiary
in such a case will get the gain.
310 Contract in Commercial Law
the question whether the plaintiff has suffered any loss is an irrelevance there,85
so also here: the trustee must treat a trust asset as trust property, period. But
the duty to account if assets are found to be missing or unavailable is different.
True, where this liability takes the form of a money obligation it looks at first
sight a bit like a debt, being a pecuniary obligation, fairly readily calculable
in amount by reference to the value of the trust asset unaccounted for,86 and
independent of the specific circumstances of either beneficiary87 or trustee.88 But
the resemblance is deceptive. For one thing, save where the missing trust assets
are still under the trustee’s control,89 it is impossible in the nature of things to
compel him to perform the trust. All the law can do is impose a duty on him to
do the next-best thing: namely, to transfer into the trust a cash sum equivalent
to the asset unaccounted for. Even if the trust assets lost were themselves cash
assets, moreover, the same follows: replacing lost cash is not carrying out the
trust but providing a substitutive remedy to restore the trust funds.90
For another, assuming that we are talking about making the trustee pay a
cash sum into the trust, the amount of that sum depends on court assessment.
Hence even though it differs from a liability to make good an open-ended
loss (giving rise to the eminently sensible suggestion to style it “substitutive
compensation” as opposed to “reparative compensation”),91 it remains at
bottom an unliquidated liability to make compensation.92 The most helpful
analogy, it is suggested, is the liability in detinue93 of a bailee who loses goods.
85 The pension example was, of course, deliberately chosen: see Beswick v Beswick [1968] AC 58
(HL), where exactly this point was in issue.
86 And does not, it has been said, include further consequential loss. As Burchett J put it in Re
Vassis (n 48) 526–27, there is a clear distinction between the nature of claims for the actual trust
moneys misappropriated and other consequential claims for damages which may arise from
a breach of trust. See too C Rickett, “Understanding Remedies for Breach of Trust” (2008) 11
Otago LR 603, 606–07; J Glister, “Breach of Trust and Consequential Loss” (2014) 8 J Eq 235. But
this is not certain: see note below.
87 For example, liability is unaffected by the fact that the asset would have been taxable in the
beneficiary’s (equitable) hands: Bartlett (n 25).
88 Thus the fact that the ultimate loss to the trust fund is entirely unforeseeable – for instance,
owing to a sudden subsequent appreciation in the value of the asset removed – is beside the
point: Re Dawson (n 23).
89 And even here the remedy of a specific order of restitution is not available as of right, with the
court retaining a jurisdiction to make a money award instead. See the South Australian decision
in Pickering v Smoothpool Nominees Pty Ltd (2001) 81 SASR 175 (Full Ct) (trust property
consisting of unique fishing permit unobtainable in the market: money payment nevertheless
ordered). Conversely, the defendant cannot it seems insist on making restitution in specie where
the plaintiff would prefer cash: see Nant-y-Glo & Blaina Ironworks Co v Grave (1878) 12 Ch D 738
(Ch D) and Re Dawson (n 23) 214–16.
90 Compare the situation with conversion. If I steal a $100 bill of yours I must pay you $100: but
this is still a substitutive remedy in damages for conversion. See D Fox, Property Rights in Money
(OUP 2008) para 9.08.
91 Terms originating in J Edelman and S Elliott, “Money Remedies against Trustees” (2004) 18 Tru
LI 116: see too Rickett (n 86) 606; Agricultural Land Management (n 32) [349] (Edelman J).
92 See Dwr Cymru Cyf (n 41) [49] (Jackson LJ). To this extent care must be taken with Lord
Millett NPJ’s statement in Hall (n 27) [168] that such liability “is not compensation for loss but
restitutionary or restorative”.
93 In England, unlike Australia, this is now a liability in conversion, following the statutory
suppression of detinue by the Torts (Interference with Goods) Act 1977 (UK) s 2. But the basis of
liability remains unaffected.
Ch 13 Of Debts, Damages and Errant Trustees 311
The theory of this latter liability is, indeed, an almost exact common-law
doppelgänger to that of the trustee. The bailee must return the goods entrusted
to him, or prove their loss was due to some cause exonerating him: if he
cannot, then he is precluded from denying that he still has them and must pay
the bailor their value.94 Yet this is a liability which, albeit based on a simple
valuation exercise, is beyond doubt neither liquidated nor a claim in debt.95
Moreover, there is a further point of dissimilarity with a debt or liquidated sum
worth noting. Such a claim is by definition fixed or calculable without reference
to the individual circumstances of particular parties. But the sum payable by
a trustee where property is unaccounted for may vary according to the loss
suffered by the trust.96 Hence while normally the award is of the value of the
misdirected property plus a standard rate of interest, if the trust would have
made a particular amount of gain from the assets concerned, then the liability
on an accounting may include this sum.97
Conclusion
The conclusion to this chapter can be expressed in short order. First, it must be
admitted that the reasoning by which the courts in Target 98 and Mark Redler99
reached their result will not do. In particular, both cases clearly misread the old
authorities on the taking of accounts against trustees, and wrongly started from
an overriding assumption that recovery for breach of trust should be treated
almost as if it were a branch of the law of damages for breach of contract or tort.
Secondly, however, there is no reason to regard the actual outcome in either case
as either unjust or wrong, or to say that the court should have disregarded the
fact that the claimants would have lost their money even if there had been no
breach of trust. Properly interpreted, the principle that a beneficiary is entitled
to have the trust fund reconstituted is entirely consistent with a decision to
have regard to what the trustee would legitimately have done with the trust
funds had everything gone according to plan. Nor is there any reason to regard
a trustee’s duty to reconstitute the trust fund as a form of debt or liquidated
liability. On the contrary: even on a strict interpretation of the old authorities,
this liability of the trustee’s falls to be regarded as compensatory in nature and
not as a fixed liability enforceable come what may whatever loss the trust may
or may not have suffered. In short, the claimants not only had no merits: in this
particular case they were not right, either.
94 Palmer (n 82) paras [1.072]–[1.073]; Reeve (n 82) 93; Jones v Dowle (1841) 9 M & W 19; 152 ER 9.
95 See Blue Sky One Ltd v Balli Group plc [2010] EWHC 631 (Comm); 2010 WL 902909 [118]
(Beatson J). See too Dŵr Cymru Cyf (n 41) [49]–[51] (Jackson J); McGuinness (n 51) [36]
(Aldous LJ) (both stating that all claims in tort are by definition unliquidated).
96 Note, the loss suffered by the trust, not individual beneficiaries: see Bartlett (n 25).
97 See the careful discussion by Hamilton J in Lewis v Kation Pty Ltd [2006] NSWSC 480 [9]–[13],
approved by Allsop J on appeal (Kation Pty Ltd v Lamru Pty Ltd [2009] NSWCA 145; (2009) 257
ALR 336 [111]). To this extent the statement in Rickett (n 86) 606–07, referred to in n 86 above,
that consequential loss does not fall to be considered at all in such cases, has to be taken with a
pinch of salt.
98 Target (n 1).
99 Mark Redler (n 2).
14
313
314 Contract in Commercial Law
4 (1890) 17 R 1, 5.
5 Stewart (n 4) 9.
6 Stair (n 1) I, 17, 16.
7 Highland and Universal Properties Ltd v Safeway Properties Ltd 2000 SC 297, 299, in his judgment
as Lord President. He noted that South African law had settled on not dissimilar lines: Benson v
SA Mutual Life Assurance Society 1986 (1) SA 776 (A).
8 Stewart (n 4) 9 (Lord Watson). See also WM Gloag, The Law of Contract: A Treatise on the
Principles of Contract in the Law of Scotland (2nd ed, Caledonian 1929) 655.
9 Gloag (n 8) 657.
10 Highland and Universal Properties (n 7) 311 (Lord Kingarth).
Ch 14 Specific Implement and Specific Performance 315
One of the more important cases on which I sat was Church Commissioners
for England v Abbey National plc, which was heard in 1994. My court sat,
exceptionally, as five judges to consider whether it was competent to enforce the
implement of a positive obligation under a lease by means of an interdict.11 The
order was sought by the Church Commissioners, who were the landlords of
units in a shopping centre, against one of its tenants, Abbey National, who had
breached the terms of the lease by ceasing to keep their unit open for business.
This was one of the early cases of attempts in our court to enforce a keep-
open clause. The tenant was still in occupation of the unit but the business
had been relocated to other premises, the electricity had been switched off, the
security shutters were being kept closed and the staff had ceased to work there.
Counsel for the tenants accepted that the landlords were entitled to an order
declaring that the tenant was bound to implement its obligations under the
lease, and that they were entitled in principle to an order for specific implement
as well.12 It was the request for an interdict that was in issue.
There had been a decision in an earlier case at first instance, in Grosvenor
Developments (Scotland) Ltd v Argyll Stores Ltd who were the tenants of a
supermarket and had given notice of their intention to discontinue trading,
that an interdict to prevent them from doing so was incompetent.13 The sheriff ’s
decision was affirmed in the Inner House of the Court of Session on the ground
that where the obligation is to refrain from doing something the court will grant
a decree of interdict, but that it will not do so to enforce a positive obligation.14
Lord Kincraig said that the obligation in the keep-open clause was far too general
to be enforced by specific implement, and Lord Jauncey said that in his view
an action for specific implement of the keep-open clause would fail not only
because the order sought implement of the obligation in circumstances in which
performance would not be required under the lease but also because it would
be impossible of enforcement.15 It must be appreciated that, in contrast to the
mandatory order issued under the injunction procedure in English law, under
Scots law an interdict cannot be issued to order someone to do something. The
issue for us in Church Commissioners was whether the Grosvenor Developments
case had been wrongly decided on this ground. We held that as the function
of an interdict was essentially a negative one, namely to prevent the taking of
action in breach of the obligation, the earlier decision was sound. We endorsed
the decision at first instance that it was not competent for the court to grant an
order to perform an obligation in the form of an interdict. I went on to say that
the objection to the granting of interdict on the grounds of competency did not
leave the party without any other possible remedy to regulate matters for the
time being pending the granting of an order for specific implement.16 It would
have been open to the judge to grant an order for specific relief under s 46 of the
Court of Session Act 1988 (UK) if that remedy had been asked for. But, as it had
not been asked for, we did not make that order.
It is worth emphasising that, although the parties to that dispute had their
head offices in England, the issue between them was decided according to Scots
law as this was the law of the forum where the litigation was being conducted.
The arguments on both sides were about what was competent according to
Scots law. No authorities from England were cited, and none are referred to in
the court’s judgments. I mention this simply in order to make the point that on
matters such as this Scots law has developed its own way of dealing with them.
It is a mature system which does not need to refer to or borrow from others to
resolve disputes of the kind that arose in that case. I think that it should also
be said that it was the practice, at least during my time in the Court of Session
both as an advocate and as a judge, to regard English authorities as of no help
and even perhaps as misleading when we were dealing with areas of law where
it was clear that our own system could provide the answers. So references to
English decisions in matters of that kind were not encouraged. It was assumed
that, as our own system gave us all we needed to resolve the dispute, we had
nothing to learn from them. In many respects, as one would expect in what
we still call the United Kingdom, the laws of the two countries – England and
Scotland – are the same. But their laws as to the remedies that are available
under the law of contract are not. This is not just a matter of language: “specific
implement” in the one, and “specific performance” in the other. It is a matter
of substance too. In this area of the law – to borrow a phrase which describes
the position of Hong Kong after its handover to China – the United Kingdom
is one country with two systems.17
In 1996 I was asked to move to London to sit in the House of Lords as a
Lord of Appeal in Ordinary. Here I was, of course, required to sit on appeals
from the courts of England and Wales and Northern Ireland as well as from
the Court of Session in Scotland. And before very long, in February 1997,
I was asked to sit in the Appellate Committee in a keep-open case which
had come before the House from the Court of Appeal in England. This was
Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd.18 As so often
in these cases, the lease in question was of a unit in a shopping centre. The
unit in this case was in Sheffield which was to be operated as a supermarket.
As it was the largest shop in the shopping centre and the greatest attraction,
it was to serve as a magnet for other traders there. Magnets of that kind are
commonly sought by developers to attract other traders to take up places in the
shopping centre, and it is important for the long-term viability of the centre
that they should remain there. The lease contained a covenant which required
the tenant to keep the premises open for retail trade during the usual hours of
business in the locality. Having undertaken a major review of their operations
across the country, however, the tenants had decided to close a number of their
supermarkets which were loss-making or less profitable. The landlords asked
them to continue trading until another tenant could be found, but the tenants
went ahead and closed their supermarket and began stripping out the fixtures
17 Article XIX of the Act of Union 1707 provided that the Court of Session was to remain ‘in all
time coming within Scotland’. Its effect was to ensure the continuity of the Scottish legal system
after the union with England.
18 [1998] AC 1 (HL).
Ch 14 Specific Implement and Specific Performance 317
and fittings. So the landlord brought an action against them seeing specific
performance and/or damages.
The judge at first instance granted an order for damages but refused an
order for specific performance. The Court of Appeal allowed an appeal against
that decision and ordered specific performance.19 But its decision was not
unanimous. There was a vigorous dissent by Millett LJ. No doubt prompted by
that dissent, the landlords sought and were given leave to appeal by the House
of Lords. The panel assigned to the case consisted of three English judges,
Lords Browne-Wilkinson, Slynn and Hoffmann, and two Scots – myself and
Lord Clyde. We decided to allow the appeal and to restore the judge’s order to
refuse specific performance. There were no dissents. The judgment was given
on 21 May 1997 by Lord Hoffmann.
I cannot now recall how the discussion went when we conferred at the end
of the hearing. But I think that it is probable that both Lord Clyde and myself
drew attention to how the issue would be dealt with under Scots law. This is all
the more likely as the report shows that among the cases cited in argument were
two decisions of the Court of Session. One was the Grosvenor Developments
case already mentioned, in which it was observed that the keep-open obligation
in that case was far too general to be enforced by specific implement.20 The
other was Retail Park Investments Ltd v The Royal Bank of Scotland,21 another
keep-open case, in which the Inner House held, contrary to what had been
thought to be the position in Grosvenor Developments, that the order of specific
performance that the landlords sought in that case would merely require the
tenants to continue to honour their obligation for the remainder of the term
of the lease and, as it was sufficiently precise and specific as to what had to be
done, the order should be granted. What we do know is that near the start of
his speech Lord Hoffmann permitted himself to make a comment on the two
systems which has prompted others to wonder whether he was right.
He had noted a few paragraphs earlier that a decree of specific performance
is a discretionary remedy and that the question for the House was whether the
Court of Appeal was entitled to set aside the exercise of his discretion by
the judge. Addressing then what he described as the settled practice in the
English courts, he said that there was no dispute about that, although as it had
never been examined by the House of Lords it was open to the landlords to
say that it rested on inadequate grounds or had been too inflexibly applied. In
Braddon Towers Ltd v International Stores Ltd Slade J said22 that, whether or not
it might properly be described as a rule of law, for many years practitioners had
advised their clients that it was the settled and invariable practice of the court
never to grant mandatory injunctions requiring persons to carry on a business.
Having examined the basis for it and how it had been applied in practice, Lord
Hoffmann concluded that the settled practice was based on sound sense. There
were no binding rules, but that did not mean that there could not be a settled
practice which the court would apply in all but exceptional circumstances. All
the reasons that the judge had given for refusing the order were proper matters
for him to take into account. So the appeal should be allowed.
But it is his comments on the two systems that are of continuing interest
and which deserve a second look. Having observed that it was the orthodox
doctrine by the end of the 19th century that the power to decree specific
performance was part of the discretionary jurisdiction of the court to do justice
in cases where the remedies available at common law were inadequate, he went
on to say this:23
“By contrast, in countries with legal systems based on civil law, such as
France, Germany and Scotland, the plaintiff is prima facie entitled to specific
performance. The cases in which he is confined to a claim for damages are
regarded as the exceptions. In practice, however, there is less difference
between the common law and civilian systems than these general statements
might lead one to suppose. The principles upon which English judges exercise
the discretion to grant specific performance are reasonably well settled and
depend on a number of considerations, mostly of a practical nature, which
are of very general application. I have made no investigation of the civilian
systems, but a priori I would expect that judges take much the same matters
into account in deciding whether specific performance would be appropriate
in a particular case.”
It was the practice in the House of Lords for every member of the Appellate
Committee, when we were giving judgment in the Chamber of the House –
as we had to do as we were giving judgment on the House’s behalf, to make
a speech stating what his decision was on the appeal. In that environment,
where the tradition is that every communication by a member of the House
when sitting in the chamber has to be made orally, that was the only way we
could do this. The leading judgment and any dissents from it had, of course,
to be fully reasoned. Where concurring speeches were being delivered it was
the usual practice for them to be confined simply to a statement of that fact. In
this case, all the other members of the Committee delivered formal speeches
agreeing with Lord Hoffmann. Lord Browne-Wilkinson and Lord Slynn both
said that they would allow the appeal for the reasons that Lord Hoffmann
had given. The wording that Lord Clyde and I adopted was subtly different.
We both said that we had the benefit, or the opportunity, of reading Lord
Hoffmann’s speech in draft, and we both said that we agreed with him that
the appeal should be allowed. But neither of us said in terms that we would
do so for the reasons he gave for making this order. Lord Clyde said, on the
contrary, that he wished to reserve his opinion on the approach which might
be adopted by the civilian systems. Perhaps I should have done so too. But at
least I did not endorse everything that Lord Hoffmann had said. I think that
this does leave me with room to examine the soundness of his observations
without any embarrassment. I should perhaps add that there would have
been a let out if I had said that I agreed with his reasons. We always comforted
ourselves with the thought that the use that phrase did not mean that we
agreed with everything that our colleague had said. But I do not have to resort
to that excuse.
ferry service.26 Having also mentioned Slade J’s decision, after reviewing the
authorities, in Braddon Towers v International Stores27 to refuse an interlocutory
injunction which would have required the defendants to reopen and operate
a supermarket, he said that in his opinion the existence of the practice was
beyond dispute but that none of the authorities contained a comprehensive
rationale for the practice. So he set about providing his own analysis.
He took first an objection which was to be found in the early cases based
on the impossibility of the court supervising the carrying out of the work.
He said under reference to Shiloh Spinners Ltd v Harding28 that this objection
had little force today. In that case Lord Wilberforce said that it was necessary
to move away from earlier authorities to reject as a reason against granting
relief the impossibility for the courts to supervise the doing of the work. He
thought also that objections based on doubts that the defendant might have
as to what he should do to avoid being in breach of the order, on difficulties
that the court might have in the interpretation and application of the order
and on the possibilities of evasion should carry little weight too. The argument
was that in view of such difficulties the order might be the engine rather than
the means of resolving disputes. The plaintiff, said Millett LJ, is the best judge
of his own interests. A sounder objection was that the court should not make
an order which obliged the defendant to do continuous acts involving labour
and care or to require the continuous employment of people. In his view it was
always necessary to consider the consequence to the defendant of granting the
relief as well as the consequence to the plaintiff of leaving him to his remedy in
damages.29 There was a fundamental objection to such an order, as if granted
for any length of time or for an indefinite period it would be oppressive. It
would expose the defendant to potentially large, unquantifiable and unlimited
losses which might be out of proportion to the loss which his breach of contract
had caused to the plaintiff. An award of damages, on the other hand, reflected
normal commercial expectations and ensured a more efficient allocation
of resources.
Recognising the objection that it would be a travesty of justice that a party
should be allowed to break his contract at pleasure by electing to pay damages
for the breach,30 he said that English law has adopted a pragmatic approach
in resolving that dispute. Courts of equity had never enforced all contracts.
The leading principle was that where damages are an adequate remedy it is
inappropriate to grant equitable relief. The moral strength of the claim to a
decree of specific performance was that the court would be doing no more
than requiring the defendants to do what they had undertaken to do. But that
26 Hooper v Brodrick (1840) 11 Sim 47; 59 ER 791; Lord Abinger v Ashton (1873) LR 17 Eq 358;
Powell Duffryn Steam Coal Co v Taff Vale Railway Co (1874) LR 9 Ch App 331; Attorney-General
v Colchester Corporation [1955] 2 QB 207 (QBD); Dowty Boulton Paul Ltd v Wolverhampton
Corporation [1971] 1 WLR 204 (Ch D); Gravesham Borough Council v British Railways Board
[1987] Ch 379 (Ch D).
27 Braddon Towers (n 22).
28 [1973] AC 691 (HL); he referred also to C H Giles & Co Ltd v Morris [1972] 1 WLR 307 (Ch D)
and Jeune v Queens Cross Properties Ltd [1974] Ch 97 (Ch D).
29 Co-operative Insurance (n 19) 304.
30 See Union Pacific Railway Co v Chicago, Rock Island and Pacific Railway Co 163 US 564, 600
(1896) (Fuller CJ).
Ch 14 Specific Implement and Specific Performance 321
(7) there would be the possibility of wasteful litigation if the order could not
be precisely drawn;
(8) it would be an injustice if the effect of the order were to be that the plaintiff
could secure more than was due to him;
(9) to carry on business in a hostile relationship is wasteful for the parties and
the legal system;
(10) in contrast to all the above, an award of damages would bring the litigation
to an end;
(11) it is undesirable for judges to make orders in terrorem under threat of
imprisonment which will work only if one does not inquire too closely
what they mean.
He concluded this analysis by saying that, as the principles of equity have
always had a strong ethical content, the needs of justice will override all
the considerations which support the settled practice where there is a gross
breach of personal faith or an attempt to use the threat of non-performance
as blackmail.
It is plain that some of these reasons for supporting the settled practice
overlap and run into each other. They can perhaps be compressed into three
main concerns about the risk of injustice if an order or specific performance
were to be made. The first was the difficulty, waste of time and expense of
litigation that would result from supervision of the order by the court: see
reasons (1), (2), (5), (6) and (7). The second was the undesirable effects of the
order on the party against which the order was made: see reasons (3), (4), (8)
and (9). The third was a public interest argument: the contrast between the
bringing of litigation to an end by an award of damages, and the undesirability
of judges engaging in a rather disreputable process by making an order which
lacks precision under the threat of imprisonment: see reasons (10) and (11).
From the standpoint of English law this is quite a formidable basis for saying
that the settled practice is founded on practical considerations and common
sense. But what about the proposition that, as they have that quality and are of
very general application, one could expect the civilian judges to take much the
same matters into account in their jurisdictions and, as the proposition implies,
come to the same conclusion?
An indication as to how this question should be answered can be found in
the reasons given by Lord President Rodger and Lord Kingarth in Highland
and Universal Properties v Safeway Properties.32 The leading opinion was given
by Lord Kingarth, but the Lord President added some penetrating observations
of his own with which ought to be looked at first as they set the scene for what
follows. The court had, of course, the advantage of having Lord Hoffmann’s
reasons in Co-operative Insurance before them, and the challenge of having to
explain why in their case they were to reach a different result. The tenants had
submitted that the English practice rested on important considerations which
should lead to the same result in Scotland, so the issue could not be avoided. In
the result the court’s reasoning was much fuller and more carefully expressed
than it might otherwise have been. After all, their own domestic law was well
settled and was not difficult to apply, even in a keep-open case. We can see this
in the fact that six years earlier, in Church Commissioners, the tenants accepted
that the landlords were entitled to an order declaring that the tenant was bound
to implement its obligations under the lease, and that they were entitled in
principle to an order for specific implement too. The effect of Lord Hoffmann’s
speech was to require the judges to take a fresh look at the Scots approach to see
whether it stood up to scrutiny.
The Lord President noted at the outset that the tenants, who were seeking
to have the order for specific implement set aside, were drawing on arguments
about the exercise of a discretion in English law to support the argument
that, irrespective of any discretion in a Scottish judge to withhold the order
where it would be unjust to grant it in the particular case, the court should not
ever make such an order in a keep-open case. Nevertheless he was prepared
to recognise that points which the English courts take into account may well
be factors which would have a bearing on the decisions to be reached under
Scots law and under other systems which share the same basic approach.33 But
he added that, when weighing the various factors, it was necessary to keep in
mind the experience of the Scottish courts. Leaving the detailed reasoning to
Lord Kingarth, he concentrated his attention on two inter-related factors. The
first was directed to Lord Hoffmann’s comments on the enforcement process
which I have grouped together in the first of the concerns about injustice:
the difficulty, waste of time and expense of litigation that would result from
supervision of the order by the court. The second was the suggestion that it
might not be possible to formulate a decree which tells the tenant sufficiently
clearly what he must do.
As to the first point, Lord Rodger said that unquestionably there are happier
circumstances to run a business. But it must also be noted that all the decree
did was to require the party to perform the commercial obligation which it
deliberately undertook when it entered into the contract. I would add that, for
the Scots lawyer, this is the logical starting point. It is quite striking how this
fundamental argument seems to be absent from the English judges’ analysis. The
explanation for this, of course, is that their starting point is that the remedy to
which a plaintiff is entitled as of right is the remedy of damages. It is not all that
surprising that taking this as the starting point leads to a different conclusion.
Lord Rodger then said that the penal aspects of the order which feature in Lord
Hoffmann’s list may not be the same in Scotland. The ordinary rule is that no
penal consequences follow on a failure to comply with the order unless it is
shown that the failure was a deliberate defiance of the order of the court. As for
the burden of continued supervision, the Scottish experience did not suggest
that applications to the court for its supervision had been frequent or had
consumed an undue amount of court time. Provided the decree was sufficiently
precise, proceedings for breach of the order should be the exception rather than
the rule. As for the second point, as to whether a sufficiently precise order could
be framed, the test in practice was whether a decree could be formulated which
would leave the tenants in no doubt as to the exact obligation which they were
bound to discharge. He saw no difficulty in satisfying the required standard of
precision in this case. The Lord President refrained from making any comment
as to the soundness of Lord Hoffmann’s reasoning under English law. His
message was that the Scottish experience of the way these cases were dealt with
suggested quite strongly that the objections were much less formidable in his
jurisdiction than they appeared to be in England.
Lord Kingarth34 set out, as background to his comments on Lord
Hoffmann’s reasons, the statements by Lord Herschell and Lord Watson in
Stewart v Kennedy35 that no assistance can be drawn from the English decisions
because the two countries approach the issue from different standpoints. From
that starting point he said that, while it was possible that matters might have
developed since then, the weight of recent Scots authority appeared to be firmly
against the tenants’ contentions. It was inconceivable that the court could have
said what they did in Church Commissioners36 case if they had thought that, as a
matter of general law, it was not competent to enforce the keep-open obligation
by specific implement. Interim orders by way of specific implement had
frequently been granted since that decision, and they had apparently not given
rise to any obvious difficulties of enforcement. He said that observations in
Grosvenor Developments37 that the obligation was far too general to be enforced
by specific implement were plainly obiter. In his view any practical difficulties in
policing such orders in Scotland could be exaggerated. He made the same point
when considering the objection that it would be difficult to draw up an order
which reflected the terms of the obligation with sufficient precision to pass
the required test for an order of this kind. That test would have to be satisfied
before the order could be granted, but not every single particular needed to be
spelled out. It would be sufficient to state what had to be achieved, leaving open
the precise means of doing so. The court could take account of the commercial
realities which formed the background to the undertaking of the parties’ mutual
obligations. He proposed a small adjustment to the order which had been made
by the Lord Ordinary for the avoidance of doubt, to clarify what was meant by
“the normal hours of business”. That change having been made, he was satisfied
that the order was sufficiently specific in its terms.
I recall very clearly my concern that the decision of the Court of Session to
grant specific implement on that case might be appealed to the House of Lords.
Even the most basic principles of Scots law could seem to be quite vulnerable in
that forum. They can do even today in the UK Supreme Court. There was usually
room for only two Scots Law Lords on any committee, and there are now only
two Scottish justices on the Supreme Court. They would be outnumbered by
the English by two to three and, if the committee was enlarged to seven instead
of the normal five, they would be outnumbered by two to five. The situation
would be likely to be even more critical after the judgment was delivered if,
as soon happened, Lord Rodger were to become one of the two Scottish Law
Lords. Having sat on the case in the Court of Session, he could not sit on any
appeal against that decision in London. That would have left me on my own
as the sole Law Lord from Scotland. Of course, I would have done my best to
hang on to what was established Scots law. But doing so is not always easy in the
face of suspicious English judges. I recall being saved from possible disaster in
another case, on an issue of Scots property law as to which the law of Scotland
has its own distinct rules where the two Scots were on one side and two of
the English on the other, only by the shrewd chairmanship of Lord Bingham.38
“I do not want to create alarm in the drawing rooms in Edinburgh”, he said as
we discussed the case after the hearing. “If the two Scots among us agree with a
unanimous Court of Session, who am I to disagree?” His was the casting vote.
In the event, the decision in Highland and Universal was not appealed, and it
has been followed without question in Scotland ever since.39
Britel Fund Trustees Ltd v Scottish and Southern Energy plc,40 which was the
first to come before the Court of Session after the decision in that case was
given, provides a useful guide as to how the decision in Highland and Universal
works out in practice. The landlords of a shopping centre in Dundee brought
proceedings against the tenants of one of their shop units which had ceased
trading there. The remedies that they sought included interdict and an order of
specific performance which required the tenants to keep the unit open. Various
interim orders were pronounced and the tenants, who had re-opened the shop,
entered into negotiations with the landlords. As the Lord Ordinary noted in
his opinion,41 the tenants accepted that they were in breach of the keep open
clause, that it was binding in general terms and specifically enforceable against
them and that a final order of specific implement should be pronounced. The
issue which was before the court was simply as to the terms of the final order.
There was no challenge to the decision in Highland and Universal which was,
of course, binding in the Outer House. But no attempt was made to keep the
issue open for review by a higher court. Counsel for the tenants derived three
propositions from Highland and Universal which were at the heart of the
discussion: that an order for specific performance should not innovate upon
the terms of the contract, although the court could make an order which
was more restricted or more particularised than those of the contractual
obligation; that it must be precise, so as to make the party against whom it
was pronounced aware of what was required of it; and that a party will not be
ordered to do the impossible or that which was outwith its power.42 The dispute
was whether, as the tenants contended, the proposed final order purported to
bind the tenants in circumstances in which they would not be bound by the
contractual obligation. Having examined the contract, the Lord Ordinary was
persuaded that he should not pronounce a final order in the terms proposed
by the landlords and deferred a final decision to afford them an opportunity to
reconsider their position and, if so advised, reformulate the terms of the order
they were asking the court to pronounce. The report does not say what then
happened, but the usual procedure in such cases is for the parties to present the
court with an agreed form of order, which the court then makes without having
to deliver another judgment.
In AMA (New Town) v Law,43 which is the only case in which the decision
in Highland and Universal has been discussed in the Inner House after the
judgement in that case was given, the pursuer was seeking implement of
a contract to buy flats in a housing development by the making of an order
against the purchaser to pay the price. It was not a keep-open case. The
question was whether the pursuer could be compelled to seek the alternative
remedy of damages. It had, contrary to the usual practice, withheld delivery
of the title to the flats until the price was paid. The defenders, for their part,
were not willing to complete the contract. Their argument was that the pursuer
could not obtain the price while retaining the title, as these were concurrent
and reciprocal obligations. As the contract had not been completed, the only
remedy was damages. This was rejected, applying White & Carter (Councils)
Ltd v McGregor, on the ground that it was for the pursuer as the innocent
party to choose how to enforce its rights.44 The decision itself is controversial
and the reasons for it may require to be looked at again one day.45 But it was
accepted, following an observation by Lord President Rodger in Highland and
Universal, that there could be exceptional circumstances in which implement
would impose a burden on the contracting party which was completely out
of proportion to the remainder of the contract.46 So far as it goes, this passing
reference can be taken as a recognition that the way Highland and Universal
dealt with the question of specific implement was soundly based and is not
open to question. Although the decision differed from that of the House of
Lords in the Co-operative Insurance case,47 there appears to be no pressure from
Scotland for a change in the law on that particular issue.48
That is not say, however, that Highland and Universal has escaped criticism.
In a recent comparative analysis of “keep open” covenants in Scotland and
England49 it has been argued, not only that the two jurisdictions are not as
different as has been suggested, but also that the current Scots law as declared
in Highland and Universal is a recent, radical and mistaken departure from
previous authority. The authors of this chapter, David Campbell and Roger
Halson (“the authors”), accept that, from the perspective of what they describe
as the performance interest, the decision in Highland and Universal is bound
to be preferable to that in Co-operative Insurance. But they say that Lord
Rodger’s contrast between the two cases involves an excessive simplification of
the laws of both jurisdictions and that this amounts to a real error in respect
of keep-open covenants.50 They make three preliminary points in support of
this argument. First, while accepting that specific implement is the “primary”
remedy for breach of Scotland, it is not a common remedy as in practice it is
sought comparatively rarely and has even more rarely been granted. Second,
prior to the decision of the Inner House in Retail Parks,51 the position in Scots
law was for all practical purposes indistinguishable from that in England52 and
the decision of the Inner House in Retail Parks represented an effective reversal
of the law as it was up to that date. And third, the cases decided after Retail
Parks did not provide unambiguous support for the view of Scots law take in
Highland and Universal. If the law is as that case left it, this did not represent
the continuity of the Scots legal tradition but a remarkable change in the law of
keep-open covenants because, prior to Retail Parks, Scots law had entertained
quite the opposite position to the one for which Highland and Universal had
received such affirmation from the perspective of the performance interest.
It is hard to disagree with the first proposition. There are various reasons
why, leaving aside considerations of hardship and impossibility, the court
will decline to grant such an order: where the obligation is to pay a sum of
money, for example, or to deliver an article which is readily procurable on the
market, or the obligation involves an intimate relationship such as service or
partnership.53 And at first sight, the second flows from the first, as looked at
overall, it is probable that in practice the application of the remedies did not
differ much between the two jurisdictions. It is certainly true that, prior to the
decision of the Inner House in Retail Parks, it was thought that the possibility
of obtaining an order for specific implement in a keep-open case had been
precluded by what had been said in Grosvenor Developments because the terms
of the obligation, as reflected in any order that might be made to enforce it,
were too vague. As noted above,54 it was observed in that case that an action for
specific implement of the keep-open clause would fail not only because the order
sought implement of the obligation in circumstances in which performance
would not be required under the lease, but also because it would be impossible
of enforcement. In Postel Properties Ltd v Miller and Santhouse plc55 the Lord
Ordinary refused to make an order for specific implement of a keep-open
clause on the view that no case had been put before him where such an onerous
obligation had been imposed by a court and that in Grosvenor Developments,
which was the only case that came anywhere near it the proposition had been
firmly rejected. In Church Commissioners 56 the Inner House, sitting as a court of
five judges, approved the decision in Grosvenor Developments. And in Overgate
Centre Ltd v William Low Supermarkets Ltd57 the Lord Ordinary, following what
had been said in Grosvenor Developments and Postel, held that the terms of the
proposed order of specific implement was too wide and too unspecific in its
terms and refused to make the order.
But I believe that, on closer examination of all these cases, the possibility
of enforcing a keep-open clause by an order for specific performance had not
been nearly as clearly negatived as Campbell and Halson are suggesting. For
one thing, as the judges in both Retail Parks and Highland and Universal were
right to observe later,58 the observations in support of that view in Grosvenor
Developments were obiter. The issue in that case was whether it was competent
for the court to enforce a positive obligation by means of an interdict. An
order for specific performance was not being sought in that case, and it is clear
from the context in which the observations were made that the point was not
fully argued. For another, the decisions of the Lords Ordinary in the Postel
and Overgate cases, in so far as they were based on what was said in Grosvenor
Developments, were from the outset open to review by the Inner House in a
case where the issue as to whether an order for specific implement should be
granted was fully argued. And, while the authors were right when they said that
the Grosvenor Developments was explicitly and unambiguously followed by the
five judges in Church Commissioners, the issue in that case once again was as to
the competency of enforcing a positive obligation by an interdict.
The suggestion that the views in regard to an order for specific implement
in Grosvenor Developments had been endorsed in Church Commissioners was
rejected in Retail Parks, on the ground that the court in Church Commissioners
was dealing with a subsidiary issue about the enforcement of a hypothetical
application based on the particular terms in which the lease was expressed.59 As
already noted,60 counsel for the tenants in that case accepted that the landlords
were entitled in principle to an order for specific implement. It is worth
noting too that in Highland and Universal Lord President Rodger regarded my
observations in Church Commissioners as supporting the view that, as a matter
of general law, it was competent to enforce obligations of this kind by such an
order.61 For these reasons it seems to me that the question whether an order
for specific implement could ever be made in a keep-open case was still an
open question when it came before the Inner House in Retail Parks. Contrary
to what the authors believe, I think that its decision that the order sought by
the pursuers in that case would merely require the defenders to honour their
obligation for the remainder of the term of the lease, and that it passed the test
of precision and specification laid down in the authorities, did not depart from
previous authority on this issue.
This leads me to the third proposition. As will be clear for what I have said
so far, I do not accept the authors’ assertion62 that the view taken in Highland
and Universal of the law prior to Retail Parks was in important respects wrong.
They are right, however, to conclude that the law as applied in Retail Parks is
now regarded in Scotland as having been settled by Highland and Universal
and that litigation there which directly opposed a decree of specific implement
would be fruitless, save in exceptional circumstances. That was the view of the
58 Retail Parks (n 21) 247 (Lord Cullen); Highland and Universal (n 7) 310 (Lord Kingarth).
59 Retail Parks (n 21) 247 (Lord Cullen). See also the discussion of this point in Church
Commissioners (n 11), 661 (Lord President Hope); 666 (Lord Clyde).
60 See Church Commissioners (n 11) 654.
61 Highland and Universal (n 21) 310.
62 AMA (New Town) (n 43) 487.
Ch 14 Specific Implement and Specific Performance 329
Lord Ordinary, Lord Drummond Young, in one of the few keep-open cases that
have reached the Court of Session, all in the Outer House, since the decision
in that case.63 Even if there was something to be said for the view that the
Inner House over-reached itself in Highland and Universal, I see no prospect
of the decision in that case being overruled or departed from in Scotland in
the foreseeable future. The late Lord Rodger was one of the outstanding jurists
of his generation. His judgments are universally regarded as carrying great
weight, especially in Scotland. The prospect of this issue ever reaching the UK
Supreme Court, where the Scots judges would be in minority, has receded now
that permission is required for an appeal from the Court of Session to that
court.64 The old system, whereby an appeal to that court lay as of right, has been
departed from. It is hard to see a direct challenge to the decision in Highland
and Universal getting over that first hurdle.
The authors go on, however, to develop another criticism of that case which
needs to be examined too. It affects the view that one might take of whether,
leaving aside the question whether that decision brought about a change in
the law, it was soundly based. Having applauded65 what they describe as the
wisdom of Millett LJ, when he said that it was always necessary to take into
account the interests of both parties,66 they say that the judgment in Highland
and Universal misses the point as it concentrated so much on the supervisory
difficulties.67 This should not have been the main point taken, as it prevented
proper consideration of the issue of interpretation of the covenant. Their main
concern, as expressed prior to their discussion of the cases,68 is that what really
matters in commercial practice is clarity of the law’s rules, not the mandatory
stipulation of outcomes by the law of contract, around which commercial
parties can plan and bargain. A declaration that keep-open covenants will
actually be enforced according to their terms jeopardises that clarity. If, as in
English law, compensatory damages are the default remedy, parties should be
assumed to have contracted on that basis. When a party contracts on such a
basis, it never gets a guarantee of literal performance. What gets is a guarantee
that the court will impose on the party in breach a secondary remedy which
will, by default, take the form of compensatory damages. The court should
have focussed on the point that, prior to Retail Parks, a keep-open covenant
would almost certainly have been interpreted in the English way. As the lease
in Highland and Universal was entered into in 1979, it should have been
interpreted on the basis of the law that was in force at that time which was
indistinguishable from English law. So too should the lease in Retail Parks,
which was entered into in the same year. It was unhelpful for Lord Rodger
to focus almost entirely on the supervision issues, as it diverted his attention
from this crucial issue.
It seems a bit unfair to criticise the judges in Highland and Universal for
concentrating almost exclusively on the supervision issues when they featured so
63 Oak Mall Greenock Ltd v McDonald’s Restaurants Ltd [2003] ScotCS 135 (OH) [5].
64 Courts Reform (Scotland) Act 2014 (asp 18) (UK) s 117.
65 AMA (New Town) (n 43) 486.
66 Co-operative Insurance (n 19) 304.
67 AMA (New Town) (n 43) 493.
68 AMA (New Town) (n 43) 470.
330 Contract in Commercial Law
enter into their contract under a system of law such as ours must accept that the
way the law is to be applied in their case is not frozen at any particular point of
time but is always open to interpretation by the court according to the proper
law of the contract. As the premises were in Scotland the proper law must be
taken to have been Scots law. I do not, for this reason, agree with the authors
that the judges in Highland and Universal missed the point or that the focus of
their judgment was misplaced.
I see, then, no escape from the conclusion that there is, and will continue
to be, a fundamental difference of approach between the two systems as to
the performance of the obligation that has been agreed upon. In Scots law
there is a basic entitlement to insist upon the performance of it. Factors such
as possible hardship to the party in breach are dealt with by the exercise of a
discretion by the court, to be weighed against that entitlement. For the English
courts there is no such basic entitlement which has to be outweighed. One may
still argue as to whether this difference is more theoretical than real – whether,
as Lord Hoffmann put it,76 there is less difference between the common law
and civilian systems than one might suppose and that judges can be expected
to take much the same matters into account in deciding whether specific
performance or specific implement would be appropriate in a particular case.
But I do not think that one can now overlook the fact that the two systems
approach the issue from different starting points and that, as the courts in
Scotland are likely to favour the entitlement to specific implement, the results
are likely to be different too. There are exceptions which may be developed
further, and it may be that commercial needs of the kind that the authors
favour will strengthen the argument for a more equal balance in the choice of
remedy between the two parties to the contract.77 I do not see this as likely to
happen for quite some time, however, and in the absence of any enthusiasm
for change on the part of the Scottish Law Commission legislation to address
the issue is not in prospect. There are some issues on which the Scots like to
differ from the English, and this is one of them.
76 See n 23.
77 See A Smith, “Specific Implement” in K Reid and R Zimmermann (eds), A History of Private Law
in Scotland (OUP 2000) vol 2, 219.
15
Commonwealth v Amann
Aviation Pty Ltd 25 Years On:
Re-examining the Problem
of Pre-breach Expenditure in
Contract Law
David Winterton
Introduction
It is now 25 years since the High Court of Australia’s landmark decision in
Commonwealth v Amann Aviation Pty Ltd (“Amann”),1 which raised fundamental
questions in relation to the assessment of damages following the repudiation of
a commercial contract. In particular, Amann presented the question of whether,
following the promisor’s wrongful repudiation, a promisee who is unable to
prove that it would have made a net profit from the contract’s performance
can nevertheless recover reasonable expenditure incurred, but not recouped, in
preparing for such performance. Amongst other matters, Amann also raised the
question of which party bears the onus of proof in relation to the recoupment
(or non-recoupment) of pre-breach expenditure in these circumstances. The
case has provoked significant academic commentary,2 but important questions
remain unresolved. The purpose of this chapter is to identify, and attempt to
answer, some of these questions.
After briefly outlining the facts and decisions below, this chapter proceeds
to undertake a close review of the different approaches taken by the Justices
in the High Court, with the aim of identifying those aspects of their Honours’
reasoning that are defensible and those aspects which, it is respectfully submitted,
333
334 Contract in Commercial Law
are not. As a result of this process, a number of claims will be defended. These
claims include – but are not limited to – the following:
(1) If awards for reasonable wasted expenditure are understood simply as a
particular application of “the Robinson v Harman principle”,3 the promisee
should not have the benefit of a “legal presumption”4 in favour of the
recoupment of such expenditure when it is uncertain whether this party
would (eventually) have profited from the contract’s performance. This,
however, does not preclude the existence of an “evidentiary” onus on the
promisor, as found by both Toohey J and Gaudron J in Amann, to raise
doubt as to whether the promisee would have recouped its pre-breach
expenditure before a decision-maker will require the promisee formally to
prove the likelihood of recoupment.
(2) If, contrary to the first claim, a “legal presumption” in favour of the
recoupment of wasted expenditure is found to be supported by
the authorities,5 this presumption should not extend to financial benefits
that were not (expressly or impliedly) promised under the contract, even
if such benefits can be said to have been within the parties’ reasonable
contemplation at the time of formation.
(3) The foregoing claims are also consistent with recognising that the chance of
realising any commercial benefits that may have accrued to the promisee as
a consequence of the contract’s performance are recoverable if the promisee
can establish the loss of this chance with sufficient certainty in accordance
with established principles.6
(4) Consistently with the approaches taken by Deane and McHugh JJ in Amann,
when determining what position the promisee would have occupied “but
for” the promisor’s repudiatory breach, there should be an appropriate
discount made to reflect the existence of any relevant, non-negligible
countervailing contingencies in accordance with the principles enunciated
in Malec v JC Hutton Pty Ltd,7 and Sellars v Adelaide Petroleum NL.8
3 This is the principle that when awarding damages for breach of contract the aim is, “so far
as money can do it”, to put the promisee into “the same situation … as if the contract had
been performed”: Robinson v Harman (1848) 1 Ex 850 (Exch), 855 (Parke B). For detailed
consideration of what application of this principle entails, see D Winterton, Money Awards in
Contract Law (Hart Publishing 2015).
4 As Professor Swadling has observed, the word “presumption” is used in a variety of different
senses within the law: WJ Swadling, “Explaining Resulting Trusts” (2008) 124 LQR 72, 75–77.
But as Swadling explains, the existence of a strict “legal presumption” connotes a rule that proof
by evidence of one fact (eg the incurring of certain reasonable expenditure in reliance on a
contract) gives that party to the litigation the benefit of a second fact (that such expenditure
would in fact have been recouped “but for” the breach), so that the burden of proof then lies
on the opposing party to adduce evidence to rebut this presumed fact. As Swadling proceeds to
explain, in the case of a true “legal presumption” the failure to rebut means that “the tribunal of
fact must find the secondary fact proved” (emphasis in original).
5 Note that Lücke has argued convincingly that there was not majority support for the
“presumption of recoupment” in Amann itself: Lücke (n 2) 145. This point is discussed further
below.
6 See eg Howe v Teefy (1927) 27 SR (NSW) 301 (SC); cf Chaplin v Hicks (1911) 2 KB 786 (CA)
where the lost chance was one that was in fact promised under the contract.
7 (1990) 169 CLR 638 (HCA).
8 (1994) 179 CLR 332 (HCA).
Ch 15 Commonwealth v Amann Aviation Pty Ltd 25 Years On 335
(5) As far as Amann itself is concerned, it was McHugh J who decided the
case correctly.
(6) Finally, in cases where the promisee cannot establish with sufficient
certainty that it would have recouped its reasonably wasted expenditure,
consideration should be given to the development of a mechanism for
apportioning between the two contracting parties this loss having regard
(at least) to the parties’ respective contributions in bringing about the
contract’s early termination.
9 While it was arguable that Amann’s breaches were sufficiently serious to justify termination at
common law, Beaumont J at trial and Sheppard J in the Full Federal Court held that they were
not so serious.
10 Amann Aviation Pty Ltd v The Commonwealth (1988) 100 ALR 267 [136] (FCA).
11 Amann Aviation Pty Ltd v The Commonwealth (1990) 22 FCR 527.
12 Amann (n 1) 159.
336 Contract in Commercial Law
Court in TC Industrial Plant Pty Ltd v Robert’s Queensland Pty Ltd.13 A majority
of the Full Court held that Amann’s damages should be substantially increased to
$5,475,184 (plus interest), which represented a full reimbursement of Amann’s
(reasonable) net wasted expenditure ($5,219,135), plus the return of a security
deposit ($113,000) and reimbursement for certain termination payments
that Amann was required to make to its employees ($143,049). A significant
factor in the court’s reasoning to this figure was its assessment of the prospect
of the Commonwealth’s valid termination of the contract via cl 2.24 at some
point during the parties’ three-year contract as only 20% and its consequential
conclusion that no discount should be made for this contingency.
On appeal to the High Court, six different judgments were delivered but the
Full Federal Court’s award in Amann’s favour was upheld by a bare majority,
comprising Mason CJ and Dawson, Brennan and Gaudron JJ. The next part
of this chapter undertakes a comprehensive review of the various different
approaches adopted in the High Court, but for now the following important
observations may be noted:
(1) In opposition to what might then have appeared to be the position under
English law,14 all the High Court Justices agreed that in an action for breach
of contract a claimant cannot recover its reasonable wasted expenditure,
sometimes misleadingly described as “reliance damages”,15 in the alternative
to an award aiming to uphold the Robinson v Harman principle. Such an
award nevertheless may be available as a particular application of (or in
substitution for) this principle in circumstances where it has not been
established with sufficient certainty that the promisee either would or
would not have profited from the contract had the breach not occurred.
(2) Except for McHugh J, all of the Justices held that in an action for damages for
breach of contract, once the claimant demonstrates that it has (reasonably)
incurred expenditure in reliance upon the contract’s existence, the onus to
some extent shifts to the defendant to show that the claimant would not (or
may not) have recouped this expenditure “but for” the breach.16
(3) A majority of the court (Mason CJ and Dawson Brennan and Deane JJ)
appeared to hold that the basis for the aforementioned shift in onus is the
raising of a rebuttable “legal presumption” in the promisee’s favour that it
would have recouped any expenditure reasonably incurred in preparing
for the contract’s performance.17 By contrast, Toohey and Gaudron JJ
took the view that there is merely an “evidentiary” onus on the defendant
to raise the possibility that the claimant would not have recovered its
reasonable wasted expenditure, with the formal onus of proof remaining
on the claimant to prove the financial position it would have occupied
“but for” the breach.
(4) McHugh J took an altogether different approach from the rest of the court,
awarding Amann substantial damages on the basis that this was necessary
to uphold the Robinson v Harman principle directly by putting Amann into
the position it would have been in had the Commonwealth not repudiated the
agreement rather than because the Commonwealth had failed to prove that
Amann would not eventually have recouped its wasted expenditure.
18 Amann (n 1) 74.
19 Applying Hadley v Baxendale (1854) 9 Ex 341 (Exch).
338 Contract in Commercial Law
justified bestowing upon Amann the benefit of a “legal presumption” that the
expenditure it incurred in preparing for the contract’s performance would have
been recouped. The result of this was effectively to reverse the usual onus of
proof on the promisee to prove its loss with sufficient certainty so that it was
now for the promisor to demonstrate, on the balance of probabilities, that the
promisee’s reasonably incurred pre-breach expenditure would not in fact have
been recouped.
Although Mason CJ and Dawson J recognised that prior to Amann it
could not be said that this so-called “presumption of recoupment” was part of
Australian law, their Honours found persuasive support for the existence
of such a presumption in a number of English and American authorities,20
as well as the views of certain leading commentators in those jurisdictions.
In proceeding then to explain why they were of the view that Australian law
also should recognise the existence of the “presumption of recoupment”, their
Honours commenced with a discussion of the High Court’s important earlier
decision in McRae v Commonwealth Disposals Commission (“McRae”),21 which
in their view:
“‘illustrates the proposition that a plaintiff has a prima facie case for recovery
of wasted expenditure once it is established that the expense was incurred
in reliance on the promise of the party in breach, there being a failure of
performance by that party’.22
Although Mason CJ and Dawson J recognised that, due to McRae’s peculiar
facts, its reasoning “does not depend upon the presumption that an innocent
party would not have entered into the contract unless it would at least have
recovered its reliance expenditure under the contract had it been performed”,23
their Honours nevertheless held that the High Court’s reasoning in that case
was “not inconsistent with the application, in appropriate cases, of … [the
aforementioned] presumption” and that the existence of such a presumption
“has much to commend it … [because] it is just and fair that the repudiating
party should bear the onus of showing that the party not in breach would have
made a loss on the contract”.24
This may persuade some, but the preceding statement demonstrates that,
as both Toohey and Gaudron JJ recognised, strictly speaking, McRae is not
authority for the strict “legal presumption” that Mason CJ and Dawson J
recognised in Amann, which certainly provides a basis for questioning
the validity of their Honours’ reasoning. The same point has been made
forcefully by Ng, who argues convincingly that the existence of the so-called
legal presumption in favour of recoupment in the United States and England
“is predicated upon a fundamentally different conception of the basis for
reliance damages to that which prevails in Australia”.25 Ng explains that this is
20 For example, L Albert & Son v Armstrong Rubber Co (1949) 178 F 2d 182 (2d Cir) and CCC Films
(London) Ltd v Impact Quadrant Films Ltd [1985] 1 QB 16 (QBD).
21 (1951) 84 CLR 377 (HCA).
22 Amann (n 1) 89.
23 Amann (n 1) 89.
24 Amann (n 1) 89.
25 Ng (n 2) 139.
Ch 15 Commonwealth v Amann Aviation Pty Ltd 25 Years On 339
26 For discussion, see M Owen, “Some Aspects of the Recovery of Reliance Damages in the Law of
Contract” (1984) 4 OJLS 393, 395.
27 Ng (n 2) 140. In consequence, Ng favours the approach taken by Gaudron and Toohey JJ on this
point, as is explained below.
28 Note that it is possible (and perhaps preferable) to see the “cause” of this lost opportunity not as
the Commonwealth’s repudiation of the agreement but rather as Amann’s decision to terminate
for this repudiation: see Seddon (n 2), drawing an analogy with the High Court’s reasoning in
Shevill v Builders Licensing Board (1982) 149 CLR 620 (HCA).
340 Contract in Commercial Law
recouped its reliance losses should fall on the contract-breaker and not on the
(innocent) claimant”.29
But this says nothing at all in relation to how far the benefit of this
presumption should go when determining the promisee’s future hypothetical
position and it is clearly necessary that the law impose some limit here. The
limit chosen by Mason CJ and Dawson J appears to be (some but perhaps
not all of) those losses that were within the parties’ reasonable contemplation
at the time their contract was formed and therefore not “too remote”. With
respect, however, this cannot be the appropriate place at which to draw
the line. The opportunity for Amann to renew its arrangement with the
Commonwealth was not something that the Commonwealth ever promised to
provide and, if Amann’s lost chance of renewal is indeed included, consistency
of legal principle demands that all other not “too remote” possible losses
also should be relevant to an assessment of Amann’s prospects of recouping
its expenditure.
One does not need an overly active imagination to realise that the adoption of
this as a general principle may lead to considerable difficulties in its application
to certain cases, particularly because, as already observed, the promisee will
generally, if not always, be in a significantly better position to adduce evidence
in relation to the (possibly speculative) benefits that it hoped to reap as a
consequence of the contract’s performance. In Amann, for example, it seems
likely that Amann was better placed to adduce evidence in relation to the likely
prospects of obtaining a renewal (and possibly further renewals) because this
chance must have formed an integral part of its overall commercial strategy
and, accordingly, its decision to enter into a contract with the Commonwealth
in the first place.30
This, of course, is not to say that Amann could not seek to recover the profit
it would have made had the parties’ arrangement been renewed. But the
onus should have been on Amann to prove the existence of this (speculative)
prospective loss both because it was better placed to adduce evidence in relation
to the chance of renewal and also because only this approach properly recognises
the fundamental distinction, generally recognised by the law, between benefits
that a promisor has a legal obligation to provide and benefits that the promisee
hopes for or expects as a consequence of the contract’s performance. Such a
claim would be in the nature of one for the “loss of a chance” to make a further
29 A Burrows, Remedies for Torts and Breach of Contract (3rd ed, OUP 2004) 70. A notable aspect
of the Amann case was that the claimant was not entirely “innocent”. Also see Learned Hand J’s
famous statement in L Albert & Son v Armstrong Rubber Co (n 20) 189, that where it is difficult
to know “what the value of the performance would have been … it is a common expedient and
a just one … to put the peril of the answer upon that party who by his wrong has made the issue
relevant to the rights of the other. In principle therefore the proper solution would seem to be
that the promisee may recover his outlay in preparation for performance, subject to the privilege
of the promisor to reduce it by as much as he can show that the promisee would have lost, if the
contract had been performed”.
30 This is true even if, as in Amann, the Commonwealth ultimately had the power to decide whether
to grant a renewal. The likelihood of a renewal is a fact that must be determined objectively
and, in this regard, Amann would appear to have been better placed to adduce evidence in
relation to this matter on the assumption that it would have formed an integral part of its overall
commercial strategy and thus its initial decision to contract with the Commonwealth.
Ch 15 Commonwealth v Amann Aviation Pty Ltd 25 Years On 341
31 (1927) 27 SR (NSW) 301 (SC). Compare Chaplin v Hicks (1911) 2 KB 786 (CA) where the lost
chance was a benefit that was promised under the contract.
32 An assumption that, his Honour notes in Amann (n 1) 174, was made by the Full Court.
33 Amann (n 1) 174 (emphasis added), approved in Lahoud v Lahoud [2009] NSWSC 623 [111]
(Ward J). A similar point is made by Treitel in “Damages for Breach of Contract in the High
Court of Australia” (n 2).
342 Contract in Commercial Law
certainty also must be taken into account. However, Mason CJ and Dawson J
specifically disavowed such an approach, refusing to discount Amann’s award
for wasted expenditure by reference to the proven 20% chance that the
Commonwealth would validly terminate the contract under cl 2.24. Their
Honours’ stated reason for doing so was because this was an event that was
“unlikely” to happen. But as Deane J explained, this was inappropriate because
this chance was “a superimposed risk” that flowed “not from performance of
the contract but from Amann’s own breach”,34 which meant that it should have
been taken into account in the usual way that such contingencies are (that
is, via a degree of probabilities discount rather than a balance of probability
analysis).35
34 Amann (n 1) 131. Deane J’s reasoning is considered immediately below, but it is noteworthy that
the High Court subsequently endorsed his approach to the quantification of damages in relation
to future hypothetical unknown losses in Sellars (n 8).
35 See eg Malec (n 7).
36 Amann (n 1) 142.
Ch 15 Commonwealth v Amann Aviation Pty Ltd 25 Years On 343
all the other judges recognised, is that it was not promising anything in this
regard. Lücke agrees, explaining that there are “great difficulties with this aspect
of Brennan J’s judgment” because even if “the negotiating advantage may have
been a likely, or even a necessary consequence of the three-year contract … it
does not follow that it had itself been promised”.37 Moreover, Lücke goes on to
observe that:
“On Brennan J’s view, the contract would, by freezing the tender conditions,
have stultified the freedom of the Commonwealth to negotiate in 1990 …
[so that the] Commonwealth could, for example, no longer have offered to
provide the planes itself in order to attract a wider range of tenderers from
which to select a truly reliable organisation.”38
A further important point to make in relation to Brennan J’s analysis concerns
his view as to the relevance of the trial judge’s finding that there was a 20%
chance that the Commonwealth would have validly terminated the contract
in any event. Like Deane J, and in my view correctly, Brennan J recognised
that this finding was “relevant to the value of Amann’s contractual benefits”.39
However, unlike Deane J, his Honour held that discounting was inappropriate
here because the Commonwealth had failed to discharge its onus of proving
that Amann would not recoup its expenditure. Assuming that the prospect
of renewal was indeed a benefit “implicit in Amann’s right to perform”, this
reasoning is defensible because a failure to show that 80% of the value of the
prospect of renewal was less than Amann’s wasted expenditure equates to a
failure to show that Amann would not have recouped its wasted expenditure.
That being said, there does remain an (at least apparent) incongruity in his
Honour’s decision to take into account Amann’s prospect of renewal in
computing its award for reasonable wasted expenditure whilst not taking into
account the chance that the Commonwealth would have validly terminated the
contract in any event, which it is respectfully contended arises as a consequence
of his Honour’s artificial construction of the parties’ contract.
37 Lücke (n 2) 140.
38 Lücke (n 2) 140.
39 Amann (n 1). The fact that his Honour generally agreed with Deane J’s approach is supported
by his statement (at 114) that discounting would have been appropriate had Amann “borne the
onus of proving its damages as expectation damages”.
40 Amann (n 1) 141 (emphasis added). The reference to “any evidence as to expenditure” surely
means “any evidence as to recoupment of expenditure”.
344 Contract in Commercial Law
“in effect, an evidentiary onus on the defendant to show that receipts would
not have equalled outlay by the plaintiff, though ultimately the aim is to
determine what loss has occurred on the basis of all available evidence.”41
According to Toohey J, it followed from this that “the fairest method of assessing
damages … in circumstances of uncertainty, is to balance contingencies that
are significant”, given that assessing the likelihood of hypothetical events “is
not simply a matter of proof … [but rather one that] involves prediction and
conjecture”.42 However, his Honour was also of the view that, when doing this,
“there is no requirement of a mathematical appraisal of the likelihood of every
possible future occurrence”.43 Whilst recognising that “views will [no doubt]
differ as to how these possibilities should be reflected in the quantification of
Amann’s damages”, his Honour concluded that, since the prospects of renewal
(or non-renewal) and of the Commonwealth’s early termination were all
“significant”, Amann’s loss was “most fairly represented” by an award of 50% of
its wasted expenditure.44
Although eschewing the commendable attempts at scientific precision
evident in some of the other judgments, Toohey J’s approach, in effectively
apportioning Amann’s wasted expenditure between Amann and the
Commonwealth, is certainly not without some appeal in light of the parties’
respective contributions in bringing the contract to an end.45 Additionally,
Toohey J’s view that the onus of proof resting on the defendant in defending
a claim for reasonable wasted expenditure is merely “evidentiary” in nature
is compelling. It is compelling especially given that his Honour correctly
observed that, when deciding McRae, it was only necessary for the High Court
to hold that the defendant was under an evidentiary (rather than presumptive)
onus given that, in the circumstances of the case, it was not possible for the
Commonwealth Disposals Commission to discharge even this weaker burden.
Toohey J’s stated reason for apportioning Amann’s wasted expenditure
between it and the Commonwealth was that balancing “contingencies that are
significant” is “the fairest method of assessing damages … in circumstances of
uncertainty”.46 It was suggested that there is undoubtedly some appeal in this
approach. It is also the case that it is not all that dissimilar from the analyses
favoured by Deane and McHugh JJ, even though their Honours each opted
for a lesser degree of discounting in accordance with the Full Court’s factual
findings. Significantly, however, Professor Seddon has identified an alternative
basis upon which a result similar to that reached by Toohey J might be defended,
which involves recognising that “Amann’s losses were at least partly attributable
to its own fault in being so far behind in preparing to perform the contract”.47
41 Amann (n 1) 142, noting that “It may be assumed, in the absence of evidence to the contrary, that
the plaintiff would have recovered his costs”.
42 Amann (n 1) 145, citing Malec (n 7) 642.
43 Amann (n 1) 147.
44 Amann (n 1) 147, noting that this concurred with the award made by Sheppard J (dissenting) in
the Full Federal Court.
45 Seddon advocates an approach that reaches a similar conclusion to Toohey J, but on the basis
explained further in the text: Seddon (n 2) 219.
46 Amann (n 1) 143.
47 Seddon (n 2) 219.
Ch 15 Commonwealth v Amann Aviation Pty Ltd 25 Years On 345
The reason why Amann’s arguable failure to be “ready, willing and able” to
perform its own future obligations at the time of the Commonwealth’s wrongful
termination was not made an issue in the High Court appears to be that the
findings of fact below on this issue were accepted for the purposes of the appeal.48
It is at least arguable, however, that even if Amann’s breaches were not sufficiently
serious to constitute a repudiation of its agreement with the Commonwealth,
a court should nevertheless be able to take them into account when deciding
upon the extent to which the Commonwealth should have to bear responsibility
for Amann’s wasted expenditure, given that these breaches clearly contributed to
the contract’s early termination. The problem with this suggestion, as Professor
Seddon makes clear, is that the common law’s present “switch mechanism” tends
to produce “all or nothing outcomes”, like that reached in Amann, and does not
allow for some kind of apportionment of loss between the parties. In opposition
to this approach Professor Seddon argues that:
“the law should more readily embrace mechanisms for reducing damages in
respect of a loss suffered by the plaintiff if it could be said that part of the
loss was caused in some way by the plaintiff or was the responsibility of
the plaintiff ”.49
More will be said about this suggestion later, but first it is necessary to finish
reviewing the various judgments in Amann.
Turning next to Gaudron J’s approach, her Honour agreed with Toohey J
that there was only a practical or evidentiary onus on the Commonwealth to
show that Amann would not have recouped its expenditure.50 Her Honour
nevertheless reached a different conclusion to Toohey J, agreeing in the result
with the award made by Mason CJ and Dawson J, and Brennan J. The critical
difference between Gaudron J’s approach and that of all the other members of
the court was in relation to her estimation of the value that should be attributed
to the planes that Amann would own upon the conclusion of the initial three-
year contract. Thus, while her Honour said that it “would be wrong to assess
the value of Amann’s contractual rights” by reference to the prospect of renewal
since this was not a benefit that the Commonwealth ever promised to provide,
she also held that:
“it would be equally wrong, and contrary to common sense, to assign a value
to Amann’s planes at the end of the contract period without regard to the
Commonwealth’s likely need for aerial surveillance.”51
48 While it is recognised that the Amann appeal was concerned solely with the issue of damages, the
question of Amann’s readiness and willingness to perform was (at least arguably) relevant to this
issue and not just to the issue of liability.
49 Seddon (n 2) 208. The appeal of Seddon’s approach can be seen in his observation that: “The
result arrived at by, for example, Toohey J that Amann should recover only half of its expenditure
could have been arrived at by asking: to what extent was Amann’s breach a cause of its losses? Or
to avoid the word ‘cause’, to what extent was Amann responsible for the losses that it suffered?
This seems to be no less a legitimate exercise – and far less convoluted – than asking: what were
the chances that the Commonwealth (already in breach) might have used its contractual powers
to terminate (had it not been in breach) so that Amann would not have been able to recoup its
expenses?” (at 219).
50 Amann (n 1) 156.
51 Amann (n 1) 152.
346 Contract in Commercial Law
(3) C rucially, this pre-condition was not satisfied here because there was no
express or implied promise in the initial contract that, if Amann performed
this contract, it would obtain a commercial advantage that would have
allowed it to make a net profit, meaning that it was possible to know
with certainty that Amann would not in fact have made a profit from the
contract’s performance.
(4) As at the date of breach, Amann had paid, or was liable to pay, $9,526,464,
comprised of $6,136,464 in expenditure it had incurred “in acquiring
aircraft and other establishment costs” and a further liability of $3,390,000
in the form of interest payments or borrowing costs associated with this
expenditure.59
(5) In addition to these expenses, the incurring of which was not dependent
on whether performance of the contact preceded, it was estimated that
in order for Amann to earn $17,107,462 in revenue over the contract’s
duration it would incur further operating costs of $12,043,420 in addition
to a sum of $368,479 on aircraft acquisition.
(6) For McHugh J, this meant that the provisional sum required to put Amann
into the financial situation it would have been in had the contract been
performed was [$17,107,462 – (12,043,420 + $368,479)] = $4,695,563,
plus any further (not “too remote”) losses Amann had or would incur as a
result of the contract’s early termination.
(7) Here, these further consequential losses were the $143,049 in termination
payments Amann had to pay its employees and the $113,000 security
deposit that had been wrongfully forfeited to the Commonwealth.
(8) Significantly, however, the finding below that there was a 20% chance that
the Commonwealth would have validly terminated the contract meant
that there was a 20% chance that Amann would have suffered this “loss”
(ie estimated future revenue – future expenses – further losses consequent
on termination) in any event, which meant that, in accordance with the
principles articulated in Malec v JC Hutton Pty Ltd,60 Amann’s damages
must be discounted by 20%.
(9) However, while McHugh J discounted the $4,695,563 figure and the
$113,000 security deposit by 20%, he did not discount the termination
payments in the same way, meaning that he awarded Amann the sum of
$3,989,899.
59 Thus, an important point of difference between McHugh J and the other Justices was that his
Honour treated Amann’s borrowing costs as an expense that had already been incurred by the
date of breach. According to Professor McLauchlan this finding is “surprising”, but it appears
to be entirely sensible (McLauchlan, “Reliance Damages for Breach of Contract” (n 2) 434).
The point McHugh J makes is that Amann had this liability regardless of whether the contract
proceeded so that it was sensible to ignore this “expense” for the purposes of calculating the “loss”
caused by the contract’s early termination. Professor Lücke agrees, observing that McHugh J’s
characterisation of Amann’s borrowing costs as already incurred “seems correct, subject to the
comment that plaintiffs have a duty to mitigate their loss and that they may be able to do so by
seeking to be released from such obligations”, though any costs incurred in doing this would
obviously also be recoverable: Lücke (n 2) 132.
60 Malec (n 7).
348 Contract in Commercial Law
Taking Stock
The preceding discussion was intended to establish a number of propositions.
Relevantly, these included the following:
(1) the analysis favoured by Mason CJ and Dawson J was problematic for at
least two distinct reasons and therefore cannot be supported;62
(2) In finding that Amann was entitled to the benefit of a “legal presumption”
that it would have recouped its reasonably wasted expenditure (and in
extending the benefit of the “legal presumption” of recoupment beyond
those benefits that the Commonwealth promised to provide), Deane J’s
reasoning also cannot be supported;
(3) subject to Brennan J’s overly broad interpretation of McRae, and provided
his Honour’s construction of the parties’ agreement was indeed correct, his
reasoning was internally consistent and therefore prima facie defensible;63
(4) the interpretation of McRae adopted by Toohey and Gaudron JJ is preferable
to those favoured by Mason CJ and Dawson, Brennan and Deane JJ;
(5) Toohey J’s conclusion that Amann’s wasted expenditure should have been
apportioned between it and the Commonwealth, whilst not without some
intuitive appeal, was nonetheless unsupportable as a matter of authority;
(6) Gaudron J’s reasoning was internally consistent and, subject to the
(doubtful) validity of her factual assumptions regarding the residual value
of Amann’s planes,64 prima facie defensible; and
(7) McHugh J’s reasoning was supported by the applicable legal principles and
should be adopted in analogous future cases to the extent that this remains
open as a matter of stare decisis.
64 Note, however, that such evidence was presented and accepted by the rest of the Court and that,
in Lücke’s view, her Honour may have been taken in by “the ingenuity of counsel” in concluding
that that the performance of the contract would have resulted in the planes becoming more
valuable by 1990 than they were in 1987: Lücke (n 2) 151.
65 Amann Aviation (n 10) [136] (Beaumont J).
66 For a recent, extensive discussion of this issue, see Flame SA v Glory Wealth Shipping PTE Ltd
[2013] EWHC 3153 (Comm).
67 Normally, such a claim would be for the financial loss the Commonwealth could causally attribute
to such breaches, but in Amann there appears to have been “liquidated damages” provisions that
the Commonwealth could have relied on. It appears as though the Commonwealth did not seek
to enforce these provisions, though it is not clear why.
350 Contract in Commercial Law
that Gaudron J’s assessment of the planes’ residual value was correct,71 this
should have meant that the evidence established that Amann would not in fact
have broken even on the contract and, assuming that any hypothetically valid
termination by the Commonwealth happened at or near the beginning of
contract’s three-year duration, had an approximately 80% chance of making
an initial loss of approximately $3,913,572. This in turn meant that, assuming
Amann’s readiness and willingness to perform and leaving aside the question
of the planes’ post-contract value, Amann was prima facie entitled to recover
at least 80% of $1,561,612,72 being the value of the chance that it lost as a result
of the Commonwealth’s wrongful repudiation.73
It must be observed, however, that this figure also could have been arrived
at via a simple application of the Robinson v Harman principle. This would
be done simply by subtracting the remaining $15,801,899 (ie $21,021,034 –
$5,219,135) to be incurred from the payments that would have been received
from the Commonwealth ($17,107,462) and then adding the forfeited security
deposit ($113,000) and employee termination payments ($143,049), neither
of which Amann would have incurred, to give a total of $1,561,612, but
discounting all of this, except the employee termination payments, by 20% to
reflect the chance that the Commonwealth would have validly terminated the
contract in any event.
An important question that then arises is how this figure (which might be
increased by the inclusion of not “too remote” consequential losses proved with
sufficient certainty) is to be reconciled with the sum arrived at by McHugh J.
If his Honour was indeed correct in concluding that the entirety of Amann’s
liability of $3,390,000, in the form of interest payments or borrowing costs
associated with expenditure already outlaid, would have been incurred even
if the contract did not proceed, then he must be correct in not deducting this
amount from the gross profits ($17,107,462) that Amann would probably have
received from the Commonwealth because to do so would, in effect, be to count
this liability twice. Thus, assuming that McHugh J was correct that this entire
liability was to be incurred regardless of whether the contract proceeded, the
minimum amount that Amann should have recovered on the analysis favoured
here is 80% of ($1,418,563 + $3,390,000) + $143,049 = $3,989,899.
Additionally, as explained above, it remained open to Amann to prove any
further consequential losses that it could establish with sufficient certainty,
provided it could causally attribute these losses to the Commonwealth’s breach
and establish that they were within the parties’ reasonable contemplation at
the time of formation in accordance with the generally accepted approach to
71 As observed at n 64, Lücke suggests that her Honour may have been taken in by “the ingenuity
of counsel in concluding that that the performance of the contract would have resulted in the
planes becoming more valuable by 1990 than they were in 1987”: Lücke (n 2) 151.
72 Whether McHugh J’s significantly higher figure of $4,695,563 was correct depends upon
whether his Honour was right to characterise, as expenditure that would be incurred regardless
of whether the contract proceeded or not, Amann’s liability of $3,390,000 in the form of
interest payments or borrowing costs associated with its pre-performance expenditure. As
Lücke observes, this approach “seems correct”, provided of course that account is taken of any
mitigatory actions Amann could reasonably have taken in order to reduce this expenditure:
Lücke (n 2) 132.
73 This figure (ie $1,561,612) comes from subtracting $3,913,572 from $5,475,184.
352 Contract in Commercial Law
contractual “remoteness”. It was held in the courts below that the lost chance
of renewal was indeed a loss that satisfied the second of these requirements
and, at least according to accepted principles, it also satisfied the first.74 Finally,
it should be noted that even if Amann was entitled to recover compensation
for this (consequential) lost chance of renewal (or, more accurately, for the
chance of obtaining the profits that would thereby have resulted), it is clear
that the prospect that the Commonwealth would have validly terminated the
initial contract in any event would need to be taken into account in valuing this
lost chance.75
74 It is worth noting, however, that it might be argued that this lost chance was better viewed
as caused by the promisee’s decision to accept the promisor’s repudiation (and terminate the
contract rather than affirm) instead of by the repudiation itself via an analogy with the reasoning
in Shevill (n 28). For further discussion of this suggestion, see Seddon (n 2) 220.
75 As explained earlier, this is simply an application of the principles established by the High Court
in Malec (n 7) and Sellars (n 8). Thus, whatever chance there was found to be of a renewal if the
initial contract was completed would need to be discounted by 20% to reflect the chance that
the initial contract was not in fact completed. It might also be argued that the Commonwealth
should have been able to set-off against any liability a “counterclaim” for 20% of any financial
losses it could prove it would have incurred had the initial contract been validly terminated.
But this cannot be correct because termination under a term does give the terminating party an
entitlement to recover “loss of bargain damages”, in accordance with the High Court’s decision
in Shevill (n 28).
Ch 15 Commonwealth v Amann Aviation Pty Ltd 25 Years On 353
promisor given this party’s relative disadvantage in relation to the proof of the
relevant facts in issue.
This of course says nothing in relation to whether the aforementioned
“presumption of recoupment” was made part of Australian law in Amann.
While there is considerable support for the existence of this presumption in
the judgments of Mason CJ and Dawson J, and Deane J (as well as significant
opposition to it in the judgments of Gaudron, Toohey and McHugh JJ), Brennan
J’s views on the matter, upon which the establishment in Amann of any such
presumption must depend, are more equivocal. While Brennan J held that on
the facts Amann was entitled to the benefit of the postulated presumption,
according to his Honour this was because an assessment of Amann’s damage
“on an ordinary basis” had been made “impossible” by the Commonwealth’s
breach. However, as Lücke points out, even if one is of the view that it was, in
the relevant sense, “impossible” to assess Amann’s damage, any such difficulty
was not created by the Commonwealth’s repudiation but by “pre-existing
evidentiary difficulties” because had “it been attempted before the breach to
predict the plaintiff ’s chances of profit, it would have been just as difficult as it
was afterwards”.76
This observation is entirely persuasive, but the point can perhaps be put even
more simply in the following way. In McRae it was theoretically impossible
even to speculate as to the value of the chance that the plaintiff lost due to the
Commonwealth’s breach, while in Amann it was not theoretically impossible
to speculate about the value of Amann’s lost chance even though, practically
speaking, it was very difficult, perhaps even impossible, to place a value on
this lost chance because of the insufficient information available at the time of
the contract’s termination to make any kind of reliable assessment as to what
would have happened following the contract’s (hypothetical) completion.77 In
any event, returning to the central point, Lücke is clearly quite correct to note
that since:
“Brennan J did not support a general version of the presumption but one which
had been forced into the straight-jacket of McRae … there was [in Amann] no
majority [support] for the presumption [of recoupment], whether one counts
all the judges or only those who supported the dismissal of the appeal.”78
It is therefore contended that it cannot be said that Australian law unequivocally
recognises the existence of a “legal presumption” in favour of a promisee
who terminates for the promisor’s repudiation that the promisee would have
recouped the expenditure reasonably incurred in preparing for the contract’s
performance. Moreover, even if one takes the view that Brennan J’s judgment
did recognise the existence of such a presumption, his Honour certainly did
not hold that the promisor’s burden in discharging this onus extends to
demonstrating the unlikelihood of recoupment when (at least some) reasonably
79 Unfortunately, there is not space to explore this issue in any detail here, but the two obvious
choices are the development of a common law principle to this end or the enactment of a
legislative solution in accordance with the suggestion made in the text that follows.
80 This term has been chosen deliberately to leave open the question of the precise nature of this
“assumption” (ie whether it is a legal presumption or merely an evidentiary starting point).
81 Compare the views expressed in Peel (n 68) and McLauchlan, “Repudiatory Breach, Prospective
Inability and The Golden Victory” (n 68).
Ch 15 Commonwealth v Amann Aviation Pty Ltd 25 Years On 355
the contract’s early termination. Specifically, it was argued that, rather than
formally shifting the onus of proof on the question of “recoupment”, there
should, at most, be an “assumption” of recoupment simply to provide an
evidentiary starting point in making a finding on the issue so that the promisor
is only required to demonstrate the possibility of non-recoupment before a
court will require the promisee affirmatively to establish, on the balance of
probabilities, the financial position it would have occupied “but for” the breach.
But if, contrary to this, a “presumption” of recoupment is to be recognised
by Australian law, it is important that the promisor’s burden in discharging
this onus should not extend beyond disproving recoupment in relation to the
benefits that were contractually promised.
So far, so good, but what about cases like Amann where the promisee’s entire
commercial strategy involved making a calculated loss on the initial contract in
the hope of securing a (speculative) consequential benefit upon the contract’s
completion, either in the form of a renewal of its initial arrangement with the
promisor, as in Amann itself, or on some other basis, such as (say) by building a
positive reputation that leads to future profitable contracts with other parties?
Leaving aside situations, of which Amann was arguably an example, where the
promisee is not itself “ready, willing and able” to perform its future contractual
obligations, it is recognised that cases in the category just described do raise the
possibility of injustice for the promisee if, in the face of insuperable evidential
uncertainty as to what would have happened “but for” the breach, the promisee
is left entirely to bear the loss of any reasonably wasted expenditure.82
The solution that Professor McLauchlan proposes is to ask a simple
question: did the promisor’s breach cause the relevant pre-breach expenditure
to be wasted (or would it have been wasted in any event)?83 If the answer is “yes”,
the wasted expenditure should be recoverable. According to McLauchlan, such
an approach is defensible on the basis that it attempts to give effect directly
to the Robinson v Harman principle’s stated aim of putting the promisee, “so
far as money can do it … [into] the same situation … as if the contract had
been performed”. However, as McLauchlan does recognise and the Amann case
demonstrates, the “real, and difficult, issue” in applying this approach is where
to place the burden of proof in relation to the question of recoupment when
there is significant evidential uncertainty as to what would have happened “but
for” the repudiation.84
One of the principal arguments made here has been that it would be
a mistake formally to place the onus of proof in relation to this fact on the
defendant-promisor, particularly if the burden in discharging this onus extends
to disproving recoupment even in relation to speculative consequential benefits
that this party has not (expressly or impliedly) promised to provide. However,
the fact that at least some common law jurisdictions seem to have adopted this
position is somewhat understandable given that the common law presently has
82 Note that even on McHugh J’s analysis Amann had incurred, or would incur, $9,526,464 in
reasonable wasted expenditure as a result of the contract’s early termination, but was awarded
only $3,989,899 in damages meaning that it was still left to bear a sizeable shortfall of $5,536,565
= ($9,526,464 - $3,989,899).
83 McLauchlan, “Reliance Damages for Breach of Contract” (n 2) 448.
84 McLauchlan, “Reliance Damages for Breach of Contract” (n 2) 448.
356 Contract in Commercial Law
speculative business venture or perhaps even for some other purpose altogether
such as, for example, to obtain and perform future contracts with other parties,
or minimise its tax liability.
Conclusion
Twenty five years after the decision in Amann, many important and difficult
questions raised by the case remain unanswered. The main purposes of this
chapter were to isolate these questions and make some progress towards their
resolution. It has also been argued that, of the reasons delivered in the High
Court, only McHugh J’s analysis can be defended in its entirety. After a brief
review of the facts and the lower court decisions, the various High Court
judgments were examined, with the objective of identifying those aspects of
their Honours’ reasoning that are supportable, either as a matter of authority
or fundamental legal principle, and those which are not. This process led to the
identification of, and an attempt to defend, a number of propositions.
Perhaps chief amongst these propositions was the notion that, if awards
for reasonable wasted expenditure are understood simply as a particular
application of the Robinson v Harman principle, as indeed they should be, the
promisee should not, in the face of evidential uncertainty as to whether it would
eventually have profited from the contract’s performance, have the benefit of
a rebuttable “legal presumption” that it would have recouped this expenditure.
Rather, the promisor’s onus should at most be merely “evidentiary”, requiring it
only to raise some doubt as to the likelihood of recoupment before the promisee
is formally required to establish that recoupment was likely. If, however, the
legal “presumption of recoupment” is to become part of Australian law,
the promisor’s burden in discharging this onus should not extend to needing
to prove non-recoupment even in relation to speculative consequential benefits
that the promisee hopes will result from the contract’s performance but which
the promisor has not (expressly or impliedly) promised to provide.
In addition to these claims in relation to the existence and scope of any legal
“presumption of recoupment”, two further (and relatively uncontroversial)
claims about the calculation of the promisee’s “expectation damages” in
circumstances of evidential uncertainty were defended. The first of these claims
was that a denial of the aforementioned legal “presumption of recoupment”
is not inconsistent with allowing the promisee to recover damages for any
sufficiently certain lost chance of realising a financial benefit than can be causally
attributed to the promisor’s breach. The second was that, in accordance with
the principles laid down in Malec v JC Hutton Pty Ltd, and Sellars v Adelaide
Petroleum NL, in calculating such damages, an appropriate discount must be
made to reflect any countervailing, non-negligible contingencies that reduced
the likelihood of recoupment, in accordance with the approaches taken by
McHugh and Deane JJ.
In addition to these claims, two further propositions were advanced.
The first was that, whatever position is taken in relation to the so-called
“presumption of recoupment”, a promisee’s entitlement to recover its reasonably
wasted expenditure should depend upon its own readiness and willingness
358 Contract in Commercial Law
88 Significantly, however, it was recognised that it may be appropriate to extend to the promisee the
benefit of a rebuttable presumption that it would have so performed.
16
Introduction
Overview
Australia and England are seemingly divided in their approaches to a
common problem: when can equitable estoppel operate as a cause of action?
At first glance, it might seem that each has taken a different fork in the road:
the High Court of Australia in Waltons Stores (Interstate) Ltd v Maher1 boldly
recognised that equitable estoppel can operate to give B a right where B
has relied to his or her detriment on a belief, for which A is responsible,
that B had or would acquire a right against A; in England, meanwhile, the
traditional restriction has been maintained and the doctrine can operate
as an independent cause of action only where B’s belief relates to identified
property, usually land, of A.2
On further examination, however, the contrast is not quite so clear. In
Australia, and New South Wales in particular,3 it has been argued that Waltons
Stores can be seen as simply an application of conventional principles, and so
does not provide authority for the extension of equitable estoppel beyond its
* I am grateful to John Mee and to participants in the “Contracts in Commercial Law” conference.
I have also benefited from discussing the issues in this chapter with Andrew Robertson, as well
as with other members of the Melbourne Law School Obligations Group, and with members of
the Private Law Discussion Groups at Leicester University and at University College London.
1 (1988) 164 CLR 387 (HCA).
2 Thorner v Major [2009] UKHL 18; [2009] 1 WLR 776 [61].
3 The views of Handley AJA on both the proper scope of promissory estoppel and the correct
interpretation of Waltons Stores have clearly been influential: for extra-judicial statements of
those views, see eg K Handley, “The Three High Court Decisions on Estoppel 1988–1990” (2006)
80 ALJ 724, 726 and K Handley, Estoppel by Conduct and Election (Sweet & Maxwell 2006). For
a persuasive criticism of Handley’s analysis, see A Robertson, “Three Models of Promissory
Estoppel” (2013) 7 Journal of Equity 226.
359
360 Contract in Commercial Law
original boundaries.4 As a result, it has recently been noted that: “[i]t is not
yet finally resolved in Australia whether promissory estoppel can operate as a
cause of action”.5 In England, there is first instance authority inconsistent with
the idea that, when proprietary estoppel is based on a promise, that promise
must be one that B has or will acquire a right in identified land,6 and academic
contributions continue to cast doubt on the validity of that supposed limit.7
The approach adopted here is a simple one. As shown by relatively recent
decisions of the highest courts in each of Australia8 and England,9 it is clear
that, in the guise of a particular form of proprietary estoppel, equitable
estoppel may operate as a cause of action. It is argued that the principle
recognised in such cases, referred to in this chapter as ‘the principle’, is as
follows: A may come under a liability to ensure that B suffers no detriment
as a result of B’s reasonable reliance on a promise, made by A to B, that B
reasonably understood as seriously intended by A. The question is as to the
proper limits of that principle: in particular, is it capable of applying only
where A’s promise relates to “identified property (usually land) owned (or,
perhaps, about to be owned) by [A]”?10 The answer given here, in short, is No:
there is no inherent aspect of the principle that prevents its wider operation;
nor is there any convincing extrinsic concern which can justify placing an
artificial limit on the principle.
This conclusion depends on an analysis of the principle which sees it as
distinct both from other principles making up the law of estoppels, and
4 See eg the analyses of Waltons Stores proposed in DHJPM v Blackthorn Resources [2011] NSWCA
348; (2011) 285 ALR 311 [48] (Meagher JA and Macfarlan JA), [122] (Handley AJA). The view
that Waltons Stores is best seen as a proprietary estoppel case is however inconsistent with the
fact, noted by Keane J in Crown Melbourne Limited v Cosmopolitan Hotel (Vic) Pty Ltd [2016]
HCA 26 [134], that Mason CJ and Wilson J ((1988) 164 CLR 387, 404) identified Waltons Stores
as a case of promissory estoppel. In Baird Textile Holdings Ltd v Marks & Spencer plc [2001]
EWCA Civ 274; [2002] 1 All ER 737 [98], Mance LJ suggested that, were the facts of Waltons
Stores to arise in England, the same result might be reached via an estoppel by representation
(on the basis of the reasoning of Deane and Gaudron JJ that A could be precluded from denying
that exchange had occurred).
5 Mineralogy Pty Ltd v Sino Iron Pty Ltd (No 6) [2015] FCA 825 [769] (Edelman J), referring in
particular to the discussion of the point by Bathurst CJ in Ashton v Pratt [2015] NSWCA 12
[115]–[140], a case in which resolution of the point was not required, as B could not satisfy the
detriment requirement of an equitable estoppel.
6 See eg Motivate Publishing v Hello Ltd [2015] EWHC 1554 (Ch) [55]–[61] (Birss J) (application to
intellectual property); Strover v Strover [2005] EWHC 860 (Ch); [2005] WTLR 1245 (application
to distribution of insurance payout); Salvation Army Trustee Co Ltd v West Yorkshire Metropolitan
CC (1981) 41 P & CR 149 (QBD) (application to promise to buy land from B). See too Sutcliffe
v Lloyd [2007] EWCA Civ 153; [2007] 2 EGLR 13 where A’s promise related to the sharing of
profits from the development of land, but was not a promise that B would necessarily acquire
any rights in the land itself.
7 See eg B McFarlane and P Sales, “Promises, Detriment, and Liability: Lessons from Proprietary
Estoppel” (2015) 131 LQR 610; N McBride, “A Fifth Common Law Obligation” (1994) 14 Leg
S 35; D Nolan, “Following in their Footsteps: Equitable Estoppel in Australia and the United
States” (2000) 11 KCLJ 202; J Moncrieff and J Neyers, “(Mis)Understanding Estoppel” [2003]
LMCLQ 429. For an important earlier contribution, cited in Waltons Stores, see D Jackson,
“Estoppel as a Sword” (1965) 81 LQR 223.
8 Sidhu v van Dyke [2014] HCA 19; (2014) 251 CLR 505.
9 Thorner (n 2).
10 Thorner (n 2) [61] (Lord Walker).
Ch 16 Equitable Estoppel as a Cause of Action 361
from the law of contract: in that sense, it is neither one thing nor one other.
Its application to promises of future conduct distinguishes it from preclusive
doctrines such as estoppel by representation, and its application to promises to
confer a new right takes it beyond the doctrines making up promissory estoppel.
The principle does not, however, allow detrimental reliance to substitute for
consideration as a route to contractual enforcement: it may apply where other
standard contractual requirements (and not only consideration) are absent
and, in any case, it does not operate to impose an immediate duty on A to
perform A’s promise. Rather, once the relevant facts have occurred, the principle
operates to impose a liability on A: a court may be able to make an order against
A dealing with the specific form of unconscionable conduct that consists of
A’s leaving B to suffer a detriment as a result of B’s reasonable reliance on a
promise of A which B reasonably understood as seriously intended by A. It will
be argued here that, far from undermining contract law, the recognition of such
a principle may play an important role in justifying the classical requirements
of contract formation. Indeed, the principle may exemplify a more general
point, also of interest when considering the law of restitution: the existence of
such liabilities may be crucial in helping to justify the content of rules which
operate to impose private law duties.
11 See eg DHJPM (n 4) [56], where Meagher JA referred to the importance of the “nature of the
relationship between the parties and whether they contemplate that any interest to be granted or
promise to be performed is to be created by a binding contract” and illustrated this by the failure
of B’s claim, in a commercial context, in Cobbe v Yeoman’s Row Management Ltd [2008] UKHL
55; [2008] 1 WLR 1752, in contrast with the success of B’s claim, in a non-commercial context,
in Thorner. For a similar analysis of the difference between those two cases, see Thorner (n 2)
[96]–[97] (Lord Neuberger).
12 Crossco No 4 Unlimited v Jolan Ltd [2011] EWCA Civ 1619; [2012] 2 All ER 754 [133]. See
too Cobbe (n 11) [68] (Lord Walker), drawing a distinction between the domestic context in
which a claimant expects to acquire an interest in land and commercial cases in which “the
claimant is typically a business person with access to legal advice and what he or she is expecting
to get is a contract”. See too Crown Melbourne (n 4) at [143], where Keane J referred to the
“need of commerce for certainty” as supporting a relatively strict approach to determining if
a representation is clear enough to serve as the basis of a promissory estoppel. Note also the
extra-judicial suggestion of Lord Neuberger, “The Stuffing of Minerva’s Owl? Taxonomy and
Taxidermy in Equity” (2009) 68 CLJ 537, 542: “before he can establish a proprietary estoppel
claim, a claimant must show that he acted in the belief that he has something which can be
characterised as a legal right – at least in a commercial arm’s length context”.
362 Contract in Commercial Law
The argument to be made here is that the specific limits inherent in the
principle applied in cases such as Sidhu and Thorner do not include any bar on
the principle’s operation in the commercial context. Of course, in determining
if the requirements of the principle have been made out, a court will have regard
to the particular factual context of the parties’ dealings,13 but this does not
require any rigid division between commercial and other cases.14 First, there is
no shortage of commercial cases in which B has successfully invoked equitable
estoppel as a cause of action.15 In Anaconda Nickel Ltd v Edensor Nominees Pty
Ltd,16 for example, the Victorian Court of Appeal rejected the argument that
equitable estoppel should not arise where a “promise was made in the course
of commercial dealings between well-advised corporations, each concerned
to advance its own interests”;17 rather, “unconscionability” was regarded as an
underlying principle, and the “injustice” that would arise were A allowed to
renege on a promise, thereby leaving B to suffer a detriment as a result of its
reasonable reliance on that promise, was not nullified by the commercial nature
of the parties’ dealings.
Second, it would be a mistake to think that there is anything in the nature of
commercial dealings which means that it could never “shock the conscience”18
of the court for A to leave B to suffer a detriment arising from B’s reliance on
A’s non-contractual promise. After all, the requirements developed by common
law for the formation of a valid contract apply both to commercial and non-
commercial dealings. If commercial cases were to be treated differently, it
would be necessary for judges to develop principled means of identifying such
cases. It is simple, however, to think of facts on which it is difficult to come to
a firm view as to whether or not the parties’ dealings are commercial:19 “[t]he
13 See eg Cobbe (n 11) and DHJPM (n 4); Austotel Pty Ltd v Franklins Selfserve Pty Ltd (1989) 16
NSWLR 582 (CA); Crown Melbourne (n 4) at [139] (Keane J) and [217] (Nettle J). A common
obstacle for B is that B’s reliance occurred before negotiations reached a stage where any promise
of A could be regarded as sufficiently certain so as to be reasonably understood by B as seriously
intended as capable of being relied on: see B McFarlane, “Proprietary Estoppel and Failed
Contractual Negotiations” [2005] Conv 501.
14 See N Hopkins, “The Relevance of Context in Property Law: A Case for Judicial Restraint?”
(2011) 31 Leg S 175.
15 For English authorities allowing proprietary estoppel claims in a commercial context, see eg Hoyl
Group Ltd v Cromer Town Council [2015] EWCA Civ 782; [2015] HLR 43; Herbert v Doyle [2010]
EWCA Civ 1095; [2011] 1 EGLR 119; Sutcliffe (n 6). For further Australian authorities allowing
equitable estoppel to operate as a cause of action in a commercial context, see eg Waltons Stores
(n 1); EK Nominees Pty Ltd v Woolworths Ltd [2006] NSWSC 1172; ACN 074971109 Pty Ltd (as
Trustee for the Argot Unit Trust) v The National Mutual Life Association of Australasia Ltd [2008]
VSCA 247; (2008) 21 VR 351; Yarrabee Chicken Company Pty Ltd v Steggles Ltd [2010] FCA 394.
Equally, as pointed out by Keane J in Crown Melbourne (n 4) at [153], it would cause injustice if
equitable estoppel were to operate in an unconstrained way outside the commercial context.
16 [2004] VSCA 16; (2004) 8 VR 38.
17 Anaconda (n 16) [40].
18 The phrase used by Lord Walker in Cobbe (n 11) [92] to describe the cases in which a proprietary
estoppel claim arises.
19 See eg Clark v Clark [2006] EWHC 275 (Ch); [2006] 1 FCR 421: A and B were brothers who were
also sole and equal shareholders in a company and carried on business from the land on which
they also lived. The dispute in Ashton (n 5), according to Bathurst CJ at [139], “could be said to
involve a commercial arrangement [but] it seems closer to a domestic arrangement”. Indeed,
even in Thorner (n 2), the farm was a business and B, whilst related to A, did not live with A.
Ch 16 Equitable Estoppel as a Cause of Action 363
20 Cavendish Square Holding BV v Talal El Makdessi; Parking Eye Ltd v Beavis [2015] UKSC 67;
[2015] 3 WLR 1373 [168] (Lord Mance) rejecting counsel’s submission that the penalties
doctrine should not apply in “commercial cases”.
21 In Sutcliffe (n 6) [5], reference was made to the view of the first instance judge that the pre-
contractual work on the planned development carried out by B was “amazing”. In Leading Edge
Events Australia Pty Ltd v Kiri Te Kanawa [2007] NSWSC 228, Bergin J similarly noted the
potential benefits of B’s pre-contractual work in preparing for a concert from which A was to
profit. For a more detailed economic analysis, see R Craswell, “Offer, Acceptance and Efficient
Reliance” (1996) 48 Stan LR 481.
22 See eg A Schwartz and R Scott, “Precontractual Liability and Preliminary Agreements” (2007)
120 Harv LR 661.
23 See eg O Ben-Shahar and J Pottow, “On the Stickiness of Default Rules” (2006) 33 Fla State UL
Rev 651, 682, arguing that: “unfamiliar terms may … raise suspicions and scare away potential
counterparties”.
24 See R Scott, “A Theory of Self-Enforcing Indefinite Agreements” (2003) 103 Col LR 1641.
25 This suggestion was made extra-judicially by Lord Neuberger (n 12) 546.
364 Contract in Commercial Law
Preclusive estoppels
Evidence of such confusion can be seen in the analysis of Lord Scott in Cobbe. On
his Lordship’s view,27 the term “proprietary estoppel” is to be interpreted literally,
and the doctrine is assumed to have the same, limited effect as an estoppel by
representation: it determines the factual background28 against which the parties’
rights are to be decided, but does not provide a substantive principle which in
itself determines those rights.29 Such a doctrine cannot avail B where he or she
has relied on a promise as to A’s future action: B needs no assistance in proving
the promise, and, in the absence of any substantive doctrine capable of providing
protection where B has relied on a non-contractual promise, A can happily admit
the promise, and B’s reliance, and still deny B any redress. The preclusive nature
of an estoppel by representation means that, simply as “a matter of logic”,30 it
cannot apply to a promise of future action, and this was recognised by courts of
equity31 just as at common law. As an interpretation of preclusive estoppel, Lord
Scott’s analysis is, therefore, faultless;32 yet that is precisely why it cannot account
for the principle applied in cases such as Sidhu and Thorner, which is neither
purely preclusive (as it is a substantive principle which in itself determines the
parties’ rights) nor incapable of applying to promises of future conduct.
Certainly, the mere addition of the adjective “proprietary” cannot convert
a preclusive doctrine such as estoppel by representation into a cause of action.
This is the problem with the view of proprietary estoppel adopted by Lord
Denning MR in Crabb v Arun District Council.33 His Lordship there referred to
his own judgment in Moorgate Mercantile Co Ltd v Twitchings34 – a decision of
the Court of Appeal which was shortly to be reversed by the House of Lords35 –
to support the point that the effect of estoppel on a true owner of property
may be that: “his own title to property, be it land or goods, has been held to
be limited or extinguished, and new rights and interests have been created
therein”.36 This analysis is of some importance as, in Thorner, Lord Walker
invoked it when stating that: “[i]t is the relation to identified land of the
defendant that has enabled proprietary estoppel to develop as a sword, and
not merely as a shield”.37
The Court of Appeal’s decision in Moorgate Mercantile was, however,
concerned with the application of the preclusive doctrine of estoppel by
representation to A’s statement as to the present ownership of a car. As such
a representation is as to a matter of fact, or mixed fact and law, it can lead to
A’s being precluded from denying its truth. That preclusion can then assist B
in establishing a claim against A. For example, in Knights v Wiffen,38 B, a sub-
purchaser from X of unascertained barley which A had contracted to sell to X,
had relied on A’s representation that A held specific barley in its granary for
X and would now hold that barley for B. In fact, no barley had been appropriated
by A to the contract with X. On X’s insolvency, A refused to allow B to take any
barley from the granary. B’s claim in conversion against A was successful: A was
precluded from asserting the fact (the lack of appropriation of any barley to A’s
contract with X) that prevented title passing to B. This example, however, merely
demonstrates that the preclusive logic of estoppel may, in certain cases, prevent
A from denying the truth of a matter that is crucial to B’s making a successful
claim. This is not a unique attribute of proprietary estoppel: any preclusive
estoppel may, in suitable circumstances, have such an effect. In Waltons Stores,
for example, on the view of the facts adopted at first instance and accepted by
Deane and Gaudron JJ,39 A was simply prevented from denying that a contract
had already been concluded, by means of exchange, between A and B, and B
was therefore able to establish a contractual claim.40 Equally importantly, the
preclusive doctrine of estoppel by representation does not transform into a
cause of action merely as a result of its application in a proprietary context. In
Knights v Wiffen, for example, B’s success in a conversion claim against A did not
mean that B had in fact acquired title to any barley: it is in the “very nature of
33 Crabb (n 26).
34 [1976] QB 225 (CA). The Court of Appeal judgment in Moorgate Mercantile was handed down
on 18 June 1975, and that in Crabb on 23 July 1975. The House of Lords’ decision to reverse the
Court of Appeal in Moorgate Mercantile was promulgated on 16 June 1976.
35 [1977] AC 890 (HL).
36 Moorgate (n 34) 242, cited in Crabb (n 26) 187.
37 Thorner (n 2) [61].
38 (1869-70) LR 5 QB 660 (QBD).
39 See Waltons Stores (n 1) 436–41, 461–63. See too Baird Textile (n 4) [98] (Mance LJ).
40 See J Campbell, “Waltons v Maher: History, Unconscientiousness and Remedy – The ‘Minimum
Equity’” (2013) 7 Journal of Equity 171, noting that the remedy ordered at first instance was
made under s 68 of the Supreme Court Act 1970 (NSW), in lieu of specific performance.
366 Contract in Commercial Law
41 See C Blackburn, A Treatise on the Effect of the Contract of Sale (William Benning & Co 1845) 122
(Blackburn J was one of the judges in Knights v Wiffen). See Sale of Goods Act 1979 (UK) s 16;
Sale of Goods Act 1923 (NSW) s 21. See too Lord Mustill in re Goldcorp’s Exchange Ltd [1995]
1 AC 74 (PC) 90: “common sense dictates that the buyer cannot acquire title until it is known to
what goods the title relates”.
42 The term used by Devlin J in Eastern Distributors v Goldring [1957] 2 QB 600 (CA) 607, 611
(Devlin J), distinguishing the operation of estoppel from cases where B in fact acquires title as a
result of an agent’s apparent authority.
43 See Lord Mustill in re Goldcorp’s Exchange (n 41) 94: “The most that the Knights v Wiffen line of
authority can give to the purchaser is the pretence of a title where no title exists”.
44 Cobbe (n 11) [66]. See too DHJPM (n 4) [68] (Meagher JA). For full discussion of this suggested
limit, and its rejection in Thorner, see J Mee, “The Limits of Proprietary Estoppel: Thorner v
Major” (2009) 21 CFLQ 367.
45 Thorner (n 2) [3] (Lord Hoffmann).
46 See too Delaforce v Simpson-Cook [2010] NSWCA 8; (2010) 78 NSWLR 483: A’s promise was
made as part of the notation at the end of a consent order. B was therefore aware that the
notation was not part of the legally binding order. Nonetheless, a proprietary estoppel claim
based on that promise was successful.
47 Sidhu (n 8) [15], referring to the first instance judgment: [2012] NSWSC 118 [66].
48 Of course, if B in fact argues that he or she relied on a belief that a contract existed between A and
B, then it will be necessary to ask if B could reasonably have believed that such an arrangement
existed: see Ashton (n 5) [132], [237].
Ch 16 Equitable Estoppel as a Cause of Action 367
Promissory estoppels
Some recent authority, particularly in New South Wales, has challenged the
view that Waltons Stores permits equitable estoppel to operate as a cause of
action beyond the proprietary context. In Saleh v Romanous, for example,
Handley AJA stated that: “[a] promissory estoppel is not enforced as a
contract, but as an equitable restraint on the exercise or enforcement of the
promisor’s rights”.52 On this analysis, a “promissory estoppel must be negative
in substance”53 and so cannot operate as an independent source of rights. As
has been judicially noted,54 this constitutes a direct challenge to the influential
reasoning of Brennan J in Waltons Stores and, in particular, the assertion that
there is no relevant distinction between a “change in legal relationships effected
by a promise which extinguishes a right and a change in legal relationships
effected by a promise which creates one”.55
It will be argued here that, as an interpretation of the principles applied in
important promissory estoppel decisions such as Hughes v Metropolitan Railway
Company56 and Central London Property Trust Ltd v High Trees House Ltd,57 the
analysis of Handley AJA is correct.58 Conversely, the assertion of Brennan J
does not provide a convincing reason for extending the traditional categories
of promissory estoppel, as the content of rules regulating the loss or assertion of
pre-existing rights often differs, with good reason, from the content of rules
regulating the acquisition of new rights. Perhaps the clearest examples are the
rules of waiver, and of election, which can operate to extinguish a claim-right or
59 See eg Sale of Goods Act 1979 (UK) s 11(2); Bottiglieri di Navigazione SpA v Cosco Qingdao Ocean
Shipping Co (The Bunga Saga Lima) [2005] EWHC 244 (Comm); [2005] 2 Lloyd’s Rep 1.
60 In the context of election, see eg Sale of Goods Act 1979 (UK) s 11(4) and s 35(4); The Northern
Pioneer [2003] 1 WLR 1015 (CA) 1037 (Lord Philips MR): “If the shipowner continues to
provide the services of his ship, or the charterer continues to make use of those services beyond
such time as would reasonably be needed to react … the inference will normally be that he has
decided not to exercise the right …”.
61 For further analysis of the Hughes principle, see B McFarlane, “Understanding Equitable
Estoppel: From Metaphors to Better Laws” (2013) 66 CLP 267, 282–86.
62 Conduct here includes both action and/or inaction by B.
63 See too eg Inwards v Baker [1965] 2 QB 29 (CA).
64 D Klimchuk, “Equity and the Rule of Law” in L Austin and D Klimchuk (eds), Private Law and
the Rule of Law (OUP 2014) 263. Although note that very similar principles apply at common
law too: see eg Hickman v Haynes (1875) LR 10 CP 598; Minister of Health v Bellotti [1944] 1 KB
298 (CA) 305–06.
65 So eg in Legione v Hateley (1983) 152 CLR 406 (HCA), although of course it was found by a
majority that the principle did not apply on the facts of the case, the principle was in play as if
A could be said to have made a sufficiently clear promise that the time in which B had to pay
would be extended, A could then have been prevented from exercising A’s contractual power to
terminate arising from B’s failure to pay.
66 It would be a mistake to think that any case in which the Hughes principle applies can also be
seen as one in which the principle in Sidhu and Thorner applies: first, the former principle can
apply where A has encouraged a belief of B whereas the analysis in Thorner requires A to have
made a promise (although this point is controversial, see eg Hoyl Group (n 15)); second, the
former principle does not seem to require proof of detriment by B, as it is rather focused on
A’s benefit: see eg Hughes (n 56) 449 (Lord O’Hagan) and the analysis of D Gordon, “Creditor’s
Promises to Forego Rights” [1963] CLJ 222.
67 For further analysis of the High Trees principle, see McFarlane (n 61) 281–82.
68 In BP Exploration Co (Libya) Ltd v Hunt (No 2) [1979] 1 WLR 783, 811, eg Goff J described the
effect of an election as based on the “need for finality in commercial transactions”.
Ch 16 Equitable Estoppel as a Cause of Action 369
existing duty owed by B to A. Whilst distinct from Hughes, and from preclusive
estoppel,69 the principle in High Trees is therefore also necessarily incapable of
operating as an independent cause of action, as it regulates the question
of whether a pre-existing right has been extinguished.
Handley AJA therefore seems to be correct in concluding that the principles
in each of Hughes and High Trees are necessarily negative in substance. This
does not mean, however, that the overall conclusion of Handley AJA must be
accepted, and that of Brennan J rejected. The crucial point is that correctly
identifying the negative nature of the principles in each of Hughes and High
Trees does not provide a convincing reason to limit the scope of other principles,
such as that applied in Sidhu and Thorner.70 As Finn noted,71 a critical step,
evident in a decision such as Crabb, was taken when proprietary estoppel was
permitted to function not only as a means to prevent A’s assertion of a right
against B, but also as a means to require A to confer a right on B. As a distinct
strand of equitable estoppel has thus developed, there is no necessary reason
why the inherent limits on the Hughes and High Trees principles must also
apply to that principle. The real challenge to the view adopted by Handley AJA
lies not in Brennan J’s argument that principles applying to cases involving
the extinguishing of rights must also apply to cases involving their creation,
but rather in the different argument, also made by Brennan J, that principles
applied to promises to confer rights in property should also apply to promises
to confer other forms of right.72
69 Note that the principle in High Trees does not seem to require the prospect of B’s suffering a
detriment, as it depends instead on A’s acceptance of B’s substitute performance, which may
in fact, as in High Trees itself, confer a benefit on B. It is therefore unfortunate that, owing to
the confusion with preclusive estoppel, courts have often strained to find a detriment to B in
cases covered by the High Trees principle: see eg Je Maintiendrai v Quaglia (1980) 26 SASR 101,
115–16; Collier v P & MJ Wright (Holdings) Ltd [2007] EWCA Civ 1329; [2008] 1 WLR 643.
70 To that extent, the position taken here accords with the submission of B in Ashton (n 5) [107]
that: “the principle stated in Saleh and DHJPM [does] not extend to equitable estoppel generally”.
71 See P Finn, “Equitable Estoppel” in P Finn (ed), Essays in Equity (Law Book Co 1985).
72 Waltons Stores (n 1) 426: “Moreover, unless the cases of proprietary estoppel are attributed to
a different equity from that which explains the cases of promissory estoppel, the enforcement
of promises to create new proprietary rights cannot be reconciled with a limitation on the
enforcement of other promises. If it be unconscionable for an owner of property in certain
circumstances to fail to fulfil a non-contractual promise that he will convey an interest in the
property to another, is there any reason in principle why it is not unconscionable in similar
circumstances for a person to fail to fulfil a non-contractual promise that he will confer a
non-proprietary legal right on another?” That analysis was cited with approval by Nettle J in
Crown Melbourne (n 4) at [216], where it was used to justify applying the same certainty test to
promissory as to proprietary estoppel: see further n 84.
370 Contract in Commercial Law
73 See eg Combe v Combe [1951] 2 KB 215 (CA); Crown Melbourne (n 4) at [133] – [141] (Keane J).
Note too, the argument of A in Giumelli v Giumelli (1999) 196 CLR 101 (HCA) 121 (rejected by
the High Court of Australia) that the measure of relief in equitable estoppel must be limited “lest
the requirement for consideration to support a contractual promise be outflanked and direct
enforcement be given to promises which did not give rise to legal rights”. Note also the fate of the
now defunct equitable doctrine of “making representations good”: see eg F Dawson, “Making
Representations Good” (1982) 1 Cant LR 329; Finn (n 71); and P Matthews, “The Words Which
Are Not There: A Partial History of the Constructive Trust” in C Mitchell (ed), Constructive and
Resulting Trusts (Hart Publishing 2009) 25–44.
74 In Sidhu (n 8), specific performance of the promise was impossible as the cottage initially
promised to B had since been destroyed in a fire, but the High Court upheld the finding of the
Court of Appeal of New South Wales that B was entitled to payment of a sum “measured by
reference to the value of [B’s] disappointed expectation” (see [42]).
75 PS Atiyah, “When is an Enforceable Agreement Not a Contract? Answer: When it is an Equity”
(1976) 92 LQR 174, 174.
76 Headed “Informal Contracts Without Assent or Consideration”.
77 Headed “Contracts without Consideration”.
78 For a recognition of this point in the American context, see eg Cyberchron Corp v Calldata
Systems Development Inc 47 F 3d 39, 46 (1995), where the court expressly rejected A’s argument
that promissory estoppel could operate only as a substitute for consideration.
79 See eg Crabb (n 26), Waltons Stores (n 1), Thorner (n 2), Sidhu (n 8). In some cases (see eg Yaxley
v Gotts [2000] Ch 162 (CA); Kinane v Mackie-Conteh [2005] EWCA Civ 45; [2005] WTLR 345)
reliance is placed on s 2(5) of the Law of Property (Miscellaneous Provisions) Act 1989 (UK),
which provides a specific exception for constructive trusts, but the better view is simply that s 2 is
not even prima facie applicable, as a proprietary estoppel claim does not depend on the existence
of a contract.
80 Cobbe (n 11) [29], referring to the Law of Property (Miscellaneous Provisions) Act 1989 (UK) s 2.
Ch 16 Equitable Estoppel as a Cause of Action 371
81 See eg Waltons Stores (n 1) 408 (Mason CJ and Wilson J), 416 (Brennan J). See too Tipperary
Developments Pty Ltd v State of Western Australia [2009] WASCA 126; (2009) 38 WAR 488
[137]–[140] (McLure JA).
82 Lord Neuberger (n 12) 546.
83 This is clear from the wording of each of s 2 of the Law of Property (Miscellaneous Provisions) Act
1989 (UK) and s 54A of the Conveyancing Act 1919 (NSW). Indeed, in Cobbe (n 11) itself, Lord
Scott permitted B’s personal claim for the value of B’s work rendered pursuant to the parties’ oral
discussions.
84 As noted by Bathurst CJ in Ashton (n 5) [114], McPherson J in Riches v Hobgen [1985] 2 Qd
R 292, 300–01 (in a passage cited by the plurality in Giumelli (n 73) 121) “appeared to accept
that an equitable estoppel could be applied to give some effect to an agreement that for want of
certainty or some other essential element falls short of constituting an enforceable contract”. In
Thorner (n 2), Lord Neuberger suggested at [86] that an estoppel claim can arise even if A and B
have each adopted reasonable, but different, interpretations of the content of A’s promise, which
is not the case for the latter claim (see eg Raffles v Wichelhaus (1864) 2 Hurl & C 906; 159 ER
375). The position in relation to promissory estoppel is not so clear: see eg the differing views
in Crown Melbourne (n 4) of Keane J (at eg [147], arguing that a more stringent certainty test
applies to promissory as opposed to proprietary estoppel) and Nettle J (at [216], arguing that the
same test applies in each case). On the analysis of this chapter, the approach of Nettle J is to be
preferred, at least where a claim, whether in promissory or proprietary estoppel, is based on the
principle identified here: as stated by Nettle J at [217]: “the notion that there is or should be some
a priori distinction between the degree of objective certainty required to found a promissory
estoppel compared to a proprietary estoppel runs counter to principle.”
85 It is relied on in Thorner (n 2) by each of [52]–[57] (Lord Walker) and [101] (Lord Neuberger).
86 Walton v Walton (CA, 14 April 1994). See further B McFarlane, “Proprietary Estoppel: The
Importance of Looking Back” in J Pila and P Davies (eds), The Jurisprudence of Lord Hoffmann
(Hart Publishing 2015).
87 This is not to say that the certainty of a promise is irrelevant to a proprietary estoppel claim. On
the contrary, as seems to have been the case in Cobbe (n 11), it may prevent B’s showing that B
reasonably understood A’s promise as seriously intended by A.
372 Contract in Commercial Law
“does not look forward into the future and guess what might happen. It looks
backwards from the moment when the promise falls due to be performed and
asks whether, in the circumstances which have actually happened, it would be
unconscionable for the promise not to be kept.”
The analysis in Walton is crucial to the argument made here.88 The principle
applied in the proprietary estoppel cases, even if it requires a promise to be
made by A to B, does not impose an immediately binding duty on A to honour
that promise, but rather ensures that A is not free to “shock the conscience
of the court” 89 by leaving B to suffer a detriment as a result of B’s reasonable
reliance on that promise.90 This means, first, that, in contrast to the contractual
position, there is no guarantee that a successful claim will lead to B’s receiving
the value of A’s promise: at the very least,91 there will be cases in which, given the
limited nature of B’s potential detriment, A will be able to avoid unconscionable
conduct92 by paying a sum of money to B that will remove that prospect of
detriment.93 Second, it may be possible for A to show that, as things turned
out, it would not in fact be unconscionable for A to leave B to suffer at least
88 It is consistent too with Arfaras v Vosnakis [2016] NSWCA 65, in which the conclusion that
there was no objectively ascertainable intention of A and B to enter into a binding legal
contract (and also that there was no consideration to support A’s promise) ensured the failure
of B’s contractual claim, but did not prevent a successful equitable estoppel claim. See too
the key point made by McPherson J in Riches v Hogben [1985] 2 Qd R 292, 300–01 (in a
passage approved in Giumelli (n 73) 121): “[w]hat distinguishes the equitable principle from
the enforcement of contractual obligations is, in the first place, that there is no legally binding
promise”.
89 The phrase used in Cobbe (n 11) [92] (Lord Walker) to describe the cases in which a proprietary
estoppel claim arises.
90 See Waltons Stores (n 1) 423 (Brennan J) and also Commonwealth v Verwayen (1990) 170 CLR 394
(HCA) 454 (Dawson J) (approved in Giumelli (n 73) 121), stating that “the discretionary nature
of the relief in equity marks a further reason why the fear of the common law that promissory
estoppel would undermine the doctrine of consideration is unwarranted”. Hoffmann LJ’s
analysis helps to explain the precise sense in which the equitable relief is discretionary, without
being wholly at large. The idea that the avoidance of detriment is at the heart of estoppel was
restated in Crown Melbourne (n 4) by French CJ, Kiefel and Bell JJ at [39], by Keane J at [139]
and by Nettle J at [216].
91 It can further be argued that protecting B’s expectation should not operate even as a prima facie
outcome, and that in all cases the basic focus of the court should simply be to ensure that B
suffers no detriment as a result of B’s reasonable reliance (although in some cases, such as Sidhu
(n 8) and Thorner (n 2) the nature and extent of B’s detriment may be such that B should be
given the value of A’s promise: see eg A Robertson, “The Reliance Basis of Proprietary Estoppel
Remedies” [2008] 72 Conv 295; B McFarlane, The Law of Proprietary Estoppel (OUP 2014) paras
7.35–7.69).
92 See eg Campbell (n 40) 187–88 for the argument that the ultimate goal of equitable estoppel, as
reflected in the remedy, is the prevention of unconscionable conduct.
93 See eg Verwayen (n 90) 442 (Deane J); Sidhu (n 8) [84]: “If [B] had been induced to make a
relatively small, readily quantifiable monetary outlay on the faith of [A’s] assurances, then it
might not be unconscionable for [A] to resile from his promises to [B] on condition that he
reimburse her for her outlay” (for an example of such a case arising in practice, see eg Powell v
Benney [2007] EWCA Civ 1283 and Young v Lalic [2006] NSWSC 18).
Ch 16 Equitable Estoppel as a Cause of Action 373
some detriment:94 it seems that the range of factors (for example, the types of
changed circumstances) which A may be able to invoke when making such an
argument is wider than it would be if A’s promise were contractually binding.95
It is therefore possible to meet the concern that the principle in Sidhu and
Thorner, if expanded beyond the proprietary context, would “overthrow” the
requirement of consideration.96 Consideration is a requirement of contractual
claims, and is not threatened by the recognition of non-contractual claims. Nor
can it be said that no cause of action (even if non-contractual) can arise from
a promise unaccompanied by consideration. Even if promises in deeds are put
to one side, there remain a number of examples in which a promise without
consideration can form a crucial part of a cause of action97 and, in some cases at
least, the cause of action may lead to B’s being put, as far as possible, in the same
position as B would have been in had the promise been performed.98
Indeed, it can be argued that the classical requirements of contract formation,
such as the doctrine of consideration, can more easily be justified precisely
because other doctrines may, in some circumstances, give some legal effect to
A’s promise. First, a comparison can again be drawn with formality rules: the
English Law Commission, when proposing the rule that a contract for the sale
or other disposition of an interest in land must be made in writing signed by
both parties, specifically adverted to proprietary estoppel as a means to deal with
any injustice that might otherwise arise from the rule.99 Second, decisions which
might otherwise seem to depend on extensions of, or exceptions to, the classical
requirements of contract formation can instead be seen as applications of an
independent principle imposing a liability to ensure that B suffers no detriment.
In the proprietary context, for example, the identification of such a principle
94 In PW & Co v Milton Gate Investments Ltd [2003] EWHC 1994 (Ch), [2004] Ch 142 [201],
Neuberger J invoked the notion of unconscionability in explaining why events occurring after
B’s reliance may be taken into account in determining if an estoppel by convention has been
established: “Estoppel is a doctrine designed to do justice, and, at least normally, it seems scarcely
consistent with doing justice to ignore facts, which have occurred since the date upon which an
action was taken in reliance upon the estoppel, and which may well impinge significantly, or
even determinatively, on the issue of unconscionability”.
95 In Thorner (n 2), eg Lord Scott raised at [19] the question of A’s position if A had been required
to sell A’s farm to fund his own medical care. It would seem, however, that the backwards-looking
nature of proprietary estoppel means that it can react to such changes: see eg Uglow v Uglow
[2004] EWCA Civ 987; [2004] WTLR 1183 [30] (Mummery LJ); Germanotta v Germanotta
[2012] QSC 116 [141]–[148] (McMeekin J). The view on this point expressed by Handley AJA in
Delaforce v Simpson-Cook (2010) 78 NSWLR 483 [85]–[89] may therefore be too narrow. Note
too EA Farnsworth, Changing Your Mind: The Law of Regretted Decisions (Yale UP 1998) 85–88,
arguing that a broader set of circumstances than those leading to frustration should be relevant
when considering a non-contractual means of giving effect to a promise of future conduct.
96 [1951] 2 KB 215 (CA) 220.
97 See eg Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 (HL) (gratuitous promise
involving an assumption of responsibility giving rise to a duty of care); Yearworth v North Bristol
NHS Trust [2009] EWCA Civ 37; [2010] QB 1 (gratuitous promise to take care of property as
part of a gratuitous bailment). As in Cobbe (n 11), an express or implied promise of payment
can form part of the basis under which B undertakes work for A and therefore support a
restitutionary claim for the value of such work.
98 As is the case where a duty of care arises and where A’s promise is one to take reasonable care, as
in Yearworth (n 97).
99 Law Commission, Formalities for Contracts for Sale etc of Land (Law Com No 164, 1987) para 5.2.
374 Contract in Commercial Law
can rebut Atiyah’s criticism100 that a case such as Crabb involves an implicit
rejection of the traditional tests for consideration. If the principle operates more
widely, it may also assist in explaining the operation of unilateral contracts in
a case where B has begun, but not completed, performance.101 If there is some
limit, in such a case, on A’s freedom to revoke A’s promise,102 it may be difficult
to explain on standard models of consideration,103 as B has made no promise
to complete performance, and partial performance was not requested by A.104
Rather than stretching such standard models of consideration, it may instead be
possible to regard A, in such a case, as under an initial liability to ensure that B
suffers no detriment as a result of B’s reasonable reliance on A’s promise, with A’s
contractual duty arising only on B’s completion of performance.105
This analysis might seem to raise the spectre that the principle in Sidhu
and Thorner, if extended, might “absorb the whole of contract law”.106 First, of
course, it is important to note that B may acquire a contractual right even in
the absence of reliance;107 many practically important contractual bargains are
beyond the scope of any principle that requires reliance by B on A’s promise.
Second, it is clear that, where a contract exists, A is under a duty to perform and
so B has an entitlement to have his or her expectation protected on breach by
A;108 in contrast, when the principle in Sidhu and Thorner applies there are at
least some cases in which B will have to settle for lesser redress.109 Third, whilst
it imposes a free-standing liability, the principle analysed here is a second-order
one, as in assessing whether the prospect of detriment arises, any other rights
100 P Atiyah, “When is an Enforceable Agreement Not a Contract? Answer: When it is an Equity”
(1976) 92 LQR 174.
101 Where performance is completed, the significance of there being a unilateral contract is that A
is under an immediate duty to perform A’s promise to B, rather than under a liability to ensure
that B suffers no detriment as a result of B’s reasonable reliance.
102 As was accepted in eg Schweppe v Harper [2008] EWCA Civ 442; [2008] BPIR 1090 [44]–[45]
(Waller LJ) and in Errington v Errington and Woods [1952] 1 KB 290 (CA) 295; [1952] 1 All ER
149, 153 (Denning LJ).
103 Note that E Peel, Treitel’s Law of Contract (13th ed, Sweet & Maxwell 2011) 3–158 includes such
unilateral contracts as one of the ‘special cases’ in which consideration may be found even if not
present in the classic sense.
104 The analysis of the Full Federal Court in Mobil Oil Australia Ltd v Wellcome International Pty Ltd
(1998) 81 FCR 475, 501–06 is persuasive in rejecting any “universal proposition that an offeror
is not at liberty to revoke the offer once the offeree ‘commences’ or ‘embarks upon’ performance
of the sought act of acceptance”.
105 This is consistent with the approach of the Full Federal Court in Mobil Oil Australia (n 104) where
it is also noted that B will have an alternative means of protection if A can be shown to have made
a collateral contractual promise (for which consideration was provided) not to revoke A’s offer.
106 The phrase used by S Waddams, Dimensions of Private Law (CUP 2003) 67 in considering the
argument in G Gilmore, The Death of Contract (Ohio State UP 1974).
107 As in the case of an executory contract. In contrast, as noted by McPherson J in Riches v Hogben
[1985] 2 Qd R 292, 300–01 (in a passage approved in Giumelli (n 73) 121): “the equitable principle
has no application where the transaction remains wholly executory on the plaintiff ’s part”.
108 Even if, as in eg Williams Bros v Ed T Agius Ltd [1914] AC 510 (HL); Clark v Macourt [2013] HCA
56; (2013) 253 CLR 1, this results in B’s ending up in a better position than B would have been
in had the contract been performed.
109 See eg Jennings v Rice [2002] EWCA Civ 159; [2003] 1 FCR 501; Henry v Henry [2010] UKPC 3;
[2010] 1 All ER 988; Sullivan v Sullivan [2006] NSWCA 312; ACN 074 971 109 Pty Ltd (as Trustee
for the Argot Unit Trust) v National Mutual Life Association of Australasia Ltd [2008] VSCA 247.
Ch 16 Equitable Estoppel as a Cause of Action 375
Conclusion
The nature and function of the principle
It has been argued here that decisions such as Sidhu and Thorner rest on a
particular strand of equitable estoppel that does not depend simply on
restraining A’s assertion of a fact or a right, and which does not operate to
make a promise immediately binding. The principle underlying those cases
can be seen as “backwards-looking”:117 it imposes a liability on A such that
a court can intervene to prevent the particular form of unconscionable
conduct which consists of A’s leaving B to suffer a detriment as a result of
B’s reasonable reliance on a promise of A which B reasonably understood as
seriously intended by A.
There is thus a clear separation between contract law as a duty-imposing
doctrine and a principle which instead imposes a liability, concretised as a
duty only if and when a court ascertains what is required of A in the particular
case. This model is consistent with the notion that, prior to any such court
order being made in B’s favour, B has an “equity by estoppel”;118 even if, for
example as in Thorner, that equity will be satisfied by an order that A convey
particular land to B, it would not be accurate to say that, prior to such an
order, A already had a duty to make that transfer. Such a conclusion would be
premature, given the backward-looking nature of the principle.119 An analogy
can be drawn with the argument of Stephen Smith, that, where A commits a
breach of contract or a tort, A does not come under an immediate duty to pay
damages to B, but is instead subject to a liability.120 In the case of proprietary
estoppel, however, the liability is not a secondary one, depending on a pre-
existing duty of A and arising in response to a breach of that duty. Rather, the
liability is a primary one,121 imposed in order to prevent a particular form of
unconscionable conduct by A.
The closer parallel, at this abstract level of course, may be with restitutionary
claims, which may also arise in the absence of any breach of duty by A, as
when, for example, A is the recipient of B’s mistaken payment. As Smith
has noted, it is often difficult to think of A as being under a duty to make
restitution as soon as payment is received: at that stage, A may be entirely
117 Following the analysis of Hoffmann LJ in Walton v Walton (CA, 14 April 1994).
118 See eg Land Registration Act 2002 (UK) s 116(a).
119 It is important to emphasise, as noted in Walden v Atkins [2013] EWHC 1387 (Ch); [2013] BPIR
943 [45], that the backwards-looking nature of the principle does not mean that B has no right
at all before a court order. A court may for example have to establish the nature of B’s right at
some point prior to the court’s order. Where, for example, property was transferred by A to C,
and B wishes to make a claim against C, the court needs to establish whether B had any rights
in that property at the time of the transfer to C. This can be done by asking if, had A’s liability
been given effect to at that point in time, that would have been done by ordering A to grant B
a property right rather than, for example, paying money to B. See further McFarlane (n 91)
paras 8.80–8.117.
120 S Smith, “Duties, Liabilities, and Damages” (2012) 125 Harv LR 1727.
121 A Robertson, “Estoppels and Rights-Creating Events: Beyond Wrongs and Promises” in J Neyers
et al (eds), Exploring Contract Law (Hart Publishing 2009) makes the important point that
equitable estoppel can give rise to a right of B even in the absence of any wrongful conduct of A;
see eg Repatriation Commission v Tsourounakis [2007] FCAFC 29; Walden (n 119).
Ch 16 Equitable Estoppel as a Cause of Action 377
122 See S Smith, “A Duty to Make Restitution” (2013) 26 Can J L Juris 157 and S Smith, “The Restatement
of Liabilities in Restitution” in C Mitchell and W Swadling (eds), The Restatement Third: Restitution
and Unjust Enrichment – Critical and Comparative Essays (Hart Publishing 2013).
123 (2014) 253 CLR 560 [65]–[76].
124 Australian Financial Services (n 123) [88], where reference was made to Gillett v Holt [2001]
Ch 210 (CA).
125 Australian Financial Services (n 123) [86].
126 Crabb (n 26).
127 Finn (n 71).
128 See eg The Earl of Oxford’s Case (1615) Chan Rep 1; 21 ER 485; Inwards (n 63).
129 S Smith, “A Duty to Make Restitution” (n 122) 170. See too B McFarlane, “Unjust Enrichment,
Rights and Value” in D Nolan and A Robertson (eds), Rights in Private Law (Hart Publishing
2009).
130 See H Smith, “Property, Equity, and the Rule of Law” in L Austin and D Klimchuk (eds) (n 64)
for the view that a characteristic form of equitable intervention consists in preventing A from
taking opportunistic advantage of rules that work very well in the vast majority of cases.
378 Contract in Commercial Law
131 For discussion of the distinct strands of proprietary estoppel, see McFarlane (n 91) ch 1.
132 See further McFarlane (n 91) paras 2.80–2.113.
133 See eg Hoyl Group (n 15) 43 relying on the formulation in C Harpum et al (eds), Megarry &
Wade: The Law of Real Property (8th ed, Sweet & Maxwell 2012) para 16.001. See too DHJPM
(n 4) [48], [94].
134 See too McFarlane and Sales (n 7).
135 Waltons Stores (n 1) 428.
136 See above, “Promissory estoppels”.
Ch 16 Equitable Estoppel as a Cause of Action 379
that, where the principle applies, the liability imposed on A may have different
consequences to those of the envisaged legal relationship.137 Moreover, it might
seem arbitrary if the principle can apply, for example, where A promises to make
a contract with B to paint B’s house (a promise of a binding legal relationship)
but not if A simply promises to paint B’s house. Further, as Robertson has shown,
a number of Australian authorities are inconsistent with such a limit.138
An argument in favour of such a restriction could, however, be made by
focussing on the nature of the principle as a liability-imposing rule. It may be
that liability-imposing rules can be seen, as a group, as not required by free-
standing corrective justice, but rather as necessary to support the functioning
of such primary rules, and thus as having a second-order element, dealing with
dangers posed by the legal system itself. A promise-based proprietary estoppel
case such as Sidhu or Thorner could be said to reveal the dangers to B of A’s
power to make an inter vivos or testamentary transfer of land to B, and of
B’s reliance on that power. The liability arising in such a case mitigates the
dangers of such a power to B. The same can be said in a case where A promises
to exercise a different legal power (the power to contract) in B’s favour, but
not when A simply promises to perform an act for B’s benefit, as A’s power to
perform the act does not derive, in any meaningful sense, from legal rules.139 If,
then, the function of the principle in Sidhu or Thorner is to depend on its nature
as a liability-imposing rule, there may be an argument for limiting its operation
to cases where the prospect of detriment to B depends not only on A’s promise
but on the presence of a legal rule conferring a power on A.
An analogy can be drawn with restitutionary liability.140 In a case where,
rather than mistakenly conferring a right on A, B mistakenly performs a
pure service for A, it seems reasonably clear that the classic strict-liability
restitutionary model does not apply.141 Similarly, it is not clear that the model
applies where, rather than directly exercising a legal power to confer a benefit
on A, B sets in train a series of events which leads to A’s acquiring such a
benefit from a third party.142 The crucial question in such cases can be seen
as one of extrapolation from the core case of the mistaken payment: is the
key feature of that case B’s causing a benefit to be conferred on A or, more
narrowly, is it the operation of legal rules to ensure that the same event caused
both a loss of a right by B and a gain of a right by A?143 From the standpoint
of first principle, it may seem arbitrary to distinguish between different means
by which B may factually cause a benefit to be acquired by A, just as it seems
arbitrary to distinguish between A’s promise to enter a contract with B, and
A’s promise to perform an act for B. If, however, the underlying liability is not
itself based on first principles, but rather functions to deal with risks caused by
the presence of legal rules, the distinction between those cases may be justified.
It is not, however, the purpose of this chapter to decide whether equitable
estoppel’s ability to operate as a cause of action should be restricted to cases
where A’s promise relates to a legal power of A. The crucial point is rather
that, in establishing the limits of the principle applied in Sidhu and Thorner,
a court should not regard that principle as a form of preclusive or promissory
estoppel, or as a means of giving contractual effect to promises unsupported by
consideration, but should rather focus on the inherent nature and function of
the principle itself.144
142 For recent analysis of this point, referring to the academic and judicial debate as to the correct
test for establishing if A’s enrichment is at the expense of B, see Bank of Cyprus UK Ltd v Menelaou
[2015] UKSC 66; [2016] AC 176 [28]–[35] (Lord Clarke), [65]–[73] (Lord Neuberger).
143 An argument in favour of the narrower view is made by McFarlane (n 129).
144 It has been argued here that the principle is currently applied in the guise of each of promissory
and proprietary estoppel and so, consistently with the approach of Nettle J in Crown Melbourne
(n 4) at [216]-[218], the principle should be applied in the same way whether the promissory
or proprietary label applies. This does not mean, however, that the whole of the two doctrines
should be unified, as each of promissory and proprietary estoppel also includes further, distinct
principles: see further McFarlane (n 61). This may help to explain the apparent lack of enthusiasm
in Crown Melbourne for a wholesale unification of equitable estoppel: see eg French CJ, Kiefel
and Bell JJ at [37]-[38] and Keane J at [139].
17
The Mechanics of
Equitable Assignments:
One Engine or Two?
CH Tham
1. Introduction
What happens when a legal or equitable chose in action is equitably assigned?1
There are at least two ways of looking at the issue.
First, some have suggested that equitable assignments operate by way of
“transfer” of property rights. For example, in Burton v Camden London Borough
Council, Lord Millett observed as follows:2
“My Lords, the word ‘assignment’ is not a term of art. It denotes any conveyance,
transfer, assurance or other disposition of property from one party to another.
The essence of an assignment is that it operates to transfer its subject matter
from the ownership of the assignor to that of the assignee. …”
This may be read as suggesting that, for Lord Millett, “assignments” effect a
“transfer” of a pre-existing property interest from the assignor to the assignee
through extinction of the assignor’s entitlements against the obligor, coupled
with a simultaneous revesting by the obligor of similar entitlements against
himself in the assignee. Consequently, on this model of assignment, it would be
as if the assignor had “dropped out” and no longer had any legal or equitable
relationship with the obligor, whereas the assignee had stepped into the shoes
of the assignor and had taken the assignor’s place in relation to the obligor.
1 The discussion in this chapter will focus on equitable assignment, leaving aside consideration of
statutory assignment which, in England, arises pursuant to s 136 of the Law of Property Act 1925
(UK). This is the modern-day equivalent of s 25(6) of the Supreme Court of Judicature Act 1873
(UK). The Australian equivalents may be found in the Civil Law (Property) Act 2006 (ACT) s 205;
Conveyancing Act 1919 (NSW) s 12; Law of Property Act (NT) s 182; Property Law Act 1974 (Qld)
s 199; Law of Property Act 1936 (SA) s 15; Conveyancing and Law of Property Act 1884 (Tas) s 86;
Property Law Act 1958 (Vic) s 134; and Property Law Act 1969 (WA) s 20. For reasons of brevity,
this chapter will also leave aside consideration of the various statutory modes of assignment
applicable to specified types of choses in action, eg copyright, patents, and insurance contracts.
2 Burton v Camden London Borough Council [2000] 2 AC 399 (HL) 408.
381
382 Contract in Commercial Law
3 See also: JG Starke, Assignments of Choses in Action in Australia (Butterworths, 1972) 10;
FC Tudsbery, The Nature, Requisites and Operation of Equitable Assignments (Sweet and
Maxwell 1912).
4 MG Bridge, Personal Property Law (4th ed, OUP 2015) 231.
5 See also: Starke (n 3) 10: “An assignment of a chose in action is a transaction or disposition
which has the effect, in general, of immediately transferring the right in question from the party
in whom it is vested to another party”. Tudsbery (n 3) 1: “An assignment is a transfer or making
over to another of the whole of any property, whether real or personal, in possession or in action,
or any estate or right therein”.
6 Doe d Lewis v Lewis (1842) 9 M & W 662, 664; 152 ER 280, 281.
Ch 17 The Mechanics of Equitable Assignments: One Engine or Two? 383
7 Gorringe v Irwell India Rubber and Gutta Percha Works (1886) 34 Ch D 128 (CA) 136.
8 Marcus Smith and Nico Leslie, The Law of Assignment (2nd ed, OUP 2013) paras 11.09–11.18.
9 Smith and Leslie (n 8) para 11.05. But see comments below, at text to n 21.
10 Eg Smith and Leslie (n 8) para 4.03 suggest that the reason why the assignor of an equitable
chose “drops out of the picture” post-assignment is because by such assignment, the assignor’s
beneficial interest in the chose assigned will have passed to the assignee; yet such “transfer”
of beneficial interest necessarily entails the assignor retaining her entitlements vis-a-vis the
equitable obligor to the chose assigned as a trustee of those entitlements.
11 Smith’s and Leslie’s bifurcated view is more fully explored below in Part 2(a).
12 Supreme Court of Western Australia: the article was written prior to Edelman J’s appointment
to the Federal Court of Australia.
13 James Edelman and Steven Elliott, “Two Conceptions of Equitable Assignment” (2015) 131 LQR
228, 246.
14 The three principal English authorities stating how an equitable assignee steps into the shoes of
the assignor and may therefore bring proceedings in equity against the obligor without joining
the assignor are discussed below, at text at, and following, n 25.
384 Contract in Commercial Law
when it was thought that the assignee[15] who assigns an equitable interest ‘has
no interest in the subject matter’.”16
The suggestion in this chapter is that there is another way to square the
circle, beginning with the realisation that we may have assumed (wrongly) that
the “trust” concept provides sufficient explanatory force for the multiple effects
observed when a legal or equitable chose is equitably assigned. While equitable
assignments have effects not dissimilar to those which would arise when a bare
trust is constituted over the chose in question – these are the “trust” effects
arising by a “trust” mechanism – equitable assignments also produce effects not
dissimilar to those which would arise where an agent has been appointed but
has also been released from the typical fiduciary obligations owed by an agent
to its principal.
Though such an agency relationship would be atypical, it cannot be doubted
that it is, in principle, perfectly possible: so far as a principal is owed fiduciary
obligations by her agent, the principal has the power to release her agent from
those obligations, leaving the agent free to invoke those delegated powers as he
pleased – rather as the Romans are said to have recognised to be the case with
a cessio actionum.17 Consequently, the entitlements of the principal which have
been delegated to the “agent” may be invoked by that “agent” as the “agent”
pleases. For the purposes of this chapter, these will be referred to as the “agency”
effects arising by the “agency” mechanism underpinning equitable assignments.
This chapter proposes that the trust mechanism may be applied without
distinction to equitable assignments of either legal or equitable choses in
action. But this is not the only mechanism driving equitable assignments, and
the agency mechanism explains why an equitable assignee of an equitable chose
may deal directly with the obligor to the equitable chose assigned, bypassing or
“leap-frogging” his assignor – for example, by bringing judicial proceedings in
equity against a defaulting obligor in the assignee’s own name, without having
to join the assignor.18
15 Given the context, it would appear that the authors were referring to B, the assignee of A. The
point, however, is that B had ‘sub-assigned’ her interest to C and so, had ‘dropped out’.
16 Edelman and Elliott (n 13) 246, citing the authority of Cator v Croydon Canal Co (1843) 4 Y & C
Ex 593; 160 ER 1149; Redman v Permanent Trustee Company of New South Wales Ltd (1916) 22
CLR 84 (HCA), and Fulham v McCarthy (1848) 1 HLC 708; 9 ER 937 (on appeal from the Irish
High Court of Chancery). However, Redman is not independent authority for the proposition
since the sole reference on point was made by Isaacs J, obiter in Redman, 95, relying on the
authority of Fulham v McCarthy. Even so, Edelman and Elliott recognise that their thesis that
the “dropping out” of such “trustee” would appear to have been contradicted by dicta in Nelson
v Greening & Sykes (Builders) Ltd [2007] EWCA Civ 1358; [2008] 1 EGLR 59 [57].
17 This is discussed further in Part 3, below.
18 As in Cator (n 16) and other cases to similar effect – these are discussed in Part 2(a), below.
Ch 17 The Mechanics of Equitable Assignments: One Engine or Two? 385
19 For an ample summary of the most significant secondary sources, see Edelman and Elliott
(n 13). Key English cases stipulating that this is so include: The Wasp (1867) LR 1 A&E 367 (High
Court of Admiralty) 369; Re Steel Wing Company, Ltd [1921] 1 Ch 349 (Ch) 356; Warner Bros
Records Inc v Rollgreen Ltd [1976] 1 QB 430 (CA) 443–44; Bexhill UK Ltd v Razzaq [2012] EWCA
Civ 1376 [58]; and Roberts v Gill & Co [2010] UKSC 22; [2011] 1 AC 240 [68].
20 It is, of course, entirely possible for a trust to be constituted over an equitable interest or chose:
see Re Barney [1892] 2 Ch 265, 272 (Ch) (Kekewich J).
21 In Squib v Wyn (1717) 1 P Wms 378, 381; 24 ER 432, 433, in connection with a dispute arising
in a spes successionis (ie an equitable chose in action), Lord Cowper, LC observed that, “choses
in action are assignable in equity, though not at law …”. Similar sentiments were expressed
by Lord King LC in Duke of Chandos v Talbot (1731) 2 P Wms 601, 608; 24 ER 877, 880:
“that though a chose in action, as a bond, &c, was not in strictness of law assignable, yet in
equity it was, as every day’s experience shewed …”. It seems, however, that no distinction was
drawn between the assignability in equity of legal or equitable choses in action; and this was
accepted to be the case in Lord Carteret v Paschal (1733) 3 P Wms 197, 199; 24 ER 1028, 1029
(see n 33).
22 It is suggested that such trust should not be taken to be constructive, else equitable assignments
of subsisting equitable choses would not have to comply with the formalities imposed by s
53(1 (c) of the English Law of Property Act 1925, which would come as a shock to generations of
students who have pored through the minutiae of Grey v Inland Revenue Commissioners [1960]
AC 1 (HL). The equivalent provision in Australia may be found in the Civil Law (Property) Act
2006 (ACT) s 201; Conveyancing Act 1919 (NSW) s 23C; Law of Property Act (NT) s 10; Law of
Property Act 1936 (SA) s 29; Conveyancing and Law of Property Act 1884 (Tas) s 60(2); Property
Law Act 1969 (WA) s 34. In Queensland, dispositions of subsisting equitable interests need only
be evidenced in writing: Property Law Act 1974 (Qld) s 11(1)(c).
23 Smith and Leslie (n 8) para 11.09.
386 Contract in Commercial Law
24 GJ Tolhurst, The Assignment of Contractual Rights (Hart Publishing 2006) para 4.03.
25 In Packer v Wyndham (1715) Prec Cha 412, 415; 24 ER 184, 186 counsel submitted that, “any
disposition by Cestuique Trust is binding upon the trustee in a court of equity, and even at law”.
The report does not record whether the Lord Chancellor agreed with this submission.
26 Smith and Leslie (n 8) para 11.07.
27 Cator (n 16) 593–94; 1149–50.
28 Smith and Leslie (n 8) para 11.07, fn 7.
Ch 17 The Mechanics of Equitable Assignments: One Engine or Two? 387
interest of the donor, and the donee may go with that deed to the trustees, and
say, transfer to me the interest in this sum of stock; and I think that in such
a case it would not even be necessary to make the donor a party to a suit to
enforce a gift[;]”29
Smith and Leslie also cite the authority of Fulham v McCarthy, where Lord
Cottenham LC said of the assignment before the court:
“It is not an assignment of a legal right, it is an assignment in equity of a
purely equitable interest; in which case, as Mr Turner very properly admitted
at the bar, the course of practice of Courts of Equity is to file a bill, not by the
assignor, who, if the assignment be valid, has no longer any interest in the
property assigned, but by the party claiming as assignee.”30
This conception of the operation of an equitable assignment is not limited to
academic commentators. Similar sentiments can be found in some of the cases,
though usually, the cases are careful to stipulate that any “change” in the parties
to whom an obligor is duty-bound by reason of an equitable assignment arises
only when such obligor has received notice of the assignment. For example, in
Société Genérale de Paris v Tramways Union Co,31 Cotton LJ opined that:
“[w]here there is an assignment, available only in equity, of an interest in
personalty vested in a trustee, or of a debt due to the assignor, there notice
is necessary, for until notice is given, the trustee can pay to his original cestui
que trust, and the debtor may pay to this creditor. But after notice the trustee
holds the fund in trust for the assignee, and the debtor cannot obtain a good
discharge without the concurrence of the transferee. In equity, without any
further act done by the assignor there is, as against the trustee or debtor, a
change of the person entitled to be considered the cestui que trust or creditor,
and disregard of the assignment will, in equity, make the trustee or the
debtor liable.”
The difficulty with these “transfer” conceptions of equitable assignment
(even if limited to instances of assignments of equitable choses in action), is
that they appear to require us to accept that so far as such “transfer” is taken to
entail an extinction and a re-grant, and so far as it is postulated such extinction
would lead to the entitlements of the assignor being entirely extinguished
following the assignment (upon notice to the obligor), the end-result is the
unilateral variation of the obligations which an obligor to a chose in action had
voluntarily undertaken without his assent to the same. If we conceive equitable
assignments to operate in the manner of a trust, however, the concern as to
unilateral variation of an obligor’s obligation will recede.
32 Saunders v Vautier (1841) 4 Beav 115; 49 ER 282. It may be noted that some jurisdictions have
rejected this doctrine. For a brief account of the position adopted by most jurisdictions within
the United States, see Paul Matthews, “The Comparative Importance of the Rule in Saunders
v Vautier” (2006) 122 LQR 266, 282–87. The rule has also been legislatively modified in the
Canadian provinces of Alberta and Manitoba, an account of which may be found in DWM
Waters, Mark R Gillen and Lionel D Smith, Waters’ Law of Trusts in Canada (4th ed, Carswell
2012) 1258–62.
Ch 17 The Mechanics of Equitable Assignments: One Engine or Two? 389
obligations – but as outlined above, this was what the trustee had signed up for
when he assented to the office in the first place. So even in this connection, the
trust analysis does not contravene the prohibition against unilateral variation
of obligations without the obligor’s assent.
There has been a long and consistent string of authorities which apply to
equitable assignments of equitable choses in action the same “trust” analysis as
has been applied to equitable assignments of legal choses in action, chiefly, to
explain how a gift of an equitable chose in action or interest by way of equitable
assignment may be made. The most significant of these will be discussed, below.
33 Lord Carteret v Paschal (1733) 3 P Wms 197; 24 ER 1028; affd Paschall v Thurston (1734) 2 Bro
PC 10; 1 ER 759. The facts of the case are more clearly set out in the report of the appeal to the
House of Lords.
34 Smith and Leslie (n 8) para 13.82; but they do not attempt to explain why this should be so.
35 For a summary of the law on coverture, see Viscount Simonds (ed), Halsbury’s Laws of England
(3rd ed, Butterworths 1957) vol 19 “Husband and Wife”.
390 Contract in Commercial Law
In June 1729, Doctor Herbert, assigned the said arrears, all subsequent arrears,
and the benefit of Lord Chancellor Cowper’s decree, to Lord Carteret and Sir
Clement Cotterell by deed of indenture to hold on various trusts: that, after
Lady Bromsall’s death, they should pay £500 to Sir Thomas Cross, and £3,900 to
Lady Granville out of the debt arising from Lord Chancellor Cowper’s decree,
and as to the surplus, to pay to such persons, and in such manner, as he by his
deed or will should appoint.
Doctor Herbert died intestate in October 1729, and Lady Bromsall survived
him by a few months before dying in April 1730.
The issue before the court in Lord Carteret v Paschal was whether Doctor
Herbert had, by his assignment, so reduced his wife’s equitable chose in action
arising from Lord Chancellor Cowper’s decree in favour of Lady Bromsall into
his possession so as to prevent any part of it from enuring to Lady Bromsall
when she survived him and became discovert. The problem was particularly
acute as to Doctor Herbert’s voluntary assignment to Lord Carteret and Sir
Clement of the surplus.36 If the assignment as to the surplus was invalid, then
it would follow that Doctor Herbert would not have sufficiently reduced this
part of his wife’s equitable chose in action into his possession, and so, by the
doctrine of survivorship, it would form part of Lady Bromsall’s estate when she
became discovert by surviving him.
Significantly, it was, “admitted on all sides that if a man in his own right
be entitled to a bond or other chose in action, he may assign it without any
consideration”.37 This led Lord Chancellor King to hold that the assignment as to
the surplus was valid, notwithstanding Dr Herbert having only held the chose in
respect of his wife by reason of the doctrine of coverture and his assignment of
it having been voluntary. Consequently, the surplus of the arrears was not to be
distributed as part of Lady Bromsall’s estate; and this case came to be accepted
as authority for the proposition that equitable assignments were effective, even if
made voluntarily without consideration – though the doctrinal explanation for
this result would only be gradually revealed in the subsequent case law.
36 In contrast, as Dr Herbert had previously been indebted to both Sir Thomas Cross and Lady
Grenville, it was accepted that the assignments to Lord Carteret and Sir Clement in respect of Sir
Thomas Cross and Lady Granville had been made for value: Carteret (n 33) 198, 1029.
37 Carteret (n 33) 199; 1029.
38 Sloane v Cadogan (1808) reported in Sir Edward Sugden, A Practical Treatise of the Law of Vendors
and Purchasers of Estates (11th ed, S Sweet 1846) 1119. Neither Smith and Leslie (n 8), nor AG
Guest and YK Liew, Guest on The Law of Assignment (2nd ed, Sweet and Maxwell 2015) refer
to this key case. Unsurprisingly, given that it is concerned with the assignment of an equitable
chose, it is not discussed in Tolhurst (n 24) either.
Ch 17 The Mechanics of Equitable Assignments: One Engine or Two? 391
come here, for when the trust is created no consideration is essential, and the
Court will execute it though voluntary.”41
The critical point in Sir William Grant’s judgement is highlighted above:
that the reason why the trustees of the Earl’s marriage settlement were “trustees
for his [William Cadogan’s] assigns” was because William Cadogan had already
constituted a trust in respect of his equitable interest – and given that he had
done nothing else apart from execute the deed of assignment, that trust must
have been manifested by way of that very same deed.42 And the next case provides
clear confirmation that this is indeed the doctrinal explanation underlying the
result in Sloane v Cadogan.
promise, oral or not under seal, which is nudum pactum, may be thought
perhaps hardly to come, for such a person has in effect had no promise at all.
In effect no contract has been made with him. But whatever rule there may be
against ‘volunteers’ it does not apply to the case of one who, in the language
of this Court, is termed a cestui que trust, claiming against his trustee. For
that which is considered by this jurisdiction a trust may certainly be created
gratuitously. So that the absence of consideration for its creation is in general
absolutely immaterial.”46
Knight Bruce LJ clearly accepted that English law permitted the holder of an
equitable interest (such as the interest of a remainderman under the terms of
a trust), while sui juris, to make a gift of that interest by way of an equitable
assignment. And significantly, as to whether consideration was required for
such equitable assignment to be effective, Knight Bruce LJ pointed out that
“whatever rule there may be against ‘volunteers’ it does not apply to the case
of one who … is termed a cestui que trust, claiming against his trustee. For
that which is considered by this jurisdiction a trust may certainly be created
gratuitously”.
From this, it is plain that Knight Bruce LJ considered an equitable assignment
of an equitable interest to be effective, even absent any consideration, because by
such assignment, a relation of trustee and cestui que trust had been created, and
in respect of such trust, once validly constituted, the absence of consideration
was of no import.
49 In the context, given that the Vice-Chancellor was disagreeing with the proposition that an
assignment by deed ought not to be treated as a declaration of trust, the Vice-Chancellor’s point
might have been more clearly made had he said that so far as a deed of assignment of an equitable
interest operates in equity to divest the assignor of his equitable right, “it is an operation no less
in the nature of declaring a trust than any other actual conveyance of an equitable estate or
interest in real or personal property”.
50 Voyle (n 47) 29; 288 (emphasis added).
51 (1886) 17 QBD 442 (QB). Smith and Leslie (n 8) para 13.83, fn 128 appear to have taken this to
be a case concerning an equitable assignment of a legal chose in action arising by way of debt.
Though Wills J referred to the subject-matter of the assignment as a “debt” in his judgment
(Harding, 445), in the context, it is clear that Wills J was referring to an equitable chose in action,
being George Harding’s equitable entitlement as a legatee to the testamentary trust arising under
James Harding’s will.
52 Harding (n 51) 445.
Ch 17 The Mechanics of Equitable Assignments: One Engine or Two? 395
for payment.53 The defendants were not justified, therefore, in their refusal
to execute their trust by tendering payment to Miss Harding. But Wills J also
discussed the position, had the assignment been equitable.
Wills J’s statement of the position in equity is telling. The key issue was
whether the donor had done everything within his power to complete the gift:
“The rule in equity amounts to this; that so long as a transaction rests in
expression of intention only, and something remains to be done by the donor
to give complete effect to his intention, it remains uncompleted, and a Court
of Equity will not enforce what the donor is under no obligation to fulfil. But
when the transaction is completed, and the donor has created a trust in favour
of the object of his bounty, equity will interfere to enforce it.”54
On the facts before the court, Wills J recognised that:
“[i]n the present case it was proposed to assign a sum of money due from
the trustees, the defendants; and probably before the Judicature Act it would
have been impossible to give a legal title to Laura Harding, so as to enable
her to sue in her own name in respect of this right of action; she could have
maintained a suit in equity, but the legal title could not have been completed
in her. Now it can be done; and it seems to me that the legal title has been so
completed by the notice signed by George Harding and sent by him to the
plaintiff. [Though i]f it is to be regarded as an equitable assignment, he has
done all that he could to make it complete; [but] if as a legal assignment, he
has completed it; and under s 25(6) of the Judicature Act, 1873, the assignee
of a chose in action may sue in his own name, the law as to the necessity
for a consideration not applying, as it seems to me, if the assignment is
completely made.”55
Read together, these passages indicate that, had it been necessary to consider the
position purely in equity, Wills J was of the view that George Harding had done
all he could do to complete the assignment, and in so doing, he had created a
trust in favour of his daughter. So this decision, too, lends supports to the trust
analysis.
53 Pursuant to s 25(6) of the Judicature Act 1873 (UK), whereby the “power to give a good discharge”
shall “pass and transfer” to the statutory assignee. This is preserved in s 136(1)(c) of the Law of
Property Act 1925 in England and Wales, and the equivalent provisions in Australia are listed at
n 1.
54 Harding (n 51) 444 (emphasis added).
55 Harding (n 51) 445 (emphasis added).
56 Re Spark’s Trusts [1904] 1 Ch 451 (Ch). Smith and Leslie (n 8) make no reference to this case.
396 Contract in Commercial Law
60 See Donaldson (n 29). The same was accepted to be the case in Cator (n 16), so far as the court
there recognised that the assignees in that case had validly required the Croydon Canal Co to
fully execute the trust on which they held the funds in question and could bring proceedings in
equity against the Croydon Canal Co for its failure to do so in their own names without needing
to join the assignor.
61 See G 2.38 in Francis De Zulueta (tr), The Institutes of Gaius: Part I Text with Critical Notes and
Translation (Clarendon Press 1946) 75.
62 Holland (n 67) 92 “It will be convenient to call the person entitled ‘the person of inherence’; and
the person obliged, ‘the person of incidence’”.
63 See G 2.39 in Zulueta (n 62) 75.
64 But see discussion above in Part 2(b).
398 Contract in Commercial Law
debtor had had notice of it,[65] subject however, to all defences which would
be good against the assignor…”66
Leaving aside concerns as to maintenance and champerty, perhaps the core
reason why the courts of common law could not countenance the “transfer” of
a legal chose in action save by way of a novation was because it recognised that
such “chose” is a relation between persons. As Professor Ames explained:
“A right of action in one person implies a corresponding duty in another to
perform an agreement or to make reparation for a tort. That is to say, a chose
in action always presupposes a personal relation between two individuals. But
a personal relation in the very nature of things cannot be assigned. Even a
relation between a person and a physical thing in his possession … cannot be
transferred. The thing itself may be transferred, and, by consent of the parties
to such transfer, the relation between the transferor and the thing may be
destroyed and replaced by a new but similar relation between the transferee
and the res. But where one has a mere right against another, there is nothing
that is capable of transfer. The duty of B to A, whether arising ex contractu
or ex delicto, may, of course, be extinguished and replaced by a new and
coextensive duty of B to C. But this substitution of duties can be accomplished
only in two ways: either by the consent of B, or, without his consent, by an act
of sovereignty …
When the substitution of duties is by consent, the consent may be given
either after the duty arises or contemporaneously with its creation. In the
former case the substitution is known as a novation, unless the duty relates to
land in the possession of a tenant, in which case it is called an attornment. A
consent contemporaneous with the creation of the duty is given whenever an
obligation is by its terms made to run in favour of the obligee and his assigns,
as in the case of annuities, covenants, and warranties before mentioned, or to
order or bearer, as in the case of bills and notes and other negotiable securities.
Here, too, on the occasion of each successive transfer, there is a novation by
virtue of the obligor’s consent given in advance; the duty to the transferor is
extinguished and a new duty is created in favour of the transferee.
… [But the field for the substitution of duties by consent was therefore
extremely limited, and in the great majority of cases a creditor would have
found it impossible to give another the benefit of his claim had not the
ingenuity of our ancestors devised another expedient, namely, the letter
of attorney. By such a letter, the owner of a claim appointed the intended
65 Receipt of notice of assignment by the obligor to the chose in action assigned is not essential for
the assignment to be valid as between assignor and assignee. However, receipt of notice by the
obligor to the chose generally leads to such obligor being fixed with knowledge (actual and/or
constructive) as would render the obligor to become additionally duty-bound in equity to the
assignee not to act in such a way as would dishonestly assist the assignor in committing a breach
of her equitable duties to the assignee arising from such assignment. The significance of notice,
therefore, insofar as it leads to, say, a debtor paying his creditor “at his peril” (to borrow a phrase
used in Walter & Sullivan Ld v J Murphy & Sons Ld [1955] 2 QB 584 (CA) 588), is that it leads
to a form of liability in equity for having committed an equitable wrong. The point was made
by Harlan F Stone, “The Nature of the Rights of the Cestui Que Trust” (1917) 17 Col LR 467,
485; and has also been noted in passing elsewhere, see CH Tham, “Notice of Assignment and
Discharge by Performance” [2010] LMCLQ 38, 52, fn 79.
66 Thomas Erskine Holland, The Elements of Jurisprudence (13th ed, Clarendon Press 1924) 314–15
(emphasis added).
Ch 17 The Mechanics of Equitable Assignments: One Engine or Two? 399
transferee as his attorney, with power to enforce the claim in the appointor’s
name, but to retain whatever he might recover for his own benefit. In this way
the practical advantage of a transfer was secured without any sacrifice of the
principle of the inalienability of choses in action.”67
Consequently, Professor Ames concluded that:
“[T]he so called assignment of a chose in action is, in reality, a power of
attorney for the attorney’s own benefit, ie the procuratio in rem suam of the
Roman law.”68
What Professor Ames’ account leaves aside, however, is that equitable choses
in action are just as much personal relations as legal choses in action. As a
result, the relation between the equitable obligor and his obligee cannot be
“transferred” to another without the obligor’s assent. But such assent may be
given at the time of the proposed “transfer”, or “in advance”, at the time when
the obligation was originally undertaken, as explained above in Part 2(a) in
connection with the obligations of a trustee to a bare or special trust.
How, then, do we account for equity’s seeming readiness to give effect to
assignments of equitable choses so much so that the assignee of an equitable
chose may deal directly with the equitable obligor without any need for the
assignor’s further co-operation?
The reason may be that equity came to regard all assignments as necessarily
entailing the kind of grant of authority one would associate with grants of
powers of attorney to effect an “assignment” of the benefit of a legal chose in
action at law. It co-opted “agency” reasoning to form part of the institutional
conception of “equitable assignment”.
So far as courts of equity were concerned, an equitable assignee of any
chose in action was, by virtue of that assignment, empowered by virtue of the
equitable assignment to bring judicial proceedings in respect of the assignor’s
entitlements against the obligor to the chose as if he were the assignor. So far
as the judicial proceedings in question were equitable – because the subject-
matter of the assignment had been an equitable chose – then nothing further
would be required for the assignee to bring such proceedings. But where the
judicial proceedings in question were to be legal – because the subject-matter
of the assignment had been a legal chose (such as a common law debt) – then
equity would give effect to its recognition of the assignee’s entitlement to bring
proceedings in right of the assignor by recognising that the assignee would have
been empowered by the equitable assignment to require the assignor to effect
a power of attorney as would allow the assignee to bring an action at law in
respect of the legal chose assigned, and would further support such power by
standing ready to grant equitable remedies such as an injunction to compel the
assignor to comply with such a request if and when made.
67 JB Ames, Lectures on Legal History and Miscellaneous Legal Essays (HUP 1913) 211–13 (and
reproduced in JH Wigmore (ed), Select Essays in Anglo-American Legal History (CUP 1907)
vol III, 580); being a revised version of JB Ames, “The Disseisin of Chattels – III. Inalienability of
Choses in Action” (1890) 3 Harv LR 337.
68 JB Ames, A Selection of Cases on the Law of Trusts with Notes and Citations (2nd ed, Harv LR Pub
1893) 61, restating a point previously made in JB Ames, “The Disseisin of Chattels – Part III”
(n 67) 340–41, fns 1, 2.
400 Contract in Commercial Law
Support for the above proposition may be found in Shadwell VC’s judgment
in Hammond v Messenger, a case where a common law debt had been equitably
assigned to an assignee:
“If this case were stripped of all special circumstances, it would be simply a bill
filed by a plaintiff who had obtained from certain persons to whom a debt was
due a right to sue in their names for the debt.”69
We may note that the Vice-Chancellor observed that the plaintiff-assignee had
obtained from the assignor-creditor a right to sue in their names for their debt.
It is difficult to see how such a right could have been a common law right: the
assignee was not privy to the debt, nor had he been appointed as the assignor’s
agent to bring such proceedings. All that had happened, so far as the pleadings
on the bill disclosed, was that there had been an equitable assignment of the
debt to the assignee.
The plaintiff-assignee’s “right” to sue in the assignor’s names for the
debt – which could only be sued for in an action at law in debt – must therefore
have been an equitable right; and that such equitable right arose from the
equitable assignment of the debt. This would be entirely consistent with the
analysis of Blackstone, for example, who tells us that an equitable assignment
entails something in the nature of a trust plus a power in the assignee to sue in
the name of the assignor.70
But what would it mean for the plaintiff to have obtained an equitable right
to sue at common law in the assignor’s names? Since a court of equity has no
power to override the jurisdictional rules of a court of common law, all a court
of equity may do is to recognise that an assignee of a legal chose in action has an
equitable power to require the assignor to execute a power of attorney as would
be recognised by a court of common law so as to enable legal proceedings to
be brought by the assignee in respect of the legal chose assigned in right of the
assignor. And if the assignor failed to comply with such a request or intimated
that it would refuse to comply with such a request by the assignee if it were
made, then a court of equity would grant a mandatory injunction to compel
the assignor to do that which it was obligated to do.
And this is precisely the kind of reasoning which was resorted to in
Hammond. Inter alia, the plaintiff-assignee in Hammond prayed for an order
that, “the Plaintiff may be at liberty to use the name of the Defendants, Wilks
& Wooler [the assignors], in an action at law to be brought by him against
Messenger [the debtor]”.71 But this was refused by the Vice-Chancellor.
On the bill before the court, the Vice-Chancellor concluded that no such
order should be granted since it had not been pleaded on the bill that the
assignors had, “at all interfered to prevent, or that they intend[ed] to prevent the
Plaintiff from using their names at law”. So there was not even any intimation
of an intended breach by the assignors of their equitable obligation as would
arise if the plaintiff-assignee were to invoke his power as equitable assignee to
require them to execute a suitably worded power of attorney as would then
permit him to commence proceedings at law against the debtor. Thus, since
none was pleaded, there were no grounds for the court to grant a mandatory
injunction to compel them to do their equitable duty as would arise if a power
of attorney were to be requested. The Vice-Chancellor could not but uphold
the demurrer by the defendants to the claim, and so the plaintiff-assignee’s suit
failed. But tellingly, he was at liberty to re-apply – presumably, if the appropriate
pleadings could be made.
For present purposes, Hammond tells us the following. In order to give
effect to the equitable right granted to an assignee of a chose in action to bring
proceedings on that chose in the assignor’s name, where the chose assigned
was legal (and so proceedings would have to be brought at law), the courts
of equity would recognise a power in the assignee to require the assignor to
execute a suitable power of attorney to bring such proceedings at law in respect
of the legal chose to allow the assignee to bring such proceedings. This step is
required because a court of law would not recognise the equitable assignment to
have such effect at law.72 And since a legal chose in action could only be brought
into possession by bringing an action at law, an indirect means of allowing the
assignee to bring such legal chose in action into possession would be necessary.
But the source of this entitlement is equitable in origin. It derives from the
equitable assignee’s entitlement to sue in right of the assignor by reason of the
equitable assignment. Consequently, where the chose assigned is equitable, and
not legal, the need to interpolate a power to execute a power of attorney in
order to give effect to the equitable assignee’s entitlement to sue in right of the
assignor falls away.
The cases above show that a court of equity would recognise an equitable
assignment as having the effect of causing the assignor to become obligated to
her assignee in a manner akin to that arising between a bare trustee and her
beneficiary. This is the “trust effect” which underpins equitable assignments of
either legal or equitable choses. But an equitable assignment has further effects
in equity which enable the assignee to “leap-frog” the assignor so as to invoke
the assignor’s entitlements as obligee to the chose assigned as if the assignee
72 Although by the time of Dawson v Great Northern and City Railway Company [1905] 1 KB 260
(CA) 272–73, the Court of Appeal had taken the position that an equitable assignee of a legal
chose in action could bring an action in her own name, joining the assignor as co-plaintiff or
co-defendant as necessary, “for the conveyance [of the chose by the assignment] confers on
the plaintiff an irrevocable power to sue in the name of Blake [the assignor], and any defect
in the constitution of this action might be cured by adding him as a co-plaintiff. Further, the
power is such as … to entitle the plaintiff [as Blake’s assignee] to give receipts in the name of
Blake for anything that may be recovered in the action, and in this way the defendants would
be protected against any claim by him thereafter”. This, of course, led the way to the decision
of the Privy Council in Vandepitte v Preferred Accident Insurance Corpn of New York [1933]
AC 70 (PC, Supreme Court of Canada), which clearly approved this form of procedural
shortcut to avoid the necessity of bringing two separate proceedings, one in Equity, and the
other, at common law.
402 Contract in Commercial Law
were the assignor and as the assignee pleased. This includes the power to bring
judicial proceedings in respect of the chose assigned against the obligor to
that chose.
Where the subject-matter of the dispute falls entirely within the ambit of
equity, as in the case of an equitable assignment of an equitable chose in action,
there is no need to initiate separate judicial proceedings in another jurisdiction.
Thus, “leap-frogging” cases like Cator tell us that the courts of equity do
recognise equitable assignments to have an “agency effect” such that the assignee
of an equitable chose in action may invoke the assignor’s powers and other
entitlements as obligee to the equitable chose assigned as if he were the assignor.
Though the Chancery courts could have adopted the approach applied by
the common law by which every conveyance of title to property would entail
a simultaneous extinction and re-vesting of entitlements in the disponor and
disponee, respectively, the case law reveals it did not do so. Instead, the Chancery
courts may be seen to have adopted a dual-pronged approach by considering
every equitable assignment to take effect as if a bare trust had been constituted
over the benefits of the chose in action assigned, whilst simultaneously regarding
the assignee as having been empowered to invoke the powers of the assignor in
a manner akin to the assignee’s having been appointed as the assignor’s agent,
but freed from the usual constraints imposed on agents to act for the benefit of
their principals. It is possible, therefore, to explain how equitable assignments
operate by recognising that there are two mechanisms which underpin the
operation of equitable assignment, not just one.
4. Conclusion
The tentative suggestion in this chapter has been that to understand how
equitable assignments of choses in action work, we do not have to accept that
such assignments work by way of a trust only insofar as the chose assigned
is legal, leaving it a mystery as to how such assignments operate when the
chose assigned is equitable. Rather, it is proposed that an equitable assignment
operates by means of two mechanisms: trust and agency.
This is not to say that the type of agency relationship created between
assignor and assignee is a typical one; but then, agency is a flexible doctrine – or
at least, it is a flexible mode of thought. In this context it is, indeed, atypical, in
that the assignor-principal releases the assignee-agent from the typical fiduciary
obligations owed by an agent to his principal such that the agent is free to invoke
his principal’s entitlements in relation to the chose in question as if he were the
principal and as the agent pleased. But it is through this combination of trust
and agency that we effect the “transfer” of the chose in action that has been
assigned, whilst still recognising and honouring the fundamental principle that
obligations, once undertaken, ought not to be susceptible to unilateral variation
by the obligee without the obligor’s consent.
As Professor Powell pithily observed, an authority coupled with an interest
is really a transfer of property73 – and so, the competing conceptions of
73 Raphael Powell, The Law of Agency (2nd ed, Pitman 1961) 388, fn 5.
Ch 17 The Mechanics of Equitable Assignments: One Engine or Two? 403
equitable assignment, one as a “transfer”, and the other as “trust”, may not be so
far apart after all. If we recognise that equity simulates a “transfer” by coupling
a trust with a grant of a special form of authority in the assignee, and that
such equitable transfer by way of equitable assignment entails no extinction
and re-grant (as occurs with a transfer or conveyance of legal title in realty or
tangible personalty), it becomes less difficult to speak of equitable assignments
as “transfers”. And that, perhaps, is how equitable assignments work.
18
Introduction
Questions concerning the efficacy of contractual exclusion clauses lie at the
heart of much litigation, including much commercial litigation. This, moreover,
is scarcely a recent phenomenon and large topics in the field of contract law
such as the formation of contracts, the incorporation of terms and the contra
proferentem doctrine have been worked out (and continue to be worked out)1
in the specific context of considering the application in any given case of an
exclusion or limitation of liability clause or clauses which directly or indirectly
may have that effect, such as “no reliance” and “entire agreement” clauses.2
This latter category of clause may have the effect of precluding liability for pre-
contractual representations, for example, by “negat[ing] one or more elements
of a claim” and thus “prevent[ing] the liability from arising in the first place”.3
In common law jurisdictions, there are some surprising (and not always
subtle) differences in judicial approach to the interpretation of exclusion
and limitation clauses, and those approaches have varied greatly over time.4
1 See eg Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165;
Alameddine v Glenworth Valley Horse Riding Pty Ltd [2015] NSWCA 219; (2015) 324 ALR 355,
being cases where the anterior determination of what documents comprised the contract was a
critical first step in considering whether an exclusion clause was even engaged.
2 In respect of entire agreement clauses operating with exclusionary effect, see E Macdonald,
“Unfair Contract Terms Act – Thirty Years On” in A Burrows and E Peel (eds), Contract Terms
(OUP 2007); J Cartwright, “Excluding Liability for Misrepresentation” in Burrows and Peel,
Contract Terms; A Trukhtanov, “Exclusion of Liability for Pre-contractual Misrepresentation:
A Setback” (2011) 127 LQR 345. See also on such clauses more generally D McLauchlan, “The
Entire Agreement Clause: Conclusive or a Question of Weight?” (2012) 128 LQR 521.
3 Cartwright (n 2) 213.
4 For a more general comparative law account of civil and common law approaches to contract
interpretation, see S Vogenauer, “Interpretation of Contracts: Concluding Comparative
Observations” in Burrows and Peel, Contract Terms (n 2).
405
406 Contract in Commercial Law
It famously took the House of Lords at least two attempts over more than a
decade to quash Lord Denning’s doctrine of fundamental breach5 and, even
then, as shall be seen, occasional signs of its revival have been identified from
time to time.
Even when and where principles have been clearly stated and doctrinal
controversies apparently settled, one not infrequently encounters a measure
of lip service being paid as judges grapple with the often perceived injustice
that may flow from the enforcement of an exclusion or limitation clause in
accordance with its terms. The bolder the drafting of such clauses in terms of
what is excluded, whether expressly or indirectly, the more creative common
law judges invariably become in the interpretation afforded to the exclusion or
limitation clause in question. Examples of such ingenuity, outside of the reach
of statutory regimes introduced to mollify the harshness of the rigid application
of contractual exclusions such as the Unfair Contract Terms Act 1977 (UK) and
Contracts Review Act 1980 (NSW), are also given later in this chapter. There is,
of course, an obvious danger in judges making assessments as to whether or
not a particular exclusion or limitation clause is fair or whether its invocation
would be in some way “unjust” because the court will not always be equipped
with all of the material facts including the extent to which the allocation of
risk implicit in an exclusion or limitation clause has been reflected in the
contract price.
Differences in approach may also be discerned in the statutory responses
of leading common law jurisdictions to such clauses. In some, the focus is on
particular classes or categories of contract; in others, more general statutory
norms are engaged. In some jurisdictions, of which the United Kingdom is
perhaps the clearest example, law reform was led by the judiciary, and Lord
Denning, in particular, rather than the legislature. It was surely no coincidence
that the revolutionary Unfair Contract Terms Act 1977 (UK) was enacted only
three years before the House of Lords’ decision in Photo Production Ltd v
Securicor Transport Ltd,6 which saw the controversial doctrine of fundamental
breach given its ultimate judicial quietus. The Australian Trade Practices Act
1974 (Cth), whose reach, in most respects and in its misleading or deceptive
conduct provisions, in particular, was not confined to consumer or any other
class of relational contracts, had been passed only six years earlier.7
A consequence of statutory control of exclusion clauses is that, within their
sphere of operation, such statutes with criteria such as “reasonableness” and
“unfairness” inevitably operate to undermine the certainty that exclusion
and limitation clauses are plainly intended to confer. The content of such
criteria is sometimes itself made the subject of statutory guidance but this is
inevitably open-ended and non-exhaustive.
One of the purposes of this chapter is to highlight the differences that
exist across various common law jurisdictions in common law and statutory
approaches to exclusion and limitation clauses. This is not purely an exercise
The corollary of freedom of contract and party autonomy in its purest form
was judicial indifference to exploitation of superior bargaining power so long
as that exploitation did not meet the stringent tests of fraud, duress or undue
influence.17 It has been noted that “opportunities for strong parties to impose
harsh and oppressive terms upon weak and unsuspecting parties multiplied
as the standard form contract became the principal vehicle to facilitate the
distribution of goods and services”18 and one can readily detect in a 20th
century survey of common law jurisprudence in relation to exclusion clauses
an increasing and almost intuitive judicial antipathy to clauses which excluded
or limited liability for what, ex hypothesi, will have been breaches of contract
or negligent acts leading to damages for which the affected party will not have
been responsible.
Contracts of adhesion, as that pejorative term connoted, formed a sharp
focus for reconsideration of the paramountcy of freedom of contract as a value.
Professor Kessler’s famous article – “Contracts of Adhesion – Some Thoughts
about Freedom of Contract”19 – was significant in this regard. Solicitude for
those perceived to be vulnerable and unable in substance to negotiate in the face
of “take it or leave it” standard terms began to be reflected in many jurisdictions
with legislative activity. In certain jurisdictions, of which England was perhaps
most prominent, that ground-breaking legislative activity was preceded by
strong judicial activism.
Common law courts gave effect to their antipathy to exclusion and
limitation clauses through a variety of techniques of construction which, from
time to time, have strained the apparently clear language in which contracts
have been drafted; other techniques involved development of doctrines such as
fundamental breach which were sought to be elevated to the status of a “rule
of law”. Resort was also had to public policy so as to limit the enforcement
of exclusion clauses, although this was not always explicit. On occasion, this
was done through examining the reasonableness of the exclusion (and not
enforcing unreasonable or “unconscionable” clauses); or identifying types
of conduct said to be per se incapable of exclusion such as gross negligence,
deliberate misconduct and actions undertaken in bad faith.
In an interesting historical footnote to L’Estrange, the successful counsel in
that case, a 35-year-old AT Denning, was later to become the progenitor of the
doctrine of fundamental breach by reference to which an exclusion clause was to
be treated as incapable of excluding liability for fundamental breach of contract.
Some 48 years after L’Estrange, Lord Denning signed off on his own judicial
career in George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd,20 in which he
memorably described the common law’s engagement with exclusion clauses
17 See also a similar phenomenon in relation to the doctrine of penalties as noted in Austin v United
Dominions Corporation Ltd [1984] 2 NSWLR 612, 626, cited by the High Court of Australia in
Andrews v Australia and New Zealand Banking Group Limited [2012] HCA 30; (2012) 247 CLR
205 [14].
18 C Edwards, “Freedom of Contract and Fundamental Fairness for Individual Parties: The Tug of
War Continues” (2009) 77 UMKC LR 647, 664.
19 F Kessler, “Contracts of Adhesion – Some Thoughts about Freedom of Contract” (1943) 43 Col
LR 629.
20 George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] QB 284 (CA).
410 Contract in Commercial Law
over the course of much of the 20th century. Under the heading “The heyday of
freedom of contract”, and in his own inimitable style, his Lordship wrote:
“None of you nowadays will remember the trouble we had – when I was
called to the Bar – with exemption clauses. They were printed in small print
on the back of tickets and order forms and invoices. They were contained in
catalogues or timetables. They were held to be binding on any person who
took them without objection. No one ever did object. He never read them
or knew what was in them. No matter how unreasonable they were, he was
bound. All this was done in the name of ‘freedom of contract’. But the freedom
was all on the side of the big concern which had the use of the printing press.
No freedom for the little man who took the ticket or order form or invoice.
The big concern said, ‘Take it or leave it’. The little man had no option but to
take it. The big concern could and did exempt itself from liability in its own
interest without regard to the little man. It got away with it time after time.
When the courts said to the big concern, ‘You must put it in clear words’, the
big concern had no hesitation in doing so. It knew well that the little man
would never read the exemption clauses or understand them.
It was a bleak winter for our law of contract. It is illustrated by two cases,
Thompson v London, Midland and Scottish Railway Co [1930] 1 KB 41 (in which
there was exemption from liability, not on the ticket, but only in small print at
the back of the timetable, and the company were held not liable) and L’Estrange
v F Graucob Ltd [1934] 2 KB 394 (in which there was complete exemption in
small print at the bottom of the order form, and the company were held not
liable).”21
Lord Denning continued, this time under the sub-heading “The secret weapon”:
“Faced with this abuse of power – by the strong against the weak – by the
use of the small print of the conditions – the judges did what they could to
put a curb upon it. They still had before them the idol, ‘freedom of contract’.
They still knelt down and worshipped it, but they concealed under their
cloaks a secret weapon. They used it to stab the idol in the back. This weapon
was called ‘the true construction of the contract’. They used it with great
skill and ingenuity. They used it so as to depart from the natural meaning
of the words of the exemption clause and to put upon them a strained and
unnatural construction. In case after case, they said that the words were not
strong enough to give the big concern exemption from liability; or that in
the circumstances the big concern was not entitled to rely on the exemption
clause. If a ship deviated from the contractual voyage, the owner could not rely
on the exemption clause. If a warehouseman stored the goods in the wrong
warehouse, he could not pray in aid the limitation clause. If the seller supplied
goods different in kind from those contracted for, he could not rely on any
exemption from liability. If a shipowner delivered goods to a person without
production of the bill of lading, he could not escape responsibility by reference
to an exemption clause. In short, whenever the wide words – in their natural
meaning – would give rise to an unreasonable result, the judges either rejected
them as repugnant to the main purpose of the contract, or else cut them down
to size in order to produce a reasonable result. This is illustrated by these cases
in the House of Lords: Glynn v Margetson & Co [1893] AC 351; London and
North Western Railway Co v Neilson [1922] 2 AC 263; Cunard Steamship Co Ltd
v Buerger [1927] AC 1; and by Canada Steamship Lines Ltd v The King [1952]
AC 192 and Sze Hai Tong Bank Ltd v Rambler Cycle Co Ltd [1959] AC 576 in the
Privy Council; and innumerable cases in the Court of Appeal, culminating in
Levison v Patent Steam Carpet Cleaning Co Ltd [1978] QB 69. But when the clause
was itself reasonable and gave rise to a reasonable result, the judges upheld it;
at any rate, when the clause did not exclude liability entirely but only limited
it to a reasonable amount. So where goods were deposited in a cloakroom
or sent to a laundry for cleaning, it was quite reasonable for the company to
limit their liability to a reasonable amount, having regard to the small charge
made for the service. These are illustrated by Gibaud v Great Eastern Railway Co
[1921] 2 KB 426; Alderslade v Hendon Laundry Ltd [1945] KB 189 and Gillespie
Bros & Co Ltd v Roy Bowles Transport Ltd [1973] QB 400.”22
The growing judicial antipathy to exclusion clauses in the 20th century
coincided unmistakably with the post-war advent of consumerism in the
developed world and judicial law reform, masked by the employment, but in
truth the manipulation, of well-established judicial techniques, presaged more
widespread legislative intervention in the last quarter of the 20th century.
When George Mitchell reached the House of Lords, Lord Diplock observed:
“[T]he passing of … the Unfair Contract Terms Act 1977 had removed from
judges the temptation to resort to the device of ascribing to words appearing
in exemption clauses a tortured meaning so as to avoid giving effect to an
exclusion or limitation of liability when the judge thought that in the
circumstances to do so would be unfair.”23
That legislation still left for the courts in England, however, the need to grapple
with broadly-drawn exclusion clauses in settings not captured by the Unfair
Contract Terms Act 1977 (UK) or Misrepresentation Act 1967 (UK). Thus, while
Photo Production rejected the doctrine of fundamental breach, the House of
Lords still reserved the right not to give effect to an exclusion clause where
its effect would be to deprive the agreement of the legal characteristics of a
contract, by conferring on one party the liberty to ignore his obligations with
impunity. In these circumstances, the House held that the exclusion may be
held to be repugnant to the contract and of no effect.
As shall be seen, it was the absence of similar legislation in Canada to the
Unfair Contract Terms Act 1977 (UK) (and Contracts Review Act 1980 (NSW)
and Trade Practices Act 1974 (Cth), in Australia) that saw the Supreme Court
of Canada continue to flirt with the doctrine of fundamental breach and to
reserve for the courts a power not to enforce exclusion clauses in circumstances
where that was not fair and reasonable, or was unconscionable (in the Canadian
sense of that term).
A valuable historical perspective on the relationship between the emergent
judicial and legislative regulation of exclusion of liability and the economic
history of the late 19th and 20th centuries in the United States is provided
by Professor Edwards in her article “Freedom of Contract and Fundamental
Fairness for Individual Parties: The Tug of War Continues”.24 It is interesting
to observe that the judicial activism of Lord Denning in England in the 1950s
and 60s was paralleled in the United States by the adoption of the Uniform
Commercial Code (UCC) throughout various States in the United States in those
same decades.25 Key elements of the UCC related to the doctrine of good faith26
and the doctrine of unconscionability as a basis for refusing the enforcement
or the wholesale enforcement of a contract.27 The open-textured nature of the
twin notions of good faith and unconscionability under the UCC lent itself to
incremental development by the courts and permitted “different visions of the
contract relationship and of the role of courts in contract affairs” to develop in
the United States.28
In New York, as Kalisch-Jarcho Inc v City of New York29 illustrates, explicit
considerations of public policy have driven the jurisprudence.30 The position
was summarised by the New York Court of Appeals as follows:
“But an exculpatory agreement, no matter how flat and unqualified its terms,
will not exonerate a party from liability under all circumstances. Under
announced public policy, it will not apply to exemption of willful or grossly
negligent acts (cf, eg, Gross v Sweet, 49 NY 2d 102, 106, with Ciofalo v Vic Tanney
Gyms, 10 NY 2d 294, 297; see, generally, 15 Williston, Contracts [3d Jaeger ed],
§ 1750A; 5 Corbin, Contracts, § 1068; Restatement, Contracts 2d, § 195).
More pointedly, an exculpatory clause is unenforceable when, in contravention
of acceptable notions of morality, the misconduct for which it would grant
immunity smacks of intentional wrongdoing. This can be explicit, as when it
is fraudulent, malicious or prompted by the sinister intention of one acting in
bad faith. Or, when, as in gross negligence, it betokens a reckless indifference
to the rights of others, it may be implicit (Matter of Karp v Hults, 12 AD 2d 718,
affd 9 NY 2d 857).
In either event, the policy which condemns such conduct is so firm that
even when, in the context of the circumstances surrounding the framing
of a particular exculpatory clause, it is determined, as it was by one of the
interrogatories here, that the conduct sought to be exculpated was within the
contemplation of the parties, it will be unenforceable (see Peckham Rd Co v
State of New York, 32 AD 2d 139, 141-42, affd 28 NY 2d 734; Johnson v City of
New York, 191 App Div 205, affd 231 NY 564).”31
Somewhat surprisingly, New York law appears to uphold arguments based upon
certain forms of exclusion clause including “no reliance clauses” as answers to
claims of fraud, an approach that would not be accepted in either England
or Australia. Thus, in Citibank NA v Allan R Plapinger,32 the New York Court
of Appeals held that, although there was sufficient evidence to raise a triable
issue of fraudulent inducement into a guarantee, a disclaimer in the guarantee
was sufficiently specific to bar consideration of that defence to a call on the
guarantee. The court said:
“[T]he rule that fraud in the inducement vitiates a contract [was] subject to
exception where the person claiming to have been defrauded has by his own
specific disclaimer of reliance upon oral representations himself been ‘guilty
of deliberately misrepresenting [his] true intention’ …”33
The court was plainly influenced by the fact that, in the instant case, there had
been “extended negotiations between sophisticated business people” and that
what had “been hammered out is a multimillion dollar personal guarantee
proclaimed by defendants to be ‘absolute and unconditional’”.34
Explicit recognition and invocation of public policy avoids the truth,
described by Karl Llewellyn in this very context, that “Covert tools are never
reliable tools”.35 So, too, the rejection of the doctrine of fundamental breach in
the United Kingdom recognised that, although motivated by a concern to avoid
perceived unjust outcomes, the approach was overbroad and capable of judicial
manipulation in the characterisation of the breach which in turn did nothing
to engender respect for the rule of law and for the courts. Similar observations
may be made in relation to strained interpretations of language or over-eager
deployment of the contra proferentem approach to contractual interpretation in
the context of reading down exclusion clauses.
Having noted, in the course of the above discussion, the approaches to
exclusion clauses historically taken in England as well as the explicitly public
policy approach taken in New York, it is a valuable exercise to consider some
further jurisdictions.
for specific or consequential damages or damages for loss of use arising directly
or indirectly from any breach of this contract, fundamental or otherwise or
from any tortious acts or omissions of their respective employees or agents
and in no event shall the liability of the Seller exceed the unit price of the
defective product or of the products subject to late delivery.”39
Dickson CJ, with whom La Forest J agreed, observed that: “In the face of the
contractual provisions, Allis-Chalmers can only be found liable under the
doctrine of fundamental breach”.40 Dickson CJ expressed an “inclination” to
follow Photo Production and to treat fundamental breach as a matter of contract
construction. He said that:
“In my view, the courts should not disturb the bargain the parties have struck,
and I am inclined to replace the doctrine of fundamental breach with a rule
that holds the parties to the terms of their agreement, provided the agreement
is not unconscionable.”41
Dickson CJ observed that not all exclusion clauses are unreasonable and that
that fact was ignored by the “rule of law approach” to fundamental breach.42
The parties bargain for the consequence of deficient performance, his Lordship
said, and “[i]n the usual situation, exclusion clauses will be reflected in the
contract price”.43 After stating that he was “much inclined to lay the doctrine
of fundamental breach to rest and, where necessary and appropriate, to deal
explicitly with unconscionability”,44 he went on to say that, in his view:
“[T]here is much to be gained by addressing directly the protection of the
weak from over-reaching by the strong, rather than relying on the artificial
legal doctrine of ‘fundamental breach’. There is little value in cloaking the
inquiry behind a construct that takes on its own idiosyncratic traits, sometimes
at odds with concerns of fairness. This is precisely what has happened
with the doctrine of fundamental breach … Only where the contract is
unconscionable, as might arise from situations of unequal bargaining power
between the parties, should the courts interfere with agreements the parties
have freely concluded … Explicitly addressing concerns of unconscionability
and inequality of bargaining power allows the courts to focus expressly on the
real grounds for refusing to give force to a contractual term said to have been
agreed to by the parties.”45
Dickson CJ and La Forest J expressly disagreed with the different approach
advocated by Wilson J, with whom L’Heureux-Dubé J agreed. Wilson J
eschewed an approach that assessed whether the exclusion clause in question
was unfair or unreasonable per se. Rather, she advanced the view that, even
if the exclusion clause in question was clear and unambiguous, it was for the
courts to determine whether, in the context of the particular breach that occurred,
it was fair and reasonable to enforce the clause in favour of the party that had
overriding public policy, proof of which lies on the party seeking to avoid
enforcement of the clause, that outweighs the very strong public interest in the
enforcement of contracts.”52
Australia
After the House of Lords’ final rejection of Lord Denning’s fundamental
breach doctrine in Photo Production, which had never established a foothold
in Australia, the only clearly discernible difference in approach between the
English and Australian courts in this area was in relation to clauses that limited
but did not exclude a contracting party’s liability. In Darlington Futures Ltd v
Delco Australia Pty Ltd,53 a unanimous High Court of Australia stated that:
“[T]he interpretation of an exclusion clause is to be determined by construing
the clause according to its natural and ordinary meaning, read in the light of
the contract as a whole, thereby giving due weight to the context in which the
clause appears including the nature and object of the contract, and, where
appropriate, construing the clause contra proferentem in case of ambiguity.
Notwithstanding the comments of Lord Fraser in Ailsa Craig, the same
principle applies to the construction of limitation clauses.”54
The court saw considerable force in the point made by the Chief Justice of
South Australia in the court below, namely that a limitation clause may be so
severe in its operation as to make its effect virtually indistinguishable from that
of an exclusion clause. This lack of distinction in approach between exclusion
and limitation clauses remains the orthodoxy in Australia, although, in the
context of attempts to escape limitation of liability clauses by reference to the
misleading or deceptive conduct provisions of the Trade Practices Act 1974 (Cth)
and its successor, the Australian Consumer Law, some judges of the Supreme
Court of New South Wales have suggested that a distinction can and should be
drawn between exclusion and limitation clauses.
It is a well-established principle of Australian law that a party is not
permitted to “contract out” of the Trade Practices Act 1974 (Cth) and its
analogues, whether directly in the form of an exclusion clause, or indirectly in
the form of “entire agreement” and “no reliance on previous representation”
clauses: see Henjo Investments v Collins Marrickville where Lockhart J stated:
“Otherwise the operation of the Act, a public policy statute, could be ousted by
private agreement. Parliament passed the Act to stamp out unfair or improper
conduct in trade or in commerce; it would be contrary to public policy for
special conditions such as those with which this contract was concerned to
deny or prohibit a statutory remedy for offending conduct under the Act.”55
In Firstmac Fiduciary Services Pty Ltd v HSBC Bank of Australia Ltd, Sackar J
observed that “a distinction clearly needs to be drawn between a contractual
term purporting for example to bar a statutory remedy altogether and one
that purports to impose a monetary or temporal limit on the extent of the
remedy”.56 The case in point concerned a clause that purported to restrict the
time period within which a statutory claim could be brought; it did not seek
to place any monetary limit of recovery for the statutory tort, and thus the
observation insofar as it applied to monetary limits was obiter dictum. It is
doubtful whether, at least as concerns monetary limits, a contractual limitation
in respect of statutory liability would be held to be effective in the face of a
finding of misleading or deceptive conduct.
One interesting and often passed-over aspect of the court’s judgment in
Darlington is the statement that:
“[T]he principle, in the form in which we have expressed it, [viz that ‘the
interpretation of an exclusion clause is to be determined by construing the
clause according to its natural and ordinary meaning, read in the light of the
contract as a whole, thereby giving due weight to the context in which the
clause appears including the nature and object of the contract …’] does no
more than express the general approach to the interpretation of contracts and
it is of sufficient generality to accommodate the different considerations that
may arise in the interpretation of a wide variety of exclusion and limitation
clauses in formal commercial contracts between business people where no
question of the reasonableness or fairness of the clause arises.”57
On one view of the matter, the court seemed to be at least reserving the
possibility in this passage that a different approach may be available in non-
commercial contracts and that, in that different context, considerations of
reasonableness or fairness may govern or at least inform the judicial approach
to both exclusion and limitation clauses. That possible judicial “hint” has never,
to my knowledge, been taken up again by the court58 and the broad open-
ended type of inquiry contemplated by various judges in the Supreme Court
of Canada in Hunter Engineering, for example, decided three years after the
decision in Darlington, has not found traction in Australia. This is probably
because, in the area of consumer contracts, the Contracts Review Act 1980
(NSW) and the Trade Practices Act 1974 (Cth) and its analogues and successors
have supplied a statutory basis for the exclusion or modification of exclusion
and limitation clauses.
Another difference in approach between the Australian and Canadian courts
can be illustrated by the decision of the High Court of Australia in Toll (FGCT)
Pty Ltd v Alphapharm Pty Ltd.59 That case involved a question of the efficacy
56 Firstmac Fiduciary Services Pty Ltd v HSBC Bank of Australia Ltd [2012] NSWSC 1122 [38]. See
also Owners SP 62930 v Kell & Rigby Pty Ltd [2009] NSWSC 1342; cf Omega Air Inc v CAE Australia
Pty Ltd [2015] NSWSC 802 [31].
57 Darlington (n 53) 510–11 (emphasis added).
58 This may well have been because of the availability of statutory protections in both consumer
contracts under the Trade Practices Act 1974 (Cth) and in the context of insurance policies, by
reason of the passage of the Insurance Contracts Act 1984 (Cth), only two years prior to the
decision in Darlington (n 53).
59 Toll (n 1).
418 Contract in Commercial Law
standard form contracts64 unfair where one of the parties to the contract has
fewer than 20 employees and the contract in question has an up-front value
of up to $300,000 or, if it extends more than three years, an up-front value of
up to $1,000,000. The first example given in s 25 of the Australian Consumer
Law (contained in Sch 2 of the Competition and Consumer Act 2010 (Cth)) of a
term that “may be unfair” and thus void under s 23 is “a term that permits, or
has the effect of permitting, one party (but not another party) to avoid or limit
performance of the contract”.
As an interesting counterpoint in the area of legislative activity in Australia,
and very much against the legislative trend, the provisions of the Civil
Liability Act 2002 (NSW) and its analogues in other States operate in certain
circumstances to uphold exclusion clauses and contractual waivers. Thus s 5N
of that Act, which is addressed to the subject of recreational activities and
was introduced in response to the so-called insurance crisis at the turn of the
century, relevantly provides:
“(1) Despite any other written or unwritten law, a term of a contract for the
supply of recreation services may exclude, restrict or modify any liability
to which this Division applies that results from breach of an express or
implied warranty that the services will be rendered with reasonable care
and skill.
(2) Nothing in the written law of New South Wales renders such a term of
a contract void or unenforceable or authorises any court to refuse to
enforce the term, to declare the term void or to vary the term.
(3) A term of a contract for the supply of recreation services that is to the
effect that a person to whom recreation services are supplied under
the contract engages in any recreational activity concerned at his or her
own risk operates to exclude any liability to which this Division applies
that results from breach of an express or implied warranty that the
services will be rendered with reasonable care and skill.
(4) In this section, ‘recreation services’ means services supplied to a person
for the purposes of, in connection with or incidental to the pursuit by the
person of any recreational activity.”
64 The definition of a “standard form contract” in s 27 of the Australian Consumer Law (contained
in Sch 2 of the Competition and Consumer Act 2010 (Cth)) is not what one would expect from
the use of that term in everyday parlance. It is as follows:
“(1) If a party to a proceeding alleges that a contract is a standard form contract, it is presumed to be a
standard form contract unless another party to the proceeding proves otherwise.
(2) In determining whether a contract is a standard form contract, a court may take into account such
matters as it thinks relevant, but must take into account the following:
(a) whether one of the parties has all or most of the bargaining power relating to the transaction;
(b) whether the contract was prepared by one party before any discussion relating to the transaction
occurred between the parties;
(c) whether another party was, in effect, required either to accept or reject the terms of the contract (other
than the terms referred to in section 26(1)) in the form in which they were presented;
(d) whether another party was given an effective opportunity to negotiate the terms of the contract that
were not the terms referred to in section 26(1);
(e) whether the terms of the contract (other than the terms referred to in section 26(1)) take into account
the specific characteristics of another party or the particular transaction;
(f) any other matter prescribed by the regulations.”
420 Contract in Commercial Law
65 Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty
Limited (ACN 113 114 832) (No 4) [2007] FCA 963; (2007) 160 FCR 35.
66 Citigroup Global (n 65) [276]–[281], [601].
67 Citigroup Global (n 65) [81].
68 B McDonald “Contractual Exclusions and Indemnities of Liability for Negligence” in G Tolhurst
and E Peden (eds), Commercial Issues in Contract Law (Ross Parsons Centre of Commercial,
Corporate and Taxation Law 2008) 24.
69 McDonald (n 68).
Ch 18 Excluding Exclusion Clauses 421
of negligence is fatal to the proferens even if the words used are prima facie
wide enough to cover negligence on the part of his servants.”70
Professor McDonald points out a possible tension between the third of the
Canada Steamship principles and the vanilla approach to the construction of
exclusion clauses mandated in Darlington. If that vanilla approach is taken, and
the words employed are wide enough to cover negligence, then it is difficult to
see why the court, consistent with Darlington, should consider whether there is
any other head of liability that could possibly be excluded other than negligence,
and conclude, if such a head existed, that the clause did not apply effectively to
exclude negligence. As Professor McDonald observes, “[s]uch a rigid rule does
not sit well with an overarching principle of construction which aims always
to discern the ‘intention’ of the parties by reference to the particular contract,
implying that the same words could have different meanings in different
contracts”.71
There is certainly Australian authority which suggests that the Canada
Steamship rules did not survive and cannot be reconciled with the approach to
the construction exclusion clauses articulated in Darlington: see, for example,
Schenker & Co (Aust) Pty Ltd v Maplas Equipment and Services Pty Ltd;72 Glebe
Island Terminals Pty Ltd v Continental Seagram Pty Ltd (1993);73 Brambles Ltd
v Wail.74 There are, however, Australian cases (including very recent cases)
that see a continuing role for the Canada Steamship rules or guidelines, as
they are sometimes referred to: see, for example, Graham v The Royal National
Agricultural and Industrial Association of Queensland.75 The very recent decision
of the New South Wales Court of Appeal in Alameddine v Glenworth Valley
Horse Riding Pty Ltd76 suggests that there is no difference in approach as between
Australia and the United Kingdom. Macfarlan JA, with whom Simpson JA and
Campbell AJA agreed, said, conformably with although not referring to the
Canada Steamship decision, that:
“A further reason for concluding that the respondents did not, as a matter of
contract, exclude their liability to the appellant is that exclusion clauses are not
ordinarily construed so as to extend to the consequences of the defendant’s
negligence unless the clause refers to that basis of liability.”77
In National Westminster Bank Plc v Utrecht-America Finance Co,78 the English
Court of Appeal did not apply the Canada Steamship rules to the construction
of a “no reliance clause”. Clarke LJ drew something of a distinction between
a clause that in terms excluded liability in negligence (in relation to which he
70 Canada Steamship Lines Ltd v The King [1952] AC 192 (PC) 208 (emphasis added).
71 McDonald (n 68) 15.
72 Schenker & Co (Aust) Pty Ltd v Maplas Equipment and Services Pty Ltd [1990] VR 834 (SC)
845–46.
73 Glebe Island Terminals Pty Ltd v Continental Seagram Pty Ltd (1993) 40 NSWLR 206 (CA) 242.
74 Brambles Ltd v Wail [2002] VSCA 150; (2002) 5 VR 169.
75 Graham v The Royal National Agricultural and Industrial Association of Queensland [1989] 1 Qd
R 624 (SC) 630.
76 Alameddine (n 1).
77 Alameddine (n 1) [55].
78 National Westminster Bank Plc v Utrecht-America Finance Co [2001] EWCA Civ 658; [2001] 3 All
ER 733.
422 Contract in Commercial Law
79 See eg Colnaghi USA Ltd v Jewelers Protection Services Ltd, 81 NY 2d 821, 823–24; 611 NE 2d 282,
283–84 (1993).
80 Geys v Société Générale, London Branch [2012] UKSC 63; [2013] 1 AC 523.
81 Geys (n 80) [31].
Ch 18 Excluding Exclusion Clauses 423
(3) if a doubt arises on this point it must be resolved in favour of the other
party and against the proferens.”82
What is most interesting about this summary is that it appears to de-emphasise and
arguably exclude the third of the Canada Steamship principles which were noted
earlier in this chapter.83 Lord Hope DP’s restatement appears to be remarkably
close to the statement of interpretive approach to exclusion clauses in commercial
contractual settings articulated by the High Court of Australia in Darlington.84
On the application of the Canada Steamship principles, as re-summarised,
to the facts of the case in Geys, Lord Hope DP opined that:
“The position in this case was that the terms of the employment contract were
the product of negotiation between the parties. Nevertheless the exclusion
clause was conceived in favour of the bank. The provisions under which the
claimant was required to waive all contractual and statutory claims against
it, and thus to exempt the bank from any liability in damages for breach of
contract, are at first sight all embracing. But they are not without qualification.
The critical words are those that indicate that the draft termination agreement
in Schedule 1 may be amended to take account of payments ‘due to you
under this letter’. In order to be effective to achieve what the bank says it was
meant to achieve the agreement had to be clearly expressed. At the very least
for the claimant, for the reasons given above, the wording that was chosen
was ambiguous. In this situation the ordinary principle must be applied.
Any doubt that the wording gives rise to must be construed in favour of the
claimant and against the bank.”85
This decision illustrates the extent to which English courts, even at the ultimate
appellate level, will strive to avoid what they perceive to be an unreasonable
outcome even in the face of what Lord Hope DP was constrained to concede
was an apparently “all embracing” exclusion. I very much doubt that the High
Court of Australia, applying Darlington and Toll, would have reached a similar
decision on the same facts as Geys.
That old (construction) habits appear to die hard in England is also
illustrated by the approach adopted by the Court of Appeal to the construction
of an “entire agreement” clause in AXA Sun Life Services Plc v Campbell Martin
Ltd.86 In that case, an “entire agreement” clause provided that “this agreement
shall supersede any prior promises, agreements, representations, undertakings
or implications whether made orally or in writing between you and us …”.87
The Court of Appeal held that, that apparently broad clause was not sufficiently
broad to preclude raising a case of pre-contractual misrepresentation. The court
interpreted the phrase “representations” as confined to collateral warranties.
The mode of analysis was similar to that adopted in BSkyB Ltd v HP Enterprise
Services UK Ltd.88 As has been observed, “[t]he search for an alternative meaning
and the ingenuity in finding it to deny effectiveness to the intended exclusion
89 Trukhtanov (n 2) 347.
90 Internet Broadcasting Corporation Limited (trading as NETTV) v MAR LLC (trading as
MARHedge) [2009] EWHC 844 (Ch); [2010] 1 All ER (Comm) 112.
91 Internet Broadcasting Corporation (n 90) [11].
92 Internet Broadcasting Corporation (n 90) [13].
Ch 18 Excluding Exclusion Clauses 425
repudiatory breach’”.95 It was, he held, “heterodox and regressive and does not
properly represent the current state of English law”.96
The particular attack was on the presumption which Moss QC had sought
to identify as having been derived from both Photo Production and the earlier
decision in Suisse Atlantique:97 “What the learned Deputy Judge appears to
have done’ said Justice Flaux ‘is to quote selectively from the speeches on those
cases, whereas full consideration of the relevant speeches demonstrates that
the cases do not support the [presumption]”.98 He observed that the notion
of there being any such presumption was “wholly inconsistent”99 with the
speech of Lord Wilberforce in Photo Production. Justice Flaux noted that, in the
subsequent development of the law after Photo Production, “courts [had been]
more inclined than ever to eradicate anomalous categories of case or obsolete
principles which might then lend credence to the survival of the doctrine [of
fundamental breach]”.100 He cited in support of this argument the example of
the treatment of the deviation cases in maritime law that had previously been
treated as a sui generis category in which even clearly worded exclusion clauses
did not apply to loss caused as a result of a deviation in the passage of a vessel.101
In Shared Network Services Limited v Nextiraone UK Limited, Lewison LJ
noted that he had granted leave to appeal the decision of Flaux J, observing
that, although he considered that Flaux J’s decision was right, the conflict of
authority that had emerged between Flaux J, in AstraZeneca UK, on the one
hand and Gabriel Moss QC in Internet Broadcasting Corporation, on the other
hand, should be resolved by the Court of Appeal.102 No report of the appeal in
that case has been located and it is to be inferred that the matter was resolved
(and thus the clash between the approaches of Moss QC and Flaux J left
unresolved). The decision of Flaux J in AstraZeneca was referred to in passing
by Carr J in Fujitsu Services Limited v IBM United Kingdom Limited.103
Although not referred to in terms, some reinforcement of Internet
Broadcasting Corporations’s invocation of presumptions in the construction
of exclusion clauses is supplied by the Court of Appeal’s decision in Kudos
Catering (UK) Limited v Manchester Central Convention Complex Limited.104
At first instance, it had been held that the effect of the very broadly drawn
exclusion clause wholly excluded the respondent’s liability for the appellant’s
claimed loss of profit following the appellant’s acceptance of the respondent’s
repudiation of the contract.
On appeal, Tomlinson LJ rejected the argument to the effect that the
literal construction of the exclusion clause did not prevent the appellant from
seeking specific performance of the contract. That was for a range of reasons.
A consequence of specific performance not being either available or feasible was
that, if the primary judge’s construction of the exclusion clause were adopted,
the contract would, in those circumstances, be “effectively devoid of contractual
content since there is no sanction of non-performance by the respondent”.105
Tomlinson LJ observed that it was “inherently unlikely that the parties
intended the clause to have this effect” given that the “parties thought that they
were concluding a mutually enforceable agreement”.106 His Lordship drew on
the dictum of Lord Wilberforce in Suisse Atlantique as follows:
“[An exception clause] must … reflect the contemplation of the parties that a
breach of contract, or what apart from the clause would be a breach of contract,
may be committed, otherwise the clause would not be there; but the question
remains open in any case whether there is a limit to the type of breach which
they have in mind. One may safely say that the parties cannot, in the contract,
have contemplated that the clause should have so wide an ambit as in effect to
deprive one party’s stipulations of all contractual force: to do so would be
to reduce the contract to a mere declaration of intent.”107
Tomlinson LJ also referred to the presumption that had been referred to by
Lord Clarke in Rainy Sky SA v Kookmin Bank,108 namely that “neither party to
a contract intends to abandon any remedies for its breach arising by operation
of law”.109 In the event, Tomlinson LJ held that the words “in relation to this
Agreement” in a clause in which the contractor acknowledged that the company:
“shall have no liability whatsoever in contract, tort (including negligence) or
otherwise from any loss of goodwill, business, revenue or profits, anticipated
savings or wasted expenditure (whether reasonably foreseeable or not) or
indirect or consequential loss suffered by the Contractor or any third party in
relation to this agreement”
meant that all liability was excluded ‘in relation to the performance of this
Agreement.110
As such, the extraordinarily broadly drafted exclusion clause was construed
as not extending to losses suffered in consequence of a refusal to perform or
to be bound by the agreement. His Lordship rejected the not unsurprising
submission that this approach represented an objectionable resort to the
discredited doctrine of fundamental breach of contract. His Lordship
characterised his approach as:
“a legitimate exercise in construing a contract consistently with business
common sense and not in a manner which defeats its commercial object. It is
an attempt to give effect to the presumption that parties do not lightly abandon
the remedy for breach of contract afforded them by the general law.”111
The presumption that neither party intends to abandon any remedies for
breach by the other arising by operation of law, and that clear words are
required to be used in order to rebut that presumption, has also been relied on
in a number of recent English cases apart from Kudos: see, for example, Fujitsu
Services;112 Transocean Drilling UK Limited v Providence Resources plc.113
UNIDROIT Principles
In the course of surveying the contemporary approaches to the construction of
exclusion clauses across various jurisdictions, it is also useful to note how the
issue is dealt with by the UNIDROIT Principles of International Commercial
Contracts, designed as these have been to be able to be selected by international
contracting parties as a neutral form of governing law in transnational
contracts.
Article 5.2.3 of the UNIDROIT Principles provides that “the conferment
of rights in the beneficiary includes the right to invoke a clause in the contract
which excludes or limits the liability of the beneficiary”. Article 7.1.6 provides,
however, that:
“A clause which limits or excludes one party’s liability for non-performance or
which permits one party to render performance substantially different from
what the other party reasonably expected may not be invoked if it would be
grossly unfair to do so, having regard to the purpose of the contract.”
The Official Commentary to the Principles states that:
“The reason for the inclusion of a specific provision on exemption clauses is
that they are particularly common in international contract practice and tend
to give rise to much controversy between the parties. Ultimately, this Article
has opted in favour of a rule which gives the court a broad discretionary power
based on the principle of fairness. Terms regulating the consequences of non-
performance are in principle valid but the court may ignore clauses which are
grossly unfair.”114
The Commentary, after nodding to the doctrine of freedom of contract recited
in art 1.1 of the Principles, goes on to elaborate as to what is meant by “grossly
unfair” within the meaning of art 7.1.6. Thus it is said that:
“This will above all be the case where the term is inherently unfair and its
application would lead to an inherent imbalance between performances of
the parties. Moreover, there may be circumstances in which even a term that
is not in itself manifestly unfair may not be relied upon: for instance, where
the non-performance is the result of grossly negligent conduct or when the
aggrieved party could not have obviated the consequences of the limitation or
exclusion of liability by taking out appropriate insurance. In all cases regard
must be had to the purpose of the contract and in particular what a party
could legitimately have expected from the performance of the contract.”
118 HIH Casualty & General Insurance Limited v Chase Manhattan Bank [2003] UKHL 6; [2003]
1 All ER (Comm) 349.
119 Chase Manhattan Bank v AXA Reinsurance UK plc, 752 NYS 2d 17; 300 AD 2d 16 (Supreme
Court 2002).
120 Reinsurance Australia Corporation Limited v HIH Casualty & General Insurance Limited (in liq)
[2003] FCA 56; (2003) 254 ALR 29.
121 Reinsurance Australia (n 120) [90].
122 Text to n 31.
123 HIH (n 118) [17].
124 HIH Casualty & General Insurance Ltd v Chase Manhattan Bank [2001] 1 All ER (Comm) 719.
Ch 18 Excluding Exclusion Clauses 431
such authority as there is, both the judge (para 35) and the Court of Appeal
(para 109) decided against the existence of such a rule.”125
His Lordship went on to express the opinion that, although not ultimately
necessary to decide the point, if it were possible to exclude such liability for the
ordinary consequences of fraudulent or dishonest misrepresentation or deceit
by an agent, acting as such, inducing the making of the contract, the insured (in
that case, Chase) would need to do so “in clear and unmistakable terms on the
face of the contract”.126 He continued:
“The decision of the House in Pearson v Dublin Corp does at least make plain
that general language will not be construed to relieve a principal of liability
for the fraud of an agent: see in particular the speeches of Lord Loreburn
LC at 354, Lord Ashbourne at 360 and Lord Atkinson at 365. General words,
however comprehensive the legal analyst might find them to be, will not
serve: the language used must be such as will alert a commercial party to the
extraordinary bargain he is invited to make. It is no doubt unattractive for a
contracting party to propose a term clearly having such effect, because of its
predictable effect on the mind of the other contracting party, and this may
explain why the point of principle left open in Pearson v Dublin Corp has
remained unresolved for so long.”127
Lord Bingham drew an interesting contrast with the approach of New York’s
Judge Gammerman in related litigation, quoting him as observing:
“The clauses are drafted with great precision. Each sentence and word within
each clause serves a separate function. Some portions of the clauses are limited
to representations/omissions about the risk, while others are not. Given the
sophistication of the parties, I decline to read into the contractual language
limitations that are not stated in the plain text of the parties’ agreements.”128
His Lordship concluded that he could “see no persuasive argument for varying
or relaxing our domestic rule which, as it seems to me, serves to encourage
an open and cards-on-the-table (face upwards) approach to the making of
contracts”.129
Lord Hoffman, agreeing with Rix LJ in the Court of Appeal, stated that
fraud was quite different from negligence:
“Here again I agree with Rix LJ that fraud is quite different from negligence:
‘Parties contract with one another in the expectation of honest dealing’,
particularly in an insurance context. I think that in the absence of words
which expressly refer to dishonesty, it goes without saying that underlying the
contractual arrangements of the parties there will be a common assumption
that the persons involved will behave honestly. As Lord Loreburn LC said of
the exempting clauses in S Pearson & Son Ltd v Dublin Corporation [1907]
AC 351, 354, ‘They contemplate honesty on both sides and protect only against
honest mistakes’.”130
Although the English courts did not go as far as the New York courts, it
was accepted that the clause was effective to exclude liability for negligent
misrepresentation. The effect of the trans-Atlantic interpretations of the Truth
of Statements clause was summarised by Jacobson J of the Federal Court of
Australia in Reinsurance Australia as follows:
“Thus, the position in the United Kingdom is that the ability of insurers
(including reinsurers whose contracts follow the terms of the underlying
insurance contracts) to seek to avoid the contracts of or for insurance or to
claim damages is heavily qualified by the truth of statements clause. In the
USA, the truth of statements clause provides a complete answer to a claim for
misrepresentation or non-disclosure. It is well established that such a clause
does not preclude a claim under the Trade Practices Act if the agreement itself
was induced by misleading conduct; see for example Leda Holding Pty Ltd v
Oraka Pty Ltd [1998] ANZ ConvR 582; (1998) ATPR 41-601.”131
It is well established that conduct under the Trade Practices Act 1974 (Cth) may
be misleading or deceptive if that is its objective effect, even if that effect were
not intended. Thus even innocent misrepresentation may sound in an award of
statutory damages.
As in Qantas Airways Ltd v Rolls-Royce plc,132 there was evidence before
Jacobson J in Reinsurance Australia that, as a matter of English conflict of laws
principles (including principles of characterisation), were the case to be heard
in England, the Trade Practices Act 1974 (Cth) would not be “picked up” as
part of any governing law, with the consequence that the statutory remedies
of either damages or contractual avoidance under that Act would be likely
to be precluded by the operation of the exclusionary elements of the Truth
of Statements clause. Jacobson J noted the substantial differences between
English law relating to misrepresentation and non-disclosure and the law
applicable in Australia under the Trade Practices Act 1974 (Cth), the principal
differences relevantly being that, under the Trade Practices Act 1974 (Cth), a
representation may be as to a future matter, innocent misrepresentation may
sound in damages, there is a reversal of onus with respect to future matters and
it is not possible to contract out of liability and concluded that “[a]ccordingly,
under English law the remedies which would be open to ReAc and Monde
Re are more restricted than in a claim under the Trade Practices Act”.133 This
greater restriction was driven by a combination of the operation of English
conflict of laws principles as well as key differences between the operation of
the Misrepresentation Act 1967 (UK) and the Australian Trade Practices Act
1974 (Cth), in turn reflecting different policy responses to contractual clauses
excluding liability for misrepresentation.
One interesting aspect of the approach taken in both Qantas and Reinsurance
Australia was the implicit assumption that the provisions of the Trade Practices
Act 1974 (Cth) would apply potentially to alter or adjust contractual liability
irrespective of the law governing the particular contract. This assumption
134 M Davies, A Bell and PLG Brereton, Nygh’s Conflict of Laws in Australia (9th ed, LexisNexis 2014)
paras 19.39–19.49.
135 Commonwealth Bank of Australia v White; ex p the Society of Lloyd’s [1999] VSC 262; [1999] 2 VR
681 [89].
434 Contract in Commercial Law
the contract,136 then s 52(1) of the Insurance Contracts Act 1984 (Cth) would
not apply to preclude reliance on a contractual exclusion or limitation of
coverage.137
Conclusion
The rigidity of approach to the construction of exclusion and limitation
clauses that, less than a hundred years ago, so appealed to Sir Thomas Scrutton,
frequently hailed as one of England’s greatest commercial judges, has been
supplanted in common law jurisdictions by a combination of statutory overlay
and the deployment of judicial techniques of contractual interpretation that
strain against the exclusion or limitation of liability. Freedom of contract is no
longer paramount and, in truth, has not been for many years.
The contractual certainty so cherished by late 19th and early 20th century
judges has not been achieved and case law abounds and continues to multiply
apace. It is as though the judges are in a continuous struggle with sophisticated
commercial drafters for the title of “most ingenious”. Economists would decry
this as a grossly inefficient cost of business, and the desire to strive for what
appears to be a “just outcome” has, as has been seen, often been at the cost
of legal coherence in contractual interpretation. The explicit public policy
decisions taken by legislatures since the late 1960s, when the Misrepresentation
Act 1967 (UK) was first passed in England, and the advent of statutes such as the
Unfair Contract Terms Act 1977 (UK) and, in Australia, the Trade Practices Act
1974 (Cth), have led to greater transparency, although these enactments have
themselves generated their own extensive libraries of interpretative case law.
Outside the reach of such statutory provisions, however, judges can still be
seen to resort to the at-times casuistic techniques of interpretation deployed
over so many years by Lord Denning before the passage of consumer protection
legislation in England. The realm of exclusion clauses is not, of course, the only
area of law in which freedom of contract competes with other public policy
goals or virtues. Other familiar examples include the doctrine of unreasonable
restraint of trade and the law relating to penalties. Unlike the doctrine of
restraint of trade, however, the open-ended criterion of “reasonableness” has
never been advanced, at least in the case of written and signed contracts, as
a common law criterion of, or for the legitimacy of, exclusion or limitation
clauses in Australia. Indeed, that would be fundamentally inconsistent with
Darlington. The position in other common law jurisdictions is perhaps not so
clear cut.
Finally, as this chapter has sought to highlight through its comparative focus,
there is no uniformity of approach in either statutory or judicial responses to
the attempt to exclude or limit contractual liability. In a transnational context,
that lack of uniformity provides the platform and occasion for jurisdictional
manoeuvring in cases where the stakes are sufficiently high.
Illegality as a Defence
in Contract
Andrew Burrows
* This chapter must now be read in the light of the Supreme Court’s enlightened reasoning in Patel
v Murza [2016] UKSC 42 (see n 19).
1 In Miller v Miller [2011] HCA 9; (2011) 242 CLR 446 [26], it was said that the law on illegality
in tort, which was in issue in that case, must be coherent with the law on illegality in contract
(and trusts).
435
436 Contract in Commercial Law
On the other side of the line, there are some contracts that are void or
voidable or unenforceable or partly unenforceable for what, in one sense,
may be regarded as public policy reasons but which we do not conventionally
regard as an aspect of “illegality and public policy”. This is because we are
able to articulate more specific reasons, often concerned with ensuring
that the parties have truly consented or that the contract is procedurally or
substantively fair, that explain the law’s intervention. These include the formal
requirements for certain types of contract, such as writing and signature, the
law on misrepresentation, undue influence and duress, the law on penalties,
and the striking down of unfair terms under, for example, the Unfair Contract
Terms Act 1977 (UK) and the Consumer Rights Act 2015 (UK).
As the Law Commission said, in defining the ambit of illegality for the
purposes of its consultation paper on Illegal Transactions:6
“we do not intend our project to deal with transactions which fail on
the grounds of (i) non-compliance with formalities; (ii) inequality or
unfairness, for example misrepresentation, undue influence, duress,
unconscionability or inequality of bargaining power, and (iii) lack of
capacity. Although in general terms one might say that these transactions
are void, voidable, or unenforceable because it would be contrary to public
policy to recognise or enforce them, in each case there are more specific
reasons for invalidating the transaction. There is, for example, a large body
of case law relating to when a contract is voidable for undue influence. But
contracts vitiated by undue influence are not generally, if ever, classed as
‘illegal’ and we do not intend to deal with them in this project.”
In the Supreme Court in Les Laboratoires Servier v Apotex Inc,7 Lord
Sumption recast this scope question as being one that focuses on the type
of turpitude that may count for the purposes of the illegality defence.
Within that, he included criminal conduct and what he termed – and here
one worries about the apparent imprecision of the terminology – “quasi-
criminal” conduct.8
(iv) Although many textbooks purport to make this distinction, there is a
difficult divide between, on the one hand, describing a contract as illegal
and, on the other hand, describing the effects of an illegal contract. The
two tend to elide because to describe a contract as illegal already gives
the impression that a decision has been made that one effect is that the
contract is unenforceable. To avoid this elision, it seems preferable to talk of
the relevant conduct, rather than the contract, being illegal. This leaves open
the effect on the contract of that conduct. One can then go on, without
having pre-judged the question, to consider what effect is in issue. It may
be that one is looking at the enforceability of the contract; but, alternatively,
one may be looking at the quite different question of “unwinding the
contract” so as to award restitution of (the value of) benefits conferred
6 Law Commission, Illegal Transactions: The Effect of Illegality on Contracts and Trusts (Law Com
CP No 154, 1998) para 1.7 (footnotes omitted).
7 [2014] UKSC 55; [2015] AC 430.
8 Les Laboratoires (n 7) [25], [28]. It is perhaps significant that by the time of Jetivia SA v Bilta
(UK) Ltd [2015] UKSC 23; [2015] 2 WLR 1168 [63], his Lordship’s preferred terminology was
“illegal or immoral acts”.
438 Contract in Commercial Law
under it. That is, one may be looking at the law of unjust enrichment rather
than the law of contract.
(v) Finally, the subject is difficult because the courts have not adopted a consistent
approach and, similarly, the textbooks adopt markedly different approaches.
This makes understanding what is going on that much more difficult. It is
also true that, even accounting for the uncertainty, the treatments within
many books and judgments are more complex and long-winded than they
need to be. It would seem that, despite all the decisions of judges and all the
ink that has been spilt by commentators, we are barely the wiser.
Until very recently, illegality as a defence in contract was as problematic
in Australia as in England. The reason for that may indeed have been that
Australian law had not broken free from the English precedents. In the contract
case of Fitzgerald v FJ Leonhardt Pty Ltd9 Kirby J said:10
“Illegality, and the associated problems of statutory construction and public
policy, have been described as a ‘shadowy’11 and ‘notoriously difficult’12 area
of the law where there are ‘many pitfalls’.13 Many of the authorities on the
point are difficult to reconcile.14 Commentators claim that some of them are
marked by ‘obscurities, supposed distinctions and questionable techniques
of decision’.15 They suggest that this is an area of the law which is ‘intensely
controversial and confused’.”
It is strongly arguable that recent decisions of the High Court of Australia –
such as Fitzgerald itself, Nelson v Nelson16 with its penetrating and enlightened
rejection of the reliance rule applied by the House of Lords in Tinsley v Milligan,17
and Equuscorp Pty Ltd v Haxton18 on illegality and unjust enrichment – have
put Australian law on the right track. To appreciate why that may be so, we now
need to consider how one can overcome the difficulties posed by the illegality
defence in contract.
19 I am therefore putting to one side any discussion of Patel v Mirza [2014] EWCA Civ 1047;
[2015] Ch 271, on which an appeal has very recently been heard by the Supreme Court. That
concerned restitution of money paid for failure of consideration and the withdrawal doctrine.
The withdrawal doctrine almost always arises where, as in Patel v Mirza, the party seeking to
withdraw claims restitution. On illegality in the law of unjust enrichment, see Andrew Burrows,
The Law of Restitution (3rd ed, OUP 2011) ch 19, pp 588–601; Andrew Burrows, A Restatement
of the English Law of Unjust Enrichment (OUP 2013) 107–10, 136–41. Although not discussed
in this chapter, it could conceivably, if rarely, have a role where a party seeks to withdraw
from an executory contract that would otherwise be enforceable despite the involvement of
illegal conduct.
20 (1978) 139 CLR 410 (HCA).
21 Fitzgerald (n 9).
22 The continuum is made particularly clear if, under the second exercise, the purpose of the statute
is crucial. Indeed on one very wide understanding of “statutory interpretation” (associated with
the old idea of the “equity of the statute”) one might regard there as being just one exercise of
statutory interpretation (other than where one is dealing with a common law offence). On the
“equity of the statute” in this context see Deane and Gummow JJ in Nelson (n 11) [48]–[51]; and
see generally Edelman J in Burragubba v State of Queensland [2015] FCA 1163.
440 Contract in Commercial Law
apparent that, in line with the supremacy of legislation, a court should consider
the legislative effect first but, where it concludes that there is no legislative effect,
it will need to go on to consider the effect at common law.
27 Yango (n 20).
28 Fitzgerald (n 9).
442 Contract in Commercial Law
the English courts in the early 1990s35 accepted, in contract as well as tort, a
discretionary test of whether in all the circumstances it would be an affront to
the public conscience to afford the claimant the relief sought. That “shocking
the public conscience” test was rightly rejected, not least for being far too
vague, by the House of Lords in Tinsley v Milligan but their Lordships’ approval
instead of the reliance rule, led in turn to the work of the Law Commission
which favoured a more flexible approach. That was subsequently judicially
accepted and applied in the context of contract in ParkingEye v Somerfield.
Turning now to the trilogy of Supreme Court cases, it was unanimously
decided in Hounga v Allen36 that the claimant’s position as an illegal immigrant
was not a defence to her claim for the statutory tort of unlawful racial
discrimination. Lord Wilson (with whom Lady Hale and Lord Kerr agreed)
openly saw the issue as turning on a consideration of various public policy
factors. There was a particular focus on preserving the integrity of the legal
system which was in turn said to involve examining whether the claimant
had profited from the wrongdoing and deterrence. Lord Hughes (and Lord
Carnwath) agreed with most of Lord Wilson’s reasoning essentially differing
only on the weight placed on upholding the public policy against human
trafficking.
In focussing on preserving the integrity of the legal system, Lord Wilson
expressly referred to the Supreme Court of Canada’s use of that idea in the
illegality tort case of Hall v Hebert.37 His Lordship could equally well have
referred to the High Court of Australia’s decisions in the illegality tort case of
Miller v Miller38 or the illegality unjust enrichment case of Equuscorp Pty Ltd
v Haxton39 in both of which the same idea was expressed in the language of
maintaining “coherence in the law”.40
Had one stopped the clock there, one might have been forgiven for thinking
that all was becoming clear in English law and that there was a degree of
welcome uniformity of approach being adopted in the highest courts in the
United Kingdom, Canada and Australia.
Unfortunately, a very different approach41 was favoured, without Hounga v
Allen even being mentioned, in the reasoning of the majority of the Supreme
Court (Lord Sumption, with whom Lord Neuberger and Lord Clarke agreed)
only three months later in the appeal in Les Laboratoires Servier v Apotex
Inc.42 The claim was for damages under a cross-undertaking in damages given
by Servier who had been granted an injunction against Apotex to restrain
43 See also Lord Sumption’s summary in Jetivia (n 8) [63] where he preferred to talk of “illegal and
immoral acts” rather than “turpitude”.
44 See also Lord Sumption in Jetivia (n 8) [100]: “ordinary private wrongs, sounding in tort or
contract, do not give rise to the illegality defence”.
Ch 19 Illegality as a Defence in Contract 445
45 Jetivia (n 8).
46 Jetivia (n 8) [15]. For similar sentiments, see Lord Mance at [34] and Lords Toulson and Hodge
at [174]. See also Sharma v Top Brands [2015] EWCA Civ 1140; [2016] PNLR 12 [38] (Sir Terence
Etherton C).
47 Before that, see also Bowmakers Ltd v Barnet Instruments Ltd [1945] KB 65 (CA).
446 Contract in Commercial Law
48 A variant of the reliance rule that has been sometimes been applied especially in tort cases,
eg Cross v Kirby (CA, 18 February 2000) is a causal-type test which asks whether the claim is
“inextricably linked” with the illegality. For consideration of this test, see Hounga (n 24) [31]–
[41] and [55]–[59]. For clarification that this would widen the scope of the illegality defence as
compared to the reliance test, see Lord Sumption in Jetivia (n 8) [102]. See also the reference by
Lord Goff in Tinsley v Milligan to Dering v Earl of Winchelsea (1787) 1 Cox 318, 319–20; 29 ER
1184–85. For the proposition that the illegal conduct must have “an immediate and necessary
relation” to the claim which was summarised by Lord Sumption in Les Laboratoires (n 7) [18] as
a test of whether the claim was tainted by a “sufficiently close factual connection with the illegal
purpose”. See also Sharma (n 46) [43]–[47]. For reservations about the “inextricably linked test”
(and with Lord Hoffmann preferring the equally opaque language of causation) see the tort
case of Gray v Thames Trains Ltd [2009] UKHL 33; [2009] 1 AC 1339 [54] (illegality defence
where claimant sought compensation for the effects of his criminal conduct brought about by
the injury negligently inflicted by the defendant). For a more typical example of a tort case
(claimant involved in criminal conduct being injured in a traffic collision) where the causation
reasoning on illegality was opaque, see McCracken v Smith [2015] EWCA Civ 380; [2015] PIQR
P19. For justified criticism of the Australian approach to illegality in tort (albeit written before
Miller (n 1) where the High Court held that duty of care was owed towards passenger engaged in
joint criminal activity but only after she had asked to be let out of the car) see James Goudkamp,
“The Defence of Joint Illegal Enterprise” (2010) 34 MULR 425. For the position being made
even worse by the Australian tort statutes, see James Goudkamp, “A Revival of the Doctrine of
Attainder? The Statutory Illegality Defences to Liability in Tort” (2007) 29 SLR 445.
49 [2014] EWHC 3056 (Ch) [126].
50 Nelson (n 11). For the correct approach, including the exceptions, see McHugh J at 604–05.
51 Fitzgerald (n 9). For the approval of McHugh J’s approach and exceptions in Nelson, see McHugh
and Gummow JJ at text between nn 28–34.
52 Nelson (n 11) [27].
Ch 19 Illegality as a Defence in Contract 447
has nothing to do with the equitable positions of the parties or the policy of
the legislation is unsatisfactory, particularly when implementing a doctrine
that is founded on public policy.”
In the latter case, in a brilliant exposition, Kirby J said:53
“Whatever may be the position in England following the decision of the House
of Lords in Tinsley v Milligan, in Australia it must be accepted, from decisions of
this court,54 that the rule against enforcement is not inflexible. Clearly it
should not be so. It would be absurd if a trivial breach of a statutory provision
constituting illegality, connected in some way with a contract or contracting
parties, could be held to justify the total withdrawal of the facilities of the
courts.55 It would be doubly absurd if the courts closed their doors to a party
seeking to enforce its contractual rights without having regard to the degree of
that party’s transgression, the deliberateness or otherwise of its breach of the
law and its state of mind generally relevant to the illegality. Similarly, it would
be absurd if a court were permitted, or required, to consider the refusal of relief
without careful regard to the relationship between the prohibited conduct and
the impugned contract. Thus, different considerations may exist where the
contractual rights being enforced arise directly from the illegality, as distinct
from those which arise only incidentally or peripherally.56 It is one thing for
courts to respond with understandable disfavour and reluctance to attempts
to involve them and their processes in an inappropriate and unseemly way
effectively in the advancement of illegality and wrong-doing. It is another to
invoke a broad rule of so-called ‘public policy’ which slams the doors of the
court in the face of a person whose illegality may be minor, technical, innocent,
lacking in seriousness and wholly incidental or peripheral to a contract which
that person is seeking to enforce.”
A flexible range of factors approach is, of course, open to the criticism that
it is hopelessly vague and discretionary and that it is simply a rehash of the
discredited “shocking the public conscience”57 test. The Law Commission
sought to render the approach more certain, initially by advocating a statutory
“structured discretion”, and subsequently favouring an approach attainable
without legislation, under which certain factors were specified as ones that the
courts should openly articulate and consider. So if one were to give flesh to
the bones of the “range of factors” approach, what would be the full range of
factors that might be relevant and what would the overall aim be?
I would suggest the following as a possible concretisation of the approach.
If the formation, purpose or performance of a contract involves conduct that is
criminal, the contract is unenforceable by one or either party if to deny enforcement
would be an appropriate response to that conduct, taking into account where
relevant –
(i) how serious the criminal conduct was;
(ii) whether the party seeking enforcement knew of, or intended, the conduct;
53 Fitzgerald (n 9) 249.
54 He here referred to Yango (n 20); and Nelson (n 11).
55 He here referred to St John Shipping (n 24) 280–81, 288–89 (Devlin J).
56 He here referred to St John Shipping (n 24) 284, 289–90, 292–93.
57 See above, text to n 35.
448 Contract in Commercial Law
(iii) how central to the contract or its performance the conduct was;
(iv) how serious a sanction the denial of enforcement is for the party seeking
enforcement;
(v) whether denying enforcement will act as a deterrent to criminal
conduct;
(vi) whether denying enforcement will ensure that the party seeking
enforcement does not profit from the conduct;
(vii) whether denying enforcement will further the purpose of the rule which
the conduct has infringed;
(viii) whether denying enforcement will avoid inconsistency or incoherence
in the law thereby maintaining the integrity of the legal system.
This formulation sets out all the factors that a consideration of past decisions
indicates might be taken into account in deciding whether the denial of
enforcement of the contract is an appropriate response to the illegal conduct.58
Those factors were largely spelt out in ParkingEye v Somerfield (especially the
judgment of Toulson LJ). The list also includes the factors spelt out by the Law
Commission in its two consultation papers. It is not clear that all the factors
(for example, the first four) can be accurately described as “policy factors”
except in the loose sense that they are together seeking the best answer to a
policy question.
Clearly not all those factors would be in play in every case. Rather the
approach would require the courts to consider the relevance of those factors to
the particular facts and to spell out those factors that are considered important
and decisive in arriving at the conclusion that to deny enforcement would, or
would not, be an appropriate response to the conduct.
Something further should be said about the last two of those factors. As
regards the last, this was said to be of primary importance by the Supreme
Court in Hounga v Allen following the emphasis given to it by the Supreme
Court of Canada in the tort case of Hall v Hebert. Moreover, as we have
already noted, the “coherence” of the law was stressed in the recent Australian
cases of Miller v Miller and Equuscorp v Haxton. This is the same idea as
not “stultifying the law” which was the language used by Lord Radcliffe in
Boissevain v Weil59 and formed the basis of influential work by Professor
Birks on illegality in the context of unjust enrichment.60 However, at least
in difficult cases, it is not at all clear how practically useful this idea is. It
operates at such a high level of generality that it leaves open what one means
by consistency or coherence. It could justify almost any approach to the
defence of illegality. Some would say that there is only inconsistency in a very
narrow range of cases as, for example, where the criminal law has imposed
one sanction (imprisonment or payment of a fine) and then an award of
damages would contradict that (by giving the claimant damages in contract
58 Many past cases, including those applying a rule-based approach, have had one or more of these
factors in mind. In other words, one might say that this approach is best viewed as bringing to
the surface what has often, albeit covertly, underpinned this area of the law.
59 [1950] AC 327 (HL).
60 Peter Birks, “Recovering Value Transferred under an Illegal Contract” (2000) 1 Theoretical Inq
L 155; Unjust Enrichment (2nd ed, Clarendon Press 2005) 247–53.
Ch 19 Illegality as a Defence in Contract 449
or tort for having been in prison or having paid that fine). Others would say
that the very approach of weighing up several different factors so as to achieve
an appropriate response is designed to ensure that there is no inconsistency
in the law. So while this factor has been included in the list, it is doubtful that
it operates on the same level as the other factors.
A similar observation can probably be made about the penultimate factor:
the purpose of the rule. One can argue that this lies behind other relevant
factors and that it will normally need fleshing out in order to be of practical
use. In other words, like coherence, it normally operates at a higher level of
generality than the other specified factors.
Lest it be thought that the reliance rule and the range of factors approach
are the only two approaches that one can detect in the English case law, it is
important to add that, prior to Tinsley v Milligan, a more traditional approach
in contract – and of course Tinsley involved a trust not a contract – was to focus
on rules that distinguished between illegality in formation and illegality in
performance. One plausible interpretation of the cases was that the following
two basic rules applied (which for shorthand purposes will be referred to as
“the formation rule” and “the performance rule” respectively): 61
“A contract which had as its purpose, or was intended to be performed in a
manner that involved, criminal conduct was unenforceable (a) by either party
if both parties knew of that purpose or intention; or (b) by one party if only
that party knew of that purpose or intention.
If that first rule was inapplicable because it was only the performance
of a contract that involved conduct that was criminal, the contract was
unenforceable by the party who performed in that objectionable way but
was enforceable by the other party unless that party knew of, and participated
in, that objectionable performance.”
Although criticisms could be, and were, made of those rules, it is important
not to lose sight of them in particular because those who argue against a “range
of factors” approach, and yet can see the objections to a reliance rule, may be
tempted to argue in favour of a different set of rules. One must therefore bear
in mind that a different set of rules has already been tried.
Before I turn to examine precisely why, in my view, the “range of factors”
approach is be preferred to either the reliance rule or the rules as to formation
and performance, it may be helpful in understanding the different approaches
to consider how they would apply to some hypothetical examples. This is in line
with my general belief, as regards methodology, that, because law is ultimately
a practical discipline, all legal analysis is sharpened by being tested on the anvil
of real or hypothetical cases.
61 For these types of rules in contract, see HG Beale (ed), Chitty on Contracts (32nd ed, Sweet &
Maxwell 2015) paras 16-11, 16-16–16-20.They may be regarded as deriving from, eg Anderson
Ltd v Daniel [1924] 1 KB 138 (CA), esp Atkin LJ (vendor of fertiliser that, contrary to statute,
did not specify in an invoice the percentage of chemicals, held unable to enforce the contract
so as to recover the price); Archbold’s (n 13) esp Devlin LJ (for the facts, see n 24 above); and
Ashmore Benson Peace & Co Ltd v AV Dawson Ltd [1973] 1 WLR 828 (CA) (for the facts, see
n 64 below).
450 Contract in Commercial Law
62 Put another way, it cannot be right to insulate the justice as between the parties from the
wider policy issues raised by the criminal law: private law and public law cannot clash in this
extreme way.
Ch 19 Illegality as a Defence in Contract 451
conduct and D’s knowledge of that (that is illegality should be a defence); and
that the desirable answer in Example 2 is that C’s claim should succeed for the
agreed sum in carrying the goods (that is illegality should not be a defence).
But if one applies the reliance rule, one comes to the incorrect (that is
undesirable) answer in Example 1 albeit the correct (or, desirable) answer in
Example 2. In neither example does C need to rely on the illegality in order to
make out its contractual claim. All that C has to show is the contract and that
the other party is in breach of that contract.
In contrast, if one applies the rules as to formation and performance, one
comes to the correct answer in Example 1 but the incorrect answer in Example 2.
As regards Example 1, the formation rule means that C cannot enforce the
contract because C knew of the illegal purpose. As regards Example 2, the
performance rule means that the contract is unenforceable by C as the party
who performed in the way that involved criminal conduct.
Of the three approaches we are considering, only the “range of factors”
approach enables one to reach the correct answer in both Example 1 and
Example 2. In particular, it can take into account the seriousness of the
illegality and the knowledge of the parties in Example 1 and the triviality of
the illegality and its non-centrality in Example 2. Applying those factors, the
appropriate response to the illegality is to refuse C’s claim in Example 1 but to
allow C’s claim in Example 2.
The conclusion to be reached from these examples is that, despite the
certainty that the reliance rule and the rules as to formation and performance
supply, the most satisfactory outcome – because it can take into account a
number of variables so as to reach the desired outcome – is produced by the
“range of factors” approach.
I now turn to articulate more fully the advantages of a range of factors
approach by offering six criticisms of a rule-based approach.
63 Tinsley (n 17).
452 Contract in Commercial Law
64 The idea of “participation” in the performance rule is also unclear. In Ashmore (n 61), the
claimant’s goods were loaded onto a lorry that was not licensed to carry goods of that weight. It
was held that the contract could not be enforced by the claimant (his goods had been damaged
when the lorry toppled over during the journey) because the claimant had seen the goods being
loaded and that that amounted to “participation” in the illegal performance. It is hard to see why
standing by, doing nothing, amounts to participation.
65 ParkingEye (n 29) [32]. At [33] Jacob LJ also thought that there was “something distinctly odd
about the supposed ‘intention from the outset’ rule”. This was because if the intention had only
been formed after execution of the main contract, the performance rule and not the formation
rule would apply (and that would then require consideration of “participation” by the party
seeking enforcement).
66 Law Commission, The Illegality Defence: A Consultative Report (Law Com CP No 189, 2009)
para 3.31.
67 Law Commission, Illegal Transactions (n 6) para 7.30.
Ch 19 Illegality as a Defence in Contract 453
(iii) As with the main criticism of the rule of formation, the reference to
performance that involves illegal conduct in the rule of performance set
out above fails to reflect the important fact that the varieties of illegal
performance can vary hugely from trivial infractions of a statutory
offence to serious criminal illegality. If the rule of performance were
accurate, it would mean, for example, that a party who performs a
contract of carriage by speeding on the motorway for 100 metres would
be unable to sue for the agreed contract price on delivery of the goods.
No doubt for this sort of reason, several important cases appear to
contradict this rule. So, for example, in St John Shipping Corp v Joseph
Rank Ltd,68 which we have earlier considered in respect of the legislative
effect of criminal conduct, a shipping company performed a contract
of carriage by overloading the ship thereby committing an offence. The
master was fined and prosecuted for that offence. Having considered
both the legislative and common law effects of that criminal conduct,
Devlin J concluded that the company’s claim for the agreed price should
succeed. Similarly, in Shaw v Groom,69 a landlord committed an offence
by failing to provide his tenant with a proper rent-book but that did not
preclude him from recovering the rent.
(iv) More generally, while a purported advantage of a rule-based approach (as
opposed to a more flexible approach) is its certainty, there are cases that do
not fit any of those rules. In truth, the courts have often sought ways round
the rigid rules because they do not like the results reached by applying
them. This led the Law Commission to argue that the problems of the
traditional approach were not merely that it produced undesirable results
but also that the law was uncertain. The implication is that the flexible
approach would not only produce more acceptable results but would in
practice be no less certain than a rule-based approach.
(v) It is sometimes suggested, as if a defence of a rule-based approach, that
the fact that it produces undesirable outcomes is irrelevant because, as
made clear as long ago as 1775 by Lord Mansfield in Holman v Johnson,70
the illegality defence operates as a rule of policy and is not designed to
achieve justice between the parties. Certainly it is correct, as was made
clear at the start of this paper, that the illegality defence is not designed to
achieve justice as between the parties: if it were, there should be no illegality
defence and the parties’ normal rights and remedies would apply. However,
that does not mean that any result, however arbitrary, is acceptable: one
should surely be striving for the most desirable policy outcome and it may
be that that is best achieved by taking into account a range of factors rather
than applying a fixed rule.
(vi) It may be argued that, if there are deficiencies in rules that have so far
been developed, the way forward is to refine those rules so as to remove
those deficiencies rather than departing from the rules altogether. As
someone who passionately believes in the importance of clear legal rules
71 It has been suggested to me that the approach of Tony Weir, teaching in Cambridge, has much
to commend it. He argued that two rules were applicable: (i) that you cannot be sued for not
committing a crime; and (ii) you cannot sue someone to be paid for committing a crime. But
these rules may produce undesirable results in situations where the performance has involved
central and serious criminality. Say, eg C contracts with D to carry D’s goods. C does so but is
only able to do so by using a lorry that is unroadworthy or by using a lorry that is specifically
stolen for the purpose. D finds out about that illegal mode of performance and, although the
goods have been delivered, refuses to pay. The Weir rules would seem to say that D must pay and
that the illegality is not a defence. But, in my view, the illegality is so central to the performance
and, at least where the lorry has been stolen, the illegality is so serious that the illegality should be
a defence. Or to take another example, say A contracts with B for B to obtain planning permission
to develop certain land. B does so but only by bribing officials. A discovers this and refuses to pay
B. If one were to allow B to recover (as the Weir rules would appear to do) B would be rewarded
for corruption. It is hard to see that it makes much sense to distinguish (as the Weir rules do)
between that case and one where A contracts with B for B to obtain planning permission by
bribing officials and B does so and claims the agreed sum. I am very grateful to Nick McBride for
drawing my attention to the Weir rules and for subsequent emails on their application.
72 This is not to suggest that the central aspects of the previous rules are irrelevant but rather that
those aspects should be flexibly weighed up against others rather than being straightjacketed
into fixed rules. It has also been pointed out to me that a further advantage of a flexible approach
is that relief may be granted on terms as in Nelson (n 11) (claimant held entitled to enforce the
resulting trust against her daughter but on condition that she paid to the State the housing
subsidy that she had illegally (ie fraudulently obtained)).
Ch 19 Illegality as a Defence in Contract 455
(as, for example, in s 33 of the Limitation Act 1980 (UK)).73 But a “balancing”
approach is well-established in public law.74 And, as was explained at the start of
this chapter, illegality is so difficult not least because it involves a clash between
public and private law. It is therefore not surprising that, in resolving that clash,
an unusual approach for private law turns out to be the best route forward.
Conclusions
My central conclusions may be summarised as follows.
(i) Illegality as a defence in the law of contract is a difficult topic for several
reasons. They include: that there is a clash here between public and private
law values; that both common law and legislation tend to be involved; that
there is uncertainty as to what counts as “illegality” and hence as to the
scope of the enquiry; that there is an unhelpful pre-judgmental tendency
to label the contract, rather than the conduct, as illegal; and that neither
the courts nor commentators have adopted a convincing and consistent
approach to the issues.
(ii) In seeking to overcome the difficulties, it is helpful to focus on the core
question: what is the impact of criminal conduct on the enforceability of a
contract?
(iii) In answering that question, there is a critical distinction between the
legislative and the common law effect of criminal conduct on a contract.
The former is a matter of ordinary statutory interpretation and is relatively
straightforward. It is the latter – working out the effect at common law –
which is so difficult.
(iv) The most recent English case law reveals a marked split of judicial approach
between those favouring a reliance rule and those favouring a “range of
factors” approach. Traditionally a third approach in contract was to apply
rules focusing on illegality in formation and in performance.
(v) There are significant deficiencies with a rule-based approach. It is
preferable instead to apply a range of factors approach, such as that
applied by the Court of Appeal in ParkingEye v Somerfield. This is at root
73 It was for this reason that, initially, I was very doubtful whether the judges could bring about the
necessary reform in its area. Hence my earlier preference for a statutory structured discretion. In
Burrows, The Law of Restitution (n 19) 601, I wrote as follows about the final recommendation
of the Law Commission: “A problem for the largely non-statutory reform now favoured by
the Law Commission is that it is clearly somewhat unusual for the courts, at common law, to
articulate and balance policies in the way recommended; and it is unclear, for example, whether
one would need to wait for the Supreme Court to signal this as the correct judicial approach”.
Similar scepticism about a non-statutory solution was put forward by Lord Sumption in a
lecture to the Chancery Bar Association: “Reflections on the Law of Illegality” 23 April 2012.
This was subsequently published in (2012) RLR 1. Note that, even in private law and without a
statute, some courts have favoured a multifactorial approach: see eg the use of a multifactorial
approach in deciding whether a duty of care was owed in a novel situation in Caltex Refineries
(Qld) Pty Ltd v Stavar [2009] NSWCA 258.
74 See eg the judgment favouring a multifactorial approach of French J in the High Court
of Australia in Clarke v Commissioner of Taxation [2009] HCA 33; (2009) 240 CLR 272. See
generally Jacco Bomhoff, Balancing Constitutional Rights: the Origins and Meanings of Postwar
Legal Discourse (CUP 2013).
456 Contract in Commercial Law
Introduction
Andrews v Australia and New Zealand Banking Group Ltd 2 elucidates one
possible answer to what courts and commentators have observed as a
fundamentally unresolved question: what is the doctrinal rationalisation for
the penalties doctrine? Put another way, on what basis can the curial process
use the penalties doctrine to legitimately strike down or substantively alter
consensually created rights and obligations? Although Andrews has been met
with some3 (albeit not universal)4 academic criticism, this chapter argues that
the High Court of Australia’s decision in Andrews is welcome because it opens
the way for the law of penalties to be developed along coherent principles which
will make equity’s intervention in this area justifiable. This chapter argues that
post-Andrews, the penalties doctrine in Australia ought to be understood as
a species within the wider genus of the law relating to security rights. Where,
applying orthodox principles of interpretation, A has a right against B which is
acquired for the limited purpose of securing a particular primary outcome (that
is, the “primary stipulation” or “real purpose of the bargain”), the assertion of
that right is necessarily controlled by the primary outcome.5 If this analysis
1 My thanks to Ben McFarlane, Charles Mitchell, Dave Heaton, Long Pham and Clare McKay for
their suggestions. I would also like to thank the various conference attendees that took the time
to discuss this chapter with me.
2 [2012] HCA 30; (2012) 247 CLR 205.
3 See JW Carter and others, “Contractual Penalties: Resurrecting the Equitable Jurisdiction”
(2013) 30 J Con L 99; and Edwin Peel, “The Rule Against Penalties” (2013) 129 LQR 152.
4 See Paul Davies and PG Turner, “Relief Against Penalties Without a Breach of Contract” (2013)
72 CLJ 20; and Ben McFarlane, “Penalties and Forfeiture” in John McGhee (ed), Snell’s Equity
(33rd ed, Sweet & Maxwell 2014).
5 See also McFarlane (n 4) para [13.001].
457
458 Contract in Commercial Law
Part I – Background
Andrews – formulation and decision
In Andrews, the High Court of Australia delivered a unanimous judgment
which fundamentally changed the accepted understanding of the law of
penalties. The Andrews litigation (still active at the time of writing with there
being a pending appeal from a recent decision of the Full Court of the Federal
Court of Australia back to the High Court of Australia)7 involves a class action
brought by bank customers claiming, inter alia, that various bank fees levied
on personal, business and credit card accounts constitute penalties. In an
interlocutory first instance decision, Gordon J held that only those fees imposed
upon a customer’s breach of contract were capable of being characterised
as penalties.8 Justice Gordon was bound9 by the Court of Appeal of the New
South Wales Supreme Court’s decision in Interstar Wholesale Finance Pty Ltd v
Integral Home Loans Pty Ltd,10 which was authority for the proposition that the
penalties doctrine was not enlivened on the happening of a specific event other
than breach of a contractual duty. Similarly, the House of Lords’ decision in
Export Credits Guarantee Department v Universal Oil Products Co11 is authority
for the position in English law that a breach of contract is required to enliven
the penalties doctrine (recently reaffirmed by the Supreme Court of the United
Kingdom in Cavendish Square Holding BV v Makdessi12 and ParkingEye Ltd v
Beavis13). Justice Gordon also referred to a utilitarian justification for the breach
requirement: by limiting the penalties doctrine to cases involving breach of
contract the doctrine is necessarily confined, thereby restricting the doctrine’s
potential to abrogate impermissibly the parties’ powers to create mutually
binding rights and obligations.14
Accordingly, Gordon J held that of the bank fees being challenged only late
payment fees on credit card accounts were capable of being characterised as
penalties (being the only impugned fees imposed upon a breach of contract).15
Conversely, her Honour held that bank fees such as honour, dishonour, non-
payment and over credit limit fees were not capable of being characterised as
penalties as they were not levied on breach of contract, but were conditions
triggered on specified circumstances which the customer was under no legal
duty to avoid. Justice Gordon’s decision was appealed to the Full Court of
the Federal Court of Australia and the matter was then removed, before
the appeal was heard, to the High Court of Australia. The gravamen of the
appeal concerned the question whether a breach of contract was a necessary
precondition to enliven the doctrine to relieve against penalties.
The High Court in Andrews unanimously recognised that the penalties
doctrine does not hinge upon breach of a contractual obligation. The
importance of the High Court’s decision to this chapter necessitates that the
court’s formulation of when the penalties doctrine is engaged be set out in full:
“In general terms, a stipulation prima facie imposes a penalty on a party
(‘the first party’) if, as a matter of substance, it is collateral (or accessory)
to a primary stipulation in favour of a second party and this collateral
stipulation, upon the failure of the primary stipulation, imposes upon the
first party an additional detriment, the penalty, to the benefit of the second
party. In that sense, the collateral or accessory stipulation is described as
being in the nature of a security for and in terrorem of the satisfaction
of the primary stipulation. If compensation can be made to the second
8 Andrews v Australia and New Zealand Banking Group Ltd [2011] FCA 1376; (2011) 211 FCR 53
[77]–[80].
9 Andrews (n 2) [29].
10 [2008] NSWCA 310; (2008) 257 ALR 292 [99], [134].
11 [1983] 1 WLR 399 (HL) 402–04.
12 [2015] UKSC 67; [2015] 3 WLR 1373 [12]. The appeals in Cavendish and ParkingEye were heard
conjointly and have the same neutral and report citation.
13 [2015] UKSC 67; [2015] 3 WLR 1373 [12].
14 Andrews Trial (n 8) [78]–[79].
15 Andrews (n 2) [21]–[22].
460 Contract in Commercial Law
party for the prejudice suffered by failure of the primary stipulation, the
collateral stipulation and the penalty are enforced only to the extent of that
compensation. The first party is relieved to that degree from liability to
satisfy the collateral stipulation.”16
The High Court’s removal of the breach requirement and its reformulation
of the law of penalties rested on a twofold historical justification (which
the Supreme Court of the United Kingdom17 has since criticised). The first
justification was that the modern penalties doctrine developed from the
Lord Chancellor’s equitable jurisdiction to relieve against penalties, which
predated the emergence of assumpsit for nonfeasance and the modern law of
contract. Put shortly, the history of the doctrine was anchored in Chancery’s
prevention of the unconscionable enforcement of obligations created under
bonds (specifically conditional bonds)18 where relief did not, and could
not, depend upon a breach of contract (discussed in more detail in Part III
below). Considering that the common law (c 1670s)19 and statute20 (with the
enactment of the statutes of William (1696–97)21 and Anne (1705))22 followed
equity in providing relief against the unconscionable enforcement of bonds,
it also followed that limiting relief to cases where there is a breach of contract
was inconsistent with the historical origins and development of the penalties
doctrine.23 The second justification was that the creation and expansion of
common law and statutory jurisdictions to relieve against penalties did not
abolish the related equitable jurisdiction (so that the penalties doctrine became
exclusively a rule of common law). Such developments made equitable relief
generally unnecessary but not wholly obsolete.24 Accordingly, the appeal was
allowed and the matter remitted to Gordon J to determine the issues at trial in
accordance with the High Court’s reasons.25
The High Court’s reformulation governs a vital question that affects
consumer, commercial and government contracting: when will a court refuse
to enforce a contractual right because it penalises a party to the contract? It has
recently been observed that the ramifications of Andrews are not yet apparent.26
Another, more critical, academic analysis of Andrews has suggested that the
case has repositioned the entirety of the law of penalties.27 While I welcome the
court’s repositioning of this doctrine, the decision in Andrews requires further
analysis for at least two broad reasons.
First, the High Court’s formulation of when the penalties doctrine is
enlivened, and its departure from the breach requirement, was based on a
historical analysis. The reasoning has been criticised for relying too much on
legal history and failing to provide a clear rationale28 for reformulating the law.
Indeed, Professor Peel has gone so far as to criticise Andrews as being a history
lesson which simply begs the question: why have a penalties doctrine at all?29
The purpose of Part III of this chapter is to defend the Andrews formulation by
providing a missing analytical link between the court’s historical analysis and a
clear doctrinal rationale.
Second, given the limited nature of the appeal before the High Court,30 there
was understandably little elucidation of how the court’s reformulation of the
law of penalties will apply in future cases, thus leaving its implications to be
developed incrementally. Accordingly, the decision has led to some confusion
amongst legal professionals. Indeed, one aspect of academic criticism of the
decision is expressed in terms of commercial uncertainty and a perceived
interference with the parties’ powers to contract.31 It follows that providing a
framework for the operation of the penalties doctrine has become of the first
importance. For example, in the Andrews formulation, much of the work has
to be done by identifying the collateral and primary stipulations contained in
a contract. However, the High Court provided little express legal or empirical
analysis as to how this process is to be undertaken. As one academic text
has posited, “the distinction between collateral and alternative [primary]
25 Subsequently, Gordon J held that a $35 late payment fee levied by A on B for B’s failure to make
minimum credit card repayments on time constituted a penalty. However, Gordon J held that
“honour” or “dishonour” fees of between $35–38 levied by A on B when B attempted to draw
funds which would overdraw his savings or business accounts did not constitute penalty; and
(ii) a fee levied by A on B when B exceeded a set credit limit on a credit account also did not
constitute a penalty, see: Paciocco v Australia and New Zealand Banking Group Ltd [2014] FCA 35;
(2014) 309 ALR 249. In the Paciocco Appeal (n 7), the Full Court of the Federal Court of Australia
reversed Gordon J’s decision that the late payment fees on credit cards are penalties: Paciocco
Appeal (n 7) [52]. The Full Court upheld Gordon J’s decision that honour and dishonour fees
on bank accounts and over limit fees on credit cards do not constitute penalties.
26 Katy Barnett and Sirko Harder, Remedies in Australian Private Law (CUP 2014) 306.
27 Carter (n 3) 99.
28 Carter (n 3) 128.
29 Peel (n 3) 152.
30 The appeal was from a first instance interlocutory decision concerning the arguable availability, and
not the application, of the penalties doctrine: Andrews (n 2) [15].
31 See Carter (n 3) 111–12; and Richard Manly, “Breach No Longer Necessary: The High Court’s
Reconsideration of the Penalty Doctrine” (2013) 41 ABLR 314, 331–36.
462 Contract in Commercial Law
stipulations is not easy to draw”.32 Part III of this chapter demonstrates that an
intention-based rationalisation of Andrews can be reconciled with the outcomes
in existing jurisprudence to provide clearer guidance for delineating between
collateral (in the sense of a security) and primary stipulations.
32 Barnett and Harder (n 26) 306; a similar point is also made in Manly (n 31).
33 See Mineralogy Pty Ltd v Sino Iron Pty Ltd (No 6) [2015] FCA 825 [470] (Edelman J).
34 See the first instance decision of Gordon J from the remitted Andrews litigation: Paciocco Trial (n 25)
[11]–[17] (Gordon J). See also Paciocco Appeal (n 7) [19].
35 This position stands in stark contrast to the Supreme Court of the United Kingdom’s recent holding
that the penalties doctrine in England is wholly a common law rule: Cavendish (n 12) [6]–[10].
36 Andrews (n 2) [63]. Justice Edelman in Mineralogy (n 33) [470] cites the High Court’s references to
the “unified” administration of law and equity as illustrating a unified doctrine. The rejoinder to this
argument is that elsewhere in Andrews the High Court emphasised that the implementation of the
Judicature system was procedural: Andrews (n 2) [68].
37 McFarlane (n 4) para [13.007]. Further, Professor Burrows has observed that there is no reason to
create a new category of case where the common law and equity give different answers to the same
question as to do so creates an incoherent and fractured body of jurisprudence, see Andrew Burrows,
“We Do This at Common Law But That in Equity” (2002) 22 OJLS 1, 5.
38 Further, whether the doctrine is a rule of “equity”, “common law” or “both” might create
uncertainty in practice as lower courts only have those specific aspects of the Chancellor’s
jurisdiction which legislatures have imbued them with. Thus lower courts with a limited
“equitable” jurisdiction may not have the power to apply a purely equitable penalties doctrine.
This issue was discussed in the context of proprietary estoppel in Bushby v Dixon Holmes du Pont
Pty Ltd [2010] NSWSC 234; (2010) 78 NSWLR 111.
39 McFarlane (n 4) para [13.007].
Ch 20 Doctrinal Approaches to the Law of Penalties 463
40 This explains the breach of contract requirement to enliven the common law rule: See Robert Stevens,
“Rights Restricting Remedies” in Andrew Robertson and Michael Tilbury (eds), Divergences in Private
Law (Bloomsbury, 2016) 159, 171–77. See also the text from n 96.
41 Which is imposed as a secondary obligation by the court.
42 [1966] 1 WLR 1428 (HL) 1446. For the same sentiment expressed more recently see Cavendish (n 12) [3].
464 Contract in Commercial Law
43 Protector Endowment Loan and Annuity Company v Grice (1880) 5 QBD 592 (CA) 596.
44 AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170, 183.
45 Carter (n 3) 109.
46 Jonathan Morgan, Great Debates in Contract Law (2nd ed, Palgrave Macmillan 2015) 234. See further
AMEV-UDC (n 44) 183 (Mason and Wilson JJ); and Carter and others (n 3) 109.
47 Although this chapter focuses on the application of the penalties doctrine to contracts, as the High
Court’s historical analysis in Andrews makes clear, given that the breach of contract requirement has
been removed, there is nothing in principle preventing the application of the penalties doctrine to
other written instruments.
48 See Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71; (2005) 224 CLR 656 [31]–[32]; Andrews
Trial (n 8) [4]; and Cavendish (n 12) [33].
49 See Mindy Chen-Wishart, “Controlling the Power to Agree Damages” in Peter Birks (ed), Wrongs
and Remedies in the Twenty-First Century (Clarendon Press 1996) 271; Carter (n 3) 111–12; and
JD Heydon, MJ Leeming and PG Turner, Meagher, Gummow & Lehane’s Equity: Doctrines & Remedies
(5th ed, LexisNexis Butterworths 2015) para [18.005].
50 Phillips Hong Kong v A-G of Hong Kong (1993) 61 BLR 41 (PC) 59; and Cavendish (n 12) [33].
51 See Cavendish (n 12) [36]–[39], [126], [162]. The court’s reasoning on this point was largely
pragmatic, noting that the rule is a long-standing feature of English law.
52 Jeremy Bentham, A Comment on the Commentaries and a Fragment on Government (first published
1776, Athlone Press 1977) 416.
Ch 20 Doctrinal Approaches to the Law of Penalties 465
Rationale 2: Deterrence
The second potential rationale for the existence of the penalties doctrine is
that non-compensatory liquidated damage clauses are “likely to be regarded
as penal because their function is to act as a deterrent”.54 The prevention of
contractual provisions that deter departure from the terms of the bargain is
an unsatisfactory rationale for the doctrine. This is for two reasons.
53 DEC Yale, Lord Nottingham’s Chancery Cases (Vol 2) (B Quaritch 1957–61) 15; McFarlane (n 4)
para [13.001]; Paciocco Appeal (n 7) [103] (Allsop CJ).
54 Makdessi v Cavendish Square Holdings BV [2013] EWCA Civ 1539 (Comm); [2014] 2 All ER 125
[120], rev’d Cavendish (n 12). See also Murray v Leisureplay Plc [2005] EWCA Civ 963; [2005] IRLR
946 [111].
466 Contract in Commercial Law
64 See James Edelman, Gain-Based Damages: Contract, Tort, Equity and Intellectual Property (Hart
Publishing 2002) 65–67.
65 Attorney-General v Blake [2001] 1 AC 268 (HL).
66 Hospitality Group Pty Ltd v Australian Rugby Union Ltd [2001] FCA 1040; (2001) 110 FCR 157
[157]–[159]; and Heydon, Leeming and Turner (n 49) para [26.075].
67 Blake (n 65).
68 James Edelman, “Exemplary Damages for Breach of Contract” (2001) 117 LQR 539, 543. This view
is challenged in Lionel Smith, “Deterrence, Prophylaxis and Punishment in Fiduciary Obligations”
(2013) 7 Journal of Equity 87.
69 Andrew Burrows, Remedies for Torts and Breach of Contract (3rd ed, OUP 2004) 444–45; and
McFarlane (n 4) para [13.013].
70 Unless one considers that a normative difference exists in circumstances where the court decides that
the sum of $X is due as opposed to the parties, see the text at n (76).
71 See David Ibbetson, A Historical Introduction to the Law of Obligations (OUP 1999) 255–57; and
Hugh Collins, The Law of Contract (3rd ed, CUP 2003) 377.
468 Contract in Commercial Law
to A for the rights and benefits received under the impugned bargain,78 is this
really apt to be characterised as “punishment”? Professor Collins’ observation
is made more pertinent by the fact that the law is generally ambivalent towards
individuals making improvident bargains79 even if they lead to financial ruin
and bankruptcy, and that, as noted, there nonetheless remains the potential for
the parties to draft around the penalties doctrine. Similarly, Dr Morgan has
observed that while it makes sense to limit the private capacity to punish by the
use of force and imprisonment, it is “less obvious” that monetary contractual
incentives and disincentives raise the same policy considerations.80 While
the ability of the parties to draft around the penalties doctrine is a weakness
of many of the competing rationales, it is a strength of the intention-based
rationale advocated by this chapter. Indeed, the cases are typically illustrative
of a judicial reticence to depart from the terms of the parties’ bargain (thus the
doctrine of penalties affords the parties a generous margin of appreciation to
set their own contractual terms).81
78 Although the Supreme Court of the United Kingdom recently held that terms stipulating that
(i) B was obliged to sell remaining shares in a company to A for a price exclusive of goodwill; and
(ii) B was disentitled to receive final payments for shares already sold to A, were not penal. Both these
contingencies resulted from B’s breach of anti-competition covenants. The court reasoned, inter alia,
that such clauses were properly characterised as price adjustment clauses which altered the primary
obligations under the sale agreement and did not create obligations equivalent to contractual
alternatives to a common law damages claim: see Cavendish (n 12) [74]–[76], [81]–[82], [181]–[186],
[278], [281]. The court also observed that such clauses served A’s ‘legitimate interest’ in preserving the
value of the goodwill in the company.
79 Export Credits (n 11) 403.
80 Morgan (n 46) 236.
81 Ringrow (n 48) [31]–[32].
82 William Loyd, “Penalties and Forfeitures: Before Peachy v The Duke of Somerset” (1915) 29 Harv LR
117, 129; Robert Hillman, “The Limits of Behavioural Decision Theory in Legal Analysis: The Case of
Liquidated Damages” (2000) 85 Corn LR 717, 723–28; and Morgan (n 46) 239–40.
83 Jeannie Paterson, “The Australian Unfair Contract Terms Law: The Rise of Substantive Unfairness
as a Ground for Review of Standard-Form Contracts” (2009) 33 MULR 934, 953. See also Stewart
Macaulay, “An Empirical View of Contract” (1985) 3 Wisc LR 465, 467–69; Jay Feinman, “The
Significance of Contract Theory” (1990) 58 U Cin LR 1283, 1305–08.
470 Contract in Commercial Law
First, consumers are less proficient at making decisions the greater the
number of factors they are required to consider.84 Consequently, in entering
into standard-form contracts, consumers will typically focus on price, quality or
other key characteristics, paying little attention to the remainder of the bargain
(which may include a penalty clause).85 Second, consumers are generally limited
in their ability to assess risks associated with a particular contract term, even
if those risks are purportedly incorporated into a decision-making process.86
Several factors impact on consumers’ inability to assess risks accurately, such as
the propensity to be overly optimistic about one’s ability to perform a contract
without engaging a penal clause.
Behavioural economics has undoubtedly been an influential factor in the
recent creation of statutory regimes providing protection from unfair contract
terms (enacted in Australia and the United Kingdom).87 However, the ability
of contracting parties to adequately assess risk does not provide a plausible
rationalisation for the cases, as the doctrine operates irrespective of the parties’
capacity to properly calculate risk. Further, the related issue of the inequality
of the parties’ bargaining power is insufficient in and of itself to enliven the
penalties doctrine.88
Collins has observed, this rationalisation might explain why a court may refrain
from enforcing some penal clauses but it is an inapt basis for relief in most
cases concerning the law of penalties, particularly in commercial cases.91 For
example, preventing a party from unduly binding herself might make sense
in circumstances where A and B are in an employment relationship and the
contract stipulates that B is paid a wage of $Y per day but that if B fails to
attend work on a given day, B is obliged to pay A the sum of $Y×10. However,
the preservation of liberty and freedom of action does not seem to be a tenable
rationalisation for relief against a clause in a “carefully constructed commercial
agreement”.92 As Dr Morgan has observed, “[i]t seems melodramatic to suggest
that commercial parties agreeing to a penalty clause are enslaving themselves”.93
Third, the penalties doctrine applies equally to natural persons, corporate
persons and public bodies. If the penalties doctrine is truly concerned about
preserving personal autonomy and freedom of action, it appears unclear why
the doctrine should operate in a manner that avails corporate juristic persons
(including public bodies), as opposed to natural persons, of their obligations,
particularly as corporate juristic persons have their liberty of action nonetheless
partially limited by their constitutional documents (which, in the case of private
and public corporations, are contractual in character as between the company
and its members)94 and/or the purposes for which the corporate entity was
created.95
112 See MSC Mediterranean Shipping Company SA v Cottonex Anstalt [2015] EWHC 283 (Comm) [111].
113 David Campbell and Donald Harris, “In Defence of Breach: A Critique of Restitution and The
Performance Interest” (2002) 22 Leg S 208, 218.
114 Burrows (n 69) 450–51.
115 Burrows (n 69) 450–51.
116 769 F2d 1284, 1289 (1985). See also Morgan (n 46) 238–39.
Ch 20 Doctrinal Approaches to the Law of Penalties 475
circumstances where the parties have calculated the utility117 of a fixed sum
remedy, why the court should displace what the parties have expressly agreed.
In any event, and more generally, economics does not seek to justify its claim to
control the law, when the law must balance multiple interests, approaches and
outcomes aside from being concerned with the most economically efficient or
rational allocation of resources.
123 Andrews (n 2) [10], [79]; Paciocco Appeal (n 7) [95]; Mineralogy (n 33) [478]–[484].
124 Andrews (n 2) [37]; Mineralogy (n 33) [482]–[485].
125 The opposite view was expressed by Deane J in AMEV-UDC (n 44) 200. Justice Deane referred to such
a right being a penal sanction or, alternatively, a security right. See also Heydon, Leeming and Turner
(n 49) paras [18.025] and [18.075], who refer to stipulations meant to punish or secure performance.
The difficulty with this approach is that in Andrews (n 2) [10], the Court did not frame stipulations
intended to punish or secure performance as alternatives.
126 cf the UK position that a penalty is void: Beale (n 88) para [26.188]; and Cavendish (n 12) [87].
Ch 20 Doctrinal Approaches to the Law of Penalties 477
for the limited purpose of securing a primary obligation.127 It is for this reason
that Professor McFarlane has observed that the Andrews formulation reflects
the circumstances when a court will grant relief against the forfeiture of an
asset or right which is held by A to secure an obligation owed by B.128
The effect of the Andrews formulation is that, strictly speaking, no “penal”
clause in itself constitutes a “penalty”.129 Rather, it is A’s enforcement of the
clause beyond what is actually necessary to satisfy the “secured” primary
stipulation in specific circumstances which constitutes the “penalty”. From
a historical perspective this result can be explained on the basis of equity
restraining A’s “unconscionable” exercise of a legal right.130 However, the
problem with justifying the existence of the penalties doctrine on the basis of
unconscionability or the prevention of the unconscionable exercise of legal
rights is that, as the High Court has observed, “the statement that enforcement
of [a] transaction would be ‘unconscionable’ is to characterise the result
rather than to identify the reasoning that leads to the application of that
description”.131 The central point that the High Court appears to be making
is that an abstract principle, in this case the label “unconscionability”, cannot
be sensibly understood unless the abstraction is ultimately referable to specific
criteria that give rise to a cause of action and/or engage the relevant legal
principle. 132 Even as a doctrinal rationalisation for the rule against penalties,
recourse to “unconscionability” alone simply proves too much. If preventing
“unconscionability” were used as a sole justification for every case that fell
within settled principles, it would be possible to say, in every case, that the
opposite conclusion would be unconscionable or that every legal rule can be
justified on the basis of preventing “unconscionability”.133
Rather than focusing on “unconscionability”, a better approach is to focus
on the specific threshold requirement in the Andrews formulation (termed the
127 Andrews (n 2) [12]: it should be noted that the Andrews formulation does not require the primary
stipulation or the relevant ‘penalty’ to be payment of money.
128 McFarlane (n 4) para [13.003] draws the connection between the Andrews formulation and the
description of the “paradigm” case for relief against penalties as enunciated by Lord Neuberger in the
advice of the Privy Council in Cukurova Finance International Ltd v Alfa Telecom Turkey Ltd [2013]
UKPC 2; [2015] 2 WLR 875 [90]. Indeed, McFarlane takes this connection further and suggests that
“there is no obvious doctrinal or policy reason for maintaining English law’s clear distinction between
penalties and forfeiture jurisdictions”. For the contrary view why the doctrines remain conceptually
distinct see Heydon, Leeming and Turner (n 49) para [18.220]; AMEV-UDC (n 44) 199 (Deane J).
In a minimalistic spirit, it suffices to note that thesis advocated by this chapter does not depend on
wholly collapsing the distinction between penalties and forfeiture.
129 cf Citicorp (n 88) 40 (Priestley JA).
130 AMEV-UDC (n 44) 198–200 (Deane J); McFarlane (n 4) para [13.001].
131 Garcia v National Australia Bank Ltd [1998] HCA 48; (1998) 194 CLR 395 [34]. See also Australian
Competition & Consumer Commission v CG Berbatis Holdings Pty Ltd [2003] HCA 18; (2003) 214
CLR 51 [43]; and Tanwar Enterprises Pty Ltd v Cauchi [2003] HCA 57; (2003) 217 CLR 315 [23]–[26].
132 Jeremy Bentham referred to this process as paraphrasis: the need to explain fictitious entities
(substantive nouns referring to abstractions) by the process of explaining such abstractions with
recourse to things that exist in the physical world, that are perceivable or that could be inferred to
exist: see Philip Schofield, Utility & Democracy: The Political Thought of Jeremy Bentham (OUP 2006)
8–9, 23–24.
133 Peter Birks, “Equity in Modern Law: An Exercise in Taxonomy” (1996) 26 Univ WAL Rev 1, 97. See also
Nicholas Tiverios, “Raiders of the Secured Asset: The Doctrinal Rationalisation for the Liquidator’s
Lien or Charge Over a Secured Asset Post-Stewart v Atco” (2015) 23 Insolv LJ 101, 106–07.
478 Contract in Commercial Law
146 As Atiyah (n 141) 369–74, suggests the parties do not intend to be bound at all by such agreed
remedies clauses. He argues that the penalties doctrine essentially gives effect to the parties’ intentions
on the fundamentals of the contract, at the expense of the full enforcement of the penalty clause.
147 Atiyah (n 141) 369.
148 Joseph Biancalana, “The Development of the Penal Bond with Conditional Defeasance” (2007)
26 J Legal Hist 212.
149 Ibbetson (n 71) 28–30.
150 Ibbetson (n 71) 28–30.
151 AWB Simpson, “The Penal Bond with Conditional Defeasance” (1966) 82 LQR 392, 411.
152 Edith Henderson, “Relief from Bonds in the English Chancery: Mid-Sixteenth Century” (1974) 18
Am JLH 298, 300.
153 Simpson (n 151) 402–03.
Ch 20 Doctrinal Approaches to the Law of Penalties 481
The common law’s rigidity led to defendants in common law bond cases
becoming Chancery’s plaintiffs. AWB Simpson identifies three periods of
development.154 First, during the reign of Edward IV (1442–83), Chancery
provided relief in cases where the debtor had performed an obligation contained
in a simple bond but had failed to take the necessary steps to gain a release.
Second, during the reign of Elizabeth I (1558–1603), Chancery expanded the
circumstances in which a defendant could be afforded relief on a conditional
bond to circumstances where the defendant had suffered an accident or extremity
or had only made a trifling default, provided the defendant compensated the
plaintiff for any loss suffered. Finally, after the Restoration (1660), Chancery
would grant relief to a defendant on a conditional bond if, within a short time
from non-performance, he paid to the plaintiff the conditional defeasance,
interest and any legal costs.
It is submitted that a plausible hypothesis as to the rationale for the
development of equity’s mature jurisdiction for providing relief in conditional
bond cases is consistent and coherent with the thesis advocated by this chapter
(an intention-based rationale). As Macclesfield LC observed in the seminal
decision of Peachy v Duke of Somerset,155 the real basis for relief against
penalties and forfeiture was: “the original intent of the case, where the penalty
is designed only to secure money, and the court gives him all he expected or
desired”.156 In the latter authority of Sloman v Walter,157 Thurlow LC expanded
this formulation by extending it to apply to penalties contained in conditional
bonds that secured performance of non-monetary stipulations. His Lordship
explained that the reason why equity provides relief is that the parties
themselves insert the penalty in the bond (the collateral stipulation in the
Andrews sense) simply to ensure that the conditional defeasance (the primary
stipulation in the Andrews sense) is performed. In penalties cases, equity was
ensuring that the bondholder was only using his legal rights insofar as they
were required to secure the enjoyment of a primary object of the transaction
on the particular facts of a given case. Thus in any given case the plaintiff
was only required to pay the bondholder for damage actually incurred (as
quantified by either a Master in Chancery or jury trial).158 Similarly, in Grice,
Bramwell LJ articulated, although not without difficulty, an intention-based
rationale for the penalties doctrine:
“A definition of the principle may possibly be that where a sum is payable as
a punishment for a default, or by way of security, and the realization of that
sum is not within the original intention of the parties, the sum is a penalty;
but when it forms part of the original intention, that upon default a sum
otherwise payable at a future period, shall become forthwith payable, it is no
longer a penalty.”159
to double recovery was that the common law procedure favoured the universal
benefits of simplicity and certainty in making the bond non-traversable proof
of an obligation to pay a debt, rather than giving a careless party, who failed to
destroy the bond or take an acquittance, a remedy.
Where Chancery was allowing relief in double-recovery simple bond
cases, it was applying the same substantive principles as the common law.
However, as a result of different procedural rules, the Chancellor was simply,
as Macnair argues,166 applying the same substantive legal rule as the common
law (debts are not owed twice) but reaching a different conclusion on account
of a more in-depth factual analysis on account of different procedural rules
(evidence of the discharge of the obligation contained in the bond was
admissible in the Chancery). Relief in simple bond cases was thus not really
about the intention-based rationalisation, but can simply be justified on the
basis that different procedural rules concerning the admissibility of parol
evidence resulted in different outcomes in the common law courts and the
courts of equity.
By way of summary, there are three key points to take from the historical
analysis above. First, this analysis is set out not to suggest that a history lesson
ought solely to govern the proper rationalisation for the penalties doctrine.
Rather, it is to demonstrate that within the historical development of the
penalties doctrine there is jurisprudence and commentary which illustrates
that there is nothing anomalous about the intention-based rationalisation
being proffered as the basis for relief against penalties in conditional bond
cases. Further, this observation illustrates that the intention-based rationale
is a theory which, unlike many of the other rationalisations, can explain why
judges developed the penalties doctrine, rather than simply being an ex post
facto rationalisation for the doctrine’s existence. Put simply, if the High Court
of Australia is going to reach back in time to reformulate the penalties doctrine,
then it needs to consider the underlying doctrinal reasons as to why the grant
of relief from a penalty was considered appropriate and assess whether those
reasons are still persuasive in a modern context. In answer to this question, the
contract law minimalists will find the adoption of an intention-based rationale
appealing. Second, it is important to appreciate that the law of penalties began
its development into its modern form from about the mid-15th century. It
is axiomatic that any legal development over such a significant period is not
susceptible to a simple explanation. Finally, the analysis above is important
because it demonstrates why it is erroneous and simplistic to believe that the
High Court in Andrews “paradoxically” expanded the penalties doctrine while
utilising authorities from when the power to contract was at its zenith. The
intention-based nature of the Andrews formulation is the key to understanding
why this is so.
166 Mike Macnair, “Equity and Conscience” (2007) 27 OJLS 659, 680–81.
484 Contract in Commercial Law
167 Paciocco Appeal (n 7) [95]; and Mineralogy (n 33) [471]–[478]. It has been noted that this distinguishes
penalties from forfeiture on the basis that the former looks at the position of the parties when the
contract was made, whereas the latter looks at the position after the breach when the innocent party
is enforcing the forfeiture: Else (1982) Ltd v Parkland Holdings Ltd [1994] 1 BCLC 130 (CA) 144
(Hoffman LJ); and Cavendish (n 12) [9].
168 Parkin v Thorold (1851) 2 Sim NS 1, 61 ER 239; Tilley v Thomas (1867) LR 3 Ch App 61, 67; Solomons
v Halloran (1906) 7 SR (NSW) 32, 42–44. Such an approach is wholly consistent with the High
Court’s recent emphasis on there being a uniform law of interpretation: Byrnes v Kendle [2011] HCA
26; (2011) 243 CLR 253 [17], [93]–[118].
169 Byrnes (n 168) [93]–[118]; Cusack v London Borough of Harrow [2013] UKSC 40; [2013] 1 WLR 2022
[58]–[59]. See also ch 9 by Professor Stevens in this volume.
170 Paciocco Appeal (n 7) [200].
171 See Western Export Services v Jireh International Pty Ltd [2011] HCA 45; (2011) 86 ALJR 1 [2]–[5].
There is controversy concerning the extent to which contextual surrounding circumstances are
available, in the absence of ambiguity, to aide contractual interpretation. English courts take a
broader view whereas Australian courts have traditionally favoured a more restrictive approach. See
Stratton Finance Pty Limited v Webb [2014] FCAFC 110; (2014) 314 ALR 166 [36]–[40].
172 Byrnes (n 168) [98]–[98]; and Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA
7; (2014) 251 CLR 640 [35].
173 See Toll (FGCT) Pty Limited v Alphapharm Pty Limited [2004] HCA 52; 219 CLR 165.
Ch 20 Doctrinal Approaches to the Law of Penalties 485
174 See Dunlop (n 57) 86 (Lord Dunedin); and Re Spectrum Plus [2005] UKHL 41; [2005] 2 AC 680
[116]–[117].
175 [1983] NZLR 462.
176 Re Universal (n 175) 470.
177 Andrews (n 2) [10]–[13]. For a similar approach see M&J Polymers Ltd v Imerys Minerals Ltd [2008]
EWHC 344 (Comm); (2008) 1 Lloyds Rep 541 [41] discussed in McFarlane (n 4) para [13.007]; and
Cavendish (n 12) [15].
178 Paciocco Appeal (n 7) [200].
179 FAI General Insurance Company Limited v Australian Hospital Care Pty Ltd [2001] HCA 38; (2001)
204 CLR 641 [33].
486 Contract in Commercial Law
180 Sarah Worthington, “What is Left of Equity’s Relief Against Forfeiture” in Elise Bant and Matthew
Harding (eds), Exploring Private Law (CUP 2010) 249, 252–53.
181 K D Morris & Sons Pty Ltd (in Liq) v Bank of Queensland Ltd (1980) 146 CLR 165, 199-200; FAI
(n 179) [11]; Byrnes (n 168) [52].
182 Heydon, Leeming and Turner (n 49) para [3.180].
183 cf Cavendish (n 12) [34].
184 See Michael Byran and Vicki Vann, Equity and Trusts in Australia (CUP 2012) 104.
185 This reflects the developing relationship between terms of cooperation and reasonableness and
unconscientiousness in the exercise of contractual rights: Anthony Mason, “Contract, Good Faith
and Equitable Standards in Fair Dealing” (2000) 116 LQR 66, 73. Sir Anthony Mason has observed
that the enforcement of security rights serve as a specific example where A has to take into account
broader considerations in exercising her rights against B. See also Vodafone Pacific Ltd & Ors v Mobile
Innovations Ltd [2004] NSWCA 15 [216]–[217]; and MSC (n 112) [97].
Ch 20 Doctrinal Approaches to the Law of Penalties 487
186 See Robert French, “The Judicial Function in an Age of Statutes” (2011 Goldring Memorial Lecture,
Wollongong, 18 November 2011); and James Edelman, “Uncommon Statutory Interpretation” (2012
Western Australia Constitutional Centre Twilight Seminar, Perth, 30 May 2012). Authorities on
this point are legion: see: Potter v Minahan [1908] HCA 63; (1908) 7 CLR 277; Bropho v Western
Australia (1990) 171 CLR 1, 15; and Saeed v Minister for Immigration and Citizenship [2010] HCA 23;
(2010) 241 CLR 252 [15], [58]. Such a rule can be rationalised on the bases that (i) it improves the
procedural creation of legislative instruments as it ensures that parliament (or a delegated law making
body) actually intends the desired result by using irresistibly clear drafting; and/or (ii) there is an
assumption that law makers do not intend to abrogate certainly judicially recognised “fundamental”
rights: Brendan Lim, “The Normativity of the Principle of Legality” (2013) 37 MULR 372.
187 Professor Worthington has set out some of the staunchest academic criticisms of legal doctrines,
including relief against forfeiture, that enable ex post facto curial paternalism: Worthington (n 180),
252.
488 Contract in Commercial Law
of judicial method and not with understanding the penalties doctrine within
an intention-based framework. Indeed, it is a strength of the thesis developed
in this chapter that the parties are free to draft around the penalties doctrine
where it is irresistibly clear that A’s right against B is not a mere security right.
compensate A for the failure of a primary stipulation, as the judicial trend over
the past century has been to expand the types of losses that are recoverable
under the general law.209
Conclusion
While it remains to be seen how the antipodean equitable penalties doctrine
will develop post-Andrews, this chapter has presented a clear and coherent
framework for understanding the doctrine: the best rationalisation for the
post-Andrews penalties doctrine is that it is a species within the wider genus
of the law relating to security rights. This approach can be seen as resting
on an “intention-based” rationale, as it requires a penal clause to first be
characterised as a security right for the penalties doctrine to be engaged.
Where, applying orthodox principles of interpretation, A has a right against
B which is acquired for the limited purpose of securing a primary stipulation,
the assertion of that right ought to necessarily be controlled by the purpose
of securing performance of that stipulation (or the stipulation’s monetised
equivalent). There are four reasons why this can provide a strong underlying
justification for the post-Andrews penalties doctrine. First, the intention-based
rationalisation fit comfortably with the High Court’s “anterior” formulation for
when the penalties doctrine is engaged. Second, and related to the first reason,
this “anterior” formulation must depend on either contractual interpretation
or construction in order to be satisfied. Third, the intention-based rationale
forms one understanding of why equity historically intervened to restrain the
enforcement of penalties in conditional bond cases. Fourth, the intention-based
rationale provides a coherent path for reconciling the “anterior” issue of when
the penalties doctrine is engaged with existing penalties jurisprudence. Viewed
through the prism of an intention-based rationalisation, the genius of the
Andrews formulation is that it has the potential to contemporaneously broaden
the reach of the penalties doctrine (the doctrine can apply to any right contained
in a contract that functions in the nature of a security) whilst finally reconciling
the doctrine with the longstanding critique that it impermissibly interferes
with the parties’ powers to contract (as the doctrine has no application where it
is irresistibly clear that a right is not merely enforceable for the limited purpose
of securing performance of a primary stipulation).
493
494 Contract in Commercial Law
public policy explicit in, 434 new directions and style of reasoning
uniform commercial code of some US adopted by Supreme Court of
States, 412 Canada in relation to, 232, 233
transnational case study of insurance example of universalism, as, 233
contracts (England, New York and requirement of good faith in, 236, 239
Australia), 430-434 values brought to bear in evaluation
claim in Australia for statutory of, 109, 110-111 — see also
remedies for misleading conduct Characterisation, process of
not precluded by exclusion clause,
432-433 Freedom of contract
effect of Australian insurance contracts contracts of adhesion as focus for
legislation transnationally, whether reconsideration of paramountcy of,
any, 433-434 409
effect of Australian trade practices economic and social history of late
legislation transnationally, whether 19th century to present day and,
any, 432-433 407-413
lack of uniformity of approaches, enforcement of contract in absence of
434 fraud, misrepresentation, duress or
preparedness at first instance in New undue influence, 408-409, 410
York to uphold exclusions of erosion of, 23 — see also Exclusion /
liability for fraudulent conduct, limitation clauses
430, 431 exploitation of superior bargaining
related English litigation, 430-432 power, judicial indifference to, 409,
UNIDROIT Principles of International 410
Commercial Contracts, construction fiction, whether, 23
of exclusion clauses under, good faith as duty imposed by law,
428-429 whether conflict with, 238-242 —
avoidance of contract or contract term see also Good faith
for gross disparity, 429 judicial activism preceding
neutral form of governing law in interventionist legislation, 409
transnational contracts, 428 legislative intervention to ameliorate
no power to modify exemption clauses, outcomes of, 408, 409
429 “paramount public policy”, as,
reference to freedom of contract, 428 historically, 407-408, 434
right to invoke clause excluding or party autonomy and, 238-242, 409
limiting liability of beneficiary, good faith as duty imposed by law,
unless grossly unfair to do so, whether conflict with, 238-242
having regard to purpose of penalties doctrine and decision in
contract, 428-429 Andrews, relevance of, 458, 461,
standard terms, effectiveness of, 429 475-476, 492— see also Penalties,
doctrine of
Fiduciary relationship — see also Good standard form contracts, 409
faith UNIDROIT Principles of International
basis of, 109 Commercial Contracts, reference to,
categories of, 109 428
contract and, relationship between,
109-110 Good faith
exclusion or modification of operation anticipatory breach and concept of,
of fiduciary duties by contract, 293-294
whether, 420 Australian law of contract, in, 250-251, 254
express exclusion of, whether, 111 important role on basis of parties’
identification of existence, character and intentions and under established
scope of, 109 doctrines, 251
key ingredients, 108, 233 no generally applicable duty, 250-251,
nature of, 110-111 254
508 Contract in Commercial Law