Chapter 5: The Contents and Interpretation of a Contract

Question 1

What happens once there is enforceable agreement?

Answer 1

We have to consider what the context of the agreement is (the terms of the contract) and what they mean (the interpretation of the terms).

Question 2

The terms of a contract may be….

Answer 2

Express or Implied.

Question 3

The problem with oral agreements.

Answer 3

Although there is generally nothing wrong with an oral agreement or an agreement that is partly oral and partly written, it is much harder to prove what each party promised (in the event of a dispute or fading memory).

Question 4

Why may a dispute arise?

Answer 4

Once the contents of a contract are decided, a dispute may arise as to the meaning of the a term in the contract and then it becomes necessary for the court to interpret the term.

The meaning is determined by what a reasonable person in the position of the parties would have understood them to mean.

Question 5

What are express terms?

Answer 5

These are the terms that the parties have specifically agreed to (either in writing, orally or a combination of both).

Exceptions: consumer credit and land transactions - cannot be oral

Question 6

Explain what happens when a contract is made orally?

Answer 6

The express terms of the contract will be ascertained by determining the words actually used by the parties when the contract was made.

This may be difficult to establish and is essentially a question of fact.

Question 7

Explain what happens when a contract is made exclusively in writing?

Answer 7

All the terms are automatically express when they are written.

There is usually no difficulty in establishing what the express terms of the contract are (as most are reduced to written form).

Question 8

What happens when there is a grey a that generates a lot of discussion and disputes?

Answer 8

During the pre-contractual negotiations, one or both parties may take statements (oral or written) that are important but it may not be clear if the statement is a term or a representation (a statement that was intended to induce the other party to enter into the contract - not promissory).

Promissory - intended to be a term of the contract.

Question 9

What are the different types of pre-contractual statements?

Answer 9

. Mere Puff (exaggerated talk) - No legal consequences
. Representations (induce contract) - If wrong, consequences depends on kind of representation
. Terms (promissory) - If breach, consequences depend on kind of term

Question 10

Why did it used to be very important to distinguish between representations and the terms of the contract?

Answer 10

Because the remedies for a misrepresentation were inferior to the remedies for breach of contract.

This is before the introduction of the Trade Practices Act 1974 and its successor, the Competition and Consumer Act 2010.

The Australian Consumer Law now provides such a wide range of remedies for misrepresentation or misleading or discernible conduct and other unfair practices that it is no longer so crucial that a statement be characterised as a term of the contract.

Question 11

When does a statement constitute a term of a contract?

Answer 11

When the party making the statement has promised that they would perform it as part of the contractual bargain.

The court’s look objectively at the circumstances to determine whether or not the statement was a promise (a contractual term) or a representation (non-contractual) that was intended to induce the other party to enter into the agreement but was not promissory. It is often a fine line but guidelines have been developed that may assist a court in coming to a decision.

Question 12

What does the court consider when differentiating between pre-contractual terms:

Answer 12

. Whether the statement was promissory in nature (rather than an option or prediction)
. How much time passed from the making of the statement to the information of the contract (the less the better for the statement to be a term)
. Whether the agreement is subsequently reduced to writing (if so, less likely to be a term because the party had a chance to include it an did not)
. Whether the person making the statement was an expert or had more knowledge about the matter than the other party (if so, it is more likely to be a term)
. Generally how significant is the statement the whole context (the more significant, the more likely it is to be a term).

Question 13

Oscar Chess V Williams (1957) 1 WLR 370.

Answer 13

Page 69

Question 14

Dick Bentley Productions Limited V Harold Smith (Motors) Ltd [1965] 1 WLR 623.

Answer 14

Page 69

Question 15

Ross V Allis-Chalmers Australia Pty Ltd (1980) 32 ALR 561.

Answer 15

Page 69

Question 16

What are collateral contracts?

Answer 16

This refers to a statement which is not an actual term of a contract, but is added onto the main contract/considered an additional but subordinate (collateral to the main contract).

Damages may be recovered for breach of collateral contracts.

Question 17

What are the three criteria for a collateral contract?

Answer 17

. The statement must be promissory
. The statement must not be inconsistent with the main contract
. There must be consideration provided by the purchaser in exchange for the collateral promise (the consideration is usually that the promise proceeds to sign the main contract).

Question 18

Van Den Esschert V Chappell [1960] WAR 114.

Answer 18

page 70

Question 19

The importance of the terms: conditions, warranties and innominate terms.

Answer 19

A distinction is made between those terms that constitute conditions of the contract and those that are categorised as warranties.

The reason for distinguishing between these terms is that it imoacted parties different entitlements:
. Breach of a condition entitles the innocent party party to rescind the contract and/or claim damages
. Breach of warranty entitles the innocent party to damages only for the loss they have suggested as a result of the breach and does give them the right to terminate the contract

Question 20

What is a condition?

Answer 20

A condition is an essential term of the contract. It is a stipulation which goes to the heart of the matter.

Question 21

What is a warranty?

Answer 21

A warranty is a term of the contract, however, it is of lesser importance than a condition.

Question 22

What is an innominate term?

Answer 22

This is one where it is not clear at the time the contract is made whether the term is a condition or warranty.

The legal consequences of a breach of a term of this kind is determined by considering the consequences of the breach - if the breach has seriously affected the contract the statement is classified as a condition; if the consequences are relatively minor, it is regarded as a warranty.

Question 23

Bettini V Gye (1876) 1 QBD 183.

Answer 23

Page 70

Question 24

Associate Newspapers Ltd V Bancks (1951) 83 CLF 322.

Answer 24

Page 71

Question 25

How can terms be incorporated into a contract?

Answer 25

. By signature
. By notice
. By previous course of dealing

Question 26

Incorporation of the terms by signature.

Answer 26

To sign a contractual document is an act which itself ordinarily conveys a representation that the person who signs has either:
. Read the contents of the document
. Or approved the contents of the document
. Or is willing to take the chance of being bound by those contents whatever it might be.

Clicking “I agree” or “I accept” also binds a person whether or not they have read the terms.

Question 27

What is the patrol evidence rule?

Answer 27

If a contract is agreed to only be in writing, then any oral statements are not valid.

Meaning, if an oral statement is made and not met, the written contract is still intact.

Question 28

Incorporation of terms by notice.

Answer 28

Where the terms are not contained in a signed document, they may nevertheless be included in the contract provided REASONABLE notice of the term was given before or at the time the contract was made.

Where there is no signed document, a term may be contained either on a notice on the premises where the contract is made or in a document such as ticket, voucher or receipt.

Actual notice of an exemption clause is not necessary as long as the party seeking to rely on it showed that they had taken the steps necessary to give notice to an exemption clause. (Eg. People entering s car park, they must see signs which exclude liability before they enter)

Question 29

When will a notice have no effect?

Answer 29

If notice of the term is given after the contract has been made.

If the document is one which a reasonable person would not expect to contain contractual terms then the term is not incorporated into the contracts.

If the nature of an exemption clause is misrepresented to the other party who does not read it, the party seeking to rely on the exemption clause will not be permitted to do so.

Question 30

Incorporation by previous course of dealing.

Answer 30

People, particularly those who deal with each other on a regular basis, often enter contracts over the phone with invoices containing the terms provided on delivery.

If the person relying on the exclusions clause can prove that the dealings between the parties have been consistent and sufficiently long, they can claim that the customer had reasonable notice at some stage in those dealings even though the person has not read the term.

Question 31

What are most commercial disputes about?

Answer 31

The meaning of the terms in the agreement.

The words can be ambiguous or uncertain and the court is asked to find meaning.

The courts will attempt to find a meaning, but if the term is so uncertain or ambiguous that the court cannot give it meaning, the contract will be unenforceable.

Question 32

What happens when a dispute regarding the interpretation of contracts arises?

Answer 32

A judge can only seek to resolve the dispute by reference to the parties’ presumed intention. In such cases the task of the court is to ascertain the meaning that the document would convey to a reasonable person with knowledge of the context and background.

This will require consideration of:
. The language used by parties
. The surrounding circumstances known to them and
. The commercial purpose to be secured by the contract

Question 33

What is one of the terms that courts have been called upon to interpret?

Answer 33

The exclusion or exemption clause.

It is common for contracts in writing and for contracts where terms are to be found in other documents and notices to contain an exclusion or exemption term that limits or excludes altogether, a liability to which one party to the contract may otherwise be subject.

Question 34

What are examples of exclusion or exemption clauses?g

Answer 34

. ‘The owner of the them will not be responsible for any loss or damage suffered by the customer whether caused by breach of contract or negligence’
. ‘No responsibility accepted for lost property’
. ‘Those who enter the skateboard park do so at their own risk’

Question 35

Why have courts consistent regarded exclusion and exemption clauses with hostility?

Answer 35

This particularly occurs where:
. The term is contained in a standard form contract,
. No genuine negotiation has occurred or
. The parties are not in an equal bargaining position.

There are very strict limits on the use of exclusion clauses in “consumer” contracts.

Question 36

Why is it impossible to set universal exclusion clause rules?

Answer 36

Since exemption clauses may take a variety of forms, it is virtually impossible to lay down, in advance, universal rules as to those exclusion clauses that will protect the person seeking to rely on it and those that will not.

Question 37

When is an exclusion clause effective?

Answer 37

There are two stages of analysing whether an exclusion clause is effective in protecting a party from the effects of a breach of contract (or negligence).

1. To ask whether the term is actually a part of a contract - has it been incorporated into the contract?
2. Determine what it means (if it is part of the contract) - does it protect the party seeking to rely on the clause?

Question 38

Effectiveness of an exclusion clause: incorporation question.

Answer 38

Is the exclusion clause included in a written contract? Is it signed by the parties? If so, the clause is included whether or not the person has read it.

If there is not a contract in writing, the question is whether reasonable notice of the clause has been given.

Question 39

Effectiveness of an exclusion clause: interpretation question.

Answer 39

An exemption clause will be construed strictly and any ambiguity resolved against the person seeking to rely on it.

This is known as the “contra proferentum” rule. Thus a party drafting an exclusion should be careful to ensure that it is carefully and precisely drafted.

Question 40

An exemption clause can exclude a party from liability for negligence.

Answer 40

Exemption clauses may limit or exempt liability for negligence.

Question 41

Exemption clauses will not normally be construed as limiting or excluding liability for acts done outside the terms or scope of the contract.

Answer 41

In the examples:
. Council of the city of Sydney V West
. Darlington futures Ltd V Delco Australia Pty Ltd
. Photo production ltd V Securicor transport Pty Ltd
The breaches that occurred were fundamental (or very serious) breaches.

Question 42

What are implied terms?

Answer 42

In addition to the express terms agreed upon by the parties, other terms may be implied in the contract. In appropriate circumstances terms may be implied by the court; custom or trade usage; or statue.

Question 43

Explain terms implied by the court.

Answer 43

Terms which may be implied by the court can be subdivided into two categories:
. Those implied to give “business efficacy” to the contract and
. Those implied in specific kinds of contract.

Question 44

Terms implied by the court: terms implied to give “business efficacy” to the contract.

Answer 44

The courts will readily imply a term that the parties must cooperate to ensure the performance of their bargain.

Question 45

Terms implied by the court: terms implied in specific kinds of contract.

Answer 45

Certain terms are implied by various types of contract at common law.

Eg. In a contract for the hire of goods, there is an implied condition that the goods will be reasonably fit for the purpose which they are hired.

Question 46

Explain terms implied by custom or trade usage.

Answer 46

Where parties have contracted in a particular trade, the customs or usages of that trade may be implied into the contract.

However, in order for this to occur, the custom or usage must be notorious, certain and reasonable and not contrary to the express terms of the contract.

Question 47

Explain terms implied by statue.

Answer 47

In certain classes of contract, terms are implied by statutory provision.

Eg. The Australian Consumer Law provides for statutory guarantees in contracts for the supply of goods and services to consumers.

These include guarantees as to title, correspondence with description, acceptable quality and fitness for purpose.