Topic 9 - Contract Law (part 2)

Question 1

In what circumstances may a contract not be enforceable?

Answer 1

• Lack of consent (focus of BSB111)
• Lack of capacity (not covered)
• Lack of legality (not covered)
• Lack of formality (not covered)

Question 2

When is there a lack of consent?

Answer 2

• A contract will only be enforceable if both parties have entered into the contract willingly. If one of the parties have been bullied, pressured, manipulated into entering into the contract, the contract will be unenforceable because of lack of consent.

Question 3

What are the circumstances where consent can be lacking?

Answer 3

• Mistake
• Duress
• Undue Influence
• Unconscionability

Question 4

When is there a mistake?

Answer 4

As a general rule, if a party has made a mistake, it does not entitle them to terminate the contract or argue that the contract is unenforceable: caveat emptor (buyer beware).

Question 5

What are the exceptions that can apply to mistake?

Answer 5

• Unilateral mistakes
• Common mistakes
• Mutual mistakes

Question 6

When can the exceptions that apply to mistake (unilateral, common and mutual mistakes) apply?

Answer 6

Each of these exceptions may make a contract void (ineffective and unenforceable), provided the mistake relates to a fundamental aspect of the contract.
The court prefers to protect, where possible, the reliability and enforceability of contracts.

Question 7

What is a unilateral mistake and when will a unilateral mistake make a contract void?

Answer 7

• Only one party is mistaken.
  General rule: a unilateral mistake will not make a contract void.
• But the courts will refuse to enforce a contract where:
  one party makes a serious mistake
  about a fundamental aspect of the contract, and
  the other party seeks to take advantage of that mistake.

Question 8

What is the legal principle of L’Estrange v Graucob (1932)? (Unilateral mistake)

Answer 8

The general rule is that if a party signs a contract, they will be bound, whether they have read the contract or not.

Courts are not sympathetic towards a person who signs a contract without reading it and are generally reluctant to allow a person who has signed a written contract to avoid liability under the contract.

Question 9

What is non est factum (not my document)?

Answer 9

A contract could be declared void due to unilateral mistake if this involves the identity of one of the parties, and the parties are doing business at a distance. (If business is concluded face-to-face, then this will not apply).

A written contract could be declared void and unenforceable if:

1. the party who made the mistake had a good reason for not reading the contract (e.g. blindness, illiteracy), and
2. the mistake is about the fundamental nature of the document they were signing.

Question 10

What is a common mistake and when does it void a contract?

Answer 10

This occur where both parties make the same mistake.

A contract will be void for common mistake if:
the agreement between the parties was conditional upon the truth of a belief held by both parties and
at the time the agreement was formed the belief was incorrect.

Question 11

What is a mutual mistake?

Answer 11

Mutual mistake occurs when the parties to the contract believe they have reached an agreement but in fact there has been no meeting of minds because they were both thinking of different things at the time they made the agreement.

Question 12

What is the legal principle of Barton v Armstrong (1976)? (duress)

Answer 12

They are said to have engaged in duress and the contract is voidable.
The threat may be to the personal safety of the other party or to that of their loved ones

Question 13

What is duress and when is the contract void as a result?

Answer 13

If one party compels the other party to enter into the contract by expressly or impliedly threatening harm, then there is a lack of consent.

They are said to have engaged in duress and the contract is voidable.

The threat may be:

• to the personal safety of the other party or to that of their loved ones (Barton v Armstrong)
• to the safety of the other party’s goods or property, or
• to the other party’s economic or financial wellbeing, known as economic duress

Question 14

What is the legal principle of Johnson v Buttress (1936)? undue influence

Answer 14

It was then presumed that Johnson would have exercised undue influence over Buttress, so the onus of proof fell on Johnson to show that she had not taken advantage of the relationship. She was not able to demonstrate this, and the transfer was set aside.

Question 15

What is undue influence?

Answer 15

The parties to the contract may have a pre-existing relationship where one party has a degree of influence or dominance over the other.

If the stronger party uses this influence such that the weaker party is not really exercising their independent judgement, the contract will be declared void on the grounds of undue influence.

Undue influence will be presumed in certain relationships:

• doctor and patient,
• lawyer and client,
• trustee and beneficiary,
• parent/guardian and child, or
• religious leader and follower.

Question 16

In undue influence where does the onus lie?

Answer 16

The onus is on the stronger party to show that, despite the relationship, they did not exert their influence over the weaker party in making the contract.
If the stronger party cannot do this, the contract will be declared void.

Question 17

What happens if a relationship between parties isn’t one of the recognised relationships under undue influence?

Answer 17

• When the relationship between the parties is not one of these recognised relationships, influence will not be assumed. However, one party may still be able to show that the other party had a controlling influence over their decision making.
• If the weaker party can show that the stronger party did have a controlling influence, the onus is then on the stronger party to show that they did not use that influence.

Question 18

What is unconscionability?

Demonstrated by the legal principle of Commercial Bank of Australia v Amadio (1983)?

Answer 18

A contract can be set aside on the grounds of unconscionable conduct when (Commercial Bank of Australia Ltd v Amadio):

• one of the parties to the contract has a special weakness or disadvantage (which could include sickness, illiteracy, lack of education, or even being in love), and
• the other party knows about or should know about the special weakness or disadvantage and
• the other party takes unfair advantage of that special weakness or disadvantage.

Question 19

What the terms of a contract?

Answer 19

specific details of the agreement, that describe each party’s rights and obligations.

Question 20

What are the two types of contractual terms?

Answer 20

• express terms (covered in BSB111) and
• implied terms. Implied terms include:
  terms implied by the courts (not covered in BSB111)
  any relevant statutory terms

(These all make up the terms of a contract)

Question 21

What are express terms?

Answer 21

• Express terms are those terms explicitly agreed upon by the parties.
  They can be in writing or agreed upon verbally.

If the parties reduce their contract to writing, and the contract is signed, then the terms are what is in the written contract - they are binding even if one of the parties has not actually read the written contract (L’Estrange v Graucob).
If terms are not followed, the contract is said to be breached.

Keep in mind that a contract can be written, verbal or a combination of both.

Question 22

What is a non-contractual representation? (express terms)

Answer 22

If a representation (i.e. a statement of fact) is made during negotiations, but is not intended to become a term of the contract then it is a non-contractual representation.

Question 23

What are the principles of Dick Bentley Productions v Harold Smith Motors (1965)?

Answer 23

Held that the statement was a term of the contract. Harold Smith Motors, as a car dealer, had greater expertise and Bentley relied upon that expertise

Question 24

What would a reasonable person, aware of the circumstances of the case, believe to be the parties’ intention, given what three things?

Dick Bentley Productions v Harold Smith Motors (1965

Answer 24

1. The time lapse between statement and final agreement
   The longer the time, the less likely it was intended to be a term
2. The importance attached to the statement
   The more important, the more likely it was intended to be a term
3. Whether the parties had special skill or knowledge

If the party making the statement had special skills, the more likely it was intended to be a term

Question 25

What is the parol evidence rule?

Answer 25

• If a contract is in writing, it will be difficult to establish that a verbal statement (that was not included in the written contract) was intended to be a term of the contract.
• Where a contract is reduced to writing and appears to be entire, it is presumed that the writing contains all the terms of it and evidence will not be admitted of any previous or contemporaneous agreement which would have the effect of adding or varying it in any way
• This means that in the event of an inconsistency between a written term of an apparently complete contract and a verbal representation or promise, the court will favour the written term and disregard the verbal representation or promise.

Question 26

When does the parol evidence rule apply?

Answer 26

• The parol evidence rule only applies if the written contract appears to be a complete record of the agreement.
• If it can be shown that the contract consisted of both the written agreement and verbal representation, then the Parol Evidence Rule will not apply
• Many contracts now contain “whole of the agreement clauses” to try to prevent this exception from being used.

Question 27

What other options are available if representation is not a term of the contract?

Answer 27

• Breach of a collateral contract
• Misrepresentation
• Contravention of the Australian Consumer Law (see week 10)

Question 28

What is the legal principle of De Lasalle v Guildford (1901)?

Answer 28

Held that, although as a result of the Parol Evidence Rule, Guildford’s verbal assurance was not a term of the lease, the assurance did amount to a collateral contract.

That is, in return for Guildford’s promise about the drains, De Lasalle had entered into the lease. This constituted a secondary, collateral contract, that Guildford had breached (the promise was not fulfilled). Although the main contract (the lease) was not breached and could not be set aside, De Lasalle was entitled to compensation for breach of the collateral contract.

Question 29

What is a collateral contract?

Answer 29

A collateral contract is a secondary contract, the consideration for which is the entry into the main contract. If the representation turns out to be untrue the other party can sue for breaching the collateral contract (De Lasalle v Guildford).

Since it is the collateral contract that is breached, not the main contract, the other party cannot terminate the main contract. The other party can obtain damages for breach of collateral contract.

Question 30

What is misrepresentation?

Answer 30

A misrepresentation is a false statement of fact made by one party to induce the other party to enter into a contract, and that in fact induced the other party to enter into the contract.

If the other party was induced to enter into the contract by a misrepresentation, the contract is voidable.

This does not include:

• Promises
• Statements of opinion
• Statements of a highly exaggerated nature
• Silence

Question 31

What are the types of misrepresentation?

Answer 31

• Fraudulent misrepresentation
• Negligent misrepresentation
• Innocent misrepresentation

Question 32

What is Fraudulent misrepresentation?

Answer 32

Statement-maker knowingly or recklessly makes a false statement intending it to induce the contract
Can rescind contract and get damages

Question 33

What is Negligent misrepresentation?

Answer 33

Statement-maker is under a duty of care, and carelessly makes a false statement (see week 12)
Can rescind contract and get damages

Question 34

What is Innocent misrepresentation?

Answer 34

Statement-maker genuinely believed the statement of fact to be true
Can rescind contract, but not entitled to damages

Question 35

What are disclaimers?

Answer 35

Disclaimers are common terms in a contract. They are also known as exclusion clauses, exemption clauses or limitation of liability clauses

A disclaimer is a statement that a party will not be in breach despite failing to perform one or more of their contractual obligations.

Examples: no liability for loss or injury or no liability if goods are stolen or missing.

Question 36

What is the legal principle of Thornton v Shoe Lane Parking (1971)?

Answer 36

Held that Shoe Lane Parking could not rely upon the exclusion clause as reasonable notice of the terms had not been provided to Thornton before the contract was concluded.

As per week 8, vending machine contracts are concluded when payment is made, so providing the terms of the contract inside the car park, or on the ticket itself, is too late.

Question 37

When is a disclaimer a part of the contract?

Answer 37

• It is set out in a written contract that has been signed by the parties (L’Estrange v Graucob Ltd) (see earlier slides), or
• It is brought to the attention of the other party by reasonable notice given before the contract was formed (Thornton v Shoe Lane Parking), or
• It is implied into the contract as a result of prior dealings between the parties. (For example, the parties had done business on these terms before.)

A disclaimer can only be relied upon if it is part of the contract

Question 38

What is the legal principle of Sydney City Council v West (1965)?

Answer 38

Held that Sydney City Council could only rely upon the disclaimer while it was carrying out the business envisaged by the contract. The disclaimer could not exempt the council from loss or damage from all possible situations.

As the attendant permitted the thief to leave, the council could not rely upon the disclaimer.

Question 39

What is the contra preferentum rule?

Answer 39

If the disclaimer is contained in a contract with a consumer, the court will interpret the disclaimer contra proferentem, or against the interests of the party seeking to rely upon it (the business)

Question 40

What is the four corners rule? (Sydney City Council v West (1965))

Answer 40

If it is not clear whether the disclaimer protects the business in all circumstances or within the ambit (‘four corners’) of the contract, the court will prefer the narrower interpretation

Question 41

When are remedies used?

Answer 41

If one party breaches a term of the contract and they are not protected from liability by an effective disclaimer

Question 42

What is partial performance?

Answer 42

when a party complies with some terms but breaches one or more other terms of the contract.

Question 43

What is the legal principle of Associated Newspapers Ltd v Bancks (1955)?

Answer 43

Held that Bancks was entitled to terminate the contract. The promise by Associated Newspapers was of such importance that Bancks would not have entered into the contract without it.

When such a term (a ‘condition’) is breached, the contract can be terminated and damages recovered.

Question 44

What is a condition and what rights does a breach of condition give the other party?

Answer 44

A condition is a term of the contract of fundamental importance. In the absence of such a term, the party favoured by the term would not have entered into the contract in the first place.

Breach of a condition gives the other party the right to :
Confirm the contract and recover damages or
Terminate the contract and recover damages.
(Associated Newspapers v Bancks)

Question 45

What is the legal principle of Bettini v Gye (1876)?

Answer 45

Held that the requirement that Bettini attend rehearsals was not of fundamental importance (i.e. was not a condition). So Gye was not entitled to terminate the contract.

Question 46

What is a warranty and what happens if it is breached?

Answer 46

A warranty is a term of lesser importance. In the absence of such a term, the party favoured by the term would have entered into the contract anyway.

If a warranty is breached, the injured party must still perform the contract (which remains valid), but may have the right to sue for damages for loss suffered because of the breach. (Bettini v Gye).

Whether a term is a condition or a warranty is determined objectively, taking the conduct of the parties and the context into consideration.

Question 47

When is a party entitled to damages?

Answer 47

When there has been:

• A breach of contract by the other party,
• A breach of a collateral contract by the other party, or
• Fraudulent or negligent misrepresentation by the other party.

The objective of the court in making an award of damages is to restore the other party to the position they would have been in if the breach or misrepresentation had not occurred, that is, if the contract has been performed properly.

Question 48

What are equitable remedies?

Answer 48

If an aggrieved party can demonstrate to the court that an award of damages is not a satisfactory remedy, the court may decide to provide an equitable remedy, such as specific performance, or injunction.

Question 49

What is an order of specific performance?

Answer 49

This is a court order directing the party in breach to fulfil their contractual obligations.

Question 50

What is an injunction?

Answer 50

This is a court order forbidding someone from engaging in particular conduct that will be a breach of the law or that will infringe the legal rights of another.