T1, 2021 business law lecture 4 - contracts 3

1. 2105 AFE – Introduction to Business Law
Lecture 4: Construction of a Contract
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2. OBJECTIVES
 Consent
 Legality
 recognise the difference between, representations and
contractual terms;
 explain the parol evidence rule and list what is
required to establish the existence of a collateral
contract;
 explain what is meant by warranties and conditions;
 demonstrate ways that terms may be implied;
 discuss the consequences of signing a document and
exclusion clauses.

3. Definition: Consent
In contract law: ‘Consent’ means the
voluntary agreement by a person in the
possession and exercise of sufficient mental
capacity to make an intelligent choice to do
something proposed by another.
◦ E.g. -Is there genuine agreement between
the parties?
- What have the parties agreed to?
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4.  If one of the parties has not given genuine
consent, then the contract could be either
Void or Voidable depending on what the
parties have agreed to
- Valid reasons for lack of genuine consent
(in contract law) are considered to be:
Mistake, misrepresentation, duress, undue
influence or unconscionable conduct of the
other party
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5. There are four different types of recognised at law–
◦ Common mistake
◦ Mutual Mistake
◦ Unilateral Mistake
◦ Non est Factum
◦ If a mistake operates, it renders a contract Void
ab initio (from the beginning) or voidable.
 Only mistakes of fact can render a contract void
 Money paid under a mistake of law may be recoverable
David Securities Pty Ltd v Commonwealth Bank of
Australia (1994)
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6.  Common Mistake - occurs when there is
agreement but both parties make the same
mistake as to identity or existence of the subject
matter.
Pritchard v Merchant’s and Tradesman’s Mutual Life
Assurance Society (1858) and not accidental qualities or
attributes
If there is an implied promise of the existence of the subject
matter and the other party acts in reliance of that promise to
their detriment, common mistake will not have occurred.
McRae v Commonwealth Disposals Commission
(1951)
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7.  Mutual Mistake
• If the parties misunderstand each other and are at
cross-purposes (talking about different things)
there is no genuine agreement between the parties
Raffles v Wichelhaus (1864)
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8. - Only one of the parties is mistaken, and the
other is, or ought to be, aware of this but does
nothing to correct it
◦ Mistake as to parties
The mistaken party must be able to show:
•That the identity of the other party was a
material factor; and
•That the intention was to deal only with a
particular person who was not the party with
whom the contract was made and that fact was
(or should have been) known to that party –
Lewis v Averay [1972]
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9. ◦ Where the mistake is to a Term
 Where the mistake goes to the existence or content of a
term, the court may hold that the contract is void as there
was not a true acceptance of the offer
Hartog v Colin & Shields (1939)
 It is not necessary for the party not mistaken to have
actual knowledge of the mistake as long as they strongly
suspected there was a mistake of a fundamental character
Taylor v Johnson (1983) - text p.330
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10.  Non est factum (‘it is not my deed’)
◦ The signer must show that the document signed
is essentially or fundamentally different from
that which they thought it was and that failure
to read was not due to carelessness on their part
Foster v Mackinnon (1869)
◦ There are only two groups of persons who can
raise the defence:
 Those who are unable to read owing to
blindness or illiteracy and who must rely on
others for advice as to what they are signing;
and
 Those who through no fault of their own are
unable to understand the meaning of a
particular document
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11.  At Common Law, the contract is Void ab
initio
 At Equity, remedies include:
◦ Specific Performance
◦ Rectification
◦ Setting aside on Condition
◦ Rescission
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12. Definition: Misrepresentation
A representation which does not accord with the
true facts (past or present) and thus renders a K
voidable
There are three types of Misrepresentation:
◦ Fraudulent Misrepresentation - intention to
induce a person to enter into a contract
through fraud (lies)
◦ Innocent Misrepresentation - there is a lack of
intentional deceit
◦ Negligent Misrepresentation - statement made
innocently but carelessly
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13.  Fraudulent Misrepresentation
◦ There must be an intentional deceit
and the court is only concerned with
the belief held by the representor at
the time Derry v Peek
◦ There must be a false statement of fact that
the representor knew was false or did not
believe was true, which it was known would be
acted
on, and which was acted on
◦ A contract induced by fraud is voidable
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14. Definition: Innocent Misrepresentation
◦ A misstatement of a material fact, not known to
be false, made by one party to another, which
induces the other to enter into a contract
◦ The appropriate remedy depends on whether the
representation is a: Condition or Warranty
 If Condition - sue for damages/or for a total failure to
perform the contract.
 If Warranty - sue for damages only/no order for
rescission in equity
Whittington v Seal Hayne (1900)
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15. Definition: Negligent Misrepresentation
• An innocent but negligent misrepresentation can
give rise to an action where a ‘special relationship’
can be shown to exist between the parties
Hedley Byrne & Co Ltd v Heller & Partners Ltd (1964)
Esso Petroleum Co. Ltd v Mardon (1976) text p.335-6
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16. Guidelines for Negligent Misrepresentation
◦ A relationship exists between parties such that the person
providing the information or advice must exercise a duty of
care
◦ Subject matter is of a serious or business nature
◦ Person providing the advice realises that the recipient
intends to act upon that advice or information
◦ It was reasonable for recipient to rely on the advice or
information; and
◦ Damage was suffered by the recipient usually, monetary
loss
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17.  Duress involves use of threats or
violence against a person, their
goods or economic interest to force
them to enter into a contract against
their will
 Lack of voluntary agreement
 It only has to be one of the reasons
for a person to enter into a contract
and the effect on the contract is that
it will be voidable at the option of
the injured party
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18.  Involves the improper use of a position of
influence or power possessed by one person
over another in order to induce the victim to
act for the benefit of the controller.
 Lack of GENUINE CONSENT to the agreement
Barton v Armstrong (1973) (duress)
 The usual remedy is Rescission
 Action must commence within a reasonable
time or right to rescission may be lost
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19. Is the purpose of the contract legal?
 Contracts can be illegal or void at both statute and
common law
 Void Contracts
◦ An agreement rendered void at common law by statute
will not be enforced by the Courts
◦ Any money paid or property transferred under such
agreement may be irrecoverable
 Illegal Contracts
◦ A ‘contract’ deemed illegal when it is formed is totally
void
◦ Illegality may arise either because the contract is of a
kind prohibited by statute, or because it is of a class
regarded as contrary to public policy
◦ Neither party has any rights or remedies 1
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20.  The parties may have no rights or remedies
 The extent of the invalidity depends upon the terms of
the statute - it may be possible to sever the void term out
of the contract and leave the remainder of the contract
still valid
 Consequences of statutory illegality depend upon when
the contract becomes illegal (cont.)
◦ If the contract is illegal as performed, the contract is
void, but not void ab initio.
Anderson Ltd v Daniel (1924); but cf
St John Shipping Corp.v Joseph Rank Ltd (1957)
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21.  Contracts which would violate the social
or moral attitudes of the community and
are void ab initio for example:
◦ Contracts to commit a crime, a tort or a fraud
on a third party;
◦ Contracts that are sexually immoral or which
prejudice the status of marriage;
◦ Contracts to the prejudice of public safety, or
of good relations with other countries;
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22. Clauses in contracts in restraint of trade are prima
facie void, as being contrary to public policy, unless
the restraint is reasonable
Nordenfelt v Maxim Nordenfelt Guns and
Ammunition Co. Ltd (1894) (text p. 354)
 Restraints imposed upon the vendor of a business
◦ Sale of a business assumes the parties are in a
more equal bargaining position (than K’s of
employment).
◦ Question of fact as to whether the restraint is
reasonable
Amoco Australia Pty Ltd v Rocca Brothers
Motor Engineering Co Pty Ltd (1973) (text p. 358)
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23. Cont.
 Contracts of employment (text p. 355-7)
◦ As the parties are usually in an unequal
bargaining position, restraint clauses are
generally struck down by the courts unless:
 There is a protectable proprietary interest, e.g.
intellectual property rights, customer connections
Forster & Sons Ltd v Suggett (1918)
 They are of reasonable length in time and area
Atwood v Lamont (1920); and
 They are reasonable fair for both parties
Schroeder Music Publishing Co Ltd v Macauley (1974)
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24. Super League v NRL
 The NRL knowing that a Murdoch funded Super League rival
was imminent induced the NRL clubs and players to sign
loyalty agts thus prohibiting the players and clubs from
playing elsewhere.
 After several presentations the Super League executives
induced several clubs and many players to defect to SL. The
NRL cited the loyalty agts and asserted that the clubs and
players were prohibited under the terms of their agt not to
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25. HELD: The NRL’s loyalty agts. Were
void as they were in in
contravention of statute and were
deemed to be in restraint of
trade.
 It is possible to restrict an
employee from working
competitively after termination of
employment but strict tests on
area and duration of restraint
apply.
* The courts will allow clauses 2
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26.  The terms of a contract are its contents.
Terms are legally binding. The terms
contain the obligations of each party. Terms
can be either express or implied.
 Representations are statements that do not
form part of the contract and are made
before making of the contract in the course
of negotiations. Representations are not
legally binding.

27. Representation or Term?
The courts distinguish between statements that are not
actionable and do not form part of the contract and
those that are actionable
 Statements that do not form part of the contract
include:
◦ Representations which are pre-contractual statements
made by the offeror to induce the offeree to enter into the
contract and
◦ Puffs which are statements no reasonable person would
take seriously: “Drink milk and fly through the day”
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28. ◦ Whether the statement was made with the
intention of preventing the other party from
looking for/finding any defects;
◦ Whether one of the parties had special skill or
knowledge;
◦ Consider if the breach has deprived the innocent
party of substantially the whole benefit that they
should have derived from the contract
Oscar Chess v Williams [1957]- 48 Morris really 39
Morris – innocent misrep rep not term
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29.  A breach of a term of a contract will entitle
the innocent party to a remedy.
 Sometimes it will need to be determined
whether a statement or representation is a
term of a contract.
 In determining whether a statement is a term
of the contract or a mere representation, the
courts apply the objective test.
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30. How do you determine whether a statement is a term or
representation of a contract?
In trying to decide the intention of the parties the following matters are considered to
be relevant to whether a statement has become a term of a contract:
(1) When was the statement made? Was it made at an early stage of
negotiations or close to the time the contract was concluded?
(2) In what form is the statement? That is was it in writing or was it
verbal, or was it partly in writing and partly verbal? If a
statement is made verbally, and then a written contract that
does not contain this statement is prepared, this suggests that
the statement is not a term.
(3) Does one party to the contract have special skills and expertise
that are relied on by the other party? If yes, then this may
indicate that the statement is a term of the contract- Dick
Bentley Productions v. Harold Smith Motors.
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31. Case example
Dick Bentley Productions Ltd and another v. Harold Smith (Motors) Ltd
Facts:
During negotiations for the purchase of a Bentley motor vehicle, the
defendant told Dick Bentley that the vehicle had a new engine and gearbox
fitted. The defendant stated that the car had only been driven 20,000
miles (32,000 kilometres). This statement was untrue but the defendant
made it believing it to be true. When Bentley discovered that the car had
traveled 100,000 miles (161,000 kilometres) since the new engine was
installed, he sued for breach of contract.
Decision:
The court held that the statement about the distance traveled by the car had
become a term of the contract. The person, who made the statement, Harold
Smith Motors, had special knowledge and skill. The statement was made so
that both parties should have realised that the buyer would rely upon it.

32.  Contracts may be wholly oral or they may be wholly in writing
or they may be some combination.
Oral contracts
These require the court to determine, based on the evidence,
which parties’ account of events surrounding the contract is the
most credible. Witness statements are critical to the success of
a parties’ claim. It can be very difficult to prove that an oral
contract exists.
Written contract
These may contain “whole of agreement clause” or “entire
agreement clause” – which means that the written document
comprises the whole of the contract and any extraneous
statements are merely representations. A whole of agreement
clause cannot exclude implied terms.
Parol evidence rule
The parol evidence rule is employed with respect to contracts
wholly in writing.
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33. Parol evidence rule
The parol evidence rule is employed with respect to contracts
wholly in writing.
 Under the rule, oral evidence is not admissible to add to, vary
or contradict the written document.
 In this case oral evidence or any other extrinsic material such
as previous drafts, letters or memoranda will not be accepted
to vary the written agreement.

34.  The Parol Evidence Rule excludes oral evidence that
will ‘add to, vary or contradict’ the written
document
There are a number of exceptions to the Parol
Evidence Rule:
◦ Custom or trade usage demands otherwise;
◦ It will suspend a written agreement when the
contract has not yet become effective;
◦ The written agreement is not the whole contract:
Van Den Esschert v Chappell (1960) “white ants”
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35. Example:
Van Den Esschert v Chappell
 Facts: The purchaser of a house enquired as to whether there
were white ants in the house and seller told the intending
buyer that there was no white ant activity in the house. The
written contract didn’t contain the any statement to that
effect. The buyer upon discovering after the sale that the
house was damaged by white ants sued the seller.
 Held: The evidence was admissible about the verbal
statement because the written contract was not a complete
record of the agreement. The court awarded damages to the
buyer.
The courts will admit parol evidence where the document in
question is only a partial record of the bargain struck.
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36. The rule is subject to qualifications, (exceptions) whereby the
court allows parties to provide the following oral evidence:-
(1) that a custom or trade usage is part of the contract
(2) that the operation of the contract is to be suspended
until the happening of a certain event
(3) To establish that the written document represents only
part of the agreement

37. (4) Circumstances surrounding the contract to clarify any
ambiguous language used in the written contract.
(5) that due to a mistake of the parties, their agreement has
been inaccurately expressed.
(6) To establish a collateral contract.
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38.  A collateral contract is a contract that exists alongside the main contract.
(That is there are in fact two contracts and so both can be enforced).
The criteria required for collateral contracts:
(1) the statement must not be inconsistent with the main
contract;
(2) the statement must have been intended as a promise and
intended to induce the main contract;
(3) the statement forming the collateral contract must be
“promissory” in nature and is a condition precedent to
entry into the main contract;
(4) there must be separate consideration for the collateral
contract. The consideration for the collateral contract is
the making of the main contract.

39. Shanklin Pier Ltd v Detel Products (1951)
The plaintiff ordered their contractor to use paint supplied by
the defendant. The defendant had represented to the plaintiff
that the paint would last for seven years. The paint proved
defective and the plaintiff, although third parties to the supply
contract, was held entitled to sue for breach of the promise as
to durability. This was on the grounds that the transaction gave
rise to an additional collateral contract between the plaintiff
and the defendant where the consideration was the plaintiff's
ordering the contractor to enter into the principal contract for
the supply of the paint.
Held:
The Court found that there was a collateral contract based on the
representation of Detel. The consideration was found in the
plaintiff's request to the contractor to use Detel's product.
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40. De Lassalle v Guildford [1901]
Facts: Parties entered into a written lease in respect of
certain premises. Prior to signing the contract, DL the lessee
sought an assurance from G that the drains were in working
order. G orally gave such an assurance which later proved to
be untrue. When DL sued, he had to overcome the fact that
there was no mention of the verbal assurance in the original
lease.
Held: G’s assurance about the drains formed a collateral
contract. The consideration for the collateral contract was DL
entering the lease. The court awarded DL damages for
breach of the collateral contract.

41.  The question of whether a term is a condition or a
warranty depends upon the intention of the parties.
What is a condition?
A condition is an essential term of a contract.
Where there is a breach of a condition:
(1) the innocent party has the right to terminate the
contract and obtain damages; or
(2) The innocent party may proceed with the contract
and sue for damages.

42. Luna Park Ltd v Tramways Advertising Pty Ltd (1938)
Facts:
Luna Park (an amusement park) had contracted with Tramways
Advertising to display advertising boards on the trams for 8 hours
per day during each of 3 seasons. TA failed to meet this
requirement.
Held:
The High Court of Australia held that the term was a condition.
The
court said that the contract was worded so that the completeness
of the display of the advertisement was an essential term of the
contract. A breach of a condition entitled the defendants to
damages and to rescind the contract.
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43. Bancks v Associated Newspapers (1951)
 Facts: B entered into a contract with AN whereby he
agreed to prepare on a weekly basis a full page of
comic drawings of the character “Ginger Megs” -
Drawings were to be published on the front page of
the comic section of the newspaper - Due to newsprint
shortage, drawings appeared on the third page of the
comic section - B notified AN that he no longer
considered himself bound by the contract due to the
breach of a condition of the contract.
 Held: AN’s undertaking to publish the comic on the
front page was regarded as a condition of the contract
because B would not have entered the contract without
it. Therefore, AN had breached a condition of the
contract which enabled B to terminate the contract.

44. It is important for the courts to decide whether a
term is a condition or a warranty as this is will
effect remedies available to the injured party
Condition: terms fundamental to the contract. If
they are breached, the injured party will be allowed
to end the contract and/or sue for damages
Warranty: less important terms which if broken,
allow the contract to proceed, but the injured party
can get damages for financial loss
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45.  A warranty is a non-essential term of the contract.
 Where there is a breach of a warranty:
(1) it does not entitle the innocent party to terminate the
contract.
(2) The innocent party must proceed with the contract but
can sue for damages. It is important therefore to identify
the nature of the term that is being breached because
treatment of a warranty as a condition may lead an
innocent party breaching their obligations under the
contract.

46. Case Example:
Bettini v Gye (1876)
Facts: B, opera singer, contracted to sing for G
a promoter from 30 March to 13 July 1875
- B had to be in London six days prior to the
First performance for rehearsal Because of illness, B arrived four days
late and G refused to proceed with the contract.
Issue: Was B’s late arrival a breach of a condition which enabled G to
terminate the contract?
Held: The rehearsal clause was a warranty. As B was to sing for G
for approximately 3.5 months, the failure to attend at rehearsals could only
affect the actual performances of the first week or fortnight of the engagement
at the most. The breach of the warranty entitled G to damages but not to
terminate the contract.

47.  Implied terms are those which are declared to be part of the contract
even though the parties have not expressly included them in the
contract.
 A term will be implied into a contract if its inclusion is consistent
with the intention of the parties.
There are 4 ways in which the term may be implied:
(1) By previous course of conduct - Prior dealings – note the courts
try their best to uphold contracts - Hillas & Co. Ltd v Arcos Ltd
(1932) - (timber purchase 1930 &1931)
(2) By custom or trade usage - Pelly v Royal Exchange Assurance
- (w’housing fishing tackle – normal practice)

48. (3)Courts have implied terms into contracts in order to give
them business efficacy. The courts do not do this readily
though and have identified the following as being required
in order to imply a term:
- The term must be reasonable and equitable
- The term must be necessary to give business efficacy to the
contract,
- The term must be capable of clear expression; and
- The term must not contradict any express term of the contract.
(4) Terms can be implied by statute

49. ◦ In relation to terms implied by statute both the Sale of
Goods Act (Qld) and the Competition and Consumer Act
2010 set out a standard practice.
The purpose of the legislation is to provide consumer
protection in regard to contract transactions. They are that
goods and services must:
◦ Correspond with their description
◦ Be Fit for the purpose
◦ Be of merchantable quality
◦ Services will be rendered with due care and skill
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50.  Sale of Goods Act (Qld): Applies to all transactions
for the sale of goods. The implied terms can be
excluded in a parties’ contract.
 Note that in some states (eg NSW) this can only be
done if it is for a commercial purpose (in NSW this
means not for personal or domestic use).
 Competition and Consumer Act: This part of the
Act applies to consumer transactions for the sale of
goods and services. The implied terms cannot be
excluded in the parties’ contract. Consumer
transaction: Price of the goods or services is under
$40,000 or where the price is over $40,000, the
goods are of a kind ordinarily acquired for
personal, domestic or household use or
consumption. In each case they may not be for re-
supply or for transforming them in trade or
commerce in manufacture etc.
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51.  An exclusion clause is a contractual clause that attempts to
exclude a party from liability for breach of contract or for
negligence
 Their effectiveness is a matter of construction of the contract as
a whole, taking into account the bargaining position of the
parties
 Steps followed when examining exclusion clauses:
1.The exclusion clause must form part of the contract
2.Interpretation of the exclusion clause must be sufficiently wide
to comprehend the breach
3.The exclusion clause must not have been limited by legislation
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52.  The courts have allowed an exclusion clause
to form part of the contract in certain
situations.
 The courts have distinguished situations
where the exclusion clause is part of a
signed document and those where it is not
signed.

53. Where there is a signed document
 A person who signs a written document is bound by its
terms, whether they have read and understood the
document or not. Note that the document must be a
contractual document.
 There is also an exception in that a party who
misrepresents the nature of effect of an exclusion
clause, whether innocently or not, cannot rely on it:

54. Case example:
Curtis v Chemical Cleaning & Dyeing Co [1951]
Facts: Mrs Curtis took a frock to a dry cleaning shop operated by the
defendant company. The shop assistant asked her to sign a “receipt”.
Mrs Curtis asked what the document was about. The shop assistant told her
that it was a disclaimer of liability for any damage done to beads and
sequins during the cleaning process.
In fact, the document contained a clause excluding liability for almost any
damage done to garments. The shop assistant had misrepresented the
clause but it was an innocent misrepresentation. When the dress came
back it was stained. Mrs Curtis asked the dry cleaner to pay for the damage
but the dry cleaner refused, relying on the exclusion clause.
Held: The court held that the defendant could not rely on the document.
The shop assistant misrepresented the effect of the clause in the contract.
The dry cleaner was liable in negligence for the damage.

55. Exclusion clause in an unsigned documents ( “Ticket” cases):
(1) Did the party who seeks to rely upon the clause
take reasonable steps to bring it to the notice of
the other party?
(2) Did the party give sufficient notice to the other
party before entering into the contract.

56. Case Example:
Thornton v Shoe Lane Parking Co. Ltd (1972)
Facts: Thornton entered a car park operated by the defendant. At the
barrier was an automatic ticket issuing machine which issued a ticket.
Thornton took the ticket and drove his car into the car park. The
ticket
contained the words: “Issued subject to conditions displayed on the
premises”. There were several notices inside the car park containing
printed conditions but these were not visible from the entrance. One
such condition excluded the parking station from liability for personal
injury. Thornton was injured in the car park in an accident in which
the
owner of the car park was partly to blame. Thornton sued and the car
park owner relied upon the exclusion clause.
Held: The court held that the defendant had not done all that was
reasonable to bring the clause to the customer’s attention before the
making of the contract. The notice of the exclusion clause came too
late
to bind the customer to its consequences.

57.  A clause may also be incorporated into a contract
without specific reference to it because of a
previous course of dealings between the parties.
 If there is any ambiguity in an exclusion clause, the
courts will resolve that ambiguity.

58.  Two rules of interpretation: contra proferentem rule and four
corners rule. Note that the exclusion clause will only be
interpreted by the Court if it satisfies Step 1 (i.e. forms part of
the contract).
 Contra Proferentem Rule: Courts will resolve any ambiguity
or uncertainty in the exclusion clause against the party
relying on the exclusion clause: White v John Warwick & Co
Ltd [1953] 1 WLR 1285 where the exclusion clause did not
clearly exclude liability in tort (“nothing in this agreement
shall render the owners liable for any personal injuries to the
riders of the machine hired”). It was construed as only
applying to contractual liability.
 Four Corners Rule: An exclusion clause only covers a loss that
occurs when a party is acting within the “four corners” of the
contract. In other words, exclusion clauses do not apply to
actions outside the contract.

59.  Four Corners Rule:
Council of the City of Sydney v West
 Facts: W parked car in a car park owned and operated by the
council - The attendant gave W a ticket - Later in the day, a
person told another attendant he had lost his ticket and gave a
registration number of a car which was not the registration
number of W’s car – the attendant issued the person with
another ticket which was used to drive W’s car out of the car
park - W returned to find car missing - Car later found in a
badly damaged state.
 Exclusion clause on the back of the ticket given to W earlier in
the day stated that “the council does not accept any
responsibility for the loss or damage … however such loss …
may arise or be caused”.
 Held: The act of releasing the car to a thief was outside the
terms (i.e. four corners) of the contract. The actions were not
only negligent (which was covered by the exclusion clause) but
not authorised by the contract (which was not covered by the
exclusion clause).

60.  Implied terms enacted by the CC (ACL) and
SOG Acts cannot be excluded in consumer
contracts.
 For example: Sections 54-56 and 60-61 of the CCA
imply terms into all consumer contracts (for goods
and services of less than $40,000)
◦ Therefore any contract which purports to
exclude any or all liability does not exclude
CCA protections-
 A party to a K cannot K out of statutory liability
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61. 2105 AFE – Introduction to Business Law
Lecture 4 (cont’d): Construction of a Contract II
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62. Objectives
– Identify the circumstances that will discharge or terminate a contract;
– Explain what is meant by a ‘breach of contract’ and the remedies
available to the injured party.
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63. 63
63
Discharge
Performance Frustration Operation of
law
Agreement Breach Virtue of
term
Lapse of
time

64. There are several ways in legal obligations undertaken
on making a contract may be terminated. They are by:
(1) Actual performance
(2) Agreement
(3) Terms in the contract
(4) Frustration
(5) Operation of Law
(6) Breach of contract
64

65.  Clearly one way to discharge an obligation under a contract is to
perform it. However a party will be discharged by performance of
his/her promise only if his/her performance is precise and exact.
 Actual Performance usually occurs when the parties to the contract fulfil
their obligations precisely and completely in accordance to the contract.
i.e. It must comply strictly with the terms of the contract.
 Case Example: Re Moore & Landauer & Co [1921]
 Facts: Some tinned fruit was contracted to be delivered in boxes of 30, and was
delivered in instead of boxes of 24. Even though the total was the correct
quantity, the buyer was be entitled to refuse acceptance and to reject the goods
on the basis of the seller’s defective performance. In this case the seller had not
completely performed the exact thing contracted for and therefore the contract
had not been discharged. Seller was bound to perform precisely or to pay
damages for the failure to do so.
65

66. This rule has a number of exceptions. They are:
(1) Substantial performance
(2) Severable or divisible contracts
(3) Obstruction of performance
66

67. 1. Substantial performance:
If one party fulfils the terms of the contract with substantial performance, the
other party is obliged to perform (but may obtain damages for the deviation). (It
means that degree of performance of a contract which, while not equal to full and
complete performance, is so nearly equivalent that it would be unreasonable to
deny the contractor the payment agreed upon in the contract, subject, of course,
to the owner's right to recover whatever damages he has suffered by reason of
the contractor's failure to render full and complete performance).
Case example: Hoenig v Isaacs [1952]
Facts: Where there was an agreement to redecorate and refurnish a flat for
750 pounds the plaintiff was paid only 400 pounds - the work
was substantially complete though not entirely complete. There was
a dispute as to the quality of a small amount of work for approx 55
pounds.
Held: The plaintiff was entitled to the remaining 350 pounds less the 55
pounds paid to remedy the defects.
67

68. 2. Severable or divisible contracts
A contract may indicate clearly that some performance less than
complete performance may be enough to confer partial rights on
the performing party:
e.g. A contract to build a home may contain a provision for payment at
certain specified stages of construction.
Note:
If a contract is divisible, a party may recover under the contract after
performing only part of it. On the other hand, if the contract is not
divisible, a party who performs only part of it may not recover
according to the terms of the contract, but that party may recover to
the extent that the other party received a benefit from the partial
performance. Whether the contract in this case was divisible
depends on the intention of the parties. In determining the intention
of the parties, you may consider the language of the contract, the
circumstances under which the parties made the contract, and what
the parties themselves believed as shown by the evidence.
68

69. 3. Obstruction of performance
Where a party who tenders performance, i.e. offers or attempts
to perform, but cannot do so because the other party refuses
performance, then a person’s contractual obligations will be
regarded as discharged.
69

70. Both parties agree to end the contract, e.g. as a compromise to avoid
litigation. Examples:
◦ Mutual discharge or release.
Parties mutually agree to end their contract.
◦ Novation (substituted agreement)
Novation is the replacement of one contract between two parties with
another contract, either between the same parties or others. Example:
70
B C
A

71.  A contract itself may provide terms for its own
termination upon failure of some specified event.
 Such terms are known as condition subsequent and
condition precedent.
 Example : Gold Coast Commonwealth Games
71

72.  Frustration (definition): Impossibility of performance of a contract.
Examples: Taylor v Caldwell (1863)
◦ Caldwell agreed to let a music hall to Taylor so that four concerts
could be held there. Before the date of the first concert, the hall
was destroyed by fire. Taylor claimed damages for Caldwell's
failure to make the premises available. The court held that the
claim for breach of contract must fail since it had become
impossible to fulfil. The contractual obligation was dependent
upon the continued existence of a particular object.
◦ Particular thing which forms the subject matter of the contract
ceases to exist.
72

73. Frustration can only arise where:
◦ An unforeseen event outside the control
of the parties has significantly changed
the obligations of the parties;
Case Example: Krell v Henry [1903]
◦ where a flat was rented to watch the coronation procession for the
King. The procession was delayed for a considerable time and it
was held that the lessee was not bound to pay the rent.
Next Slide Case Example: Codelfa Constructions PL v State
Rail Authority of NSW (1982)
73

74. Codelfa contracted to complete construction
work on the Eastern Suburbs Railway within
130 weeks. The parties assumed they would
have statutory immunity from proceedings for
nuisance and that it could work continuously.
However Codelfa was restrained by injunctions
from working at night and incurred extra cost
and delays. Codelfa claimed costs either as
damages or breach of implied warranty as to
the hours it could work or on a quantum meruit
following frustration of the K.
HELD: It was not possible to imply the suggested
term, since the Ct. could not be satisfied that it
was one which the parties would necessarily have foreseen. The Ct
held that the K could be discharged due to impossibility of
performance.
(Pictured right: Bondi Junction railway at the beginning of the Eastern Suburbs Railway Line)
74

75.  Frustration (test) what to look for:
1. Unforeseen event
2. The event occurred after the contract was made
3. Both parties not responsible for the event
4. Event made the performance of the contract radically
different from what was originally agreed.
75

76.  Frustration (examples):
◦ As a result of a change in the law, performance of
the contract is illegal,
◦ A contract is for personal services, and the party
to perform the service subsequently dies or is
permanently disabled,
◦ Government intervention,
◦ Increase in burden of performance.
76

77.  Bankruptcy: A person who is obliged to pay money
pursuant to a contract and becomes bankrupt
pursuant to the Bankruptcy Act 1966 is relieved
from their obligations. The law regards any such
contract as discharged.
 Merger: Where a right is extinguished because it
coincides with or is incorporated into a greater
right. Applying this to contracts, if a simple
contract in writing is replaced by a deed, then the
simple contract no longer exists and it has
discharged by merger (i.e. by all its terms being
incorporated in the deed). This will only occur if the
deed is made between the same parties. This of
course will only come about by way of agreement
of the parties.
77

78.  A breach of a contract by one party may entitle the innocent
party to terminate. However not all breaches give rise to a right
to terminate the contract.
 The breach may be actual (during performance) or anticipatory
(before performance).
 What is an Actual breach?
A party fails to perform its contractual obligations at the time
when Performance falls due.
**Example: 5pm deadline
78

79. What is an Anticipatory breach?
 Breach before the performance of some or all of the contractual obligations of
a party to it, is known as anticipatory breach. When this happens it is referred
to as repudiation of the contract.
 In this case the innocent party does not have to wait for the actual breach to
occur. The innocent party has two options:-
◦ Accept the repudiation immediately, terminate the contract and sue for
damages.
◦ Refuse to accept the repudiation, wait until performance falls due and then
treat the contract as terminated and sue for the contract price.
◦ **Example: 5pm deadline
 Case example: Hochster v De La Tour (1853)
Facts: Defendant engaged Hochster to act as a courier. Three weeks before
the date of commencement, the defendant wrote to Hochster advising
him that his services were not required.
Held: This amounted to anticipatory breach and thus the plaintiff could
claim damages for breach of contract.
79

80. 80

81. Remedies
Damages
Recission Restitution Specific
Performance
Injunction Quantum
meruit
Anton Piller
order
Common law Equitable
remedies

82. 1. Right to rescind (Right of Rescission)
2. Quantum meruit
3. Damages
4. Injunction
5. Specific Performance
**Next Slides
82

83.  This gives the innocent party the right to set aside the
contract.
 It is an equitable remedy but remember is only available if
there is a breach of condition.
 A breach of a warranty gives no such right.
83

84. • Quantum meruit is: “the amount he/she deserves" or
"what the job is worth”.
Case Example: Pavey & Matthews v Paul (1987)
Facts: A builder did work under an oral contract. Under builder’s
licensing legislation, the contract had to be in writing
otherwise it was unenforceable. The builder sued for
work done and materials supplied on a quantum meruit
claim.
Held: The customers of the builder had received the benefit of the
work done by the builder and hence should pay for the
benefit received.
• This is sometimes looked at in terms of unjust enrichment.
84

85. Definition: Damages:
Damages are a pecuniary compensation
or indemnity, which may be recovered
in the courts by any person who has
suffered loss, detriment or injury, whether
to his person, property, or rights, through
the unlawful act or omission or negligence
of another.
Damages may be compensatory or punitive
according to whether they are awarded as
the measure of actual loss suffered or as
punishment for outrageous conduct.
i.e. Exemplary or punitive damages**Later
85

86. Damages are calculated on the basis of
looking at what the position of the plaintiff
would have been if the contract had been
properly performed
Damages are assessed on a once and for all basis
at the date of breach
Damages are recoverable for provable or
economic loss as well as:
-Expectation losses
-Reliance losses
Case Example: Commonwealth of Australia v
Amann Aviation Pty Ltd (1991)
86

87.  Liquidated Damages
◦ Awarded where a plaintiff is able to sue for a
specified sum, which must be a genuine or bona fide
pre-estimate of the actual loss that will flow from the
breach.
 Unliquidated Damages
◦ Awarded where an injured party has no fixed sum in
mind and leaves the court to decide the amount.
Example: A couple who successfully sued a travel agent
for the ‘distress and disappointment’ caused by a badly
organised honeymoon holiday would probably leave it
to the court to determine the value of their loss.

89.  The type of damages that will be awarded will
be determined by the seriousness of the
breach and whether the contract has
specified the amount of damages to be paid
in the event of breach:
◦ Nominal Damages – plaintiff’s legal rights have
been infringed but they have suffered no actual loss
Charter v Sullivan (1957)
◦ Ordinary Damages – must be able to show loss
suffered by the plaintiff as a result of the breach
and can be either general or special damages;
◦ Exemplary Damages – punitive and may be awarded
for non-economic loss

90. Mitigation of Damages:
The Doctrine of mitigation of damages (which is
sometimes referred to as the doctrine of
avoidable consequences) imposes on the party
injured by breach of contract to exercise
reasonable diligence and ordinary care in
attempting to minimise the extent of damage
done.
I.e. The innocent party has a legal obligation to
minimise its loss – losses that are not mitigated
will not be awarded to the innocent party.
**Example: 5pm
90

91. Injunction:
An injunction is a court order which prohibits a
party either from doing an act, continuing to do an
act or repeating an act.
Example:
An injunction to prevent a breach of contract
threatened by one party. In essence an injunction
is an order issued by a court that restrains a person
from doing or threatening to do a specified act.
This is an important remedy developed by the equity courts.
Usually used where damages are ineffective.
91

92.  5. Specific performance:
Specific performance is a court order requiring the party who
breached the contract to carry out their contractual
obligations.

Specific performance is usually available when the contract
involves some kind of unique goods or other unusual benefit
to the other party, and ordinary money damages aren’t
sufficient.
 Specific performance unavailable if damages is an adequate
remedy or in contracts for personal services.
 It is rarely available for breach of contract unless it is a
contract for the sale of land or the item is unique in some
way.

 **Example: 5pm
92

93.  The Statutes of Limitations of the
States and Territories determine the
TIME LIMITS within which an injured party
must take action
 An injured party can lose their right to an
action in contract unless they act within a
certain time period – 6 years for simple
contracts or 12 years for deeds under
seal- Limitation of Actions Act 1974
(QLD)

94.  We have now finished the series of lectures
in regard to K law.
 By now you should be able to recite the six
essentials of K and understand the
respective principles.
 You should also be able to apply these
principles to hypothetical ILAC problems