2. Plan for the day • Welcome to week 7.
• In Week 6: We learnt how a contract is formed.
• We discussed the essential elements of a legally
binding agreement (Intention to create legal relations;
Agreement and Consideration).
• We also learnt how lack of capacity, consent and
illegality affect agreements.
• We will learn how an agreement differs from a legally
binding agreement.
• In Week 8 we will learn:
• how terms differ from representations
• Difference between condition, warranty and
innominate term
• Exclusion clauses in contracts
• How a contract may be discharged
3. Zoom Chat: Think for 1 minute
Q: All contracts are agreements, but not all agreements
are contracts. YES/NO
Type your answer in the chat window, BUT DON’T Press
the Enter key unless I tell you……
Your time starts now….. DON’T Press the enter key yet.
4. Zoom Chat: Think for 1 minute
Q: Ching Chong advertises certain Australian birds (cockatoo)
‘for sale’ in a magazine under the heading classified
advertisements. Under the Australian law, these birds cannot
be bought or sold. Ching Chong is unlawfully offering birds
for sale. Yes/NO
Type your answer in the chat window, BUT DON’T Press
the Enter key unless I tell you……
Your time starts now…..
5. • The law classifies statements made during negotiations into two
categories:
1. A representation – a non-contractual statement made pre-contract
during negotiations
2. A term of the contract , a contractual statement – intended to be
legally binding.
• Terms of the contract have been classifies into categories:
A. Conditions – an essential term critical to the contract. Breach of
condition may lead to termination and sue for damages.
B. Warranties – a non-essential term of lesser importance to the contract.
Breach may lead to damages (termination of the contract is not possible).
Representations or terms
6. • Whether the statement in the contract is a “Representation” or
“Term” will depend on what parties have agreed, said or done
at the time of entering the contract or prior to entering the
contract.
• Whether the statement is a “term” or “representation” will be
determined by the courts objectively.
“The judicial task is not to discover the actual intentions of each
party; it is to decide what each was reasonably entitled to
conclude from the attitude of the other”.
McCutcheon v David MacBrayne Ltd (1964) 1 WLR 125
Representations or terms
7. - How important was the truth of the statement?
- Was the statement so important that the innocent party (plaintiff)
would not have contracted unless it was true?
- What time period was there between the statement and the final
agreement?
- Was the innocent party asked to check the statement?
- Was the statement made (by the defendant) with the intention of
stopping the innocent party from finding any defects?
- Was the statement later omitted when the contract was put in
writing? (The problem of the parol evidence rule)
- Did the party who made the statement have special knowledge or
skill regarding the subject matter?
Representations or terms
8. • The courts read the contract as a whole and it is read in context within
which it was made.
• The meaning of commercial documents is determined objectively.
• Words, grammar and punctuation may be very important to help
interpret a contract AND also why certain words/statements have been
included in the contract. For example, if the contract states that:
“This agreement shall continue in force for a period of five years from the
date it is made and thereafter for successive five year terms unless and
until terminated by one year prior notice in writing by either party”.
Interpreting the contract
9. Mic Moment
• How would you interpret this clause?
• Is your interpretation same as your peers in
the class?
• Let’s hear from you.
10. Q: Does this mean that the contract will run for five years from
the date it is made, with further five year extensions”
(thereafter for successive five year terms); OR
Q: Can it be terminated early with one year’s notice (unless
and until terminated by one year prior notice in writing by
either party”?.
ANS: Either makes sense. Doesn’t it? Can you interpret it any
other way? If yes, what will be your interpretation?
Interpreting the contract
11. • In signed contracts/documents, the Parol Evidence Rule applies:
“If the parties agree that the contract is to be entirely in writing, they cannot
later try to go beyond the documents to present evidence of the meaning of
words or to show that a further point was omitted”.
The Parol Evidence Rule applies where:
• The contract is reduced to writing;
• Appears on its face to be entire;
• It is presumed that the writing contains all of the terms, and no
evidence of unwritten agreements will be admitted.
Mercantile Bank of Sydney v Taylor (1891) 12 LR (NSW) 252 at 262.
Interpreting the contract
12. Parol Evidence Rule does not apply in the following
circumstances:
– Partly written, partly oral contract.
– Impliedly subject to trade usage or custom.
– Contract has been suspended by oral agreement.
– Some mistake has been made.
– Translations and explanation of a technical term.
– To explain an ambiguity.
– To prove invalidity of the document or a false description.
Exceptions to Parol Evidence Rule
13. • If the contact is partly oral and partly written – inferred that the written contract
was not intended to contain all the terms of the contract. This brings us to the
issue of Collateral contract (the main contract is entered in consideration of the
statement made at the time of entering the contract or prior to entering the
contract).
• In collateral contracts ‘a statement of fact, made by one party before or
at the time of making a contract, which leads the other party to enter
into the contract’.
• Parol evidence rule does not apply if the contract is partly oral and partly
written.
• But if the contract is only written, if allowed, it cannot be inconsistent with the
written contract.
Getting around the parol evidence rule
14. Collateral contracts
There are three pre-requisites to turn a statement of fact into a collateral contract:
• intention by the person making the statement that the statement is to be relied on;
• reliance by the person alleging the existence of the collateral contract; and
• intention by the maker of the statement to guarantee its truth or falsity.
A collateral contract is a separate ‘side contract’ with the (often misleading) statement
of fact as its main term. A collateral contract is valid and enforceable only if:
1. The statement is promissory (not representational). Thus, intention by the
person making the statement that it is to be relied on, and to guarantee its truth
or falsity.
2. The statement is consistent with the main contract.
3. It is not supported by past consideration - the promise is agreed, before the
statement is made which is relied upon.
17. Terms of the contract can be conditions and warranties
• Conditions
– A term which is essential to the contract.
– If breached, contract may be at an end and/or other party may sue for
damages.
• Warranties
– Less important term.
– If breached, only entitled to damages.
• Hybrid/Innominate/intermediate terms: The term that cannot be classified as a
condition or a warranty.
- If the term is breached in a major way, it will be treated as a condition
- If it is breached in a minor way, it will be treated as warranty.
Conditions, Warranties or Hybrid
18. Terms that not expressed in the contract, but for some reason, need to be included.
Terms may be implied by the courts in contracts:
• To give business efficacy to the contract;
• By custom and business usage;
• By a previous course of dealing;
• By statute;
• By the courts to define ambiguous or meaningless terms;
• From the express words of the contract or from the nature of the contract; or
• From the common intention of the parties.
For example, in The Moorcock (1889) 14 PD 64 case: P (shipowner) contracted with D (wharf
owner) to unload cargo at D’s wharf. Both knew that P’s ship would hit the bottom at low tide but
neither expected that this would cause any damage to the ship.
In fact, the ship was damaged when it hit the bottom at low tide.
• P sued D and the court gave effect to the presumed intention of the parties — D had impliedly
represented that reasonable care had been taken to determine that the riverbed could safely
handle the ship.
Implied terms of a contract
19. ‘…for a term to be implied, the following conditions 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.’
Pre-conditions for implied terms
20. • Uncertainty may sometimes indicate that there is no real agreement.
• However, a contract containing an ambiguity is not necessarily
uncertain or incomplete, and the courts will try and give effect to it.
• The courts may sometimes sever (cut/delete) uncertain terms.
• The courts will not enforce an incomplete agreement, such as an
agreement to agree at some time in the future.
• Similarly, a meaningless term (that something has been agreed, but
on reflection, no meaning can be attributed to the agreement) may
not be enforced or severed from the contract.
Uncertain and meaningless terms
21. • These terms attempt to limit, restrict or exclude the rights of one of
the parties to the contract.
Q: When will an exclusion clause operate or be valid?
ANS: Two tests help establish whether an exclusion clause will operate:
1. Is the clause a term of the contract?
2. Does the exclusion clause cover the loss or damage that has been suffered?
NOTE: The operation of an exclusion clause may be ‘misleading or
deceptive’ or ‘unconscionable’, and therefore in breach of s18 or ss20-21
respectively of the Australian Consumer Law. We will discuss these topics
later in our lectures
Exclusion clauses
22. • A person is bound by a document they have signed, regardless of whether
they have read it. L’Estrange v Graucob (F) Ltd [1934] 2 KB 394
• Unsigned documents: Vouchers, receipts and tickets are non-
contractual in nature (Causer v Browne- ticket cases).
• Terms can be incorporated into a contract from other places by being
referred to in the contract.
• Not notifying a person before the contract is formed about the terms may
result in them being excluded.
• The responsibility is on the person who wants to rely on an exclusion
clause (D) to bring the clause to the attention of the other party.
Exclusion clauses in signed documents
23. • An exclusion clause will only be effective if notice has been given.
• Was the customer aware, or should the customer have been aware, of the clause?
• Case examples:
– Thompson v London, Midland & Scottish Railway Co.
– Olley v Marlborough Court Ltd.
– Balmain New Ferry Co Ltd v Robertson.
Exclusion clauses are now limited by legislation.
For example, under Australian Consumer Law (ACL):
• Section 18 – misleading or deceptive.
• Sections 24-25: Unfair terms – an exclusion clause may be an unfair contractual term.
• Section 29 – false representations.
• Consumer guarantees.
• Section 276 – manufacturers liability.
NOTE: We will discuss the ACL in the lectures around weeks 10 & 11.
Requirement of reasonable notice of exclusion
clauses in unsigned contracts-ticket cases
24. • Under the doctrine of privity of contract only an original party to a contract may sue or be sued
upon it. Under the privity rule:
– only a party to the contract has any rights under the contract, and
– the contract imposes obligations only on the parties to the contract. For example in:
Beswick v Beswick [1968] AC 58
• Coal merchant B agreed to sell his business to his nephew, A, in consideration of A:
- agreeing to employ B as a consultant at £6.10s a week for the rest of B’s life; and
- after B’s death, continuing to pay £5 per week to B’s widow, Mrs C.
• Mrs C was not a party to the contract and had not signed anything, even though she was a
beneficiary under the contract.
• After B died, A paid Mrs C one payment of £5 and then no more.
Mrs C applied for an order for specific performance of the agreement in two capacities:
1. as administratrix of B’s estate; and
2. in her personal capacity.
Mrs C succeeded under (1) because she was not suing as Mrs C but she was suing on behalf of B, a
party to the contract. Mrs C failed under (2) because she was not a party to the contract between A&B.
Privity of Contract
25. • Agency – An undisclosed principle may be sued.
• Certain land contracts/agreements affecting land – that third parties may enforce an
agreement if the agreement is expressed in their favour.
• Bills of exchange, cheques and promissory notes – Third party can sue provided there
is a valid negotiation.
• Documentary letters of credit.
• Novation – Is a three-party agreement where a contract between A and B is
discharged and replaced with a new contract between A and C.
• Assignment of contractual rights.
• Trusts – Doctrine of privity does not prevent the manager or trustee of a trust from
enforcing the equitable obligations in a trust deed.
• Other statutory exceptions – e.g., unconscionable conduct.
Exceptions to Privity Rule (pp. 287-289 PT)
26. Termination of the contract may occur through:
• Performance;
• Agreement;
• Breach;
• Lapse of time;
• Operation of law; or
• Frustration.
Termination of contract
27. • A contract comes to an end when each party has performed their obligations under the contract.
• The postal acceptance rule does not apply to payment under a contract, payment is not done until it
is received.
• The obligations under a contract must normally be performed exactly as required by the contract -
usually near enough, is NOT good enough!
• Parties must do exactly what they are contracted to do.
• In Re Moore & Co Ltd and Landauer & Co [1921] 2 KB 519 ‘A contract for delivery of fruit tins in boxes
of 30 was not performed when boxes of 24 tins were delivered - even though the same number of
tins arrived’.
• Performance must take place when it is due under the contract, or if there is no
specified time, under an implied term of ‘within a reasonable time’.
NOTE: ‘Time is of the essence’
• If there is a clause which states time is of the essence, the contract must be performed within
that time. The clause may be a condition, or it may be a warranty.
Termination by performance
28. • Where the contract is divisible.
For example, If there are progress payments allowed, the
contract is divisible; If the contract is to be satisfied by
instalments, it may be divisible.
• Where partial performance has been accepted by the parties.
• If one party has accepted part performance and agreed,
expressly or impliedly, to a quantum meruit claim.
Exceptions to the rule of precise
performance
29. • Substituted agreement;
• Constructive termination for convenience (government policy has
changed);
• Accord and satisfaction;
• Failure of condition precedent or condition subsequent;
• Election to terminate;
• Abandonment;
• Waiver.
A contract may also be discharged (strictly speaking, made unenforceable)
by the passage of time.
Termination by agreement and lapse of time
30. Termination by operation of law occurs when:
a. Merger of contract into a deed.
b. Fraudulent and significant alteration of a written
document.
c. Death.
d. Bankruptcy sometimes.
Termination by operation of law
31. • When the performance of a contract may become impossible
if something happens over which neither party has any
control.
• If there is no special provision in the contract to deal with
this event, the contract comes to an end due to frustration.
• Force majeure clauses (acts beyond your control).
NOTE: Each State and Territory in Australia has enacted law
“Frustrated Contracts Act” that deal with the rights and
obligation of parties in ‘frustrated contracts’.
Termination by frustration
32. • If the contract is breached by one of the parties (or both parties), the
contract law provides various remedies under common law and equity.
• Damages at common law (compensation for the innocent party).
• Equitable remedies:
– Specific performance;
– Injunction;
– Mareva order;
– Anton Piller order;
– Damages in equity.
The issue of Damages
33. • The innocent party must prove in the court on the
balance of probabilities whether the:
a. Breach – Is there a breach of contract?
b. Causation – Were losses caused by the breach?
c. Remoteness – Is the loss too remote?
d. What damages can the plaintiff claim?
e. Has the plaintiff contributed to the damage?
f. Mitigation – Has the plaintiff mitigated their losses?
g. Has the plaintiff lost the right to sue?
Damages for breach of contract
34. In Hadley v Baxendale [1854] EngR 296, the court held that:
• Where the damage flows from a breach arising ‘naturally’ or in the
‘usual course of things’.
• Such damages ‘as may reasonably be supposed to have been in the
contemplation of both parties, at the time when they made the
contract’ (special damages).
• Special damages cannot be awarded unless they were ‘in the
contemplation of both parties’.
Rules on Damages
35. • General damages (Provide compensation to the plaintiff for loss. The damages are the
difference between the contract price and the cost of making the work conform).
• Nominal damages (Damages where there is no loss, eg $1.00.
• Exemplary damages (Designed to punish bad conduct, such as deliberate wrongdoing.
• Expectation damages (Protect loss of profit and the loss of a
commercial opportunity).
• Reliance damages (The plaintiff may claim compensation for the
expenditure incurred as a result of relying on the defendant’s
promise, or ‘reliance expenditure’ or wasted expenditure).
Recoverable damages
36. Damages for breach of contract may be:
a. liquidated damages,
b. unliquidated damages, but can be in the form of penalties
• Liquidated damages – a claim for a fixed amount (liquidated
damages), such as the price of goods.
• Unliquidated damages do not nominate the exact amount of
damages.
• A plaintiff suing for a breach of contract can sue for ‘liquidated’
damages or ‘unliquidated’ damages, but not for a penalty.
• Penalties – A provision for payment interpreted as a penalty will not
be enforceable.
Liquidated and unliquidated damages
37. • The civil liability amendments allow apportionment of damages for
negligent breach of contract where the breach of contract is
‘concurrent and coextensive with a duty of care in tort’.
• In some jurisdictions, the parties can agree, expressly or by
implication, that the proportionate liability legislation does not apply.
Mitigation of loss
• The law does allows the injured party the right to sue, but it also
expects the injured party to mitigate (minimise) its losses.
• The burden of proof is on the defendant to prove that the plaintiff has
failed to mitigate the losses, not on the plaintiff to prove mitigation.
Contributory negligence & Mitigation of loss
38. • The plaintiff (innocent party) loses a right to sue for a
breach of contract, either at law or in equity under the
following circumstances:
• Statutes of Limitation (Maximum 6 years within
which an action in breach of contract may be
brought for simple contracts; 12 years for a Deed).
Loss of right to sue
