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8 June 2014 BLO1105 – Business Law 1 Welcome to Business Law.

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1 8 June 2014 BLO1105 – Business Law 1 Welcome to Business Law

2 LECTURERS CITY FLINDERS Adv Andy Schmulow (Subject coordinator) Dr Daud Hassan (Senior Lecturer: Victoria Law School) FOOTSCRAY PARK Mr Gerry Box (Co-author: Parker and Box) 6/8/2014 BLO1105 – Business Law 2

3 8 June 2014 BLO1105 – Business Law 3 Contact Details: Andy Schmulow Flinders Street Campus Room 1030 Phone

4 Contact Details: Dr Daud Hassan Queen Street Campus Room 1.05 Phone /8/2014 BLO1105 – Business Law 4

5 Contact Details: Gerry Box Footscray Park Campus Room Phone /8/2014 BLO1105 – Business Law 5

6 8 June 2014 BLO1105 – Business Law 6 Subject Outline An Introduction to the Australian Legal System. A detailed study of the Law of Contract. All Business Graduates and their advisers should have a sound understanding of Contract Law principles.

7 8 June 2014 BLO1105 – Business Law 7 Assessment Summary Check Subject Guide p. 2. This is definitive and serves as a contract between you and the University. NOTE: TUTORIAL PARTICIPATION IS COMPULSORY AND YOU MAY NOT MISS MORE THAN TWO (2) TUTORIALS. IF YOU DO YOU AUTOMATICALLY FAIL

8 8 June 2014 BLO1105 – Business Law 8 Tutorials Tutorial attendance and participation. Your attendance at and your level of participation in Tutorial discussions will be monitored and recorded by your Tutor. At the end of semester, you will be allocated a mark out of a possible 10%. WHAT HAPPENS IF YOU MISS MORE THAN 2?

9 8 June 2014 BLO1105 – Business Law 9 Assignment You are required to submit during your scheduled tutorial in the week commencing Monday 27 th April, 2009 a written assignment or research essay of 2,000 – 2,500 words on the topic in the Student manual for Semester 1, p. 17. NOT SEMESTER 2 TOPIC p. 18. You will receive a mark out of a possible 25.

10 8 June 2014 BLO1105 – Business Law 10 Final Examination The final examination is a 3 hour exam, and isOpen Book You may take into the exam any written or printed materials, and use them to assist in answering the questions, which are problem-based. Marks are out of a possible 60%

11 8 June 2014 BLO1105 – Business Law 11 Teaching Method Two hours of lectures each week. Check timetable details of lectures Tutorials. You must also attend One tutorial of one hours duration each week. TUTORIALS ARE COMPULSORY YOU MAY NOT MISS MORE THAN TWO (2). IF YOU DO YOU AUTMOTAICALLY FAIL

12 8 June 2014 BLO1105 – Business Law 12 Materials Student Manual. The Business Law Students Manual is an essential requirement for students. Cost is about $12 or from E Reserve or WebCT. It is available at the Bookshop, and contains the Subject Outline, Syllabus details, Tutorial programs and other materials, including past exam papers.

13 8 June 2014 BLO1105 – Business Law 13 Materials (Continued) Textbooks. The officially prescribed texts are An Introduction to the Law of Contract by Stephen Graw, 5 th ed., and Business Law for Business Students, Parker & Box,2 nd Ed., in VU bookshop for $98.88 as a package. If bought individually, Graw is about $72.10 and Parker & Box is about $41.58

14 8 June 2014 BLO1105 – Business Law 14 Materials (Continued) How to Study Business Law Crosling & Murphy, Butterworths. Lecture Notes Summary. Available at VU Library on Electronic (E) Reserve, or from the Faculty website. PowerPoint slides are available on the WebCT website.

15 8 June 2014 BLO1105 – Business Law 15 Student Support Programs The Teaching and Learning Unit conducts various programs during the semester to assist students with assignment preparation and examination preparation. Details of these classes will be announced in lectures at the appropriate times.

16 8 June 2014 BLO1105 – Business Law 16 Australian Legal System Some knowledge is assumed. Week 1 & 2 Lectures will overview this area, focusing on: - The evolution of Australian Law The sources of law The common law The doctrine of precedent

17 8 June 2014 BLO1105 – Business Law 17 Australian Legal System Law reporting systems The adversary system Federal system of government State & Federal Court structures The Commonwealth Constitution Legislation and how to interpret it.

18 8 June 2014 BLO1105 – Business Law 18 Evolution of Australian Law Following settlement by the English in 1788, the English common law model was imposed in Australia. As a penal colony, martial law prevailed. English law then applied from early 19 th Century until late in the 20 th Century Many English concepts survive today.

19 8 June 2014 BLO1105 – Business Law 19 Evolution of Australian Law Australian law gradually developed its own flavour as an offshoot of English law Finally, we severed our ties with English law, but only recently. Result is a system heavily based on English law, but now completely independent of it. Processes and precedents still apply today

20 8 June 2014 BLO1105 – Business Law 20 Sources of Law in Australia Primary Sources Legislation, and Precedent Secondary Sources Commercial Custom Legal textbooks and journals Law Reform Commission Reports

21 8 June 2014 BLO1105 – Business Law 21 Primary Sources of Law Legislation comprises Acts of Parliament (Statutes), Statutory Rules & Regulations, and other Delegated Legislation. For us as Victorians, this means both Australian and Victorian legislation

22 8 June 2014 BLO1105 – Business Law 22 Primary Sources of Law Precedent is judge-made law, as distinct from law enacted by Parliament. It is law as pronounced by the courts when deciding cases over many years. Legislation prevails over the common law. Parliament has the final say as to what the law is in any area.

23 8 June 2014 BLO1105 – Business Law 23 The Common Law This term is used to describe A type of legal system. (Contrast common law and civil law systems, for example) The body of decisions made by courts over time that collectively comprise thecommon law. (Cf Legislation)

24 8 June 2014 BLO1105 – Business Law 24 The Doctrine of Precedent Inherited from the UK, it means that decisions of superior courts in a legal system (or hierarchy) are binding on inferior courts in the same hierarchy. The Supreme Court of Victoria binds other Victorian Courts, because it is our (State) superior court. The High Court of Australia binds all Australian Courts.

25 8 June 2014 BLO1105 – Business Law 25 Advantages of Precedent Properly applied, the courts become Consistent, Non-discriminatory and fair, and Predictable in their decisions Some disadvantages apply. There is a safety valve in the operation of the doctrine.

26 8 June 2014 BLO1105 – Business Law 26 Law Reporting Systems Vital to Precedent, the (printed) Law Reports recorded all significant legal judgments for future reference.They are very relevant to Contract Law, which is not codified. CLR and VR are important to Victorians. Meehan v Jones (1982) 149 CLR 571 Causer v Brown [1952] VLR 1

27 8 June 2014 BLO1105 – Business Law 27 Useful Websites Students should note two particular websites that are extremely helpful in tracking down Statutes and Cases. All High Court cases and Acts can be found on All recent Victorian cases and Acts can be found on

28 8 June 2014 BLO1105 – Business Law 28 The Adversary System All common law countries adopt the adversary system in conducting trials. Civil law countries use the inquisitorial approach. Differences include:- The role of the judge; Onus & burden of proof, and Some presumptions, eg innocence.

29 8 June 2014 BLO1105 – Business Law 29 The Australian Constitution This is the charter for operation of ourfederal system of government. Adopted by a majority of people and States in 1900, it has operated since 1901 more or less unchanged. Federal systems (cf. unitary systems) exist in many large countries, e.g., USA, Canada.

30 8 June 2014 BLO1105 – Business Law 30 The Australian Constitution This results in having two law-making authorities (Commonwealth and State), and a division of law-making powers between the two. Many complications arise from this, causing conflicts between the two governments. The constitution enshrines the UK concept of theseparation of powers.

31 8 June 2014 BLO1105 – Business Law 31 Federal System of Government Every federation has the problem of two (competing) law-making authorities. Unitary systems (the majority of countries) do not have this problem. When confronted with a legal problem, we have to check both Commonwealth (Australia-wide) laws, as well as State (Victoria-wide) laws

32 8 June 2014 BLO1105 – Business Law 32 The State Court System The State Courts are 1. The Court of Appeal (the Full Court); 2. The Supreme Court 3. The County Court 4. The Magistrates Court. 5. Various Tribunals, including VCAT

33 8 June 2014 BLO1105 – Business Law 33 The Federal Court System The Federal Courts are 1. The High Court of Australia 2. The Family Court 3. The Federal Court 4. The Federal Magistrates Court The Federal & Family Courts, created in 1976, rank equally in importance.

34 8 June 2014 BLO1105 – Business Law 34 Tribunals Tribunals have succeeded because They provide quick and easy access They are not as expensive as courts They are informal, and They are very efficient. Rapid growth reflects their popularity.

35 8 June 2014 BLO1105 – Business Law 35 Statutory Interpretation Interpreting Acts is now the main function of courts, rather than creating new law, which is now mostly done by parliament. Problems include Human error in drafting Rapid technological change Changes in words and community standards

36 8 June 2014 BLO1105 – Business Law 36 Common Law Rules (of interpretation) The Courts developed three main Rules to assist in interpreting Acts:- 1. The Literal Rule, 2. The Golden Rule, and 3. The Mischief Rule. Many Maxims (rules of lesser importance) were also developed by the Courts.

37 8 June 2014 BLO1105 – Business Law 37 Statutory Rules (of interpretation) Recently, (1984) Parliaments gave their own instructions to the Courts about this task. They passed legislation to require the courts to use the literal rule when reading and applying statutes. If that creates a problem, the courts then must use the purposive approach.

38 8 June 2014 BLO1105 – Business Law 38 The Purposive Approach If in doubt (as to what the words mean), the judge must ask What was the purpose of this Act?, or Why was this Act passed? The judge must then interpret and apply the Act to give effect to that purpose.

39 8 June 2014 BLO1105 – Business Law 39 Different Branches of Law One main division or distinction is between civil law and criminal law. Civil law involves claims by one citizen against another in the litigation process. Criminal law involves the prosecution of a citizen by the state (police) for a crime.

40 8 June 2014 BLO1105 – Business Law 40 The Law of Tort A tort is a civil wrong for which the remedy is an action for damages. Examples of torts are negligence (the most common tort), defamation, nuisance, trespass and deceit.

41 8 June 2014 BLO1105 – Business Law 41 Contract Law Contract law is the law concerning legally enforceable agreements. It is the cornerstone of all of our commercial or business law. We study it intensively simply because we are students of business. We will work in business or advise people who do.

42 8 June 2014 BLO1105 – Business Law 42 Constitutional Law Constitutional Law is the study of the constitution, in our case the constitution of the Commonwealth of Australia. This involves the relative powers of the Commonwealth (Australian) and State Governments, disputes between States, between States and Commonwealth.

43 8 June 2014 BLO1105 – Business Law 43 Administrative Law Public servants can now have their decisions tested by citizens through various tribunals. Formerly, only the legality of the decision could challenged. Under administrative law, the correctness of the decision can now be challenged and reviewed by the tribunal.

44 8 June 2014 BLO1105 – Business Law 44 The Rules of Equity Different in origin from the common law, equity developed in the Kings Court, later taken over by the Chancellor, and became known as Chancery Courts. The rules of natural justice (as distinct from common law rules) were applied. The two systems have merged in all out courts.

45 8 June 2014 BLO1105 – Business Law 45 Further Reading Business Law for Business Students, pages 1 – 53; or The Introductory Chapters of either Business Law in Australia, Vermeesch & Lindgren, or Australian Business Law, Latimer, CCH.

46 8 June 2014 BLO1105 – Business Law 46 Contract Defined A contract is An agreement that the law will enforce; A promise (or set of promises) that the courts will enforce; or A legally enforceable agreement. All emphasize agreement (or set of promises), and enforceability.

47 8 June 2014 BLO1105 – Business Law 47 Contract Formation Formula Many problems require us to say whether a contract exists. To resolve this, a useful formula is Offer + Acceptance = Agreement Agreement + Intention + Consideration = Contract

48 8 June 2014 BLO1105 – Business Law 48 Typical Formation Process The vast majority of contracts are formed by the process outlined. An offer is made by A to B. That offer (or some negotiated variation of it) is accepted by B. Agreement exists. (Courts still typically apply this test.)

49 8 June 2014 BLO1105 – Business Law 49 An Exception to the Rule In Clarke v Dunraven [1897] AC 59, the Court of Appeal held (decided) that agreement had been achieved between C and D. They had each advised a third party, the secretary of a Yacht Club, that they would be bound by the Clubs rules in the conduct of yacht races.

50 8 June 2014 BLO1105 – Business Law 50 Introductory Points ( about contract). Contrast Simple Contract and Formal Deed. Does the contract have to be in writing? Doctrine of part performance. How to prove terms of verbal contract? Contrast bilateral and unilateral contracts.

51 8 June 2014 BLO1105 – Business Law 51 Components of a Contract Essential components, or elements, are:- Offer; Acceptance (these two make agreement); Intention (to be legally bound); and Consideration. (Some add capacity, legality of purpose etc, but these are less important).

52 8 June 2014 BLO1105 – Business Law 52 Intention (to be legally bound) Not all agreements are contracts. Some will not be enforced in a Court. Why? Because they were never intended to create legal obligations or legal consequences. Consider some simple examples.

53 8 June 2014 BLO1105 – Business Law 53 Testing by Using Presumptions A presumption is a probable outcome. It is not an absolute. It can be overturned (rebutted), but only by strong contrary evidence. Examples:- The presumption of innocence. The presumption of survivorship.

54 8 June 2014 BLO1105 – Business Law 54 The Relevant Presumptions If an agreement concerns a personal, domestic or social transaction, the Court presumes that intention was not present. and If the agreement concerns a business or commercial transaction, the Court presumes that intention was present.

55 8 June 2014 BLO1105 – Business Law 55 Testing Methods Courts use two quite different testing methods. One is subjective testing. This involves testing by reference to the persons actually involved in the case. What did you intend when you made this deal?

56 8 June 2014 BLO1105 – Business Law 56 Subjective Testing Although used a lot in criminal trials, where intention is an essential ingredient of a crime in many cases, subjective testing is not often used in civil trials. It is flawed because we usually get two opposite and competing answers to the same questions.

57 8 June 2014 BLO1105 – Business Law 57 Objective Testing The preferred method in civil trials, this method tests by reference to some outside or objective criterion or yardstick. The benchmark is often the reasonable person, or the intelligent bystander. Although not perfect, it is better than subjective testing.

58 8 June 2014 BLO1105 – Business Law 58 Summary of Testing ( for Intention ) We can solve any problem on this question (whether intention exists) by following this strategy:- 1. Applying the presumptions as above; and 2. Testing the question objectively, not subjectively. We will look at some relevant cases.

59 8 June 2014 BLO1105 – Business Law 59 Domestic Arrangements Married couples, and closely-related family members. See Balfour v Balfour [1919] 2 KB 571 Cohen v Cohen (1929) 42 CLR 91 Murphy v Simpson [1957] VLR 598

60 8 June 2014 BLO1105 – Business Law 60 Balfour v Balfour B promised to pay maintenance to his wife pending her return to Ceylon, where he worked with the UK diplomatic corps. He did not pay. After divorce, she sued. The court held that agreements between spouses – while living together – are not contracts. No intention exists.

61 8 June 2014 BLO1105 – Business Law 61 Social Agreements Coward v Motor Insurers Bureau [1962] 1 All ER 531 (an agreement between two fellow workers for transport to and from work on a motor cycle), and Cameron v Hogan (1934) 51 CLR 358 (an agreement between members of a political party)

62 8 June 2014 BLO1105 – Business Law 62 Rebutting the Presumption Remember that the two presumptions apply, but each presumption can be rebutted. Rebuttal is achieved by leading strong evidence to defeat the presumption. The onus of proof is borne by the party seeking to rebut the presumption.

63 8 June 2014 BLO1105 – Business Law 63 Rebuttal in Domestic Cases See McGregor v McGregor (1888) 21 QBD 424 Merritt v Merritt [1970] 1 WLR 1211 The precedent set in Balfour v Balfour (no intention in husband/wife agreements) does not apply if the married couple are separated when the agreement is made.

64 8 June 2014 BLO1105 – Business Law 64 Rebuttal in the Migration Cases Wakeling v Ripley (1951) SR (NSW) 183 Riches v Hogben [1986] 1 Qd R 315 Todd v Nichol [1957] SASR 72 The presumption of non-intention was triggered by close relationship, but was held to be rebutted by serious outcomes to the parties in each case.

65 8 June 2014 BLO1105 – Business Law 65 Wakeling v Ripley Ws married sister migrated to Australia from UK (at Ws request) to look after him, in return for promised benefits. After disagreement, W reneged on his offer. R sued for damages for breach of contract. Held: Despite close relationship, intention exists, and there is a contract.

66 8 June 2014 BLO1105 – Business Law 66 Further Rebuttal Cases Parker v Clarke [1960] 1 All ER 93 (aged care agreement between two friendly, unrelated couples) Popiw v Popiw [1959] VLR 197 (separated husband and wife) Simkins v Pays [1955] 1 WLR 975 (competitions, raffles and lotteries)

67 8 June 2014 BLO1105 – Business Law 67 Commercial (business) Agreements The presumption of intention applies here. Any agreement made at arms length ( with a stranger) will be treated as commercial, even when the subject-matter is personal. This presumption can also be rebutted, but the cases show that rebuttal is difficult to achieve.

68 8 June 2014 BLO1105 – Business Law 68 Carlill v Carbolic Smoke Ball Co. Defendant argued that a cash reward offered in a newspaper to promote product sales was an advertising stunt, with no intention to be legally bound (to pay). Held: The reward is an offer, accepted by C by buying and using the product. Intention exists and there is therefore a contract.

69 8 June 2014 BLO1105 – Business Law 69 Edwards v Skyways Ltd An agreement between Defendant and Es Union to pay superannuation payments on early retirement of pilots taking a package was a commercial agreement. The presumption of intention applied, was not rebutted, and therefore prevailed, despite the fact that the payments were described as ex gratia, (voluntary).

70 8 June 2014 BLO1105 – Business Law 70 Express Exclusion ( of intention ) Can the (contracting) parties exclude intention by agreement? This was achieved by an exclusion clause in Jones v Vernons Pools Ltd [1938] 2 All ER 626. A ticket in a soccer pools competition contained an effective exclusion clause (this is not a legal contract). The claim by Jones failed.

71 8 June 2014 BLO1105 – Business Law 71 Honour Clauses in Contracts Can the parties avoid a contract by inserting an honour clause in the agreement? See Rose & Frank Co v Crompton Bros Ltd. [1925] AC 445. Dispute taken to Court, but agreement contained a detailed and specific honour clause. The Court held that there was no legal contract.

72 8 June 2014 BLO1105 – Business Law 72 Ousting the Jurisdiction It is acceptable to say This agreement is not a contract, as in the last case. But it is not acceptable to say This agreement is a contract, but the Courts cannot adjudicate upon it. This is an attempt to oust the jurisdiction of the courts, and is against public policy.

73 8 June 2014 BLO1105 – Business Law 73 Letters of Comfort A letter by a parent company to a Bank lending money to its subsidiary company might be a letter of comfort, or a guarantee to repay the loan if the borrower fails to do so. It is a question of intention. Would a reasonable person conclude that intention existed?

74 8 June 2014 BLO1105 – Business Law 74 Letter of Comfort Cases Kleinwort Benson Ltd v Malaysian Mining Corp Bhd [1988] 1 WLR 799 (No intention) Commonwealth Bank of Australia Ltd v TLI Management Pty Ltd [1990] VR 510 (No intention) Banque Brussels Lambert SA v Australian National Industries Ltd (1989) 21 NSWLR 502 (Intention to guarantee repayment was found)

75 8 June 2014 BLO1105 – Business Law 75 Administrative Arrangements Is an agreement between government and a citizen a legal contract or not? See The Administration of the Territory of PNG v Leahy (1961) 105 CLR 5, and Australian Woollen Mills Ltd v Commonwealth of Australia (1954) 92 CLR 424 In both cases, no intention was concluded.

76 8 June 2014 BLO1105 – Business Law 76 Summary of Intention Problems involving intention can be solved by 1. Discussing and applying the two presumptions, using cases to illustrate the distinction between them, and 2. Remembering to use an objective, as distinct from a subjective, testing mechanism.

77 8 June 2014 BLO1105 – Business Law 77 Offer Defined A proposal or proposition which, if accepted, gives rise to an agreement The person making the offer (the offeror) will make it to one person (the offeree), or to a group of persons, or sometimes to the world at large

78 8 June 2014 BLO1105 – Business Law 78 Requirements of an Offer The offer can be express, which means that it is expressed by being spoken or written, or it can be implied, usually from conduct or behaviour. It must be promissory, i.e., it can be converted by acceptance into a binding obligation. Harvey v Facey [1893] AC 552

79 8 June 2014 BLO1105 – Business Law 79 Offer v Invitation to Treat Some activities appear to be making offers, but legally are not. They may be only extending an invitation to treat or aninvitation to negotiate or deal. Consider 1. Display of goods for sale 2. Distributing brochures or circulars, and 3. Advertising goods for sale.

80 8 June 2014 BLO1105 – Business Law 80 Display of Goods for Sale A retailer of goods who displays them for sale appears to be offering the goods for sale to customers. However, the courts take the view this action (placing goods on display for sale) is not an offer to sell as such, but only an invitation to customers to make an offer to buy. See

81 8 June 2014 BLO1105 – Business Law 81 Boots Case In Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1952] 2 QB 795, When B displayed goods (including prescribed drugs) for sale in a self-service chemist store, plaintiff claimed that B was guilty of the offence ofoffering drugs for sale otherwise than under the supervision of a qualified chemist.

82 8 June 2014 BLO1105 – Business Law 82 Boots Case (Cont.) Bs defence was that the customer makes the offer at the check-out, where a chemist was in attendance to supervise sales. The issue becomes where is the offer made? Does B offer to sell (at the display shelf), or does the customer offer to buy (at the check-out)? Held: The latter. Therefore B not guilty.

83 8 June 2014 BLO1105 – Business Law 83 Display in conventional shop Boots Case was a self-service, or supermarket situation. What happens in a conventional store? See Fisher v Bell [1961] 1 QB 394, where B was charged with offering for sale an offensive weapon when he put a flick- knife in his shop window with a price tag. Held: Not guilty; display only an invitation.

84 8 June 2014 BLO1105 – Business Law 84 Brochure Distribution Distribution of brochures, circulars, catalogues or other advertising material looks like the making of offers, but it legally is not. See Grainger & Sons v Gough [1896] AC 325, where a circular listing products and prices from a wine store was held to be only an invitation to treat.

85 8 June 2014 BLO1105 – Business Law 85 Advertisements generally An advert. in a paper or other media looks like an offer, but generally it is regarded legally as only an invitation. The prospective buyer has to make an offer that the advertiser can accept or reject. See Partridge v Crittenden [1968] 2 All ER 421

86 8 June 2014 BLO1105 – Business Law 86 Exceptions to the Rule The general rule is that an advert will not be an offer. There are two exceptions:- 1. The advert may convert (from an invitation) to an offer if conditions are imposed that the prospective buyer must satisfy to buy the article advertised. 2. If the advert offers a reward to the reader

87 8 June 2014 BLO1105 – Business Law 87 The Smokeball revisited In Carlill v Carbolic Smokeball Co., the company argued the general rule that an advert is not an offer, and there was thus no contract with Mrs C. The court rejected this argument, noting that when a reward is advertised, the advert becomes an offer that the reader can accept by conduct (buying the product etc.)

88 8 June 2014 BLO1105 – Business Law 88 Sales by Auction When selling goods (or land) by auction, the auctioneer in calling for bids is extending an invitation to the assembled buyers to make him an offer. The resultant bids are offers. The contract is formed if and when the auctioneer accepts one of the bids (offers)

89 8 June 2014 BLO1105 – Business Law 89 Sales by Tender Sale by tender is becoming more popular. Tenders have long been used to form contracts for major works, or high volume supply of goods. Calling for tenders is an invitation. Submitting a tender is making an offer. When the advertiser accepts the preferred tender, if any, the contract is formed.

90 8 June 2014 BLO1105 – Business Law 90 Evaluating Tenders If the advert inviting tenders specifies a process or procedure that will be applied in evaluating tenders, that process or procedure must be strictly followed. If not, damages will be payable to an aggrieved unsuccessful tenderer. See Hughes Aircraft Systems Int. v AirServices Australia (1997) 146 ALR 1

91 8 June 2014 BLO1105 – Business Law 91 Acceptance of Offer Offer + Acceptance = Agreement An acceptance is a clear and undoubted assent to the offer and all of its terms. It can be express (stated or written), or it can be implied from conduct. No magic formula of words. Four rules of acceptance have evolved.

92 8 June 2014 BLO1105 – Business Law 92 The Four Rules of Acceptance 1. It must be clear and undoubted. 2. The correct method must be used. 3. The acceptance must be given with knowledge of, and in reliance upon, the offer. 4. Acceptance must be communicated.

93 8 June 2014 BLO1105 – Business Law 93 Rule One of Acceptance Acceptance must be clear, undoubted. If the offeree tries to change any terms of the offer, he is not accepting it but making acounter-offer. This replaces the first offer with a second one. Less obviously, it destroys the first offer.

94 8 June 2014 BLO1105 – Business Law 94 Conditional Acceptance An acceptance given subject to a condition will not operate unless and until the condition is satisfied. A simple example would be I accept your offer to sell me your car for $20,000 provided I can get a loan of $10,000 from my Bank.

95 8 June 2014 BLO1105 – Business Law 95 Masters v Cameron (1954) 91 CLR 353 A complex case of conditional acceptance. C sold a property to M, who paid a deposit of 10%. Both signed a Sale Note prepared by the agent, to be replaced later on by a formal contract of sale that Cs solicitors would prepare. The sale note contained a clause that C insisted be inserted by the agent.

96 8 June 2014 BLO1105 – Business Law 96 Masters v Cameron (Cont) This agreement is made subject to the preparation of a formal contract of sale which shall be acceptable to my solicitors. When the contract was prepared to replace the Sale Note, M refused to sign it because he couldnt get the loan he needed to buy the house. Is the Sale Note a binding, legal contract?

97 8 June 2014 BLO1105 – Business Law 97 Masters v Cameron (Cont) Was Cs acceptance of Ms offer to buy conditional on the signing of the replacement contract? The High Court held that it was, because the words used suggested that new terms could be added to those in the Sale Note. M should not be forced to include new terms that he had not even seen or considered.

98 8 June 2014 BLO1105 – Business Law 98 Rule Two of Acceptance This rule focuses on the method to be used in accepting an offer. The offeror, when making the offer, can dictate HOW the offer is to be accepted. If he does, his stipulations are binding on the offeree, and must be strictly followed.

99 8 June 2014 BLO1105 – Business Law 99 Rule Two Sub-rules. 1. An exclusive method must be used 2. A nominated method, or any quicker one, may be used 3. If no method nominated, the same method (as the offeror used) may be used 4. If communication is instantaneous, acceptance is effective when received. 5. The Postal rule of acceptance.

100 8 June 2014 BLO1105 – Business Law 100 Rule Two - Sub-rule One In rare cases, the offeror might say (when making the offer):- If you want to accept this offer, you must accept by (say) fax. If he does, acceptance by any method other than fax will not be binding on the offeror.

101 8 June 2014 BLO1105 – Business Law 101 Rule Two - Sub-rule Two If a method is nominated by the offeror, but not exclusively, that method – or any faster method – may be used by the offeree. For example, if acceptance by post is specified, fax could be used as an alternative. But the new method must in fact faster, not just in theory. See Eliason v Henshaw (1919) 4 Wheaton 225

102 8 June 2014 BLO1105 – Business Law 102 Rule Two - Sub-rule Three This is a very helpful sub-rule. If no method is nominated by the offeror, there is a presumption that the offeree can use (to accept the offer) the same method that the offeror used (to make the offer). So an offer made by post can be accepted by post if no alternative is stated by the offeror.

103 8 June 2014 BLO1105 – Business Law 103 Rule Two Sub-rule Four If communication is instantaneous, the acceptance is effective only when actually received by the offeror. This applies to telephone, telex, fax. See Entores Ltd v Miles Far East Corporation [1955] 2 QB 327

104 8 June 2014 BLO1105 – Business Law 104 Entores Ltd v Miles Far East Corp A contract was formed by telex, the offer being telexed from London to Amsterdam, and the acceptance was telexed back. The question was where was the contract made? This establishes the law of the contract which must be applied in any dispute. Held, acceptance occurred in UK

105 8 June 2014 BLO1105 – Business Law 105 Rule Two - Sub-rule Five If the Postal Rule of Acceptance is activated, the posted acceptance is legally effective when the letter is posted, (as distinct from when it is received). This curious rule, created in England in early 19 th century can be explained only in the context of the Law of Agency.

106 8 June 2014 BLO1105 – Business Law 106 The Postal Rule of Acceptance Remember to justify using this rule if you invoke it. It applies if the offeror expressly nominates it, or the circumstances allow it to be invoked by implication. Remember also that it applies only to acceptances – not revocations, counter- offers, or any other communications.

107 8 June 2014 BLO1105 – Business Law 107 Electronic Transactions Acts Recent Acts have been passed by the Australian and Victorian Parliaments to authorize the use of electronic communication ( etc) in business and in dealing with government. This has some implications for us in the area of contract formation.

108 8 June 2014 BLO1105 – Business Law 108 Rule Three of Acceptance An acceptance must be given with knowledge of the offer, and in reliance upon the offer. You cannot accept by accident – it must be a conscious decision to make the contract. See R v Clarke (1927) 40 CLR 227

109 8 June 2014 BLO1105 – Business Law 109 R v Clarke C had heard of an offer by the government of WA to pay a reward. When arrested and questioned, he gave the information sought. He claimed the reward in contract. Held. On his own admission, he had forgotten the reward, and was seeking to protect himself. No valid acceptance of offer.

110 8 June 2014 BLO1105 – Business Law 110 Rule Four of Acceptance The acceptance must be communicated. This can be express (stated or written), or implied from the offerees conduct. But it must be one or the other. See Felthouse v Bindley (1862) 142 ER 1037 See also Brogden v Metropolitan Railway Co (1877) 2 AC 666

111 8 June 2014 BLO1105 – Business Law 111 Acceptance by Agent An agent can be used to accept on behalf of the offeree. But the agent must be properly authorized to accept the offer. See Powell v Lee (1908) 99 LT 284 Contrast Northern territory of Australia v Skywest Airlines Pty Ltd [1987] 48 NTR 20

112 8 June 2014 BLO1105 – Business Law 112 Cross Offers What if two identical offers (A to sell to B, and B to buy from A) cross in transit? Is there a contract in this situation. The court held in Tinn v Hoffman & Co ( 1873) 28 LT 271 that two identical offers are not the same as an offer and an acceptance. One offer has to be accepted.

113 8 June 2014 BLO1105 – Business Law 113 Counter-offers The counter-offer does two things 1. It substitutes a new offer for the offer that it replaces. 2. It legally destroys the previous (replaced) offer. The offeree cannot revive the replaced offer, but the offeror may. See Hyde v Wrench ER 132

114 8 June 2014 BLO1105 – Business Law 114 Request for Information A counter-offer destroys the replaced offer. An enquiry or request for information does not. See Stevenson Jacques & Co v McLean (1880) 5 QBD 346 This distinction can be very important in problem solving.

115 8 June 2014 BLO1105 – Business Law 115 Revocation of Offer The general rule is that an offer can be revoked at any time before it is accepted, even if the offeror says he will leave it open for a defined time period. See Routledge v Grant (1928) 4 Bing 653 Revocation of Offer

116 8 June 2014 BLO1105 – Business Law 116 Exception to the Rule The exception to the general rule occurs when an option is bought and paid for by the offeree in order to keep the offer open for an agreed amount of time. See Goldsborough Mort & Co Ltd v Quinn (1910) 10 CLR 674

117 8 June 2014 BLO1105 – Business Law 117 Revocation (Continued) If revoking an offer before the expiry of its stated life-expectancy, which can only be done if there is no valid option, the offeror should take care to ensure that the offeree is notified of the revocation. A revocation is not affected by the postal rule. See Byrne v Van Tienhoven (1880)

118 8 June 2014 BLO1105 – Business Law 118 Lapse of Offer How long does an offer last? At the latest, at the end of its allocated timeframe, if one is set. But if none is set, it will lapse after areasonable time. See Ramsgate Victoria Hotel v Montefiore (1888). This is a question of fact in each case. It could be seconds, or many years.

119 8 June 2014 BLO1105 – Business Law 119 Consideration Consideration emerged in the English courts in the 16 th Century to defeat fraudulent claims. Consideration is Peculiar to the common law systems; Traceable back to the 1500s. It means that agratuitous promise will not be legally enforced.

120 8 June 2014 BLO1105 – Business Law 120 Consideration Defined Lord Pollock defined consideration as An act or forbearance of one party, or the promise thereof, is the price for which the promise of the other is bought, and the promise thus given for value, is enforceable. Consideration must be something of value.

121 8 June 2014 BLO1105 – Business Law 121 Elements of Consideration Consideration can be Positive (doing something, or promising to do something), or Negative (a forebearance, such as promising that you will NOT do something). Consideration can be present or future, but not past.

122 8 June 2014 BLO1105 – Business Law 122 The 6 rules of Consideration 1. Necessary in all simple contracts. 2. Past consideration is not good consideration. 3. It must come from the promisee, but need not go back to the promisor. Note: The promisor makes the promise, the promisee receives it.

123 8 June 2014 BLO1105 – Business Law 123 The 6 Rules of Consideration 4. It need not be adequate, or commercially realistic. 5. It must not be too vague. 6. It must be sufficient in the eyes of the law. These last three rules are inter-related.

124 8 June 2014 BLO1105 – Business Law 124 Rule 1 of Consideration If the contract is a simple contract, consideration must be proved to exist. If it is a formal deed, consideration is not required. Formal deeds are rare, and recognisable by the words used in the jurat or signing clause, namely signed, sealed and delivered.

125 8 June 2014 BLO1105 – Business Law 125 Rule 2 of Consideration Consideration can be in the present or the future, but past consideration is not acceptable. See Eastwood v Kenyon (1840), Roscorla v Thomas (1842), and Anderson v Glass (1868)

126 8 June 2014 BLO1105 – Business Law 126 Possible Exception to Rule 2 In contracts of service, this rule might be overcome. SeeLampleigh v Braithwait (1615), and Re Caseys Patents, Stewart v Casey (1892) A promise to pay something is implied when the work is requested.

127 8 June 2014 BLO1105 – Business Law 127 Rule 3 of Consideration Consideration must come from the promisee, but need not revert to the promisor. That is, the benefit may move sideways, to a third party. The doctrine of privity of contract states that only a party to a contract can sue or be sued under that contract. See Dunlop Pneumatic Tyre Co v Selfridge.

128 8 June 2014 BLO1105 – Business Law 128 Rule 3 – Joint Promisees If a promise is made to 2 promisees jointly, as where A promises B and C to pay for work done, or for value provided only by B or by C See: Coulls v Bagots Executor & Trustee Co Ltd (1967) One promisee providing value on behalf of 2 promisees is acceptable.

129 8 June 2014 BLO1105 – Business Law 129 Rule 4 of Consideration Put simply, this rule means that the price does not have to be right. The court will not enquire whether the price is adequate or not. It is not the courts concern. So long as some price is paid, the court will look no further.

130 8 June 2014 BLO1105 – Business Law 130 Nominal Consideration The price might be a price in name only. See Thomas v Thomas (1842) Does it have to be expressed in currency terms? SeeChappell & Co Ltd v Nestle Co Ltd (1960)

131 8 June 2014 BLO1105 – Business Law 131 Rule 5 of Consideration Consideration must be something of recognisable value – it must not be too vague. SeeWhite v Bluett (1853) Dunton v Dunton (1892), and Loftus v Roberts (1902)

132 8 June 2014 BLO1105 – Business Law 132 Rule 6 of Consideration It must be legally sufficient. A moral obligation per se is not enough. What about a promise not to sue, or to abandon a claim? See Wigan v Edwards (1973), and Hercules Motors Pty Ltd v Schubert (1973)

133 8 June 2014 BLO1105 – Business Law 133 Existing Legal Obligation If the promisee is already legally obliged to do that which the promisor asks him to do to justify payment, there is no consideration for the promise. See Collins v Godefroy (1831). But if he does something extra, there is. See Glasbrook Bros Ltd v Glamorgan CC (1925)

134 8 June 2014 BLO1105 – Business Law 134 Existing Contractual Duty If payment is promised just to perform an existing contract, there may be a problem enforcing that promise. See Stilk v Myrick (1809) Hartley v Ponsonby (1857). Contrast Williams v Roffey Bros & Nicholls (Contractors) Ltd (1991) Musumici v Winadell Pty Ltd (1994)

135 8 June 2014 BLO1105 – Business Law 135 Existing Contractual Duty (cont) The two old cases concluded that there is no consideration for a promise to simply perform your existing contract, and no more. The modern cases are more creative in looking for things that might amount to consideration.

136 8 June 2014 BLO1105 – Business Law 136 Discharge of Obligation A contract can be formed to discharge an obligation created by an earlier contract, such as a debt or loan. In other words, the first contract creates the debt and the second contract discharges it. This is normally, but not always, done by total repayment of the debt.

137 8 June 2014 BLO1105 – Business Law 137 Discharge of a Loan Contract As with the first contract, the second contract must have all necessary components, including consideration. Assume A owes $1000 to B under an existing contract. Assume it is due for repayment, but A cannot pay in full. He offers B $700, and B agrees to accept it in full settlement of the debt.

138 8 June 2014 BLO1105 – Business Law 138 Discharge of a Loan (cont) In other words, B is promising A that he will not sue him for the other $300. But, is this promise enforceable at law? It is enforceable as a contract ONLY if there is consideration for it. Sadly for A, there is no consideration. So B can change his mind

139 8 June 2014 BLO1105 – Business Law 139 The Rule in Pinnels Case This rule states that payment of a lesser sum will not extinguish a debt for a greater amount. Since 1608, the rule has impacted on the doctrine of consideration, and exposed the one area where it does not function fairly. The rule enables a creditor to make a promise, and then change his mind.

140 8 June 2014 BLO1105 – Business Law 140 Foakes v Beer (1884) This case restated the rule in a different context. Bs promise not to claim interest on a debt paid by installments was ignored by her. The court held that her promise (to forego interest) was not binding as a contract, because it lacked consideration.

141 8 June 2014 BLO1105 – Business Law 141 Exceptions to the Rule Courts did not like the Rule, but could not avoid it without destroying consideration. Their solution was to allow exceptions to the rule whenever possible. The following exceptions were created and allowed by the courts over many hundreds of years until its impact was effectively eroded.

142 8 June 2014 BLO1105 – Business Law 142 Exceptions to the Rule (cont.) 1. Prepayment 2. Payment by transferring a chattel 3. Fraud on a third party 4. Composition with creditors or settlement of a valid legal claim, and finally 5. Promissory estoppel. We will examine each exception.

143 8 June 2014 BLO1105 – Business Law 143 Prepayment of Debt. Payment (of a lesser sum) on the due date is a problem. But, if the debtor pays a lesser amount before repayment is legally required, such prepayment benefits the creditor and disadvantages the debtor. The benefit and/or disadvantage is good consideration for the creditors promise.

144 8 June 2014 BLO1105 – Business Law 144 Transferring a Chattel If, instead of paying cash, I give my creditor some object of value, and he agrees to accept it in full settlement, he cannot later change his mind and sue. This is because the court will not ascribe a value to the object. It could be worth a fortune to the creditor

145 8 June 2014 BLO1105 – Business Law 145 Fraud on a Third Party If a person outside the contract, that is athird party pays part of the debt and the creditor agrees to accept it, the creditor cannot later sue the debtor for the balance. If he could, it would amount to a deception of the person who paid part of the debt. See Hirachand Punamchand v Temple (1911)

146 8 June 2014 BLO1105 – Business Law 146 Composition with Creditors If a debtor convenes a meeting of creditors and they approve a composition under Part X of the Bankruptcy Act, no creditor can later sue for the unpaid balance of debt. This applies even if the relevant creditor voted against the scheme. All creditors are bound if it is a valid composition.

147 8 June 2014 BLO1105 – Business Law 147 Settlement of a Legal Claim If a plaintiff settles a genuine legal claim for less than its face value, he cannot later sue for the balance. Settlement is encouraged by the courts. There are many reasons why a claimant may settle for less than he is owed. Once settled, the claim cannot be revived.

148 8 June 2014 BLO1105 – Business Law 148 Estoppel If a person is estopped from doing something, he is prevented from doing it. Estoppel is a legal doctrine that prevents a person saying one thing and meaning another in a business dealing. If another person acts on your statement, you are estopped from denying its truth.

149 8 June 2014 BLO1105 – Business Law 149 Estoppel (continued) Look at the agency example on pages 33 – 34 of the Lecture Notes on E-Reserve. If I create a deception, or even allow it to be created and do nothing to correct it, I cannot later benefit from that deception by trying to revert to the true facts. Why didnt Dr.Foakes argue estoppel?

150 8 June 2014 BLO1105 – Business Law 150 Limitation on estoppel The limiting aspect of estoppel was that courts applied it only to statements of a factual nature, and refused to extend it to promises of future intention. He is my agent is a statement of fact. I will not sue you for the interest is a promise of Mrs Beers future intention.

151 8 June 2014 BLO1105 – Business Law 151 Promissory Estoppel This approach was changed in 1947 in the High trees House Case. Central London Property Trust Ltd v High Trees House Pty Ltd The facts are set out in detail on page 34. Lord Denning, using lateral thinking for which he became famous, createdpromissory estoppel.

152 8 June 2014 BLO1105 – Business Law 152 Promissory Estoppel (cont) Ordinary estoppel applied to facts. Promissory estoppel applies to promises. By extending the concept in this way, making us accountable for our promises, Lord Denning effectively overcame 339 years of problems. It quickly caught on, despite being only obiter dicta.

153 8 June 2014 BLO1105 – Business Law 153 Limiting the Doctrine But, the logical extension of promissory estoppel arguably does away with consideration completely. If I make you a promise, and you act on it to your disadvantage, I must perform it! The fear of this result was overcome by the decision in Combe v Combe (1951)

154 8 June 2014 BLO1105 – Business Law 154 Combe v Combe Mrs Combe tried to create a new contract by arguing promissory estoppel. The Court of Appeal limited the doctrine to cases where there is an existing contract, and an attempt is made to vary or discharge it by entering into a second agreement. The doctrine of consideration was preserved.

155 8 June 2014 BLO1105 – Business Law 155 Detriment or Disadvantage. To invoke the doctrine, the promisee must act on the promise. But need he act to his detriment? Yes, but potential detriment will suffice. See Je Maintiendrai Pty Ltd v Quaglia (1980) and Legione v Hateley (1983)

156 8 June 2014 BLO1105 – Business Law 156 A New Development Consideration has evolved over 400 years of cases, the standout 20 th century case being High Trees House. But the Australian case of Waltons Stores (Interstate) Ltd v Maher in 1988 could have even more repercussions in the long term. Some say it could do away with consideration.

157 8 June 2014 BLO1105 – Business Law 157 Waltons v Maher Maher won a claim for damages against W, even though there was no contract signed, because W had promised M that they would sign, M acted on that promise to his substantial detriment, and the court held that Ws conduct was unconscionable

158 8 June 2014 BLO1105 – Business Law 158 Waltons v Maher (cont) This is a radical departure from established precedent. You can get damages for a persons failure to enter into a contract as promised. But its application is limited, and subsequent cases show that it has not, as was once feared, opened the floodgates.

159 8 June 2014 BLO1105 – Business Law 159 Contents of the Contract A contract can contain Express (stated or written) terms, and Implied terms, that is terms that are not apparent, but may be implied into the contract by the court. This can be done by reference to prior dealings, trade custom, to make the contract workable, or by statute.

160 8 June 2014 BLO1105 – Business Law 160 Express Terms Some typical questions about express terms are: - How important is the term? Are all terms of equal importance? What if its meaning is not clear? What if it is ambiguous? How to you prove oral terms?

161 8 June 2014 BLO1105 – Business Law 161 Proving Oral Terms There are obvious problems in proving oral terms that are not admitted by an opponent. But it is possible to do so by giving credible evidence of them, having witnesses present and so on. It is always better to have a written contract. See Buckenara v Hawthorn Football Club Ltd (1988 )

162 8 June 2014 BLO1105 – Business Law 162 The Parol Evidence Rule Whenever we have a written contract, an important rule is activated. The Parol Evidence Rule states that if we have a written contract that appears to cover all the details, verbal evidence to add terms, vary existing terms, or change the written contract in any way, will not be considered by the Court.

163 8 June 2014 BLO1105 – Business Law 163 The Rule Explained Courts assume that the written contract will accurately tell the whole story about the transaction. If prepared by experts, it should! If either party can add or subtract terms, or change terms, what is the point of having a written contract in the first place?

164 8 June 2014 BLO1105 – Business Law 164 Exceptions to the Rule Custom or trade usage; Verbal condition precedent; Written contract is not complete; Ambiguous terms; Mistake in the terms; and Confusion as to identity of the parties.

165 8 June 2014 BLO1105 – Business Law 165 Custom or Trade Usage If contracts in a particular industry or trade always contain fixed terms, they do not have to be included in the written contract. They will be implied by the Court if they are established and accepted by most people in that industry. See British Crane Hire Corp. Ltd v Ipswich Plant Hire Ltd ( 1974 )

166 8 June 2014 BLO1105 – Business Law 166 Limit to this Exception But a term based on trade customs or conventions will not be implied into the contract if it will directly contradict an express term in the contract. See Summers v Commonwealth of Australia ( 1918 )

167 8 June 2014 BLO1105 – Business Law 167 Verbal Condition Precedent A detailed, written contract might fail to mention that it is conditional. For example, it is not to commence operation until some event occurs to activate it. If so, verbal evidence of the condition precedent is allowable. See Pym v Campbell ( 1856 )

168 8 June 2014 BLO1105 – Business Law 168 Incomplete Written Contract It is possible, but difficult, to prove that some vital clause has been omitted from the contract, and to argue for its inclusion. There must be special circumstances to succeed in this approach. See Van Den Esschert v Chappell ( 1960 ) This exception is rarely invoked.

169 8 June 2014 BLO1105 – Business Law 169 Ambiguous or Mistaken Terms If a term has more than one meaning, or has been included in the contract by mistake, the Court will allow verbal evidence to be lead to remove the ambiguity, or to rectify the mistake. This is necessary to make the contract operate properly, and to achieve its purpose.

170 8 June 2014 BLO1105 – Business Law 170 Identity of the Parties Confusion can arise as to the correct identity of a party – usually when a natural person enters into a contract on behalf of a company to be incorporated. Pending incorporation, who was liable? The shelf company industry has largely overcome this problem.

171 8 June 2014 BLO1105 – Business Law 171 Analysis of Statements Consider statements made during negotiations. Are all promises potential terms? Putting that another way, is everything said actionable if false or incorrect? The Parol Evidence Rule covers this if the contract is written.

172 8 June 2014 BLO1105 – Business Law 172 Verbal (oral) Contracts Some statements become terms, allowing a contractual remedy if untrue. You can get damages for breach of condition or for breach of warranty. But if the statement is not a term, it might be a misrepresentation. The remedies are different.

173 8 June 2014 BLO1105 – Business Law 173 Oscar Chess Ltd v Williams An important case outlining the method of deciding whether a pre-contract statement becomes a term or not. W. traded in his car, which he said was a 1948 model, on a new one. It was actually a 1939 model, but he did not know. OCL sued for damages for breach of warranty to recoup the excess money they had allowed.

174 8 June 2014 BLO1105 – Business Law 174 Tests Applied In deciding that it was not a warranty, the court examined: - The objective intention of the parties; The actual words used; The proper inferences from known facts; Was it written down? Comparative skill and knowledge.

175 8 June 2014 BLO1105 – Business Law 175 The Result Having concluded that it was not a warranty, the court could not award damages to OCL. They could have proved innocent misrepresentation (W unknowingly made a false statement), but the remedy for that is rescission, not damages. The court could not rescind this contract.

176 8 June 2014 BLO1105 – Business Law 176 Collateral Contract The preferred result for the victim of a false statement is to be able to show that a term has been breached, rather than to try and argue misrepresentation. The remedies are stronger. This has lead to the emergence of thecollateral contract argument.

177 8 June 2014 BLO1105 – Business Law 177 Collateral Contract Explained A collateral contract is a separate contract from the main contract, and is represented by a separate promise not included in the main contract. It can be argued that A signed the main contract only because B made the collateral promise.

178 8 June 2014 BLO1105 – Business Law 178 Consideration?? If the collateral promise is to become a collateral contract, there must be consideration for that promise. What consideration exists? The act of signing the main contract arguably provides the consideration for the collateral promise, making it contractual.

179 8 June 2014 BLO1105 – Business Law 179 De Lassalle v Guildford A lease had been drawn up between D and G, and they were about to exchange parts (copies) of the lease, which would result in the lease contract existing. When asked, the owner promised the tenant that the drains were in good order. They were not! D claimed damages for breach of a collateral contract.

180 8 June 2014 BLO1105 – Business Law 180 De Lassalle v Guildford (cont) In defence, the owner pleaded the Parol Evidence Rule. The court held that the tenant had signed the lease only because the collateral promise had been made. There was thus consideration for the promise, transforming it into a collateral contract. As the promise was false, this contract had been breached. D got damages.

181 8 June 2014 BLO1105 – Business Law 181 Interchangeable Arguments The collateral contract argument is virtually interchangeable with the 3 rd exception to the Parol Evidence Rule argument, as used in Van Den Esschert v Chappell. Both arguments emerged as creative solutions to the Parol Evidence Rule. Both have limited application.

182 8 June 2014 BLO1105 – Business Law 182 Limiting Aspects Our Courts limit the argument, requiring 1. Consistency between the collateral promise and the terms of the main contract [See Hoyts Pty Ltd v Spencer ( 1919 )] 2. A strong motivational link between the promise and the signing of the main contract. [J.J Savage & Sons Ltd v Blakeney ( 1970 )]

183 8 June 2014 BLO1105 – Business Law 183 Interpreting Contract Terms Courts often have to give meaning to a term if it is unclear. But if it is so uncertain that they cannot save it, they will either preferably, sever the uncertain term, or reluctantly, declare the whole contract void for uncertainty. They will try and uphold contracts if possible.

184 8 June 2014 BLO1105 – Business Law 184 Scammell & Nephew v Ouston To illustrate, an agreement to buy a new truck on hire purchase terms over 2 years could not be enforced by the court, because the term was too uncertain. Since the price was not clearly defined, and the price is a vital term in any contract, the contract was held to be void for uncertainty.

185 8 June 2014 BLO1105 – Business Law 185 Importance of Terms The terms (clauses) of a contract fall into three possible categories. 1. Conditions. 2. Warranties. 3. Intermediate (or innominate) terms. Correct classification controls the remedy for breach of each category.

186 8 June 2014 BLO1105 – Business Law 186 Conditions A condition is an important term or clause in the contract. It is central to the contract, and goes to the root of the contract. If you took this term away, the contract would be radically different. Note that, if there is a dispute, the court will decide if the term is a condition, whatever the parties might have called the term.

187 8 June 2014 BLO1105 – Business Law 187 Warranties A warranty is a term of lesser importance than a condition. It is subsidiary to the condition, but it is nevertheless still important. It deals with cosmetic rather thanstructural or fundamental aspects of the transaction.

188 8 June 2014 BLO1105 – Business Law 188 Intermediate Terms A recent creation, intermediate or innominate terms are hybrids, being sometimes treated as conditions and at other times treated as warranties. The choice (between condition and warranty) is made depending on the timing and importance of the relevant breach.

189 8 June 2014 BLO1105 – Business Law 189 Remedies for Breach A breach of condition entitles repudiation of the contract and/or damages. A breach of warranty entitles damages only. Breach of an intermediate term entitles either the remedy for breach of condition (if it was a condition at the time), or the remedy for breach of warranty (if it was a warranty at the time).

190 8 June 2014 BLO1105 – Business Law 190 Relevant Cases Cases illustrating the distinction between conditions and warranties include Bettini v Gye ( 1876 ); Poussard v Spiers & Pond ( 1876 ); Associated Newspapers Ltd v Bancks ( 1951 ). Note that intermediate terms are rarely found.

191 8 June 2014 BLO1105 – Business Law 191 Condition Precedent A condition precedent is a term in a contract that relates to some outside event. That event must occur before performance is required. A common example is a clause making the buyers performance conditional upon obtaining the necessary loan.

192 8 June 2014 BLO1105 – Business Law 192 Condition Subsequent A condition subsequent is also a term relating to some outside event. When it occurs, it will bring an operating contract to an end. The return of faulty goods is a common example. See Head v Tattersall ( 1871 )

193 8 June 2014 BLO1105 – Business Law 193 Exclusion Clauses An exclusion clause is a term in a contract that seeks to either Totally exclude (called an exclusion clause), or Limit in some way (called a limitation clause) the liability of one party if a breach occurs.

194 8 June 2014 BLO1105 – Business Law 194 Common Examples Such clauses are to be found, for example, in 1. Car park tickets; 2. Dry cleaning dockets; 3. Entertainment tickets; 4. Airline tickets; 5. Film processing dockets, and elsewhere.

195 8 June 2014 BLO1105 – Business Law 195 Signed & Unsigned Documents Such clauses can be found in signed contracts, or in what we call ticket cases, where the clause is found on a ticket or docket that has not been signed by the customer. The examples listed above are all ticket cases. The distinction matters as the rules differ.

196 8 June 2014 BLO1105 – Business Law 196 Signed Document Rules Predictably, a person is bound by the terms of any contract that they sign. This applies whether or not they have read it, and also whether or not they understand it. Put simply, if you sign it, you wear it! See LEstrange v Graucob Ltd ( 1934 ).

197 8 June 2014 BLO1105 – Business Law 197 Possible Exceptions The only possible escape routes from this are 1. If the clause is misrepresented to the customer. See Curtis v Chemical Cleaning & Dyeing Co ( 1951 ). 2. If the customer can successfully pleadnon est factum.

198 8 June 2014 BLO1105 – Business Law 198 Non Est Factum Literally, this means It is not my deed!, which implies that the wrong document is signed. Historically a defence for illiterate people, it is very hard to prove in modern times. See Gallie v Lee ( 1971 ), and contrast Petelin v Cullen ( 1975 )

199 8 June 2014 BLO1105 – Business Law 199 Unsigned Documents Most problems occur in this context. The question that the court must decide is Has the exclusion clause printed on the ticket or docket become part of (a term of) the contract? If so, it will affect the customers rights. If not, it will not bind the customer.

200 8 June 2014 BLO1105 – Business Law 200 The Testing Process To test whether the clause has become part of the contract, the courts will apply two tests, namely 1. The nature of the document test, and 2. The reasonable notice test. These tests are applied sequentially in the order stated.

201 8 June 2014 BLO1105 – Business Law 201 Nature of the Document Test This test involves examining the docket and asking what is its role in the transaction? Would a reasonable person expect it to contain terms of the contract? Does it have any other logical function, such as proving payment (a receipt), or proving ownership (a voucher)?

202 8 June 2014 BLO1105 – Business Law 202 Cases on the First Test See Causer v Brown ( 1952 ), where the court held that a dry cleaning docket was logically a voucher to prove ownership of garments. Also Chapelton v Barry Urban District Council ( 1940 ), where the ticket was logically a receipt to prove payment of a deck chair hiring charge.

203 8 June 2014 BLO1105 – Business Law 203 Signed Delivery Dockets When delivery dockets are signed after receipt of goods, it is too late to try to include new terms in the contract, which has already been performed. See Walter Wright Pty Ltd v DJ Hill & Co Pty Ltd ( 1971 ), and Rinaldi & Patroni Pty Ltd v Precision Mouldings Pty Ltd ( 1986 )

204 8 June 2014 BLO1105 – Business Law 204 Future of the First Test As exclusion clauses become more common, and more accepted by society, it will be increasingly hard to pass this test, since the test is applied objectively. It is no advantage to say I didnt know it was there, because the question is whether a reasonable person would know.

205 8 June 2014 BLO1105 – Business Law 205 The Reasonable Notice Test This test is applied only if the customer fails the first test. It requires that reasonable steps be taken by the business operator to bring the clause to the notice and attention of the customer. Again, the test is applied objectively.

206 8 June 2014 BLO1105 – Business Law 206 Relevant Cases See, as examples Parker v South Eastern Railway Co ( 1877 ) [clause on back of ticket] Thompson v L. M.&S. Railway Co ( 1930 ) [clause on train timetable on platform] Thornton v Shoe Lane Parking Co ( 1971 ) [clause hidden on back of pillar in car park]

207 8 June 2014 BLO1105 – Business Law 207 Exclusion Clause on Display The clause may be displayed on a sign, rather than (or as well as) being printed on a ticket or docket. This is quite effective, so long as the sign containing the clause is prominently on display at a point where all customers can see and read it.

208 8 June 2014 BLO1105 – Business Law 208 Actual & Constructive Notice See Balmain New Ferry Co v Robertson ( 1906 ), where the High Court held that terms may be communicated by displaying them for the public to read. Those who see and read the sign have actual notice of the clause. Those who could have, but didnt read it have constructive notice.

209 8 June 2014 BLO1105 – Business Law 209 Timing of the Notice Notice (of the exclusion clause) must be given before or when the contract is formed, not later. If given afterwards, it is too late. See Olley v Marlborough Court Ltd ( 1949 ), where an attempt to rely on a clause of which details were given after formation of the contract, failed.

210 8 June 2014 BLO1105 – Business Law 210 Prior Dealings The business operator can rely on previous dealings with the same customer to try and invoke an exclusion clause. But it can be difficult. See Hollier v Rambler Motors ( 1972 ). In this case, the court refused to allow reliance on the clause when prior dealings were pleaded.

211 8 June 2014 BLO1105 – Business Law 211 The Contra Proferentem Rule Because exclusion clauses damage our rights, change the rules of the game, and are sometimes introduced in a sinister way, courts do not like them. They interpret them contra proferentem, that is adversely to the business operator. See White v John Warwick & Co. ( 1953 )

212 8 June 2014 BLO1105 – Business Law 212 Implied Terms Implied terms, as distinct from express terms, are not evident in the contract. We have to find them elsewhere, either by using some common law rules to imply them, or – more frequently – by relying on a statute to imply them. Terms will be implied only if it is necessary.

213 8 June 2014 BLO1105 – Business Law 213 Common Law Implication Terms can be implied as follows: - By industry custom or convention, sometimes called trade usage; By reference to past dealings; To give business efficacy to a contract, in order to make the contract work properly.

214 8 June 2014 BLO1105 – Business Law 214 Industry Custom or Convention See British Crane Hire Corporation Ltd v Ipswich Plant Hire Ltd ( 1974 ) as an example. Note that a term will not be implied in this way if it contradicts an express term in the contract. Summers v Commonwealth of Australia ( 1918 )

215 8 June 2014 BLO1105 – Business Law 215 Past Dealings Previous dealings between the parties will often lead to the inclusion by the Court of missing terms. See Hillas & Co Ltd v Arcos Ltd ( 1932 ); Balmain New Ferry Co v Robertson ( 1906 ); Hollier v Rambler Motors (AMC) ( 1972 ).

216 8 June 2014 BLO1105 – Business Law 216 Business Efficacy If the contract does not make sense, a term may be implied to make it function. See The Moorcock (1886 ). But a term will not be implied in this manner if the contract makes sense without it. See Codelfa Construction Pty Ltd v State Rail Authority of NSW ( 1982 ).

217 8 June 2014 BLO1105 – Business Law 217 Statutory Implied Terms Part I of the Victorian Goods Act 1958 (originally enacted in the 1890s) implied terms into all contracts for the sale of goods. These related to title, fitness for purpose, quality and description of goods sold, and protected the buyer against unscrupulous sellers. But they could be avoided!

218 8 June 2014 BLO1105 – Business Law 218 Part I of Goods Act 1958 Protection for buyers under this old Part of the Goods Act became ineffective, because sellers could – and therefore usually did – avoid these implied terms by getting buyers to sign away their rights. See LEstrange v Graucob Ltd ( 1934 ) as an example of this trend.

219 8 June 2014 BLO1105 – Business Law 219 Trade Practices Act 1974 A Commonwealth Act, the TPA restored to buyers the old Goods Act protections. They could not be avoided as previously. But the TPA applied only to corporations (not natural persons), and only to consumer sales.

220 8 June 2014 BLO1105 – Business Law 220 Goods Act Part IV Because of the gaps in the TPA, the Victorian Parliament passed the Goods (Sales & Leases) Act 1981, which added Part IV to the old Goods Act. Sales and leases to consumers in Victoria are covered by this Act. Dealers and wholesalers can look after themselves.

221 8 June 2014 BLO1105 – Business Law 221 Fair Trading Act 1999 (Vic) In 2003 the Victorian Government decided to move the statutory implied terms from Part IV of the Goods Act 1958 into the Fair Trading Act It did so by enacting new Parts 2A and 2B of the FTA, being sections 32A to 32 ZD. Part IV of the Goods Act has been repealed.

222 8 June 2014 BLO1105 – Business Law 222 Avoidance of Terms As with the TPA, the new part of the Victorian goods Act does not permit a seller to escape these reinstated protections. So long as the buyer is a consumer, and the criteria for application of the Acts are met, the seller cannot avoid the implied terms (as they once could).

223 8 June 2014 BLO1105 – Business Law 223 Capacity to Contract Some persons do not have the ability (the legal capacity) to contract. These include minors, mentally ill persons, persons badly affected by alcohol or drugs, bankrupts, foreign nationals (in time of war), prisoners. In some cases, such as bankrupts, capacity is limited.

224 8 June 2014 BLO1105 – Business Law 224 Married Women Under the common law, married women lacked the capacity to contract, as we saw in Eastwood v Kenyon. This has now been overcome by statute. The most common problem area is with minors (persons under the age of 18).

225 8 June 2014 BLO1105 – Business Law 225 Legal Minors The general rule is that a minor does not have the capacity to make a contract. The exceptions are A contract for the purchase ofnecessaries, and A contract of employment for the benefit of the minor, such as an apprenticeship.

226 8 June 2014 BLO1105 – Business Law 226 Necessaries A necessary is something without which the minor cannot exist, such as basic food, shelter, clothing, medical and like services in an emergency. Clearly, a luxury item is not covered. See Nash v Inman ( 1908 )

227 8 June 2014 BLO1105 – Business Law 227 Necessaries (cont) Necessaries were summarized in Chapple v Cooper (1844), where the station in life concept was evident. More modern examples appear in Scarborough v Sturzaker (1905), and in Bojczuk v Gregorcewicz (1961). Some statutes affect minors contracts.

228 8 June 2014 BLO1105 – Business Law 228 Mistake If a mistake occurs during contract formation, the court may declare the contract void for (because of the) mistake. If so, there was never a contract at all, since the parties never reached agreement in the first place. The contract is void ab initio, or a nullity from the beginning.

229 8 June 2014 BLO1105 – Business Law 229 Consequence of Voidness It is vital to understand that, when a finding of mistake occurs, the contract is void. It follows that there can be no legal outcomes resulting from the contract. For example, if the contract was intended to transfer ownership from A to B, such transfer cannot be achieved!

230 8 June 2014 BLO1105 – Business Law 230 Categories of Mistake Mistake is not easily proved, since it allows a convenient escape route from a contract. But three categories of mistake exist, namely Common mistake; Mutual mistake; and Unilateral mistake.

231 8 June 2014 BLO1105 – Business Law 231 Common Mistake Cases usually relate to non-existence of the subject matter. See Pritchard v Merchants & Tradesmans Mutual Life Ass. Society (1858) But if one party effectively guarantees the existence of the subject matter, he cannot argue mistake. See McRae v CDC (1951)

232 8 June 2014 BLO1105 – Business Law 232 Mutual Mistake This occurs when the parties are at cross- purposes, as where A owns cars 1 and 2. B offers to buy car 1 from A, whereas A thinks that B is offering to buy car 2. This type of confusion arose in Raffles v Wichelhaus (1864), when cargo was described as Ex Peerless from Bombay

233 8 June 2014 BLO1105 – Business Law 233 Unilateral Mistake This is one-sided mistake. One party is mistaken, and the other knows (or ought reasonably to know) that he is mistaken. Note actual and constructive knowledge. Usually unilateral mistake applies to The subject-matter of the contract, or The identity of the other party.

234 8 June 2014 BLO1105 – Business Law 234 Payment by Personal Cheque These cases often arise when goods are sold and paid for by personal (as distinct from bank) cheque. To accept a personal cheque in exchange for goods is to give credit to the buyer. Can the seller argue mistake (as to identity), and have the contract declared void?

235 8 June 2014 BLO1105 – Business Law 235 Mistaken Identity If the contract IS declared void, it means that it was void from the beginning, and it cannot achieve legal outcomes, such as transferring ownership. Therefore, the goods sold have not been sold at all, and legal ownership of the goods never left the seller. He gets them back!

236 8 June 2014 BLO1105 – Business Law 236 Mistake v Misrepresentation There is a competing argument, namely that the buyer has fraudulently misrepresented his identity. Mistake makes a contract VOID. Misrepresentation makes a contract VOIDABLE. This distinction is vitally important! The cases explain why it is important.

237 8 June 2014 BLO1105 – Business Law 237 Phillips v Brooks Ltd. (1919) P sold goods to X, believing him to be Y, and accepted a cheque drawn on Ys account. The cheque was forged, and bounced.X quickly pawned the goods to BL. P sued BL for the goods, arguing mistake. Held. You cannot argue mistake when dealingface-to-face.

238 8 June 2014 BLO1105 – Business Law 238 Phillips v Brooks (cont) P could have proved misrepresentation of identity by X, and this would have made the contract voidable (capable of being avoided at the option of P). But P did not take any steps to avoid it before X resold the goods to BL. Therefore BL keeps the goods. P can only sue X.

239 8 June 2014 BLO1105 – Business Law 239 Avoiding the Contract How do you avoid a contract that is voidable because of a misrepresentation? This can be done by physical cancellation of the contract, or by endeavour. See Car & Universal Finance Co v Caldwell (1965). I t was held that a contract is avoided if all reasonable attempts are made.

240 8 June 2014 BLO1105 – Business Law 240 Ingram v Little (1961) This case appeared to contradict the precedent of Phillips v Brooks. Two ladies sold their car to a trickster, who said he wasHutchinson. He wasnt. They took a cheque in payment. Later they found their car in Littles used car yard. The court held they were mistaken, and they got their car back.

241 8 June 2014 BLO1105 – Business Law 241 Lewis v Averay (1971) Lewis sold his car to Green, another trickster who had Greens cheque book and proof of identification. He later found the car which had been bought from G by Averay, and sued for its return. Lord Denning strongly criticised Ingram v Little, and reinstated Phillips v Brooks.

242 8 June 2014 BLO1105 – Business Law 242 Bona Fide Purchaser Note that the third party who buys the goods must be a genuine buyer, paying fair value for the goods, and being unaware of any defect in the title. If he is not, he does not get good title as against the true owner. A price comparison is a good guide.

243 8 June 2014 BLO1105 – Business Law 243 Conclusion In cases of this type, the better view is that the third party – if genuine – will obtain and retain good title to the goods. The original owner therefore loses title, and is left with a doubtful remedy, namely an action to recover his loss from the trickster.

244 8 June 2014 BLO1105 – Business Law 244 Non Est Factum Remember the defence of non est factum, which is really based on unilateral mistake as to the nature of the document signed. The cases of Gallie v Lee and Petelin v Cullen, previously discussed in exclusion clauses, apply. You must prove both mistake and an absence of carelessness.

245 8 June 2014 BLO1105 – Business Law 245 Misrepresentation If a false statement cannot be proved to be a term, the misrepresentation possibility should be explored. This is a false statement made during negotiations, that induces the person hearing it to enter into the contract. The essentials are fact and inducement.

246 8 June 2014 BLO1105 – Business Law 246 Types of Misrepresentation There are three distinct categories of misrepresentation, namely Innocent (unintended deception); Fraudulent (intended deception); and Negligent (breach of a duty of care). The remedies vary for the different types.

247 8 June 2014 BLO1105 – Business Law 247 Statement of Fact The offending statement must be of a factual nature – not a statement of law or an expression of opinion. Note that an apparent statement of a factual kind might in some circumstances be treated as only an expression of opinion. See Bissett v Wilkinson (1927)

248 8 June 2014 BLO1105 – Business Law 248 The Converse Result Similarly, what appears to be an expression of opinion might in some cases be treated by the court as a statement of fact. This is specially so if the person making the statement knows exclusively all of the facts upon which the apparent opinion is based. See Smith v Land & House Property Corp Ltd.

249 8 June 2014 BLO1105 – Business Law 249 Silence as a Response Generally speaking, silence (as a response to a question) will not be misrepresentation. Exceptions apply, including Utmost good faith contracts; Special relationships; If silence distorts the truth; and If a statute requires disclosure.

250 8 June 2014 BLO1105 – Business Law 250 Utmost Good Faith Some types of contract are governed by the requirement that the parties are bound to apply the utmost good faith in their dealings. Insurance contracts require full disclosure in proposals by the customer because of the imbalance of knowledge.

251 8 June 2014 BLO1105 – Business Law 251 Special Relationships When a special relationship exists between the parties, the dominant party must make full disclosure when contracting with the subservient or weaker party. Examples include doctor/patient, solicitor/client, parent/child, teacher/pupil, banker/customer, director/shareholder etc. There is a fiduciary duty owed.

252 8 June 2014 BLO1105 – Business Law 252 Distortion of the Truth Sometimes, silence can distort the truth, if only part of the story is told. In such case, silence is not acceptable. See R v Kylsant (1932) to illustrate. Directors statement in a prospectus that profits had been paid for 6 years did not tell the full story.

253 8 June 2014 BLO1105 – Business Law 253 Statutory Requirements Some Acts of Parliament require that certain information be disclosed, such as the Sale of Land Act 1962 (Vic). The vendor of real estate must supply detailed information to prospective buyers before the contract is signed. Similar rules apply to sale of a business.

254 8 June 2014 BLO1105 – Business Law 254 Inducement is Required The second requirement for misrepresentation is that the innocent party must be induced by the false statement to enter into the contract. If he isnt induced, no harm results. See Attwood v Small (1838) as an example. The same would apply to an RACV check.

255 8 June 2014 BLO1105 – Business Law 255 Misrepresentations Classified. The false statement may be Innocent (unintended); Fraudulent (intended); or Negligent (carelessly given). An innocent misrepresentation is relatively easy to prove, requiring only proof of a false statement that induced the contract.

256 8 June 2014 BLO1105 – Business Law 256 Fraudulent Misrepresentation More difficult to prove, this requires the additional component that the person knew that the statement was false, or that he couldnt care less whether it was true or false. See Derry v Peek (1889) for discussion on the elements of fraudulent misrepresentation.

257 8 June 2014 BLO1105 – Business Law 257 The Remedies In all cases of misrepresentation, rescission is the appropriate remedy. In the case of fraudulent and negligent misrepresentation, damages are also available. The problem with rescission is that – although in theory a good remedy – the right to rescind is easily compromised or lost.

258 8 June 2014 BLO1105 – Business Law 258 Limitations on Rescission Rescission will not be awarded if there is Unreasonable delay; Affirmation of the contract; Intervention of third parties; Change or destruction of subject-matter; The rule in Seddons Case applicable.

259 8 June 2014 BLO1105 – Business Law 259 Effect of Losing Rescission When the right to rescind is lost for one or more of the foregoing reasons, this places the victim of an innocent misrepresentation in an invidious position. He cannot get damages, since they are not available for innocent misrepresentation. He has lost the right to rescind. He has no remedy at all!

260 8 June 2014 BLO1105 – Business Law 260 Possible Solutions The options are 1. Try to prove it is fraudulent or negligent. 2. If an oral contract, try to prove it is a term, as was tried in Oscar Chess v Williams. 3. If a written contract, try to include it as a term by arguing the 3 rd exception to the PER, or arguing collateral contract.

261 8 June 2014 BLO1105 – Business Law 261 Continued While these solutions are possible, we have seen that they have their difficulties. Proving fraud is not easy, if denied. The 3 rd exception to the Parol Evidence Rule has limiting factors, as does the collateral contract argument. There is thus no simple solution available.

262 8 June 2014 BLO1105 – Business Law 262 Negligent Misrepresentation Negligence is breach of a duty of care. There must therefore be a case where the duty is owed and breached. This can occur in a special relationship, or if an opinion is given carelessly by an expert. As an example, see Esso Petroleum Ltd v Mardon (1976).

263 8 June 2014 BLO1105 – Business Law 263 Statutory Misrepresentation Business operators are now subject to legislation in this area. Relevant Acts are Trade Practices Act 1974 (Cth); and Fair Trading Act 1999 (Vic). Misrepresentation occurs if a misleading or deceptive statement is made in the conduct of a business. Note s.52 TPA.

264 8 June 2014 BLO1105 – Business Law 264 Duress, Undue Influence & Unconscionable Conduct Here we examine 3 types of behaviour or conduct occasionally apparent when contracts are being negotiated. If occurring, the contract becomes voidable at the option of the victim of such activity. This makes sense, because agreement has not been freely and voluntarily given.

265 8 June 2014 BLO1105 – Business Law 265 Duress Duress is the use of violence, or the threat of violence to a person, his goods or his assets in order to force him into a contract. The victim of such contract can – at his option – have the contract set aside (avoided) because of the duress. See Barton v Armstrong (1974)

266 8 June 2014 BLO1105 – Business Law 266 Duress (continued) Historically, physical violence or threats to harm the person or immediate family was required. Today, threats of economic damage will suffice. See Universe Tankships of Monrovia v International Transport workers Federation (1982)

267 8 June 2014 BLO1105 – Business Law 267 Undue Influence Less obvious, undue influence occurs when the free will of a party is compromised by a person in a dominant situation. Usually this involves a special relationship between the two parties. In such cases, the courts presume that the stronger party has unduly influenced the weaker.

268 8 June 2014 BLO1105 – Business Law 268 Undue Influence (cont) The onus is then upon the dominant party to prove that the weaker party was not unduly influenced. If he fails, the contract is voidable at the option of the victim. See Lloyds Bank Ltd v Bundy (1974), and Tate v Williamson (1866)

269 8 June 2014 BLO1105 – Business Law 269 Unconscionable Conduct This means conduct that offends good conscience. Relatively unknown under the common law, due to the freedom of contract doctrine, it is now a recognized reason to have a contract set aside. There is usually an inequality of bargaining power, and the weaker is disadvantaged.

270 8 June 2014 BLO1105 – Business Law 270 ….continued Such inequality can result from ignorance, illness, pressing need, financial desperation. See Clifford Davis Management Ltd v WEA Records Ltd. (1975 ), where advantage was taken of the business inexperience of musicians and composers to negotiate grossly unfair management terms. The contract was set aside.

271 8 June 2014 BLO1105 – Business Law 271 Australian Cases Apart from the case of Waltons v Maher, important Australian cases on unconscionability include Commercial Bank of Australia Ltd v Amadio (1983 ), and Nolan v Westpac Banking Corporation Ltd (1989)

272 8 June 2014 BLO1105 – Business Law 272 Parliamentary Intervention This is another area where Statutes have been passed to strengthen the common law. Conduct in business that is harsh and oppressive is now outlawed by the TPA and the Fair Trading Act (Vic). The courts will consider bargaining strength, conditions imposed, clarity of documents, unfair tactics and so on.

273 8 June 2014 BLO1105 – Business Law 273 Discharge of Contract A contract can be discharged (terminated) by 1. Performance; 2. Agreement; 3. A term in the contract; 4. Breach of a condition in the contract; 5. Operation of law; and 6. Frustration.

274 8 June 2014 BLO1105 – Business Law 274 Performance The most common method of discharge, as most contracts are formed and performed without problems. Note that part-performance is not acceptable. See Cutter v Powell (1795) Performance must exactly comply with the terms of the contract. See Moore v Landauer (1921)

275 8 June 2014 BLO1105 – Business Law 275 Part Performance Exceptions The total ban on part performance created hardship, and exceptions have been allowed when The contract is divisible into parts; and When the contract has been substantially (almost totally) performed. Contrast divisible and non-divisible contracts.

276 8 June 2014 BLO1105 – Business Law 276 Quantum Meruit If a contract has been partly performed, and there is a reason for not completing it, the court will use the quantum meruit rule to decide how much the contractor should be paid. This also applies if there is no agreement as to price. A reasonable price will be paid for a reasonable quality job.

277 8 June 2014 BLO1105 – Business Law 277 Time of Completion. The term setting the date for completion of the contract is usually only a warranty. It can be converted to a condition by saying time shall be of the essence in this contract. If this is done, any late completion is breach of condition, not breach of warranty.

278 8 June 2014 BLO1105 – Business Law 278 Discharge by Agreement A contract is created by agreement. Logically, it can be discharged in the same way. This can be done by a term in the original contract, or by a separate agreement. If it is done by a separate agreement, remember that there must be consideration, or the agreement will not be enforceable.

279 8 June 2014 BLO1105 – Business Law 279 Discharge by a Term This is a reference to a condition subsequent, which we have discussed previously. It is a term referring to some event which – when it occurs – will bring the contract to an end.

280 8 June 2014 BLO1105 – Business Law 280 Discharge by Law The possibilities here are: - Merger of two contracts, when the smaller contract merges with the larger one; Bankruptcy, when the Act prevents the continuation of some contracts; and Document alteration in a material way.

281 8 June 2014 BLO1105 – Business Law 281 Discharge by Breach This refers to breach of condition, entitling repudiation, as distinct from breach of warranty, which entitles only damages. Note the terms: - Repudiatory breach, and Anticipatory breach.

282 8 June 2014 BLO1105 – Business Law 282 Discharge by Frustration An outside, supervening event, might make performance of the contract impossible. Prevention of performance by an act of God, natural disaster, force majeur, riot, civil commotion, might discharge the contract. The event must be beyond the control of the parties, and not anticipated by them

283 8 June 2014 BLO1105 – Business Law 283 Historical Background Historically, courts would not entertain this argument, saying that the parties should have protected themselves by terms in the contract. In theory, that is alright, but how do you foresee the unforeseeable? A contract covering every possibility would be too heavy to carry into court.

284 8 June 2014 BLO1105 – Business Law 284 Acceptance of Frustration In Taylor v Caldwell (1863), the frustration argument was accepted when a building hired to stage concerts was destroyed by fire the night before the first concert. The promoters action to recover expenses from the owner failed, since the contract was discharged by the frustrating event (in this case, the fire).

285 8 June 2014 BLO1105 – Business Law 285 Proving Frustration In National Carriers Ltd v Panalpina (Northern) Ltd (1981) it was held the requirements are 1. A supervening event; 2. Not caused by either party; 3. Not contemplated by the contract; 4. Changes the nature of the contract; and 5. Causes resulting injustice to the parties.

286 8 June 2014 BLO1105 – Business Law 286 Examples of Frustration Destruction of the subject-matter, as in Taylor v Caldwell; Illegality of purpose, as in Esposito v Bowden; Circumstances ceasing to exist, as in Horlock v Beal; Cancellation of event, as in Krell v Henry;

287 8 June 2014 BLO1105 – Business Law 287 Examples (continued) Change of government policy, as in MWB v Dick, Kerr & Co.; Event making performance impossible, as in Wong Lai Ying v Chinachem Investment Co.; Event causing unreasonable delay, as in Bank Line v Capel

288 8 June 2014 BLO1105 – Business Law 288 Limitation on Frustration Note that frustration will not apply if it still possible to perform the contract. This applies even though it might be much more onerous and/or less profitable to do so. See the Tsakiroglou Case, arising out of the closure of the Suez Canal in wartime. The frustration argument failed in this case.

289 8 June 2014 BLO1105 – Business Law 289 Codelfa Constructions Case This Australian case in 1982 against the NSW State Rail Authority shows a more flexible approach by the High Court to the frustration argument. Codelfa was able to have the contract rewritten because of the intervention by residents to limit the hours of work.

290 8 June 2014 BLO1105 – Business Law 290 Frustrated Contracts Act Under the common law, frustration does not operate retrospectively, so that prepayments for work not done at time of frustration cannot be recovered. The Act changes this, and the contractor may now only retain money paid for work already done at time of frustration.

291 8 June 2014 BLO1105 – Business Law 291 Remedies for Breach (of contract) Before we discuss damages – the traditional and main remedy for breach of contract - we need to examine 2 equitable remedies, namely: - Specific performance; and Injunction (restraining order).

292 8 June 2014 BLO1105 – Business Law 292 Specific Performance If a legal contract exists between A and B, and B refuses (for no valid reason) to perform it, A can seek an order for specific performance of the contract by B. If satisfied (that the contract exists, is valid, and Bs refusal to perform cannot be legally justified), the court will order B to perform his contractual obligations.

293 8 June 2014 BLO1105 – Business Law 293 Continued……. We thus have a strategy to compel performance of a contract when refusal occurs. This covers cases, such as a property purchase, where damages might not properly compensate. An assertive threat to take this step (seek specific performance) usually works.

294 8 June 2014 BLO1105 – Business Law 294 Injunction In contrast to specific performance, which is a positive remedy, the injunction is a negative remedy. It prevents or restrains a person from taking action that will breach the contract or will damage property that is the subject-matter of the contract.

295 8 June 2014 BLO1105 – Business Law 295 Injunction Risks By their nature, injunctions are often sought and obtained ex parte, in the absence of the party restrained. The applicant must give undertakings to the court that he will pay costs and damages if it emerges that he has improperly sought and obtained the injunction. This is a significant deterrent.

296 8 June 2014 BLO1105 – Business Law 296 Damages The courts objective in awarding damages is to compensate the victim (of the breach of contract), not to punish or penalise the one who breached the contract. Punitive damages have no relevance to contract law, although applied in some other areas, such as tort.

297 8 June 2014 BLO1105 – Business Law 297 Two Aspects of Damages Two questions arise for determination. 1. Do the losses claimed result from the contract breach? This is the question ofremoteness of damage. 2. How much damages do we award? This is the question of the measure of damages.

298 8 June 2014 BLO1105 – Business Law 298 Remoteness of Damages Not all damages that appear to result from a breach of contract can necessarily be claimed. They may be too remote from (too far removed from) the breach. There has to be a causal connection or an identifiable link between the breach and the loss claimed to result from it.

299 8 June 2014 BLO1105 – Business Law 299 Continued ……… Consider the textbook examples of bizarre cases. You could argue that these losses could be claimed, specially if you apply the but for test. In Leisbosch Dredger v SS Edison (1933 ), Lord Wright said we have to draw the line.

300 8 June 2014 BLO1105 – Business Law 300 Hadley v Baxendale (1854) Still the leading case on remoteness, involved a cartage contract under which B agreed to transport Hs broken crankshaft from his flour mill to the manufacturer to use as a pattern for a replacement shaft. B was also to transport the new shaft, when made, back to H.

301 8 June 2014 BLO1105 – Business Law 301 Continued ……… B took much too long to perform the contract, and H claimed damages for loss of production in his mill. It was held that B is liable only for losses that he can foresee. He can foresee losses that are either A natural consequence of his breach, or Losses he has been told about by H.

302 8 June 2014 BLO1105 – Business Law 302 Foreseeable Losses Any losses falling outside these two categories were not foreseeable by B when the contract was formed, and he cannot be liable to pay them. H could have made the production losses foreseeable by B simply by telling him that the broken crankshaft was his ONLY crankshaft.

303 8 June 2014 BLO1105 – Business Law 303 Continued …….. Losses are too remote from the breach if they are not foreseeable by the contracting party. They are foreseeable if they are either Natural consequences (everyone knows, or should know, they will result!), or Consequences that the contractor has been told about when the contract is made.

304 8 June 2014 BLO1105 – Business Law 304 The Practical Solution The solution is to make sure that you tell your contractor what the consequences of any breach by him will be, and he will be liable for resultant losses. But, in business, people often are too secretive as they do not want others to know their commercial secrets.

305 8 June 2014 BLO1105 – Business Law 305 Victoria Laundry Case The decision in Hadley v Baxendale was followed and endorsed in Victoria Laundry (Windsor) Ltd v Newman Industries Ltd (1949). Again, the defendant was liable for losses they could foresee, but not for those that they could not foresee.

306 8 June 2014 BLO1105 – Business Law 306 Interest on Lost Capital If capital is lost and successfully claimed as damages, the High Court held in Hungerfords v Walker (1989), that the plaintiff could also claim interest on the capital for the duration of the loss. Interest paid on lost capital, or lost on investing it, is a natural consequence of the breach causing the loss of capital.

307 8 June 2014 BLO1105 – Business Law 307 Measure of Damages Damages can be special, general, nominal or punitive. As noted, the latter are not given in contract disputes. Restoration – not punishment – is the aim. Damages are measured by the expectation loss method if applicable, and by thereliance loss method if not.

308 8 June 2014 BLO1105 – Business Law 308 Amann Aviation Case In Commonwealth v Amann Aviation Pty Ltd (1992), an award of $410,000 under the expectation loss method was increased on appeal to the Full court of the Federal Court to $6.6 million by using the reliance loss method. The High Court upheld this increase on a further appeal.

309 8 June 2014 BLO1105 – Business Law 309 Mitigation of Loss All plaintiffs are required to keep losses to a minimum, and to prevent unnecessary escalation of loss. This applies to contract and other areas of law. It is tempting to allow the losses to mount up, but this can work against the claimant. Reasonable steps to mitigate are required.

310 8 June 2014 BLO1105 – Business Law 310 Examples of Mitigation Examples include The wrongfully dismissed employee must take reasonable steps to find another job; The landlord must take reasonable steps to find a replacement tenant if the tenant leaves before end of lease. They might not succeed, but they must try!

311 8 June 2014 BLO1105 – Business Law 311 Jarvis v Swan Tours Ltd (1972) Tourism students should note that Jarvis won a claim for damages for injured feelings and emotional upset against a tour operator who breached a contract with him. This was the first recorded case of this happening in a contract case (cf tort), and was a typical Lord Denning innovation.


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