Welcome to Business Law

Welcome to Business Law
BLO1105 – Business Law Welcome to Business Law 1 April 2017 BLO1105 – Business Law

LECTURERS CITY FLINDERS FOOTSCRAY PARK Adv Andy Schmulow
(Subject coordinator) Dr Daud Hassan (Senior Lecturer: Victoria Law School) FOOTSCRAY PARK Mr Gerry Box (Co-author: Parker and Box) 4/1/2017 BLO1105 – Business Law

Contact Details: Andy Schmulow
Flinders Street Campus Room 1030 Phone 1 April 2017 BLO1105 – Business Law

Contact Details: Dr Daud Hassan
Queen Street Campus Room 1.05 Phone 4/1/2017 BLO1105 – Business Law

Contact Details: Gerry Box
Footscray Park Campus Room Phone 4/1/2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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 1 April 2017 BLO1105 – Business Law

WHAT HAPPENS IF YOU MISS MORE THAN 2?
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? 1 April 2017 BLO1105 – Business Law

You will receive a mark out of a possible 25.
Assignment You are required to submit during your scheduled tutorial in the week commencing Monday 27th 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. 1 April 2017 BLO1105 – Business Law

The final examination is a 3 hour exam, and is “Open 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% 1 April 2017 BLO1105 – Business Law

You must also attend One tutorial of one hour’s duration each week.
Teaching Method Two hours of lectures each week. Check timetable details of lectures Tutorials. You must also attend One tutorial of one hour’s duration each week. TUTORIALS ARE COMPULSORY YOU MAY NOT MISS MORE THAN TWO (2). IF YOU DO YOU AUTMOTAICALLY FAIL Lecture Streams may be swapped at will. Tutorial changing is more difficult. There are 1,000 students enrolled in this subject on this Campus, 950 of whom want to attend the same tutorial. You will have been allocated a tutorial group, and changing is difficult, but will be done if you have a clash or other compelling reason. Lifestyle preferences are not a compelling reason. Tutorials are conducted virtually all day every day except Monday. If you wish to change tutorial groups, contact me to discuss. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

Materials (Continued)
Textbooks. The officially prescribed texts are “An Introduction to the Law of Contract” by Stephen Graw, 5th ed., and “Business Law for Business Students”, Parker & Box,2nd 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 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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” 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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 19th Century until late in the 20th Century Many English concepts survive today. 1 April 2017 BLO1105 – Business Law

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 1 April 2017 BLO1105 – Business Law

Sources of Law in Australia
Primary Sources Legislation, and Precedent Secondary Sources Commercial Custom Legal textbooks and journals Law Reform Commission Reports 1 April 2017 BLO1105 – Business Law

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 1 April 2017 BLO1105 – Business Law

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. Stress the transition from the predominance of the courts as law-makers and the relatively low volume of legislation to the present situation of having the courts operate mainly as interpreters of legislation. 1 April 2017 BLO1105 – Business Law

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 the “common law”. (Cf “Legislation”) 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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 1 April 2017 BLO1105 – Business Law

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 1 April 2017 BLO1105 – Business Law

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”. 1 April 2017 BLO1105 – Business Law

The Australian Constitution
This is the “charter” for operation of our “federal” 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. 1 April 2017 BLO1105 – Business Law

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 the “separation of powers”. 1 April 2017 BLO1105 – Business Law

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 1 April 2017 BLO1105 – Business Law

The State Court System The State Courts are
The Court of Appeal (the “Full Court”); The Supreme Court The County Court The Magistrates Court. Various Tribunals, including VCAT 1 April 2017 BLO1105 – Business Law

The Federal Court System
The Federal Courts are The High Court of Australia The Family Court The Federal Court The Federal Magistrates Court The Federal & Family Courts, created in 1976, rank equally in importance. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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 Given that Parliamentary Counsel are skilled at and experienced in wording (drafting) new legislation for the politicians, you would think that they would get it right. The human experience, however, is that courts have trouble with the interpretation of statutes. It is said anecdotally that appeal courts spend 80% of their time engaged in interpretation of legislation. 1 April 2017 BLO1105 – Business Law

Common Law Rules (of interpretation)
The Courts developed three main Rules to assist in interpreting Acts:- The Literal Rule, The Golden Rule, and The Mischief Rule. Many “Maxims” (rules of lesser importance) were also developed by the Courts. Explain the three rules, giving case examples to highlight. Bedford’s case is a good one on absurd outcomes from the Literal rule, requiring the Golden Rule to be applied. There are other cases, Lee v Knapp for exaple about failing to stop after an accident. The mischief rule was applied in the “soliciting for prostitution in a street” case, when she argued that she was not in the street because she was on a balcony in the airspace above it. The maxims should be mentioned – certainly the “ejusdem generis” maxim at least. 1 April 2017 BLO1105 – Business Law

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”. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

The Rules of Equity Different in origin from the “common law”, equity developed in the “King’s 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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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”. 1 April 2017 BLO1105 – Business Law

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 1 April 2017 BLO1105 – Business Law

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.) 1 April 2017 BLO1105 – Business Law

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 Club’s rules in the conduct of yacht races. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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). 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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”? 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

Although not perfect, it is better than subjective testing.
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. 1 April 2017 BLO1105 – Business Law

Summary of Testing (for Intention)
We can solve any problem on this question (“whether intention exists”) by following this strategy:- Applying the presumptions as above; and Testing the question objectively, not subjectively. We will look at some relevant cases. 1 April 2017 BLO1105 – Business Law

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 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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) 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

Wakeling v Ripley W’s married sister migrated to Australia from UK (at W’s 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. 1 April 2017 BLO1105 – Business Law

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) 1 April 2017 BLO1105 – Business Law

Commercial (business) Agreements
The presumption of intention applies here. Any agreement made “at arm’s 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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

Edwards v Skyways Ltd An agreement between Defendant and E’s 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). 1 April 2017 BLO1105 – Business Law

Express Exclusion (of intention)
Can the (contracting) parties exclude intention by agreement? This was achieved by an “exclusion clause” in Jones v Vernon’s 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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

“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. 1 April 2017 BLO1105 – Business Law

“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? 1 April 2017 BLO1105 – Business Law

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) 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

Summary of Intention Problems involving intention can be solved by
Discussing and applying the two presumptions, using cases to illustrate the distinction between them, and Remembering to use an objective, as distinct from a subjective, testing mechanism. 1 April 2017 BLO1105 – Business Law

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” 1 April 2017 BLO1105 – Business Law

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 1 April 2017 BLO1105 – Business Law

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 an “invitation to negotiate or deal”. Consider Display of goods for sale Distributing brochures or circulars, and Advertising goods for sale. 1 April 2017 BLO1105 – Business Law

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 1 April 2017 BLO1105 – Business Law

“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 of “offering drugs for sale otherwise than under the supervision of a qualified chemist”. 1 April 2017 BLO1105 – Business Law

Boots Case (Cont.) B’s 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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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 1 April 2017 BLO1105 – Business Law

Exceptions to the Rule The general rule is that an advert will not be an offer. There are two exceptions:- 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. If the advert offers a reward to the reader 1 April 2017 BLO1105 – Business Law

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.) 1 April 2017 BLO1105 – Business Law

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) 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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 1 April 2017 BLO1105 – Business Law

Offer + Acceptance = Agreement
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. 1 April 2017 BLO1105 – Business Law

The Four Rules of Acceptance
It must be clear and undoubted. The correct method must be used. The acceptance must be given with knowledge of, and in reliance upon, the offer. Acceptance must be communicated. 1 April 2017 BLO1105 – Business Law

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 a “counter-offer”. This replaces the first offer with a second one. Less obviously, it destroys the first offer. 1 April 2017 BLO1105 – Business Law

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”. 1 April 2017 BLO1105 – Business Law

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 C’s solicitors would prepare. The sale note contained a clause that C insisted be inserted by the agent. 1 April 2017 BLO1105 – Business Law

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 couldn’t get the loan he needed to buy the house. Is the Sale Note a binding, legal contract? 1 April 2017 BLO1105 – Business Law

Masters v Cameron (Cont)
Was C’s acceptance of M’s 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. There was obvious scope for inclusion of additional terms by Cameron’s solicitors. The words used in the Sale Note were not capable of any other interpretation. It does not matter whether new terms were added or not. The fact is that they could be added, which suggests that C was not wanting to be finally bound by any contract unless his solicitors were happy. The irony of this case is that it was C’s caution that enabled M to escape the “contract” and get a refund of his deposit. Note the three categories of cases that the High Court listed. The third and last category were cases (like this one) where the facts indicated that at least one party did not wish to be bound to the deal unless and until the replacement contract was prepared and signed by both parties. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

Rule Two Sub-rules. An exclusive method must be used
A nominated method, or any quicker one, may be used If no method nominated, the same method (as the offeror used) may be used If communication is instantaneous, acceptance is effective when received. The Postal rule of acceptance. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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 1 April 2017 BLO1105 – Business Law

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 1 April 2017 BLO1105 – Business Law

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 19th century can be explained only in the context of the Law of Agency. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

Rule Four of Acceptance
The acceptance must be communicated. This can be express (stated or written), or implied from the offeree’s 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 1 April 2017 BLO1105 – Business Law

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 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

Counter-offers The counter-offer does two things
It substitutes a new offer for the offer that it replaces. It legally destroys the previous (replaced) offer. The offeree cannot revive the replaced offer, but the offeror may. See Hyde v Wrench ER 132 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

Revocation of Offer 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 1 April 2017 BLO1105 – Business Law

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 1 April 2017 BLO1105 – Business Law

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) 1 April 2017 BLO1105 – Business Law

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 a “reasonable time”. See Ramsgate Victoria Hotel v Montefiore (1888). This is a question of fact in each case. It could be seconds, or many years. Reference can be made to the contrast between an auction (where an offer may lost only for a few seconds), and a government reward offer, where it might last for 30 years. 1 April 2017 BLO1105 – Business Law

Consideration Consideration emerged in the English courts in the 16th Century to defeat fraudulent claims. Consideration is Peculiar to the “common law” systems; Traceable back to the 1500s. It means that a“gratuitous” promise will not be legally enforced. 1 April 2017 BLO1105 – Business Law

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”. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

The 6 rules of Consideration
Necessary in all “simple contracts”. Past consideration is “not good consideration”. It must come from the “promisee”, but need not go back to the “promisor”. Note: The promisor makes the promise, the promisee receives it. 1 April 2017 BLO1105 – Business Law

The 6 Rules of Consideration
It need not be “adequate”, or commercially realistic. It must not be too vague. It must be “sufficient” in the eyes of the law. These last three rules are inter-related. 1 April 2017 BLO1105 – Business Law

If it is a formal deed, consideration is not required.
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”. 1 April 2017 BLO1105 – Business Law

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) 1 April 2017 BLO1105 – Business Law

Possible Exception to Rule 2
In contracts of service, this rule might be overcome. See Lampleigh v Braithwait (1615), and Re Casey’s Patents, Stewart v Casey (1892) A promise to pay something is implied when the work is requested. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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 court’s concern. So long as some price is paid, the court will look no further. 1 April 2017 BLO1105 – Business Law

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? See Chappell & Co Ltd v Nestle Co Ltd (1960) 1 April 2017 BLO1105 – Business Law

Rule 5 of Consideration Consideration must be something of recognisable value – it must not be too vague. See White v Bluett (1853) Dunton v Dunton (1892), and Loftus v Roberts (1902) 1 April 2017 BLO1105 – Business Law

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) 1 April 2017 BLO1105 – Business Law

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) 1 April 2017 BLO1105 – Business Law

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) 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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 1 April 2017 BLO1105 – Business Law

The Rule in Pinnel’s 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. 1 April 2017 BLO1105 – Business Law

Foakes v Beer (1884) This case restated the rule in a different context. B’s 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. 1 April 2017 BLO1105 – Business Law

Their solution was to allow exceptions to the rule whenever possible.
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. 1 April 2017 BLO1105 – Business Law

Exceptions to the Rule (cont.)
Prepayment Payment by transferring a chattel Fraud on a “third party” Composition with creditors or settlement of a valid legal claim, and finally Promissory estoppel. We will examine each exception. 1 April 2017 BLO1105 – Business Law

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 creditor’s promise. 1 April 2017 BLO1105 – Business Law

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 1 April 2017 BLO1105 – Business Law

Fraud on a “Third Party”
If a person “outside the contract”, that is a “third 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) 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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 didn’t Dr.Foakes argue estoppel? 1 April 2017 BLO1105 – Business Law

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 Beer’s future intention. 1 April 2017 BLO1105 – Business Law

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, created “promissory estoppel”. 1 April 2017 BLO1105 – Business Law

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”. 1 April 2017 BLO1105 – Business Law

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) 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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) 1 April 2017 BLO1105 – Business Law

A “New” Development Consideration has evolved over 400 years of cases, the “standout” 20th 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. 1 April 2017 BLO1105 – Business Law

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 W’s conduct was “unconscionable” 1 April 2017 BLO1105 – Business Law

Waltons v Maher (cont) This is a radical departure from established precedent. You can get damages for a person’s 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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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? 1 April 2017 BLO1105 – Business Law

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) 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

If prepared by experts, it should!
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? 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

See British Crane Hire Corp. Ltd v Ipswich Plant Hire Ltd (1974)
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) 1 April 2017 BLO1105 – Business Law

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) 1 April 2017 BLO1105 – Business Law

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) 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

The court could not rescind this contract.
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. 1 April 2017 BLO1105 – Business Law

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 the “collateral contract” argument. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

What consideration exists?
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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. See overhead to illustrate. 1 April 2017 BLO1105 – Business Law

Interchangeable Arguments
The collateral contract argument is virtually interchangeable with the 3rd 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. 1 April 2017 BLO1105 – Business Law

Limiting Aspects Our Courts limit the argument, requiring
Consistency between the collateral promise and the terms of the main contract [See Hoyts Pty Ltd v Spencer (1919)] A strong motivational link between the promise and the signing of the main contract. [J.J Savage & Sons Ltd v Blakeney (1970)] 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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”. 1 April 2017 BLO1105 – Business Law

Importance of Terms The terms (clauses) of a contract fall into three possible categories. Conditions. Warranties. Intermediate (or “innominate”) terms. Correct classification controls the remedy for breach of each category. 1 April 2017 BLO1105 – Business Law

If you took this term away, the contract would be radically different.
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. 1 April 2017 BLO1105 – Business Law

A warranty is a term of lesser importance than a condition.
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 than “structural” or “fundamental” aspects of the transaction. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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). 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

That event must occur before performance is required.
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 buyer’s performance conditional upon obtaining the necessary loan. 1 April 2017 BLO1105 – Business Law

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) 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

Common Examples Such clauses are to be found, for example, in
Car park tickets; Dry cleaning dockets; Entertainment tickets; Airline tickets; Film processing dockets, and elsewhere. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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 L’Estrange v Graucob Ltd (1934). 1 April 2017 BLO1105 – Business Law

Possible Exceptions The only possible escape routes from this are
If the clause is misrepresented to the customer. See Curtis v Chemical Cleaning & Dyeing Co (1951). If the customer can successfully plead “non est factum”. 1 April 2017 BLO1105 – Business Law

See Gallie v Lee (1971), and contrast Petelin v Cullen (1975)
“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) 1 April 2017 BLO1105 – Business Law

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 customer’s rights. If not, it will not bind the customer. 1 April 2017 BLO1105 – Business Law

The Testing Process To test whether the clause has become part of the contract, the courts will apply two tests, namely The “nature of the document test”, and The “reasonable notice test”. These tests are applied sequentially in the order stated. 1 April 2017 BLO1105 – Business Law

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)? 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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) 1 April 2017 BLO1105 – Business Law

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 didn’t know it was there”, because the question is whether a reasonable person would know. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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] 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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 didn’t read it have constructive notice. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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) 1 April 2017 BLO1105 – Business Law

Terms will be implied only if it is necessary.
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. 1 April 2017 BLO1105 – Business Law

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 . 1 April 2017 BLO1105 – Business Law

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) 1 April 2017 BLO1105 – Business Law

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). 1 April 2017 BLO1105 – Business Law

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). 1 April 2017 BLO1105 – Business Law

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! 1 April 2017 BLO1105 – Business Law

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 L’Estrange v Graucob Ltd (1934) as an example of this trend. 1 April 2017 BLO1105 – Business Law

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”. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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 1999. 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. 1 April 2017 BLO1105 – Business Law

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). 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

This has now been overcome by statute.
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). 1 April 2017 BLO1105 – Business Law

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 of “necessaries”, and A contract of employment for the benefit of the minor, such as an apprenticeship. 1 April 2017 BLO1105 – Business Law

Clearly, a luxury item is not covered.
“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) 1 April 2017 BLO1105 – Business Law

Some statutes affect minor’s contracts.
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 minor’s contracts. 1 April 2017 BLO1105 – Business Law

The “contract” is “void ab initio”, or a nullity from the beginning.
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. 1 April 2017 BLO1105 – Business Law

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! 1 April 2017 BLO1105 – Business Law

But three categories of mistake exist, namely
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. 1 April 2017 BLO1105 – Business Law

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) 1 April 2017 BLO1105 – Business Law

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” 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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? 1 April 2017 BLO1105 – Business Law

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! 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

Phillips v Brooks Ltd. (1919)
P sold goods to X, believing him to be Y, and accepted a cheque drawn on Y’s 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 dealing “face-to-face”. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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). It was held that a contract is avoided if all reasonable attempts are made. 1 April 2017 BLO1105 – Business Law

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 was “Hutchinson”. He wasn’t. They took a cheque in payment. Later they found their car in Little’s used car yard. The court held they were mistaken, and they got their car back. 1 April 2017 BLO1105 – Business Law

Lewis v Averay (1971) Lewis sold his car to “Green”, another trickster who had Green’s 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. 1 April 2017 BLO1105 – Business Law

“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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

The essentials are fact and inducement.
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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

See Bissett v Wilkinson (1927)
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) 1 April 2017 BLO1105 – Business Law

See Smith v Land & House Property Corp Ltd.
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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

“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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. Director’s statement in a prospectus that profits had been paid for 6 years did not tell the full story. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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 isn’t induced, no harm results. See Attwood v Small (1838) as an example. The same would apply to an RACV check. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

Fraudulent Misrepresentation
More difficult to prove, this requires the additional component that the person knew that the statement was false, or that he couldn’t care less whether it was true or false. See Derry v Peek (1889) for discussion on the elements of fraudulent misrepresentation. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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 Seddon’s Case applicable. 1 April 2017 BLO1105 – Business Law

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! 1 April 2017 BLO1105 – Business Law

Possible Solutions The options are
Try to prove it is fraudulent or negligent. If an oral contract, try to prove it is a term, as was tried in Oscar Chess v Williams. If a written contract, try to include it as a term by arguing the 3rd exception to the PER, or arguing collateral contract. 1 April 2017 BLO1105 – Business Law

Continued While these solutions are possible, we have seen that they have their difficulties. Proving fraud is not easy, if denied. The 3rd exception to the Parol Evidence Rule has limiting factors, as does the collateral contract argument. There is thus no simple solution available. 1 April 2017 BLO1105 – Business Law

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). 1 April 2017 BLO1105 – Business Law

Statutory Misrepresentation
Business operators are now subject to legislation in this area. Relevant Acts are Trade Practices Act 1974 (C’th); 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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

See Barton v Armstrong (1974)
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) 1 April 2017 BLO1105 – Business Law

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) 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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 Lloyd’s Bank Ltd v Bundy (1974), and Tate v Williamson (1866) 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

….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. 1 April 2017 BLO1105 – Business Law

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) 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

Discharge of Contract A contract can be discharged (terminated) by
Performance; Agreement; A term in the contract; Breach of a condition in the contract; Operation of law; and Frustration. 1 April 2017 BLO1105 – Business Law

Note that part-performance is not acceptable.
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) 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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”. 1 April 2017 BLO1105 – Business Law

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 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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 promoter’s action to recover expenses from the owner failed, since the contract was discharged by the frustrating event (in this case, the fire). 1 April 2017 BLO1105 – Business Law

Proving Frustration A supervening event; Not caused by either party;
In National Carriers Ltd v Panalpina (Northern) Ltd (1981) it was held the requirements are A supervening event; Not caused by either party; Not contemplated by the contract; Changes the nature of the contract; and Causes resulting injustice to the parties. 1 April 2017 BLO1105 – Business Law

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; 1 April 2017 BLO1105 – Business Law

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 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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). 1 April 2017 BLO1105 – Business Law

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 B’s refusal to perform cannot be legally justified), the court will order B to perform his contractual obligations. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

Damages The court’s 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. 1 April 2017 BLO1105 – Business Law

Two Aspects of Damages Two questions arise for determination.
Do the losses claimed result from the contract breach? This is the question of “remoteness of damage”. How much damages do we award? This is the question of the “measure of damages”. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

Consider the textbook examples of bizarre cases.
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. 1 April 2017 BLO1105 – Business Law

Hadley v Baxendale (1854) Still the leading case on remoteness, involved a cartage contract under which B agreed to transport H’s 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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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 the “reliance loss” method if not. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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! 1 April 2017 BLO1105 – Business Law

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. 1 April 2017 BLO1105 – Business Law

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