1. THE LAW OF COMMERCIAL CONTRACT Contractual Theories

2. THE LAW OF COMMERCIAL CONTRACT “It is not enough to lambast the courts for reaching results that one intuitively finds absurd. One must burrow beneath the results to find the flaw in the theory or doctrine that produced the outcome. For, until we discover the theoretical or doctrinal error, we can never be completely sure that it is the result rather than our intuitions that are mistaken.” - Professor R.E. Barnett Cornell Law Review (July, 1992)

3. THE LAW OF COMMERCIAL CONTRACT The Promise Theory  One has an obligation to keep ones promises  The contract  The offer is a promise  The acceptance is a promise  The consideration is a promise (to give something of value)

4. THE LAW OF COMMERCIAL CONTRACT Freedom of Contract  Persons should not have contractual obligations imposed upon them without their consent  Persons should have the power to alter their legal relations by consent

5. THE LAW OF COMMERCIAL CONTRACT Freedom of Contract “If there is one thing more than another which public policy requires, it is that men of full age and competent understanding shall have the utmost liberty in contracting, and that their contracts, when entered into freely and voluntarily, shall be held sacred and shall be enforced by Courts of Justice” Printing and Numerical Registering Co v Sampson (1875) LR 19 Eq 462 per Sir George Jessel MR

6. THE LAW OF COMMERCIAL CONTRACT Promise Theory & Freedom of Contract  Creation of contract arises from voluntary acts of promisors rather than from third parties like the State  Contracts should be interpreted according to the terms of the promise rather than by imposing terms on the parties

7. THE LAW OF COMMERCIAL CONTRACT Promise Theory – Justification  Moral  Reliance Theory  Detrimental Reliance Theory  Efficacy Rationale

8. THE LAW OF COMMERCIAL CONTRACT Moral Justification  An individual is morally bound to keep their promise  To renege is to abuse a confidence he was free to invite or not and which he intentionally did invite

9. THE LAW OF COMMERCIAL CONTRACT Moral Justification – Problems  Involves the State in enforcing virtue  Commits courts to enforcing promissory commitments that the parties themselves may never have contemplated  If the moral behaviour of the promisee is relevant to the issue of enforcement then other behaviour that may argue against enforcement must be taken into account

10. THE LAW OF COMMERCIAL CONTRACT Promise Theory – Other Problems  How do you fill in the gaps in the promise  Implicitly authorises a variety of gap-filling rules based not on the parties explicit or implicit consent but on policy determined by the Courts and Parliament

11. THE LAW OF COMMERCIAL CONTRACT Reliance Theory  People are compelled to perform their promise because others have relied, or will rely, upon it. Detrimental Reliance Theory  People are compelled to perform their promise because others have acted to their detriment in reliance upon it.

12. THE LAW OF COMMERCIAL CONTRACT Reliance Theory – Problems  People are compensated for damage suffered as the result of action or inaction  Same as Tort  Undermines Freedom of Contract  People bound even when no intention to be bound  Difficult to set limits

13. THE LAW OF COMMERCIAL CONTRACT Efficacy Rationale  An exchange of promises is enforceable because both parties are made better of than before the contract  Advanced by economists

14. THE LAW OF COMMERCIAL CONTRACT Efficacy Rationale – Problems  Permits contract to go un-enforced when presumption of gain on pre-contract position is undermined by other factors such as:  Inequality in bargaining position  Disparities of information  Why assess benefit by reference to pre-contract status and not post-contract status?  Bad bargains would be unenforceable

15. THE LAW OF COMMERCIAL CONTRACT Consent Theory  Predates Promise Theory  Prevalent before 20 th Century  Have the parties manifested their intention to create or alter their legal relations i.e. to be legally bound  The existence of a bargain frequently corresponds to the existence of a manifest intention to be legally bound  So, in practice, there is little difference between promise theory and consent theory

16. THE LAW OF COMMERCIAL CONTRACT Modern Developments  Consumer Protection  Equity and Unconscionability  Estoppel  Economic Duress  Unconscionable conduct  Unjust enrichment

17. THE LAW OF COMMERCIAL CONTRACT Consumer Protection  ‘National Review of the Law of Negligence’ (the Ipp Review,2002) recommended a number of changes to the Trade Practices Act.  There was concern that the Act should not be used to circumvent state reforms to tort laws that addressed damages for injury or death.  Amendments to the TPA were recommended  The amendments have been opposed by the ACCC and legal groups

18. THE LAW OF COMMERCIAL CONTRACT Consumer Protection  Suppliers of recreational services to consumers can exclude their implied contractual liability for death or personal injury where the services are supplied without due care and skill.  This has been implemented via the Trade Practices Amendment (Liability for Recreational Services) Act - came into effect in December 2002.

19. THE LAW OF COMMERCIAL CONTRACT Consumer Protection  The IPP Report recommended that the TPA be amended so that:  individuals could not bring actions for damages for personal injury and death under the ‘unfair practices’ provisions of the TPA; and  the power of the Commission to bring representative actions for damages for personal injury and death resulting from a breach of the consumer protection provisions be removed.  The legislation is currently before the Senate.

20. THE LAW OF COMMERCIAL CONTRACT Consumer Protection  The IPP Report also recommended that the ‘unconscionable conduct’ restrictions on liability of manufacturers and importers for defective goods, and liability of manufacturers and importers for unsuitable goods provisions of the Act, which otherwise would apply to claims of negligently caused personal injury or death

21. THE LAW OF COMMERCIAL CONTRACT Consumer Protection  The Pendulum is swinging Consumer Protection Let the Buyer Beware

22. THE LAW OF COMMERCIAL CONTRACT Equity and Unconscionability  Estoppel  Economic Duress  Unconscionable conduct  Unjust enrichment

23. THE LAW OF COMMERCIAL CONTRACT Equity and Unconscionability “The underlying values of equity centred on good conscience will almost certainly continue to be a driving force in the shaping of the law unless the underlying values and expectations of society undergo a fairly radical alteration…“ Chief Justice Sir Anthony Mason “The Place of Equity and Equitable Remedies in the Contemporary Common Law World” (1994) 110 Law Quarterly Review 238, 258

24. THE LAW OF COMMERCIAL CONTRACT Equity and Unconscionability “If the present trend continues, the element of uncertainty which is associated with the greater emphasis on good conscience will be dissipated by an increase in the number of decisions on a wide range of fact situations…” Sir Anthony Mason “The Place of Equity and Equitable Remedies in the Contemporary Common Law World” (1994) 110 Law Quarterly Review 238, 258