Contract Law
Contract Law
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The readings for this module are particularly onerous but this is the nature of the
beast of contractual law. It is recommended that you undertake them in
conjunction with the topic so that you can direct your studies appropriately and
apply your knowledge to the application questions throughout. This will help
solidify your comprehension.
The content for this topic is contained in the following chapters.
Principles Textbook
Chapter 12: Identifying the Express Terms
Chapter 13: Construing the Terms
Chapter 14: Implied Terms
Cases Textbook
Chapter 12: Identifying the Express Terms
Chapter 13: Construing the Terms
Chapter 14: Implied Terms.
Terms of a contract
The ‘terms of the contract’ refers to each clause of a written contract. If it is an
oral contract, it refers to each matter the parties have agreed. In this context,
‘term’ is synonymous with clause, stipulation, provision.
Other terms used are ‘covenant’ or ‘conditions’. These may be used
interchangeably with ‘term’ but are generally interpreted narrowly. Terms of a
contract are distinguishable from statements of fact, also known as
representations, which may be used to induce a party to a contract.
There are three types of terms that you need to be familiar with:
1. Express terms are terms expressly agreed to by the parties and are set
out in a contract.
2. Implied terms are those terms which are not contained in the contract but
are found to exist between the parties because they are implied in the
contract itself or because a statute mandates that they are implied.
3. Consumer guarantees under Australian Consumer Law are a set of rules
that apply to goods and services purchased by consumers.
Parties may come to argue over what is a term of the contract, particularly in the
case of contracted negotiations. Where these negotiations are reduced to writing
in a document setting out the terms, determining what the parties intended to be
a binding term of contract is informed by that document. The court will look at
the document narrowly and any argument that terms falling outside the written
document will be more difficult (not impossible) to make out.
Other contracts are formed over a series of correspondence, including but not
limited to emails, letters or verbal exchanges by telephone or in person. Some
contracts may be in part written and oral. If this is the case, the terms of the
contract are informed by the written document and supplemented by the oral
terms.
A contractual lawyer needs to identify the terms of the contract which can be
difficult, particularly in the case of implied terms because construction of the
contract and identification of terms often overlap. In this case, construction is an
element of the identification of terms.
To determine what written express terms will be incorporated into a contract we
must look at both written and oral terms. The ‘parol evidence rule’ is essential
to the identification of express terms but this will be discussed in the next
module.
Express terms
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Notice
The test to be satisfied for incorporation by notice has two limbs which are:
1. Whether the displayed or delivered terms were available to the party prior
to the contract formation;
2. Whether reasonable steps were taken to inform the party intended to be
bound of the terms.
The party must have actual knowledge or been given reasonable notice of the
terms. Those terms must be readily available. Read Thornton v Shoe Lane
Parking extracted at [12.65] of the Cases Textbook.
If the terms are unusual, the party intending on relying on them must make
notice of them prominently (think bright flashing lights).
Pre-contractual statements
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Representation or term?
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Note
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Surrounding circumstances
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Read [13.15]-[13.25] of the Principles Textbook and ch 13 of the Cases
Textbook.
The ‘true rule’ per Mason J in Codelfa Construction Pty Ltd v State Rail
Authority of New South Wales (1982) 149 CLR 337, 352 dictates whether the
courts may look behind the contract and consider the surrounding circumstances
in which that contract was made.
The true rule distinguishes the Australian approach to surrounding
circumstances from the United Kingdom’s approach which is broader.
See: Investors Compensation Scheme Ltd v West Bromwich Building
Society [1998] 1 WLR 896 [912-13], although the disconnect between the two
has been the subject of much judicial consideration.
From the readings, you will glean that there is much ambiguity around the
judicial position on surrounding circumstances, particularly between lower
courts and that of the High Court. However, until the High Court overturns the
‘true rule’, the lower courts are bound by it.
Contract drafters may try to limit the scope for a court to consider surrounding
circumstances by stating the intention and commercial purpose of the contract
in its recitals.
Collateral contracts
A statement made during negotiations that does not form part of the terms
of the main contract
Example
Salesperson: Buy this perfume! If you buy the perfume today, I can
throw in this lipstick for free!
Customer: Well, I don’t just want the perfume, but if I get lipstick too,
then it’s worth buying the perfume.
In this illustration you can see:
Main contract: Sale of perfume
Collateral contract: Assignment of lipstick in exchange for agreement to
buy perfume.
Collateral contracts still need to satisfy the usual requirements of contract
formation: agreement, consideration, certainty and intention to create
legal relations.
Collateral contracts must involve a promise, distinguishable from sales
talk, opinions and representations (e.g. ‘This is my favourite!’; ‘That goes
so well with your skin tone.’; ‘I think if you use this, you’ll notice a big
improvement.’)
In addition to the usual requirements for contract formation, consideration
for a collateral contract is entry into the main contract.
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Implied terms
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Your studies in this subject concentrate on the first two reasons as the
third reason is more properly covered in your studies of commercial law.
The below table sets out classes of contract and the implied terms derived
from common law authorities.
Terms are implied by courts by determining two limbs:
Test of necessity
The test of necessity is that the court finds that implying the term is necessary in
the sense that if it were not ‘the enjoyment of the rights conferred by the
contract would be or could be rendered nugatory, worthless, or, perhaps, be
seriously undermined’: See Byrne v Australian Airlines, (1995) 185 CLR 411,
450.
The test of necessity was considered in Liverpool City Council v Irwin [1977]
AC 239. In that case, express terms of the tenancy agreement provided for the
tenant’s obligations, but none for the landlord. The court found it necessary to
imply that the landlord had the obligation to reasonable care of the common
areas, however this did not obviate the tenant’s obligation to also take
reasonable care of the same areas. E.g. a tenant cannot trash the stairwell to the
building and rely on the implied term discussed to compel the landlord to rectify
it.
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Consistency
The court cannot imply a term that contradicts the express terms of a contract.
Courts do not want to interfere with parties’ freedom to contract.
The court cannot imply a term if:
1. It is impossible to give effect to both the express terms and the
implied term;
2. The implied term expresses a contrary intention from the express
terms; or
3. The matters which would be addressed by the implied term are
dealt with sufficiently in the express terms.
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Required reading
In your Principles textbook:
Chapter 13: Construing the terms
Chapter 10: Restitution
In your Cases texbook:
Chapter 13: Construing the terms
Chapter 10: Restitution
Construction
‘Construction’ is a term of art used to describe the process of ascertaining the
objective intention of the parties when they have expressed the terms of a
contract in written form. In this sense, the word ‘construction’ does not relate to
‘building’, but to the verb ‘construe’ as in ‘one construes a contract’ or ‘in
construing the contract’.
The main idea here is that the court is always trying to find the objective
common intention of the parties. There are a number of categories and rules to
learn, but they all relate back to the main idea of objective intention.
It is an objective test, meaning it is not subjective to the party’s understanding
of that intention but rather what a reasonable person in the promisee would
place on them.
This is based on the presumption that the parties meant what they said.
Why don’t the courts just ask the parties for their actual intentions? Because, at
the time of contract formation, the parties only knew the other’s intention by
what they said or wrote, and on those grounds, they agreed to be bound. It
would be unfair to bind a party to another party’s actual but unstated intention.
Where parties have expressed their actual intentions clearly on all the important
aspects of the agreement and kept those intentions, disputes are unlikely to
arise. In establishing the rules of construction, the case law emerges from
situations where those intentions have not been expressed clearly, the intention
is silent on an important feature of an express term or the party has changed
their intention.
Ambiguity
Test of objectivity
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Exclusion clauses
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Contra proferentum
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Restitutionary remedies
Defences
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Capacity
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A minor is a person who is under the age of 18 years old. Both the common law
and statute operate to restrict the capacity of minors to contract. The existing
mix of common law and multiple different state legislative rules in relation to
the capacity of minors has rendered the assessment of the contractual capacity
of minors exceedingly complex.
The general rule at common law is that a contract made by a minor is voidable.
There are, however, a number of exceptions (some of which now have statutory
force).
Section 124 of the Corporations Act 2001 (Cth) gives a company the same legal
capacity as ‘an individual’ including the power to make an agreement and s 125
effectively provides that the performance of an act, including entry into an
agreement by a company will not be invalid merely because it is beyond the
power of the company’s constitution.
Under s 127(2) a company may make a contract either by using its common
seal; or s 126 a company may make a contract through an agent acting on its
behalf. Section 126 empowers a person acting on behalf of the company with its
express or implied authority to ‘make, vary, ratify or discharge a contract’.
A contract made by a promoter of a company on behalf of the company but
before it has been formed is not enforceable at common law but is enforceable
now under s 131(1) of the Corporations Act 2001 (Cth) provided that the
company, once formed, ratifies that pre-registration contract within an agreed
time or, if no time is set, a reasonable time.
Under s 131(2), if the company does not form or ratify the contract the
individual responsible for making the contract on its behalf may also be liable.
An unincorporated association has no legal personality and therefore lacks
contractual capacity. Thus a contract that purports to be with the association
will be void. However, if the contract intends to be with members of the
association then there can be a valid contract with those persons.
Bankrupts
The common law was that a married woman lacked contractual capacity and
that her contracts were void because she had no legal personality separate to
that of her husband. The position at law was mitigated by the position at equity
and the development of the doctrine of the married woman’s separate estate.
The doctrine of privity
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Required reading
Read the following chapters from the Principles Textbook
Chapter 36: Unconscionable Dealing
Chapter 38: Unconscionable Conduct under Statute
Chapter 16: Unfair Contract Terms
Read the following chapters from the Cases Textbook
Chapter 36: Unconscionable Dealing
Chapter 38: Unconscionable Conduct under Statute
Chapter 16: Unfair Contract Terms
Unconscionable conduct
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Special disadvantage
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Emotional dependence
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Knowledge
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Three standards
The types of cases above are said to be broadly supported by three standards:
Contract Review Act 1980 (NSW)
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Section 23(2) Contract is still binding if the unfair term can be severed
Section 23(2) provides that if the contract can operate without the unfair term,
the contract continues to bind the parties. In this instance, the unfair term is
severed from the remainder of the contract and the remainder of the contract
remains enforceable (for severability, see s 4L of the CC Act).
Section 23(3) Definition of a ‘consumer contract’
Section 23(3) defines a ‘consumer contract’ as a contract for the supply of
goods or services or the grant of an interest in land, to an individual, whose
acquisition of the goods, services or land is ‘wholly or predominantly for
personal, domestic or household use or consumption’.
Section 23(4) Definition of a ‘small business contract’
Section 23(4) defines a small business contract as a contract for a supply of
goods or services, or a sale or grant of an interest in land and at the time the
contract is entered into, at least one party to the contract is a business that
employs fewer than 20 persons; and either of the following applies:
(i)the upfront price payable under the contract does not exceed $300,000;
(ii)the contract has a duration of more than 12 months and the upfront
price payable under the contract does not exceed $1,000,000.