Advanced Contract Law · 2018. 2. 23. · Advanced Contract Law Exam Notes . Termination • Termination can result through circumstances in which a contract is discharged or brought

Advanced Contract Law

Exam Notes

Termination

• Termination can result through circumstances in which a contract is discharged or brought to an end as a result of events that have occurred after the contract was formed.

Termination by Agreement • A contract can be terminated by the parties through agreement. This is by way of an

express or implied termination clause of the contract or through a subsequent agreement.

Express Term

• For example, termination ‘at will’, or by giving specified period of notice. L Schuler AG v Wickman Machine Tool Sales Ltd Held: Contract provided terms for termination (eg. On a certain date, if notice given or breach of a condition).

Implied Term

• Court may imply a right for one or both parties to terminate the contract as the parties did not intend the contract to continue forever. Reasonable notice of termination must be given in cases of an implied right.

Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd Held: That reasonable notice will vary depending on the circumstances of the case. Subsequent Agreement

• Subsequent to the original agreement, the parties may enter into another agreement to terminate their original contract.

• Subject to consideration or execution by deed.

• Where both parties still have obligations under the contract, mutual exchange of release constitutes valid consideration. Accord and Satisfaction

• Accord is the agreement to discharge the obligation and the satisfaction is the legal consideration which binds the parties to the agreement.

• If P agrees to accept promise of something, they release the D’s obligations under the contract. Once satisfaction (acceptance/ consideration) of new promise occurs, a new agreement has been formed. McDermott v Black

Termination by Abandonment or Waiver • Where both parties decide not to proceed with the contract, their abandonment of

the contract amounts to a mutual discharge.

• A period of inactivity or conduct that indicates the parties no longer intend their contract to be on foot can be considered mutual abandonment. DTR Nominees Pty Ltd v Mona Homes Pty Ltd

Termination for Delay • A stipulation of time for the performance of an act if different from an obligation to

perform that act.

• Unless there is an express statement in the contract which stipulates that it is timely performance is an essential term (that ‘time is of the essence’) there is no time obligation.

• Obligation must otherwise be performed within a reasonable time (assessed objectively).

Time is of the essence

• Failure to meet time is of the essence requirements provides the aggrieved party the right to terminate.

• If time is of the essence is stated in the contract, it is considered an essential term of the contract.

• Goods Act 1958 s 15: Stipulations as to time of payment are not deemed to be of the essence of a contract of sale. Other stipulations as to time being of the essence depends on the terms of the contract.

• Property Law Act 1958 s 41 – Not deemed essential if not stipulated ‘time is of the essence’. Union Eagle Ltd v Golden Achievement Ltd [1997] Held: English Court found that 10 minutes late was too late and in order to create certainty, any delay when ‘time is of the essence’ strict compliance is intended. Therefore, cannot be rescinded through equity.

Notices

• When delay is evident, an aggrieved party is entitled to give notice to the party who has breached the contract.

• The notice must: o Specify time for performance; o Ensure the time specified is reasonable; o State that time is of the essence and if the breaching party does not

perform, will terminate the contract.

• Aggrieved party must be willing and able to perform their obligations under the contract at the time the notice is served.

Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd Held: Time must be reasonable and in this case, time specified in notice was not reasonable amount of time for a lease to be registered. Louinder v Leis Held: Must be unreasonable delay for a notice to be issued. Delay not

unreasonable in this case. Breach of one contractual provision does not

entitle a new contract to be rewritten.

Election • Where there is a breach of condition, serious breach of an intermediate term or

repudiation, the aggrieved party has the choice to either elect to affirm or terminate the contract.

Restrictions on Right to Terminate • There are five exceptions to the right to terminate:

o Readiness and willingness o Election o Estoppel o Waiver o Relief against forfeiture

Readiness and Willingness

• Aggrieved party must demonstrate they were ready and willing to perform their obligations under the contract. If not, aggrieved party also at fault and unable to take advantage of other party’s repudiation. Foran v Wight (1989)

Election

• You are restricted on your right to terminate depending on your choice of election: affirmation or termination.

• When electing, must have knowledge of conduct and demonstrate an unequivocal intention.

Estoppel

• A right to terminate may be restrained by equitable estoppel.

• An aggrieved party may be estopped from terminating a contract where they induced the other party to believe contract will not be terminated in the circumstances and the other party has relied on this to their detriment. Legione v Hateley Held: No estoppel as secretary did not make a clear, unequivocal representation.

Waiver

• Does not operate as its own doctrine. Once an election has been made, you waive your right to change your mind. Agricultural and Rural Finance Pty Ltd v Gardiner Held: pg 683 of case book.

Relief against Forfeiture

• Equity may grant relief against the unjust forfeiture of proprietary interests.

• Deprives the vendor of the benefit of their otherwise valid right to terminate a contract.

• Relief against forfeiture is concerned with protecting the unconscientious (immoral) exercise of legal rights.

Stern v McArthur Held: Relief given as withholding relief would have resulted in a large gain to the vendors.

Damages Right to Damages

• When a contract is breached, the innocent party has a right to recover damages (monetary compensation).

• Purpose is to place the innocent party in the financial position they would have been in had the breach not occurred.

• Three types of damages: expectation, reliance and loss of a chance notwithstanding limitations: causation, remoteness and mitigation.

o Cannot recover damages in both expectation and reliance.

Compensation Principle

• Damages are compensatory in nature. Robinson v Hannan (1848) Held: “where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same position with respect to damages, as if the contract had been performed”

• Damages are usually assessed at the time of breach.

• Plaintiff bears the onus of proving on the balance of probabilities that they have suffered a loss as a result of the breach of contract.

Expectation Damages

• Generally, the most common award of damages.

• Expectation damages seek to compensate the Plaintiff for the benefit expected to gain from performance of the contract (direct loss)

• Expectation damages also include consequential losses. For example, the reasonable loss of a subsequent transaction incurred as a result of the breach.

Damages to Repair

• Where there is a breach of an obligation to build or repair, the damages awarded will be:

o Difference between actual market value of property and the value it would have had if the contract had of been performed properly; or

o The cost of remedying the work. Bellgrove v Elridge (1954) Held: Rectification must be a reasonable and necessary course to adopt. Go to page 520 of text for further notes on reasonableness if required. Tabcorp Holding Ltd v Bowen Investment Pty Ltd (2009) Held: Court said that putting an innocent party in the same situation as if contract was performed is not always a financial position. In this case, to rectify changes to the foyer, reconstruction had to be ordered.

Quantifying Expectation Damages

• When subject matter of contract is goods, ‘market value’ rule comes into effect.

• Goods Act 1958 (Vic) s 57(3) – prima facie damages to be assessed as difference between contract price and market/current price of the goods.

Liquidated Damages and Penalties • To avoid litigating, a contract may incorporate a clause quantifying an amount in

advance if a damages claim arises that the Plaintiff may recover.

• These are enforceable as liquidated damages as long as they don’t breach the rule against penalties.

Liquidates Damages

• Terms of a contract may specify that if a particular breach takes place, the aggrieved party will be entitled to damages from the other party in a particular sum or rate.

• These terms are genuine pre estimates of the loss that would be suffered as a result of the breach.

• Valid and enforceable contract clauses. Penalties Doctrine

• This is a sum payable under a contract which is not an estimate of loss caused by breach but rather in torrorem (threat/fear) as an extravagant, exorbitant or unconscionable amount designed to ensure the performance of the contract.

• These clauses are invalid and unenforceable.

• Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] set out tests: 1. Penalty or liquidated damages is not conclusive (use of those terms do not

essentially mean it will be that) 2. The essence of a penalty is putting the fear into the breaching party. Essence

is a genuine pre estimate of what damage will be. 3. A question of construction. Determine what objective intention of contract is.

If there is ambiguity in contract, look at factual circumstances surrounding the contract. (exception to the Parol Evidence rule).

4. Various construction tests include: o Penalty – extravagant and unconscionable in amount in comparison with

greatest loss that could be proved. o Penalty – breach of payment term but stipulated sum greater that what

should have been paid (other than interest) o Presumption of penalty – a single lump sum payable by way of

compensation for one or more breaches, some serious while others trifling

o Just because precise estimation almost an impossibility, does not prevent a sum from being a genuine pre-estimate of damage.

Cases: AMEV-UCD Finance Ltd v Austin (1986) Held: Cannot be entitled to all rental payments and the goods as well. This clause did not amount to a genuine pre estimate amount. Therefore, this was a penalty. Mason and Wilson JJ observed: test is one of degree and depends on:

1. The degree of disproportion between stipulated sum and loss likely to be suffered by the plaintiff; and

2. The nature of the relationship between the parties.

Equitable Remedies • Damages may be an inadequate form of compensation in some situations.

• Equity has developed remedies to supplement common law damages to achieve a fair and just result in the relevant circumstances.

• Main equitable remedies are: Specific Performance and Injunctions. o They are discretionary and will only be awarded if the Court is persuaded they

are warranted in the circumstances.

Specific Performance

• Specific performance is a remedy compelling the D to perform their contractual obligations.

• May only be granted where damages are inadequate.

• Three essential requirements for specific performance: 1. Valuable consideration 2. Contract enforceable (example: not subject to vitiating factors) 3. Damages must be inadequate in the circumstances

• Courts will take into account: o Whether contract is for personal services o Delay in seeking relief o Whether P is also in breach of contract o Whether P is willing to perform o Hardship on the D o Whether the SP will achieve anything o Whether the Courts will continually have to supervise

Dougan v Ley (1946) Held: Specific performance granted with respect to the sale of a licensed taxi. (limited licenses and great demand for them relevant in Courts decision to grant).

Injunction

• Injunctions restrain a party from doing or continuing an act that amounts to breach of contract.

• A prohibitory injunction restrains or forbids a party’s breach of contract.

• A mandatory injunction requires a party to take a positive step (Courts reluctant to grant). Page One Records Ltd v Britton (1968)

Curro v Beyond Productions Pty Ltd (1993) Held: Production company successfully sought injunction restraining TV presenter from accepting reporter role with rival company in breach of her contract. (Prohibitory Injunction: prohibited from engaging in other employment). Damages in addition to or in place of specific performance or injunction Lord Cairn’s Act Section 38 of Supreme Court Act 1986 “…if the Court has jurisdiction to entertain an application for an injunction or specific performance, it may award damages in addition to, or in substitution for, an injunction or specific performance”

Frustration • Contracts may be disrupted by events outside of the control of the parties.

• In some circumstances, these events may be so catastrophic and goes beyond anything the parties could have anticipated at the time of making a contract.

• The doctrine of frustration provides an excuse for non-performance in these circumstances.

Doctrine of Frustration

• The doctrine of frustration operates as a defence against claims for breach where there has been a radical change in circumstances surround the contract after formation rendering performance impossible.

• Courts are of the view that contracts can only be frustrated in exceptional circumstances.

• Test for frustration set out in: David Contractors Ltd v Fareham UDC [1956]: o Without default of either party o Contractual obligation has become incapable of being performed

• The modern test for frustration is based upon the construction or interpretation of the contract.

Types of Frustration

• Illegality o A contract can become frustrated where performance becomes

illegal. o Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943]

Held: Contract could not be performed due to outbreak of war and subsequent illegality of providing goods. Contract frustrated.

• Destruction of subject matter o A contract can be frustration where the subject matter of the contract

is destroyed. o Taylor v Caldwell (1836)

Held: Contract was frustrated as the hall was destroyed in the fire. Destruction rendered performance impossible without fault of either party.

• Disappearance on the basis of the contract o A contract can be frustrated where the exceptional event in question

destroys the basis of the contract. o Krell v Henry [1903] (hotel for coronation case).

Held: The doctrine can extend to the non existence of an expressed condition going to the root of the contract. If there is a state of affairs which goes to the root of the contract and the circumstances cease to exist, contract will be treated as frustrated.

o Herne Bay Steamboat Co v Hutton [1903] Held: Contract was not frustrated as the hiring of the ship for the purposes of the naval review did not go to the root of the contract and was not in contemplation of both parties.

o Brisbane City Council v Group Projects Pty Ltd (1979)

Vitiating Factors • Vitiating factors are found in common law and statutory provisions: duress, undue

influence, unconscionable dealings, mistake, misrepresentation, misleading and deceptive conduct.

• If a vitiating factor is present in contract formation, it gives rise to the right to rescind.

Common Law - Abuse of Power • Commons law vitiating powers fall into three categories: duress, undue influence

and unconscionable dealing.

Duress

• The illegitimate use of pressure applied by a dominant party to a weaker party pressuring the weaker party to enter into a contract.

• Three main categories of duress: Duress to the person, duress to goods and economic duress.

Elements of Duress

• Two main elements derived from: Universe Tankships Inc of Monrovia v International Transport Workers Federation [1963]:

o Pressure amounting to compulsion applied by one party (D) to induce the other party (P) to enter into/ modify a contract

o Illegitimacy of pressure exerted.

• Test for legitimacy: o Consider the nature of the pressure; and o The nature of the demand which the pressure is applied to support.

• Test for ‘compulsion of the will’ of the party: o If found that the Plaintiff’s will is so oppressed that they are incapable of

acting as a free and independent party. Duress to the Person

• Common law – Duress to the person is a threat of or actual violence to a person or unlawful imprisonment. Barton v Armstrong (1976) Held: Duress was determined as a present factor in the execution of the deed. Even though there were strong economic reasons for the execution of the deed, the fact that there was a threat of murder (violence) was enough to have the contract set aside.

• Equity – Recognises the use of pressure as coercion. Courts can set aside an agreement that is harsh and executed under pressure. Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) Held: If found that illegitimate pressure is simply present, the onus is on the Defendant to prove that it made no contribution to the Plaintiff entering into the agreement.

• Main remedy is to have the contract set aside or rescinded.

Unconscionable Dealing

• Situations where exploitation or the taking of unconscientious advantage of the weaker party may lead to a situation of entering a contract where genuine consent is not present.

• Looks at conduct of stronger party in attempting to force a person under a special disability in circumstances where it is not consistent with equity or good conscious.

• Also refer to statutory unconscionability, Section 20 Australian Consumer Law. Elements

• The elements come from the case of Commercial Bank of Australia Ltd v Amadio: o A party to a transaction must have been under a special disability with

absence of any reasonable degree of equality between them o Special disability must have been sufficiently evident to the stronger

party to make it prima facie unfair or ‘unconscientious’ that they procure or accept the weaker parts assent to the transaction in the circumstances.

• Where first two elements are made out, the onus is on stronger party to show that the transaction was ‘fair, just and reasonable’.

Special Disability

• Concerns the ability of the innocent party to make a judgment as to their own best interests.

• Special disability cannot be comprehensively defined but some suggestions from Fullagar J in Blomley v Ryan (1956) are:

o Poverty or need of any kind o Sickness o Age CBA v Amadio o Infirmity (weakness) of body or mind o Drunkenness Blomley v Ryan (1956) o Illiteracy or lack of education o Lack of assistance or explanation where assistance or explanation is

necessary. o Emotional dependence Louth v Diprose o Predatory state of mind Kakavas v Crown Melbourne

Knowledge of the Disability

• Stronger party must be aware of the existence of the special disability.

• Where no actual knowledge, willful ignorance (know/ should know but choose not to see it) to the vulnerability in question is sufficient to satisfy knowledge of special disability. Kakavas v Crown Melbourne

Rebuttal

• Where evidence points to an unfair transaction is the context of an unconscionable dealing, then the presumption must be rebutted by the stronger party.

• Stronger party must prove adequate consideration, this is through demonstrating that the transaction was fair, just and reasonable.

Statute – Australian Consumer Law • The Australian Consumer Law (ACL) is found in Schedule 2 of the Competition and

Consumer Act (Cth) 2010.

• Previously consumer’s protection provisions were found in the Trade Practices Act 1974.

Unconscionable and unjust conduct • Part 2.2 of the ACL provides a statutorily definitive right to the innocent party where

the statutory unconscionable conduct falls within the definition of equitable unconscionability as stated in such cases as Amadio. Section 20

• Section 20 ACL – former s 51AA TPA prohibits conduct that is unconscionable in trade or commerce within the meaning of the unwritten law from time to time.

o The reference to the ‘unwritten law’ in s 20 is a reference to a definition of unconscionability in equity.

• Australian Competition and Consumer Commission v Lux Distributors Pty Ltd [2013] Held: Sales people pretended to be someone else and induced 5 older ladies into buying vacuum cleaners. Held to be unconscionable under s 20.

Misleading and Deceptive Conduct

• Conduct that is misleading or deceptive is where it leads or causes an error.

• The ACL and in particular s 18, play a large role in regulating and prohibiting misleading and deceptive conduct in trade or commerce.

• Formerly, s 52 of the Trade Practices Act 1974 (Cth) and s 9 of the Fair Trading Act 1999 (Vic).

• Section 18

• s 18(1) – A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

• Under this section, intention/ fault is not necessary to prove an allegation.

Trade or Commerce

• s 18(1) only applies to corporations (‘in trade or commerce’) rather than all individuals.

• Concrete Constructions NSW Pty Ltd v Nelson (1990) Held: A statement made to an employee in the course of their ordinary activities is not conduct in trade or commerce for the purposes of the provisions in s18.

Representations

• The Court will take into consideration who the representation alleged misleading and deceiving conduct was made to and take different approaches accordingly.

Statutory - Remedies • Where it is found that there has been a contravention of s 18 or s 20, remedies are

available under s 236 and s 237 of the ACL.

Section 236

• If a person suffers loss because of another through a contravention of Ch 2 or Ch 3 in ACL (ss 18 and 20 incl.) the Claimant may recover damage within 6 years.

• Elements under s 236: 1. Breach of s 18 or s 20 2. That loss or damage has been or is likely to be suffered 3. Causal connection between loss and contravention (demonstrate reliance) 4. 6 year limitation of action

Loss or likely loss

• The Plaintiff must sustain a prejudice or disadvantage as a result of altering their position in reliance of the misleading or deceptive conduct.

• Marks v GIO Australia Holdings Ltd (1998) Held: No loss or likely loss found in this case. This needs to be demonstrated by the Plaintiff or no relief can be awarded. The plaintiff conceded that the loan was still more beneficial to them than any other loan on the market.

Causation

• S 18 of ACL ‘by conduct’ requires a causal link between the loss suffered and the contravening act.

• This can be done through establishing actual reliance on the misleading or deceptive conduct in entering into the contract

• Henville v Walker (2001) Held: Common sense approach requires no more than the act/ event to have materially contributed to the loss or injury suffered.

Section 237 (discretion)

• Empowers the Court to grant any Orders is sees fit to prevent loss or likely loss suffered as a result of contravening these sections.

• This section grants the Court discretionary powers and practitioners/ plaintiff’s need to advise the Court what remedies they are seeking.

• Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) Held: Court will consider the conduct of the parties after they had knowledge of misleading qualities of representation. An entitlement to relief under s 237 is not a right, must show that the Court exercises its discretion. In doing that, a Court will look at conduct after the fact to decide. Court took into account the delay of two years in bringing the action and subsequently decided rescission was not appropriate. Damages awarded instead. Section 243 - Non-exhaustive list of orders Court might make:

• Order declaring contract void