Study Guide Module 4

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Module 4: Consent, legality and contents of a contract

Introduction

In this module we examine the final two of the six essentials of a simple contractgenuine consent and the legality of its objectsand then proceed to consider the standardised classificatory system as developed by common law judges in relation to the substance of a contractexpress and implied terms, conditions, warranties and innominate terms as well as exemption or exclusion clauses. Exemption clauses have proved especially troublesome to the common law, both conceptually and in practice. The idea that a contract may so structure relations between two parties that in effect prevents any primary obligations from arising and/or secondary liability to pay damages in the event of a breach, unsurprisingly received a fairly cool reception from common law judges concerned that contracts not asymmetrically consist of mere illusory promises by one party while imposing full liability on the other party. While in more recent times for reasons of economic efficiency and to stop the abuse of transactional bargaining and monopoly power, there has been extensive statutory intervention designed to limit the freedom of commercial entities to contractespecially with consumerson terms that are patently one-sided and unfair.

Objectives

On completion of this module you should be able to:

define the factors that may detract from consensus ad idem being achieved in a simple contract

define, explain and illustrate the types of mistake in contractual terms

define and distinguish between innocent and fraudulent misrepresentation

recognise examples of duress and undue influence in cases of contracts

describe an example of an unconscionable contract.

Readings

Textbooks Turner & Trone 2013 Chs 79

Davenport & Parker 2012 Chs 79

Factors affecting validity of contract

Although it may be possible to point to a contract between two persons, it is often the case that one of them did not genuinely agree to that contractthat is achieve consensus ad idem. This lack of real common consent may be caused by any of the following:

mistake

misrepresentation

duress

undue influence

inequality of bargaining power.

As will be seen, the occurrence of any of these events may affect the validity of the contract entered into.

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Mistake

Can a person who enters a contract as a result of a misunderstanding have the contract declared void? Suppose, for example, that A, who bought a painting from B for $1000, later discovers that it is worth only $100. Or suppose that C purchases a property from D believing it to be suitable for establishing a vineyard but, to her dismay, discovers that the soil is not suitable for such a usage. Can the mistaken parties have their contract cancelled and reclaim any purchase money paid to the seller?

From the outset, it should be noted that the courts are very reluctant to grant relief on the grounds of mistake. In the absence of some other vitiating factor, such as misrepresentation, the mistaken party is usually left to suffer the consequences of their mistake.

There are, however, instances where the courts will provide a remedy for the mistaken party and it is with those instances that the following discussion is primarily concerned.

Types of mistake

In the contractual sense there are three types of mistake:

common mistakewhere each party makes exactly the same mistake

mutual mistakewhere the parties misunderstand each other and are therefore at crosspurposes, and

unilateral mistakewhere one party is mistaken and the other party knows or ought to be aware of the mistake made.

Each of these categories will be examined separately; however, before doing so, several points common to them all require immediate emphasis.

Firstly, the law will only assist if the mistake is one of fact, not law. A mistake as to the law governing a particular situation is not sufficient to render a contract void. This is so because everyone is presumed to know the law. Thus, a person who makes a payment unaware that the payment contravenes a particular law cannot claim the payment back by pleading mistake.

In Holt v Markham [1923] 1 KB 504, the plaintiffs, acting as agents for the British Government, paid to the defendant, an officer in the Royal Air Force during the 19141918 war, a gratuity which was payable to officers on demobilisation. The amount payable was determined by government regulations then in force. Because the plaintiffs overlooked a particular regulation, the defendant was overpaid. Their claim for recovery of the excess was dismissed on the basis that their mistake was one of law, not fact.

Common mistake

Common mistake occurs when each party to the contract makes the same mistake. In such cases, although the parties are in agreement as to the terms of their contract, a shared mistake strikes at the efficacy of that contract.

Common mistake at common law

The courts will not render a contract void on the ground of common mistake unless the mistake involves a matter which is so fundamental to the contract that both parties regard it as a condition precedent to the existence of a binding contract. Whether a common mistake is of that nature will, of course, depend upon the facts of the case.

Common mistake as to the existence of the subject matter

Where the common mistake involves the existence of the subject matter, the contract will be void. In Scott v Coulson [1903] 2 Ch 249, for example, a contract to assign a life insurance policy was declared void because, unknown to both the assignor and the assignee of the policy, the assured had already died.

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A common mistake about the existence of the subject matter is not to be confused with those instances in which one of the parties to a contract promises that the subject matter does exist. In cases where the latter occurs, the non-existence of the subject matter leaves the promisor in breach of contract.

Such a case is found in McRae v Commonwealth Disposals Commission (1951) 84 CLR 377. The Disposals Commission called for tenders for the purchase of an oil tanker wrecked on a specified reef. McRaes tender of 285 was accepted and he spent a further 3 000 mounting a salvage expedition. No ship was found and it was discovered that there had never been a wreck in the place specified. McRae sued the Commission for breach of contract.

In reply, the Commission argued that there had been a common mistake as to the existence of the tanker and therefore no contract has been created. This defence failed, the High Court of Australia finding that it was not a case of common mistake. In the words of Dixon and Fullagar JJ:

It is not a case in which the parties can be seen to have proceeded on the basis of a common assumption of fact so as to justify the conclusion that the correctness of the assumption was intended by both parties to be a condition precedent to the creation of contractual obligations. The Officers of the Commission made an assumption, but the plaintiffs did not make an assumption in the same sense. They knew nothing except what the Commission had told them. If they had been asked, they would certainly not have said: Of course, if there is no tanker, there is no contract. They would have said: We shall have to go and take possession of the tanker. We simply accept the Commissions assurance that there is a tanker and the Commissions promise to give us that tanker. The only proper construction of the contract is that it included a promise by the Commission that there was a tanker in the position specified.

Common mistake involving an owner purchasing his own property

The principle which applies to the non-existence of the subject matter (res extincta) also applies to contracts where, unknown to either party, the purchaser is in fact buying his own property. Such contracts are, of course, void. In Bell v Lever Brothers Ltd, discussed below, Lord Atkin expressed the rule in the following terms:

Corresponding to mistake as to the existence of the subject matter is mistake as to title in cases where, unknown to the parties, the buyer is already the owner of that which the seller purports to sell him. The parties intended to effectuate a transfer of ownership: such a transfer is impossible: the stipulation is naturali ratione inutilis (at 218) of its nature impossible).

Common mistake as to the quality, nature of the subject matter

As was noted earlier, a common mistake of this type is not sufficient to have the contract rendered void. The following cases illustrate the strictness of the courts in this regard.

In Bell v Lever Brothers Ltd [1932] AC 161, Bell had been appointed managing director of a Lever Brothers subsidiary in Africa. He was employed for a five-year period at a salary of 8 000 per annum. After serving three years of that term. Bell was made redundant and his employer agreed to pay him 30 000 for the premature termination of his contract. Soon after the payment had been made, Lever Brothers became aware that during his period as managing director, Bell had breached his duty to the company by trading on his own account. They were also advised that such a breach would render Bell liable to dismissal without any compensation.

Consequently, Lever Brothers brought an action to recover the 30 000. They alleged that the termination contract was void for common mistake, namely, that the contract was negotiated on the basis that both parties believed that some payment was obligatory.

It was held (by a three to two majority) that the mistake was not such as to render the contract void. The majority took the view that irrespective of what the parties thought about the need for payment, the subject matter of the contract was the samethe termination of the contract of employment. It was immaterial that the same result could have been achieved by other means. In his judgment dismissing the claim, Lord Atkin noted that it would be wrong to decide that an agreement has already been broken and could have been terminated otherwise. The contract released is the identical contract in both cases, and the party paying for release gets

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exactly what they bargain for. It seems immaterial that they could have got the same result in another way, or that if they had known the true facts they would not have entered into the bargain. For example, A buys Bs horse; he thinks that the horse is sound and he pays the price of a sound horse; he would certainly not have bought the horse if he had known as a fact that the horse was unsound. If B has made no representation as to the soundness and has not contracted that the horse be sound, A is bound and cannot recover.

In Leaf v International Galleries [1950] 2 KB 86, the plaintiff purchased from the defendant a painting titled Salisbury Cathedral which both parties honestly believed was painted by Constable. When it was later revealed that the painting was not by the artist, the plaintiff sought, inter alia, to have the contract declared void for common mistake.

It was held that there was no operative common mistake. Denning LJ put the matter in the following terms:

This was a contract for the sale of goods. There was a mistake about the quality of the subject matter, because both parties believed the picture to be a Constable: and that mistake was in one sense essential or fundamental. But such a mistake does not avoid the contract: there was no mistake at all about the subject matter of the sale. It was a specific picture Salisbury Cathedral. The parties were agreed in the same terms on the same subject matter, and that is sufficient to make a contract (at 90).

In other words, the plaintiff contracted to buy a painting called Salisbury Cathedral and that is what he received.

Common mistake in equity

Basically, equity follows the common law, and those contracts declared void for common mistake at common law will also be regarded as void in equity. That being the case, it will refuse to grant specific performance of such agreements. There are, however, two instances in which equity may intervene: firstly, it may set aside a contract concluded on the basis of a common mistake and, secondly, it may order the rectification of an agreement which has been inaccurately expressed in written form.

Agreements that may be set aside

It is now recognised that in some cases where the common mistake relates only to the quality, nature or value of the subject matter, the court, exercising its equitable jurisdiction, may grant some form of relief. Clearly, it cannot declare the contract void, for to do so would offend common law principles. Instead, it can, if it chooses, set aside the contract on such terms as it thinks fit. The role of equity in this regard was extensively canvassed in Solle v Butcher [1950] 1 KB 671, the facts of which are discussed below. In the course of his judgement, Denning LJ indicated that equity will only intervene if the following conditions are met:

(a) there was a common misapprehension of a fundamental nature

(b) that party seeking the equity relief must not themselves be at fault

(c) it must be unconscionable to allow the other party to benefit from the mistake, and

(d) the rights of third parties will not be affected.

If any of these conditions are not met, the common laws assessment of the situation will stand.

In Solle v Butcher, Butcher leased a flat to Solle for seven years at a fixed annual rent of 250 per annum. After occupying the flat for two years, it was discovered that the maximum rent payable for the flat under rent restrictions legislation in force at the time was 140 per annum. The only way Butcher could have increased that amount was if he had served a notice of increase prior to Solles signing the lease. He did not serve such a notice because both he and Solle believed that, due to certain structural alterations carried out on the flat, the flat was not subject to the legislation. In fact, Solle, who was also Butchers letting agent for other flats that he owned, had obtained legal opinion to that effect. He also advised Butcher that 250 per annum was a reasonable rent for the flat.

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Notwithstanding that advice, Solle brought an action against Butcher claiming the excess paid over the previous two years and a declaration that he could remain in the flat for the remainder of the lease for 140 per annum. Butcher counter-claimed, seeking a declaration that the lease was void for common mistake. Solle succeeded at first instance and Butcher appealed.

The Court of Appeal did not declare the contract void for common mistake. As Denning LJ put it:

It is clear that here there was a contract. The parties agreed in the same terms on the same subject matter. It is true that the landlord was under a mistake which was to him fundamental: he would not for one moment have considered letting the flat for seven years if it meant that he could only charge 140 a year for it. He made the fundamental mistake of believing that the rent he could charge was not tied down to a controlled rent: but, whether it was his own mistake or a mistake common to both him and the tenant, it is not a ground for saying that the lease was from the beginning a nullity. (at 692)

The court did, however, set aside the contract upon terms that were just to both parties. Basically, those terms gave the tenant the right to choose either to stay on at what he agreed was a fair rent (250) or to leave.

Thus, equity intervened in regard to a common mistake which, because of its nature, was ignored by the common law.

Rectification

When persons reduce their agreement to writing, they expect that the written instrument will accurately reflect that agreement. However, sometimes this expectation is thwarted by an unintentional drafting error. In such case, equity may intervene and rectify the written agreement so that it does represent the parties intentions.

The mistake may occur when the parties purport to record in writing with a previously concluded agreement, or where there is no such previous agreement, their concurrent intention. The aim of rectification is to make the written instrument a true record of that agreement or intention.

These conditions were not met in Rose v Pim [1953] 2 QB 450. In that case, the plaintiff, a grain merchant, had received an order from a customer for Mexican horsebeans here described as feveroles. After the plaintiff had been assured by his supplier, the defendant, that horsebeans and feveroles were the same thing, he entered into an oral contract with the defendant for the purchase of a quantity of horsebeans. That contract was later reduced to writing. When at a later date the parties discovered that horsebeans and feveroles were not identical, the plaintiff sought, inter alia, to have the contract rectified by substituting the word feveroles for horsebeans. This the court refused to do.

It was held that although the parties were under a common mistake in believing that horsebeans and feveroles were one and the same, the written contract entered into truly reflected what the parties had agreed to. Consequently, rectification was not appropriate.

Mutual mistake

Mutual mistake occurs when the parties are at cross-purposes: both parties are mistaken as to the others intention. For example, A, the owner of several horses, offers to sell one to B and B accepts. Whereas A intended to sell to B his horse Neanderthal, B thought he was buying Piltdown. Strictly speaking, there is no agreement between A and B. But does this mean that there is no contract between them? As will be seen, the law does not adopt such an all-or-nothing approach to problems involving mistakes of this kind.

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Mutual mistake at common law

In cases of mutual mistake, the courts do not automatically reject the notion of a contract simply because there is no apparent agreement between the parties. Rather, the courts apply an objective test, asking whether, given the facts of the case, a reasonable person would infer a contract between them. If so, the contract so inferred will be binding on them. In other words, the court is seeking to determine whose interpretation of the contract is the correct one. In Smith v Hughes (1871) LR 6 QB 597, Blackburn J summarised the role of the objective test in the following terms:

If, whatever a mans real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party, and that other party upon that belief enters into the contract with him, the man thus conducts himself would be equally bound as if he had intended to agree to the other partys terms (at 607).

If, on the other hand, a reasonable person appraised of the facts could not infer a contract, then no contract will exist between the parties because of the lack of agreement.

The objective test did not identify a contract in Raffles v Wichelhaus (1864) 2 H & C 906. The defendant had agreed to purchase from the plaintiff 125 bales of Surat cotton ... to arrive Ex Peerless from Bombay .... In fact there were two ships of that name both of which sailed from Bombay to England but at different times of the year. A dispute arose when the parties alleged that they were not referring to the same ship (a mutual mistake).

It was held that no contract existed: on the facts of the case, a reasonable person could not impute any definite agreement. The facts pointed equally well to the cargo on either vessel.

Mutual mistake in equity

Generally speaking, equity follows the common law in relation to mutual mistake. In a few exceptional cases, courts exercising their equitable jurisdiction have set aside contracts held valid at common law. However, the main relief granted is a refusal to order specific performance of the imputed contract against the mistaken party. The cases indicate that equity will be reluctant to order specific performance if to do so would cause hardship on that party.

Given the nature of mutual mistake, rectification is not available.

Unilateral mistake

Unilateral mistake occurs when one party alone is mistaken and the other party knows or, in the circumstances, should know of the mistake. Unilateral mistake cases usually belong to one of the following categories:

1. those involving mistaken identity

2. those involving a mistake as to a term of the contract other than the identity of a party, or

3. hose involving a mistake as to the nature of a document signed.

However, it is worth noting here that in common with mistake generally, a unilateral mistake will be of no consequence unless it is fundamental to the contract.

A case which illustrates the issues involved and the difficulty in rebutting the presumption in face-to-face dealing is Phillips v Brooks Ltd [1919] 2 KB 243.

North entered Phillipss jewellery shop and pretended that he was one Sir George Bullough. Phillips checked a directory to verify the address given by North and found that it did correspond with that of Sir George. North then selected approximately 3 000 worth of jewellery and wrote out a cheque for the required amount. However, rather than take the jewellery North suggested that Phillips keep it until the cheque was cleared. He did, however, convince Phillips to let him take a ring (which was worth 450) for his wifes birthday. The cheque was subsequently dishonoured and Phillips discovered that the ring was in the possession of Brooks Ltd, a pawnbroker, with whom North had pledged it for 350. Phillips sued for its return, alleging that the contract between himself and North was void for unilateral mistake.

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His action failed, the court finding that the contract was not void, but voidable, and as an innocent third party (Brooks Ltd) has acquired an interest in the ring prior to Phillips voiding the contract, Phillips could not force its return. His remedy, for what it was worth, was against North. Thus, the presumption was upheld.

Hartog v Colin & Shields [1939] 3 All ER 566

The defendants offered to sell to the plaintiff 300 000 Argentine hare skins for 5 1s 0d per pound. The plaintiff accepted even though he knew that during the negotiations between himself and the defendants, they had always referred to price per piece. Evidence was also presented to show that it was a trade custom to fix the price with reference to a piece. The matter was of considerable importance because 5 1s 0d per pound was equivalent to 1 18s 4d per piece. The plaintiffs action for non-delivery was rejected, the court finding that the sellers had made a fundamental unilateral mistake of which the buyer was aware.

Petelin v Cullen (1975) 49 ALJR 239

Petelin, a man who spoke little English and could not read it at all, signed an extension of an option to purchase his land when he thought he was signing a receipt. The original option had been granted to Cullen who was acting on behalf of a developer. Cullen paid $50 for the option which had to be exercised within six months. When that period expired without the option being exercised, Petelin received a further cheque for $50 payment, which he accepted. The reason he

accepted the second cheque was that when he was given the initial payment, Cullen had intimated that he would receive a second payment six months later. Petelin in fact signed an extension of the option, and during the extended period the option was exercised. An action was brought for specific performance of the option, and Petelin relied on non est factum.

The High Court of Australia refused to grant specific performance and found that the plea of non est factum had been made out. The documents signed were fundamentally different and negligence did not arise because there was no innocent third party involved: as Cullen was acting as agent for the prospective purchaser, they were regarded as one person.

Misrepresentation

It can be seen that in cases of operative mistake (other than common mistake) the basic notion is that the parties have not really agreed on the terms of their contract. With misrepresentation, on the other hand, the basic notion is that although the parties have agreed on the terms of the contract, one of them was motivated to enter the contract by a representation that is false. The law dealing with misrepresentation is primarily concerned with determining the rights of such persons and, as will be seen, their position will largely depend upon whether the false representation was made innocently, fraudulently or negligently. The topic of negligent misrepresentation is further examined in Module 7, Law of Tortsnegligence being a tortious not contractual wrong, although the two typically arise from the same commercial transaction. For now, students should simply remember that Negligent Misrepresentation is a civil wrong, action in Tort Law (the law of wrongs) not Contract Law. Also that deceit/fraudtelling liesis both a criminal and civil wrong.

What is a representation?

A misrepresentation is simply a representation that is untrue. It follows, therefore, that an analysis of what constitutes a representation should precede any discussion of misrepresentation.

A representation can be defined as a statement made by one party to the other, before or at the time contracting, with regard to some existing fact or to some past event, which is one of the causes that induces the contract. The representation must fulfil its purpose and actually induce the representee to make the contract. It need not be the only inducement in that regard; it must, however, have some effect on their decision to contract.

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In Attwood v Small (1838) 6 CI & Fin 232, the vendors of a mine grossly overstated the mines capacity. Small, the prospective purchaser, appointed an expert to assess the mines actual capacity and, on the basis of his report, proceeded with the purchase. When he later discovered the misrepresentation of the vendor, Small sought to rescind the contract.

His action failed, the House of Lords finding that the purchaser was influenced by his own advisers and not by the vendors statement.

Fraudulent misrepresentation

A fraudulent misrepresentation is a false representation made by a person who at the time of making it had no honest belief in its truth. If the representor does believe that his representation is true, no action for fraud can be maintained, even if the representor was negligent in holding that belief.

In Derry v Peek (1889) 14 App Cas 337 (HL), the respondent bought shares in a tramway company on the faith of a statement in the prospectus that the company was authorised to use steam power instead of horses. In actual fact, the specific Act of parliament which allowed the company to run the trams provided that steam could only be used with the consent of the Board of Trade. When the company did seek that consent it was refused and the company was ultimately wound-up. The respondent brought an action against the directors claiming damages for fraudulent misrepresentation.

Although he succeeded in the Court of Appeal, the House of Lords found in favour of the appellant directors. According to the House of Lords, the directors believed that the statement in the prospectus was true and that was enough to defeat an action against them for fraud. Lord Herschell discussed the important cases dealing with fraudulent misrepresentation and concluded as follows:

I think the authorities establish the following propositions: first, in order to sustain an action of deceit, there must be proof of fraud, and nothing short of that will suffice. Secondly, fraud is proved when it is shown that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false. Although I have treated the second and third as distinct cases, I think the third is but an instance of the second, for one who makes a statement under such circumstances can have no real belief in its truth. And probably covers the whole ground, for one who knowingly alleges that which is false, has obviously no such honest belief. Thirdly, if fraud be proved, the motive of the person guilty of it is immaterial. It matters not that there was no intention to cheat or injure the person to whom the statement was made .... In my opinion making a false statement through want of care falls far short of, and is a very different thing from, fraud, and the same may be said of a false representation honestly believed though on insufficient grounds ... (at 374).

The equity remedy of rescission ab initio is available for fraudulent (pre)contractual misrepresentation. As Meagher et al. (1992, pp. 335336) note: . the notion of fraud is deeply embedded in equity [but also] .. since Pasley v Freeman (1789) 100 ER 450, the common law regarded fraud as founding an action on the case for damages. Further at law, a contract is readily voidable for fraudulent misrepresentation if it remains entire executory. In that instance each party (defrauding party included) being entitled to restitutio in integrum can be readily restored to their original precontractual state. However, as the common law takes a strict view of what constituted proper restitution and lacks adequate procedures to enforce it, this means that rescission [at law] may not be had for many executed or partly executed contracts (Meagher et al. 1992, p. 654). But since equity in its concurrent jurisdiction takes a less stringent, more flexible approach to the degree of restitution required, seeking rather to do practical justice between the parties and utilises consequential orders for adjustment purposes. Such contracts can attract equity rights and court jurisdiction to effect a rescission (the courts now having conjoint common law and equity jurisdiction). Or as the High Court said in Alati v Kruger [1955] HCA 64 at para. 10:

But it is necessary here to apply the doctrines of equity, and equity has always regarded as valid the disaffirmance of a contract induced by fraud, even though precise restitutio in integrum is not possible, if the situation is such that, by the exercise of its power including the power to take accounts of profits and to direct enquires as to allowances proper to be made for deterioration, it can do what is practically just between the parties, and by so doing, restore them substantially to the status quo

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While in Vadasz v Pioneer Concrete (SA) Pty Ltd [1995] HCA 14, the High Court again stressed the need for flexibility in achieving what is practically just for both partieshere in a commercial settingand divided a guarantee founded on misrepresentation (assumed to be fraudulent) into avoidable past and but valid future indebtedness components on the justification that this, is to do no more than hold the appellant to what he was prepared to undertake independently of any misrepresentation (per Deane, Dawson, Toohey, Gaudron & McHugh JJ at para. 31).

In practical application of equity rescission principles, first, a court can issue a declaration that any self-help rescission undertaken by the victim is in fact justified. Secondly, even though the contract may be partly performed, a court can properly order that it be rescinded ab initio to effect substantial restitution in integrum especially where property hasnt been transferred between parties and there are no related or derivative third party property or contractual rights to consider. Thirdly, a consequential court order for recovery of all monies paid under the contract. Fourthly, a fraudulent party is equally entitled to restitution, i.e. entire cancellation of the contract. Fifthly, damages in equity for deceit are awardable to allow the victim to recover all the losses directly flowing from the fraudulent misrepresentationunless not reasonably foreseeable or due to supervening factors and this includes capital as well as income and unavoidable trading losses. Or, in other words, the general principle is that the plaintiff is to be put, so far as possible, in the position he would have been in if he had not acted on the fraudulent inducement: Gould v Vaggelas [1984] HCA 68 per Gibbs CJ; (see Turner and Trone 2013, para. 7.560 & 28.600).

Innocent or negligent misrepresentation

In certain circumstances, an innocent through negligent misrepresentation will give rise to an action for damages. For a long time the courts have recognised that this is the case where physical damage has resulted from the misstatement. It has also been accepted that where the parties are in a contractual or fiduciary relationship, damages can be awarded for purely economic loss.

More recently, however, it has become evident that the right to obtain damages for negligent misrepresentation is not so restricted.

In 1963, the House of Lords indicated as much in Hedley Byrne and Co Ltd v Heller and Partners Ltd [1964] AC 465. Hedley Byrne, an advertising agency, were engaged by Easipower Ltd to conduct an advertising campaign. As Hedley Byrne was obliged to enter a contract with television and newspaper companies whereby it would incur personal liability if Easipower defaulted, it asked its bankers to obtain a credit report on Easipower from Heller and Partners, Easipowers bankers. Heller and Partners provided a report which was favourable to their customer, and on that basis Hedley Byrne proceeded with the campaign. Subsequently, Hedley Byrne incurred substantial financial loss when Easipower went into liquidation.

Hedley Byrnes action for damages against Heller and Partners failed on the ground that the report provided by Heller and Partners was headed Confidential. For your private use and without responsibility on the part of this bank or its officials, an effective disclaimer in the circumstances. However, by way of obiter dicta, the court held that had there been no such clause with the report, Heller and partners may have been liable in negligence, and this was so even though the damage was purely financial and there was neither a contractual nor fiduciary relationship between the litigants.

Their Lordships indicated that before such a liability arises there must be a special relationship between the parties. Lord Reid indicated that such a relationship exists:

..... where it is plain that the party seeking information or advice was trusting the other to exercise such a degree of care as the circumstances required, where it was reasonable for him to do that, and where the other gave the information or advice when he knew or ought to have known that the inquirer was relying on him (at 486).

General law remedies for fraudulent and innocent representation

The principal law remedies for misrepresentation are rescission, for both fraudulent and innocent misrepresentation, and damages, for fraudulent misrepresentation only.

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Duress and undue influence

The concept of agreement necessarily implies that the parties voluntarily made their choice to contract with each other, therefore, the law provides a remedy, should their choice be made as a result of outside pressure rather than as a result of the exercise of free will. The common law developed the plea of duress to cater for those instances where the pressure involved actual or threats of violence or unlawful imprisonment. Equity, as could be expected, adopted a broader approach, granting relief where one party was in a position to, and did, exert undue influence over the other. Although the two pleas will be dealt with separately, it is conceivable that a particular situation could involve both.

Personal and economic duress

Duress includes situations in which (i) a person enters a contract because of actual or threatened violence or actual or threatened unlawful imprisonment and (ii) payments are coerced or contractual promises obtained by illegitimate pressure beyond that commercially acceptabledirectly or against a third partyoverriding the free will of the victim. In which case the law allows recovery of any money paid by restitution, and any contract entered into coercively is otherwise voidable at the option of the victim of the duress.

Personal duress is illustrated by Barton v Armstrong (1973) 3 ALR 355. Barton brought proceedings to have certain contracts between Armstrong and himself set aside because of duress. He alleged, and the trial judge accepted, that the defendant had threatened his life and safety and that of his family. However, his action was dismissed because the trial judge also found that the threats had not coerced him and that he had entered the contract for business reasons. The plaintiff appealed but that was also dismissed, the Court of Appeal finding that the party alleging the coercion had to prove that he was coerced into entering the contract.

A further appeal to the Privy Council was upheld. The Privy Council held that it was for the coercive party to show that the duress was not a contributing cause to the other partys decision to contract and by a three to two majority, it was held that Armstrong had not shown this. The Privy Council also indicated that the coercion did not have to be the main reason for entering into the contract: it only had to be a contributing cause. Consequently, the fact that Barton may have entered into the contract anyway was not a decisive factor.

While in the 18th century, common law judges and magistrates readily imposed fair prices against sellers for commodities (grain especially), freedom of contract has since largely prevailed with the terms of the paradigmatic contract being the product of consensus (offer and acceptance) being reached by commercial parties with approximate equality of information and bargaining power, reflecting dynamic supply/demand conditions. But in a variety of cases, either via a unilateral decision or fair bilateral bargaining, a firm may only be able to sell its goods/services at a loss either e.g. due to poor cost control, falling demand, or increased lower-cost competition. Thus, the fact of a firm agreeing to sell at a loss or on barely profitable terms or other very unfavourable terms isnt evidence per se, of unconscionable behaviour of some sortincluding economic duressby the buyer. A courts decision to that effect, means the behaviour complained of fails to conform with the minimum acceptable standard of commercial behaviour or transacting, with some latitude allowed since such standards are typically imprecise and variable. Consequently, the more directly economics-based restrictive trade practices provisions of the Competition and Consumer Act 2010 (Cth) are better equipped to address abusive market behaviour than broad common law doctrines, principles and rules of unconscionability and economic duress.

Bad terms (a hard bargain) only give rise to legal concern and possible intervention when indicative of a contracting partys lack of free will, i.e. true consensus. Economic duress, arguably a species of the genus unconscionable behaviour, involves the will being coerced, vitiating consent.

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Economic duress which is arguably a class of unconscionable behaviour was described by Isaacs J in Smith v William Charlick Ltd (1924) 34 CLR 38 in terms of compulsion being, a legal wrong, and the law provides a remedy by raising a fictional promise to repay (cited by Moccata J in North Ocean Shipping [1978] 3 All ER 1170 at 1180). There is also no effective difference in the remedies vis--vis payments and agreements to pay under duress. In North Ocean Shipping v Hyundai [1978] 3 All ER 1170 at 1182, Moccata J followed and applied Kerr J in The Siboen and the Sibotre [1976] 1 Lloyds Reports 293who in turn drew on Australian case lawfor the proposition that whether or not purely nominal but legally sufficient consideration was paid or not didnt matter, since:

If it had, the contract was voidable and equity would allow rescission and order repayment (i.e., restitution of unjust enrichment)

while if not the contract was void and payment recoverable in quasi-contract.

The issue of paying or agreeing to pay under protest is a little problematic: failing to protestor protesting but not clearly keeping the protest alivemay raise issues of whether an agreement or variation has been affirmed, thereafter disentitling that party from avoiding liability (the outcome in North Ocean Shipping). However, the Australian view regarding the presence/absence of protest is that it is not conclusive but rather that it is an evidential issue, relevant to the question of whether the victim acted freely or under compulsion (Carter and Harland 2002, para. 1325). Where proven, economic duress allows the other party to avoid the contract, resist a payment variation or recover any monies paid/payable either in quasi-contract or equity as the precise nature of the transactions the subject of duress dictate: North Ocean Shipping v Hyundai [1978] 3 All ER 1170; The Universal Sentiment [1983] 1 AC 366; Pao On v Lau Yiu Yong [1980] AC 614; TA Sundell v Emm Yannoulatos (1955) 56 SR (NSW) 323; Turner and Trone (2013, paras 7.7407.790 & 12.520). But in any event:

a contractual party is bound to perform all existing contractual stipulations without variation: Collins v Godefroy (1831) 109 ER 1040; Hartley v Ponsonby (1957) E&B 872.

Applying Foakes v Beer (1884) 9 AC 605, even if the coerced party agrees to accept a lower contractual price, unless the coercive party supplies further consideration, then the victim afterwards can sue for the outstanding full price payable or performance due under the contract unless promissory estoppel is somehow applicable.

In Wigan v Edwards (1973) ALJR 586 at 594, Mason J said that, the general rule is that a promise to perform an existing duty is no consideration, at least when the promise is made by a party to a pre-existing contract (cited in Carter & Harland 2002, para. 34). The general rule logically covers the promise to pay a lesser amount too.

And so, in TA Sundell v Emm Yannoulatos (1955) 56 SR (NSW) 323, a buyer under an existing contract that was coerced into making additional payments on threat of non-supply, later recovered that excess as a payment made under economic duress, or compulsion.

Undue influence

Undue influence can be pleaded whenever a persons free will is compromised by pressure exerted by another person. If, as a result of that pressure, the person is influenced to enter a contract with the dominant party, the courts may declare the contract voidable at the option of the influenced party. The cases involving the plea of undue influence usually concern dispositions by gift or for inadequate consideration.

Undue influence presumed in certain instances

It is now recognised that in certain situations undue influence will be presumed, and in those situations the dominant party bears the burden of proving the absence of pressure. While in general the law as Maine said in 1861, has gone from status to contract, there are classes of persons who since they either lack personal capability, an independence of mind or true freedom to contract, it is necessary to designate and treat them in terms of status in order to give them special protection.

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The situations referred to involve parties in a fiduciary relationship, and are as follows:

1. parent and child

2. trustee and beneficiary

3. physician and patient

4. solicitor and client

5. guardian and ward

6. religious adviser and devotee.

In Tasker v Algar [1928] NZLR 529, a mentally infirm person made several gifts of money to friends who looked after and cared for him. On his death, the administrator of his estate sought to have the gifts set aside, alleging that they had been obtained by undue influence.

The court held that the circumstances were such that a fiduciary relationship existed between the donor and the donees of the money and that the donees therefore had to rebut the presumption of undue influence. As they could not do this, the gifts were set aside.

Unconscionable contracts

Traditional general law attitude

Until recently, the common law has refused to entertain the possibility of invalidating a contract because it is harsh or oppressive to one of the parties. This attitude reflected the prevailing philosophy of freedom of contract.

On the other hand, equity has always been prepared to grant relief against harsh and unconscionable bargains wherever one party to the bargain is at a special disadvantage, as where he or she suffers from an illness, ignorance, impaired faculties, inexperience or financial need. In such cases, the onus of proving undue influence lies on the party suffering under the disadvantage, but once established, the onus shifts to the dominant party to show that the transaction was fair and reasonable.

Lord Denning reiterated this principle in Clifford Davis Management Ltd v WEA Records Ltd [1975] 1 WLR 61. The two members of a music group who composed the groups music entered an agreement with the manager of the group whereby, in return for the payment of one shilling and a royalty on sales, the manager purchased the copyright in all the music composed by them. The agreement was for an initial five-year term, with the manager having an option to extend it for a further five years. The agreement provided that the composers were to produce one composition per month, and further, that the manager had complete freedom to choose whether he would exploit any given piece. It was also provided that the manager could assign the copyright if he chose to.

Subsequently, the manager and the group split. The group employed a new manager, produced a new album and arranged for him to distribute it. As a result of this development, the original manager brought an action seeking an injunction to restrain what he regarded as a breach of his copyright.

The injunction was refused, the Court of Appeal found that the contract between the plaintiff and the composers was unenforceable because it was harsh and oppressive. Lord Denning indicated that the relevant factors in reaching this conclusion were as follows:

1. The terms of the contract were manifestly unfairthe composers were tied for up to ten years without any retaining fee. In reality, all they had was a promise by the manager to use his best endeavours to promote the works.

2. The consideration for the copyright was grossly inadequateif the manager chose not to exploit a composition, he obtained a copyright in that work for one shilling.

3. The fact that the plaintiff managed the group weakened their bargaining power. They relied on him greatly as he was skilled in business and they were not.

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4. The manager exerted undue influence over the composersgiven the complex nature of the agreement, and the onerous terms contained in it, he should have advised the composers to seek independent legal service.

A remedy may consequently be available if the inequality of bargaining power allows the stronger party to force a manifestly unfair contract on the weaker party. It is not certain whether the courts will declare such a contract void or voidable: none of the decisions referred to required this point to be determined. But given the nature of the disputes likely to arise, a more probable remedy will be a refusal to order specific.

Illegal contracts

If a contract has as its object something which is forbidden, or discouraged by the law, the courts will not assist a party to enforce it. Contracts may be rendered:

illegal by statute

void by statute

illegal at common law

void at common law.

Contracts rendered illegal by statute

This is where an Act of Parliament declares a certain kind of contract shall be illegal: Joe v Young (1964) NZLR 24. Section 5.25 Land Settlement Promotion Act 1952 (NT) declared that transactions in contravention of the Act were deemed to be unlawful and of no effect. Young was in possession of a market garden under a lease for a term of three years from July 28 1959, renewable for a further term of three years. The lease fell within the terms of the Land Settlement Promotion Act 1952, s. 5.23, and, since no steps had been taken to file a declaration or to make application to the land valuation court, it was deemed to be unlawful and of no effect. The owner sued for possession.

Held: since there had been a breach of the Act the contract of lease was illegal, and the owner was entitled to return of his land.

Property or money transferred under a contract illegal by statute cannot be recovered: Holman v Johnson (1775) 1 Cowp. 341. Here Lord Mansfield confirmed that this was primarily because the person suing for recovery is founding the action on an immoral or illegal act: ex dolo malo non oritur actio ex turpi causa (no right of action arises from a base cause).

Contracts rendered void by statute

If a contract is void by statute then money or property transferred is normally recoverable by the transferor: note however s. 248 Racing and Betting Act 1980 (Qld) which states: all contracts or agreements, whether by parol or in writing, by way of gaming or wagering, shall be null and void, and no suit shall be brought or maintained for recovering any sum of money ... upon any wager ....

In Coral v Kleyman (1951) 1 All ER 518 Kleymans son owed Coral (a bookmaker) betting debts totalling 355. Kleyman promised to pay these debts in consideration of Coral not reporting Kleymans son to Tattersalls as a defaulter.

Held: the promise was unenforceable.

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Contracts illegal at common law

The following are examples of contracts illegal at common law:

contracts to commit a crime or tort

immoral contracts of a sexual kind

contracts which injure the state in its foreign relations

contracts which affect the freedom or security of marriage or parental duties

contracts which tend to prevent the administration of justice

contracts intended to defraud the revenue

contracts in restraint of trade.

Some case examples of the above:

Pearce v Brooks (1866) LR 1 Ex 213

Pearce agreed to hire a brougham to Brooks, a prostitute. The carriage was to be used by Brooks to carry on her business as a prostitute. When Pearce sued for the rental, the question of Pearces knowledge of the unlawful object arose. The court held that Pearce knew or ought to have known of the unlawful object, and could not recover.

In Parkinson v College of Ambulance Ltd [1925] 2 KB 1. Parkinson was unable to recover monies paid to the secretary of the College on condition that the College secured a knighthood for Parkinson. This was an illegal object, Parkinson knew it was illegal and could not recover.

Contracts void at common law

These include:

contracts to oust the jurisdiction of the courts

contracts in restraint of trade.

Contracts to oust the jurisdiction of the courts

Parties to a contract cannot agree to avoid the courts in the event of a dispute arising. However they can include an arbitration clause if they wish. Even this does not stop the courts from intervening. In Scott v Avery (1856) 5 HL Cas 811. Lord Cranworth both confirmed that parties could not by agreement oust or avoid the jurisdiction of the court, and also recognised the right of arbitration in contracts. If the arbitration is unsuccessful or challenged, then both parties have the right to apply to the courts for relief.

This has to be read however subject to the growth of government sanctioned alternate dispute resolution, e.g., the revised Commercial Arbitration Act 2010 (NSW)the CAArepresentative of uniform legislation Australia-wide. Key sections of the CAA include: the arbitrator; the procedure; alternatives to arbitration; arbitration and litigation; the award and enforceability of awards. The CAA, perhaps an early form of ADR, sets out a highly structured arbitral process basically modelled on formal litigation, with extensive interconnection with standard court-based litigation processes and recourse to judicial oversight. See Turner and Trone 2013, pp. 3738.

An award obtained under the CAA is final and binding (s35), courts have no power to set it aside, other than to hear appeals on issues of law either referred to a court during the hearing by the arbitrator or following issuance of the award (sss 34, 34A & 36). And since the emphasis is on consensus as to procedure, section 27D allows the parties even if there is an arbitral agreement to settle the dispute by mediation etc and authorise the arbitrator to mediate between them.

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Contracts in restraint of trade

Such contracts have been defined by Diplock LJ in Petrofina (GB) Ltd v Martin [1966] 1 All ER 126 as:

A contract in restraint of trade is one in which a party (the covenantor) agrees with the other party (the covenantee) to restrict his liberty in future to carry on trade with other persons not parties to the contract in such manner as he chooses.

In Nordenfelt v MaximNordenfelt Guns and Ammunition Co Ltd (1891) All ER Rep 1, the House of Lords made it clear that generally contracts in restraint of trade were void as contrary to public policy. Here Nordenfelt had sold his armaments business to the company. As part of the contract for sale he covenanted that he would not carry on a similar business in competition with the company for at least 25 years. This was held to be enforceable against Nordenfelt since he had agreed to the convenant. Restraints on trade that are perceived as being reasonable may be enforced, if they are in the public interest but not if the prime purpose is to stop competition from a former employer: Drake Personnel Ltd v Beddison [1979] VR 13.

Here the plaintiff company carried on business as an employment agency. Beddison had been employed by the company and upon his ceasing such employment he set up a similar employment agency close to the company premises. This was contrary to Beddisons employment contract with the company which stated that if he left their employment he would not within 12 months set up a similar business within 25 miles of the plaintiff.

Held: the covenants were an unreasonable restraint on trade.

In Buckley v Tutty (1971) 46 ALJR 23. Tutty was under contract to play rugby league for the Balmain Rugby League Club. A condition of the contract was that while he remained on the clubs retain list, he could not transfer to another club. The only way a player could transfer was if the club struck him off the retain list or agreed to transfer him. The club could charge a substantial fee for a transfer. The High Court of Australia held it was an unreasonable restraint of trade: the transfer fee not only may prevent a player from reaping the financial rewards of his own skill but it may impede him in obtaining new employment (at 378).

The terms of a contract: express, implied and exemption clauses

Not all clauses of a contract are necessarily capable of neat primary division and classification into conditions, warranties, and even innominate terms. Contracts may also contain definitional sections and procedural clauses or terms that might defy a partys efforts to use them strategically if they become contentious for whatever reason. An arbitration clause is a procedural term which would tend to be considered a warranty for rescission vs. damages purposes on breach: if a term is essentially procedural in character it will be difficult to establish that the term is a condition in the absence of some special factor (Carter & Harland 2002, p. 697). Also, it would arguably be an abuse of judicial and arbitral process and bad faith dealing to endeavour to use the breach of a procedural term as the means of avoiding a contract where there was no breach of a substantive term, that is, a condition.

In any event, the courts have a general oversight role concerning the classification and enforcement of the terms of a contract, whatever the parties may have supposedly agreed upon (e.g., exclusion clauses): L Schuler AG v Wickham Machine Tool Sales Ltd [1974] AC 235. As Graw (2002, p. 212) points out, in determining whether such a condition is a term permitting repudiation, the court will look at the agreement as a whole in relation to the breach and determine whether it is in fact a condition in the true sense of that word or not. For instance even if a contract expressly states that a clause was a condition, the courts on application could authoritatively construe and determine its proper classification and characteristics and perhaps decide that the best approach was simply to enforce it, by injunction if necessary conformable with the deemed intention of the parties. After all, the primary obligation of the parties to a contract is due performance. And so it is first necessary to ascertain the proper meaning of contract clauses that are vague or ambiguous. Construction means, determining the meaning of words used to express the terms of a contract; and the means by which particular legal effects are ascribed to the terms which make up the contract (Carter and Harland 2002, p. 234).

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Express terms

A statement may be an express term of the contract or a representation inducing its formation. The importance of the distinction is that different remedies are available if a term is broken or a representation is untrue. Which it is depends on the intention of the parties. It may be helpful to consider:

(a) The stage of negotiations at which the statement was made. The later it was made the more likely it is to be a term.

(b) Whether the statement was reduced to writing after it was made. If it was reduced to writing, it is clearly regarded as important, and is probably a term of the contract.

(c) Whether the maker of the statement possessed special skill or knowledge as compared with the other party.

In Oscar Chess Ltd v Williams [1957] 1 WLR 370, the defendant, a private individual, sold to the plaintiffs, who were car dealers, for 280 a car honestly described as a 1948 Morris 10. It was in fact a 1939 model worth 175. The statement that it was a 1948 model was held not to be a term of the contract, since the defendant had himself been sold the car as a 1948 model, being given a forged log book. The defendant thus had no special knowledge as to the age of the car, whereas the plaintiffs, being car dealers were in at least as good a position as the defendant to know whether the statement was true.

In contrast is Dick Bentley Productions v Harold Smith Motors [1965] 2 All ER 65 where a dealer sold a Bentley car stating that it had only done 20 000 miles since a replacement engine, whereas it had in fact done 100 000 miles since then. This statement was held to be a warranty since the dealer was in a better position to know the mileage than the purchaser.

There are two basic types of express terms:

(a) A condition is a vital term, going to the root of the contract, breach of which normally entitles the innocent party to treat the contract as at an end (i.e., to repudiate the contract) and to claim damages

(b) A warranty is a term which is subsidiary to the main purpose of the contract, breach of which only entitles the innocent party to damages.

Classification as condition or warranty depends on the intention. The court will base its decision on the commercial importance of the term, or less usually, on the effects of the breach.

In Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26, a ship delivered under a 24-month charter party was unseaworthy, and took seven months to repair. The court said that many contractual undertakings could not be categorised simply as conditions or warranties, and the innocent party should be entitled to rescind only if the effect of the breach is to deprive him of the benefit of the contract substantially. Since the ship was available for 17 out of the 24 months, recission was not granted. The actual in between state was termed an innominate term. Nothing less than a serious breach of an innominate term entitled the innocent party to treat the contract as to an end.

Implied terms

Terms may be implied by custom, the courts, or by statute. In this manner, a simple contract may include both express terms and also terms implied by the courts if those prospective implied terms are reasonable and equitable, necessary for business efficacy, obvious, clearly expressed and not inconsistent with the express terms. Thus, implied terms can supplement or extend contractual obligations. The five criteria set out in BP Refinery v Shire of Hastings (1977) 180 CLR 266 for the inclusion of implied terms into a contract are now applied less rigorously and more flexibly: Hospital Products Ltd v USSC (1984) 156 CLR 41; Hawkins v Clayton (1988) 164 CLR 573. There are in fact four ways in which terms can be implied into a contract (i) implications from the express terms of a contract; (ii) implications from the nature of the contract; (iii) implications from usage (local, industry custom); and (iv) implications from considerations of business efficacyi.e., essential terms without which the contract wouldnt function as intended: Brambles v Bathurst City Council [2001] NSWCA 61 per Heydon JA at paras 2830; Codelfa Construction Pty Ltd v SRA of New South Wales (1982) 149 CLR 337; The Bell Group v Westpac [2008] WASC 239 per

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Owen J paras 26732677. Once industry custom or usage has achieved sufficient notoriety, it is attributable to contracting parties independently of their actual knowledge thereof: Con-Stan Industries v Norwich [1986] HC 14 per Gibbs CJ et al. at para. 10. While concerning business efficacy, in The Bell Group case at para. 2677, Owen J said that:

The question of whether a term is to be applied will ultimately depend on whether it is necessary for the reasonable or efficient operation of the contract assessed against the background of, but without rigidly applying, the BP Refinery criteria.

Custom

The parties are presumed to have contracted by reference to the customs prevailing in the trade or locality in question, unless they have shown a contrary intention.

In British Crane Hire v Ipswich Plant Hire [1974] 2 WLR 856, both firms were in the business of hiring out cranes and heavy plant. The defendant urgently needed a crane for work on marshy ground and agreed to hire such a crane from the plaintiffs. The method of payment was agreed but the hire conditions were not. The plaintiff then sent the defendant a copy of their standard conditions (which were similar to those used throughout the trade) which provided that the hirer would be liable for all expenses arising out of the cranes use. Before these conditions were signed the crane sank into the marshy ground, and the plaintiffs incurred expenses in recovering it. The plaintiff claimed these expenses from the defendant.

Their action succeeded since both parties were in the same trade, and had equal bargaining power, and the evidence was that they both understood that the plaintiffs standard conditions of hire would apply.

The courts

The courts will imply two types of terms into contract. First, terms which are so obvious that the parties must have intended them to be included. These are called terms implied in fact. Second, terms which are implied to maintain a standard of behaviour, even though the parties may not have intended them to be included. These are called terms implied in law.

Terms implied in fact

The implied term must be both obvious and necessary to give business efficacy to the contract. The courts will not imply a term merely because it is reasonable to do so. The test used is known as the officious bystander test.

In The Moorcock (1889) 14 PD 64, the defendants, who were wharf owners, contracted to allow the plaintiffs to unload their ship at the wharf. The ship grounded at low water and was damaged by settling on a ridge of hard ground. The defendants were held to be in breach of an implied term that the wharf was safe.

Terms implied in law

Terms implied in law cover many classes of contract. Thus in a contract of employment, the employees, impliedly undertake, for example, to serve the employer faithfully, and that they are reasonably skilled. The employer impliedly undertakes to provide safe premises, and will not require the employees to do any unlawful act. Similarly in a tenancy agreement the landlord impliedly covenants that his or her tenant shall have quiet possession, and the tenant impliedly agrees not to damage the premises.

Statutes

Two major Commonwealth and Queensland statutes are:

1. Competition and Consumer Act 2010 (Cth) which provides protection to consumers, and implies certain statutory guarantees in consumer contracts for the supply of goods and services via its Australian Consumer Law provisions.

2. Sale of Goods Act 1896 (Qld)the original regulatory initiativewhich provides implied conditions and warranties with respect to the supply of goods.

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And the new National Credit Code, enacted as Schedule 1 of the National Consumer Credit Act 2009 (Cth) superseding prior state/territory based credit legislation, similarly regulates the provision of credit to natural persons with an expansive array of implied and overriding terms applying to the credit contract entered into.

Exemption clauses

An exemption clause is a term in a contract which seeks to exempt one of the parties from liability, or which seeks to limit his or her liability to a specific sum if certain events occur, such as a breach of warranty, negligence, or theft of goods. An exemption clause may become a term of the contract by signature or by notice.

If a person signs a document he or she is bound by it even if they do not read it.

In LEstrange v Graucob Ltd [1934] 2 KB 394, the plaintiff who was the proprietor of a cafe, purchased a cigarette vending machine. She signed, without reading a sale agreement which contained a large amount of small print. The machine was defective but the vendors were held to be protected by an exemption clause contained in that small print.

At common law, an exclusion clause cannot be relied upon where the party seeking to rely on the clause misrepresented the nature or extent of the clause: Curtis v Chemical Cleaning & Dyeing Co [1951] 1 KB 805; Liaweena (NSW) Pty Ltd v McWilliams Wines (1991); Mendelssohn v Normand Ltd [1970] 1 QB 177. Notwithstanding the whole of agreement clause, a court would receivebeyond the Parol evidence ruleevidence of the oral statements fraudulently, negligently or innocently misrepresenting the effect of the exclusion clause.

In Curtis v Chemical Cleaning and Dyeing Co Ltd [1951] 1 KB 805, the plaintiff took a white satin wedding dress, trimmed with beads and sequins to the cleaners. The assistant gave her a form to sign, and when asked about its contents said that it excluded the companys liability for damage to the beads and sequins. The plaintiff then signed the form, which in fact contained a clause excluding the company from all liability. When the dress was returned it was badly stained. The company attempted to rely on their exemption clause but it was held that they could not do so since the assistant had misrepresented (albeit innocently) the effect of the form.

Where a document is not signed the exemption clause will only apply if:

the party knows of the clause, or if

reasonable steps are taken to bring it to his or her notice before the contract is made.

In Olley v Marlborough Court [1949] 1 KB 532, the plaintiff booked in at the defendants hotel. When she went to her room she saw a notice on the wall stating that the hotel would not be liable for articles lost or stolen unless they were handed in for safe keeping. The plaintiff left some furs in the bedroom, closed the self-locking door, and hung the key on a board in reception. The furs were stolen.

It was held that the exemption clause was not effective. The contract was completed at the reception desk, and accordingly a notice in the bedroom came too late to be incorporated into the contract.

Limitations on the use of exemption clauses

In considering the validity of exemption clauses, the courts have had to strike a balance between:

the principle that parties should have complete freedom to contract on whatever terms they wish, and

the need to protect the public from unfair exemption clauses in standardform contracts used by large business organisations.

The use of exemption clauses by large businesses to abuse their bargaining power is clearly indefensible. Nevertheless exemption clauses do have a proper place in business. However they are now extensively regulated by legislation, especially in relation to transactions between business entities and consumers. Nowadays, Anglo-Australian courts (no doubt cognisant that statute law intervenes extensively to protect those at risk classes of

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contracting parties) take a less doctrinal, more pragmatic stance, that is adhering to the neutral construction of exclusion or limitation clauses in commercial contracts especially, deferring to freedom of contract and general availability of insurance for a party desirous of covering any residual risk they might bear thereunderpresuming no doubt the price of the contract factors in that element of risk. The Australian term exclusion clause now covers all such exculpatory terms (Vermeesch and Lindgren 2005, p. 163). While in the leading High Court case Darlington Futures Ltd v Delco Australia Pty Ltd [1986] HCA 82 at para. 16, on appeal the full bench (Mason CJ et al.) held that the same rules of construction applied to both exclusion and limitation clauses:

. the interpretation of an exclusion clause is to be determined by construing the clause according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract, and where appropriate, construing the clause contra proferentem in case of ambiguity. Notwithstanding the comments of Lord Fraser in Ailsa Craig. the same principle applies to the construction of limitation clauses.

To sum up, to be effective, the exclusion clause must be fully incorporated into the contract not being an extraneous stipulation introduced too late; nor its terms misrepresented so as to prevent the relevant party relying upon it (see Turner and Trone 2013, pp. 151155). Secondly, while it was once thought they couldnt apply to a fundamental breach of contract, or beyond the four corners of the contract, Council of Sydney v West (1965) 114 CLR 481 posited the now accepted rule that its all a matter of construing the contractual terms, as confirmed in Photo Production Ltd v Securicor [1980] 1 All ER 556 and Darlington Futures Ltd v Delco Australia Pty Ltd [1986] HCA 82. Thirdly, an appropriately worded exemption clause can exclude a party from liability from the tort of negligence besides contractual breaches of an express/implied term: Davis v Pearce Parking Station (1954) 91 CLR 642. Broadly defined, the essence of the tort of negligence is that in certain circumstances the law imposed a duty on a person to take reasonable care not to cause [financial, physical or proprietorial] harm to other persons (Turner and Trone 2013, para. 28.50).

Fourthly, using standard legal classification, an exclusion clause may (i) deny or delimit the principal obligations otherwise arising under the contract, or (ii) seek to exclude (secondary) liability for breach of such obligations (Greig and Davis 1987, p. 597). Fifthly, a general exclusion clause may not in fact be designed to address as Phillimore LJ observed in Joseph Travers & Sons Ltd v Cooper [1915] 1 KB 73 at p. 101 (cited in Coote 1997), each and every loss irrespective of the causeextending to include patently unauthorised acts, negligence and wilful damage. It particular, an exclusion clause may not necessarily be effective to encompass or address the following:

Liability in negligencea tort, which arises by operation of law, not contract.

Liability under the tort of deceit for fraudulent statements or fraudulent performance of the contract.

Applying the Delco case, losses arising from activities undertaken by a firms employees for which they have no authority, i.e. completely unauthorised activities or transactions. A firm is also vicariously liable in tort for its employees actions though not within the regular course of employment (i.e. a frolic of their own) if reasonably foreseeable.

Also applying Kamil Export (Aust) Pty Ltd v NPL (Australia) Pty Ltd [1996] 1 VR 538 and related cases surveyed by Coote (1997), exclusion clauses dont cover deliberate conversion, theft, wilful or criminal damage to or sabotage of properties by a contracting party (a firm) or its employees including acts so ill-designed or reckless theyre likely to effect property damage etc.

Conditions and warranties

A breach of a condition entitles the innocent party to rescind (i.e., terminate) the contract and/or claim damages, whereas a breach of warranty entitles the innocent party to damages only for the loss he or she has suffered as a result of the breach and does not give a right to end the contract.

In Bettini v Gye (1876) 1 QBD 183, Gye, the director of an opera company, contracted with Bettini, a singer, in opera and concerts for a period of three months. The contract said that Bettini would be in London at least six days before the rehearsals. Bettini only arrived two days before rehearsals, because of illness. Whereupon Gye refused to accept his services, and treated the contract as at an end.

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Held: the term was a warranty, not a condition, so Gye could not terminate the contract, but could only claim damages for any loss sustained by him because of Bettinis lateness.

In Associated Newspapers Ltd v Bancks (1951) 83 CLR 322, Bancks contracted to prepare a weekly drawing of his cartoon character, Ginger Meggs, for a newspaper, which agreed to present the drawing each week as a full page feature on the front page of the comic section of its Sunday newspaper. Because of a news print shortage the cartoon appeared on page three of the comic section of the newspaper for three consecutive Sundays, upon which Bancks told the newspaper that the contract was at an end, because of the newspapers breach.

Held: in an action by the newspaper that its undertaking to publish Bancks cartoon on the front page of the comic section was a condition of the contract, breach of which meant Bancks could treat the contract as at an end.

Non est factum references

The principle of non est factum may apply to any contract, not merely to terms, conditions or warranties. It means it is not my deed. A common law defence which permits a person who has executed a written document in ignorance of its character to plead that notwithstanding the execution it is not my deed.

In Foster v Mackinnon (1869) LR 4 CP 704, a person of very poor sight was induced to sign a bill of exchange by being told it was a guarantee. It was held that he was not liable.

In Commercial Bank of Australia Ltd v Amadio (1983) 46 ALR 402, the plaintiffs Mr & Mrs Amadio had signed a mortgage to the bank as security for payment of debts owed by their son to the bank. The plaintiffs were elderly Italians with little knowledge of English, and when they were asked to sign the mortgage they thought it was a guarantee up to $50 000 for six months only. Later the sons company went into liquidation and the bank claimed from Mr & Mrs Amadio the sum of $240 000.

Held: that the plaintiffs had not been aware of what they were signing. No proper explanation had been given to them, and accordingly the mortgage or contract was not valid.

References

Carter, JW & Harland, DJ 2002, Contract law in Australia, 4th edn, LexisNexis Butterworths, Chatswood.

Coote, B 1990, Exception Clauses, Deliberate Acts and the Onus of Proof in Bailment Case, Journal of Contract Law, vol. 12.

Graw, S 2002, An introduction to the law of contract, 4th edn, Law Book Co, Sydney.

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