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BOND UNIVERSITY
SCHOOL OF LAW
Principles of Contractual Liability
(Torts and Contracts C)
LAWS11-212
COURSE MATERIALS
January 2003
(Semester 031)
Jay Forder
COURSE CO-ORDINATOR
Table of Contents
PART A – COURSE GUIDE ...................................................................................................................... 1
Introduction.......................................................................................................................................... 1
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PART 1 – CONTRACT FORMATION .............................................................................................................. 2
1. Background and context ......................................................................................................... 2
What is contract law about? ............................................................................................................ 2
Where does contract law come from and where does it fit? ............................................................ 2
2. What is a contract? ................................................................................................................. 3
How do contracts come about?........................................................................................................ 3
Definition and essential elements .................................................................................................... 3
3. The offer .................................................................................................................................. 4
What is an offer? ............................................................................................................................. 4
Powerplay with offers ................................................................................................................. 4
Actual or apparent agreement? ................................................................................................... 4
Distinguishing offers from other pre-contractual statements .......................................................... 4
Duration of the offer ........................................................................................................................ 5
Problems with revocation ........................................................................................................... 5
Options ............................................................................................................................................ 5
4. Acceptance .............................................................................................................................. 5
General principles relating to acceptance ........................................................................................ 5
Effect of identifying offer & acceptance .................................................................................... 6
Method and time of acceptance ....................................................................................................... 6
UK postal acceptance rule .......................................................................................................... 6
Postal acceptance in Australia .................................................................................................... 6
Other methods of communication .............................................................................................. 7
5. Intention to enter legal relations ............................................................................................ 7
The objective test ............................................................................................................................ 7
Classifications and presumptions .................................................................................................... 7
6. Certainty ................................................................................................................................. 7
Contract may be void for vagueness ............................................................................................... 8
Methods of overcoming uncertainty ................................................................................................ 8
Conditional acceptances. ................................................................................................................. 8
PART 2 – CONSIDERATION, ESTOPPEL & PRIVITY ....................................................................................... 9
1. Consideration ......................................................................................................................... 9
Filtering methods............................................................................................................................. 9
Definition and descriptions ............................................................................................................. 9
1. Must move from the promisee .......................................................................................... 9
2. May be executory or executed, but not past. ..................................................................... 9
3. Must be sufficient............................................................................................................ 10
Problems and criticisms................................................................................................................. 10
2. Estoppel ................................................................................................................................ 10
Background and early development .............................................................................................. 10
Acceptance in Australia................................................................................................................. 11
3. Privity ................................................................................................................................... 11
PART 3 – TERMS IN THE CONTRACT ......................................................................................................... 13
i
1. Categorising terms ............................................................................................................... 13
Types of pre-contractual statement ............................................................................................... 13
Terms and representations ............................................................................................................. 13
Conditions and warranties ............................................................................................................. 13
Innominate or intermediate terms .................................................................................................. 13
Express and implied terms ............................................................................................................ 14
2. Parol evidence rule ............................................................................................................... 14
Collateral contracts ........................................................................................................................ 14
3. Tickets, receipts and notices ................................................................................................. 14
The incorporation principle ...................................................................................................... 15
The interpretation principle ...................................................................................................... 15
4. Implied terms ........................................................................................................................ 16
Implied from the facts ................................................................................................................... 16
Implied (imposed) by law .............................................................................................................. 17
5. Interpreting terms ................................................................................................................. 17
PART 4 – DISCHARGE OF THE CONTRACT ................................................................................................. 19
1. By performance ..................................................................................................................... 19
The order of performance .............................................................................................................. 19
The time for performance .............................................................................................................. 19
Requirements for discharge ........................................................................................................... 19
Entire contracts doctrine ........................................................................................................... 19
Substantial performance ........................................................................................................... 19
Divisible contracts .................................................................................................................... 19
Limited quantum meruit ........................................................................................................... 20
2. By agreement ........................................................................................................................ 20
3. By acceptance of breach or repudiation ............................................................................... 20
Breach and the right to terminate .................................................................................................. 20
Repudiation and anticipatory breach ............................................................................................. 21
Nature and effect of termination.................................................................................................... 21
4. By frustration ........................................................................................................................ 21
Early development ......................................................................................................................... 21
Current scope................................................................................................................................. 22
Recognised categories .............................................................................................................. 22
Events foreseen ......................................................................................................................... 22
Self-induced frustration ............................................................................................................ 22
Juristic basis .................................................................................................................................. 22
Effects of frustration ...................................................................................................................... 23
PART C – POWERPOINT SLIDES ........................................................................................................ 23
ii
Principles of Contractual Liability – Sem 031 Page 1
PART A – COURSE GUIDE
Introduction
This course follows on from the Law of Civil Remedies. Having studied what remedies the law provides,
you now begin to study when these remedies are available. The two major sources of civil obligations in
common law are torts (studied in Principles of Tortious Liability) and contracts (studied in this course).
Our emphasis will be on the process of creating and defining contractual rights; of establishing the terms
of the contract and how they are interpreted; and finally on the termination of contracts. Issues relating to
the enforceability of flawed contracts will be studied in the Law of Obligations, together with a review of
some legal and policy issues common to torts and contracts. Issues as to the formal requirements for
written contracts are studied in connection with the sale of land and the doctrine of part performance in
later subjects. The capacity of parties to enter into contracts is considered primarily in relation to
corporations in Corporations Law. In subjects studied later in your course, you will consider the impact of
statute and practice on these basic principles of contract in areas such as sale, secured transactions, trade
practices, equity, company law, consumer transactions and so on. Contract is the foundation for all these
subjects.
Page 2 Principles of Contractual Liability – Sem 031
Part 1 – Contract formation
1. Background and context
H-T Ch 1, I, X & XI
Supplementary reading: H-C Ch 1; CH Ch 1, esp 1.29-1.33
What is contract law about?
The classical view is that contract law is about enforcing obligations that were undertaken voluntarily by
the parties. Some refinements of this view focus on the will of the parties, or the moral imperative in
enforcing promises (promise theory), or the parties‟ consent to the imposition of the obligation (consent
theory).
There are several other theories and perspectives, eg analyses by economists, the critical legal studies
movement or feminists. You will encounter some of these views in the more theoretical law courses, such
as Legal Reasoning. See also Chapter 1 in the prescribed text.
For example, the economic analysis focuses on the meaning of wealth (eg money, property, land, goods
(chattels), rights, obligations) and ownership (eg MY house/car/ money/dog). What role is played by the
concept of „rights‟? (Leaving aside land, note the classification of rights into things (choses) in possession
and things (choses) in action.) The economists suggest that assets have no commercial value unless they
have utility or are marketable. A person in business dedicated to the pursuit of wealth, must consider how
rights are created, and how they are marketed (ie transferred). That is what contract is about!
Where does contract law come from and where does it fit?
General principles are synthesised and extracted from cases involving many different types of agreements.
It is largely a case-law subject with many old English cases establishing the principles, although there is
increasing statutory intervention. You study many of the different types of contract in more detail in later
courses.
How does this course relate to Civil Remedies and Principles of Tortious Liability? What obligations may
a person be under, and how do they arise?
Contract is part of the law of obligations, a division of private law (as opposed to public law). Most legal
systems differentiate between three different sources or types of obligations. In broad terms contract deals
with obligations that are voluntarily undertaken, ie when one party promises to do something. Criminal
law deals with obligations imposed on people and prosecuted by the State (criminal wrongs). Torts law
deals with obligations between parties not to cause each other unnecessary harm (civil wrongs). But be
wary of these pigeonholes – they are not perfect. Other sources of obligations that don‟t fit quite so easily
into this scheme include restitution, equitable and statutory obligations.
In this course we will build on your knowledge of the remedies available in civil law. We will focus on
the creation or formation of contracts, their interpretation, and the way they come to an end. In the
Obligations course you study the enforceability of flawed contracts (such as those affected by fraud,
misrepresentations, duress, illegality, etc), the effect of the Trade Practices Act and similar Acts together
with a review of some legal and policy issues common to torts and contracts.
Assumptions & tensions
Note these traditional assumptions that run through early contract law:
Freedom of contract
Negotiation prior to agreement
Equal bargaining power
Commercial interests
The cases also reveal perennial tensions between:
individualism, freedom of contract vs interventionism, welfarism
Principles of Contractual Liability – Sem 031 Page 3
certainty, uniformity vs flexibility, discretion, justice
subjective intention vs objective or apparent intention
globalisation/international interests vs local/national interests
In Australia, we have two different regimes for finding agreement, depending on whether the contract is a
domestic contract, or an international contract for the sale of goods. If the latter, Australia has agreed to
be bound by a multilateral governmental convention, which is implemented through legislation in each
State and Territory. The relevant provisions of the United Nations Convention on the International Sale
of Goods are set out in CH at 2.38-39.
2. What is a contract?
Supplementary reading: CH 1.16-1.17; G 2.1 & 2.3-2.4
How do contracts come about?
Consider different types of contract and how they are made? Consider contracts:
for the sale of land – by private treaty or by auction
for the sale of goods
for the sale of shares in a company
for a bank loan
for travel or the carriage of goods
for insurance
for employment
We can classify contracts (for this purpose of identifying how they are made) into –
(i) Contracts that are formal and wholly in writing, including deeds; could be one document
(specially prepared or a “standard form”) or several documents
(ii) Contracts that are informal and still entirely or mostly in writing (such as an exchange of
correspondence)
(iii) Contracts that are made orally
(iv) Contracts inferred from conduct
The essence of all of these is that a promise to do something (or refrain from doing something) has been
made. In what circumstances are these promises enforceable?
Definition and essential elements
A definition might be „an agreement that gives rise to legally enforceable obligations‟, but definitions like
this tend to be unhelpful. It is more meaningful to set out the elements that normally make up an
enforceable contractual obligation:
1. There must be two or more parties having legal capacity to enter the particular contract
2. There must be agreement between them (objectively tested). This is usually manifested by an offer
to be legally bound on certain terms and a corresponding acceptance of the offer
3. There must be sufficient certainty about the terms of the agreement for it to be enforceable
4. The parties must have an intention to be legally bound by their agreement
5. The agreement must be supported either by consideration or by a deed (or in unusual situations
estoppel may apply)
6. The contract must comply with any required formalities (statutes require some contacts to comply
with formalities, such as being in writing)
7. The contract must not be illegal or otherwise affected by vitiating factors that nullify their intention,
such as an operative mistake.
To avoid duplication, we only deal with some of these essential elements in this course. We spend the first
three weeks dealing with offers and acceptances, certainty and intention. We then devote the next three
weeks to the important and problematic requirement of consideration and related issues. [The remaining
elements are all dealt with in other courses: Legal capacity is dealt with in your Business Associations
course – we merely mention it here. Formalities are dealt with in other courses when they arise in relation
Page 4 Principles of Contractual Liability – Sem 031
to particular types of contracts, such as in Land Law or Personal Property Transactions. The vitiating
factors are dealt with in Obligations.] In the second half of this course we deal with the contents of
contracts, how they are interpreted and how they come to an end.
3. The offer
H-T Ch 2, I & II
Supplementary reading: CH 2.5-2.26; G Ch 3
Agreement requires a meeting of the minds or consensus ad idem. This is usually, but not always, the
result of an identifiable offer and an acceptance of that offer.
What is an offer?
We look for “a manifestation by one party to the other of his willingness to be bound by certain terms if
the other party, to whom the manifestation is directed, shows his willingness to be bound to the offeror on
those terms. The offer therefore gives to the offeree the power to create a contract by making an
acceptance.”
Powerplay with offers
The offeror has power to dictate the terms of the contract when making the offer. The offeree has power
to create the contract by accepting the offer. The offeree may also:
reject the offer (in which case the offer comes to an end)
make a counter-offer (in which case the original offer comes to an end, because the counter-offer is a
rejection of the original offer)
seek more information or clarification (in which case the original offer may still be capable of
acceptance)
do nothing (in which case the original offer terminates after a reasonable time).
Hyde v Wrench (1840) 49 ER 132 [G 3.7.2]
Stevenson, Jaques v McLean (1880) 5 QBD 346 [CH 2.87: G 3.7.3]
It is often difficult and sometimes artificial to analyse negotiations in terms of offer and acceptance.
Butler v Ex-Cell-O [1979] 1 All ER 965 [H-C p 74; CH 2.32; G 3.7.4]
Actual or apparent agreement?
Parties might look as though they are agreeing, but they might differ as to what they meant, that is they
might have a different understanding of the contract. There is still a valid contract if there is agreement
when tested objectively, ie parties are nevertheless bound if a reasonable person would have thought they
were agreeing.
Smith v Hughes (1871) 6 QB 597 [H-C p 814; CH 12.35]
Distinguishing offers from other pre-contractual statements
The following are NOT offers but stages in negotiation because they do not manifest an intention to be
bound but only a willingness to discuss terms:
(a) invitations to treat
Is the display of goods in a shop-window an offer?
Or the display of goods in a supermarket?
Pharmaceutical Soc of GB v Boots Cash Chem [1953] 1 QB 401 [H-C p 46; CH 2.6; G 3.3.2]
Or the listing of goods in a periodical or mail order catalogue?
Partridge v Crittenden [1968] 2 All ER 421 [G 3.3.1]
Or the listing of goods on the WWW?
(b) supplying information
Harvey v Facey [1893] AC 552 [G 3.1.2]
(c) offering goods for sale by auction
AGC (Advances) Ltd v McWhirter (1977) 1 BPR 9454 [CH 2.23; G 3.3.3]
Hughes Aircraft Systems v Airservices Australia (1997) 146 ALR 1 [G 3.3.4]
(d) do cross-offers make a contract?
Principles of Contractual Liability – Sem 031 Page 5
Duration of the offer
Basic principle: an offer can not be accepted after it has ceased to exist - it must be in existence at the
time of acceptance (whenever that is). It is therefore often necessary to ascertain both the time of
termination of the offer and the time of the attempted acceptance.
An offer is terminated by -
(a) Express or implied time limit or occurrence of a condition to which the offer was subject
(b) Lapse of reasonable time
(c) Death
of offeror
is termination automatic on death or only when the offeree learns of the death of the offeror?
of offeree
if offer made to one person, only that person can accept it
(d) Rejection (but distinguish an enquiry for further information – see above)
(e) Revocation
can be at any time before acceptance
must be communicated to offeree
is not effective until it reaches offeree
Byrne v Van Tienhoven (1880) 5 CPD 344 [G 3.9.3]
Problems with revocation
Can the offeree ignore information that the offer has been withdrawn if it does not come from the
offeror?
Dickinson v Dodds [1876] 26 ChD 463 [CH 2.81; G 3.9.4]
How do you revoke an offer to the public at large?
Can the offer of a promise to be accepted by performance of an act (eg $100 if you stop smoking for a
month) be revoked at any time before the act is complete?
Veivers v Cordingley [1989] 2 Qd R 278 [CH 2.91]
Mobil Oil Australia v Wellcome International (1998) 81 FCR 475 [H-C p 51; G 3.9.6]
Options
An option is an offer with a separate concluded agreement to keep the offer open for a specific period. It
separate option contract must be supported by consideration (or be in a deed) otherwise the offeror is not
bound to keep the offer open for the option period.
Goldsborough Mort v Quinn (1910) 10 CLR 674 [H-C p 48; CH 2.97; G 3.9.2]
4. Acceptance
Reading: CH 2.27-2.138; G Ch 4
Acceptance is an unqualified indication of assent in response to an offer that is still open.
General principles relating to acceptance
1. Offer can only be accepted by those persons to whom it was made
offers to particular persons
Boulton v Jones (1857) 27 L.J.(Ex) 117 [G 4.2.2]
can have offers to the whole world
Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 [H-C p 33; CH 2.12; G 3.4.1]
2. The offeree must be aware of the offer and intend to accept it
R. v Clarke [1927] 40 CLR 227 [H-C p 63; CH 2.68; G 3.6.2]
3. Acceptance must be unqualified and correspond with the offer
recall counter-offers compared with requests for information (discussed above under offers)
4. Acceptance must usually be communicated
cross offers not effective
Tinn v Hoffman (1873) 29 LT 271 [G 3.6.3]
the offeror can dispense with communication if he is prepared to take the risk of not
knowing whether the offer has been accepted or not
Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 [H-C p 33; CH 2.12; G 3.4.1]
an offer can be accepted by conduct
Page 6 Principles of Contractual Liability – Sem 031
Brogden v Metropolitan Railway (1872) 2 AC 666 [G 4.5.5]
Empirnall Holdings v Machon Paull (1988) 14 NSWLR 523 [H-C p 67; G 4.5.5]
but cannot impose a condition that silence shall be construed as acceptance
Felthouse v Bindley (1862) 11 CB (NS) 869 [H-C p 66; CH 2.51; G 4.5.3]
s 64 Trade Practices Act 1974, (FTA s 57-59)
Effect of identifying offer & acceptance
Note: the formula of “offer and acceptance” is an artificial model which serves to identify four important
contractual matters:
(i) the fact of agreement (ie is there a legally binding contract?)
(ii) the time of agreement (because once the contract is made, neither party can unilaterally change
it, except in some circumstances by waiving rights)
(iii) the content of the agreement (ie the express terms)
(iv) the place where the agreement is made (where the acceptance is notified to the offeror – which is
important for determining which law applies to the contract and which legal system has
jurisdiction to settle disputes)
MacRobertson Miller Airlines v CoT (1975) 133 CLR 125 [H-C p 38]
Method and time of acceptance
Generally acceptance can be communicated by any method, ie orally, in writing, by post, telegraph,
telegram, telephone, fax, email, etc. It is only effective when communicated to the offeror.
The method of acceptance may be prescribed by the offeror.
Manchester Diocesan C for E v C & G Investments [1970] 1 WLR 241 [CH 2.47; G 3.11.3]
What if acceptance is sent by a different method? Is it invalid, even if quicker than the prescribed
method?
When is a letter of acceptance effective?
when posted (expedition theory)?
when received at destination (reception theory)?
when read by the offeror (information theory)?
UK postal acceptance rule
Henthorn v Fraser [1892] 2 Ch 27 [G 4.5.9]
“[where] circumstances are such that it must have been within the contemplation of the parties that,
according to the ordinary usages of mankind, the post might be used as a means of communicating
acceptance, the acceptance is complete as soon as it is posted.”
The historical reason for this rule is a little obscure. Could it have been because at that time there was
uncertainty about the effect of revoking by a quicker method? Or because post was risky, and the offeror
who contemplated it being used should bear the risk? Or because it gave certainty to the offeree at an
early stage, or easier to prove?
This is an unusual exception to the general rule that acceptance is effective when notified to the offeror. It
leads to some absurd consequences – if the acceptance letter is lost in the post, the offeror might be bound
even though they knew nothing of the acceptance.
Household Fire & Carriage Insurance v Grant (1879) 4 Ex D 216 [G 4.5.11]
The rule is not part of civil law systems or used in international sales of goods. It is no longer quite so
prevalent in the UK – courts easily find that the rule has been overborne by a contrary intention, express
or implied.
Holwell Securities v Hughes [1974] 1 All ER 161 [G 4.5.10]
Postal acceptance in Australia
When the HC considered the rule, Dixon CJ and Fullagar J said “the offeror must have contemplated and
intended that his offer be accepted by the doing of that act [of posting]”. This is not the same as
contemplating the use of the post. Could this be interpreted as an implementation of the general principle
that the offeror can specify, expressly or impliedly, the method of acceptance?
Tallerman & Co v Nathan's Merchandise (1957) 98 CLR 93 [H-C p 69; CH 2.61; G 4.5.9]
Principles of Contractual Liability – Sem 031 Page 7
Bowen CJ did not think so in the NSW Supreme Court, but was able to interpret the offeror‟s intention as
requiring actual notification of acceptance.
Bressan v Squires [1974] 2 NSWLR 460 [CH 2.58]
Other methods of communication
The UK postal acceptance rule has been applied to telegrams, but not to instantaneous or virtually
instantaneous methods of communication, such as telex and fax.
Brinkibon v Stahag Stahl etc [1982] 2WLR 264 [H-C p 69; CH 2.62]
Reese Plastics v Harmon-Sobelco (1988) 5 BPR 11,106 (NSW) [G 4.5.13]
Note Electronic Transactions Act 1999 (Cth) & State Acts [H-C p 71]
5. Intention to enter legal relations
H-T Ch 4
Supplementary reading: CH Ch 4; G Ch 5
The objective test
The test of intention is an objective one. We are not concerned with what the parties actually thought or
intended. We are not concerned with their motive or reason for entering the contract or with private
undisclosed reservations. We are concerned with what, from their words and conduct, a reasonable person
would take them to have intended.
This requirement of „objective intention‟ applies equally to the parties‟ intention to enter legal relations
(IELR) as it does to their intention about the scope and meaning of the terms of their agreement (see
later).
There are two policy reasons for requiring an intention to enter legal relations:
to implement what the parties look as though they are trying to achieve
to avoid inappropriate disputes clogging the courts
Classifications and presumptions
There are certain presumptions depending on the type of contract. All these presumptions are rebuttable,
and should not be treated as firm rules – they depend on the facts of each case and on the overall onus on
the plaintiff to prove the existence of an enforceable contract.
Ermogenous v Greek Orthodox Community [2002] HCA 8 [H-C p 114]
a) Commercial dealings – presumption that IELR
Esso Petroleum v Comm of Customs & Excise [1976] 1 AER 117 [CH 4.27]
Rose & Frank v Crompton [1925] AC 445 [CH 4.21; G 5.4.1]
b) Family arrangements – presumption that did not IELR
Jones v Padavatton [1969] 2 AER 616 [CH 4.15]
Balfour v Balfour [1919] 2 KB 571 [CH 4.6; G 5.2.2]
c) Agreements with Governments – policy reasons make it difficult to assume IELR
Administrator of PNG v Leahy (1960-61) 105 CLR 6 [H-C p 132; CH 4.35]
Factors tending to favour a finding that there is IELR:
substantial mutual sacrifice
symbolic consideration (evidence of intention)
formal contract, lawyers involved
made in atmosphere of distrust
Factors tending to count against a finding that there is IELR:
closeness of relationship
virtually gratuitous benefits
informal contract, eg not reduced to writing
6. Certainty
H-T Ch 5
Page 8 Principles of Contractual Liability – Sem 031
Supplementary reading: CH 2.113-2.138; G 4.4.1-4.4.5
Contract may be void for vagueness
What happens if the offer and/or the acceptance is indefinitely expressed? What happens if there are
important gaps in the contract? If the express terms don‟t deal with the issue, a court may be prepared to
find that there was an implied term (see Part 3 on terms). Otherwise the contract may be void for
uncertainty, vagueness or incompleteness. „Void‟ means there never was a valid contract in the first place
(known as void ab initio).
Scammell Ltd v Ousten [1941] AC 251 [G 4.4.1]
Raffles v Wichelhaus (1864) 159 ER 375 [G 11.4.2]
Methods of overcoming uncertainty
Courts generally try to find meaning and certainty where the can – they are not to be the „destroyers of
bargains‟. Typical methods by which courts (or lawyers drafting contracts) cope with uncertainty include:
a) Referring to customs or trade usages.
b) Referring to the previous course of dealings between the parties.
c) Referring to an external formula or method. Traditionally, if there was merely an agreement to
negotiate or to agree in the future, this was unenforceable because there is no meeting of the
minds yet. Recent NSW courts have been prepared to hold that an agreement to negotiate in
good faith may be enforceable in appropriate circumstances.
Coal Cliff Collieries v Sijehama (1991) 24 NSWLR 1 [H-C p 139; CH 2.129; G 4.4.4]
(applied in Australis Media v Telstra (1998) 43 NSWLR 104)
If terms need to be left for later decision, there has to be some independent third party or method
that will finalise them – the parties themselves cannot be left to make the final decision. Note
treatment of ADR clauses.
Hawthorn FC v Harding [1988] VR 49 [G 4.4.4]
Aiton Australia v Transfield (1999) 153 FLR 236 [H-C p 155]
d) Finding that the parties impliedly agreed to be bound by whatever is reasonable in the
circumstances. Early cases tended to refuse to „fix‟ the contract by imposing what was
reasonable – it was seen as too vague and subjective. But modern courts are more prepared to use
this concept if it is possible to give it meaning. Some statutes require courts to adjudicate on
what is reasonable, eg Sale of Goods Act 1896 (Qld) s 11 says if the price is omitted, it is to be a
reasonable price.
e) Severing the vague part from the rest of the contract. Severance is possible if there is agreement
on all the substantial matters; cutting out the meaningless part leaves the substance of the
contract intact and does not require redrafting; and the parties objectively intended to be bound
whether the particular clause was part of the contract or not.
Fitzgerald v Masters (1956) 95 CLR 420 [G 4.4.5]
Conditional acceptances.
When does the contract come into existence, for example where it is expressed as an agreement „subject
to contract‟ – meaning subject to a further document being signed? There appear to be three possibilities:
There is no contract unless and until the second document is signed
The contract is now and the new document is part of the performance, ie the parties are obliged to
sign the new document
The contract is now, but the obligations are suspended, and the new document merely triggers the
obligations to perform
Masters v Cameron (1954) 91 CLR 353 [H-C p 134; CH 2.135; G 4.3.2]
Godecke v Kirwan (1973) 47 ALJR 543 [H-C p 172; G 4.3.3]
What about acceptance „subject to finance‟?
Meehan v Jones (1982) 56 ALJR 813 [H-C p 165; CH 2.116]
Principles of Contractual Liability – Sem 031 Page 9
Part 2 – Consideration, estoppel & privity
H-T Ch 3, 7 & 8
Supplementary reading: CH Ch 3 & 9; G Ch 6 & 8
1. Consideration
Filtering methods
All legal systems have requirements that prevent certain types of agreement from clogging up the courts.
Possible filtering requirements that might make a promise binding include having a ritual (eg handshake),
referring to cultural expectations, referring to what is moral, referring to intention to be bound, having
regard to the extent of the reliance, and requiring something to be given in exchange for the promise.
The English legal system requires not only a serious intention to be bound, but also one of three other
possible methods: a deed („under seal‟), consideration or estoppel (detrimental reliance). A contract which
is not under seal is not legally binding unless the promisee has furnished consideration or unless there was
detriment resulting from such reasonable reliance on the promise as would found an estoppel.
Consideration is needed when a promise is made and again if that promise is varied later. To work out
whether consideration is an issue, identify the promise that a party is trying to enforce, and then ask what
that party gave in return for the promise.
Definition and descriptions
„An act or forbearance of one party, or the promise thereof, is the price for which the promise of the
other party is bought; and the promise thus given for value is enforceable.‟
Lord Dunedin in Dunlop v Selfridge [1915] AC 847 at 855
„Some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or
responsibility given, suffered or undertaken by the other.‟
Currie v Misa (1875) LR 10 Exch 153 at 162
The benefit or detriment must be given in return for the promise that is being enforced (known as the
price of the promise or bargain theory of consideration). [See lecture for some examples.]
Australian Woollen Mills Pty Ltd v Commonwealth (1954) 92 CLR 424 [H-C p 43; CH 3.20]
Beaton v McDivitt (1987) 13 NSWLR 162 [H-C p 79]
1. Must move from the promisee
Consideration must move from the promisee, but need not move to the promisor, ie the person seeking to
enforce the promise must have provided the consideration, although it can be for the benefit of a third
party. [The overlapping privity doctrine is discussed later.] Note the unjust situation that might arise [see
lecture slides]. There are three arguments that might, to some extent, overcome these difficulties:
Joint promisees
Coulls v Bagot's Executor & Trustee Co Ltd (1967) 119 CLR 460 [H-C p 262; CH 3.27]
The Trident exception
Trident Insurance v McNiece Bros (1988) 165 CLR 107 [H-C p 282; CH 9.6]
Statutes, eg s 48 Insurance Contracts Act 1984 (Cth) and s 55 Property Law Act 1974 (Qld) (see
discussion under privity).
2. May be executory or executed, but not past.
Executory consideration means that a promise has been given in exchange for a promise, and at the
time this description is used, the promises are still to be performed.
Executed consideration means that at the time this description is used, one of the parties has already
performed the act or forbearance that was the consideration.
Past consideration means a promise to do something on account of an event that happened in the
past.
Roscorla v Thomas (1842) 3 QB 234 [H-C p 90; CH 3.37; G 6.2.5]
Page 10 Principles of Contractual Liability – Sem 031
There is an exception (known as the rule in Lampleigh v Braithwait) – if an act was performed at the
request of the other party and both intended it would be paid for, a later promise to pay is enforceable if it
would have been enforceable if given in advance.
In re Casey's Patents [1892] 1 Ch 104 [CH 3.38]
See also the exception in Bills of Exchange Act 1909 (Cth) s 32.
3. Must be sufficient
Consideration need not be adequate (ie a fair or just price) but must be sufficient (ie must be of some
value in the eyes of the law). Nominal consideration is acceptable, eg a „peppercorn rent‟. If there is no
real obligation at all, it might be illusory consideration.
Problems and criticisms
Performance of an existing public or other duty arising under the law
Collins v Godefroy (1831) 109 ER 1040 [G 6.4.2]
Popiw v Popiw [1959] VR 197 [CH 3.83; G 6.4.2]
But exceeding the existing duty would be consideration
Glasbrook v Glamorgan County Council [1925] AC 270 [CH 3.70; G 6.4.2]
Ward v Byham (1956) 2 All ER 318 [CH 3.77; G 6.4.6]
Performance of a duty arising under an existing contract with the promisor
Stilk v Myrick (1809) 170 ER 1168 [CH 3.87; G 6.4.3]
Hartley v Ponsonby (1857) 119 ER 1471 [CH 3.87; G 6.4.3-6.4.4]
Williams v Roffey Bros & Nicholls [1991] 1 QB 1 [H-C p 94; CH 3.87; G 6.4.5]
Musumeci v Winadell (1994) 34 NSWLR 723 [H-C p 97; CH 3.87; G 6.4.5]
Performance of a duty arising under a contract with a third party (and see privity issues later)
Shadwell v Shadwell (1860) 142 ER 62 [G 6.4.6]
Changing one‟s behaviour
Dunton v Dunton (1892) 18 VLR 114 [CH 3.55; G 6.2.8]
White v Bluett (1853) 22 LJExch 36 [G 6.2.8]
Release from part of a debt owed (the rule in Pinnel’s case)
Foakes v Beer (1884) 9 AC 605 [H-C p 91; CH 3.89; G 6.5.2]
Forbearance to sue and compromise of disputed claim – consideration because giving up rights
Composition with creditors? Now dealt with by statute, eg Bankruptcy Act 1966 (Cth)
The cases are often difficult to reconcile – they can be illogical, offend the expectations of the parties,
inequitable and even immoral. In 1937 the UK Law Revision Commission produced a report
recommending substantial change to the doctrine. It suggested any agreement in writing should be
enforceable – consideration should only be required for unwritten agreements. It also suggested
consideration should not be required for options, agreements to accept a lesser sum, promises to do
something one is already bound to do, and promises to benefit third parties. It also anticipated the need for
a rule relating to detrimental reliance (estoppel).
2. Estoppel
H-T Ch 7
Supplementary reading: CH 3.112-3.141; G 6.6
Background and early development
There are a number of situations in which the lack of consideration allows a party to get out of a promise
they have made, eg Coulls v Bagots Trustees, Stilk v Myrick, Foakes v Beer (above). There are sometimes
possibilities for suing under non-contractual remedies, eg misrepresentation in tort, misleading or
unconscionable conduct under the Trade Practices Act 1974 (Cth) or State equivalents, and equitable
arguments such as the law of trusts and restitution (unjust enrichment). One of the more important
equitable principles that has developed to cope with this situation is the doctrine of estoppel.
Being estopped means being precluded from a course of action or arguing a particular point because of
your previous behaviour. In common law, a false representation of existing facts could give rise to
estoppel (Jorden v Money 1854 5 HLC 185). This overlaps with misrepresentation. It does not apply to
representations about future conduct in a contractual context, so is unhelpful in dealing with the
consideration issues referred to above.
Principles of Contractual Liability – Sem 031 Page 11
A form of equitable estoppel was mentioned by Lord Cairns in Hughes v Metropolitan Railway (1877) 2
AC 439.
“… if parties … so conduct themselves as to induce one of the parties to suppose that the strict rights
arising under the contract will not be enforced or will be kept in suspense ... the person who
otherwise might have enforced those rights will not be allowed to enforce them when it would be
inequitable having regard to the dealings which have taken place ...”
Denning J (as he then was) used this statement as authority for his obiter statement in Central London
Property Trust v High Trees House [1947] KB 130. Despite the lack of consideration for the landlord‟s
promise not to claim full rental during the war, Denning said any claim for arrear rental would be
estopped. By the mid-1960s the House of Lords and the Privy Council had accepted this extension of
equitable estoppel.
Acceptance in Australia
Some Australian cases prior to 1988 had tentatively accepted the doctrine.
Je Maintiendrai v Quaglia (1980) 26 SASR 101 [H-C p 212; CH 3.127; G 6.6.3]
Legione v Hateley (1983) 152 CLR 406 [CH 19.138 (facts) & 3.115–6; G 6.6.3]
The early requirements were:
There had to be an existing legal relationship
A clear representation that rights would not be enforced
Representee acts to his substantial detriment
Representor inequitably reneges and sues
Estoppel would be a valid defence or shield
The watershed case occurred in 1988. The current position (now called promissory estoppel) is:
No pre-existing legal relationship is required
A clear representation by words or conduct
Induces the representee to rely on it
Representee acts to his substantial detriment
Reliance on the representation is objectively foreseeable
Representor knows or ought to know that reliance is actually taking place (conscience affected)
Can give rise to specific performance (as if there is a contract) or expectation damages
Waltons Stores Ltd v Maher (1988) 164 CLR 387 [H-C p 219; CH 3.119; G 6.6.3]
Austotel v Franklins Selfservice (1989) 16 NSWLR 582
Commonwealth v Verwayen (1990) 170 CLR 394 [H-C p 231; G 6.6.3]
This modern form of estoppel is more fully developed in Australia than in the UK. It applies not only to
pre-contractual negotiations, but also to the variation and termination of contracts (see later). The
unconscionability element comes through strongly in Australian cases, and mirrors developments in
statute law (eg TPA).
3. Privity
H-T Ch 8
Supplementary reading: CH Ch 9; G Ch 8
The privity doctrine merely says that only persons who are parties to a contract can sue or be sued on it.
This overlaps with the rule that consideration must move from the promisee – it is possible to argue that if
one has not given consideration, one cannot be a party to the contract.
Courts have made inroads into these doctrines (recall HL in Coulls v Bagots Trustee – joint promisees,
HC‟s narrow exception in Trident Insurance v McNiece,). Other cracks include promissory estoppel,
express or implied trusts, where the parties co-operate, and exclusion clauses.
The case that best illustrates the difficulty and the co-operative party solution:
Beswick v Beswick [1968] AC 58 [CH 9.16; G 8.1.2 & 16.9.3]
There are some important Privy Council decisions dealing with the privity issue in relation to exclusion
clauses in contracts of carriage. Early cases did not allow exclusion clauses to cover third parties.
Page 12 Principles of Contractual Liability – Sem 031
Scruttons v Midland Silicone [1962] AC 446 [CH 9.28; G 8.2.2]
New Zealand Shipping Co Ltd v Satterthwaite [1975] AC 154 [CH 9.30; G 8.2.2]
Port Jackson v Salmond & Spraggon (1980) 54 ALJR 552 [H-C p 271; CH 9.34; G 8.2.2]
Note the legislative solutions: Property Law Act 1974 (Qld), s 55; Property Law Act 2000 (NT), s 56;
Property Law Act 1969 (WA), s 11 [CH 9.40-9.45; G 8.2.3].
Westralian Farmers Co-op v Southern Meat Packers [1981] WAR 241 [G 8.2.3]
Jones v Bartlett (2000) 176 ALR 137 [G 8.2.3]
Principles of Contractual Liability – Sem 031 Page 13
Part 3 – Terms in the contract
1. Categorising terms
H-T Ch 9, 10 & 11
Supplementary reading: CH Ch 6; G Ch 9
Types of pre-contractual statement
Pre-contractual statements are categorised as puffs, opinions, representations & terms.
Puffs are intended as praise of the product (and thus are intended to induce the contract) but are not
to be taken literally. There are no legal consequences if they turn out to be untrue.
Opinions are usually given with no promise as to their truth, and so there are no legal consequences
if they turn out to be wrong – unless they were not genuinely held at the time.
Representations are statements of fact that are intended to induce the contract and to be relied on, but
are not part of the terms of the contract. If false, they give rise to the remedy of rescission (and
restitutionary damages) and, if negligent or fraudulent, may give rise to compensatory damages in
tort law. They may also give rise to statutory remedies under the Trade Practices Act 1974 (Cth) and
State equivalents. [These topics are dealt with in the Remedies and Obligations courses.]
Terms are statements of a promissory nature about existing or future facts or conduct that are agreed
on by the parties as defining the obligations they undertake. They are intended to be enforceable. If
breached, an action lies in contract law (primarily for damages) whether the breach is innocent or
not.
Terms and representations
The test of whether a statement is a term is an objective one. It is a difficult distinction to make. Helpful
factors include:
the time between the statement and the conclusion of the contract
if there is a written contract, whether the statement is reduced to writing and included in the contract
(and see the parol evidence rule later)
whether the statement is subjectively important to one of the parties (and this is known or ought to
have been known to the other party)
who is in a better position to know the truth?
Oscar Chess v Williams [1957] 1 All ER 325 [H-C p 312; CH 6.1.2; G 9.2.5]
Dick Bentley Productions v Harold Smith Motors [1965] 1 WLR 623 [CH 6.18; G 9.2.5]
Ellul & Ellul v Oakes (1972) 3 SASR 377 [CH 6.24]
Conditions and warranties
Different types of terms give rise to different remedies when breached. The traditional view was that there
were two types of terms, and they could be categorised at the time the contract was formed:
A warranty is a promise that is contractually binding but is not an essential term. A breach gives rise
to a right to claim damages, but not to reject the contract.
A condition is a major or essential term. A breach gives rise to a right to affirm the contract and
claim damages, or terminate the contract and claim damages.
Poussard v Spiers & Pond (1876) 1 QBD 410 [G 9.4.2]
Bettini v Gye (1876) 1 QBD 183 [G 9.4.2]
The test for the difference between them was expressed thus by the HC in Luna Park v Tramways
Advertising (1938) 61 CLR 286:
“whether it appears from the general nature of the contract considered as a whole, or from some
particular term or terms, that the promise is of such importance for the promisee that he would not
have entered into the contract unless he had been assured of a strict or substantial performance of
the promise, … and that this ought to have been apparent to the promisor”
Innominate or intermediate terms
Since Hong Kong Firs it has been recognised that while most terms can be categorised as conditions or
warranties at the time of contract, and remain in their category, some terms are more complex. Their
classification awaits the extent of the loss that follows when the term is breached. If the consequences of
breach are serious enough, the innocent party can terminate the contract as if it were a condition.
Page 14 Principles of Contractual Liability – Sem 031
Hong Kong Fir v Kawasaki Kisen Kaishu [1962] 2 QB 26 [H-C p 529; CH 19.27; G 9.4.4]
Associated Newspapers v Bancks (1951) 83 CLR 322 [H-C p 526; CH 19.17]
Ankar v National Westminster Finance (1987) 162 CLR 549 [H-C p 533; CH 19.21]
Express and implied terms
How do terms become part of the contract? They are usually expressed by the parties, either in writing or
orally. There may be one formal document, or a number of documents (such as an exchange of
correspondence). A written document may also incorporate terms from another document. If in writing,
the parol evidence rule might apply. If the terms are not expressed, they may sometimes be implied, for
example from the parties‟ conduct or surrounding circumstances. They can also be implied (or imposed)
by law, such as by the Trade Practices Act 1974 (Cth) and State equivalents.
2. Parol evidence rule
Reading: CH 7.4-7.82; G 9.1.2-9.1.9
The Parol Evidence Rule states that where a contract is reduced to writing and, on the face of it, is a
complete agreement, the court will not admit parol (oral) evidence to add to, vary or contradict the
express terms of the written document. The idea was to encourage certainty and prevent fraud, but it also
creates an opportunity for fraud!
The first issue is always whether the contract is complete on the face of it, or whether it is really just a
partly written and partly oral contract. If it looks like a complete written contract, there is a rebuttable
presumption that it is one. Oral evidence can be adduced to show that it was not a complete written
contract, but ultimately the court must decide whether the presumption that it was intended to be complete
has been rebutted.
Thorne v Borthwick (1956) 56 SR (NSW) 81 [CH 7.25]
Couchman v Hill [1947] KB 554 [CH 6.7]
Other circumstances in which oral evidence may be admitted to prove related relevant facts include:
to show the operation of the document was subject to a condition precedent
Pym v Campbell (1856) 119 ER 603 [CH 7.11; G 9.1.6]
to show that the contract had been discharged by an oral agreement
when seeking the remedy of rectification
where there has been fraud or misrepresentation
where there is latent ambiguity in the circumstances in which the contract was entered into, extrinsic
evidence can be adduced of the objective background to clear up the ambiguity, ie what was meant
by the written terms
in the case of a contract in a particular trade, to prove the mercantile or trade meaning of terms, as
long as the meaning does not contradict the plain meaning
Collateral contracts
Another argument often adduced to counter the parol evidence rule is that there was a collateral contract.
(Collateral contracts are also raised in two other situations – where the privity doctrine presents
difficulties, and to counter the requirements under the Statute of Frauds that certain types of contracts be
in writing or have written evidence.) It is more popular in the UK than it is in Australia. The argument is
that the parties entered into the main contract on the basis of or in reliance on a separate but collateral
statement or contract. The collateral contract must satisfy all the normal requirements of a contract (eg
intention to be bound). The consideration for the collateral contract is said to be the entering into of the
main contract. If the parol evidence rule is applies, the collateral contract cannot be inconsistent with the
main contract.
Hoyts v Spencer (1919) 27 CLR 133 [H-C p 349; CH 6.31; G 9.3.6]
Sheppard v Ryde Corporation (1951) 85 CLR 1 [CH 6.37]
Savage v Blakney (1970) 119 C.L.R. 435 [H-C p 310; CH 6.42]
3. Tickets, receipts and notices
Contracts sometimes refer to other documents that contain some terms. Many old standard form contracts
used to refer to common clauses in a book of rules; some tickets, receipts and notices refer to terms
available on request. Sometimes the tickets, receipts and notices themselves contain terms that are
supposed to apply to the contract. Are all these enforceable?
Principles of Contractual Liability – Sem 031 Page 15
The most common type of term found on tickets, receipts and notices is an exclusion or limitation of
liability – the principles discussed here are often referred to as the principles relating to exclusion clauses.
exemption clauses – exempt a party from liability
exclusion clauses – exclude something from the contract that would otherwise apply
limitation clause – limits the remedies or the amounts claimable or the time for the claim
some statutorily imposed terms cannot be excluded, or can only be excluded up to a limit
It is legitimate to use such terms to define subject matter and obligations, allocate risks and
responsibilities and make realistic pricing possible. It is illegitimate to use standard forms, tickets,
receipts, etc for surprise and exploitation. Judges have developed common law techniques to stop
exploitation. Legislators have also provided relief (see consumer protection statutes such as TPA (Cth),
FTA (states), Contract Review Act (NSW)). The result is different rules for consumers and commercial
contracts.
The judicial techniques are based on two approaches:
deciding whether the term is properly to be seen as part of the contract - the incorporation principle
if the term is part of the contract, deciding what the term means by construing it restrictively - the
interpretation principle
The incorporation principle
There are two basic rules:
1. A party who signs or knows of a term at the time they contract is bound by it. This is sometimes
described by the Latin phrase caveat subscriptor – let the signer beware. This rule wouldn‟t apply in
a case of fraud or misrepresentation (and duress, undue influence, mistake, etc?).
L’Estrange v Graucob [1934] 2 KB 394 [H-C p 322; CH 6.53; G 10.3.9]
Curtis v Chemical Cleaning & Dyeing (1951) 1 KB 805 [H-C p 324; CH 6.58; G 10.3.12]
2. A party who does not sign or does not know of a term is not bound by it, unless:
The document containing the term was presented/incorporated before the contract was finalised,
and
EITHER a reasonable person would know it contained terms / was a document of contractual
significance,
OR, if a reasonable person would not have known it was of contractual significance, then
reasonable steps must have been taken to give notice of the term to the other party before the
contract was entered into.
Olley v Marlborough Court [1949] 1 KB 532 (CA) [G 10.3.8]
Oceanic Sun Line v Fay (1988) 62 ALJR 389 [H-C p 325; G 10.3.8]
Chapelton v Barry UDC [1940] 1 KB 532 [G 10.3.4]
Mendelssohn v Normand [1970] 1 QB 177 (CA) [G 10.3.5]
Causer v Brown [1952] VLR 1 [CH 6.64; G 10.3.2]
Parker v SE Railway (1877) 2 CPD 416 [CH 6.68]
Balmain New Ferry v Robertson (1906) 4 CLR 379 [H-C p 334; G 10.3.5]
Thornton v Shoe Lane Parking [1971] 2 QB 163 [H-C p 329; CH 6.74; G 10.3.7]
Interphoto Picture Lib v Stiletto Visual Programmes [1989] QB 433 [CH 6.80; G 13.11.2]
Without reasonable steps being taken to bring the clause to the other‟s notice, knowledge may be inferred
if there has been a sufficient consistent course of dealings between parties before.
Henry Kendall v William Lillico [1969] 2 AC 31 [CH 6.85; G 10.3.14]
DJ Hill v Walter Wright (1971) VR 749 [CH 6.93; G 10.3.11 & 10.3.14]
The interpretation principle
How widely or narrowly should the exclusion clauses be interpreted? Freedom of contract suggests that,
apart from fraud, any liability can be excluded by clear drafting. However, cases disclose numerous
possibilities for arguing against an exclusion clause.
1. Where ambiguous, clauses should be interpreted contra proferentem.
Wallis & Wells v Pratt & Haynes (1911) AC 394 [CH 7.97; G 10.4.2]
2. Liability for negligence must be excluded clearly. If it is not, and there are other possible causes of
damage, a general exclusion clause will exclude liability for negligence.
White v John Warwick (1953) 2 All ER 1021 [CH 7.135]
Page 16 Principles of Contractual Liability – Sem 031
Davis v Pearce Parking Station (1954) 91 CLR 642 [H-C p 397]
3. The doctrine of fundamental breach has never been part of Australian law. However, while
exclusion clauses, if clearly drafted, can exclude liability for even the most fundamental obligations,
the more startling the exclusion, the clearer the clause must be.
Karsales (Harrow) v Wallis [1956] 1 WLR 936 [G 10.5.2]
Suisse Atlantique v NV Rotterdamsche [1967] AC 361 [G 10.5.3]
Photo Productions v Securicor [1980] AC 827 [CH 7.124; G 10.5.3]
Sydney County Council v West (1965) 114 C.L.R. 481 [CH 7.104; G 10.5.4]
4. The deviation and four corners principles appear the same – that an exclusion clause does not cover
deviations from the contract, or activities outside the four corners of the contract.
TNT v May & Baker (1966) 115 CLR 353 [H-C p 392; CH 7.117; G 10.5.4]
5. Clause must be read down where it creates an absurdity or defeats the main purpose or object of the
contract (obiter view):
Van der Sterren v Cibernetics (1970) 44 ALJR 157
Other arguments that may apply (which we don‟t deal with here):
misrepresentation that clause doesn‟t apply
qualification by another term
total failure of consideration
unconscionability (equity or statute), eg Commercial Bank of Australia v Amadio (1983) 151 CLR
447 or s 52A TPA - corporation shall not, in trade or commerce, in connection with the supply of
goods to a person, engage in conduct that is unconscionable
Recall that the privity doctrine might restrict the effectiveness of exclusion clauses when purporting to
protect third parties. Note also that UK has the Unfair Contract Terms Act (1977) which says one can
exclude only what is reasonable. NSW has the Contracts Review Act (1980) which says courts can vary
unjust contracts/clauses.
Is there a distinction between excluding and limiting clauses, ie do limitation clauses need to be read
down?
Alisa Craig Fishing v Malvern Fishing („Securicor No 2‟) [1983] 1 AllER 101 [G 10.6.1]
Darlington Futures v Delco (Australia)(1986) 161 CLR 500 [H-C p 389; CH 7.146; G 10.6.2]
4. Implied terms
H-T Ch 11
Supplementary reading: CH 6.97-6.142; G 9.5
Implied from the facts
Where the express terms are silent about a vital point, the contract could be void for uncertainty/
vagueness. Alternatively the courts prefer to imply a term if, from all surrounding facts, it was obviously
intended to apply.
“The Moorcock” (1889) 14 PD 64 [G 9.5.4]
A court will only imply a term in the following circumstances:
where it would be reasonable and equitable to do so
it must be needed to give „business efficacy‟ to the contract, ie a term will not be implied if the
contract is effective without it
it must be so obvious that it goes without saying („officious bystander test‟)
it must be capable of clear expression
it must not contradict the express terms
Codelfa Construction v State Rail Authority (NSW) (1983) 1149 CLR 337 [CH 6.99]
Byrne; Frew v Australian Airlines (1995) 185 CLR 411 [H-C p 403]
Courts look to the following to assist in implying a term into the contract:
Custom or common trade usage. It must be well-known and agreed in the trade such that parties can
reasonably be presumed to have imported the term. They can be bound even where there is no
subjective knowledge of the term
Previous dealings between the parties. This is an objective test – what would a reasonable person
think was implied.
Principles of Contractual Liability – Sem 031 Page 17
Implied terms are unique to each contract. They are based on the presumed intention of the parties.
Implied (imposed) by law
In some contracts, terms are imposed by law. These are often called implied terms, but they are not
strictly so – they are imposed on all contracts of that particular kind. They do not depend on the presumed
intention of the parties. They can be imposed by common law or statute. For example in CL, that
employee exercise reasonable care in discharging their duties. By statute there are warranties in consumer
contracts for supply of goods and services under the Trade Practices Act 1974 (Cth) and State Sale of
Goods Acts, etc. (Dealt with in Obligations course.)
5. Interpreting terms
Supplementary reading: CH Ch 7; G Ch 10
Although the parties create the contract and define their obligations, when there is a dispute it is the
function of the court to interpret their contracts. An „objective‟ approach is taken – the parties‟ state of
mind is inferred from admissible evidence as to words and acts. In oral contracts, interpretation is an issue
of fact for the jury (if there is one); in written contracts, the construction of the contract is a question of
law for the judge. (Contracts partly oral and partly in writing are treated as oral for this purpose). The
issues considered below are examples of the court seeking agreement, ie whether there is an effective
accepted offer, and what that means.
Some canons of construction
Subject to statutory requirements in respect of particular contracts, parties are free to enter into a contract
in any way they like. Where the contract is intended to be wholly in writing (which is a specific question
for the court to decide) the following rules will be used to ascertain the intention of the parties.
Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 56 ALJR 459 and the judgment of Mason
J. [CH 7.45]
1. Parties are presumed to have intended what they have said.
2. Terms must be interpreted in their plain ordinary popular sense unless something in the document
shows another sense was intended - in which case extrinsic evidence is admissible.
3. The court's primary duty is to look at the document and decide the intention of the parties. If it is
clear, the court is entitled to reject superfluous and repugnant words and to add other words to give
effect to the intention.
4. If there are two possible interpretations, one of which produces a lawful result and the other an
unlawful one, all other things being equal, it is presumed that the former is intended. The same
reasoning applies to terms that are capable of a reasonable or an unreasonable meaning.
5. When construing any particular word or phrase, one must look at its context in the whole contract,
and the nature of that document or transaction.
6. Construction of the contract will vary according to the context and circumstances in which the
contract was made.
7. The eiusdem generis rule: where specific words in a list are followed by general words, then, if the
specific words comprise a certain class, the general word should prima facie be confined to things of
that same class. This presumption, which also applies to other canons of statutory construction, is
weaker in contracts than in statutes. The court will not take a narrow or pedantic approach.
8. Where it is clear that the contract had a meaning to the parties, but that meaning is not clear, the
court may call for extrinsic evidence of –
a). the conduct of the parties prior to or at the time of the contract. There is controversy about the
significance of subsequent conduct: Schuler AG v Wickman Machine Tool Sales [1974] AC 235
[CH 7.37] approved by Victorian Court of Appeal in FAI Traders Insurance Co Ltd v Savoy
Plaza Pty Ltd [1993] 2 VR 343; but see for a contrary view Charles: “Interpretation of
Australian Contracts by Reference to Subsequent Conduct” (1991) 4 Journal of Contract Law
16;
b). a subsequent admission against their own interests of a party as to what was meant (this rule is
based on estoppel);
but may not call for evidence of the negotiations, except where the parties have agreed that a certain
meaning will not apply.
9. Where the contract is in a language other than English: Forsikrings A/S Vesta v Butcher [1989] 1 AC
852, 911-2.
Page 18 Principles of Contractual Liability – Sem 031
10. Courts will take a less interventionist approach in construing commercial contracts, where parties
have access to legal advice and are dealing at arms length, and the contracts are not harsh or socially
irresponsible. Schenker v Maplas Equipment [1990] VR 834, 840-1.
11. Where all else fails, construe contra proferentem ie against the promisor and in favour of the
promisee. Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500, 510-11.
Principles of Contractual Liability – Sem 031 Page 19
Part 4 – Discharge of the contract
H-T Ch 13-20
The contract may be brought to an end and the obligations of the parties discharged in four ways:
1. By performance
H-T Ch 18
Supplementary reading: CH Ch 18; G Ch 15.2
The order of performance
There is no general rule about the order of performance – it depends on an interpretation of the
contract, practice in the trade, etc. But a party can sue on the contract only if he has completely
performed his promise or is ready and willing to do so. Where one party‟s performance is
dependent on the co-operation of the other to perform, a tender of performance is sufficient to
make the other party liable for damages. But one cannot claim specific performance.
Automatic Fire Sprinklers v Watson (1946) 72 CLR 435 [CH 18.28]
The time for performance
In common law, time was presumed to be of the essence (meaning that a breach of a time clause
was treated as a breach of a condition, giving rise to a right to terminate the contract). In equity,
time was presumed not to be of the essence. The Property Law Act or equivalent in each State now
applies the equitable rule in all courts (eg Property Law Act 1974 (Qld) s 62). There are three
exceptions:
Where there is express agreement to the contrary
Where there is implied agreement to the contrary
Where one party has given the other notice to perform within a reasonable time, and warned that
breach of this will result in termination of the contract.
Bunge Corp v Tradax [1981] 1 WLR 711 [CH 19.50]
Louinder v Leis (1982) 149 CLR 509 [H-C p 558; CH 19.59]
Requirements for discharge
Entire contracts doctrine
Complete performance by both parties discharges the contract. What is complete performance? If there
isn‟t complete performance, can you claim for part performance? The cases distinguish between “entire”
and “divisible” contracts. A contract is entire where the one obligation (eg to pay) depends on complete
performance by other. This is often the case in agreements to pay a lump sum with no provision for part
performance. If the contract is entire, a party who has only partially performed his contract cannot sue for
payment either under the contract or on a quantum meruit (unjust enrichment). Performance must be
complete and exact.
Cutter v Powell (1795) 6 TR 320 [CH 18.12; G 15.2.3]
Corio Guarantee v McCallum [1956] VLR 755
Sumpter v Hedges [1989] 1 QB 673 [CH CH 23.24; G 16.11.8]
The strictness of the entire contracts doctrine can be countered in three ways:
Substantial performance
Where the work has been substantially performed and the parties did not intend strict compliance, an
action will lie for the contract price less an amount for deficiencies – damages for breach of warranty.
Hoenig v Isaacs [1952] 2 All ER 176 [H-C p 739; CH 18.37; G 15.2.7]
Bolton v Mahadeva [1972] 1 WLR 1009 [H-C p 743; CH 18.43; G 15.2.7]
Divisible contracts
Where the contract is divisible rather than entire, eg instalment building contracts. This depends on the
objective intention of the parties. Some statutes also make it clear the entire contracts doctrine is not to
apply, eg Property Law Act 1974 (Qld) says “rents, annuities, dividends, periodical payments in the
Page 20 Principles of Contractual Liability – Sem 031
nature of income ...” shall be apportioned. Does the entire contract doctrine or the substantial performance
doctrine apply to each divisible part?
Steele v Tardiani (1946) 72 CLR 386 [H-C p 733; CH 23.30; G 16.11.8]
Limited quantum meruit
Where the other party accepts partial performance in circumstances where he has a free choice to accept
or reject it, there is a claim for quantum meruit. And where a party is prevented by the other party from
performing his contract, payment for work done can be claimed on a quantum meruit.
Sumpter v Hedges (1898) 1 QB 673 [CH 23.24; G 16.11.8]
Planche v Colburn (1831) 131 ER 305 [G 15.2.10-11 & 16.11.7]
Pavey & Matthews v Paul (1987) 61 ALJR 151 [H-C p 198; CH 23.20; G 16.11.7]
2. By agreement
H-T Ch 14
Supplementary reading: G 15.3
The contract itself will often deal with termination, for example by one party giving a period of
notice. A power to terminate may be given to one party on the happening of certain events (eg a
breach) or by making the non-fulfilment of a contingent condition a ground of termination.
Perri v Coolangatta Investments Pty Ltd (1982) 142 CLR 537 [H-C p 512; G 15.3.2]
At any time after a contract, the parties can agree between themselves to vary its terms, to terminate
without replacing it, or to replace it with another contract (known as „novation‟). Evidence of oral
variation or discharge does not breach the parol evidence rule.
The agreement to vary, terminate or replace a contract must itself be supported by consideration or be
under seal. If both parties still have obligations to perform, they are each giving something in return
(known as bilateral discharge) and so consideration is present. Unilateral discharge, where only one party
has obligations to be performed and the other agrees to release him, requires separate consideration.
A promise by the party who has nothing to perform not to enforce full rights against the other may
give rise to an estoppel.
Je Maintiendrai v Quaglia (1980) SASR 101 [H-C p 212; CH 3.127]
Variations of the contract are sometimes also treated as a waiver of rights. A waiver or estoppel
can be withdrawn by reasonable notice.
Charles Rickards Ltd v Oppenhaim [1950] 1 KB 616 (CA) [G 15.3.9]
3. By acceptance of breach or repudiation
H-T Ch 16-17
Supplementary reading: CH Ch 19; G 15.5
Breach and the right to terminate
Breach occurs where a party:
fails to perform according to the terms of the contract (ie non-performance or defective or
delayed performance); or
expressly repudiates the contract; or
impliedly repudiates by disabling himself from performing.
Repudiation (express or implied) may occur before performance is due. This is known as
anticipatory breach (see later).
Breach itself does not terminate the contract. If the contract is breached (and note there is „strict liability‟
for breach – it doesn‟t depend on fault) the right of the innocent party to terminate depends on whether the
breached term was a condition or an innominate term with serious consequence of breach (see earlier).
Luna Park v Tramways Advertising (1938) 61 CLR 86 [CH 19.10; G 16.2.3]
Bunge Corp v Tradax [1981] 1 WLR 711 [CH 19.50]
Note the attempt to link the language of breach with the language of performance:
Principles of Contractual Liability – Sem 031 Page 21
Language of breach = Language of performance
breach of condition = entire contract and failed to
perform exactly
breach of innom term with = not entire, ie substantial
serious consequences performance acceptable but failed
to perform substantially
breach of innom term with = not entire, ie substantial
less serious consequences performance acceptable, and
performed substantially
Repudiation and anticipatory breach
A rejection of the contract by a refusal to perform (repudiation) can occur after performance is due, in
which case it amounts to a breach, or before performance is due. Does one have to wait until performance
is due before there is a breach? The answer is no – courts have recognised that an anticipatory breach of
this nature allows the innocent party to resort to their remedies immediately. This gives more certainty to
the parties, and assists the innocent party to mitigate their loss. An anticipatory breach can be express or
implied.
Frost v Knight (1872) LR 7 Ex 111
Universal Cargo Carriers v Citati [1957] 2 QB 401 [CH 19.91]
What happens if the innocent party is premature in terminating the contract? The innocent party runs a
risk if they treat the other party‟s behaviour as an anticipatory breach and decide to terminate the contract
because the other party might be able to show that they could still perform the contract. The innocent
party would then be the first one to breach the contract, and the other party might be able to claim
damages instead.
Maple Flock v Universal Furniture Prod [1934] 1 KB 148 [H-C p 552]
Nature and effect of termination
Termination for breach is not automatic – the innocent party must elect to terminate. Once the
election is made, one cannot change back again (at least not without the agreement of the other
parties). Termination leads to „rescission‟ in the contractual sense not the tortious sense, ie as
regards future unperformed obligations (ab futuro) not from the beginning (ab initio). One can
keep benefits received and sue for the obligations that had accrued up to the time of termination.
Heyman v Darwins Ltd [1942] AC 356 [CH 19.147]
McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 [H-C p 744]
Tropical Traders v Goonan (1964) 111 CLR 41 [H-C p 595; CH 19.130]
If the innocent party elects not to terminate, the contract continues. Unless it is a contract for
personal services or depends on the co-operation of the other party or there is no „legitimate
interest‟ in continuing, the innocent party may be able to complete the contract and claim the
contract price.
White & Carter (Councils) Ltd v McGregor [1962] AC 413 [CH 22.32; G 15.5.4]
Automatic Fire Sprinklers v Watson (1946) 72 CLR 435 [CH 18.28]
There is always a danger that the contract might be brought to an end in another manner before it is
completed, and the innocent party will lose their remedy altogether.
Avery v Bowden (1855) 119 ER 647 [G 15.5.4]
4. By frustration
H-T Ch 13
Supplementary reading: CH Ch 20; G 15.4
Early development
The common law rule is that strict performance of contractual obligations is required. It is irrelevant how
much fault is involved when a party breaches their obligations. If parties wish to excuse non-performance
Page 22 Principles of Contractual Liability – Sem 031
in certain circumstances or to limit their obligation to taking reasonable steps to produce a certain result,
they should say so in the contract.
By 1863 the courts were prepared to recognise an exception where the contract became physically
impossible to perform through no fault of the promisor (supervening impossibility of performance). The
doctrine soon grew a little wider to encompass situations where a commercial venture was frustrated, and
is now known as the doctrine of frustration. It is the premature termination of a contract because of the
occurrence of some intervening event or change in circumstances, so fundamental as to be regarded by the
law as striking at the root of the agreement, and being an event or change in circumstances for which the
parties had made no provision in the contract. It is still a rather unusual and limited exception to the strict
performance requirement.
Taylor v Caldwell (1863) 3 B&S 826 [H-C p 449; CH 20.9; G 15.4.1]
Jackson v Union Marine (1874) LR 10 CP 125 [CH 20.13]
Current scope
Recognised categories
Current law recognises the following categories:-
destruction of physical subject matter
death or incapacity of one party to a contract for personal service
non-occurrence of an event which is the basis of the contract
Krell v Henry [1903] 2 KB 740 [H-C p 452; CH 20.19; G 15.4.8]
Herne Bay Steamboat Co v Hutton [1903] 2 KB 683 [G 15.4.8]
supervening legal impossibility, eg law changes to make performance illegal
frustration of commercial venture
Codelfa Construction v NSW Rail (1982) 149 CLR 337 [H-C p 458; CH 20.27; G 15.4.5]
Events foreseen
If the event is foreseen and the contract provides for it in some way, even if it doesn‟t provide for the
exact consequence it is assumed the parties foresaw and catered for the event as they wanted, so the
contractual provisions will take precedence.
Claude Neon v Hardie [1970] QdR 93 [G 15.4.9]
However, if the frustrating event produces a radical change in the situation compared with the intention
behind the clause, the frustration doctrine may still apply.
Codelfa Construction (above)
Simmonds v Hay (1964) 81 WN (Pt 1) 358 [CH 20.82]
If the parties foresee the event but the contract doesn‟t provide for it, the court is likely to conclude they
were prepared to take the risk of it happening, so the frustration doctrine would not apply. The same
reasoning will apply where the event was not foreseen but should have been.
Walton Harvey v Walker & Homfrays [1931] 1 Ch 274 [G 15.4.9]
The Eugenia (1964) 2 QB 226
Self-induced frustration
If the frustrating event is self-induced, the general rule is that the guilty party cannot rely on it to argue
that the contract has been frustrated, but the innocent party can.
FC Shepherd v Jerrom [1987] QB 301 [G 15.4.6 & 15.4.9]
Juristic basis
There have been a number of different explanations of the underlying reason for the doctrine over the
years:
“implied term” theory – was there an implied term that the contract would come to an end if the
event occurred?
“just & reasonable solution” theory – it is based on the equitable principle that the contract will not
be enforced where it would not be just
“change in the obligation” theory – that the whole nature of the obligation originally agreed on has
changed in a radical way such that it would be unfair to continue to enforce the contract. In Codelfa
Construction v NSW State Rail Authority 5 HC judges agreed with UK cases that this was the basis
of the doctrine.
Principles of Contractual Liability – Sem 031 Page 23
The modern requirements appear to be that the doctrine will apply “where a reasonable person would
recognise that without default of either party a contractual obligation has become incapable of being
performed because the circumstances in which it is called for would render it a thing radically different
from that which was undertaken in the contract” (per Lord Radcliffe in Davis Contractors Ltd v Fareham
UDC [1956] AC 696). It is not easy to persuade a court that performance is radically different.
Tsakiroglou v Noblee Thorl [1962] AC 93 [G 15.4.9]
Effects of frustration
Frustration terminates the contract automatically, and, except for self-induced frustration, either
party may rely on it. The loss lies where it falls – no damages are payable and no money can be
recovered, except for quantum meruit or perhaps total failure of consideration.
Codelfa Construction v NSW Rail (1982) 149 CLR 337 [above & CH 20.109; G 15.4.10]
Fibrosa Spolka v Fairbairn Lawson [1943] AC 32 [H-C p 475; CH 20.130; G 15.4.10]
Re Continental C&G Rubber Co (1919) 27 CLR 194 [CH 20.124; G 15.4.10]
The main criticism of the doctrine is that it results in all or nothing approach – one of the parties is
likely to lose out. NSW, Vic, SA & UK have introduced legislative reform. Under the Victorian
legislation, which is identical to the English legislation:
money paid before the frustrating event is recoverable
money payable before the frustrating event ceases to be payable
if a party to whom sums were paid or payable incurred expense before the time of discharge in or for
the performance of the contract, the court may - if it considers it just - allow him to retain or recover
the whole or part of the money paid or payable not exceeding the amount of the expenses
if one party has received a valuable benefit before the contract is discharged, he can be ordered to
pay to the other such sum as the court thinks just, not exceeding the value of the benefit.
The NSW Frustrated Contracts Act 1978 contains a similar series of rules for adjusting parties'
rights, and provides that if there is manifest injustice, the court has a broad discretion to make
adjustments. The result has been uncertainty, and many contracts exclude its provisions.
*******
PART C – POWERPOINT SLIDES
(See following pages).
