Contract LAW EXAM Notes PDF

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USEI LACMETHOD( I SSUE, LAW, APPLI CATI ON, CONCL USI ON) s u b h e a d i n g sa r en o t r e q u i r e d If a question says ‘refer to general law principles only’ or ‘refer to statutory principles only’ (or both) this means you should focus on the common law and equity or restrict your answer to statutes we have studied in the unit (or both) T OPI CSI NT HEEXAM FORMATION OF A CONTRACT CAPACITY

 Not all people have full contractual capacity, some people have limited contractual capacity and some persons have no contractual capacity at all. Creates complications that contracts made with people may not be valid or enforceable. 

MINORS common law person under the age of 21 to be a minor, more commonly referred to as an infant. Throughout Australia, this age has been reduced to 18 (In NSW superseded by legislation), where a person has legal rights and responsibilities. However, for some contracts minors are treated as adults under Life Insurance Act 1995 (Cth), allowing minors to take out life insurance.

o In all states other than NSW, a person lacks contractual capacity, and in most circumstances if a contract is made with a minor it is voidable at the minor’s option unless it is a contract for ‘necessaries’ or beneficial contract or service in which case the contract is valid. o MINORS IN NSW  Minors (property and Contracts) Act 1970 (NSW) has abolished the application of the common law principles relating to infants’ contracts in NSW and provides that a minor is presumptively bound to a civil act, which is made in accordance with the provisions of the act 

Section 18: Provides that a minor who because of age lacks or appears to lack the necessary understanding. “This Part does not make presumptively binding on a minor a civil act in which the minor participates, or appears to participate, while lacking, by reason of youth, the understanding necessary for his or her participation in the civil act.”

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Primary test for validity is covered under section 19, to determine whether a minor will be bound to a civil act that is beneficial to the minor at the time it was made. “where a minor participates in a civil act and his or her participation is for his or her benefit at the time of his

or her participation, the civil act is presumptively binding on the minor” o NECESSARIES  Things essential to the maintenance of the minor such as articles necessary to sustain the minor’s life such as food, clothing and shelter

 Scarborough v Sturzaker (1905) 1 TASLR A bicycle was determined by the Tasmanian court to be a necessary, as Sturzaker, a minor, trvalled 19km to work each day. He traded in his old bicyle and made a part payment on a new one. Sturzaker repudiated the contract and refused to pay the outstanding amount. The court held that the contract was enforceable as the bike was a necessary and therefore he had to pay the money owing.

 Bojczuk v Gregorcewicz [1961] SASR 128 defendant was under legal age and lived in Poland. The plaintiff lent the defendant money to come to Australia, but she never repayed the loan. The plaintiff sued for the recovery of the money and the defendant pleaded infancy. The court held that the contract of a loan was not a contract for ‘necessaries’,

where

the

defendant

had

employment

and

accommodation in Poland and was no requirement for her to come to Australia. o BENEFICIAL CONTRACTS OF SERVICE  Involves education, trainingenforceable unless it’s unconscionable/ exploited minor

 De Francesco v Barnum (1890)  Young dancer signed up to 7 years to train, yet terms were exploitative, employer could terminate or send them overseas, not enforceable under section 18 

Hamilton v Lethridge (1912)  Master solicitor- trained clerk into lawyer, however terms states minor unable to open practice within 50 miles after training. Minor finished, opened up practice in 50 miles and Master sued restrictive contract. Court held minor could be restrained as overall benefit was beneficial to minor and thus, restrictive covenant in contract was enforceable; Section 19

o Contracts involving the acquisition or disposition of property  Minors may become involved in contracts to buy or sell property, contracts are not specifically enforceable due to mutuality. However minor should ratify contracts when they turn 18. o PERSONS SUFFERING A MENTAL DISABILITY Where a persons mental state at time of contract formation may have impeded their capacity to genuinely consent to understanding what they’re doing, and therefore is declared void. Common law requires defendant to prove that they entered into the contract whilst suffering mental impairment and the other party must’ve reasonably known they were suffering. 

Hart v O’connor [1985] AC 1000 Elderly man sold property for very low price before deceased. Family wanted to set aside as he was suffering metal incapacity with medical evidence. Yet, could not prove the other party would’ve reasonably known.

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Matthews v Baxter (1873) LR8Exch 132 Baxter entered into an oral contract, agreeing to buy property at auction, whilst drunk, claiming that he shouldn’t be bound. However, Baxter ratified the contract when sober and this, Court determined act binding

THE REQUIREMENT OF WRITING There is no general requirement for a contract to be written, as with partly written, partly oral contracts. However, contracts held by statutory provisions such as Conveyancing Act 1919 or formal contract must be in writing to be enforceable as written contracts promote certainty

TERMS OF A CONTRACT EXPRESS TERMS

IMPLIED TERMS  Implication of terms on the facts of the case: Formal, written terms BP Refinery v Shire of Hastings (1997): established a principle endorsed by High Court, which outlines 5 elements for the implication of terms, Each element is a useful indicator relevant to the ultimate person of what a reasonable person would have understood the contract to mean. Constructed objectively by a notional reasonable person with knowledge of the relevant background.

1. Must be equitable and reasonable (court asks what are burdens/ benefits)  Attorney General of Belize v Belize Telecom Ltd [2009]: Stated an objective test should be applied that rakes factors into account and gives effect to the presumed intention of parties. Arguably, the test shifts focus on implication of terms from necessity to reasonableness. 

Where it is not specified, imply a reasonable price and time.

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The Moorock (1889): Two parties agreed ship would be moored and for the purpose of loading cardo, ship could rest on the bottom of the river when tide goes out and comes back when it drifts in. Yet, the ship was damaged on the riverbed . Court: implied term a term in fact, that the riverbed would be safe for mooring. Introduced business efficacy test i.e was it essential to give contract effect? Court held owner should’ve reasonable identified ship safety. Court indemnified ship owner.

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 Imply a term were a ‘reasonable observer’ understands something should happen that affects the rights of parties.

2. Necessary to give business efficacy to the contract (to make the contract able to be performed) would contract be fully effective without the term

The Moorock (1889): Two parties agreed ship would be moored and for the purpose of loading cardo, ship could rest on the bottom of the river when tide goes out and comes back when it drifts in. Yet, the ship was damaged on the riverbed . Court: implied term a term in fact, that the riverbed would be safe for mooring. Introduced business efficacy test i.e was it essential to give contract effect? Court held owner should’ve reasonable identified ship safety. Court indemnified ship owner.  Imply a term were a ‘reasonable observer’ understands something should happen that affects the rights of parties.

3. So obvious it goes without saying Tested by asking whether the parties would have readily agreed on the proposed implied term if it had been suggested to them in the course of their negotiations: 

Codelfa Construction v State Rail Authority CLR 374; The test is referred to as the obvious bystander’ test.

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Shirlaw v Southern Foundries (1926)  Mackinnon LJ: where prima facie exists, something so obvious it goes without saying, during bargaining a officious bystander were to suggest some express provision for it in the agreement to which the parties would clearly agree

 Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) ‘not obvious’ 

Job to construct part of train tunnel. Statute gave rail authority immunity from prosecution while performing statutory role. Residents took authority to Court and granted injunction on weekends. Construction took much longer and Codelfa wanted extra pay for longer time.

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Court: Refused, as term was ‘not obvious’

4. Capable of clear expression (not wide)

The requirement that a term be capable of clear expression is one which has two elements. a. First, the term on which the parties would have agreed had the matter at issue been drawn to their attention must be clear. b. Secondly, the term to be implied must be capable of being formulated with sufficient precision.  Shell (UK) Ltd v Lostock Garade Ltd [1977], Lostock agreed to obtain all its petrol supplies from shell. During a petrol price war, shell gave subsidies to some

of its garages but not the one operated by Lostock. Lostock sought petrol supplies from other sources. Shell sought an injunction to prevent this, Lostock then argued that shell was in breach of an implied term not to discriminate against it in terms of the subsidies that it was giving. English court of appeal rejected this on the basis that it did not satisfy the business efficacy element, and second because the alleged term could not be formulated with sufficient precision.

5. Not be inconsistent with express terms  Term implied cannot contradict the effect of the express terms of the agreement and does not deal with a matter which the contract deals with adequately. Kitching v Phillips (2011) ALR Murphy JA, said an implied term will contradict an express term of the contract if it is inconsistent with the express terms properly construed  Attorney General of Belize v Belize Telecom Ltd [2009]: Stated an objective test should be applied that rakes factors into account and gives effect to the presumed intention of parties. Arguably, the test shifts focus on implication of terms from necessity to reasonableness. Where it is not specified, imply a reasonable price and time.

INFORMAL CONTRACTS: Hawkins v Clayton (1988)  Dean J said courts shall apply a term by reference to the imputed intention of the parties, if only, can be seen that the implication of the particular term is necessary for the reasonable or effective operation of a contract of that nature in the circumstances of the case

IMPLICATION OF TERMS BY LAW:  Pursuant to statute and common law, implication reflects policy considerations rather than the intention of the parties.

Terms implied by statute  State and territory legislation relating to the sale of goods contracts and the consumer protection provisions s 51-62 of the ACL. Statutes that imply terms prevent parties from expressly excluding these implied terms. In NSW certain provisions under cannot be excluded from consumer transactions

Terms implied by common law   A Two-part test is used to decide whether a term is implied by the common law. 1. First, the court must determine that the term is appropriate for all contracts in that type or class of contracts 2. Second the court must determine that the term is appropriate for all contracts in that type or class of contract  Court needs to be satisfied that the implication of the term is necessary in the sense that if the term is not implied ‘the enjoyment of the rights conferred by the contract would be or could be rendered nugatory, worthless, or perhaps be seriously undermined. Byrne v Australian Airlines  PG 215  Although terms implied usually relate to particular types of contracts, clear there are some terms implied by common law applying to all contracts, such a cooperation.

IMPLICATION OF TERMS BY CUSTOM  A term may be implied into a contract to incorporate a relevant custom in a particular market, trade or locality

 Con-Stan Industries of Australia Pty Ltd v Norwich Winter hunter Insurance (Australia) Ltd (1986): The high court had to deal with a claim that there existed a customary term in a contract of insurance to the effect that, in cases where the insured had paid the insurance premium to a broker and the broker failed to pass it on to the insurer, the insurer’s only claim of the premium was against the broker and not against the insure

 In rejecting this claim the following propositions were made in the high court o The existence of a custom will justify the implication of a term into a contract is a question of fact o Must be evidence that the custom relied on is so well known and acquiesced in that everyone making a contract in that situation can reasonably be presumed to have imported that term in the contract. The custom does not have to be universally accepted o A term will not be implied based on a custom where it is contrary to an express term

o A person may be bound by a custom notwithstanding the fact that he had no knowledge of it.

IMPLIED TERMS OF GOOD FAITH pg 225 Controversial issue whether the implied term in commercial contracts that parties will exercise contractual rights and powers reasonably and in good faith.

 Paterson, Robertson and duke “ensures an acceptable level of cooperation and fairness in contract performance. May already be found in existing principles of contract law.

 Carter no need, as good faith in inherent in all common law principles and an attempt to imply an independent term recquiring good faith is unnecessary and a retrograde step.

 Case of Stock v Frank Jones (Tipton) Ltd [1978] points out the extraordinary range of meaning in the English language and causing implications for determining the true intention of parties.

5. Construction of Terms and Exclusion Clauses Construction of contracts may be seen as involving two activities.

 Firstly, ascertaining the meaning of the words used (Question of fact).  Secondly, determining the legal effect of those words (Question of law). IMPORTANCE OF INTENTION  In ascertaining the meaning of terms, court is primarily concerned with objectively determining the intention of the parties: Australian Broadcasting Commission v Australasian Performing Rights Association Limited (1973)

 Basic approach set out under  Chartbrook Ltd v Persimmon Homes Ltd [2009]: decide what a reasonable person would have understood the parties to have meant in using the language

 Arnold v Britton [2013] EWCA: not the role of the court to improve the contract  When construing terms of a contract, a court must have regard to all its words used to ensure congruent operation of its various components as a whole

 Court will seek to adopt a construction that will preserve the validity of the contract in that regard will strive to avoid holding agreements in particular commercial agreements, void for uncertainty.

OBJECTIVE DETERMINATION OF INTENTION  Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) Page 237 textbook

PRINCIPLES OF CONSTRUCTION

 Presumption that unreasonable results are not intended

Even in cases where there is no ambiguity, a court may decline to apply the plain meaning of the words used if

 It would lead to an irrational result: Westpac Banking corporation v Tanzone Pty Ltd (2000)

 It would lead to a meaning that is repugnant to the objectively determined intention of the parties; Dainford Ltd v Smith (1985)

 It makes no commercial sense, must be manifestly absurd and not merely unreasonable

 Avoidance of inconsistencies (pg 241) There is a presumption in favour of business common sense Presumption that parties intended the technical use of words and departure from ordinary meaning PAROL EVIDENCE RULE 1. Exclusion of extrinsic evidence that would add to, subtract from or vary or qualify the terms of a written contract. 2. Concerned with exclusion of extrinsic evidence that would otherwise have assisted the courts in interpreting or construing the contract.

Courts are generally not willing to look outside the contractual document  Prior negotiations: This rule prevents the use of pre-contractual negotiations as evidence of the interpretation of contractual terms, it does not preclude the use of such evidence for the purpose of establishing relevant background facts which were known to the parties.

excludes extrinsic evidence of the prior negotiations of the parties. Justification under Prenn Simmonds [1971], suggesting that the evidence is unhelpful, where only the final document records consensus.

 Codelfa Construction v State Rail Authority  Mason J: prior negotiations will establish objective background facts. Such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by and merged in the contract itself. The parole evidence rule therefore excludes them, the prior oral agreement of the parties being inadmissible in aid of construction.  Post-contract conduct: Whether the parole evidence rule excludes evidence of the conduct of the parties subsequent to the entry into the contract caused large debate. Page 248

EXCEPTIONS TO THE PAROLE EVIDENCE RULE: 1. Clarifying ambiguities PAGE 249 2. To clarify intention of both parties in relation to the meaning of a particular ambiguous contractual term. 3. To identify the parties to the contract 4. To establish whether a person’s post-contractual conduct, if it constitutes admissions adverse to his or her interests, shows that a contract, that he or she claims to exist, was formed 5. To establish whether a document or clause in a document is a sham 6. To establish whether a term was incorporated into a contract 7. To establish whether the remedy of rectification is available

CONSTRUCTION OF EXCLUSION CLAUSES  Terms of a contract that seek to exclude or limit the liability of a defendant from liability to a plaintiff in the event that the defendant causes loss to the plaintiff. Following issues present: 1. Whether a defendant is liable to a plaintiff?  require plaintiff to establish that the defendant had breached a contract or committed a tort or breached a statutory provision 2. Whether the exclusion clause is a term of the contract  raises issue of incorporation 3. Whether the exclusion clause on its proper construction or interpretation, covers the defendant’s liability that has arisen? General Approach: principal task of the court is to determine the intention of the parties. Page 255  Darlington Futures Ltd v Delco Australia Pty Ltd (1986): High court set out the following two major principles: 1. An exclusion clause should be construed according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving weight to the context in which the clause appears 2. Contra Proferentum principle will be applied so that in cases of ambiguity the clause will be construed against the person relying on the exclusion clause.

 Any clause in a contract must be construed in the context in which one finds it, both the immediate context of the terms and the wider context of the transaction as a whole

EXCLUSION CLAUSES AND NEGLIGENCE: Must be clearly intended t...