A CONTRACT LAW WORKBOOK

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1 A CONTRACT LAW WORKBOOK Solutions Guide Chapter 1: The Law in Australia An introduction Reflective exercises (page 8) 1 List and define two types of public law Public law is concerned with the regulation of conduct on the part of the State. Two types of public law are criminal law and taxation law. Criminal law is a body of law that deals with constituents of criminal behaviour. Taxation law is a body of law that deals with the compulsory exaction of money by the government for public purposes. 2 Distinguish between the two primary sources of law and use examples to support your argument. The two key sources of law are judge-made law and law made by the legislature. Judge-made law is found in the decisions made by judges and is also called common law. While most law originated from common law, in modern times statute law has expanded substantially. The second source of law law made by the legislature takes the form of statutes and delegated legislation. Statute law is made by the Parliament or other bodies to whom Parliament has given law-making powers. The Parliament can create new laws, repeal and codify old laws or do any combination of these. An example of legislation is the Trade Practices Act 1974 (Cth). Chapter 2: Dimensions of Common Law Reflective exercises (page 13) 1 What does the term stare decisis mean in the context of common law? The doctrine of precedent or stare decisis is fundamental to the operation of common law. The doctrine of precedent states that a court must follow the decision of a court in the same hierarchy which is superior to that court. 2 Explain the difference between ratio decidendi and obiter dictum. The ratio decidendi in the decision in the court is what becomes binding and is the reason or ground for the judicial decision. An obiter dictum is an observation by a judge on a legal question by a case before them, but not arising in such a manner as to require a decision. 3 Explain, in your own words, the doctrine of precedent. The doctrine of precedent is fundamental to the operation of common law. The doctrine states that a court must follow the decision of a superior court in Instructor Supplement to accompany Holm, A Contract Law Workbook 1

2 the same hierarchy. Hence, a court is not bound to follow the decision of a court that is inferior to it in the same hierarchy. Reflective exercises (page 15) 1 Explain the difference between original and appellate jurisdiction Australia is made up of a number of courts which operate to accommodate different matters. Some courts have original jurisdiction and some have appellate jurisdiction. Original jurisdiction is where the courts have jurisdiction to hear a case in the first instance. Conversely, appellate jurisdiction is where the courts have the power to decide appeals. 2 The Supreme Court deals with a dispute between two citizens relating to a large commercial property. This dispute had been decided in the District Court, but upon appeal is now before the Supreme Court. The Supreme Court in this instance is an example of which type of jurisdiction? This question provides an example of an appellate jurisdiction. Note, however, that the court will likely also hear more serious matters in the first instance. Reflective exercises (page 17) 1 What is a law report? A law report is a published record of a decision of a judge or judges. It identifies the names of the parties, the name of the court and the names of the judges and the dates on which the case was heard. The report also includes details regarding the cases and legislation that have been considered as well as the full facts and reasons for the decision. 2 If you saw a citation, such as John v Nick (1988) 135 CLR 88, what information could you gain from this case citation? A law citation identifies the names of the parties, the name of the report and the year in which the case was heard. In this example, John and Nick are the two parties involved, 1988 is the year in which the matter was heard, 135 is the volume number of the Commonwealth Law Reports, of which CLR is the abbreviation, and 88 is the page number on which the report begins. Further questions to consider (page 18) The doctrine of precedent (a) Explain the difference between binding and persuasive precedents you will need to research in a suitable textbook. Instructor Supplement to accompany Holm, A Contract Law Workbook 2

3 The doctrine of precedent states that a court must follow the decision of a superior court in the same hierarchy. Precedents can be either binding or persuasive. A binding precedent is one that must be followed by a judge in a lower court in the same court hierarchy in deciding cases of a similar nature. On the other hand, if a case were to occur in a superior court within a different court hierarchy, the decision would not bind the court but might otherwise have persuasive influence. (b) Explain the term ratio decidendi. Can there be more that one ratio decidendi in a case? The ratio decidendi in a court s decision is what becomes binding. It is the reason or ground for the judicial decision. It exemplifies a proposition of law. There may be more than one ratio decidendi in a case in which case the plural term rationes decidendi applies. (c) Using your textbook, determine what the term distinguishing means in the context of common law. The term distinguishing is used to nullify the validity of a previously made decision in a court. This is usually achieved through identifying and demonstrating essential differences in the facts or on a point of law. Court hierarchy (a) Explain in your own words what the court hierarchy is and how it operates. The doctrine of precedent is predicated upon the existence of the court hierarchy and system. Therefore it is necessary to understand this hierarchy to understand the operation of the doctrine. Australia is made up of a number of courts and jurisdictions for example, the High Court, Supreme Courts and District Courts which operate to accommodate different matters according to their place in the hierarchy. Some courts have original jurisdiction and some have appellate jurisdiction. The doctrine of precedent states that a court must follow the decision of a court in the same hierarchy which is superior to that court. Hence, a court is not bound to follow the decision of a court that is inferior to it in the same hierarchy. Precedents can be either binding or persuasive. A binding precedent is one that must be followed by a judge in a lower court in the same court hierarchy in deciding cases of a similar nature. If a case were to occur in a superior court within a different court hierarchy the decision would not bind the court but might otherwise have persuasive influence. (b) Identify the advantages of the court hierarchy. The hierarchy of the courts enables each court to specialise, to an extent, in respect of their facilities and personnel, which is beneficial for the disputing parties. In addition, administrative convenience is achieved and greater economy of operation when similar matters are tried in similar courts. Instructor Supplement to accompany Holm, A Contract Law Workbook 3

4 (c) A judge presiding over the District Court of Queensland is faced with a case based upon similar facts which was recently determined by the District Court of New South Wales. Does the District Court judge need to follow the decision made in the District Court of New South Wales? The doctrine of precedent states that a court must follow the decision of a court in the same hierarchy which is superior to that court. In this particular case, not only is the District Court of Queensland on the same hierarchical level as the District Court of New South Wales, it is also in a different jurisdiction, and hence in a different hierarchy. Precedents can be either binding or persuasive. Therefore, in this case the decision in New South Wales would only have a persuasive influence upon the case in Queensland. Law reports (a) Explain the elements of a law report in consultation with your textbook. A law report is a published record of the decisions of a judge or judges. It identifies the names of the parties, the name of the court and the names of the judges and the dates on which the case was heard. As well as providing the text of the judgment itself, it also details the cases and legislation that have been considered and the full facts and reasons for the decision. (b) What is a legal case citation? A case citation is a means of identifying a particular case. It will provide the names of the parties involved and the year in which the case was decided. If the case has been reported, ie published in a report series, it will also indicate the particular report series, the volume number (if applicable) and the page on which the report begins. If the case has not been reported, the citation will be media neutral and will provide the name of the parties, the year of the decision and indicate the jurisdiction and court in which the case was heard. (c) As part of a contractual arrangement, Robertson is having a dispute with Keller. If the parties were to go to court in 2007, what would their case citation look like not taking into account the volume of the case but considering the case appeared in the Commonwealth Law Reports (CLR) beginning on page 152. Robertson v Keller (2007) CLR 152. Chapter 3: Dimensions of Statute Law Reflective exercises (page 27) 1 What does the term delegated legislation mean? Instructor Supplement to accompany Holm, A Contract Law Workbook 4

5 Law can be made by an authority other than Parliament for instance a local council. Such legislation is called delegated legislation. 2 Outline, in your own words, what the legislative process entails. The main stages of the passage of legislation through Parliament are as follows: the drafting of the bill; the bill s introduction to the Lower House of Parliament (the House of Representatives) with three readings; if passed by the Lower House of Parliament then consideration by the Upper House (the Senate, except in Queensland); once passed through both Houses, the Governor-General gives Royal Assent and the Act comes into effect on the date proclaimed. 3 What happens to law if it is not passed through the Lower House of Parliament? You may want to consult another suitable textbook to answer this question. The bill does not become law but may subsequently be reintroduced for future consideration. Reflective exercises (page 30) 1 Explain delegated legislation and provide an example. When Parliament provides other bodies, such as a local council, with the ability to make law, such legislation is called delegated legislation. For example, Parliament may allow local government to regulate parking in a particular location as the local government will be more aware of any particular related issues. 2 What are the rules relating to statutory interpretation? A number of rules of statutory interpretation have been developed by the common law. The first is the literal rule whereby if the language is unambiguous the courts will read the statute literally and give it its ordinary meaning. The second is the golden rule whereby the courts may depart from the literal meaning of a rule if it would prevent an absurdity. The final is the mischief rule which is applied where the words of an Act are ambiguous, illogical or inconsistent. The courts will consider the mischief that Parliament was trying to remedy when passing the Act. 3 An Act of Parliament states that a person must observe and comply with the instructions of a traffic-control signal. Thinking about the working of this Act, what would be the most suitable rule relating to its interpretation? According to the literal rule, a person must in a literal sense observe and comply with the instructions of a traffic-control signal presumably even if it were faulty! The golden rule states that the courts may depart from the literal meaning of a rule if it would prevent an absurdity. Therefore, according to this Instructor Supplement to accompany Holm, A Contract Law Workbook 5

6 interpretation, in the event that the light was faulty some measure of flexibility may be provided in order to avoid an absurd outcome. According to the mischief rule, where the words of an Act are ambiguous, illogical or inconsistent the courts will consider the mischief that Parliament was trying to remedy when passing the Act. In this particular case it is clear that the legislative enactment was intended to prevent a person failing to observe and comply with the instructions of a traffic control signal. Hence, the literal rule is most applicable as the enactment can be read literally. Reflective exercises (page 32) 1 What is an Acts Interpretation Act? The Commonwealth, State and Territory Parliaments have passed Act Interpretation Acts which set down rules and presumptions for the interpretation of common terms and to assist in matters relating to the operation of statutes. 2 Would a court use extrinsic material in the interpretation of legislation? Discuss. A court may take into consideration certain extrinsic material in interpreting an ambiguous provision in an Act. For instance a Law Reform Commission report may provide material which needs to be taken into account in respect of the interpretation of legislation. Further questions to consider (page 34) The law-making process (a) Outline the steps in the legislative process. The main stages of the passage of legislation through Parliament are as follows: the bill is drafted and then introduced to the Lower House of Parliament with three readings; if passed by Lower House of Parliament then it is considered by the Upper House (except in Queensland where there is no Senate); once passed through both Houses Royal Assent is given by the Governor-General and the Act comes into effect on the date proclaimed. If the bill does not become law it may subsequently be re-introduced for future consideration. (b) Describe the rules that courts use to assist in the interpretation of statute law. A number of rules of statutory interpretation have been developed by the common law. The first is the literal rule: if the language is unambiguous the courts will read the statute literally and give it its ordinary meaning. The second is the golden rule: the courts may depart from the literal meaning of a rule if it would prevent an absurdity. The final is the mischief rule: if the words Instructor Supplement to accompany Holm, A Contract Law Workbook 6

7 of an Act are ambiguous, illogical or inconsistent, the courts will consider the mischief that Parliament was trying to remedy when passing the Act. Acts interpretation (a) Outline and describe the differences between the various types of approaches that can be taken for statutory interpretation. Three rules of statutory interpretation have been developed by the common law. The first is the literal rule: if the language is unambiguous the courts will read the statute literally and give it its ordinary meaning. The second rule, the golden rule, differs from the first by providing an element of flexibility in allowing the courts to depart from the literal meaning of a rule if it would prevent an absurdity. The third rule, the mischief rule, comes into play where the words of an Act are ambiguous, illogical or inconsistent. Where this is the case the courts will consider the mischief that Parliament was trying to remedy when passing the Act. In addition to these rules, a court may also take into consideration certain extrinsic material in interpreting an ambiguous provision in an Act. Further, all jurisdictions ie the Commonwealth, State and Territory Parliaments have passed Act Interpretation Acts which set down rules and presumptions for the interpretation of common terms and to assist in matters relating to the operation of statutes. (b) What is an Acts Interpretation Act? An Acts interpretation Act is a piece of legislation (or statute) which sets down rules and presumptions regarding the interpretation of terms and matters relating to the content and operation of a statute. All Commonwealth, State and Territory jurisdictions in Australia have passed Acts Interpretation Acts. (c) Can there be more that one meaning in an Act of Parliament? Statutes are construed differently and it is for this reason that rules are used to assist the court in interpreting the meaning of an Act of Parliament. Ideally there is only one meaning behind a provision of an Act of Parliament but often ambiguities and inconsistencies occur due in part to the changing nature of the law. (d) Explain in your own words why legislation needs to be interpreted. Statutes frequently need to be interpreted by the courts to establish what it was that Parliament intended. (e) Identify the advantages of using Acts Interpretation Acts to resolve ambiguity in statute law. An Acts Interpretation Act sets down rules and presumptions regarding the meaning and interpretation of terms and matters relating to the content and operation of the statute. The advantages, therefore, are that courts are provided with the means to understand and apply the law. Instructor Supplement to accompany Holm, A Contract Law Workbook 7

8 Extrinsic materials (a) In consultation with your textbook, outline the extrinsic material that a court may use to assist in interpreting legislation. A court may take into consideration certain extrinsic material in interpreting an ambiguous provision in an Act. Examples of the extrinsic material that can be relevant are Law Reform Commission reports and Parliamentary Committee reports. Chapter 4: Formative Elements of Contract Law Reflective exercises (page 42) 1 Define the two critical elements of an agreement in contract law. The two critical elements of an agreement in contract law are that there is an offer and an acceptance. An offer is a proposal which is intended to bind the offeror upon acceptance. Be sure that each of the rules relating to offer has been considered. Valid acceptance is an unqualified and final assent to an offer. A valid offer and acceptance amount to an agreement. 2 Joel is shopping for a football and he passes a sporting store with a display indicating a one-time special on a limited edition flavio soccer ball for $29. Joel thinks this is a bargain and enters the store to inquire further. The store manager immediately tells Joel that the display ball is the last one he has in stock. Joel then insists that he has the right to buy the ball on display. Advise Joel on his rights in relation to the purchase of the soccer ball. What we have here is a clear indication of a desire to buy, which is communicated and amounts to an offer. An offer is a proposal which is intended to bind the offeror upon acceptance. Where this arrangement becomes problematic is with respect to acceptance. Valid acceptance is an unqualified and final assent to an offer. A valid offer and acceptance amount to an agreement. However, no acceptance has taken place here. It might be worth discussing the distinction between an offer and invitation to treat here also. Reflective exercises (page 45) 1 What presumptions do the courts have regarding the intention of the parties in social and domestic circumstances? The presumptions as they relate to social and domestic circumstances can be summarised as follows. If an agreement concerns a commercial matter, the courts presume that the parties do intend to create legal relations (Edwards v Skyways [1964] 1 WLR 349). 2 Jillian and Andrea are sisters who are thinking about buying white goods together. They shop around at a few retailers and decide to Instructor Supplement to accompany Holm, A Contract Law Workbook 8

9 enter into a deferred payment scheme to make their major purchase of white goods more affordable. Just before they are about to sign the agreement Jillian changes her mind. What rights, if any, does Andrea have to force Jillian to go through with the transaction? The important factor here is that this is dependent upon the existence of a valid legally binding contract. While it seems that the elements of a contract are present, it is arguable whether a contract has been effected due to the decision not to sign the written contract with, presumably, a third party. In this case, therefore, the presumption that relates to social and domestic circumstances ie that the parties do not intend to create legal relations is applicable rather than that applying to a commercial matter since the arrangement was between Jillian and Andrea, not the retailer. Hence, Andrea cannot force Jillian to go through with the transaction. Reflective exercises (page 48) 1 What is the meaning of consideration? Consideration is one measure of intent of the parties to establish legally enforceable rights and obligations. It could be said that consideration is the price that is paid for a promise. 2 John promises his son Nick that in consideration of all his love and affection he would provide him a yearly allowance of $5,000. After an argument following a change in Nick s behaviour, John makes no further payments. Referring to the legal principles, explain if Nick can enforce future payments. Love and affection would not amount to a valid form of consideration for this agreement to be legally binding. Consideration is essential in every contract and must be something of value. It is not possible to quantify this in any way. Similarly, consideration must be definite and must be present and not past and must be possible of performance. In addition, it must amount to more than what a party is already obliged to do. Hence, in this case the consideration aspect of the agreement is problematic and would render the agreement unenforceable notwithstanding the potential issues associated with the intention to be legally bound. Further questions to consider (page 49) Offer and acceptance (a) An offer must be distinguished from an invitation to treat. Discuss with reference to your textbook. An offer is a proposal which is intended to bind the offeror upon acceptance. On the other hand, an invitation to treat is merely an indication of willingness to deal or trade. (b) What is a counter offer? Discuss with reference to your textbook. Instructor Supplement to accompany Holm, A Contract Law Workbook 9

10 A counter offer is a conditional acceptance of an offer and is separate from a legally binding acceptance. This conditional acceptance becomes an offer that can then be accepted or rejected by the original offeror. (c) As part of a negotiation to buy a car, Robert offers $800 for its purchase. Sue responds to Robert s offer by stating that she will accept $850 for the car. Robert elects not to continue with the purchase. Is there a valid contract in place? An offer is a proposal which is intended to bind the offeror upon acceptance. [Discuss with the students whether the rules relating to offer have been considered.] A valid acceptance is an unqualified and final assent to an offer. [Be sure when considering acceptance in contract that each of the rules relating to acceptance has been considered.] In this case, Robert is making an offer of $800 but Sue is making a counter offer rather than an acceptance of the offer. Robert is thereby able to accept or reject this offer and chooses to reject it. Therefore, there is no formal agreement in place as there is no valid offer and acceptance. (d) In the following negotiations between two commercial entities the following occurred: 1 October letter of offer posted; 8 October letter of revocation posted; 11 October acceptance telegraphed; 15 October letter of acceptance sent to confirm the telegraph; and 20 October letter of revocation received. Explain whether a contract has been concluded with reference to the relevant legal principles. A contract has been effected here. An offer was posted on 1 October. Although the offer was followed up by a letter of revocation, that letter presumably did not arrived before the acceptance was telegraphed. An approach of acceptance that expedites the contractual process is likely to be acceptable. Nevertheless, the letter of acceptance follows, which thereby affirms the acceptance was sent (re postal acceptance rule) prior to the letter of revocation being received. A valid contract is effectuated, arguably on 11 October, certainly on 15 October. Intention to create legal relations (a) What is the legal presumption where there are commercial arrangements between parties? For an agreement to be legally binding the parties to the agreement must have intended that legal consequences would flow from the failure of one party to perform his or her obligations. The courts presume an intention to be bound, or not bound, given a particular circumstance. The presumption applied by the courts is that commercial agreements are intended to give rise to legal relations. This presumption may be readily rebutted if the evidence is presented disclosing a contrary intention. Instructor Supplement to accompany Holm, A Contract Law Workbook 10

11 (b) Explain how this legal presumption can be rebutted by evidence of a contrary intention. The presumptions underlying an intention to be legally bound can be rebutted by evidence to adduce that the social or domestic relationship intended to have legal consequences flowing from the breach or, alternatively, that the commercial relationship did not intend to have legal consequences because it was social or domestic in nature. Either presumption may be readily rebutted if the evidence is presented disclosing a contrary intention. (c) Tom and Sue are married and recently Tom was transferred interstate where he obtained a promotion and a pay rise. Tom promises his wife and extra $50 per month to maintain the household while he is away. Tom pays for a couple of weeks and then fails to make any further payments. Could Sue enforce the agreement with Tom? For an agreement to be legally binding the parties to the agreement must have intended that legal consequences would flow from the failure of one party to perform his or her obligations. The courts presume an intention to be bound, or not bound, given a particular circumstance. The presumption applied by the courts is that social and domestic agreements are not intended to give rise to legal relations (Todd v Nichol [1957] SASR 72). Hence, as this agreement relates to a social and domestic matter it is arguably a social or domestic relationship whereby the parties did not intend legal consequences to arise from its breach. However, this argument could be rebutted by evidence to the contrary, such as the need to maintain the household which arguably could give rise to breach of contract. Consideration (a) Past consideration is no consideration. Explain. Past acts cannot amount to consideration that is sufficient to support a subsequent contract. (b) In what contracts is consideration necessary? Consideration is an essential element of all simple contracts but is not essential for deeds. (c) Derrick delivers pizza for Mario Pizza world. As he gets toward the end of his shift Mario, the manager, asks if Derrick would deliver his final pizza to a friend s house for a bonus payment of $100. Derrick accepts and delivers the pizza, but afterwards Mario refuses to pay. Discuss the enforceability of this promise in terms of consideration. The issue that arises in this matter relates to consideration. Specifically, the issue relates to consideration in circumstances where the promisor does something that they are already obliged to do. Hence, the action of delivering the pizza arguably is already part of Derrick s and therefore the manager is not required to pay. Instructor Supplement to accompany Holm, A Contract Law Workbook 11

12 Chapter 5: Components of Contract The Terms and Conditions Reflective exercises (page 60) 1 What is the doctrine of privity? Why do we have such a doctrine? Privity of contract means there must be a direct legal relationship between the parties to the contract for rights and obligations to arise. This agreement or meeting of the minds must be a result of direct negotiations between the parties to the contract. At common law only a person who is party to a contract may seek contractual remedies by reference to it. That is, only a party to a contract can sue on it, or be sued on it. 2 John is shopping for a vacant block of real estate to build a new house for his family. The real estate agent shows John the block but indicates that the seller will not negotiate on price. John wants to place an offer but thinks the vacant block is overpriced. Thinking about privity of contract, can the real estate agent prevent John from placing an offer? Put simply, no. At common law only a person who is party to a contract may seek contractual remedies by reference to it. That is, only a party to a contract can sue on it, or be sued on it. John can therefore enter the contract with the seller despite the real estate agent s position. Reflective exercises (page 63) 1 Thinking about commercial contracts, write some examples of where you might see exclusions clauses. Airline tickets, car parks, dry cleaners. 2 Jillian is considering the purchase of air line tickets to fly to another major city to visit her sister. After shopping widely for the best ticket prices, she elects to purchase tickets through an online airline ticketing service offering great fares. Following a successful transaction via credit card, a series of terms and conditions appear online which indicate that Jillian must fly in the evening to obtain the best fare. Advise Jillian of her position in contract. An exemption clause may become a term of the contract by signature or by notice. It is important to note that if a person signs a document he or she is bound by it even if they do not read it. However, different rules apply to exemption clauses where there is no signed document. Where a document is not signed, the exemption clause will only apply if the party knows of the clause, or if reasonable steps are taken to bring it to his or her notice before the contract is made. In this case, there is an unsigned document but an issue that does arise is whether the terms contained within the contract were apparent at the time the contract was formed or only subsequent to the formation of the contract as per Olley v Marlborough Court [1949] 1 KB 532. Reflective exercises (page 67) Instructor Supplement to accompany Holm, A Contract Law Workbook 12

13 1 What is the definition of a condition? A condition is a significant or essential part of a contract. A breach of a condition entitles the innocent party to terminate the contract and claim damages. 2 John buys a washing machine and is told by the salesperson that the manufacturer warrants all defects for a period of one year. Soon after using the washing machine an electrical defect arises and the machine becomes inoperable. Outline, in detail, how contract law could provide a remedy here and explain why. In this scenario the washing machine is the subject matter of the contract. Hence, in this circumstance it is arguably a condition. As the contract has been performed at the time in which the defect takes place, it is likely that recourse will need to be sought on the basis of warranties. A breach of warranty entitles the innocent party to damages only for the loss suffered as a result of the breach and does not give a right to end the contract. Further questions to consider (page 68) Privity of contract (a) Outline and define the exceptions to the privity of contract doctrine. Certain exceptions to the privity of contract rule have been laid down by common law or equity, or created by statute. Foremost is agency. Agency is an agreement whereby an agent may contract on behalf of the principal with a third party, resulting in a contract between principal and third party. This thereby works against the concept of privity. However, this does not represent a true exception to the privity doctrine because the law deems the principal to be contracting in his or her own right that is, as principal. Similarly, enforcing a contract by beneficiary of trust through the trustee can work contrary to the privity of contract rule. A person may enter into a contract in his or her capacity as a trustee. While the trustee is the party in law, and as such only he or she can sue on the contract, equity will permit the beneficiary to sue on the contract (Re Garbett [1963] NZLR 384). In the assignment of legal rights, a party to a contract can assign his or her rights under a contract to a third party, thus vesting the right to enforce these rights in the third party. Clearly this has the effect of working against the privity of contract and therefore has become known as an exception. In dealings with property, it is possible to apply restrictive covenant or an easement to the land which will then bind all subsequent successors in title, and may benefit a third party or parties. (b) Explain why agency operates as an exception to privity given that, typically, this relationship facilitates contracts. Agency is an agreement whereby an agent may contract on behalf of the principal with a third party, resulting in a contract between principal and third party. This thereby works against the concept of privity but does not represent a true exception to the privity doctrine because the law deems the principal to be contracting in his or her own right. Instructor Supplement to accompany Holm, A Contract Law Workbook 13

14 Exclusion clauses (a) What is the relevance of exclusion clauses to commercial contracts? An exemption clause is a term within a contract which seeks to exempt one of the parties from liability. The term may also seek to limit a party s liability to a specific sum if certain events occur, such as a breach of warranty or negligence. Thus it is important to appreciate the implications of exclusion clauses in commercial contracts since they directly impact upon the agreement. (b) As part of purchasing an airline ticket, Robert reads the following clause: The airline will not take any responsibility for loss or damage to personal goods howsoever caused. Discuss this clause in the context of its relevance to the agreement and the impact it may have on Robert. Foremost, an exemption clause is a term within a contract which seeks to exempt one of the parties from liability. The term may also seek to limit a party s liability to a specific sum if certain events occur, such as a breach of warranty or negligence. In this case the clause is seeking to avoid liability for loss or damage to personal goods. However, it does not delimit its respective liability as well as it might due to the vague nature of the wording. While the clause attempts to cover liability for any possible consequence, it could be construed as contra proferentum due to the fact that the clause may be destructive to the rights of unsuspecting parties. (c) Tom hires a motel room late at night after travelling by car for a number of hours. He signs in at reception and then proceeds to the room located on the second floor. Upon entering the room he notices a sign stating: The motel will not be liable for any valuables not stored in the motel safe. Exhausted and hungry, Tom puts his laptop on the bed and leaves the room for dinner. During his absence the laptop is stolen. Tom wants to take legal action against the motel. Advise Tom. Where a document is not signed the exemption clause will only apply if the party knows of the clause, or if reasonable steps are taken to bring it to his or her notice before the contract is made. In the case of Olley v Marlborough Court [1949] 1 KB 532, the plaintiff booked in at the defendant s hotel. When the plaintiff went to her room she saw a notice on the wall stating that the hotel would not be liable for articles lost or stolen unless they were handed in for safe keeping. The plaintiff left some furs in the bedroom, closed the selflocking door, and hung the key on a board in reception. The furs were stolen. In this case, it was held that the exemption clause was not effective. The contract was completed at the reception desk, and accordingly a notice in the bedroom came too late to be incorporated into the contract. Hence, in Tom s case, the term has been brought to his notice following the formation of the contract and therefore cannot be deemed to be a part of that contract. Conditions and warranties Instructor Supplement to accompany Holm, A Contract Law Workbook 14

15 (a) Explain the difference in the remedies available for a breach of a condition versus a breach of a warranty in contract. A breach of a condition entitles the innocent party to terminate the contract and claim damages, whereas a breach of warranty entitles the innocent party to damages only for the loss suffered as a result of the breach and does not give a right to end the contract. (b) Explain the relevance of distinguishing a condition from a warranty for a plaintiff in a civil matter involving contract. This distinction is important as it determines the remedies that are available to the parties. A breach of a condition entitles the innocent party to terminate the contract and claim damages, whereas a breach of warranty entitles the innocent party to damages only for the loss suffered as a result of the breach and does not give a right to end the contract. (c) With reference to a suitable textbook, explain how the courts might determine if a contractual term is a condition or warranty. The courts will determine whether a contractual term is a condition or warranty by examining the circumstances and evidence of the particular case. Ultimately the nature and effect of a breach and the appropriate remedy will be determined through considering the intention of the parties to the contract. (d) Warranties are of lesser importance in contract but are still relevant. Why? A breach of warranty entitles the innocent party to damages only for the loss suffered as a result of the breach. It does not mean that they can end the contract. (e) Derrick buys a bicycle from Pizenza cycles on the basis of a display item he sees in store. When he gets home he realises that the bicycle does not have the accessories that were on the display and he decides to return the bike and get a refund of his money. Advise Derrick. This question is largely concerned with the contract that has been formed between Pizenza cycles and Derrick. Ultimately to determine what was included in the contract it will be necessary to consider the representations, if any, that were made prior to the forming of the contract. Indeed, if the contract was formed purely upon the basis of an advertisement, then the advertisement itself will likely be construed as an invitation to treat. Chapter 6: Vitiating Elements Capacity Reflective exercises (page 79) 1 Define two classes of persons who may not be capable of entering a legally binding contract Instructor Supplement to accompany Holm, A Contract Law Workbook 15

16 Those who have not attained the age of majority (minors) and those who are bankrupt may not be capable of entering a legally binding contract. 2 Joel, who is 14 years old, is shopping for sportswear. He passes a sporting store with a display indicating a one-time special on a limited edition Flavio sportswear. Joel thinks this is a bargain and enters the store to inquire further. The store manager immediately tells Joel that he is not able to conduct business with Joel as he is under age. Joel threatens to sue the store if they do not sell him the sportswear. Advise the store manager of their position in contract law. Not all persons can enter into legally binding contracts. Certain classes of people are categorised as incapable of entering into contractual obligations. Until his 18th birthday Joel is a minor. Contracts with minors at common law are valid and bind both the infant and the other contracting party where they are of benefit to the minor and remain valid unless and until they are repudiated by the infant. It is arguable that because this contract is not for necessaries, it is therefore not valid. Reflective exercises (page 81) 1 Is a contract legally binding, if one party to the contract was unaware of the mental incapacity of the other? Not all persons can enter into legally binding contracts. Certain classes of people, including those with a mental disability or those who are intoxicated, are categorised as incapable of entering into contractual obligations. Hence, the law extends a measure of protection to these parties. 2 Jillian, who is currently bankrupt, wants to enter a contract with Andrea to buy a business. Can Jillian enter into such an agreement? Would it be likely the trustee in bankruptcy would be supportive of such an investment? When a person is bankrupt all property rests in the trustee in bankruptcy. The bankrupt is thereby limited, monetarily to the contract that they may enter into without permission. It is unlikely that the trustee in bankruptcy would be supportive of this contract or investment. Reflective exercises (page 83) 1 What is the underlying rationale behind restricting the contracting capacity of persons who are incarcerated? Under Queensland law a person sentenced to more than three years imprisonment has their estate taken over by the Public Trustee. The Public Trustee has discretion as to whether contracts can be entered into on behalf of the prisoner. This limits the contractual capacity of a prisoner. This is done largely for public policy reasons so that the furtherance of crime cannot be continued whilst incarcerated. Instructor Supplement to accompany Holm, A Contract Law Workbook 16

17 2 Ali is a citizen and resident of Israel. While on holidays in Australia, Ali makes an offer on an expensive sports car, a Ferrari. Is this contractual offer valid? Why? Provided Ali has the requisite capacity then the contract will be deemed legal. The term alien is used to describe a person who has been born outside Australia. Aliens have the same contractual capacity as Australian citizens generally, but they may not take a majority shareholding in certain public companies. Hence, Ali shares the same capacity as Australian citizens generally. Further questions to consider (page 84) Capacity minors (a) Define and discuss the term necessaries. Contracts for necessaries are binding on minors because they encompass things without which the minor cannot reasonably exist. These items include food, clothing, medical care and shelter. Whether a thing is a necessary depends upon whether it is capable of being a necessary, which is a question of law, and whether the thing can be properly regarded as a necessary for this particular minor, which is a question of fact. (b) What are beneficial contracts of service? A minor can be bound to pay for contracts that will be for their benefit ie a minor may be liable to pay a reasonable sum for his or her education or in training for a profession or trade. But the contract must be of benefit as a whole to the minor as shown in the case of Leng & Co Ltd v Andrews [1909] 1 Ch 763. (c) Rob is turning 18 in two weeks time and negotiates to buy a car from Sue for $800. Sue accepts Rob s offer but later in the day says that she will only sell the car to Rob after two weeks if she does not have a better offer during that time. Two weeks pass, Sue still has the car but no longer wants to sell the car to Rob. Advise Rob. Upon acceptance of this agreement Rob has not yet reached the age of majority. Nevertheless, Sue accepts the offer and later decides that she will wait until Rob reaches the age of majority. However, this stipulation is made subsequent to the formation of the contract. When Rob reaches the age of majority and now insists upon the completion of the contract, it is arguably a valid contract at this time. A number of issues arise in this scenario. Foremost, there is the matter relating to capacity to contract and also the legality of the acceptance when the acceptance is conditionally given. However, this conditional acceptance is nevertheless subsequent to the formation of the contract. Capacity mental disability/intoxication Instructor Supplement to accompany Holm, A Contract Law Workbook 17

18 (a) What conditions have to be satisfied for a contract to be voidable for intoxication? Contracts made with a person suffering mental disability are valid and binding unless it can be shown that at the time the contract was made, the person suffering the disability was incapable of understanding the contract and that the other party was aware of the condition, as in the case of Imperial Loan Co v Stone [1892] 1 QB 599. In relation to intoxication, the law takes a similar stance to that in relation to mental disability. If a person is in such a state of intoxication that they cannot appreciate the nature of what they are doing and the other party knew or ought to have known of the condition, then the contract is voidable: Matthews v Baxter (1873) LR 8 Ex Ch 132. (b) Does the existence of a mental incapacity automatically result in a lack of capacity to enter into legally binding contracts? Contracts made with a person suffering mental disability are valid and binding unless it can be shown that at the time the contract was made, the person suffering the disability was incapable of understanding the contract and that the other party was aware of that condition. The same applies to a person suffering intoxication at the time of making a contract. Thus, if a person is in such a state of intoxication that they cannot appreciate the nature of what they are doing and the other party knew or ought to have known of the condition, then the contract is voidable. (c) Tom suffers from an existing mental incapacity which impairs his ability to speak. He enters a store to buy some electronic equipment and is told that they cannot contract with him due to his lack of capacity. Tom is upset and seeks your advice regarding the situation. Although Tom s incapacity impairs his speech, it does not necessarily impair his understanding. Contracts made with a person suffering mental disability are valid and binding unless it can be shown that at the time the contract was made, the person suffering the disability was incapable of understanding the contract and that the other party was aware of the condition. Nevertheless, in Tom s case the store owner is able to decide if they want to contract or not to contract with him. Capacity bankruptcy and incarceration (a) Can a bankrupt enter into contracts? When a person is bankrupt all property rests in the trustee in bankruptcy. The bankrupt is thereby limited, monetarily, to contracts that they may enter into without permission. (b) In what circumstances might a public trustee enter into contracts for a party incarcerated give examples. The public trustee might enter contracts on behalf of a party incarcerated if the contract will facilitate the person s rehabilitative process and is for the person s or the person s family s wellbeing. Instructor Supplement to accompany Holm, A Contract Law Workbook 18

19 (c) Derrick delivers pizza for Mario Pizza world. As he gets toward the end of his shift Mario, Derrick delivers a pizza to Andy s house. Andy greets Derrick at the door and promptly takes the pizza, saying, however, that he cannot pay as he is bankrupt and has no money. Is there a valid contract in place? Can Mario Pizza World recover money owed by Andy? An implied term that applies when a pizza is ordered is that the person making the order will pay for the goods when they are collected or delivered. With regard to this circumstance, a contract has been formed and the nonpayment for the goods ordered amounts to a breach of contract. While bankruptcy might preclude a person from entering into certain dealings, those dealings do not extend to contracts such as these and therefore Andy is required to pay and, in failing to do so, is in breach of contract. Chapter 7: Vitiating Elements Genuine Agreement Reflective exercises (page 94) 1 Outline and describe the three key types of mistake. The three types of mistake are common mistake, mutual mistake and unilateral mistake. A common mistake occurs when each party to the contract makes the same mistake. A mutual mistake occurs when the parties are at cross-purposes ie both parties are mistaken as to the other party s intention. A unilateral mistake occurs when one party alone is mistaken and the other party knows or, in the circumstances, should know, of the mistake. 2 Using examples, distinguish between common mistake and unilateral mistake. A common mistake occurs when each party to the contract makes the same mistake. In such cases, although the parties are in agreement as to the terms of their contract, a shared mistake strikes at the capability of that contract. The courts will not render a contract void for common mistake unless the mistake is fundamental to the contract, which will, of course, depend upon the facts of the case. On the other hand, a unilateral mistake occurs when one party alone is mistaken and the other party knows or, in the circumstances, should know, of the mistake. Unilateral mistake cases usually belong to situations relating to mistaken identity, mistakes relating to a term of the contract or a mistake as to the nature of a document that has been signed. Importantly, unless the unilateral mistake is fundamental to the contract it will have no consequence for the contract. Reflective exercises (page 97) 1 What are the different types of misrepresentation? A misrepresentation is a representation that is untrue. A misrepresentation may be fraudulent, innocent or negligent. A misrepresentation is not a term of Instructor Supplement to accompany Holm, A Contract Law Workbook 19

20 the contract so the party misled does not have the usual remedies available for a breach of the terms of the contract. 2 John and Nick want to enter into an agreement for the sale of a remote control toy car. Nick has had the toy car for a period of one year and indicates that he purchased the toy second-hand but has found it to be faultless. On basis of the representations made by Nick, John agrees to purchase the remote control toy car. However, shortly after John has purchased the car, it becomes apparent that the internal transmission is badly corroded due to poor maintenance. John approaches Nick regarding this matter and Nick states that he always maintained the car and that the poor maintenance must have been due to the previous owner. Consider the application of misrepresentation in this circumstance. A misrepresentation is a representation that is untrue. The law dealing with misrepresentation is primarily concerned with determining the rights of such persons and their position will largely depend upon whether the false representation was made innocently, fraudulently or negligently. A misrepresentation is not a term of the contract so the party misled does not have the usual remedies available for a breach of the terms of the contract. The outcome for this scenario is dependent upon the extent to which Nick was aware of the underlying damage to the subject matter of the contract. Hence, if he was not aware, then his misrepresentation may be innocent, which would thereby make recovery difficult. However, in certain circumstances, an innocent though negligent misrepresentation will give rise to an action for damages as per Hedley Byrne and Co Ltd v Heller and Partners Ltd [1964] AC 465. If the representation was negligent, then the legal remedies for misrepresentation are rescission, for both fraudulent and innocent misrepresentation, and damages, for fraudulent misrepresentation only. Legislation has altered the law concerning misrepresentation but this legislation does not apply in all circumstances. In cases where the legislation does not apply, common law remedies may still operate. Reflective exercises (page 101) 1 What is the key difference between duress and undue influence? Duress applies to those situations in which a person enters a contract due to actual or threatened violence or, indeed, due to actual or threatened unlawful imprisonment. Undue influence can be pleaded whenever a person s free will is compromised by pressure exerted by another person. If, due to the pressure exerted by one party, another party is influenced to enter a contract with the dominant party, the courts may declare the contract voidable at the option of the influenced party. 2 Jillian and Andrew are having a commercial dispute regarding a building contract. Jillian physically threatens Andrew with violence if he does not complete the contract on time. Advise Andrew regarding his legal position in contract. Instructor Supplement to accompany Holm, A Contract Law Workbook 20