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Introduction
In this module we examine the final two of the six essentials of a simple contractgenuine consent and the
legality of its objectsand then proceed to consider the standardised classificatory system as developed by
common law judges in relation to the substance of a contractexpress and implied terms, conditions, warranties
and innominate terms as well as exemption or exclusion clauses. Exemption clauses have proved especially
troublesome to the common law, both conceptually and in practice. The idea that a contract may so structure
relations between two parties that in effect prevents any primary obligations from arising and/or secondary
liability to pay damages in the event of a breach, unsurprisingly received a fairly cool reception from common
law judges concerned that contracts not asymmetrically consist of mere illusory promises by one party while
imposing full liability on the other party. While in more recent times for reasons of economic efficiency and to
stop the abuse of transactional bargaining and monopoly power, there has been extensive statutory intervention
designed to limit the freedom of commercial entities to contractespecially with consumerson terms that are
patently one-sided and unfair.
Objectives
On completion of this module you should be able to:
define the factors that may detract from consensus ad idem being achieved in a simple contract
define, explain and illustrate the types of mistake in contractual terms
define and distinguish between innocent and fraudulent misrepresentation
recognise examples of duress and undue influence in cases of contracts
describe an example of an unconscionable contract.
Readings
Textbooks
Turner & Trone 2013
Chs 79
Davenport & Parker 2012
Chs 79
Module 4 - Page 53
Mistake
Can a person who enters a contract as a result of a misunderstanding have the contract declared void? Suppose,
for example, that A, who bought a painting from B for $1000, later discovers that it is worth only $100. Or
suppose that C purchases a property from D believing it to be suitable for establishing a vineyard but, to her
dismay, discovers that the soil is not suitable for such a usage. Can the mistaken parties have their contract
cancelled and reclaim any purchase money paid to the seller?
From the outset, it should be noted that the courts are very reluctant to grant relief on the grounds of mistake. In
the absence of some other vitiating factor, such as misrepresentation, the mistaken party is usually left to suffer
the consequences of their mistake.
There are, however, instances where the courts will provide a remedy for the mistaken party and it is with those
instances that the following discussion is primarily concerned.
Types of mistake
In the contractual sense there are three types of mistake:
common mistakewhere each party makes exactly the same mistake
mutual mistakewhere the parties misunderstand each other and are therefore at crosspurposes, and
unilateral mistakewhere one party is mistaken and the other party knows or ought to be aware of the
mistake made.
Each of these categories will be examined separately; however, before doing so, several points common to them
all require immediate emphasis.
Firstly, the law will only assist if the mistake is one of fact, not law. A mistake as to the law governing a
particular situation is not sufficient to render a contract void. This is so because everyone is presumed to know
the law. Thus, a person who makes a payment unaware that the payment contravenes a particular law cannot
claim the payment back by pleading mistake.
In Holt v Markham [1923] 1 KB 504, the plaintiffs, acting as agents for the British Government, paid to the
defendant, an officer in the Royal Air Force during the 19141918 war, a gratuity which was payable to officers
on demobilisation. The amount payable was determined by government regulations then in force. Because the
plaintiffs overlooked a particular regulation, the defendant was overpaid. Their claim for recovery of the excess
was dismissed on the basis that their mistake was one of law, not fact.
Common mistake
Common mistake occurs when each party to the contract makes the same mistake. In such cases, although the
parties are in agreement as to the terms of their contract, a shared mistake strikes at the efficacy of that contract.
A common mistake about the existence of the subject matter is not to be confused with those instances in which
one of the parties to a contract promises that the subject matter does exist. In cases where the latter occurs, the
non-existence of the subject matter leaves the promisor in breach of contract.
Such a case is found in McRae v Commonwealth Disposals Commission (1951) 84CLR 377. The Disposals
Commission called for tenders for the purchase of an oil tanker wrecked on a specified reef. McRaes tender of 285
was accepted and he spent a further 3 000 mounting a salvage expedition. No ship was found and it was discovered
that there had never been a wreck in the place specified. McRae sued the Commission for breach of contract.
In reply, the Commission argued that there had been a common mistake as to the existence of the tanker and
therefore no contract has been created. This defence failed, the High Court of Australia finding that it was not a
case of common mistake. In the words of Dixon and Fullagar JJ:
It is not a case in which the parties can be seen to have proceeded on the basis of a common assumption of fact so
as to justify the conclusion that the correctness of the assumption was intended by both parties to be a condition
precedent to the creation of contractual obligations. The Officers of the Commission made an assumption, but
the plaintiffs did not make an assumption in the same sense. They knew nothing except what the Commission
had told them. If they had been asked, they would certainly not have said: Of course, if there is no tanker, there
is no contract. They would have said: We shall have to go and take possession of the tanker. We simply accept
the Commissions assurance that there is a tanker and the Commissions promise to give us that tanker. The only
proper construction of the contract is that it included a promise by the Commission that there was a tanker in the
position specified.
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exactly what they bargain for. It seems immaterial that they could have got the same result in another way, or
that if they had known the true facts they would not have entered into the bargain. For example, A buys Bs
horse; he thinks that the horse is sound and he pays the price of a sound horse; he would certainly not have
bought the horse if he had known as a fact that the horse was unsound. If B has made no representation as to the
soundness and has not contracted that the horse be sound, A is bound and cannot recover.
In Leaf v International Galleries [1950] 2 KB 86, the plaintiff purchased from the defendant a painting titled
Salisbury Cathedral which both parties honestly believed was painted by Constable. When it was later revealed
that the painting was not by the artist, the plaintiff sought, inter alia, to have the contract declared void for
common mistake.
It was held that there was no operative common mistake. Denning LJ put the matter in the following terms:
This was a contract for the sale of goods. There was a mistake about the quality of the subject matter, because both
parties believed the picture to be a Constable: and that mistake was in one sense essential or fundamental. But
such a mistake does not avoid the contract: there was no mistake at all about the subject matter of the sale. It was
a specific picture Salisbury Cathedral. The parties were agreed in the same terms on the same subject matter, and
that is sufficient to make a contract (at 90).
In other words, the plaintiff contracted to buy a painting called Salisbury Cathedral and that is what he received.
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Notwithstanding that advice, Solle brought an action against Butcher claiming the excess paid over the previous
two years and a declaration that he could remain in the flat for the remainder of the lease for 140 per annum.
Butcher counter-claimed, seeking a declaration that the lease was void for common mistake. Solle succeeded at
first instance and Butcher appealed.
The Court of Appeal did not declare the contract void for common mistake. As Denning LJ put it:
It is clear that here there was a contract. The parties agreed in the same terms on the same subject matter. It is
true that the landlord was under a mistake which was to him fundamental: he would not for one moment have
considered letting the flat for seven years if it meant that he could only charge 140 a year for it. He made the
fundamental mistake of believing that the rent he could charge was not tied down to a controlled rent: but, whether
it was his own mistake or a mistake common to both him and the tenant, it is not a ground for saying that the lease
was from the beginning a nullity. (at 692)
The court did, however, set aside the contract upon terms that were just to both parties. Basically, those terms
gave the tenant the right to choose either to stay on at what he agreed was a fair rent (250) or to leave.
Thus, equity intervened in regard to a common mistake which, because of its nature, was ignored by the common law.
Rectification
When persons reduce their agreement to writing, they expect that the written instrument will accurately reflect
that agreement. However, sometimes this expectation is thwarted by an unintentional drafting error. In such
case, equity may intervene and rectify the written agreement so that it does represent the parties intentions.
The mistake may occur when the parties purport to record in writing with a previously concluded agreement,
or where there is no such previous agreement, their concurrent intention. The aim of rectification is to make the
written instrument a true record of that agreement or intention.
These conditions were not met in Rose v Pim [1953] 2 QB 450. In that case, the plaintiff, a grain merchant,
had received an order from a customer for Mexican horsebeans here described as feveroles. After the
plaintiff had been assured by his supplier, the defendant, that horsebeans and feveroles were the same thing,
he entered into an oral contract with the defendant for the purchase of a quantity of horsebeans. That contract
was later reduced to writing. When at a later date the parties discovered that horsebeans and feveroles were not
identical, the plaintiff sought, inter alia, to have the contract rectified by substituting the word feveroles for
horsebeans. This the court refused to do.
It was held that although the parties were under a common mistake in believing that horsebeans and feveroles
were one and the same, the written contract entered into truly reflected what the parties had agreed to.
Consequently, rectification was not appropriate.
Mutual mistake
Mutual mistake occurs when the parties are at cross-purposes: both parties are mistaken as to the others
intention. For example, A, the owner of several horses, offers to sell one to B and B accepts. Whereas A
intended to sell to B his horse Neanderthal, B thought he was buying Piltdown. Strictly speaking, there is no
agreement between A and B. But does this mean that there is no contract between them? As will be seen, the law
does not adopt such an all-or-nothing approach to problems involving mistakes of this kind.
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If, on the other hand, a reasonable person appraised of the facts could not infer a contract, then no contract will
exist between the parties because of the lack of agreement.
The objective test did not identify a contract in Raffles v Wichelhaus (1864) 2 H & C906. The defendant had
agreed to purchase from the plaintiff 125 bales of Surat cotton ... to arrive Ex Peerless from Bombay .... In fact
there were two ships of that name both of which sailed from Bombay to England but at different times of the
year. A dispute arose when the parties alleged that they were not referring to the same ship (a mutual mistake).
It was held that no contract existed: on the facts of the case, a reasonable person could not impute any definite
agreement. The facts pointed equally well to the cargo on either vessel.
Mutual mistake in equity
Generally speaking, equity follows the common law in relation to mutual mistake. In a few exceptional cases, courts
exercising their equitable jurisdiction have set aside contracts held valid at common law. However, the main relief
granted is a refusal to order specific performance of the imputed contract against the mistaken party. The cases
indicate that equity will be reluctant to order specific performance if to do so would cause hardship on that party.
Given the nature of mutual mistake, rectification is not available.
Unilateral mistake
Unilateral mistake occurs when one party alone is mistaken and the other party knows or, in the circumstances,
should know of the mistake. Unilateral mistake cases usually belong to one of the following categories:
1. those involving mistaken identity
2. those involving a mistake as to a term of the contract other than the identity of a party, or
3. hose involving a mistake as to the nature of a document signed.
However, it is worth noting here that in common with mistake generally, a unilateral mistake will be of no
consequence unless it is fundamental to the contract.
A case which illustrates the issues involved and the difficulty in rebutting the presumption in face-to-face
dealing is Phillips v Brooks Ltd [1919] 2 KB 243.
North entered Phillipss jewellery shop and pretended that he was one Sir George Bullough. Phillips checked
a directory to verify the address given by North and found that it did correspond with that of Sir George.
North then selected approximately 3000 worth of jewellery and wrote out a cheque for the required amount.
However, rather than take the jewellery North suggested that Phillips keep it until the cheque was cleared.
He did, however, convince Phillips to let him take a ring (which was worth 450) for his wifes birthday. The
cheque was subsequently dishonoured and Phillips discovered that the ring was in the possession of Brooks Ltd,
a pawnbroker, with whom North had pledged it for 350. Phillips sued for its return, alleging that the contract
between himself and North was void for unilateral mistake.
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His action failed, the court finding that the contract was not void, but voidable, and as an innocent third party
(Brooks Ltd) has acquired an interest in the ring prior to Phillips voiding the contract, Phillips could not force its
return. His remedy, for what it was worth, was against North. Thus, the presumption was upheld.
Module 4 - Page 59
In Attwood v Small (1838) 6 CI & Fin 232, the vendors of a mine grossly overstated the mines capacity. Small,
the prospective purchaser, appointed an expert to assess the mines actual capacity and, on the basis of his
report, proceeded with the purchase. When he later discovered the misrepresentation of the vendor, Small sought
to rescind the contract.
His action failed, the House of Lords finding that the purchaser was influenced by his own advisers and not by
the vendors statement.
Fraudulent misrepresentation
A fraudulent misrepresentation is a false representation made by a person who at the time of making it had no
honest belief in its truth. If the representor does believe that his representation is true, no action for fraud can be
maintained, even if the representor was negligent in holding that belief.
In Derry v Peek (1889) 14 App Cas 337 (HL), the respondent bought shares in a tramway company on the faith
of a statement in the prospectus that the company was authorised to use steam power instead of horses. In actual
fact, the specific Act of parliament which allowed the company to run the trams provided that steam could only
be used with the consent of the Board of Trade. When the company did seek that consent it was refused and the
company was ultimately wound-up. The respondent brought an action against the directors claiming damages
for fraudulent misrepresentation.
Although he succeeded in the Court of Appeal, the House of Lords found in favour of the appellant directors.
According to the House of Lords, the directors believed that the statement in the prospectus was true and that
was enough to defeat an action against them for fraud. Lord Herschell discussed the important cases dealing
with fraudulent misrepresentation and concluded as follows:
I think the authorities establish the following propositions: first, in order to sustain an action of deceit, there must
be proof of fraud, and nothing short of that will suffice. Secondly, fraud is proved when it is shown that a false
representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it
be true or false. Although I have treated the second and third as distinct cases, I think the third is but an instance
of the second, for one who makes a statement under such circumstances can have no real belief in its truth. And
probably covers the whole ground, for one who knowingly alleges that which is false, has obviously no such
honest belief. Thirdly, if fraud be proved, the motive of the person guilty of it is immaterial. It matters not that
there was no intention to cheat or injure the person to whom the statement was made .... In my opinion making a
false statement through want of care falls far short of, and is a very different thing from, fraud, and the same may
be said of a false representation honestly believed though on insufficient grounds ... (at 374).
The equity remedy of rescission ab initio is available for fraudulent (pre)contractual misrepresentation. As
Meagher et al. (1992, pp. 335336) note: . the notion of fraud is deeply embedded in equity [but also] ..
since Pasley v Freeman (1789) 100 ER 450, the common law regarded fraud as founding an action on the case
for damages. Further at law, a contract is readily voidable for fraudulent misrepresentation if it remains entire
executory. In that instance each party (defrauding party included) being entitled to restitutio in integrum can be
readily restored to their original precontractual state. However, as the common law takes a strict view of what
constituted proper restitution and lacks adequate procedures to enforce it, this means that rescission [at law]
may not be had for many executed or partly executed contracts (Meagher et al. 1992, p. 654). But since equity
in its concurrent jurisdiction takes a less stringent, more flexible approach to the degree of restitution required,
seeking rather to do practical justice between the parties and utilises consequential orders for adjustment
purposes. Such contracts can attract equity rights and court jurisdiction to effect a rescission (the courts now
having conjoint common law and equity jurisdiction). Or as the High Court said in Alati v Kruger [1955] HCA
64 at para. 10:
But it is necessary here to apply the doctrines of equity, and equity has always regarded as valid the disaffirmance
of a contract induced by fraud, even though precise restitutio in integrum is not possible, if the situation is such
that, by the exercise of its power including the power to take accounts of profits and to direct enquires as to
allowances proper to be made for deterioration, it can do what is practically just between the parties, and by so
doing, restore them substantially to the status quo
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While in Vadasz v Pioneer Concrete (SA) Pty Ltd [1995] HCA 14, the High Court again stressed the need for
flexibility in achieving what is practically just for both partieshere in a commercial settingand divided a
guarantee founded on misrepresentation (assumed to be fraudulent) into avoidable past and but valid future
indebtedness components on the justification that this, is to do no more than hold the appellant to what he
was prepared to undertake independently of any misrepresentation (per Deane, Dawson, Toohey, Gaudron &
McHugh JJ at para. 31).
In practical application of equity rescission principles, first, a court can issue a declaration that any self-help
rescission undertaken by the victim is in fact justified. Secondly, even though the contract may be partly
performed, a court can properly order that it be rescinded ab initio to effect substantial restitution in integrum
especially where property hasnt been transferred between parties and there are no related or derivative third
party property or contractual rights to consider. Thirdly, a consequential court order for recovery of all monies
paid under the contract. Fourthly, a fraudulent party is equally entitled to restitution, i.e. entire cancellation of
the contract. Fifthly, damages in equity for deceit are awardable to allow the victim to recover all the losses
directly flowing from the fraudulent misrepresentationunless not reasonably foreseeable or due to supervening
factors and this includes capital as well as income and unavoidable trading losses. Or, in other words, the
general principle is that the plaintiff is to be put, so far as possible, in the position he would have been in if he
had not acted on the fraudulent inducement: Gould v Vaggelas [1984] HCA 68 per Gibbs CJ; (see Turner and
Trone 2013, para. 7.560 & 28.600).
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Economic duress which is arguably a class of unconscionable behaviour was described by Isaacs J in Smith v
William Charlick Ltd (1924) 34 CLR 38 in terms of compulsion being, a legal wrong, and the law provides
a remedy by raising a fictional promise to repay (cited by Moccata J in North Ocean Shipping [1978] 3 All
ER 1170 at 1180). There is also no effective difference in the remedies vis--vis payments and agreements to
pay under duress. In North Ocean Shipping v Hyundai [1978] 3 All ER 1170 at 1182, Moccata J followed and
applied Kerr J in The Siboen and the Sibotre [1976] 1 Lloyds Reports 293who in turn drew on Australian
case lawfor the proposition that whether or not purely nominal but legally sufficient consideration was paid
or not didnt matter, since:
If it had, the contract was voidable and equity would allow rescission and order repayment (i.e., restitution
of unjust enrichment)
while if not the contract was void and payment recoverable in quasi-contract.
The issue of paying or agreeing to pay under protest is a little problematic: failing to protestor protesting but
not clearly keeping the protest alivemay raise issues of whether an agreement or variation has been affirmed,
thereafter disentitling that party from avoiding liability (the outcome in North Ocean Shipping). However, the
Australian view regarding the presence/absence of protest is that it is not conclusive but rather that it is an
evidential issue, relevant to the question of whether the victim acted freely or under compulsion (Carter and
Harland 2002, para. 1325). Where proven, economic duress allows the other party to avoid the contract, resist
a payment variation or recover any monies paid/payable either in quasi-contract or equity as the precise nature
of the transactions the subject of duress dictate: North Ocean Shipping v Hyundai [1978] 3 All ER 1170; The
Universal Sentiment [1983] 1 AC 366; Pao On v Lau Yiu Yong [1980] AC 614; TA Sundell v Emm Yannoulatos
(1955) 56 SR (NSW) 323; Turner and Trone (2013, paras 7.7407.790 & 12.520). But in any event:
a contractual party is bound to perform all existing contractual stipulations without variation: Collins v
Godefroy (1831) 109 ER 1040; Hartley v Ponsonby (1957) E&B 872.
Applying Foakes v Beer (1884) 9 AC 605, even if the coerced party agrees to accept a lower contractual
price, unless the coercive party supplies further consideration, then the victim afterwards can sue for
the outstanding full price payable or performance due under the contract unless promissory estoppel is
somehow applicable.
In Wigan v Edwards (1973) ALJR 586 at 594, Mason J said that, the general rule is that a promise to
perform an existing duty is no consideration, at least when the promise is made by a party to a pre-existing
contract (cited in Carter & Harland 2002, para. 34). The general rule logically covers the promise to pay a
lesser amount too.
And so, in TA Sundell v Emm Yannoulatos (1955) 56 SR (NSW) 323, a buyer under an existing contract that was
coerced into making additional payments on threat of non-supply, later recovered that excess as a payment made
under economic duress, or compulsion.
Undue influence
Undue influence can be pleaded whenever a persons free will is compromised by pressure exerted by another
person. If, as a result of that pressure, the person is influenced to enter a contract with the dominant party, the
courts may declare the contract voidable at the option of the influenced party. The cases involving the plea of
undue influence usually concern dispositions by gift or for inadequate consideration.
Module 4 - Page 63
The situations referred to involve parties in a fiduciary relationship, and are as follows:
1. parent and child
2. trustee and beneficiary
3. physician and patient
4. solicitor and client
5. guardian and ward
6. religious adviser and devotee.
In Tasker v Algar [1928] NZLR 529, a mentally infirm person made several gifts of money to friends who
looked after and cared for him. On his death, the administrator of his estate sought to have the gifts set aside,
alleging that they had been obtained by undue influence.
The court held that the circumstances were such that a fiduciary relationship existed between the donor and the
donees of the money and that the donees therefore had to rebut the presumption of undue influence. As they
could not do this, the gifts were set aside.
Unconscionable contracts
Traditional general law attitude
Until recently, the common law has refused to entertain the possibility of invalidating a contract because it is harsh
or oppressive to one of the parties. This attitude reflected the prevailing philosophy of freedom of contract.
On the other hand, equity has always been prepared to grant relief against harsh and unconscionable bargains
wherever one party to the bargain is at a special disadvantage, as where he or she suffers from an illness,
ignorance, impaired faculties, inexperience or financial need. In such cases, the onus of proving undue influence
lies on the party suffering under the disadvantage, but once established, the onus shifts to the dominant party to
show that the transaction was fair and reasonable.
Lord Denning reiterated this principle in Clifford Davis Management Ltd v WEA Records Ltd [1975] 1 WLR 61.
The two members of a music group who composed the groups music entered an agreement with the manager of
the group whereby, in return for the payment of one shilling and a royalty on sales, the manager purchased the
copyright in all the music composed by them. The agreement was for an initial five-year term, with the manager
having an option to extend it for a further five years. The agreement provided that the composers were to
produce one composition per month, and further, that the manager had complete freedom to choose whether he
would exploit any given piece. It was also provided that the manager could assign the copyright if he chose to.
Subsequently, the manager and the group split. The group employed a new manager, produced a new album and
arranged for him to distribute it. As a result of this development, the original manager brought an action seeking
an injunction to restrain what he regarded as a breach of his copyright.
The injunction was refused, the Court of Appeal found that the contract between the plaintiff and the composers
was unenforceable because it was harsh and oppressive. Lord Denning indicated that the relevant factors in
reaching this conclusion were as follows:
1. The terms of the contract were manifestly unfairthe composers were tied for up to ten years without any retaining
fee. In reality, all they had was a promise by the manager to use his best endeavours to promote the works.
2. The consideration for the copyright was grossly inadequateif the manager chose not to exploit a
composition, he obtained a copyright in that work for one shilling.
3. The fact that the plaintiff managed the group weakened their bargaining power. They relied on him greatly
as he was skilled in business and they were not.
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4. The manager exerted undue influence over the composersgiven the complex nature of the agreement, and
the onerous terms contained in it, he should have advised the composers to seek independent legal service.
A remedy may consequently be available if the inequality of bargaining power allows the stronger party to force
a manifestly unfair contract on the weaker party. It is not certain whether the courts will declare such a contract
void or voidable: none of the decisions referred to required this point to be determined. But given the nature of
the disputes likely to arise, a more probable remedy will be a refusal to order specific.
Illegal contracts
If a contract has as its object something which is forbidden, or discouraged by the law, the courts will not assist
a party to enforce it. Contracts may be rendered:
illegal by statute
void by statute
illegal at common law
void at common law.
Contracts rendered illegal by statute
This is where an Act of Parliament declares a certain kind of contract shall be illegal: Joe v Young (1964) NZLR
24. Section 5.25 Land Settlement Promotion Act 1952 (NT) declared that transactions in contravention of the
Act were deemed to be unlawful and of no effect. Young was in possession of a market garden under a lease for
a term of three years from July 28 1959, renewable for a further term of three years. The lease fell within the
terms of the Land Settlement Promotion Act 1952, s. 5.23, and, since no steps had been taken to file a declaration
or to make application to the land valuation court, it was deemed to be unlawful and of no effect. The owner
sued for possession.
Held: since there had been a breach of the Act the contract of lease was illegal, and the owner was entitled to
return of his land.
Property or money transferred under a contract illegal by statute cannot be recovered: Holman v Johnson (1775)
1 Cowp. 341. Here Lord Mansfield confirmed that this was primarily because the person suing for recovery is
founding the action on an immoral or illegal act: ex dolo malo non oritur actio ex turpi causa (no right of action
arises from a base cause).
Contracts rendered void by statute
If a contract is void by statute then money or property transferred is normally recoverable by the transferor: note
however s. 248 Racing and Betting Act 1980 (Qld) which states: all contracts or agreements, whether by parol
or in writing, by way of gaming or wagering, shall be null and void, and no suit shall be brought or maintained
for recovering any sum of money ... upon any wager ....
In Coral v Kleyman (1951) 1 All ER 518 Kleymans son owed Coral (a bookmaker) betting debts totalling 355.
Kleyman promised to pay these debts in consideration of Coral not reporting Kleymans son to Tattersalls as a
defaulter.
Held: the promise was unenforceable.
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In Nordenfelt v MaximNordenfelt Guns and Ammunition Co Ltd (1891) All ER Rep1, the House of Lords
made it clear that generally contracts in restraint of trade were void as contrary to public policy. Here Nordenfelt
had sold his armaments business to the company. As part of the contract for sale he covenanted that he would
not carry on a similar business in competition with the company for at least 25 years. This was held to be
enforceable against Nordenfelt since he had agreed to the convenant. Restraints on trade that are perceived
as being reasonable may be enforced, if they are in the public interest but not if the prime purpose is to stop
competition from a former employer: Drake Personnel Ltd v Beddison [1979] VR 13.
Here the plaintiff company carried on business as an employment agency. Beddison had been employed by the
company and upon his ceasing such employment he set up a similar employment agency close to the company
premises. This was contrary to Beddisons employment contract with the company which stated that if he left
their employment he would not within 12 months set up a similar business within 25 miles of the plaintiff.
Held: the covenants were an unreasonable restraint on trade.
In Buckley v Tutty (1971) 46 ALJR 23. Tutty was under contract to play rugby league for the Balmain Rugby
League Club. A condition of the contract was that while he remained on the clubs retain list, he could not
transfer to another club. The only way a player could transfer was if the club struck him off the retain list or
agreed to transfer him. The club could charge a substantial fee for a transfer. The High Court of Australia held it
was an unreasonable restraint of trade: the transfer fee not only may prevent a player from reaping the financial
rewards of his own skill but it may impede him in obtaining new employment (at 378).
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Express terms
A statement may be an express term of the contract or a representation inducing its formation. The importance
of the distinction is that different remedies are available if a term is broken or a representation is untrue. Which
it is depends on the intention of the parties. It may be helpful to consider:
(a) The stage of negotiations at which the statement was made. The later it was made the more likely it is to be a term.
(b) Whether the statement was reduced to writing after it was made. If it was reduced to writing, it is clearly
regarded as important, and is probably a term of the contract.
(c) Whether the maker of the statement possessed special skill or knowledge as compared with the other party.
In Oscar Chess Ltd v Williams [1957] 1 WLR 370, the defendant, a private individual, sold to the plaintiffs,
who were car dealers, for 280 a car honestly described as a 1948 Morris 10. It was in fact a 1939 model worth
175. The statement that it was a 1948 model was held not to be a term of the contract, since the defendant had
himself been sold the car as a 1948 model, being given a forged log book. The defendant thus had no special
knowledge as to the age of the car, whereas the plaintiffs, being car dealers were in at least as good a position as
the defendant to know whether the statement was true.
In contrast is Dick Bentley Productions v Harold Smith Motors [1965] 2 All ER 65 where a dealer sold a Bentley
car stating that it had only done 20 000 miles since a replacement engine, whereas it had in fact done 100 000
miles since then. This statement was held to be a warranty since the dealer was in a better position to know the
mileage than the purchaser.
There are two basic types of express terms:
(a) A condition is a vital term, going to the root of the contract, breach of which normally entitles the innocent
party to treat the contract as at an end (i.e., to repudiate the contract) and to claim damages
(b) A warranty is a term which is subsidiary to the main purpose of the contract, breach of which only entitles
the innocent party to damages.
Classification as condition or warranty depends on the intention. The court will base its decision on the
commercial importance of the term, or less usually, on the effects of the breach.
In Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26, a ship delivered under a
24-month charter party was unseaworthy, and took seven months to repair. The court said that many contractual
undertakings could not be categorised simply as conditions or warranties, and the innocent party should be
entitled to rescind only if the effect of the breach is to deprive him of the benefit of the contract substantially.
Since the ship was available for 17 out of the 24 months, recission was not granted. The actual in between state
was termed an innominate term. Nothing less than a serious breach of an innominate term entitled the innocent
party to treat the contract as to an end.
Implied terms
Terms may be implied by custom, the courts, or by statute. In this manner, a simple contract may include
both express terms and also terms implied by the courts if those prospective implied terms are reasonable
and equitable, necessary for business efficacy, obvious, clearly expressed and not inconsistent with the
express terms. Thus, implied terms can supplement or extend contractual obligations. The five criteria
set out in BP Refinery v Shire of Hastings (1977) 180 CLR 266 for the inclusion of implied terms into a
contract are now applied less rigorously and more flexibly: Hospital Products Ltd v USSC (1984) 156 CLR
41; Hawkins v Clayton (1988) 164 CLR 573. There are in fact four ways in which terms can be implied
into a contract (i) implications from the express terms of a contract; (ii) implications from the nature of the
contract; (iii) implications from usage (local, industry custom); and (iv) implications from considerations
of business efficacyi.e., essential terms without which the contract wouldnt function as intended:
Brambles v Bathurst City Council [2001] NSWCA 61 per Heydon JA at paras 2830; Codelfa Construction
Pty Ltd v SRA of New South Wales (1982) 149 CLR 337; The Bell Group v Westpac [2008] WASC 239 per
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Owen J paras 26732677. Once industry custom or usage has achieved sufficient notoriety, it is attributable to
contracting parties independently of their actual knowledge thereof: Con-Stan Industries v Norwich [1986]
HC 14 per Gibbs CJ et al. at para. 10. While concerning business efficacy, in The Bell Group case at para. 2677,
Owen J said that:
The question of whether a term is to be applied will ultimately depend on whether it is necessary for
the reasonable or efficient operation of the contract assessed against the background of, but without rigidly
applying, the BP Refinery criteria.
Custom
The parties are presumed to have contracted by reference to the customs prevailing in the trade or locality in
question, unless they have shown a contrary intention.
In British Crane Hire v Ipswich Plant Hire [1974] 2 WLR 856, both firms were in the business of hiring out
cranes and heavy plant. The defendant urgently needed a crane for work on marshy ground and agreed to
hire such a crane from the plaintiffs. The method of payment was agreed but the hire conditions were not.
The plaintiff then sent the defendant a copy of their standard conditions (which were similar to those used
throughout the trade) which provided that the hirer would be liable for all expenses arising out of the cranes
use. Before these conditions were signed the crane sank into the marshy ground, and the plaintiffs incurred
expenses in recovering it. The plaintiff claimed these expenses from the defendant.
Their action succeeded since both parties were in the same trade, and had equal bargaining power, and the
evidence was that they both understood that the plaintiffs standard conditions of hire would apply.
The courts
The courts will imply two types of terms into contract. First, terms which are so obvious that the parties must
have intended them to be included. These are called terms implied in fact. Second, terms which are implied to
maintain a standard of behaviour, even though the parties may not have intended them to be included. These are
called terms implied in law.
Terms implied in fact
The implied term must be both obvious and necessary to give business efficacy to the contract. The courts will
not imply a term merely because it is reasonable to do so. The test used is known as the officious bystander test.
In The Moorcock (1889) 14 PD 64, the defendants, who were wharf owners, contracted to allow the plaintiffs to
unload their ship at the wharf. The ship grounded at low water and was damaged by settling on a ridge of hard
ground. The defendants were held to be in breach of an implied term that the wharf was safe.
Terms implied in law
Terms implied in law cover many classes of contract. Thus in a contract of employment, the employees,
impliedly undertake, for example, to serve the employer faithfully, and that they are reasonably skilled. The
employer impliedly undertakes to provide safe premises, and will not require the employees to do any unlawful
act. Similarly in a tenancy agreement the landlord impliedly covenants that his or her tenant shall have quiet
possession, and the tenant impliedly agrees not to damage the premises.
Statutes
Two major Commonwealth and Queensland statutes are:
1. Competition and Consumer Act 2010 (Cth) which provides protection to consumers, and implies certain
statutory guarantees in consumer contracts for the supply of goods and services via its Australian Consumer
Law provisions.
2. Sale of Goods Act 1896 (Qld)the original regulatory initiativewhich provides implied conditions and
warranties with respect to the supply of goods.
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And the new National Credit Code, enacted as Schedule 1 of the National Consumer Credit Act 2009 (Cth)
superseding prior state/territory based credit legislation, similarly regulates the provision of credit to natural
persons with an expansive array of implied and overriding terms applying to the credit contract entered into.
Exemption clauses
An exemption clause is a term in a contract which seeks to exempt one of the parties from liability, or which
seeks to limit his or her liability to a specific sum if certain events occur, such as a breach of warranty,
negligence, or theft of goods. An exemption clause may become a term of the contract by signature or by notice.
If a person signs a document he or she is bound by it even if they do not read it.
In LEstrange v Graucob Ltd [1934] 2 KB 394, the plaintiff who was the proprietor of a cafe, purchased a
cigarette vending machine. She signed, without reading a sale agreement which contained a large amount of
small print. The machine was defective but the vendors were held to be protected by an exemption clause
contained in that small print.
At common law, an exclusion clause cannot be relied upon where the party seeking to rely on the clause
misrepresented the nature or extent of the clause: Curtis v Chemical Cleaning & Dyeing Co [1951] 1 KB
805; Liaweena (NSW) Pty Ltd v McWilliams Wines (1991); Mendelssohn v Normand Ltd [1970] 1 QB
177. Notwithstanding the whole of agreement clause, a court would receivebeyond the Parol evidence
ruleevidence of the oral statements fraudulently, negligently or innocently misrepresenting the effect of the
exclusion clause.
In Curtis v Chemical Cleaning and Dyeing Co Ltd [1951] 1 KB 805, the plaintiff took a white satin wedding
dress, trimmed with beads and sequins to the cleaners. The assistant gave her a form to sign, and when asked
about its contents said that it excluded the companys liability for damage to the beads and sequins. The plaintiff
then signed the form, which in fact contained a clause excluding the company from all liability. When the dress
was returned it was badly stained. The company attempted to rely on their exemption clause but it was held that
they could not do so since the assistant had misrepresented (albeit innocently) the effect of the form.
Where a document is not signed the exemption clause will only apply if:
reasonable steps are taken to bring it to his or her notice before the contract is made.
In Olley v Marlborough Court [1949] 1 KB 532, the plaintiff booked in at the defendants hotel. When she
went to her room she saw a notice on the wall stating that the hotel would not be liable for articles lost or stolen
unless they were handed in for safe keeping. The plaintiff left some furs in the bedroom, closed the self-locking
door, and hung the key on a board in reception. The furs were stolen.
It was held that the exemption clause was not effective. The contract was completed at the reception desk, and
accordingly a notice in the bedroom came too late to be incorporated into the contract.
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contracting parties) take a less doctrinal, more pragmatic stance, that is adhering to the neutral construction
of exclusion or limitation clauses in commercial contracts especially, deferring to freedom of contract and
general availability of insurance for a party desirous of covering any residual risk they might bear thereunder
presuming no doubt the price of the contract factors in that element of risk. The Australian term exclusion
clause now covers all such exculpatory terms (Vermeesch and Lindgren 2005, p. 163). While in the leading
High Court case Darlington Futures Ltd v Delco Australia Pty Ltd [1986] HCA 82 at para. 16, on appeal the full
bench (Mason CJ et al.) held that the same rules of construction applied to both exclusion and limitation clauses:
. the interpretation of an exclusion clause is to be determined by construing the clause according to its natural
and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in
which the clause appears including the nature and object of the contract, and where appropriate, construing the
clause contra proferentem in case of ambiguity. Notwithstanding the comments of Lord Fraser in Ailsa Craig.
the same principle applies to the construction of limitation clauses.
To sum up, to be effective, the exclusion clause must be fully incorporated into the contract not being an
extraneous stipulation introduced too late; nor its terms misrepresented so as to prevent the relevant party
relying upon it (see Turner and Trone 2013, pp. 151155). Secondly, while it was once thought they couldnt
apply to a fundamental breach of contract, or beyond the four corners of the contract, Council of Sydney v
West (1965) 114 CLR 481 posited the now accepted rule that its all a matter of construing the contractual terms,
as confirmed in Photo Production Ltd v Securicor [1980] 1 All ER 556 and Darlington Futures Ltd v Delco
Australia Pty Ltd [1986] HCA 82. Thirdly, an appropriately worded exemption clause can exclude a party from
liability from the tort of negligence besides contractual breaches of an express/implied term: Davis v Pearce
Parking Station (1954) 91 CLR 642. Broadly defined, the essence of the tort of negligence is that in certain
circumstances the law imposed a duty on a person to take reasonable care not to cause [financial, physical or
proprietorial] harm to other persons (Turner and Trone 2013, para. 28.50).
Fourthly, using standard legal classification, an exclusion clause may (i) deny or delimit the principal obligations
otherwise arising under the contract, or (ii) seek to exclude (secondary) liability for breach of such obligations
(Greig and Davis 1987, p. 597). Fifthly, a general exclusion clause may not in fact be designed to address as
Phillimore LJ observed in Joseph Travers & Sons Ltd v Cooper [1915] 1 KB 73 at p. 101 (cited in Coote 1997),
each and every loss irrespective of the causeextending to include patently unauthorised acts, negligence and
wilful damage. It particular, an exclusion clause may not necessarily be effective to encompass or address the
following:
Liability in negligencea tort, which arises by operation of law, not contract.
Liability under the tort of deceit for fraudulent statements or fraudulent performance of the contract.
Applying the Delco case, losses arising from activities undertaken by a firms employees for which they
have no authority, i.e. completely unauthorised activities or transactions. A firm is also vicariously liable in
tort for its employees actions though not within the regular course of employment (i.e. a frolic of their
own) if reasonably foreseeable.
Also applying Kamil Export (Aust) Pty Ltd v NPL (Australia) Pty Ltd [1996] 1 VR 538 and related cases
surveyed by Coote (1997), exclusion clauses dont cover deliberate conversion, theft, wilful or criminal
damage to or sabotage of properties by a contracting party (a firm) or its employees including acts so illdesigned or reckless theyre likely to effect property damage etc.
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Held: the term was a warranty, not a condition, so Gye could not terminate the contract, but could only claim
damages for any loss sustained by him because of Bettinis lateness.
In Associated Newspapers Ltd v Bancks (1951) 83 CLR 322, Bancks contracted to prepare a weekly drawing of
his cartoon character, Ginger Meggs, for a newspaper, which agreed to present the drawing each week as a full
page feature on the front page of the comic section of its Sunday newspaper. Because of a news print shortage
the cartoon appeared on page three of the comic section of the newspaper for three consecutive Sundays, upon
which Bancks told the newspaper that the contract was at an end, because of the newspapers breach.
Held: in an action by the newspaper that its undertaking to publish Bancks cartoon on the front page of the comic
section was a condition of the contract, breach of which meant Bancks could treat the contract as at an end.
References
Carter, JW & Harland, DJ 2002, Contract law in Australia, 4th edn, LexisNexis Butterworths, Chatswood.
Coote, B 1990, Exception Clauses, Deliberate Acts and the Onus of Proof in Bailment Case, Journal of
Contract Law, vol. 12.
Graw, S 2002, An introduction to the law of contract, 4th edn, Law Book Co, Sydney.
Greig, DW & Davis, JLR 1987, The law of contract, Law Book Co, Sydney.
Meagher, RP, Gummow, WMC & Lehane, JFR 1992, Equity: doctrines and remedies, 3rd edn, Butterworths,
Sydney.
Turner, C & Trone, J 2013, Australian commercial law, 29th edn, Thomson Reuters, Pyrmont.
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