Introduction to Business Law Lecture 5 Defects, Interpretation and Enforcement of Contracts

1. Introduction to Business Law Lecture 5Defects, Interpretation and Enforcement of Contracts

2. Outline 1. Terms 2. Invalidity: Unenforceable contracts and terms 3. Ending the contract 4. Enforcement and Remedies

3. An offer followed by acceptance results in an agreement If all of these elements can be demonstrated then there will be a contract Last time: Elements of a contract • In order for a transaction to be recognised as a contract, all of the following elements must be demonstrated: • offer • acceptance • intention • consideration

4. 1. Terms • A term is a specific promise or obligation made under the contract. Terms could be either verbal (agreed orally) or written (agreed in writing). • For example, if A (an equipment manufacturer) and B (a retail store) enter into a contract for the sale of a cash register, the terms of the contract might include the following: • Term 1: B will pay A the sum of $1500 for a cash register. • Term 2: A will deliver the cash register to B within 7 days. • An express term is one specifically agreed to by the parties. • An implied term is a term recognised as being enforceable even though the parties have not specifically agreed to it. Usually, the courts will only imply terms if this is necessary to give effect to the intention of the parties

5. Conditions and warranties • Contractual terms can also be divided into conditions and warranties. • Some terms are so important to a contract that failure to comply with them would render the contract useless to the other party. Such terms are known as conditions. • Terms having less importance to the contract are known as warranties.

6. Interpretation of contracts and terms In the course of carrying out their promises under a contract (‘performance’, described later), parties might disagree about the meaning of a term, or sometimes even the whole contract. As a general rule, if the contract or term is clear then the words take their normal, common meaning. However, if the meaning is unclear, and the parties cannot agree on the meaning, it may be necessary for the courts to decide how the contract is to be interpreted.

7. Representations • Quite often, when negotiating a contract, a person will make statements of fact about some matter relevant to the agreement. They may also make promises, sometimes to convince the other party to ‘do the deal’. • Such statements and promises are called representations and are not normally enforceable as terms of the contract.

8. For example: James is negotiating the purchase of a used truck in order to start a delivery business. The dealer states that the truck is ‘in top condition’ and makes a verbal promise of ‘free washes for one year’ after sale. James agrees to buy the truck. The dealer has made both a statement of fact (the condition of the car) and a promise (to have the truck washed).

9. Suppose that soon after taking delivery of the truck, James finds that the dealer has broken his promise to arrange to have the truck washed. Then the truck breaks down and the dealer refuses to have it repaired. • Can James enforce either the statement or the promise?

10. In relation to the promise to have the truck washed, this was made prior to the contract being agreed and was not expressed in writing. It is very likely that the court would consider this to be a term of the contract, especially if (as is usual for vehicle sales) the contract was expressed in written form. • In relation to the statement that the truck was ‘in top condition’, this would probably be regarded by the courts as ‘puffery’ (salesperson’s exaggeration) and if so, the statement would not be enforceable as a term of the contract.

11. Business Focus: Get any changes in writing! The parol evidence rule • Business persons should, wherever possible, have contracts expressed in writing. The existence of a written document can prevent disputes about the terms of the contract and the obligations of each party. Moreover, each party will have a record of what was agreed. • One consequence of having a contract expressed in writing is that if the contract appears to represent the complete agreement between the parties, the courts will not admit evidence of alterations or additions to the contract. This is what is known the parol evidence rule: the written document is presumed to be the complete agreement between the parties.

12. The parol evidence rule has particular importance to deals in which verbal promises are made. If a written contract comes into force, the status of these verbal promises will be unclear. Unless the verbal promise was clearly intended to become a term of the written contract (for example, through oversight), the parol evidence rule will probably result in its exclusion from the contract. • Therefore, if a verbal promise has been made, the party to whom the promise has been made should ensure that it is included as a term of the written contract. This is particularly necessary for promises that alter any existing agreement. • In summary: get any changes to the written contract (including any additions) in writing.

13. Case study: Van Den Esschert v Chappell [1960] WAR 114. Facts: • Chappell entered into a contract to buy a home from Van den Esschert. As it is normal for the sale of land, the agreement took the form of a written contract. • Before signing the contract, Chappell asked Van den Esschert whether the house was infested with white ants (termites). Van den Esschert reassured Chappell that the house was free of white ants. • After the contract was finalised, Chappell discovered that the house was infested with white ants. • She sued Van den Esschert. • There was no provision in the written contract relating to white ant infestation.

14. Legal issue • The issue that the court had to decide was: did the parol evidence rule apply to this contract? In other words, should the normal presumption (that the written contract represents the entire agreement) apply, or could the verbal assurance be considered part of the contract?

15. Decision of the court • The court decided that the parol evidence rule did not apply in this case for the following reasons: • The words used by Van den Esschert were intended to be part of the contract between the parties. • White ant infestation is a serious matter. If a vendor (land seller) makes an assurance about such a serious matter then the assurance should be binding on them (unless the assurance is inconsistent with the written agreement). • The written contract made no reference to white ant infestation. • The court concluded that the absence of white ants was a term of the contract and ordered Van den Esschert to pay compensation.

16. Business Focus:read the contract carefully! Exclusion clauses • Sometimes, a contract will include a statement that if things go wrong, one of the parties will not be legally responsible for any loss that occurs to the other party. Such statements are called exclusion clauses (or exemption clauses). • Purpose - to exclude or limit the liability of the person inserting them. • Effectiveness – construe contract as a whole, taking into account the bargaining position of the parties. • Courts construe exclusion clauses strictly against the party relying on it (the contra proferentum rule).

17. Parker v South Eastern Railway Co (1877) 2 CPD 416 Facts: Parker deposited a bag in the cloakroom of the defendant’s station. He paid 2 shillings and received a ticket. On the front side of the ticket was a number and a date and on the other side were a number of clauses including a limitation clause limiting the Railway’s liability to £10. The bag was lost and Parker claimed £24 10s as the value of his bag. Issue: Were the conditions on the ticket incorporated into the contract between Parker and the Railway? Held: The court finds in favour of the Railway on the basis that Parker admitted in evidence that he saw the writing and knew it related to the business at hand. He stated he did not know it was a contract. The court applied the general rule and stated that providing the Railway had notified people of the conditions, in this case the writing on the ticket, then Parker and others were bound by it when they accepted the ticket. By keeping the ticket, Parker had assented to the terms and conditions of the contract and that included limiting the Railway’s liability. Mellish LJ, set out three scenarios for handling ticket cases:

18. Parker v South Eastern Railway Co (1877) 2 CPD 416 • If a person receiving a ticket did not see or know that there was any writing on the ticket, he is not bound by the conditions • If he knew there was writing and knew or believed that the writing contained conditions, then he is bound by the conditions • If he knew there was writing on the ticket, but did not know or believe that the writing contained conditions, he would be bound by the conditions if the delivering of the ticket was in such a way as he could see there was writing on it.

19. Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163 Facts: Thornton was a trumpeter and had a job for the BBC in London. He drove to the Shoe Lane Parking station. It had only been open a few months and he had never parked there before. There was a notice outside listing the price and a warning that cars were parked at the owner’s risk. He proceeded into the car park and stopped at a ticket machine that spat out a ticket. Three hours later Thornton returns. He went to the office and paid the fee and the car was brought down from the upper floor. He went to put his belongings in the boot and had an accident injuring himself. Shoe Lane Parking relied on an exclusion clause in their terms and conditions that were listed on a pillar away from the ticket machine at the entrance. Issue: Was the exclusion clause part of the contract between the parties? Held: The court found for Thornton on the basis that the plaintiff didn’t have adequate notice of the exclusion clause and the defendant’s hadn’t done what was reasonably sufficient to bring the conditions to the notice of Thornton. Parker’s case was distinguished on the basis that the ticket in this case was issued by an automatic machine. The offeree had no chance of returning the ticket once taken. Denning MR, stated that in this case the offer was the notice at the entrance of the car park. The acceptance was Thornton driving up to the entrance and having the ticket thrust at him. The contract was then concluded and nothing on the ticket could change the terms of the contract because it had already been entered into. In particular it could not be altered to include an exclusion clause in favour of the offeror. An offeree in a contract cannot give up their rights unless they are specifically told about it.

20. Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163 The court modified the reasoning of the court in Parker’s case and restated the three questions: • Did the offeree know that there was printing on the ticket? • Did the offeree know that the ticket contained or referred to conditions? And • Did the offeror do what was reasonable in the way of notifying prospective passengers of the existence of conditions and where their terms might be considered?

21. An example of an exclusion clause can be seen outside many public car parks. • At the front of the car park, a sign is displayed stating that the car park operator is ‘not liable for any loss or damage to vehicles parked on these premises’ (or some similar statement). • If the driver decides to enter the car park, the exclusion clause becomes a term of the contract between the driver and the car park operator, preventing the driver from recovering compensation from the operator in the event that their car is stolen or damaged whilst parked.

22. If a business person wishes to rely on an exclusion clause, they should be aware that such clauses are readily upheld by the courts, especially when they protect the business from liability to consumers (individuals). • Moreover, in the case of verbal contracts (the majority of contracts for many businesses), the exclusion clause must be brought to the attention of the consumer before they enter into the contract (this is why exclusion clauses are displayed outside car parks). In most cases, this will take the form of a notice positioned prominently in the place of business (for example, next to a cash register). • Whether the contract is verbal or written, the courts will be more likely to uphold it if it has been clearly worded and clearly identifies the loss for which liability is being excluded.

23. Importance to businesses • The Shoe Lane Parking case demonstrates that simply including an exclusion clause in the agreement is not sufficient: the business must also ensure that the other party (usually, a customer) is able to make themselves aware of what the clause says before entering into the agreement. Use of signs • An exclusion clause that is displayed by means of a sign may become a term of the contract between the parties as long as the sign is: • clearly displayed in a prominent position (for example, next to a cash register or at the entrance to the place of business); and • clearly worded to identify the loss or losses for which liability is being excluded (for example, any damage to, or theft of, a vehicle).

24. 2. Invalidity: Unenforceable contracts and terms • If a contract lacks one of the key elements (offer, acceptance, intention or consideration) it cannot be enforced. • However, even if these requirements are all met and a valid contract is formed, the courts may still refuse to enforce the contract if to do so would be unjust. Lawyers sometimes refer to contracts or terms that are unenforceable for one of the reasons described in this section as invalid. • There are different reasons why the courts may decline to enforce a contract. • lack of capacity, • lack of consent, • mistake and • misrepresentation.

25. Lack of capacity • The courts will not enforce contracts against persons who lacked the ability to properly understand the consequences of their agreement. We say that such persons lacked capacity to enter into the contract. • Minors (children) and mentally incapacitated persons are examples of persons who usually lack capacity to enter into contracts.

26. A contract may not be enforced by the other party against the minor, unless it is what is referred to as a beneficial contract (in NSW) or a contract for necessaries (in other States and Territories). • In New South Wales, minors may be bound by any contracts they enter that they are capable, as a matter of age, of understanding and that are of benefit to them. Elsewhere in Australia, a contract can be enforced against a minor where it is for goods or services that are necessary to the minor. • In NSW, a contract entered into by a minor is governed by Minors (Property and Contracts) Act 1970 (NSW).

27. Hart v O’Connor [1985] 1 AC 100 Facts: • Jack O’Connor was testamentary trustee under his father’s will. • He agreed to sell to Hart three blocks of farm land that were part of the trust estate. • O’Connor was not of sufficient mental capacity to make the agreement, but this was not apparent to Hart. Decision: • Contract enforceable Significance: • That when someone seeks to avoid a contract on the grounds of mental incapacity, they must not only prove the incapacity, they must also prove that the other party knew of it. • In this case Hart did not know about O’Connor’s incapacity and therefore the contract was enforceable.

28. Non est factum • There are some other circumstances in which the courts will refuse to enforce a contract on the basis that a party could not have understood the nature of the agreement. • Examples include written contracts that have been signed by blind persons or by persons who cannot understand (or have a poor understanding of) the English language. This is known as non est factum, (a Latin term meaning ‘not my document’).

29. Non est factum Non est factum literally means, “it is not my deed”. It is used by a person who wishes to plead that she or he did not sign the document asserted. If the plea is successful, then the document is void. If the mistaken signer was negligent, they cannot rely on non est factum. See: Petelin v Cullen (1975) 132 CLR 355 & Gallie v Lee [1971] AC 1004.

30. Petelin v Cullen (1975) 132 CLR 355 Facts: Petelin could not read or write and spoke little English, but granted Cullen an option to purchase his land at Liverpool in the UK in exchange for $50. The option was to be exercised within six months. The option lapsed and Cullen send Petelin a cheque for $50 and later got Petelin to sign what he said was a receipt, but which turned out to be an extension of the option agreement. During the extended period Cullen exercised the option. Petelin refused to transfer the property to Cullen and Cullen sued for specific performance. Petelin defended the suit with the defence of non est factum. Held: The court finds for Petelin on the basis that the document signed by Petelin was radically different from that which he had thought it to be and thus the defence of non est factum defeated Cullen’s action. The court espoused three conditions for a successful plea of non est factum: (i) Claimant belongs to a class of people who have to rely on others for advice because of an inability to read resulting from blindness or illiteracy or through no fault of their own they are unable to understand the document (eg intellectual incapacity); and (ii) The claimant must show that the document was signed in the belief that it was radically different from that which it was in fact; and (iii) The claimant wasn’t careless in failing to read and understand the document.

31. Lack of consent • A contract will not be enforced if it is clear that at least one of the parties lacked willingness to enter into contractual relations. This is known as lack of consent. Mistake Duress Lack of consent can arise in a number of situations: Undue influence Unconscionability

32. Mistake • A contract cannot usually be set aside because a party failed to make proper enquiries about the details of what they have contracted for. Nevertheless, a contract can be set aside due to a mistake. • unilateral mistake where one party is mistaken and the other party is/should be aware of the mistake but attempts to continue with the contract anyway. • common mistake where both parties are mistaken and they make the same mistake. For example, both parties might contract believing that the subject matter exists at the time of contracting, but it does not. • mutual mistake when both parties are mistaken, but about different things. This means that there was no ‘meeting of the minds’, and so the courts will set aside the contract.

33. Duress • If a person has been forced or threatened to enter into a contract, they are said to have entered into the contract under duress. The threat may be a threat against: • person (either the party or someone else), or • goods, services, land, business assets or any other thing of monetary value. • If the court is satisfied that duress has been proven it will set aside the contract.

34. Undue influence • If a party has entered into a contract at the urging of another person, and the contract benefits that other person rather than the party, the court may set aside the contract on the basis of undue influence. • For example: an elderly man falls in love with his housekeeper, who takes advantage of this fact to convince the man to sell his house to her daughter at a loss. The man signs the contract of sale but before the land title can be transferred, the man’s son steps in and tries to stop the sale. If the housekeeper’s daughter commenced legal proceedings the courts would probably refuse to enforce the contract of sale against the man on the basis that the housekeeper’s dominance had overcome his judgment.

35. Unconscionability • A contract will not be enforced if a party has taken unfair advantage of the other party. Such conduct is known as unconscionable conduct or unconscionability. Example: A real estate agent advises an elderly widow that her property is worth no more than $300,000. The widow agrees to sell the property for $300,000 and signs a contract of sale. By chance, the widow discovers that the buyer is a friend of the agent’s and the true value of the property is around $600,000. If the widow commenced legal proceedings the courts would probably set aside the contract of sale on the basis that the agent and his friend had dishonestly taken advantage of the widow’s old age and lack of knowledge about house prices.

36. Misrepresentation • A misrepresentation is an incorrect statement of fact. If a person enters into a contract in reliance on the misrepresentation, the contract can be set aside. The courts recognise three different types of misrepresentation: • fraudulent misrepresentation, • negligent misrepresentation and • innocent misrepresentation.

37. A fraudulent misrepresentation is a deliberately false statement of fact, made by one party in order to encourage the other party to enter into a contract. • A negligent misrepresentation relates to situations where the party making the statement owes a duty of care to the other party. If A makes a statement to B that is negligent (in breach of A’s duty of care to B) and party B suffers a loss by relying on the statement, then B can terminate the contract and seek compensation (called damages) from A. • An innocent misrepresentation occurs when one party makes a statement that it genuinely believes to be true. If the statement turns out to be incorrect the courts may set aside the contract.

38. 3. Ending the contract • Discharge refers to the end of contractual relations between the parties. • A contract can be brought to an end in several different ways. • Performance. Each party has done what it has promised to do. • Agreement. The parties agree to end the contract, whether or not each party has completed its obligations. • Termination. One party ends the contract without the consent of the other party.

39. Breach. Where one or more of the parties has not fulfilled some or all of their obligations under the terms of the contract, there is a breach of the contract. A number of different remedies may be available to the innocent party him or her. • Frustration. Some event beyond the control of the parties has made completion of the contract impossible or unreasonable. For example, goods to be sold are destroyed by fire before they can be delivered and paid for.

40. 4. Enforcement and Remedies • Privity of Contract - Only the parties to the contract are capable of taking legal proceedings in relation to the contract. This is known as privity of contract: persons who are not parties to the contract cannot sue, or be sued, under the contract. • For example: If A promises B to pay C $1,000 if B will fix a car for A. And B did fix A’s car but A refuses to pay C. C cannot compel A to carry out the promise because C was NOT a party to the contract between A and B (C is a 3rd party beneficiary).

41. Remedies If a party fails to perform one or more of its promises under a contract it is said to be in breach of the contract. The innocent party can seek the assistance of the courts, which may provide a number of different remedies depending on the situation. Some of the remedies for breach of contract include: • Specific performance. The court orders the party in breach to do what it has promised to do under the contract. • Injunction. The court orders a party not to participate in conduct that is inconsistent with their contractual obligations.

42. Restitution. The court makes orders that restore the injured party, as closely as possible, to the state he or she was in prior to entering into the contract.

43. Damages. If the court finds that breach of a contract has caused the innocent party to suffer harm (such as financial loss), it may order the party in breach to pay damages. Damages is monetary compensation for the harm caused by the breach. • Damages may be awarded for both direct losses and consequential losses.

44. A direct loss is a harm caused directly by the breach. For example, if a firm of accountants negligently advises a client to invest in a scheme that goes bankrupt, the client’s financial loss is directly attributable to the firm’s negligent misrepresentation. • A consequential loss is a loss that does not directly arise from the breach but is a consequence of it. In order to recover damages for consequential loss, the injured party must prove to the court that the party in breach should have known, or actually did know, about the possibility of this loss.