Strategic Management

Thursday, 1 June 2017

Determining What Is in a Contract

Determining What Is in a Contract

¨ Terms of the Contract

– Aim

• To figure out what is in the contract

• What have the parties agreed to do?

What Are the Contents of the Contract Called?

¨ Answer: terms

¨ Why do we have to determine the terms of a contract?

– -because a breach of the terms of a contract will allow an innocent party to bring an action, to obtain a remedy

However, before an innocent party can bring an action for breach of contract it must be determined what the parties to the contract agreed to do

1. Issue: Is a Statement a Term or a Representation?

¨ Issue – whether a statement is a term of the contract

¨ Term: a term is a contractual statement the truth of which is guaranteed. If a term is breached then the remedy is for breach of contract.

¨ Representation: a representation is a pre-contractual statement. If a representation is untrue then the remedy is for misrepresentation (see previous lecture slides).

How Does the Court Distinguish Between a Term and a Representation?

¨ The general test is: what were the parties intentions.

¨ As always, this is an objective test

Factors That the Court Will Look at to Determine Intention.

¨ 1. The timing of the statement, i.e. the closer the statement was made to the contract being formed the more likely it is to be a term.

E.g. Van den Esschert v Chappell [1960] WAR 114

¨ 2. How important was the statement to the parties?

E.g. Couchman v Hill [1947] KB 554

¨ 3. Was the contract reduced into writing after the statement was made? If so, then it is less likely to be part of the contract. (parol evidence rule: where the parties have recorded their agreement in a signed document that appears to represent the entire contract no external evidence is allowed to vary or contradict the terms of the written contract)

¨ 4. Did the person making the statement have special skills or knowledge? If so, then more likely to be a part of the contract

E.g. Oscar Chess Ltd v Williams [1957] 1 All ER 325

Compare with Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd [1965] 1 WLR 623

3. how are terms classified?

¨ Issue – whether a term is a condition, warranty or innominate term

¨ Condition: a contractual stipulation that is so important that a breach of the term will allow termination of the contract and/or damages

¨ Warranty: a contractual stipulation the breach of which will only result in the award of damages

How Does a Court Distinguish Between a Condition and a Warranty?

¨ Test: would the plaintiff have entered into the contract if he or she could not be assured of a strict or at least substantial compliance with the terms of the contract

¨ Associated Newspapers v Bancks (1951) 83 CLR 322

What Is an Innominate Term?

¨ A term that is capable of both a major or a minor breach

¨ If the term is breached in a major way then it will be treated as a condition with the remedies for breach of a condition being available

Innominate Term

¨ If it is breached in a minor way then it will be treated as a warranty with the remedies for a breach of warranty being available

– E.g. Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 1 All ER 474

4. Express and Implied Terms

¨ i. Express term – a term that the parties have expressly stated to be a part of the contract whether in writing or orally

¨ The only issue with an express term is how to interpret it

IMPLIED TERMS

¨ Implied terms are terms the court includes in contracts about matters that the parties do not consider at the time of contract.

¨ Terms implied in Fact (in one contract)

¨ Terms implied in Law (2 types):

Generic (of a specific class) or;
Universally implied terms

¨ Terms implied by custom or trade usage

5. Exemption Clauses

¨ Issue – whether an exemption clause is part of the contract

¨ Definitions

– Exemption Clause – a collective term for exclusion and limitation clauses

• Exclusion clause – clauses that deny any liability, e.g. car park ticket

• Limitation clauses – whilst they do not deny liability they restrict liability, e.g. airline ticket

The Issues for Exemption Clauses

¨ 1. Has the exemption clause become a term of the contract?

¨ 2. If the exemption clause has become a part of the contract does it cover the particular situation that has arisen?

¨ N.b. you must answer both questions

1. Has the exemption clause become a term of the contract?

¨ Two Situations Must Be Looked At

– i. Those situations in which the document containing the exemption clause has been signed

– ii. Those situations in which the document containing the exemption clause has not been signed

Situation 1

¨ General rule – a person who has signed a document containing an exemption clause is automatically taken to have read that document even if he or she has not.

L’Estrange v Graucob [1934] All ER 16

Exceptions

¨ 1. Fraud

¨ 2. Misrepresentation,

– e.g. Curtis v Chemical Cleaning & Dying Co [1951] 1 KB 805

¨ 3. The document was signed after the contract was made.

¨ 4. The document signed was not contractual in nature

Hill & Co Pty Ltd v Wright Pty Ltd [1971] VR 749

Situation 2.

¨ To incorporate a term into a contract where the document containing the term has not been signed then reasonable notice of the term must be given.

¨ Thornton v Shoe Lane Parking Ltd [1973]

¨ These are the factors that the court will take into consideration in deciding whether reasonable notice has been given of an exemption clause

1. The Nature of the Document

¨ Was the document contractual in nature

– Causer v Browne [1952] VLR 1

2. The Reasonableness of Notice

¨ Oceanic Sun Line Special Shipping Co v Fay (1988) 165 CLR 197

¨ In its brochure Oceanic stated “the carrier contracts on its usual conditions of carriage”

¨ Conditions themselves were not available for inspection.

¨ Court said, “literature that contain exemption clauses that appear to have no contractual effect will not form part of a subsequent contract”

¨ Reasonable notice involves a party providing the actual text of the limiting terms be made available. It is not enough that they be available upon request.

3. The Timing of the Notice

¨ Olley v Marlborough Court [1949] 1 All ER 127

4. Prior Course of Dealing

¨ Balmain New Ferry Co Ltd v Robertson (1906) 4 CLR 379

¨ “A fare of one penny must be paid on entering or leaving the wharf. No exception will be made to this rule whether the passenger has travelled by ferry or not”

2^nd Step: Applying the Exemption Clause

¨ Once it has been decided that the exemption clause is part of the contract, the next step is;

– To determine whether the exemption clause covers the situation that has arisen

¨ This is a question of interpreting the exemption clause, that is all.

Council of City of Sydney v West (1965) 114 CLR 481

Does the clause cover the breach?

¨ “A court will construe the clause according to its natural & ordinary meaning, read in light of the contract as a whole. Therefore, attention is paid to the context in which the clause appears, including the nature and object of the contract” – Darlington Futures Ltd v Delco Australian Pty Ltd (1986) CLR 500 at 510

Approaches to Interpretation

¨ Contra proferentem rule – if an exemption clause is ambiguous it will be interpreted in the least favourable way to the person relying on the clause.

Alex Kay Pty Ltd v General Motors Acceptance Corp and Hartford Fire Insurance Co [1963] VR 458

The ‘Four Corners’ Rule

¨ ‘if you undertake to do a thing in a certain way, or to keep a thing in a certain place, with certain conditions protecting it, and have broken the contract by not doing the thing contracted for in the way contracted for, or not keeping the article in the place in which you promised to keep it, you cannot rely on conditions intended to protect you only if you carried out the contract in the way contracted for’

Lord Scrutton in Gibaud v Great Eastern Railway Company [1921] 2 KB 426

¨ This basically means that an exemption clause will not be upheld where some event or breach that is wholly outside the contracting parties contemplation occurs.

¨ The question is, “does this clause, by its words, cover this event or cause of action?”

The Council of the City of Sydney v West (1965) 114 CLR 481

¨ Exemption clause read “The council does not accept any responsibility for the loss or damage to any vehicle…however such loss…may arise or be caused”

¨ The car park attendant allowed the thief to steal car.

¨ Court held the release of the car to the thief was an event that (at the time of contract) was outside the contracting parties contemplation.

Deviation

¨ Thomas National Transport (Melbourne) Pty Ltd v May & Baker (Aust) Pty Ltd (1966) 115 CLR 353

Does it matter that the clause appears unfair, ‘harsh’ or unreasonable?

¨ “It is not for the courts to say that parties cannot contract out their rights or obligations or put new limits on their powers to do so. The question for a court is only have they done so and that is determined by a consideration of construction..... but a clause that exonerates a party from any and all responsibility cannot possibly be taken literally. The problem is to determine the extent of the protection provided.”

¨ ” – Thomas National Transport Ltd v May & Baker Ltd (1966)

Business Law Questions

1 On what grounds might it be possible to get out of a contract for want of genuine consent?

2 What are the differences between the three types of misrepresentation?

3 Distinguish the three types of mistake.

4 Explain the difference between void, voidable and unenforceable.

5 What is the difference between undue influence, duress and an unconscionable contract?

6 Television advertisements showed two teams of battery-operated bunnies playing soccer. The message conveyed was that one team, powered by a certain make of battery, outlasted the other team that was powered by unidentified batteries. The team powered by the named batteries scored four goals while the other team powered by the unidentified batteries collapsed on the field. There were representations that the named batteries would last four times longer than the opposition and last four times longer than ordinary batteries. It was not stated that the named batteries were alkaline batteries and that the unidentified batteries were ordinary zinc carbon batteries.

On the basis of this advertisement Basil has bought a crate load of the batteries. Basil has found that the batteries that he has bought do not compare favourably to other alkaline batteries and are, in fact, more expensive than other alkaline batteries.

Is Basil able to get out of this contract?

7 Alistair lives in a home unit which a land developer would like to buy as a development site. All of the other owners of units in the block have agreed to sell to the developer. However, Alistair is sentimentally attached to the unit and is refusing to sell. A has had the tyres on his car slashed, stones thrown through his windows and his cat run-over. In a conversation with the developer, the developer commiserated with Alistair about Alistair's recent bad luck and urged him to sell yet again. The price offered was fair. In a parting shot the developer hinted that next time it might be more than the cat who was killed, noting that Alistair's grandchildren were often seen playing on the road. Alistair's wife urged him not to call the police but to sell the unit so they could move nearer to other family members. Alistair is worried about his grandchildren and would like to keep his wife happy. Reluctantly he agrees to sell but later has second thoughts and wishes to change his mind.

Advise Alistair.

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Business law questions

Intention to Create Legal Relations

1 What inferences can be drawn in the following situations with regard to intention to create legal relations?

A) social and domestic situations;

B) business or commercial situations.

2. In which of the following cases involving social, domestic or voluntary agreements did the court decide that a husband's promise to his wife to pay her maintenance while they were forced to live apart was not contractually binding?

A) Simpkins v Pays [1955] 1 WLR 975.

B) Balfour v Balfour [1912] 2 KB 571.

C) Wakeling v Ripley (1951) SR(NSW) 183.

D) Merritt v Merritt [1970] 2 AllER 760.

Consideration

3. What is meant by “consideration must be sufficient but it need not be adequate?”

4. A owes B $500.00. A is in financial difficulties and B accepts $400.00 in discharge of the debt. Can B sue A for the balance of $100.00? What rule are you applying?

Would it make any difference if:

A) B had agreed in writing to accept the $400.00 in discharge of the whole debt, or,

B) the $400.00 had been paid by cheque, or,

C) A had paid the $400.00 one week before the debt of $500.00 was due, or

D) C had offered to pay B $400 for A on the due date and B had agreed, or

E) A had offered to pay B $400 and give her his Powderfinger CD and B had accepted?

5. In which case did the court decide that performance of an existing contractual duty by a group of sailors was not good consideration for the captain's promise to pay extra wages?

A) Glasbrook Bros Ltd v Glamorgan County Council [1925] AC 270.

B) Hartley v Ponsonby (1871) 119 ER 1471.

C) Stilk v Myrick [1809] 2 CAMP 317.

D) Carlill v Carbolic Smoke Ball Co[1892] 2 QB 484

6. What things have to be established to make a claim for promissory estoppel?

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Business Law Sample Problem Question

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Henry inserted this advertisement in the Newcastle Herald Newspaper:

LOST: Pedigree pony in perfect condition. White with brown patches on head and legs. Will probably respond if called Spangles. Reward $300 if returned to 55 Dunromin Street, Wetland.

Liz found Henry’s animal and, while wondering what to do with it, she met the local vet. The vet told her about the advertisement he had read that morning while eating his breakfast. Liz took the animal to Henry's address, where Henry's children hailed it with wild enthusiasm. Henry however, observing that the pony had suffered some injuries, apparently as a result of breaking through a hedge, claimed that it was not in perfect condition and that Liz was not entitled to the $300.

Advise Liz.

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Question1

Brian is the Managing Director of Computer Tech Pty Ltd “CTPL”. In November 2012, Brian arranged for a number of distinguished international guests to visit Newcastle early in 2013. The guests were representatives of various international computer companies who enjoyed attending overseas conferences at quality venues. Brian was to demonstrate to them his company’s ‘ground breaking’ computer programming technology. Brian was hopeful that the guests would be so impressed by their stay and his presentation that CTPL would as a result, secure a number of valuable contracts.

Brian decided that the venue for his presentation would be the prestigious Regis Plaza at Pokolbin in the Hunter Valley. In part, the Regis Plaza was chosen above other venues as its own computer network was the most compatible with that of the more recently developed programming technology of CTPL.

Back in November 2012, Brian signed a contract and paid the Regis Plaza $10,000 for the use of its fully equipped presentation room (located in its main building) for 14^th and 16^th January 2013. The cost also included a seafood lunch for the international guests on both days of the presentation. All the details were finalised.

The first day of the conference proceeded without incident but at 11:40pm on the evening of 14th January 2013, while Brian and his guests were sleeping at a nearby luxurious hotel, an earthquake rocked the Hunter Valley. The hotel at which Brian and his guests were staying was not affected but the Regis Plaza suffered significant structural damage. Authorities decide that due to safety concerns, the main building of the Regis Plaza had to be immediately closed for 2 weeks to allow the necessary repairs to be carried out. The next morning, Brian was informed by the Regis Plaza that they were sourcing a large portable building that would be transported to site, supplied with basic power from a mobile generator and furnished for use during the final day of his presentation. Brian was not satisfied with this alternative and told the Regis Plaza that he would find another venue.

After much effort and many phone calls, Brian was able to secure another venue nearby to host the second day of his presentation. This venue was called “the Golden Retreat" and was managed by Edwin.”

At lunch time on 15th January 2013, when Brian first contacted Edwin by telephone, he was told that the Golden Retreat’s corporate room (where Brian would conduct the presentation) seats 40 people. Brian told Edwin that having sufficient seating for his guests is vital and that he has 39 international guests attending his presentation. Edwin said “no problem then” and tells Brian that he can have use of the Golden Retreat’s corporate room for his presentation for $10,000. Brian is a little upset that the Golden Retreat’s corporate rate for a single day is so expensive but Edwin tells him that his venue is the only nearby venue that has a compatible computer network. Unbeknown to Edwin, there are two other suitable local venues that have just upgraded their computer networks that were available and would have only charged Brian a total cost of $5,000 to cater for the final day of his conference.

Later that morning, while in conversation with Edwin at the Golden Retreat, Brian asks Edwin some questions about the lunch menu that is included in the cost. Edwin tells Brian that the food at the Golden Retreat is the tastiest in the region and that in his opinion; Brian’s guests will love it. Brian then signs a contract and pays Edwin the asking price of $10,000. Unfortunately, the signed written contract does not mention that Brian and Edwin agreed that there would be 39 guests attending.

The next day (on 16/01/13), when Brian is half way through his presentation, the Golden Retreat has a visit from the local council inspector who informs Brian that due to occupational health and safety laws, the conference room has a seating capacity of only 30 people. The inspector tells Brian that this is the second infringement of this nature (ie, the second fine) he has issued to this venue in the past month. Nine of Brian’s guests are forced to leave the room and are understandably, demanding Brian immediately refund them the cost of the conference. To make matters worse, the other 30 international guests were not happy with the food delivered on the second day of the conference describing it as bland and tasteless. At the conclusion of the conference, they too demand a refund of their money from Brian.

The conference has now ended and the Regis Plaza is refusing to return Brian’s $10,000 explaining that the Regis Plaza and Brian had a binding contract and that the earthquake was simply an unfortunate event. The Regis Plaza is also arguing it was arranging a viable alternative that would have allowed Brian to present to his guests on the second day but that he unreasonably rejected this alternative arrangement.

Edwin is also causing Brian grief and is refusing to refund Brian his money.

You are the lawyer for Brian and he seeks your advice on the question of whether or not, as a matter of law, he is able to insist upon the return of his money from:

a) the Regis Plaza and if so, on what basis?

b) Edwin at the Golden Retreat and if so, on what basis?

END OF ASSIGNMENT

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Good references for business law

Australian Contract Law, Terms of a contract (2012) Australian Law Contract < http://www.australiancontractlaw.com/law/scope-terms.html>

Carter, John W, Cases and materials on contract law in Australia (LexisNexis Butterworths, 2012)

Gibson, Andy, Business law (Pyront, NSW: Thomson Reuters, 2011)

Insite Law, Terms of the Contract (7 September 2012) Magazine Insite Law < http://www.insitelawmagazine.com/ch7termsofcontract.htm>

Lindgred, Kevin E, Business law of Australia (Chatswood, NSW: Lexis Butterworths, 2011)

Morris, Mark O; Evensen, Elizabeth, ‘What’s happening to the parol evidence rule? More holes in the dike’ (2000) 67.2 Defense Counsel Journal 209-220

Perell, Paul M, ‘The ambiguity exception to the parol evidence rule’ (2001) 36.1 The Canadian Business Law Journal 21,35

Peterson, Jeannie Marie, Principles of contract law (Pyront, NSW: Thomson Reuters Australia, 2012)

Schweiger v. Solbeck, (1951) 191 Or 454, 230 P2d 195

Enforcing verbal agreements in written contracts

1.0 Introduction

Contracts are agreements that define the obligation of the parties to each other. Failure to adhere to the terms outlined gives rise to the right to compensation in favour of the aggrieved party[1]. However, there could be factors that are beyond the control of either or both parties that may make it impossible for the contract to be executed. This is termed as Force Majeure in law and could include “Acts of God” and other happenings occurring on a large scale such as changes in relevant laws. The terms to the contract can either be expressly written down or implied[2]. Under normal circumstances, terms and conditions relevant to the contract are all written. However, courts can factor in information not written in the contract depending on the specific facts of the case. This is especially where such information was relied on in making the decision on whether to enter into the contract. This essay evaluates the application of the law of contract based on the experience of Brian, the Managing Director of Computer Tech Pty Ltd.

2.0 Regis Plaza

2.1 Issue

Regis Plaza gets into a contract with Brian to host his conference. However, their building is locked up by government after an earthquake. They subsequently arranged for an alternative which Brian rejected in favour of a different building. Brian latter asked to be compensated but Regis Plaza declined.

2.2 Law

In contracts, there may be circumstances that could arise that are beyond the control of the parties to the contract. These circumstances can frustrate the contract and render it unenforceable. In law, this is described using the term Force Majeure, a term that applies to changes in law, economic crises, and “Acts of God”[3]. Acts of God can include events such as floods, earthquakes, tornados, tsunamis, drought and others. There are a number of conditions that must be fulfilled for a contract to be voidable under the Force Majeure clause[4]. These include externality, unpredictability and unavoidability.

The externality element refers to the fact that the party to the contract has nothing to do with it. It has to have occurred out of no initiated action by them[5]. There is also the question of unpredictability where the party is expected not to have been able to reasonably predict such an occurrence. For example, a person who fails to prepare for a catastrophic event despite the existence of prior disaster warnings may not be able to invoke the impossibility/impracticality defence in contract[6]. However, provisions on Acts of God are more explicit in that they are described as those that could not have been avoided irrespective of the level of foresight involved.

Even where there are such Acts of God, the parties to the contract need to do everything in their power to deliver on their obligations. This means that in the event that they are not able to provide the services or products as agreed, they ought to do their best under the circumstances to provide reasonable alternatives to the other parties in the contract[7]. This rule was established in the case of Schweiger v Solbeck (1951) where it was established that the courts only invoke the doctrine of Act of God where the defendant had not role in causing or increasing the impact of the disaster[8]. In the determination of what constitutes a reasonable measure, the courts examine the facts of the case where the main elements are comparability of alternative service to the initial service, the options available to the party, and the amount of time available for such an arrangement.

For defence on the basis of Acts of God to hold, the frustration must be solely based on the natural events that have occurred. Where there are any human acts of omission or commission that aggravate the situation, the defence cannot hold[9]. It is therefore incumbent on the party using this defence to demonstrate that there is nothing they could have done to prevent the impact as witnessed. One of the early authorities was the case of Wolf v Shelley (1581) where the concept of frustration of a contract by virtue of death of a party or Act of God was first established[10]. This formed the basis for subsequent developments that currently define what can be viewed as an Act of God.

2.3 Application of law

Regis Plaza’s predicament was as a result of an earthquake. They may therefore be able to avoid liability as the contract was frustrated by an Act of God. However, it could be noted that the plaza was affected while other nearby buildings were not affected. Brian could raise the argument that this difference indicates that Regis Plaza failed to institute features that would make their building less prone to earthquakes. Unless Regis Plaza could prove that there is a good reason for the difference (such as the building maybe being closer to the epicentre of the earthquake), their defence based on “Acts of God” may not hold. To their credit on the other hand is the fact that they offered to provide an alternative by availing a portable building which would provide the same advantages as the original conference hall. Brian rejected this alternative and Regis Plaza could use his rejection to demonstrate that they played no role in frustrating the contract. It’s likely that the courts would rule in favour of Regis Plaza.

3.0 Edwin/Golden Retreat

3.1 Issue

In this case, Edwin/Golden Retreat assures Brian that he has capacity to host 40 guests but after Brian begun to conduct his conference, government agents forced them to evict 9 of their guests. The level of dissatisfaction was heightened by the provision of poor food that made the rest of the guests very dissatisfied. Apart from the promise on the seating capacity, Brian had also been promised that Edwin would provide the tastiest food in the city. Brian intends to sue over breach of condition despite the fact that neither of the promises were in writing.

3.2 Law

Failure to include the verbal promises made in the contract makes it difficult for such promises to be enforced. The general application of this rule is based on one rationale: that numerous verbal negotiations take place before a final contract is signed[11]. The final contract is believed to be a consensus on all the issues that are relevant to the contract. In other words, all negotiations before the formation of the contract become secondary to the terms of the written contract. The rationale of applying this rule is that contracts could become unenforceable where the terms are not definite and where negotiations that may not necessarily been agreed on are used to dictate what happens in the contract[12]. This is what is known as the parole evidence rule which disallows the use of prior negotiations that have not formed part of the written contract. The only exceptions that can be allowed are interpretations that may be applied to give meaning to the terms outlined[13]. Such interpretations are admissible for as long as they do not have the overall impact of reversing the real terms of the contract.

It would therefore take ambiguity in a written contract for the courts to resort to the promises made during the negotiations as the basis for getting the actual meanings intended. If the information is admitted, Brian would be able to prove that there was intentional misrepresentation. This is a criminal act and the guilty person is bound to compensate the aggrieved party for both direct and indirect costs incurred as a result of the misrepresentation.

3.3 Application of law

In applying the parol evidence rule in contracts, Brian is in a weak position. The fact that the promises made are not included in the written contract means that the probability of applying them is low. The only loophole that exists would be if there are inferences to capacity in the written contract and where there is no explanation on what constitutes capacity. If Brian can prove that there was an agreement that capacity would imply to having the ability to host 40 guests, then he could have legal recourse and be able to not only claim the cost of hiring the conference hall but also be able to sue for additional costs incurred.

On the promise to provide the tastiest food in the city, it will be difficult to obtain remedies based on this promise in the event that clarifications on the terms are sought from the pre-contract negotiations. The question of taste is subjective and difficult to determine by comprehensive standards.

4.0 Conclusion

Contracts bind parties to certain obligations. However, liability to each other can be avoided if the contract is frustrated by Acts of God. In the case of Regis Plaza, liability could be avoided if they can prove that there was no role played by in making the impact of the earthquake as big as it was on their building.

The parole evidence rule is used to guide the interpretation of contracts and keep them more certain. Accordingly, Brian may find it difficult to institute action against Edwin unless there’s a loophole in the contract that makes it necessary for reference to be made to promises made during the negotiations.

References