Contract Law Practice - Assignment Example

Contract law – NSW. Ans The doctrine of Privity s that in general, a contract is entered into by the two parties concerned and therefore it does not confer any rights or obligations on a third person who is not a party to the contract.(Tweedle v Atkinson). The Privity rule states that only the parties to a contract can enforce it. This doctrine does not allow even a third party who is a financial entity to enforce or amend the subordination clause. In the case of Trident General Insurance vs. McNiece Bros Pty Ltd, McNeice could not receive workers compensation he had paid, from the Insurance Company, since he did not have a direct contract with them. In the case of Trident, an attempt was made to alter the Privity Clause around trust principles and did not succeed because it was only obiter dicta. The doctrine of Privity does not allow a third party such as a consumer for example, to sue a manufacturer who has produced defective goods – classified as vertical privity – or indeed sue a retailer who has sold him faulty goods via a friend who has purchased the product for him - this is a case of horizontal privity. This places the consumer at a great disadvantage, especially if the retailer has gone out of business and is unable to compensate for the defective goods - he cannot sue the manufacturer unless he can establish a collateral contractual relationship, which is possible only in rare cases (Carlill vs. Carbolic Smoke). Generally, the consumer would be considered a third party to the contract between the manufacturer and retailer and therefore deprived of any rights. Modern day transactions are rarely linear in nature. Financial and commercial transactions involve several parties and the Doctrine of Privity makes no allowance for the ramifications of multiple secondary and tertiary parties involved in contracts. But the Doctrine of Privity remains strong in Australian law and is a contentious issue, impeding recoveries from third parties. This is especially so in the case of subordinated debts, where the implementation of the “security cushion” provided by a senior creditor is impeded by the Privity Doctrine. Common law principles such as promissory estoppel offer scope for development in favor of third parties (Walton Stores vs. Maher). The introduction of Section 563c into the Corporations Law of 2001 has been ineffective in the face of the Doctrine of privity and further reform is necessary. In Queensland, some statutory modifications have been carried out to the Privity Principle at Section 55 of the Property law Act 1974-78. Western Australia has also carried out some modification to Section 11 of its Property law Act 1969-73. Modifications were made in the case of Insurance through the Insurance Contracts Act (Commonwealth, Section 48). In the case of Wilson v Darling Island Stevedoring and Lighterage Co Ltd, Mason CJ and Wilson J advocate the use of trusts to work around the privity principle and point to the existence of certain specific statutory principles (p 289). But the Privity Doctrine needs to be repealed or undergo some radical reformation process in order to make it more relevant in the modern business climate. Old common law principles and the principles of contracting between two single parties no longer holds good in the case of many commercial transactions and the outmoded Doctrine disallows the settlement of relief to third parties who may not be direct parties to the contract but are nevertheless affected by the contractual provisions. Ans 2: The Contracts Review Act was introduced in 1980 on the major premise that any contract that was deemed to be unjust would be afforded relief and protection with no exclusions. Since the Contracts Review Act was proposed to be applied to commercial contracts as well, there was a reaction “bordering on the hysterical”. (Terry 1982). Later the Act was introduced but precluding corporations from obtaining relief under the Act.(Sec 6(2) of the Act). The Trade Practices Act 1974 (Commonwealth) may be partly derived from the Contracts review Act. This Act grants the jurisdiction to the Courts to declare a contract as null and void, either wholly or partially, if it is found that the contract or any of its provisions are unjust.(Sec 4(1) of the contract – see end note 1) . The Courts also have the power to grant anticipatory relief as well, by restraining any course of conduct that would lead to injustice in the future. (Sec 10 of the Act and Minister for Consumer Affairs v WW Wallack Real estate Pty Ltd and Ors – See end note 6). Moreover if a contract is deemed to be unjust in some manner, then the Court has wide ranging powers to also alter the rights of third parties who are not signatories to the contract that is under dispute, when relief is deemed to be appropriate and necessary (Section 12(1)). In the degree of wide ranging powers that have been granted to the Courts in dealing with contracts which are deemed to be unjust and in its power to enquire into the substance of the contract to determine future violations and third parties affected by its contents, the Contracts review Act is in opposition to the Will theory which mandates freedom in the entering into and exercising of contracts. Sanctity of contract is no longer supreme under the Contracts review Act and therefore it does impact upon the laissez faire theories that have mandated freedom of contract of the individuals/parties concerned. According to Stephen Waddams (1976), legislative action to control unfair contracts is not as effective as handing over the power to the courts to do so. Through this Act, it is possible for courts to review contracts without any preconceived notions while generally ensuring that contracts are adhered to and parties keep their bargains (Sherman v Kunnert). If contracts are secured through misrepresentation, undue influence or undue pressure, then the contract can be impugned as unjust under the Act. (See Section 9 (2) (j)). In making this determination, a long list of variables has been provided for use by the Courts, including the substantive nature of the contracts such as imbalance between contracting parties, economic and educational conditions of the parties to the contract, their state of mind when entering into the contract – all of which are broad ranging and quite opposed to the laissez faire theories which shun such regulation of contracts as interference with the freedom to contract. The list of variables specified above are to be used to determine characterization of the contract (Amcor Ltd t/as Australian Paper manufacturers v Watson and Anor). While the indeterminate nature of the term “unjust” which is used as the basis for this Act has been pointed out to be “a slippery word of uncertain content (Antonovic v Volker), nevertheless there is little doubt that the wide ranging provisions of this Act do supersede to a large extent the freedom and sanctity of contract as laid out in the laissez faire theories. Ans 3: When a mistake is alleged in the framing of a contract, relief is provided only when the mistake concerns the terms of the contract itself, rather than the commercial effect, and this distinction was clarified by Rimer J in the case of Clairon Ltd v National Provident Institution. Therefore the courts are only concerned with the circumstances surrounding the formation of the contract rather than its substantive consequences. (Hart v O’Connor). The principle of mistake draws a distinction between form on one hand and substance on the other, an approach that has been deemed to be superficial (Atiyah 1985) and not conducive to the desired goal of certainty. However this also finds support in common law, within the context of what constitutes a mistake(McRae v Commonwealth Disposals Commission). Mistake at common law renders it imperative for the courts to prove that a contract is void, whereas on principles of equity the Court would have to look into whether or not the contract was voidable. Therefore, there are two aspects to mistake – one of which is the subjective theory at common law requiring the contract be void while the other is the objective theory that examines whether a contract is voidable. However the distinction between the two is slim and Common law is strict in allowing relief on this basis. The distinction between the subjective and objective elements have however been emphasized in Psaltis v Schultz. The statement of Dixon J further corroborates this distinction that applies to mistake in Common law – the contract is declared void, irrespective of the third parties that may be involved. By focusing on identity of the person rather than their attributes, the substance of the subject matter as opposed to its quality and the nature of the transaction as opposed to its terms, the policy of the Courts is to examine the mistake alleged on the contract in the context of its existence rather than its substance. The major focus of the Court is on the circumstances surrounding the formation of the contract, therefore it is primarily concerned with examining whether the parties were legally fit to enter into a contract or not. The move to declare a contract void in the event any irregularity is discovered shows that the court is not concerned so much with determining the substance of the contract and its various ramifications, rather the focus is at a more basic level. Is the contract void or not? The nature of the transaction and the identity of the persons involved will determine to a large extent, the decision to declare a contract void or voidable. If an examination of the substance of the contract was undertaken, it would be possible to determine whether or not the parties are successfully moving/have moved towards a consensus and what are the mistakes alleged that have to be overcome. But by applying a blanket proposition under common law of making a determination whether or not the contract is void, the Courts are in fact, questioning the ability of the parties to reach a consensus at all, assuming that the mistake has arisen for the sole reason that the parties are unable to arrive at a consensus and therefore the contract needs to be voided. Ans 4: The promise theory of contract: Fried states that a person making a promise to another person must be able to foresee that “you would rely on my promise and you would suffer harm when I broke it.” (Fried 1981 p 10). Fried makes the point that a person who makes a promise is morally bound to keep it because that person has "intentionally invoked a convention whose function it is to give grounds - moral grounds - for another to expect the promised performance."(Fried 1981 p16), thereby summarizing the concept of contract as a legally enforceable promise (Williston, 1920). The central question powering the Promise contract theory is: why are contracts enforced? The answer is that they are enforced because one has a moral obligation to keep one’s promises. Two significant advantages to this theory are as follows: (a) it upholds the freedom of the individual to enter into a promise and in this, parallels the will theory. (b) it promotes the freedom to contract by stating that contractual obligations are entered into by the parties without the intervention of a third party. Moreover a contract may be altered by mutual assent of the parties. However, the problems arise in determining which contracts are enforceable and which are not. By emphasizing the moral base of contracts, the Courts are faced with the problem of assessing subjective elements such as intentions of the contracting parties and their morals. In the assessment of whether or not damages are payable, Fuller and Purdue(1937-37) have pointed out the detrimental reliance theory, when a party may be obligated to pay damages merely because another party relies on a promise. Other problems that arise are the gaps in promises, which are imputed through nonpromissory principles that may not have been the original intention of the parties. In the case of Wright vs. TNT Management Pty Ltd, Mc Hugh upheld the Promise Theory of Contract (See end note 2). But the case of Texaco v Pennzoil established the problems with this theory, since the issue was one of overstatement of promise by the courts wherein contractual obligations depended upon whether the parties “intended to be bound” (at page 789) In the Cohen vs. Cowles media case, the deficiencies of the Promise theory were stated by the Court, in that a moral obligation alone cannot support a contract; “Nor does the law consider binding every exchange of promises” (at page 202-203). Moreover there is also the difficulty of establishing the truth or falsity of promises in terms of future predictions as established in the cases of R v Sunair Holidays and Beattie v Lord Ebury (see end note 5 and 3). A failure to keep a promise does not make a contract misleading or deceptive, as set out in the cases of Future International Pty Ltd vs. Gadzhis, because it may have been well intended while entering into it. (page 238 – also see end note 4). The difficulty of enforcing the theory of contract as a promise therefore arises in terms of determining the exact parameters of the terms intended by the promise and involves subjective and moral aspects which cannot be determined quantitatively by the courts and may involve unfairness in contracting thorough the imputing of intended motives to perform which may not have actually been the case. Ans 5: The Parol evidence rule is concerned with the admissibility of extrinsic evidence and in Australia, extrinsic evidence is admissible only when there is ambiguity in the written contract. A court will give effect to the written words in the contract even when the result appears unreasonable, as was the case in Hohn and Anor v Mailler (2003) NSW CA 122. The basic purpose of the Parol evidence rule is to uphold the finality of the written document by excluding evidence that may suggest that the parties had a different intention from that framed within the written contract. In the case of Ginger Development Enterprises Pty Ltd v crown Development Australia Pty Ltd, the Court acknowledged the difficulty inherent in framing the limits of ambiguity; “A broader concept of ambiguity is involved; reference to surrounding circumstances is permissible whenever the intention of the parties is, for whatever reason, doubtful." Kirby P in the case of B and B Constructions Pty Ltd v Brian A Cheeseman and Associates, also addressed the difficulties in specifying ambiguity (p 452) and said that there could be a patent ambiguity in which case extrinsic evidence could be used to clear up the doubts, while in the case of a latent ambiguity – or an ambiguity that is not so clear, the Court may or may not allow extrinsic evidence to be used.(p 453). In the case of Royal Botanical Gardens and Domain Trust v South Sydney Council, the fact that ambiguity existed was the basis upon which the Court upheld the validity of the written word of the contract and provided only partial relief to the plaintiff, holding that post contractual conduct cannot be admitted into evidence. The ambiguity was also at issue Stadium Australia Management Limited v Sodexho Venues, where the arbitrator rejected the motion for admissibility of evidence pertaining to the surrounding circumstances of the contract, stating that the words of the contract were clear enough – although in the Court of Appeals, the majority found ambiguity in the contract. In the case of FAI Traders Insurance Co v Savoy Plaza Pty Limited, the admissibility of post contractual conduct was rejected, while in the case of Hope v RCA, a latent ambiguity was claimed by the barrister but was rejected by the Court on the grounds that what the defendant was actually trying to do was to add a new term to a written contract and this is precisely what the parol role of evidence forbids, since it upholds the validity and strength of the written contract. But in general, there has been an increased flexibility in the application of the parol evidence rule. In the case of Codelfa Construction Pty Ltd v Steel rail authority of NSW, Mason J makes it clear that there has been a liberalizing influence on the parol evidence rule (p 743 to 747). Evidence of the surrounding circumstances to the creation of a contract may be deemed admissible if deemed relevant to clear up an ambiguity. The issue of post contractual conduct in terms of admissibility as evidence was also at issue in White v Australia and New Zealand Theatres Ltd Hide and Skin Trading Pty Ltd v Oceanic Meat Traders Ltd. In the first instance the court adopted a very liberal approach and in the second the issue of admissibility of post contractual evidence was argued in favor of admissibility, although it was not deemed relevant in the instant case. Hence on an overall basis, the admissibility of parol evidence would depend upon the circumstances of the particular case ad the degree of ambiguity deemed by the Courts in interpreting the written contract. The surrounding circumstances leading to the formation of contract and post contractual conduct may also be deemed to be relevant in some cases. References: * Amcor Ltd t/as Australian Paper manufacturers v Watson and Anor (NSW Court of Appeal 2000 – Maeghar, Sheller and Heydon JJA) * Antonovic v Volker (1986) 7 NSWLR 151 at 157 * Atiyah, P.S. (1985) “Contract and Fair Exchange” 35 University of Toronto Law Journal * Beattie v Lord Ebury (1872) LR 7 Ch App 777 * B and B Constructions(Australia) Pty Ltd v Brian Cheeseman and Assoc Pty Ltd (HPH 451) * Carlill vs. Carbolic Smoke Ball Co Ltd (1893) 1 QBD 256 * Clairon Ltd v National Provident Institution.(2000) 2 All ER 265 * Codelfa Construction Pty Ltd v Steel rail authority of NSW (HPH 461-2) * Cohen v. Cowles Media Co., 457 N.W.2d 199 (Minn. 1990). * Contracts Review Act of 1982, NSW * FAI Traders Insurance Co v Savoy Plaza Pty Limited (1993) 2 VR 343 * Ginger Development Enterprises Pty Ltd v crown Development Australia Pty Ltd (2003) NSW CA 296 * Hart v O’Connor (1985) AC 1000 * Hide and Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (HPH 462) * Hope v RCA Photophone of Australia Pty Ltd (HPH 454) * Lon L. Fuller & William R. Perdue, Jr., The Reliance Interest in Contract Damages, 46 YALE L.J. 373 (1936-1937). * Minister for Consumer Affairs v WW Vallack Real Estate Pty Ltd and Ors. (1986) ASC 55-478 – see end note. * McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 * R v Sunair Holidays Ltd [1973] 1 WLR 1105 * Terry, Andrew. (1982). “Unconscionable contracts in New South Wales: * The Contracts Review Act 1980 (1982) 10 ABLR 311 at 319-320 * Royal Botanical Gardens and Domain Trust v South Sydney Council (2002) 186 ALR 289. * Samuel W. Williston, The Law of contracts 1st ed 1920 * Sharman v Kunnert (1985) 1 NSWLR 225 at 231 * Stadium Australia Management Limited v Sodexho Venues (Australia) Pty Limited (2003) NSW CA 234. * Texaco, Inc. v. Pennzoil, Co., 729 S.W.2d 769 (Tex. App. 1987) * Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 62 ALJR 508 * Tweedle v Atkinson (1861) 1 B&S 393 * Futuretronics International Pty Ltd v Gadzhis [1992] 2 VR 217, 236 * Waddams, Stephen (1976) “Unconscionabiltiy in contracts” 30 MOD LR 369 at 390. * Walton Stores (Interstate) Ltd v Maher (1988) 62 ALJR 110 * White v Australia and New Zealand Theatres Ltd, 1943 * Wright v TNT Management Pty Ltd (1989) 85 ALR 442, End notes: 1. Section 4(1) of the Contracts Review Act defines “unjust” in terms of being harsh, oppressive or unconscionable. 2. “a promise to do something in the future is to be regarded as a representation that it will be performed.” (McHugh J at p 451) 3. “that [t]here is a clear difference between a representation of fact and a representation that something will be done in the future. A representation that something will be done in the future cannot either be true or false at the moment it is made; and although you may call it a representation, if it is anything it is a contract or promise” (J Mellish – See Beattie vs. Lord Ebury at p 804) 4. “If it be said that [the promisee]... was mislead into entering into the contract, then the breach is irrelevant, for that breach could have played no part in misleading him... the promisors combined action could not be characterised as misleading or deceptive at the time the promisee was induced to accept the promise because the breach had not occurred at that stage” (Ormiston J – see Futuretronics vs. Gadhzis at p 238) 5. “A statement that a fact exists now, or that it existed in the past, is either true or false at the time when it is made. But it is not the case with a promise or a prediction about the future. A prediction may come true or it may not. A promise to do something in the future may be kept or it may be broken. But neither the prediction nor the promise can be said to have been true or false at the time when it was made” ( Justice McKenna -See R vs. Sunair Holidays Ltd at page 1109) 6. In the case of Minister for Consumer Affairs v WW Vallack Pty Ltd, the Court deemed that an unusual clause that was present in the contracts being prepared by the real estate agency to guarantee recovery of fees, was struck out as unjust and unnecessary. References: Read More