Australian Contract Law - Research Paper Example

CONTRACT LAW The problem at hand concerns two contracts: one between Big Oil Ltd and the Victorian Government, and; the other, between Big Oil Ltd and the Council of Portland. The first contract stipulates, among others, the construction of an oil refinery by Big Oil Ltd in Portland, the prerogative of Big Oil Ltd to transfer its interest to a company in which it has 40% stake, and for the Victorian Government to lift planning restrictions in favor of Big Oil Ltd. The second contract, on the other hand, stipulates, among others, a concession of 50% Council rates in favor of Big Oil Ltd for 50 years. Subsequently however, Big Oil Ltd transferred its ownership to an associated company, Best Oil Ltd, in which it has 40% interest and the Portland Council reacted by withdrawing the 50% concession earlier agreed. The issue here is whether or not the Council of Portland is bound by the agreement between Big Oil Ltd and the Victorian Government with respect to the prerogative of Big Oil Ltd to transfer its ownership to another company in which it has at least 40% interest. Under the law, only the parties to a contract have the right to enforce its terms and be conferred a right or be obligated under it.1 This is referred to as the principle of the privity of contracts, which was first established in Australia in the case of Tweedle v Atkinson.2 A strict application of this doctrine in the herein case would mean that Best Oil Ltd cannot enforce the 50% rating concession as against the Council considering that it was not a party to the contract between Big Oil Ltd and the Council of Portland. It is with respect to that contract only a third party. Nonetheless, the doctrine of privity is not a cut-and-dried rule the way recent cases have allowed exceptions to it. In Trident General Insurance Co Ltd v McNiece Bros Pty Ltd, 3 for example, the High Court allowed a third party in an insurance contract to claim against the insurer, but this is because a corresponding provision in the insurance law specifically grants this right.45 However, the privity doctrine is still enforced in the Australian legal jurisdiction and it is not clear under what particular exception Best Oil Co can invoke it. Best Oil’s argument is that it has a right to the 50% rating concession by reason of an implied term because of the stipulation under the contract with the Victorian Government allowing it to transfer its interest to a company in which it has at least 40% interest in. On the other hand, the Portland Council also invoked implied term in terminating the contract between it and Big Oil Ltd after the latter sold its property. It is important, therefore, to examine at this point the meaning of implied term in the context of a contract. An implied term is one that is not expressly written in the contract, but is deemed a part of it because it reflects the true intention of the party. It may be either implied in fact or by the law. A term can be implied under the following conditions: past dealings between the parties; custom or trade usage, and; business efficacy of the contract. On the other hand, there is an implied term by law under the following circumstances: in bailment contracts; in building and construction contracts; in employer and employee contracts, and; in professional and client contracts, and; laws on consumer protection under the Trade Practices Act 1974 and Territory Sale of Goods legislations.6 The last case, however, is already non-existent considering the passage of the Australian Consumer Law in early 1911 where all supposedly implied terms have already been incorporated and guaranteed relief under said law.7 In the foregoing circumstances, the closest circumstance applicable to the problem at hand, and worthy of closer scrutiny, is giving business efficacy to a contract. One of the earliest cases that mirror this type of implied term is The Moorcock 8 where the so-called Moorcock Doctrine was first crafted. This Doctrine simply holds that the legitimate and reasonable expectations of the parties will not be defeated because the parties failed to expressly include a term in the contract. To give business efficacy, therefore, to the contract the court will impute an intention to the parties by reading into it an implied term. 9 In Byrne v Australian Airlines Ltd, 10 the Court outlined the required criteria for implying terms into the contract: it is reasonable and equitable to read an implied term into the contract; it gives business efficacy to the contract; the term is evident; it is can be clearly expressed, and; the implied term does not contradict the other terms of the contract. In BP Refinery (Westernport) Pty Ltd v Shire of Hastings, 11 whose facts have parallelisms to those in the present case, BP entered into an agreement with the Australian Government for the establishment of an oil facility where one of the stipulated terms was that BP has the prerogative to assign its interests in the contract to another company of which it has a 30% stake in. The Shire of Hastings, where the oil refinery was located agreed to assess BP a lower taxation rate, but after six years withdrew unilaterally this provision in the preferential agreement when BP was taken over its local subsidiary in which it had at least 30% share in. The subsidiary sued the Shire to enforce the original agreement of tax rate concession and the issues were whether either of them can imply a term which would justify their respective courses of action. The Court decided that the Shire of Hastings cannot imply a term that would result in the termination of the original contract with respect to the lower tax rate because it would be inequitable, it is not necessary in fulfilling business efficacy and it is not evident under the circumstances. On the other hand, the Court ruled that reading an implied term in favour of BP would be proper because it is evident, it is necessary to give business efficacy, the term is capable of being expressed clearly and it does not go against any of the terms of the contract.12 The criteria of reasonableness and equitability is linked to the officious bystander test as well as the business efficacy which had their roots in the case of Reigate v Union Manufacturing 13 where the Court stated that an implied term is reasonable and equitable if a person who is not a party to the contract poses a question to both parties as to what will happen in the event a particular event relative to the contract occurs and both answer without hesitation that so and so should resolve it, and it is too clear that there is no necessity for them to expressly provide for it. On the other hand the “business efficacy” criteria means, according to the case of Exxonmobil Sales and Supply Corporation v Texaco Ltd 14 that the implied term must be necessary for the contract to take effect and not merely to enhance business performance. Finally, the “so obvious that it goes without saying” criteria simply means that where a term is so clearly evident to have been intended in the contract, but it is not included it could be implied.15 Applying the aforesaid principles and cases to the problem at hand, it is evident that Best Oil Ltd can imply the term of rating concession even if there was an assignment of interests so long as the 40% share is met, but Council of Portland cannot imply the term of termination of the concession stipulation in the event of the assignment. First, it is only equitable and reasonable that the Council extends the rating concession to the new company considering that Big Oil has a substantial stake on it and depriving the new company of the tax concession is like depriving the original company of the benefits it derived from such concession. Second, withdrawing the rating concession would substantially alter the contract considering that it is a significant part of the contract as it allows the oil company to operate with lesser burden from costs. Third, the term is obviously a part of the contract not only because of the precedence of the contract between the Victorian Government and Big Oil, but also because it is unthinkable that a company would allow itself to be deprive of such an advantage even before the expiration period of the stipulation when it still has substantial interest in the operation of the oil facility or that the Council of Portland, whose motivation in giving the concession in the first place is to acknowledge the economic gains the operation would give to its territory, would not agree to such a term had Big Oil brought it out in the open during the agreement. In addition, the reading of the implied term into the contract offers no complication but can be clearly expressed. Finally, the term does not contradict any of the terms of the contract between Big Oil and Portland Council. As to the issue of promissory estoppel, it is unlikely that Best Oil Ltd can claim it against the Council of Portland. This is because corporations have separate legal personalities and thus, whatever promises the Portland Council gave to Big Oil it gave to the latter alone. Since the Best Oil is a personality distinct from that of Big Oil Ltd, it was not privy to the promise or agreement between the Big Oil and Portland. The basis for this is the doctrine of separate personality where a corporation has a personality distinct from its shareholders, a doctrine that has since been established since the old English case of Salomon v Salomon.16 Thus, despite the fact that Big Oil owns 40% of interests in Best Oil, it has a separate legal personality from Best Oil Ltd. Commonwealth v Verwayen 17 requires that for equitable estoppel to apply a party must induce another to believe that a promise will be performed, the other party must rely on that promise and there must be detriment on the other party if the party does not fulfill that promise. The aforesaid doctrine is clearly not applicable here considering that not only is Best Oil a participant in the original contract, but the stipulated promise has already been executed by Portland in favor of Big Oil. Best Oil was never induced by Portland to believe that it will be entitled to the concession rate simply because the parties did not explicitly include the stipulation that the concession rate is applicable to an assignee of Big Oil. In conclusion, Best Oil can bring an action against Portland Council to enforce the rating concession on the ground that it is an implied term in the contract, but the Portland Council cannot imply the term of terminating the concession if and when Big Oil assigns its interest to another even though it has substantial interest in it. Such an implication by Best Oil is warranted under the circumstances because it is meets all the criteria outlined in the BP v Shire case. On the other hand, the Council of Portland cannot imply a term of termination into the contract because it does not meet the criteria in the said case. However, Best Oil cannot invoke the promissory estoppel case because it is a separate legal entity from Best Oil which is just one of its shareholders. The Council had never induced Best Oil to believe that it would grant the same rating concession to Best Oil if it would take over the ownership of the operation from Big Oil. References: Articles/Books Cho, George, Geographic information science: mastering the legal issues (2nd ed, 2005) Monahan, Geoff, Essential contract law (2nd ed, 2001) ‘Terms of a Contract,’ Australian Contract Law (2011) http://www.australiancontractlaw.com/law/scope-terms.html. Vettori, Stella, The employment contract and the changed world of work (2007) Cases BP Refinery (Westernport) Pty Ltd v Shire of Hastings [1977] 52 ALJR 20. Byrne v Australian Airlines Ltd [1995] 185 CLR 410:52. Exxonmobil Sales and Supply Corporation v Texaco Ltd [2004] 1 All ER (Comm) 435. Reigate v Union Manufacturing [1918] 1 KB 592 (CA) 605. Salomon v Salomon [1897] AC 22 The Moorcock [1889] 14 PD 64. Trident General Insurance Co Ltd v McNiece Bros Pty Ltd [1861] 1 B & S 393; 121 ER 762; [1861-1873] All ER Rep 369. Tweedle v Atkinson [1861] 1 B & S 393; 121 ER 762; [1861-1873] All ER Rep 369 Read More