Australian Contracts Law - Assignment Example

Student Name: Instructor name: Unit Name: Date: Australian Contracts Law Contract law is a major area in law and forms the foundation for the business world. A contract, by definition, refers to an agreement between two or more parties who are competent and in which each party benefits and an offer is made and accepted1 Such an agreement can either be formal, informal, oral, written or just plain understood by all the parties involved. More extensively, this term implies any form of obligation where one party becomes bound to another to perform a certain act or pay a sum of money. In other words, a contract has to involve a perfect obligation. Therefore, by its very nature, it’s dependent on the promises made between two or more parties and these promises are considered binding. The law of contracts is therefore at the heart of most commercial undertakings and it is hence one of the most integral areas of legal concern. The following are a few main characteristics that determine whether an agreement merits to be termed as a contract:2 an offer made the acceptance of that offer resulting in an agreement of sorts a promise to be performed a valuable consideration; form of payment or a promise meet commitments i.e. the time or event when the performance must be made) terms and conditions for performance Performance. A unilateral contract is one in which there is a promise to pay or give other consideration in return for actual performance. An executory contract is an agreement between a party and a debtor whereby both sides still have important performance remaining3.  In other words, when either side decides to stop performing the agreed upon contract it would actually constitute an actual breach of contract. Examples of executory contracts include: Real estate leases (tenant has to pay rent/landlord has to provide space) Equipment leases (lessee has to pay rent/lessor has to provide equipment) Development contracts (development work required/payment required on milestones). With the above definition, it is clear that executory contracts, by their very nature, can be fraught with uncertainties. Several questions may arise as to their validity, security and legality. How, for instance, can the parties involved be assured of the performance of the acts of which have been promised? How can the promise made by A be supported by a promise by B if A has not performed anything other than just mere promises? This is a valid question and a cause for concern for those involved. In centuries gone by, promises were considered binding and there was a compelling moral force and duty to keep these promises.4 However, is this moral force as strong as it was all those many centuries ago? Is it even a consideration in modern law? In terms of a person’s word being as good as their bond, this is sometimes uncertain in Australian contract law. For instance, if person A simply made a promise to pay $1000 for a computer to person B orally without any written support, the likelihood of this executory contract being binding is highly unlikely. The question as to whether executory contracts are truly binding is therefore valid and is often a source of legal woes in the courtroom. Take Walton Stores (Interstate) Ltd v Maher (1988) that was heard before the High Court of Australia.5 In the case, W and M had been under negotiations for a number of months concerning the grant of a lease over property M owned. They came under the agreement that M would demolish an existing building then build a new one which W would thereafter live in. W specified certain areas he required to be able to occupy the building. W and M then promptly agreed on the terms and rent to be paid by W to M. The solicitor for W then sent a draft lease to M’s solicitors on the 21st of October the same year and a few changes were discussed and accepted by W. The lease was summarily revised and the amendments were sent by M to W. In November, M began the demolitions. However, M started to have some misgivings about the whole project after being advised that their agreement was not even binding thus asked his solicitors to go slow on the agreement. In January 1989, began construction but later in the month W told M that he did not want to continue despite the fact that the construction was already 40% complete. This is when M sought to enforce their agreement by going to court and succeeded. W then appealed to the High Court. The above case raises important questions and issues about executory contracts. Did their mere agreement constitute anything binding legally? M believed it did and argued that under Australian contract law, promissory estoppel extends to promises of future conduct. Promissory estoppel refers to a doctrine which prevents one party from reneging on or withdrawing a promise made to a second party if the latter has sufficiently relied on that promise and acted upon it to their own detriment.6 It was adopted into Australian contract law during the Legione v. Hateley (1983) 152 CLR 406.7 In this particular case, the plaintiffs were unsuccessful due to the fact that the reliance was unreasonable and the promise made was not considered to be unequivocal. This then brings up the question of reliance and executory contracts.8 Should A’s reliance on B’s promise be deemed as sufficient consideration in a court of law? Is reliance consideration? This is a difficult aspect of executory contracts and has created niggling problems in Australian contract law has sought this address this issue. In equitable estoppel, if A makes a statement of fact to B and B has sufficiently relied upon the statement, A is legally prevented from denying the truth of the statement. It thus discourages the existing tendency towards deceptive and misleading conduct in contract formations9. This has greatly boosted executory contracts as it allows promissors to be accountable for their spoken words as long as the promissee relied on this promise for his/ her future undertakings. If the promissor is left hanging in the balance as a result of a promise made, he has the right to sue for breach of contract. Furthermore, Australian law has now put greater guarantees in executory contracts by extending promissory estoppel to cases where there exists no previous legal relationship between the two parties. As opposed to being a mere shield in executory contract cases, it has now effectively become a sword. In Mason CJ and Wilson J in Waltons Stores (Interstate) Ltd v. Maher (1988) 164 CLR 387,10 the ruling held that if estoppel (where a party is prevented from denying an argument on an equitable ground) is proven, it gives rise to an equity in the plaintiff’s favour causing the court to do the minimum equity that is just in the circumstances. From this case, another issue arose- that it is also possible for the promise to come from inaction or estoppel by silence.11 This put a major spanner in works of Australian contract law. Whereas a promise was hitherto only looked at from the angle of a written or oral agreement with a breach of the same being done in similarly written or oral form, now a promise is also considered to be breached if the promissor simply remained silent! This spells for endless opportunities in contract law and places even more pressure on people who enter into executory contracts with the false notion that they can go scot-free under the assumption that such contracts are not binding. Another positive for executory contracts in Australian contract law is the element of unconscionability12. This is whereby, if one party encourages the other party to create assumptions which inevitably lead to reliance, the promise becomes enforceable in a court of law. Herein, the following conditions are considered: a. promise made; the special relationship such as duty of information between the beneficior and the promittant; the existence of an irreversible change of situation of the beneficior of the promise; as well as dishonest behaviour on the part of the promittant. If all these conditions exist, the promise made to the beneficior is considered as sufficient consideration.13 Therefore, equity grants relief to the beneficior since it would be unconsciable on the promissors part to ignore the assumption. Another twist in executory contracts is with regards to the role played by the principle of “good faith”14 as well as the part played by honesty.15 Is such an assumption naive and unrealistic or is it a legally sound principle? The duty to act in “good faith” exists in Australian contract law and is a major boon for executory contracts16. Indeed, closely related doctrines have formed part of Australian law for well over 100 years. In 1881, Lord Blackburn’s judgment in Mackay v Dick used the principle of good faith when he ruled thus: It appears that both parties have agreed that something shall be done, which cannot effectually be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect.17 With this ruling, Lord Blackburn implied that good faith was a factor to be considered in commercial contract cases even when the contract did not specifically state something. Therefore, as long as two parties enter into an executory contract, the assumption made by the court is that the two parties entered into it in good faith and hence proper purpose existed. If B made a promise to A, it is presumed that B did so in good faith. Therefore, B is obligated to A to fulfil that promise and can thus be sued for breach of contract if he/ she fail to keep their part of the contract. Another concept that gives promises in executory contracts some weight in Australian contract law is that of cooperation and loyalty.18 These two concepts imply that when a party enters into a contract, other potential opportunities are subsequently lost. The concept of cooperation began way back in the 19th century case of Mackay v Dick. The role of cooperation in contract law is that it forces all parties to a contract to “do all such things as are necessary on his part to enable the other party to have the benefit”19. In St Martins Investments and Secured Income Real Estate the courts view was that all the parties involved had an obligation to do everything possible to ensure the success of the contract. In order to create a conducive environment for the contract to succeed, all parties must act in cooperation. Australian courts understand that for commercial undertakings to be protected there has to be loyalty and cooperation20. Cooperation needs to be evident in the formation and overall dealings of the contract. If one of the parties in the executory act in a way that is deemed to be uncooperative or disloyal with regards to the promises made; they will be seen as causing an inconvenience21. Inconvenience is seen as sufficient consideration in Australian contract law and thus if a broken promise results in inconvenience, it is tantamount to a breach of contract. From the above case, it seems set in wool that reciprocal promises due constitute sufficient consideration in Australian courts of law. However, is it always this clear cut? It isn’t and certain types of executory contracts must be rejected or assumed. This is attributable to the overlap that exists between honesty and “reasonable standards of conduct.” 22 In Australian Contract Law, there is great emphasis on reasonableness. 23The standards of the conduct have to be reasonable if the promise in the executory contract is to be binding. If, for instance, if A sues B for not having fulfilled a contract in a specific amount of time when no reasonable time for performance has been indicated or limited by the contract, B cannot be said to have reneged on the promise and thus a breach of contract will not have taken place. Another example is if party A sues party B for paying an amount which is less than A expected yet no reasonable price was implied in the executory contract, A has no legal grounds to sue B. In short, if the standard of reasonable conduct is subjectively reasonable, it then becomes subject to the principle of honesty. If it is not and the promise in the contract is only a general implication, only the general, stated promise is deemed to be binding. Such an instance where this was seen as true was seen in Hillas & Co Ltd v Arcos Ltd [1932] All ER Rep 494, 507 where Lord Wright referred to “the legal implication in contracts of what is reasonable”.24Therefore, in the modern commercial context, general promises sometimes are not deemed as sufficient consideration as such general promises are subject to abuse and misinterpretation. In addition, in these modern commercial times where fraud is commonplace, executory contracts can also be deemed to be risky and questions as to the guarantees and security of the parties involved often arise. For instance, in bankruptcy cases, a major challenge is with regards to the likelihood of a possible bankruptcy on the part of one of the parties of the contract and the subsequent protection of the client’s interest once the bankruptcy is filed. The challenge for the debtor’s lawyer is to evade certain possibly dangerous traps for the debtor that exist in the executory contract provisions of existing Australian bankruptcy legislation which give room for the assumption, rejection and assignment of the executory contract25. From these loopholes in the Bankruptcy Act, it is evident that indeed there are loopholes in executory contracts that may be used for the advantage of a debtor and this could spell disaster for the creditor. It is thus evident that for an executory contract to be enforceable, the following needs to occur: a promissor must make promise; the promissor must create the impression that the promise will be performed to encourage the supposition that contract will survive; the promissee must be able to sufficiently rely on this promise; and the law must recognise the legitimacy of the executory contract between the promissor and the promissee. If this is done, faith in the practicability and usefulness of executory contracts will be solidified. In a nutshell, therefore, a promise made by A supported by a reciprocal promise by B, where A has done nothing at the time beyond furnishing a promise in return for B’s promise is supported by Australian contract law through legal principles such as equitable estoppel, promissory estoppel, unscionability, good faith, cooperation, loyalty, and other principles as analysed in the above discussion. The promises made in executory contracts are therefore deemed as sufficient consideration and should be supported in the modern commercial context since commercial undertakings which involve executory contracts such as bankruptcy cases, real estate and equipment leases as well as development contracts rely on the success of these executory contracts to be able to thrive and succeed in Australia, now and in the future. BIBLIOGRAPHY ARTICLES/ BOOKS/ REPORTS Clarke, Julie, Walton Stores (Interstate) Ltd v Maher (1988) 76 ALR 513, (2008). Australian Contract Law, Accessed on 25th March, 2009 from http://www.australiancontractlaw.com/cases/walton.html Clarke, Julie, ‘Consideration’ (2008), Australian Contract Law, Accessed on 25th March, 2009 from http://www.australiancontractlaw.com/law/formation-consideration.html Harper, Michael, ‘The Implied Duty of “Good Faith” in Australian Contract Law’ (2004), Murdoch University Electronic Journal of Law. Accessed on 25th March, 2009 from http://www.murdoch.edu.au/elaw/issues/v11n3/harper113.html Hill, Gerald N and Hill, Kathleen T. 2005, ‘Contract’ (2005). The Free Dictionary. Accessed on 24th March, 2009 from http://legal-dictionary.thefreedictionary.com/Contract McDougall, Robert, ‘The Implied Duty of Good Faith in Australian Contract Law’ (2008). Accessed on 25th March, 2009 from http://www.lawlink.nsw.gov.au/lawlink/Supreme_Court/ll_sc.nsf/pages/SCO_mcdougall210206 Robertson, Andrew, ‘Knowledge and Unconscionability in a Unified Estoppel’ (1998) 24 Monash University Law Review 115. Spence, Michael, ‘Protecting Reliance: The Emergent Doctrine of Equitable Estoppel’ (1999), Oxford, Hart Publishing. The 'Lectric Law Library's Legal Lexicon on Contract, ‘Contract’ (2006). Accessed on 24th March, 2009 from http://www.lectlaw.com/def/c123.htm The Business Dictionary, ‘Executory Contracts’ (2008). Accessed on 24th March, 2009 from http://www.businessdictionary.com/definition/executory-contract.html Brereton, P L G, ‘Equitable Estoppel in Australia: The Court Of Conscience In The Antipodes Speech to the Australian Law Journal Conference: Celebrating 80 Years’ (2007), Accessed on 26th March, 2009 from http://www.lawlink.nsw.gov.au/lawlink/Supreme_Court/ll_sc.nsf/pages/SCO_brereton160307 CASE LAW Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 GEC Marconi Systems Pty Limited v BHP Information Technology Pty Limited [2003] FCA 50 Griffth CJ in Butt v McDonald (1896) 7 QLJ 68 Mackay v Dick (1881) 6 App Cas 251 McBride v Sandland (1918) 25 CLR 69 Renard Constructions v Minister for Public Works (1992) 26 NSWLR 234 LEGISLATION Bankruptcy Act 1966 Uniform Commercial Code Article 2 (Sales) Sale of Goods Act 1923 (NSW) s 5(2) Trade Practices Act 1974 Read More