Published on 20/05/2007

Please note the download link for these set of notes are at the end of page 2 (Exclusion Clauses and Legislation)

Terms of a Contract

In order to identify the terms of a contract, one must analyze both express & implied terms

Express Terms: Terms that are explicitly included in the contract – Important to identify what the express terms are.

Implied Terms: Terms that will be read into the contract and which were never the subject of express agreement.

Terms v Representation

Terms: Statements that govern the rights and obligations of parties concerned. They are the elements of the contract and are binding. If terms are broken there are legal consequences.

Representations: A statement that is designed to induce another party to enter into a contract. Not a term as it Lacks any contractual force.

You distinguish between terms and representation through INTENT

Deciding whether a statement is a term

General test for this is the intention of the parties – did the maker of the statement intend to guarantee the truth of the statement

Objective test: What would a reasonable third person have understood the statement to mean

Ellul & Ellul v Oakes - Statement WAS a Term

Facts: Ellul (appellants) claimed damages for breach of contract, based on a statement that a property which they purchased from the defendant was sewered. This statement had been made in certain advertising material, that statement was signed by the defendant, it was false. Judgement for the defendants. The plaintiffs appealed to the Full Court.

Issue: Whether the statement was a term of the contract?

Held: Appeal allowed. Reason - Zelling, “what effect the statement would have on the mind of a reasonable person so as to make him think that such a representation was contractual in its nature?.” He then explains the reasoning in Oscar Chess v Dick Bentley: “it does not matter if he was innocent or not but, if he didn’t behave as a reasonable man, it’s function of the Court to hold him to his promises. It was obviously within the knowledge of the defendant whether his property was sewered and the plaintiffs, who were ignorant of that fact, were justified in regarding the statement as more than a mere representation”.

None of these factors are conclusive. They are simply indicators. (Courts to decide intention) Factors:

·     Timing which elapsed between the time of making the statement and the final manifestation of agreement; if the interval is a long one, this points to a representation

·     Importance of the statement in the minds of the parties; a statement which is important is likely to be classed as a term of the contract.

·     Written: if the statement was followed by the execution of a formal contract in writing, it will probably be regarded as a representation should it not be incorporated in the written document.

·     Better Position: where the maker of the statement is, vis-à-vis the other party, in a better position to ascertain the accuracy of the statement, the court will tend to regard it as a contractual term

Oscar Chess v Williams [1957] - NOT a term of the contract

    * Williams sold a 1939 Morris Miner to the plaintiff, claiming it was a 1948 Morris Miner - Buyer sued for breach of contract.
    * Court held the circumstances of the sale were not such to make the statement a term of the contract as the owner of the vehicle had no more knowledge than the purchaser - In fact, the purchaser may have had more knowledge as they were a car dealer.
    * Statement was an innocent misrepresentation and the court would have set it aside in equity if Oscar Chess had acted earlier (8 months was too long)

Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd [1965] - WAS a term of the contract

    * Where the statement maker is in a better position than the other party to ascertain the accuracy of the statement, it is probably a term.
    * A motor dealer sold a luxury car to the plaintiff, and stated that the car had only done 20,000 miles since it had been serviced. In fact, the mileage was just below 100,000 miles and plaintiff sued for breach of contract.
    * Court held that the statement was of a promissory nature, as the seller was a motor car dealer and thus in a much better position to know the state of the car.

Collateral Contracts

Parties create a collateral contract when one party’s consideration is the entry into another (main) contract as seen in Heilbut Symons v Buckelton [1913]

Deciding whether a statement forms part of a collateral contract:

1)      Statement was intended to be relied on

2)      Reliance by the party alleging the existence of the contract

3)      An intention, on the part of the maker of the statement to guarantee it is true.

The Elements of a collateral contract are:

(i) The statement is promissory in nature - assurance JJ Savage & Sons v Blakney

(ii) There can’t be an inconsistency between the main contract and the alleged collateral contract

Hoyts Pty Ltd v Spencer - Collateral contract was inconsistent with main contract

JJ Savage & Sons Pty Ltd v Blakney - Not A collateral contract (Not promissory in Nature)

    * Plaintiff bought a boat where Defendant recommended that a specific engine would make the boat hit 15m/h. After Blakney bought the boat with that specific engine, he found that it didn’t actually hit that speed.
    * Plaintiff said he wouldn’t have purchased it if the statement had not been made. Defendant appealed to HC.
    * HC refused to infer such a contract, as at the time of the letter negotiations were still incomplete – thus Blakney could have either:

      1)made the attainment of the speed a condition in the contract
      2)made the defendants promise that the boat could attain such speed
      3)made his own judgment based on the defendant’s opinion

    * Courts can only infer a collateral contract if the plaintiff had adopted the second course, but he had adopted the third course and that statement was NOT promissory

Parole Evidence Rule

    * Parties often make promises that amount to oral terms of the contract but which do not find their way into the written document. The “parole evidence rule” may prevent the inclusion of such terms.

    * The rule is concerned with entirely written contracts and that’s that oral evidence / extrinsic material cannot be introduced that will have the effect of adding to, subtracting from or varying the terms of an entirely written contract.

          o Extrinsic material is not confined only to oral evidence; also includes written documents, such as previous drafts + written notes. - Codelfa Construction Pty Ltd v State Rail Authority of NSW

    * Justification for the rule - Bacchus Marsh Concentrated Milk Co Ltd v Joseph Nathan & Co Ltd:

“Finality in written instruments meant to be final and not allowing written words to be altered or qualified by the uncertain testimony of slippery memory.”

Entire Agreement Clause:

Existence of a written document that appears to represent a complete agreement is not conclusive that it was intended to be an entirely written contract. If however, the written document has a clause that states that it is an entire agreement, there is authority to suggest that this will be seen as an entirely written contract to which the PER will apply.

Exceptions to the Parole Evidence Rule:

Oral evidenced is permitted to:

(i) Establish that the operation of the contract won’t occur until the happening of a certain event as seen in Pym v Cambell

(ii) Establish the existence of an implied term based upon some custom or trade usage.

(iii) Establish that a written contract incorrectly records the agreement of the parties. - Enables courts to issue an order for rectification of the written contract.

(iv) Establish the existence of a prior collateral contract (only if entire agreement clause isn’t included): L G Thorne v Thomas Borthwick & Sons

Signed Contracts

The signature rule: Signature will ordinarily bind a party to the terms even if the signatory has not read or understood the terms set out in the document, unless there is fraud or misrepresentation

L’Estrange v F Graucob Ltd - Plaintiff was bound for signing even though didn’t read terms

    * Plaintiff bought an electronic slot machine and signed and handed to the defendants an order form which contained an exemption clause in small print
    * The machine didn’t work properly, therefore plaintiff claimed damages for breach of warranty that the machine was fit for purpose for which it was sold
    * Court found plaintiff was bound by the terms of the contract and was therefore not entitled to damages due to the exemption clause.
    * When a document containing contractual terms is signed, it is wholly immaterial whether the document was read or not (except for fraud or misrepresentation)

Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (appeal case) - FGCT did not do what was reasonably sufficient to give plaintiff notice of the existence on the back of the contract

Exceptions to the Signature Rule

    * In L’Estrange it was held that the signature rule did not apply to situations where documents are signed as the result of fraud or misrepresentation. This exception also extends to signatures obtained as the result of duress, unconscionable conduct and undue influence.
    * As is noted in Toll the principle of non est factum – a species of mistake – also operates as an exception. The non est factum principle will be analysed later in the notes on mistake.

Curtis v Chemical Cleaning Co - Defendant couldn’t rely on exclusion clause due to misrepresentation

    * Plaintiff to dress to defendant (dry cleaner) and was asked to sign receipt, plaintiff asked why they were signing it, they were told that the defendants would not except liability for certain risks such as damage to beads and sequins.
    * In fact, the exemption clause contained a much wider exclusion clause, which the defendant later relied upon to escape liability for negligence.
    * Court held that the defendant could not rely upon the exclusion clause as the effect of the clause had been misrepresented.

Incorporation of Terms by Notice

- unsigned documents such as tickets, signs and notices -

In the case of unsigned documents or signs containing terms, there are two major requirements to be met before a term in such cases can be said to be incorporated into the contracts:

1.      Timing: Notice of the term has to be given at or before the entering of the contract

Olley v Malborough Court Ltd - Hotel sought to rely on an exclusion clause located in a hotel room. However, the argument failed as it was held that the contract had been formed before Olley had even sat foot in the room.

Thornton v Shoe Lane Parking - Parking lot with exclusion clause on tickets. Timing = after + No Reasonable Notice was given by the defendant.

    * There was a notice outside the lot which gave the rates and stated cars were parked ‘at their own risk’. The plaintiff drove his car into the lot, took his ticket and parked the car, but when he returned there was an accident that left the plaintiff severely injured
    * When the plaintiff sued, the defendant claimed that the ticket incorporated a term which excluded it from liability. On the back of the ticket it stated that the ticket was issued subject to the conditions displayed on a pillar opposite the machine – 8 conditions were displayed – although the pillar couldn’t be seen from the automatic ticket machine.
    * Court held that the defendant couldn’t rely on the exemption clause because the plaintiff did not know of the exemption clause; and the defendant had not done what was reasonably sufficient to bring it to the plaintiff’s notice before the contract was made.

2.      Reasonable Notice: In the absence of actual knowledge, the delivery of the document or the placing of the sign must be done in such a way that the other party can be taken to have given reasonable notice of the terms.

If however the document is non-contractual in nature (E.g. Tickets, receipts and vouchers), merely handing it over to the other party is not enough. Party relying on the clause must take reasonable steps to draw the recipient’s attention to it.

Incorporation of Terms by a Prior Cause of Dealing

·         Courts will often look to past dealings between parties to assist in determining the terms of their present arrangements. There must be a previous consistent course of dealings of a sufficient length of time. - Ultimately a question of reasonableness

Henry Kendall & Sons v William Lillico & Sons - Terms in prior dealings were found reasonable in present deal

·         There was an oral contract for the sale of Brazilian nuts, and on each delivery the seller sent ‘sold notes’, evidence or confirming the prior oral contracts, and the notes included an exclusion clause for latent defects.

·         The buyer knew the notes contained terms but never read them.

·         It was held that the exclusion clause formed part of a contract. This was because it was by the regular course of dealings over a long period of time, the buyer indicated an acceptance of and readiness to be bound by the printed conditions of which they were well aware, although they had not troubled to read them.

Implied Terms

Terms that will be read into the contract and which were never the subject of express agreement.

1. Terms implied in law - either by common or statute law

(i) Trade Practices Act 1974 (C’th) -Statute that implies terms in sale of goods contracts

    * Implied condition that goods will be of merchantable quality: s71 (1);
    * Implied condition that goods are reasonably fit for the purpose for which they were supplied: s71 (2);
    * Implied condition that if goods are sold by example, the bulk will correspond with that sample: s72
    * It is important to note that parties cannot contract out of these terms implied under the TPA – s68

(ii) Under common law - In commercial contracts there is an implied term requiring the exercise of good faith in the performance of the contract

    * Duty of good faith suggests a demand that parties conduct themselves in accordance with standards of conduct which are honest, as well as being reasonable having regard to the parties’ interests: Overlook v Foxtel [2002]

    * Common law often implies quite specific terms into particular types of contracts such as employment contract where an employee will be bound by implied terms that he or she:

          o Is reasonably skilled to perform the job in question
          o Will faithfully server his or her employer
          o Will obey lawful commands made by the employer

2. Terms implied by custom or trade

A term may be implied into a contract to incorporate a relevant custom in a particular market, trade or locality.

Con-Stan Industries of Aust Pty Ltd v Norwich Winterthur Insurance - HC set out a number of rules that must be satisfied before a term will be implied on the grounds of custom or trade usage:

1) Existence of a custom or usage that will justify the implication of a term into a contract is a question of fact

2) There must be evidence that custom or usage relied upon is so well-known and acquiesced in that everyone making a contract in that situation can reasonably be presumed to have imported the term into the contract; however, the custom need not be universally accepted.

3) A term will not be implied on the bases of custom or usage where it is contrary to the express terms of the agreement.

4) A person may be bound by a custom notwithstanding the fact the he or she had no knowledge of it.

3. Implication of terms on the facts of a case

Here a court is asked to imply a particular term on the basis of the specific facts and circumstances of the case before it.

In BP Refinery (Westernport) Pty Ltd v Shire of Hastings, the Privy Council listed the 5 requirements necessary for implying a term on the business efficacy:

      1 - It must be reasonable and equitable to imply the term;

2 - It must be necessary to give business efficacy (i.e. term must be necessary to make contract effective and workable according to the presumed intention of the parties, State of NSW v Banabelle Electrical Pty Ltd)

      3 - It must be so obvious that it goes without saying (Codfelfa Constructions Pty Ltd v State Railway Authority of NSW - Term failed obvious test)

      4 - It must be capable of clear expression; and

      5 - It must not contradict any express terms of the contract.

Construction of Terms of a Contract

The process of construction involves two things, namely, the meaning of the words used and the legal effects or significance of those terms: Life Insurance Co of Australia Ltd v Phillips

Exclusion Clauses

Exclusion clauses are terms of a contract that seek to exclude or limit the liability of a defendant from liability to a plaintiff in the event that the defendant causes loss to a plaintiff.

Important: If EC is part of contract always mention the Darlington Case

Darlington Futures Ltd v Delco Australia Pty Ltd - sets out the fundamental approach to the construction of an exclusion clause:

      i.          An Exclusion clause should be construed ‘according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving weight to the context in which the clause appears including the nature of the object of the contract

In determining whether an exclusion clause shields a defendant from liability to a plaintiff, the principal task of the court is determine the intention of the parties.

      ii.         The contra proferentum principle will be applied so that in cases of ambiguity the clause will be construed against the person relying on the exclusion clause

Here courts will utilize the meaning of the clause that is least preferable to the party most relying on it as described in Thomas National Transport Pty Ltd v May & Baker Pty Ltd

5 Rules of Construction Developed by the Courts

1 -   Contra Proferentum Rule: (Explained above - (ii))

2 -   Fundamental Breach Rule:

An EC can prevent liability for a fundamental breach of contract where the clause is clear and unambiguous and where the court in viewing the circumstances of the particular case determine that the intention of the parties was to agree to an EC covering the particular breach alleged.

Suisse Atlantic Societe v NV Rotterdam [1967] - Upjohn J stated that a fundamental breach ‘goes to the root’ of an agreement’. Therefore there couldn’t be an EC to cover a fundamental breach. (Overruled see below)

Photo Production Ltd v Securicor Transport - House of Lords rejected the doctrine of fundamental breach adopted in Suisse (above), which suggested that termination for fundamental breach necessarily prevents the enforcement of an exclusion clause.

Court held that the question of reliance on an exclusion clause and the fundamental breach is ‘one of construction that there is no principle of law that a fundamental breach will automatically invalidate an EC.’

Court was not entitled to reject EC ‘however unreasonable the court itself may think it is, if the words are clear and fairly susceptible of one meaning only.

    * Defendant contracted to supply plaintiff with security patrol for their factory. Security guard destroyed the plaintiff’s factory through a fire.
    * Defendant relied on EC in the contract that stated ‘under no circumstance shall (Securicor) be responsible for any injurious act or default by any employee of Securicor…’
    * Although Securicor was found to have breached an implied term requiring to provide the service with due and proper regard to the safety and security of Photo’s premises, their primary obligation is modified by the Exclusion Clause – where Securicor’s obligation isn’t absolute, its limited to exercising due diligence in its capacity as an EMPLOYER of the staff/security.
    * Because the clause was clear and unambiguous, the defendant could rely on it given the facts

3 -   Deviation Cases

If you deviate from the contract, you lose the effect of the EC

TNT v May and Baker - Carrier deviates from the agreed voyage or route, therefore loses the benefit of an EC.

    * A TNT subcontractor was to transport May and baker’s goods from Mel to Sydney. When subcontractor collected good, was unable to store them in TNT storage depot as they were closed for the night.
    * Subcontractor went and stored them in his home garage, fire went loose and destroyed goods.
    * TNT tried to rely on their exclusion clause to protect them, however HC ruled against them on the basis that the contract stipulated that the goods be stored in TNT depot.
    * Storage in subcontractors home was an unauthorized deviation which rendered the EC inapplicable.

4 - The Four Corners Rule

If the defendant’s act that causes loss to the plaintiff is an act that hasn’t been authorized or contemplated by the contract then an EC cannot protect the defendant from liability of damages flowing from the act, as seen in Council of the City Sydney v West.

Such an act is said to be outside the scope, or four corners, of the contract.

5 - Exclusion Clauses and Negligence

For negligence by a contract breaker to be within the scope of an EC it is clear that it must be clearly intended that the clause covers negligence: Davis v Pearce Parking Station

3 rules that apply to Exclusion Clauses and how they are construed in the event that the plaintiff’s loss is due to negligence of the defendant, have been summarized in Canada Steamship Lines Ltd v The King:

i) An express exemption of liability for negligence will effectively exclude liability on the part of the defendant;

If the EC explicitly excludes liability for negligence it ill be effective…words such as ‘howsoever caused’ and ‘under no circumstances’ will generally be said to incorporate negligence: Rutter v Palmer

ii) Where there is no express reference to negligence, the court needs to determine if the words used are wide enough to exclude negligence, with any doubts on this to be resolved by applying the contra proferentum principle.

If the only way in which the defendant could be liable for breach of contract is by acting negligently then a clause that makes no mention of negligence will usually be sufficient to exclude liability for the defendant Alderslade v Hendon Laundry Ltd

iii) If the words used are wide enough to cover negligence but also encompass other grounds of liability other than negligence, the clause will be read as applying only to the ground of liability and will not operate to exclude the claim for negligence.

Topic 6 Continued on page 2...

Exclusion Clauses and Legislation

Exclusion Clauses and Legislation
(Everything below here is straight off Lecture Notes)

Important legislative provisions have been enacted limiting the application of exclusion clauses. One of the most important examples of legislative intervention in this respect is found in ss 68-68A of the Trade Practices Act 1974 (C’th). A less specific statutory intervention is by means of the Contracts Review Act 1980 (NSW).

The Trade Practice s Act 1974 (C’th)

Section 68 of the Trade Practice s Act 1974 stipulates as follows:

(1)          Any term of a contract (including a term that is not set out in the contract but is incorporated in the contract by another term of the contract) that purports to exclude, restrict or modify or has the effect of excluding, restricting or modifying:

(a)        the application of all or any of the provisions of this Division;

(b)        the exercise of a right conferred by such a provision;

(c)        any liability of the corporation for breach of a condition or warranty implied by such a provision; or

(d)        the application of section 75A; is void.

(2)          A term of a contract shall not be taken to exclude, restrict or modify the application of a provision of this Division or the application of section 75A unless the term does so expressly or is inconsistent with that provisions or section.

Thus, the effect of s 68 relates to the consumer protection provisions in Part V, Division 2 (ss 66-74) and s 75A. For a clause to be void under s 68 it must ‘exclude, restrict of modify’ the operation of the provisions in Part V, Division 2 (ss 66-74) or s 75A. Whether a clause does this is a matter of construction of the clause.

Two of the more significant provisions in Part V, Division 2 are s 71 which stipulates an implied condition that goods supplied by a corporation to a consumer are of merchantable quality, and s 74 which stipulates an implied warranty that services supplied by a corporation to a consumer will be rendered with due care and skill and that any materials supplied in connection with those services will be reasonably fit for the purpose for which they are supplied.

There are qualifications to the application of s 68 as follows:

(i) Section 68A places qualifications upon the provisions of s 68. Thus, by s 68A(1), if a corporation supplies good or services, other than for personal, domestic or household use, a clause will not be void under s 68 if it limits the corporations liability to: (a) in the case of goods, replacing or repairing goods or paying for the replacement or repairing of goods, or, (b) in the case of services, to supplying or paying for the supplying of the said services. However, s 68A(1) will not apply if it is established that it is not fair and reasonable for the corporation to rely upon it: s 68A(2). In determining whether or not reliance upon the term by the corporation would be fair and reasonable the court should consider all the circumstances of the case including the relative bargaining strength of the parties, any inducement by the buyer to agree to the term, whether the buyer had the opportunity to buy the goods or services without the term being included in the contract, whether the buyer ought to have reasonably known of the term, and in the case of goods, whether the goods were manufactured or provided to meet a special order of the buyer: s 68A(3).

(ii) The conditions and warranties in Division 2 of Part V only apply to consumers. By s 4B ‘consumers’ are broadly defined as persons (including corporations) buying goods or services at a price less than $40,000, or if the contract is for more than $40,000 the goods or services are of a kind ordinarily acquired for personal, domestic or household consumption or in the case of a motor vehicles, the vehicle is used for transport of goods on public roads. In the case of goods they must also not be purchased for the purpose of resale or use in a process of transforming them into something else by some process of manufacture or production.

The Contracts Review Act 1980 (NSW)

Under s 7 of the Contracts Review Act 1980 (NSW) a court can, inter alia, declare a term of a contract void if it is unjust. Thus, if an exclusion clause is found to be unjust within the meaning of the Act it could be declared void. In John Dorahy’s Fitness Centre Pty Ltd v Buchanan (Court of Appeal in NSW, 18 December 1996, Unreported) an exclusion clause which effectively excluded the defendant from liability in both tort and contract was, in the particular circumstances of the case, found to be unjust. A more detailed analysis of the Contracts Review Act will be undertaken later in Lecture 11.