PRINCIPLES OF CONTRACT LAW

Apply Principles of Contract Law

  7.1

Consider the following sequence of events that typifies a normal working day.

 David, an accountant, is woken on a Tuesday morning by the sound of his gardener mowing the front lawn. He quickly showers, eats breakfast and then drives to work.

 He leaves his car with the mechanic across the street in order to have his brakes fixed.

 At work he negotiates with his IT company to provide him with 3 new laptop computers and confirms his order with an email.

 He then places an advertisement in the local newspaper for a new receptionist.

 He meets with a new client and agrees to prepare the client’s tax return.

 At lunch time Dave has a cup of coffee at the local sandwich shop before going to the department store and buying a new shirt.

 After lunch, the local catering company delivers the finger food that was ordered for the afternoon meeting with another new client.

 Before the meeting, Dave renews his subscription to National Geographic, waits while the cleaning company vacuums his office, and signs an exclusive agency authority with the estate agent for the sale of his house.

 He then attends the meeting that had been planned and signs heads of agreement with the other parties to establish a joint financial venture.

 Before going home, Dave picks up his car, stops at the supermarket to buy a roast chicken and attends his karate class.

 After dinner, Dave reads the paper that was delivered in the morning makes a cup of coffee with his new espresso machine and goes to bed.

 In the above example of what would not be an untypical business day, there are no less than sixteen different examples of contracts that were made that day or of activities that, in some way, originated with the entering into a contract by Dave and another party

Identify each of the sixteen contracts that make up David’s day and briefly explain why each would be a contract.

ANSWER – 7.1:

In order to discuss the various forms of contracts which are applicable in this case study, it is essential to understand the definition of ‘Contract’. A contract is an agreement between two or more individuals or entities where a promise to do something is given and in return some valuable consideration is promised. A contract can be in writing or oral or a combination of both, asserts Tarakson, (2004). It can also be an ‘express’ or an ‘implied’ contract or a combination of both. Now we take a look at the various contracts that occurred in a day of David’s life.

7.2

Debra sees a dress advertised in the window of a boutique for $567.00. She goes into the shop, tries the dress on and says that she will buy it. She is then told by the shop assistant that there has been an error and that the actual price is $650.00. Debra demands the dress at the advertised price. The shop assistant says she will accept $610.00. Debra agrees to pay $610.00.

Analyze each step in the transaction by providing an explanation of each:

ANSWER – 7.2:

It is essential to understand the principles of laws which cover the shopkeepers when they display their merchandise in the shop windows and advertise a certain price on the goods displayed. In legal terms this is known as ‘Invitation to Treat’ and simply means that the shopkeeper has indicated a ‘Negotiable Price’ for the displayed merchandise and is now asking for an ‘Offer’ from the customer. Upon receiving the ‘Offer’, the shopkeeper has the right to ‘Quote’ a ‘Sale Price’. The negotiation between the two parties on the price and the final acceptance of the offer by one party to the other shall culminate the deal between the two parties and bind them by the laws of contract, according to Gillies, (1988).

Consider Meredith’s Dilemma! (you may need to research some of the technical terms used).

Meredith advertises that she is a conveyancer and will complete a conveyance for $500.00*(conditions apply). Harold who has purchased a house has seen Meredith’s advertisement in the local paper and has asked Meredith to act as his conveyancer on the purchase. Meredith undertakes the work. In the course of the conveyance she completes a search of the Certificate of Title. Unfortunately, she fails to notice that although she has applied to the Land Titles’ Office for the correct title, the Land Titles’ Office has sent her a copy of a title to the neighbouring block of land. This title shows no encumbrances on the property. Because Meredith’s settlement clerk is ill, Meredith sends her inexperienced son to settlement. After settlement, Meredith cannot lodge the transfer of land as it transpires that there is a caveat on the title.

Now answer each of the following questions.

8.1

Meredith advertises that she is a conveyancer and will complete a conveyance…..

(a)  What is the legal nature of this advertisement?

ANSWER – 8.1(a):

In legal terms this is known as ‘Invitation to Treat’ and is an indicative offer of services which will offered by Meredith for this ‘Indicative Price’, asserts Gillies, (2004).

(b)  Can Meredith refuse to accept a client who responds to her advertisement? Why?

ANSWER – 8.1(b):

As explained above, the offer made by Meredith in the advertisement is only an ‘Invitation to Treat’. Her acceptance of an ‘Offer’ made by a respondent to the advertisement will depend only on her fully understanding the job offered, asserts Gillies, (2004).

(c)   What is the nature of the offer made?

ANSWER – 8.1(c):

Harold has made an ‘Offer’ to Meredith of preparing a conveyance of purchase for the house that he has purchased, asserts Gillies, (2004).

(d)  What evidences that the offer has been accepted?

ANSWER – 8.1(d):

Meredith, on receiving the ‘Offer’ from Harold has conveyed her ‘Acceptance’ by commencing work on the conveyance deed. Her application to the Land Titles’ Office is evidence that she has undertaken to complete the job, asserts Gillies, (2004).

8.2

…..for $500.00.

(a)  Is Meredith bound contractually by this amount? Why or why not?

ANSWER – 8.2(a):

On the terms of invitation to treat, Meredith is not bound by this indicated amount she has put in the advertisement. But once Meredith ‘Accepts’ an ‘Offer’ by a respondent to the advertisement, she is ‘Contractually’ bound, as the terms of the ‘Implied Contract’ have been completed by both the parties, asserts Gillies, (2004).

(b)  Do you need additional information before you can answer this question?

ANSWER – 8.2(b):

In my opinion and from the details furnished in the case study, there is no further information needed to arrive at the above noted 8(a) conclusion.

8.3

Harold…….. has asked Meredith to act as his conveyancer on the purchase.

(a)  What is the nature of this request?

ANSWER – 8.3(a):

It is an ‘Offer’ by the respondent to the advertisement put in the local newspaper by Meredith.

8.4

Meredith undertakes the work.

(a)  By starting to do the work, what has Meredith impliedly undertaken?

ANSWER – 8.4(a):

Meredith has ‘Accepted’ the ‘Offer’ made by the respondent to her advertisement. This is an ‘Implied Contract’ that has now been entered into by the two parties, as per Tarakson, (2004).

8.5

Unfortunately, she fails to notice that although she has applied to the Land Titles’ Office for the correct title, the Land Titles’ Office has sent her a copy of a title to the neighboring block of land.

(a) What issues are raised by this transaction both with respect to the Land Titles’ Office and

Meredith?

ANSWER – 8.5(a):

When Meredith applied to the Land Titles’ Office for a copy of the title and the Land Titles’ Office forwarded a copy to her, an ‘Implied Contract’ is deemed to have been entered into by the parties and Meredith is entitled to receive the demanded papers. Because the Land Titles’ Office failed to give the demanded papers to Meredith, it conducted a breach of the contract and Meredith, on the legality of the Contract Law, can make a claim for damages and is also entitled to have a correct copy of the land title demanded, as per Tarakson, (2004)..

10.1

Give an example of a breach of contract where a court would award specific performance instead of damages. Explain your answer.

A breach of contract occurs when the party who has accepted to do the work is unable to perform it to the satisfaction of the person offering the job.  In such cases the court will make an award of ‘Specific Performance’. In such cases the court wishes to maintain that such orders do not cause undue hardship to the defaulting party and it finds that the damages would not offer the appropriate remedy. In cases where the court is satisfied that the damages or compensation for loss can cover up the default and would offer a sufficient and appropriate remedy, it would not pass orders of specific performance, asserts Monahan, (2001).

A Sample Case Study

Tamplin v James (1880) 15 Ch D 215

This 1880 case of Tamplin v James is the most widely cited case on the topic of specific performance. The judgment by the Court of Appeals’ Learned Judge Brett’s judgment is cited in Voumard: The Sale of Land for the proposition, which says that:

‘For the most part the cases where a defendant has escaped [specific performance] on the ground of a mistake not contributed to by the plaintiff, have been cases where a hardship amounting to injustice would have been inflicted upon him by holding him to his bargain, and it was unreasonable to hold him to it’.

It is also the most cited case by appellate courts as a case of authority on specific performance. The High Court of Australia has also made reference to the case by citing that “a party to a contract cannot… escape specific performance by simply swearing that he did not understand it”.

10.2

Give an example of a breach of contract where a court would award damages instead of specific performance. Explain your answer.

Although there are a number of remedies available for breach of contract, it is for the courts to decide which remedy is appropriate in the case concerned. However the most common remedy proposed by courts in commercial disputes is ‘Damages’ which in commercial terms means ‘Monetary Compensation’. The main idea behind such an award by the courts is to compensate the loss faced by the aggrieved party and to allow the default party a chance to learn from its mistakes. In judicial parlance damages are not considered as punishment. Specific performance is not considered to be possible in such cases, which pertain to contracts concerning land deals and sale of antique ware where the defaulting party cannot justify the loss by a performance, asserts Monahan, (2001). However courts are also of the view that the aggrieved party should not ‘sit on its hands’ meaning that it should take whatever possible steps it can take to minimize its losses.

A Sample Case Study

Jarvis v Swan Tours [1972] 3 WLR 954 Court of Appeal

Mr. Jarvis was a practicing solicitor at Barkley when he decided to take a 15 days holiday in Switzerland. He came across a brochure of Swan Tours, which claimed that it was a reputed tour operator. The company also claimed providing many benefits to the tourist who while on his tour and travel across the skiing areas of Switzerland would enjoy. It made promises like provision of an English speaking hotel owner, many skiing excursions, afternoon tea with cakes and a Yodler evening.

Upon his availing the tour, Mr. Jarvis found that most of the promises were either not fulfilled or were fulfilled partly. On his return he filed a suit for damages. The trial court judge awarded him damages of £30, noting that the promises were fulfilled partly and Mr. Jarvis was not entitled for compensation for the anxiety and distress caused because of this. Mr. Jarvis appealed and a High Court judgment held his stand as justified and awarded payment of full damages. It was held by the court that when a specific contract is entered to provide enjoyment or entertainment to a person while on a leisure tour, he is entitled for damages caused by disappointment, distress and frustration.

10.5

Look at the example of Arnold/Bob/Richard on page 30 of the learner resource. How could the facts be changed to put Richard in a situation where he could recover from Arnold? Explain your answer.

In this case study the ‘Privity of Contract’ doctrine of the Contract Law comes into force. According to ‘Privity of Contract’ law says that only those persons who are part of the contract have the right to enforce the terms of the contract, as per Tomasic, Bottomley & McQueen, (2002). In the present case study, the contract is between Arnold and Bob, although the dispute of payment actually involves Richard and Arnold. But since Richard is not part of the contract that involves the monetary transaction, he cannot legally bind Arnold to pay him. As per the terms of the contract however, Bob can sue Arnold for the breach of contract and can even force him to make the payment to Richard. To give right of payment directly to Richard, Bob can enter into a contract with him and in relevance to the contract between Bob and Arnold, can specify that the payment, as and when received by him, shall be paid directly to Richard.

11.1

In this exercise you are required to detail a complex work place fact situation giving rise to a contract and various possible breaches of the contract. (If necessary, you can put forward different fact scenarios). In each situation you are required to identify the steps giving rise to the formation of the contract, the steps giving rise to the breach of the contract and the remedies that are available for the breach. You should cover at least six remedies.

Herbertsons is an engineering company which specializes in large turnkey air-conditioning projects. Herbertsons is engaged by Phip Laboratories to undertake the reconditioning of its old air-conditioning plant at its factory which has been closed for the last four years. The contract drawn between Herbertsons and Phip Laboratories contains a number of conditions and some significant terms of the contract include the following.

a)     Herbertsons is required to obtain an ‘Environment Clearance Certificate’ from the Environment Board.

It is a mandatory condition for all equipment and machinery that can have a detrimental effect on the environment. Phips Laboratories cannot commence the operational use of the air-conditioning plant if the ‘Environment Clearance Certificate’ is not obtained by Herbertsins from the Environment Board.

b)     Herbertsons shall retain the services of Denso Suppliers for supply of spare parts for the reconditioning work.

Phips Laboratories have been availing the services of Denso Suppliers for supply of spares for its other air-conditioning plants and finds it a trustworthy business partner.

c)     Herbertsons shall carry out the full reconditioning work for a total consideration of $200,000.

After the negotiations, this is the agreed amount of services offered by Herbertsons and does not include the payment of spares, which Phips Laboratories shall make directly to Denso Suppliers.

d)     Herbertsons shall retain the services of a First Class Medical Officer at the worksite during the duration of the work.

A mandatory requirement by the Health Services Department, it is to be complied by both Herbertsons and Phips Laboratories.

e)     The work shall be completed within the specified period of eight weeks, without any break.

A condition put in by Phips laboratories because it is bound by its manufacturing license to commence production within a period of 12 weeks.

A breach of contract between the two parties can occur if even one of the above mentioned five important terms of the contract is not fulfilled and the reasons for non-fulfillment can be:

a)     Herbertsons is denied the requisite ‘Environment Clearance Certificate’ by the Environment Board.

b)     Denso Suppliers is unable to supply in time the required spares.

c)     Upon a detailed inspection of the old plant, Herbertsons finds that it is financially not viable for it to carry on the work.

d)     A close inspection of the plant warrants that certain machines need to be replaced as they are beyond repair. Both parties are unable to reconcile on the cost of replacement.

e)     Herbertsons fails to provide the services of a first class medical officer at the worksite.

f)      Despite its best efforts, Herbertsons is unable to complete the job in the required period of time.

It is not that such contracts, with so many critical terms and conditions of operation are not breached or do not face the situation where solutions seem impossible. But in such circumstances, there are always remedies available to stop the breach and carry on with contract, provided both the parties are sincere in their efforts and also both realize that a breach at such a late stage shall prove to be financially harmful for both of them. In the above case study, the following remedies can be availed by either of the parties to the contract.

a)     Both the parties can make joint representation to the Environment Board and sort out the situation in consultation with the authorities.

b)     In such a situation, it is in the interest of Phips Laboratories to forego its condition of solely engaging Denso Suppliers and let Herbertsons take charge of arranging the critical spares.

c)     Both the parties should sit down and amicably sort out the financial difficulties being faced by Herbertsons. After all it will also be in the interest of Phips Laboratories to not enter into litigations and waste its time and financial resources.

d)     In such a situation, if Herbertsons was genuinely not in a position to make a full assessment of all the old machines, it would be mutually beneficial for both the parties to come to an agreement on replacement of the worn out machinery and Phips Laboratories should bear the financial burden.

e)     Under such conditions, Phips Laboratories should make arrangements to engage the services of a medical officer and make arrangements with Herbertsons by deducting the payment from its bills.

f)      There is every possibility that Phips Laboratories has another 4 weeks in hand before commencing production, so it can settle with Herbertsons to speed up the job and complete it within the stipulated extension.

12.1 Research exercise.

In your State, identify the hierarchy of Courts. In so doing complete the following questions for each court.

(a)  What is the name of the court and where does it stand in the State hierarchy of courts?

(b)  By what Act of Parliament has the court been established?

(c)   What are the limits set on that court to hear breach of contract disputes?

In New South Wales, the hierarchy of courts is in the following order, assert Tomasic, Bottomley & McQueen, (2002):

Local Courts

The First Charter of Justice, established in 1787 gave the Governor, Lieutenant Governor and Judge Advocate powers to convene a criminal court. The origin of NSW Local Court goes back to the days when the Bench of Sydney Magistrates was established by Governor Phillip in the late 18th century. It is now made up of more than 150 courts which have the power to hear Civil, Criminal and Family Law cases. Now being the largest court in Australia, it is where criminal and civil cases first enter the court system.

Land & Environment Court

The Land and Environment Court of New South Wales is the first specialist environmental court in the world. It was established by the Land and Environment Court Act of 1979 on 1 September 1980.

Industrial Relations Commission

The Industrial Court was established by the Industrial Disputes Act of 1908 and is managed by the Industrial Relations Commission.

District Court

It hears serious criminal offences and appeals from lower courts and civil proceedings. This court was established as a result of the District Court Act 1858 (22 Vic No 18) which was passed on 12 November 1858.

Supreme Court

It is the highest court in NSW and has unlimited civil jurisdiction. It hears the most serious criminal matters. It was established by the 1823 Charter of Justice.

12.2 Research exercise.

Can the Victorian Civil and Administrative Tribunal hear cases relating to contracts? In which of its several jurisdictions can it determine contract disputes?

The Victorian Civil and Administrative Tribunal (VCAT) works on the basis of a number of “Lists” (Sections). These sections specialize in particular types of cases. The process of proceeding in a case begins when a appeal is filed for availing the services of VCAT under the relevant list. The VCAT settles a dispute through mediation, directions, hearing or compulsory conference. The procedure depends on the matter of the case, as per Tarakson, (2004).

REFERENCE LIST 

Gillies, P. 1988. Concise Contract Law. Federation Press, Annandale, NSW.

Gillies, P. 2004. Business Law. 12^th ed. Federation Press, Annandale, NSW.

Monahan, G. 2001. Australian Essential Contract Law. 2^nd ed. Routledge, New Port, NSW.

Tarakson, S. 2004. Everyday Law. 2^nd ed. Federation Press, Annandale, NSW.

Tomasic, R., Bottomley, S. and McQueen, R. 2002. Corporation Law in Australia. 2^nd ed. Federation Press, Annandale, NSW.

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