The legal system is the framework in which the law operates; the law creates standards of conduct and the courts enforce those standards.
The legal system involves those who:
• Make the laws
• Apply the laws
• Enforce the laws
• Advise on the laws
• Administer the law
• Teach and research the law

The legal system ‘works’ when its laws are:
• Certain
• Flexible
• Known
• Reasonable
For a legal system to work, its laws must be respected, observed, obeyed and the authority of the lawmaker must be respected and supported.
Contracts are used within the legal system to protect the rights of parties that reach an agreement or a mutual understanding.
Both the common law and statutory laws have application to contracts.
The rules with respect to the essential elements of a contract are predominantly common-law based, but some have been modified by statute. For example, there are numerous statutes protecting consumers. The majority of these are state rather than federal statutes, because the Commonwealth Constitution restricts the law-making of the federal parliament to certain matters. One important piece of legislation also discussed later, is the Trade Practices Act 1974 which was replaced by the Competition and Consumer Act 2010.
There has been a steady increase in legislation over the centuries to a point where it rivals the common law as a source of law governing contract law. Legislation law, statute law, made by Parliament, is a particularly important source of law because, apart from its volume (at all levels in Australia), the rule is that if common law and statute law conflict, the latter prevails. Furthermore, we turn to Parliament to pass laws that are required to deal with social change because the common law moves at a snail's pace by comparison.
An understanding of the law of contract is of fundamental importance to the functioning of the legal system in the context of business practices and conveyancing.
What is a Contract?
A 'contract' is defined in The Law of Contract (9th edn, Sweet & Maxwell, London, 1995) as 'an agreement giving rise to obligations that are enforced or recognised by the law'.
Put simply, a contract is a promise or set of promises which the courts will enforce.
When you agree to buy something now and pay for it later or take out a loan, you enter into a contract. The contract is between you and the person or organisation that you bought or borrowed from. However, contracts differ from a mere agreement that you might make with a friend or family member as a contract (unlike a mere agreement) is legally binding and can be enforced be the courts.
As a contract is a legally binding agreement between two or more people or businesses, contracts are considered to form the foundation of all business.
Task Requirements
Contracts can be complex. It is important that you fully understand the terms of a contract and any task requirements under the contract.
There is no specific format that a contract must follow. Generally, it will include some terms, either expressed or implied, that will form the basis of the agreement. The terms of a contract are its contents. The terms define the obligations of each party and outline contract conditions or contract warranties (i.e. what is required under the contract/ task requirements under the contract).
Contracts may follow a structure that can include, but are not limited to, the following items:
• Details of the parties to the contract, including any sub-contracting arrangements
• Duration or period of the contract
• Definitions of key terms used within the contract
• A description of the goods and/or services that your business will receive or provide, including key deliverables
• Payment details and dates, including whether interest will be applied to late payments
• Key dates and milestones
• Required insurance and indemnity provisions
• Guarantee provisions, including director’s guarantees
• Damages or penalty provisions
• Renegotiation or renewal options
• Complaints and dispute resolution process
• Termination conditions
• Special conditions
Always read every word of a contract, including the fine print, to identify the terms and conditions of the contract and confirm these with your client to ensure:
• The contract reflects the terms and conditions that were negotiated
• You and your client understand what is required under the contract.
Sometimes it is necessary to also determine whether a statement or representation is a term of contract and, if so, whether it is a condition of the contract or a warranty under the contract. We will discuss this in further detail later in the unit.
 
Lesson 2 of 11
1.2 Identify Type of Contract
Contrary to what people think, a contract can exist in the absence of a written agreement.
Contracts can be verbal (spoken), written or a combination of both. Some types of contracts, such as those for buying or selling real estate or finance agreements, must be in writing. We deal with these types of contracts in further detail later in this unit.
Written Contracts
Written contracts may consist of a standard form agreement or a letter confirming the agreement. They are a formal document which clearly sets out the details of what was agreed between parties in writing.
It is advisable (where possible) to make sure your business arrangements are in writing, as a written contract will give you more certainty, minimise your business risks by making agreements clear from the outset and enable you to avoid the problems associated with trying to prove a contract existed.
Verbal Contracts
Verbal contracts rely on the good faith of all parties and can be difficult to prove. They are a simple form of contract between parties where parties have merely verbally agreed to do certain things. For example, a handshake agreement is a verbal contract.
Verbal contracts can lead to uncertainty about each party's rights and obligations. A dispute may arise if you have nothing in writing explaining what you both agreed to do. A handshake agreement may be enforced by a court (though often with difficulty).
Part Verbal, Part Written Contracts
There are circumstances where a written contract does not contain the whole of the agreement between the parties. This is where part verbal, part written contracts come in.
An obvious example of a part verbal, part written contract is when a written offer is accepted verbally. In this scenario, the contract between the parties is both in writing and verbal.
When identifying the type of contract, always confirm your client’s understanding of the agreement. This will enable you to understand whether the contract is verbal, written or a combination of both!
Lesson 3 of 11
1.3 Research Key Elements of Contract
Regardless of whether an agreement is verbal or written or a combination of both, before the law will regard an agreement as a legally binding contract, a number of essential elements must exist.
Not all agreements form legally binding contracts which are enforceable by law.
For a contract to be legally binding (and therefore valid and enforceable), it must contain:
• 1

An offer - an offer is made by one person to another
• 2
An acceptance -an offer made by one person is freely accepted by another
• 3
An intention to create a legal relationship - the people entering the contract must intend the contract to be binding
• 4
Consideration (usually money) -some price (money, right or benefit) is paid in return for a promise.
However, a contract may still be considered invalid (and therefore unenforceable) if it:
• 1

Entices someone to commit a crime, or is illegal
• 2
Is entered into by someone that does not have the legal capacity, such as a minor or bankrupt
• 3
Was agreed through misleading or deceptive conduct, duress, unconscionable conduct or undue influence
• 4
Breaches other legal requirements
So, to have any legal significance, a contract must have the following six essential elements:
• 1

Offer and acceptance
• 2
Intention to create legal relations
• 3
Consideration and/or form
• 4
Legality of objects
• 5
Legal capacity
• 6
Genuine consent
An easy way to remember the above six elements is to remember the word FROLIC:
F form and/or consideration
R reality of consent
O offer and acceptance
L legality of object
I intention to create a legal relationship
C capacity of parties
We will now discuss each of these elements in turn.
Offer and Acceptance
Offer and acceptance requires a meeting of minds. There must be an offer made by one party and an acceptance of that offer by another.
An offer is a proposal. When it is accepted, it creates a legally binding agreement-a contract.
All the terms of an offer must be communicated. For example, a condition may be that the offer will only remain open for a specified period. An offer may specify conditions to be followed by the offeree. It may, for instance, specify that acceptance must be made in writing to the offeror.
Invitation to treat
An offer must be distinguished from an invitation to treat. An invitation to treat invites people to make offers. The main difference between an offer and an invitation to treat is that a person making an offer intends to be bound, whereas a person making an invitation to treat does not intend to be bound.

An item that appears in a shop 'window with a price tag on it is an invitation to treat. For example, a pair of trousers with a price tag of $75 (or an item in an advertising catalogue) is regarded by the law not as an offer but as an invitation to treat.

This is an invitation for persons interested in buying the article to make an offer to purchase. In the above example, if a person takes the trousers to a counter in order to purchase them they are making an offer to purchase. The offer can be accepted or rejected by the seller.

Advertisements can be an offer to treat. In some cases, an advertisement can be an offer if that is the intention of the advertising.

Circulars
If a circular contains a request for a person to send money it may be regarded as an offer, as
illustrated by the following case example.

Re Mount Tomah Blue Metals (1963) 4 FLR 478
FACTS: A circular requested shareholders in a company to subscribe money for conduct of the company's business and the discharge of its liabilities.

DECISION: The court held this was a request that would result in the performance of an act-the act being acceptance by shareholders. Therefore, it was an offer
and not an invitation to treat. The company was requesting a loan and offering debentures to those who sent money to the company.

Auctions
When an auctioneer calls for bids at an auction, this is only an invitation to treat. He or she is inviting those present at the auction to make an offer. A bid is regarded as an offer, it is then up to the auctioneer to either accept or reject that bid. When there is no reserve price, the auctioneer will accept the highest bid and, once the hammer has fallen, a contract has been made.

An advertisement stating that an auction will be held is generally regarded as an invitation to treat.

Online auctions
It is now commonplace for people to buy and sell goods on the Internet using online auction sites such as eBay. When goods are listed for sale on sites such as eBay the listing is generally regarded as an offer that can be accepted by any bidder who agrees before the auction closes, to pay the reserve price or the highest price above the reserve, as illustrated by the following case example.
Smythe v. Thomas (2007) NSWSC 844
FACTS: Vin Thomas owned one of the few restored World War II Wirriway Fighter planes in the world. On 15 August 2006 he listed the plane for sale on eBay. The plane was listed for a seven-day auction period with a reserve price of $150 000. eBay's terms and conditions provided that Thomas was obliged to sell to any person who lodged the minimum bid or above by the close of the auction. In addition, Thomas listed the plane for sale at $275 000 under eBay's fixed price 'Buy Now' section.

On 13 August Peter Smythe phoned Thomas asking, 'If I enter the winning bid would you accept a $10000 deposit within 7 days and the remainder within 6 weeks?' Thomas responded: 'Yes, but the final payment must occur within that time. This is non-negotiable. You should also be aware that I would like to get $250000 and I have received an expression of interest for $220 000 from a Queensland collector'.

On 15 August Smythe lodged a bid of $150 000 (the only bid received) only 10 seconds before the auction closed.

He received an email from eBay saying 'Congratulations, the item is yours. Please pay now'.

On 27 August Thomas advised Smythe that he would not sell for $150,000. Smythe sued for breach of contract and for an order for specific performance. Thomas claimed he was not in breach of contract because:
• No contract existed between them. They both had a contract with eBay but not with each other.
• There was no agreement because the listing on ebay was an invitation to treat not an offer. Smythe's bid was an offer that could be either accepted or rejected.
• Even if the auction did involve an offer and an acceptance, all the terms were not agreed upon because the parties had not agreed on the specific time or payment.
DECISION: The court held that a binding contract had been made which Thomas was obliged to specifically perform because the goods in question were unique. Thomas was obliged to sell the plane to Smythe for $150 000.

The court expressed the view that an online auction differs from a traditional auction in a number of ways. First, eBay does not take on the role of a traditional auctioneer. It does not act for the seller. Secondly, it does not enter a contract on behalf of the seller.

The court decided that when the parties agreed to be bound by eBay's terms and conditions they agreed to enter a contract that would be formed if and when a minimum bid was lodged by the deadline and the bidder was advised that he or she had 'won'.

Despite the fact that parties had not agreed on specific payment terms, the court held that on balance the parties entered a binding agreement when the bid was accepted.

Tenders
An advertisement for tenders is usually considered to be an invitation to treat. Any tender received following the advertisement will amount to an offer. A binding contractual obligation may arise if the invitation to tender specifies the exact needs of the person placing the tender and their tender is then accepted by the person who invited tenders to be submitted.

Sometimes tenders are called for in respect of the supply of goods or material that may or may not be required. If a tender is submitted to supply goods on an ‘if required’ basis it is called a standing offer.

Termination of an offer
There are several ways in which an offer can be terminated. An offer may be terminated due to:
• Lapse of an offer
• Revocation of an offer
• Rejection of an offer
• Death of the offeree or offeror
• Non-occurrence of a condition
For example, if acceptance of an offer is not made within the time stated or, where no time is stated, if the acceptance of an offer is not made within a reasonable time, the offer will lapse and can no longer be accepted.

The meaning of a 'reasonable time' will be considered objectively. If perishable goods are the subject matter of a contract, then a 'reasonable time' will be far less than for goods that are not perishable

It is permissible for an offeror to say that an offer will remain open for a certain time and then to withdraw the offer before the expiry of that time. This is allowed as long as no acceptance has been made.

It is important to remember that an offer will also be terminated if a counteroffer is made. If a counter offer is made, the original offer will lapse. A counter offer is a rejection of an offer by the putting of an alternative offer. For example, Paul offers to sell his car to Bob for $5000. Bob says he will buy it for $4500. This is a counteroffer. The original offer lapses: it is no longer in existence and cannot be accepted.

Acceptance of an Offer by Post (Contracts by Post)
Special rules apply where an acceptance is to be made through the postal system. An acceptance that is made through the post is effective when the letter of acceptance is placed in the postbox. Provided the letter has had its postage fees paid and is addressed correctly, acceptance occurs on posting. This is the case even if the letter is mislaid and never reaches the offeror. This rule is called the postal rule.

The postal rule developed in England in the late 1800s when the postal system was the principal means of communication. There were no instantaneous communication systems such as telexes, facsimile machines and email.

The postal rule applies only if the postal system is contemplated as a mode of acceptance of an offer. This will usually be the case if the offer itself was posted.

It is possible to exclude the operation of the postal rule. The offeror can specify that acceptance will not take place until actual receipt of the notification of acceptance occurs. The postal rule only applies to acceptances, not to offers. An offer made through the post will not be effective until it is received and read by the offeree.

It is possible for an offer made by post to be revoked by the offeror. However, revocation will be ineffective unless it is communicated to the offeree before the letter of acceptance is posted

Instantaneous Acceptance of an Offer
The postal rule does not apply to means of communication that are virtually instantaneous (e.g. telex, telephone, facsimile machines or email). Unless there is actual communication, no contract will be created. The postal rule does apply to telegrams, which are treated as letters and not as instantaneous communications.

The Electronic Transactions Act 2003 provides that where parties have agreed on the conditions for electronic communication, emails and other electronic communications are deemed to be sent when they enter a single communications system outside the sender's control. Therefore, the time of acceptance would be the time the acceptance is received by the offeror's server.

Acceptance must be in reliance of an offer
A person cannot accept an offer unless they are aware of it. Acceptance may occur simply by the doing of an act-for example, returning property pursuant to a reward. If the person returning the property to its owner has no knowledge of the reward, they therefore have no knowledge of the offer. Their action of returning the item cannot amount to acceptance as this act was not done in reliance of the offer. Sometimes a person may accept an offer, but their act of acceptance is not in reliance of the offer. It may have been made for some other reason.
Acceptance must be unqualified
To create a valid contract, an offer must be accepted without qualifications. If acceptance is qualified, the law will generally regard it as a counteroffer. For example, Ian offers to sell his refrigerator to Francesca for $300 and she accepts but says she can only make payment in three payments of $100, then this is a qualified acceptance. It will be regarded as a counteroffer.
Conditional acceptance
A conditional acceptance is not an effective acceptance unless the offeror agrees to the condition.

A common condition is for the acceptance to be subject to obtaining finance. If finance is subsequently arranged, the condition will be satisfied and a contract will be created.

A tentative agreement between parties is a form of conditional acceptance. Often the expression 'subject to contract' is used (i.e. the party agrees subject to a contract being drawn up). Whether a binding contract exists depends on the intention of the parties as disclosed by the language used.

Acceptance can only be made by a party to the contract
Acceptance can only come from an offeree-that is, a person who has received an offer. For example,
if Amy makes an offer to Boris, it is not possible for Craig to accept the offer as an offer was not made to him.

Revocation of acceptance
An acceptance, once given, cannot be revoked unless the offeror consents. This is because a bargain has been concluded-that is, a contract has been made, provided the other essential elements required to form a contract are present.
Time
Acceptance must take place within a prescribed time. If no time is prescribed, then acceptance must take place within a reasonable time.
Intention to create a legal relationship
The parties to the contract must intend their agreement to be legally enforceable.
Not all agreements give rise to legally enforceable obligations. People who make agreements must intend the agreement made will give rise to a legally enforceable obligation.
To determine whether there is an intention to create legal relations, the law looks at the nature of the agreement. If an agreement is of a social or domestic nature, the law has created a presumption that such agreements do not have an intention to create legal relation. A presumption is a conclusion or inference about the truth of some fact.
Social and domestic agreements
Social agreements are made between friends. A domestic agreement is one made between members of the same family or household. For example:
• Two friends agree to play tennis next Saturday. If one person fails to arrive at the agreed time, the law presumes the agreement was not intended to create legal relations. The person who breached the agreement could not be sued for breach of contract.
• A husband agrees to cook dinner for his wife and, in return, she will do the dishes. The husband fails to cook the dinner. The law presumes this type of agreement is not intended to create legal relations. The wife cannot sue the husband for failing to cook dinner.
The reason for the existence of this presumption is simple and sensible. The courts would be flooded with litigants if every social or domestic agreement gave rise to a legally enforceable obligation. The presumption can be rebutted or negated by producing evidence that there is a business or commercial flavour to the agreement, even though it is made between family or friends.

Business agreements
Agreements of a business or commercial nature are treated differently from social or domestic agreements by the law. Business or commercial agreements raise a presumption that there is an intention to create legal relations. Again, this presumption can be rebutted if evidence is produced to show there was clearly no intention to create a legally binding agreement.

If an agreement is made in the course of business dealings, then in the absence of express words to the contrary, the courts will say that legal relations were intended. This presumption can be rebutted by evidence showing no intention was envisaged.

Harley v. McDonald's Australia Ltd (2000) ATPR 41-741
FACTS: In 1999 the plaintiff entered the 'Monopoly Me Match and Win Competition'. There were two conditions attached to awarding prizes to the winners. Winners were ineligible for prizes if they failed McDonald's security and verification checks and McDonald's decision on all matters arising from the competition was final.

DECISION: Entering the competition created a valid contract between Hurley and McDonald's under which McDonald's was legally obliged to award a prize to the winner if the conditions described above were satisfied.

Charitable activities
The issue may arise as to whether participation in charitable or voluntary organisations will give rise to contractual rights and obligations. The following case example deals with this matter.
Teen Ranch Ply Ltd v. Brown (1995) 87 IR 308
FACTS: Brown was injured while working as a volunteer at a camp for teenagers run by Teen Ranch Pty Ltd, a non-profit Christian organisation. Brown argued a contract of employment existed between him and the organisation and therefore he was entitled to workers' compensation.

DECISION: The court held no contract of employment existed between the parties as there was no indication that legal relations were contemplated by the parties. Accordingly, Brown was not entitled to workers' compensation.

The decision in the above case example can be contrasted with the decision of the High Court in the following case.

Ermogenous v. Greek Orthodox Community of SA Inc (2002) 209 CLR 95
FACTS: Archbishop Spiridon of the Greek Orthodox Community in Adelaide applied for annual leave and long service leave from the defendant. The plaintiff claimed that there was no contract between the parties as the agreement lacked an intention to create a legal relationship.

DECISION: The Archbishop had rebutted the presumption that the appointment of a minister of religion is spiritual and not presumed to give rise to a legal relationship. He was successful in his claim for annual leave and long service leave on the basis that his relationship with the community organisation was more than an agreement and that it gave rise to a contract of service.

Consideration and/or Form
For an agreement to be regarded as a contract, it must be supported by consideration.
Consideration can be defined as a mutual promise; something done or promised by one party in exchange for something done or promised by the other party. Both parties must provide consideration.
Mutual promises are the basis of consideration. Consideration can be described as an exchange of value for value.
A contract lacking consideration may be valid if it is in the form of a deed (i.e. a contract under seal).
The terms 'promisor' and 'promisee' are used to describe the parties to a contract in which consideration is present. The promisor is the person undertaking to perform the consideration; the promisee is the recipient of the consideration. In contracts where both parties provide consideration, each party will be both a promisor and a promisee.
Consideration can be classified as 'executory' or 'executed'. Consideration that is still to be performed is termed executory. Consideration that has already been performed is said to be executed.
The following are examples of consideration:
• Martin agrees to mow John's lawn and John agrees to pay Martin $15.
• Bill agrees to fix Anton's lawnmower if Anton services his car.
Promises not supported by consideration are gratuitous promises. They are gifts and are not enforcable unless in the form of a deed.
A deed is a formal written contract that does not require consideration.
Rules with respect to consideration
Consideration is essential to every contract. There are a number of rules with respect to consideration.

Consideration:
• Can be present or future, but not past
• Must be of some value but need not be adequate
• Must be definite, not vague
• Must be capable of being performed
• Must not be illegal or unlawful
• Must be more than a person is already required to do
• Must move from the promisee
• Cannot be satisfied by part payment of a debt
When a party under a pre-existing contractual obligation promises to do something beyond its existing obligation in exchange for payment, this amounts to consideration. The new agreement will be enforceable.

A person cannot seek-to rely on an act as consideration for a contract if they are already under a legal duty to perform that act.

A promise to carry out a pre-existing obligation may create valid consideration if it satisfies the 'practical benefits test'. This requires the promisor to provide some extra consideration. The key aspects of this test are:
• Two parties enter a contract
• One party has strong obligations for refusing to carry out its contractual obligations
• The other party to the contract responds by promising to alter the contract
• The first party relies on this promise and agrees to carry out the terms of the contract
• The compromise means the second named party avoids a detriment or gains a benefit
• No fraud or economic duress is involved.
Generally, part payment of a debt will not be adequate consideration to discharge a debt. For example, Ian owes Diana $500. Diana agrees to accept $400 from Ian in full satisfaction of the debt. Ian may argue that Diana cannot later sue him for the outstanding $100. Legally this argument would be unsuccessful. There is no consideration passing from Ian to Diana in return for her promise not to sue.

The law has created several exceptions to this rule:
• Payment of a smaller sum along with something else (e.g. agreement to perform labour) will discharge the debt.
• Payment of a smaller sum before the debt is due will be enforceable.
• Payment of a smaller sum at a different place or in a different currency can operate as a legally enforceable discharge of a debt.
• Signing a deed of release may discharge the debt.
• Payment may be made by a" third party who is not bound by the contract.
• Agreeing to perform any other act that the debtor is not bound by the contract to perform may result in a legally enforceable discharge.
• By relying on the defence of promissory estoppel, in some circumstances a contract can be altered despite a lack of consideration being provided for the altered promise. This is due to the doctrine of promissory estoppel (see the definition below) that requires several elements
• To be satisfied:
• The promisee has altered their position in reliance on a new promise
• It would be impossible for the promisee to return to their original position without detriment
• I would be unfair for the promisor to renege.
The doctrine of promissory estoppel was developed in the following case.

Central London Property Trust Ltd v. High Trees House Ltd [1947] KB 130
FACTS: In 1937 in England, the plaintiff leased a block of flats to the defendant for ninety-nine years at £2500 per annum. War broke out and it became difficult to fill all the flats. The plaintiff agreed to reduce the rent to £1200 for the duration of the war. When the war ended, the rent reverted to £2500, but the plaintiff claimed the full rent for the whole period.

DECISION: The court held the plaintiff was not entitled to claim the full rent for the whole period (including the war years), despite the fact the defendant had given no consideration for the plaintiff's promise not to demand the full rent entitlement.

Where one party to a contract, by its behaviour, leads the other party to the contract to believe a certain state of affairs exists between them, the courts will support that state of affairs rather than the terms of the contract. It is not possible at a later time for one party to seek to deny the state of affairs. This is called the doctrine of promissory estoppel.

The High Court of Australia confirmed the doctrine applied in Australia in 1983

Legality of Object
The purpose or object of a contract must be legal. Contracts may be illegal either at common law or pursuant a statute. The factors relevant to the question of legality are:
• Contracts illegal at common law
• Contracts illegal by statute
• Effect of illegality
Contracts illegal at common law
There are a number of contracts that are illegal at common law. These contracts are either against public policy or involve the commission of an illegal act. The major categories are:
• Contracts designed to defraud the government of revenue
• Contracts intending to defraud the state or federal authorities of revenue (e.g. contracts intending to defraud in respect of liability for land, sales or income tax).
• Contracts that hinder the administration of justice. For example, a contract made between parties is illegal where one person agrees not to reveal information that could assist in the investigation of a crime.

Public Service Employees Credit Union Co-operative Limited If. Campion (1984) 75 FLR 13'
FACTS: Campion guaranteed repayment of a loan, advanced by the plaintiff credit union to his son, on the understanding the credit union would not report his son to the police for misappropriation of funds from the credit union.

DECISION: The guarantee was an illegal contract as it amounted to an agreement to stifle the prosecution of an indictable offence.

Example of contracts that are illegal at common law include:

• Contracts that are prejudicial to the institution of marriage

An agreement where the parties to a marriage agreed, before they were married, not to live together when married would be against public policy. Marriage brokerage contracts-where one party undertakes to find a marriage partner for another in exchange for a fee-are also illegal.

• Contracts that are sexually immoral

A contract between a prostitute and a client would be illegal. Note that in some states: territories, prostitution has been legalised by statute in certain licensed premises.

• Contracts that promote corruption in public life

• Contracts that involve the corruption of a public official (e.g. bribery) are illegal.

• Contracts that involve a conflict of private interest with duty

Employees or agents who allow their interest, financial or otherwise, to interfere with their duty may be guilty of a breach of duty to their employer or principal.

• Contracts in unreasonable restraint of trade

Contract in restraint of trade is one that restrains or hinders a person's ability to undertake their trade or profession. Such contracts are unenforceable unless they are reasonable. In addition these contracts must also be supported by some consideration.

A contract must be reasonable in the interests of the public and between the parties to the contract. The restriction can be no wider than is reasonable to protect the person for whose benefit the contract is made.

In determining whether a restraint is reasonable, Courts must consider the duration and the extent of the restraint. They also consider whether the restraint is in the interests of the parties to the agreement, and whether it is in the public interest. The duration of the restraint is how long it will be operative. The extent of the restraint refers to the geographical extent of the restraint.

There are two broad categories of contracts in restraint of trade:

Contracts for sale and purchase of a business
These contracts will often include a clause restraining the seller from setting up a competing business nearby. For example, Anna and Peter operate a service station. They decide to sell the business and so enter a contract of sale with Rodney and James. The sellers agree that they will not operate a service station within three kilometres of the old station for three years. This clause is one in restraint of trade, since it restricts Anna and Peter from trading freely. However, this clause could be regarded as reasonable, since it protects the goodwill the purchasers have paid for.

When confronted with a clause in restraint of trade, the court will ask if it is reasonable between this particular seller and buyer. The court will also ask if the restraint is in the public interest. In determining whether the clause is reasonable, the court will consider the duration of the restraint (three years in the above example) and the extent of the restraint (3 km). It will ask whether the restrictions are reasonable in protecting the goodwill that has been purchased.

It is difficult to lay down rules for determining if the duration and extent of a restriction are reasonable. The court will need to consider the facts in each case.

Remember:

reasonable terms = enforceable contract
unreasonable terms = unreasonable terms cannot be enforced

Contracts for employment made between an employer and employee
These contracts will often include a clause restraining the employee from engaging in a competing business while in employment or after termination of employment.

It is common for contracts of employment to include a clause restraining employees from carrying on their trade or profession in competition with their employer while in employment or after termination of their contract of employment. Courts are reluctant to enforce such restrictions. However, a person can be prevented from disclosing an employer’s trade secrets.

Large companies that have valuable intellectual property upon which their goodwill and reputation are based are much more likely to have such a contract enforced-for example, companies such as Microsoft and Coca-Cola Amatil.

The test of reasonableness will be applied, as in contracts for the sale of a business. However, courts are reluctant to enforce agreements in restraint of trade between employer and employee. They will construe them less favorably than those made in connection with the sale and purchase of a business, because of the unequal bargaining position of the parties. The employer will always be in the more dominant position.

Remember:

reasonable terms = enforceable contract
unreasonable terms = unreasonable terms cannot be enforced

Contracts illegal by statute
Often a statute will prohibit certain conduct. The prohibition may be on the making of certain contracts. Some examples of contracts prohibited by statute are:
• Agreements to share the proceeds of a robbery
• Contracts void only against certain persons. For example, contracts to alter the incidence of income tax are void against the Commissioner of Taxation
• Certain dealings by an insolvent person. These dealings will be void against the insolvent person's trustee in bankruptcy
• Certain betting and wagering contracts. The table below outlines the state and territory legislation that expressly prohibits these contracts.
STATE/TERRITORY RELEVANT LEGISLATION

New South Wales Unlawful Gambling Act 1998
Victoria Gambling Regulation Act 2003
Queensland Racing Act 2002
South Australia Lottery and Gaming Act 1936
Western Australia Gaming and Wagering Act 1987
Tasmania Racing and Gaming Act 1952
Australian Capital Territory Games, Wagers and Betting-Houses Act 1901
Northern Territory Racing and Betting Act 1983

• Restrictive trading agreements. It is common for agreements made between manufacturers, retailers and wholesalers of goods and services to contain restrictive clauses (e.g. placing a restriction on the price at which goods may be resold). The Competition and Consumer Act 2010 regulates such conduct.

If a statute regulates only the way in which the contract is performed, the contract will generally not be regarded as void. The contract will be enforceable by an innocent party. It is valid, and there will be a fine or sanction for non-compliance.

When the court is determining the effect on a contract of conduct that is prohibited by statute it will take into account the intention of the parliament in enacting the legislation. This is illustrated by the following case example.

Buckland v. Massey [1985]1 Od R 502 (Fe)
FACTS: Pursuant to s. 6 of the Motor Vehicles Safety Act 1980 (Qld) it was an offence to sell a second-hand motor vehicle without a certificate of roadworthiness. The seller and buyer of a second-hand vehicle agreed that the seller did not need to obtain the required certificate but that the buyer would do so. The seller sought to recover the balance of the purchase

DECISION: The court held that the whole of the Motor Vehicles Safety Act was concerned with ensuring that the motor vehicles for use on the road are roadworthy. The Act clearly implied that contracts for the sale of second-hand vehicles without obtaining a roadworthiness certificate were prohibited. The contract made between the parties was held to be implied prohibited by the Act and therefore was unenforceable.

Effect of illegality
The effect of a prohibition on the validity of contracts needs to be considered. Some contracts will be rendered void (i.e. have no legal effect) while others will be rendered illegal and unenforceable. In the latter case, there is still a contract but it is unenforceable, while in the former case there is no contract.

It may be possible to enforce part of a contract. The illegal part of a contract may be severed and the legal part enforced. This can only happen if the contract is capable of being severed. This is often referred to as the blue pencil test: the illegal portions are deleted with a blue pencil and, if a valid contract remains, then it has passed the test.

It is common for money to be paid pursuant to an illegal contract. Money paid pursuant to an illegal contract is generally not recoverable. Money that is paid under a contract that is merely void as opposed to being illegal is generally recoverable. This is illustrated by the following case.

Hermann If. Charlesworth [1905] 2 KB 123
FACTS: Charlesworth agreed to introduce a certain gentleman to the plaintiff, who was an unmarried woman, with a view to marriage for an initial fee of £52 and a later payment of £250 if marriage took place. A number of gentlemen were introduced to the plaintiff and the defendant wrote to a number of others on her behalf but no marriage resulted.

DECISION: The plaintiff was entitled to the return of her £52 since payment had been made under a void contract and was recoverable.

Capacity
The parties to a contract require capacity or ability to contract. Not all people have the capacity to make contracts.

Some people are under a disability when it comes to making contracts (e.g. minors); for these people, their capacity to contract is restricted.

Minors
As mentioned in previous units, a minor is any person who has not reached the age of eighteen years. Another term to describe such a person is an 'infant'. When a minor reaches the age of eighteen years, they are said to have attained 'the age of majority' or to have 'reached majority'. The age of majority in each state and territory of Australia is eighteen years. The below table contains the titles of the relevant state and territory legislation which set out the age of majority in each state and territory of Australia.
STATE/TERRITORY RELEVANT LEGISLATION
New South Wales Minors (Property and Contracts) Act 1970
Victoria Age of Majority Act 1977
Queensland Law Reform Act 1995
South Australia Age of Majority (Reduction) Act 1971
Western Australia Age of Majority Act 1972
Tasmania Age of Majority Act 1973
Australian Capital Territory Age of Majority Act 1974
Northern Territory Age of Majority Act 1974

The law protects minors and has developed special rules that apply to contracts made by them. The rules are predominantly common-law based, with some statutory modifications. This is so in all jurisdictions except New South Wales, where common-law principles have been completely replaced by the provisions of the Minors (Property and Contracts) Act 1970.

At common law, contracts made with a minor fall into one of the three categories.

Valid voidable void

A number of contracts that are made by minors are regarded as valid/binding. They are:

• Contracts for necessaries

Necessaries are goods and services suitable to the 'condition in life' of a minor. The test is a subjective one: are the goods and services necessaries for a particular minor? They may not be necessaries for minors in general, but they may be necessaries for the minor in question. They must be necessaries at the time of the sale.

Necessaries will include such items as food, clothing, shelter and medicine. However, they are not restricted to absolute necessities. Whether a contract is for the supply of necessaries will be a question of fact in each case.

• Beneficial contracts of service

Contracts that are beneficial to the minor-in the sense that they provide some form of education, employment or instruction will be binding. A contract of apprenticeship falls into this category.

• Cash transactions

Minors who pay cash for goods or services will be bound by the contract. This is so even if the contract is not for the purchase of necessaries or is not a beneficial contract of service. If no price has been agreed on by the parties, the minor is obliged to pay a reasonable price.

A contract made with a minor that is neither for necessaries nor a beneficial contract of service may be voidable. At common law, there are two types of contract that fall into this category:

Contracts binding unless repudiated
Contracts that will be binding on a minor during their majority, unless repudiated by the minor during their minority or within a reasonable time of attaining their majority, are voidable.

To 'repudiate a contract' means to reject it and to decide not to be-bound by it.

Contracts that fall into this category are those involving continuing obligations. They are contracts of a permanent nature (e.g. contracts involving land, leases or partnerships, or contracts for the purchase of shares in a company).

Minors will be bound by these contracts unless specific steps are taken to repudiate (rescind) the contract during their minority or within reasonable time of attaining the age of eighteen years. Generally, if a benefit has been received by the minor, a refund of purchase moneys cannot be obtained.

Contracts not binding unless ratified
Contracts that will not be binding on the minor unless ratified (affirmed) by the minor within a reasonable time of attaining the age of majority.

Contracts falling into this category are those that are not of a continuing nature, These contracts will not bind a minor unless the minor ratifies (affirms) the contract within a reasonable time of attaining the age of majority, A contract for the supply of goods that are not necessaries would fall into this category.

The common-law principles in relation to voidable contracts have been modified by statutes.

Victoria and Tasmania, contracts of this nature are rendered void and incapable of being ratified by the minor on attaining the age of majority. In New South Wales and South Australia, legislation that deals with a minor's capacity to contract has been enacted.

The following contracts are regarded as 'absolutely void' when made with a minor:
• Contracts for the repayment of money lent. In all states a minor is not liable on a contract to repay moneys lent on security, even if the loan has been given for the purchase of necessaries. In addition, a minor is not liable on a cheque or bill of exchange, if given for the price of necessaries.
• Contracts for the payment of goods supplied or to be supplied (other than those for necessaries)
• All 'accounts stated' (an account stated is an admission of a sum of money being due from one person to another).
These contracts cannot be enforced against a minor. It is possible for the minor to voluntarily pay back a loan, but the other party cannot force the minor to do so.

Torts committed by minors in connection with a contract

As a general rule, minors are liable for the torts they commit. However, a minor is generally not able for a tort connected with a contract. A minor will be liable for a tort, however, where the act that is committed is not contemplated by the parties when they enter the contract

Persons of unsound mind and intoxicated persons
Again as mentioned in previous units, persons of unsound mind and intoxicated persons have a limited capacity to make contracts. The law seeks to protect persons who may enter agreements without understanding the nature of the obligations imposed on them because of their state of mind. Mental guardianship legislation has been enacted by each state and territory.

It is important to recognise that a combination of statute law and common-law rules regulates the legal capacity of persons of unsound mind to enter into contracts.

A person who is of unsound mind, or intoxicated because of alcohol or other drugs, will be bound by a contract unless two matters can be proved:
• That the impaired person did not understand what they were doing because of the condition they were in
• That the person with whom the impaired person was contracting knew of the impaired person's condition.
If these matters are proved, a contract is voidable at the option of the impaired person. The onus of proof rests on the intoxicated or mentally ill person. It is necessary for the impaired person to repudiate the contract within a reasonable time of becoming sober or sane.

York Glass Co. Ltd If. Jubb [1925] All ER Rep 285
FACTS: Jubb contracted to purchase the plaintiff's company business. On the date of contracting, he was technically insane and shortly thereafter was placed in a lunatic asylum. The receiver of his estate, who was appointed under a lunacy statute, repudiated the contract. The plaintiff company sued for damages, alleging the repudiation was wrongful.

DECISION: The court held that a contract entered by someone of unsound mind is valid unless the impaired person can show the other party was aware, at the time of contracting, that the impaired person was so insane that he was incapable of understanding what he was doing. In this case, there was no evidence to show that the plaintiff company view or suspected that Jubb had been insane at the point of contracting. The contract was valid and Jubb's estate had to pay damages for not performing the contract.

In each jurisdiction, the sale of goods statutes set out in Table below provide that mentally incapable persons or intoxicated persons will be liable to pay a reasonable price for the sale of necessaries supplied to them while they are contractually disabled. The term 'necessaries' has the same meaning as when used in the context of minors' contracts.
STATE/TERRITORY RELEVANT LEGISLATION
New South Wales Sale of Goods Act 1923
Victoria Goods Act 1958
Queensland Sale of Goods Act 1896
South Australia Sale of Goods Act 1895
Western Australia Safe of Goods Act 1895
Tasmania Sale of Goods Act 1896
Australian Capital Territory Sale of Goods Act 1954
Northern Territory Sale of Goods Act 1972

Bankrupts
A declaration of bankruptcy does not remove an individual's contractual capacity. However, the Bankruptcy Act 1966 (Cwlth) provides that in certain cases, bankrupts must disclose their bankruptcy prior to entering a contract. A bankrupt who proposes to obtain credit in excess of $4623 must disclose the fact they are an undischarged bankrupt. Disclosure is also required if a bankrupt is trading under a firm or under an assumed name. The penalty for failure to disclose is up to three years imprisonment
(s. 269).

Section 269 also provides an undischarged bankrupt may not carryon business under an assumed name without disclosing to the persons with whom they deal that they are an undischarged bankrupt.

A person who contracts knowingly with an undischarged bankrupt should be cautious because the contract may not be binding on the trustee in bankruptcy. The trustee may intervene and disclaim the contract.

Corporations
A corporation is regarded by the law as a legal entity capable of suing, being sued and owning property. Unlike a natural person, it is an artificial legal entity. It has the power to contract through individuals. Corporations have the same power to contract as natural persons, as long as the person making the contract on behalf of the company has authority to contract.

At common law, contracts entered on behalf of a company not yet incorporated cannot be ratified by the company once incorporated. The Corporations Act 2001 (Cwlth) remedied this position.

Genuine Consent
The parties to a contract must genuinely consent to the making contract. Their consent must be genuine and not given because of misrepresentation, due or undue influence.
This element is sometimes referred to as the ‘reality of consent’. The reasons why this element may be absent:
• Mistake
• Misrepresentation
• Duress
• Undue influence
• Undue influence
Where a binding contract has been entered into, legislation does exist to give the courts the power to review an otherwise binding agreement. The Contracts Review Act 1980 (NSW) provides that unjust or unfair contracts (i.e. contracts where parties have not given genuine consent) may be reviewed by the District Court or Supreme Court.
 
Lesson 4 of 11
1.4 Assess the Validity Contract
Contracts may be classified according to validity, performance and formation.
Validity
Contracts can be classified according to their validity into several categories
TYPES OF CONTRACT METHOD OF FORMATION
Valid contract Enforceable by either party
Void contract Not enforceable
Voidable contract Able to be avoided (rescinded) by innocent party
Unenforceable contract Not enforceable
Illegal contract Not enforceable
Valid Contract
A valid contract is a contract in which all elements are present and it is enforceable by law
Very few contracts are required to be in writing, or to be evidenced in writing, in order to be valid (we will look at contracts which are required to be in writing in a later part of this unit). Apart from a very small group of contracts which are required to be in writing, contracts made verbally will be valid and enforceable by the law.
Obviously, it will be easier to prove the existence and terms of a written contract. Problems will arise when seeking to enforce a verbal contract. It will be necessary to decide which party is telling the truth. For these reasons, it is recommended that contracts should be placed in writing.

Void Contract
A void contract is one that is of no legal effect. A contract falling into this category cannot be enforced by a party to the contract. A contract is void where, for example, the consideration for the contract is immoral or where a party enters a contract under a mistaken belief-although only certain instances of mistaken belief will make a contract void.
Voidable contract
A voidable contract is a contract one of the parties is entitled to rescind (i.e. not be bound by the contract). This right is usually given to the injured party. Examples of voidable contracts are those entered into as a result of misrepresentation, duress or undue influence.
Unenforceable Contract
An unenforceable contract is one in which all the essential elements are present, but a technicality may make it impossible for the contract to be enforced. For example, a contract for the assignment of copyright has to be in writing (Copyright Act 1968 (Cwlth)). If the assignment is not in writing, the contract will be unenforceable.
Illegal Contract
An illegal contract is one in which the purpose or object of the contract is illegal, pursuant either to common law or to statute. For example, contracts in restraint of trade are illegal at common law unless reasonable. An example of a contract illegal by statute would be one involving a restrictive trade practice. For example, price fixing between a wholesaler and a retailer is prohibited by the Trade Practices Act 1974 (Cwlth).
Performance
Another way of classifying a contract is according to performance. A contract can be either executed (where one party has performed their side of the bargain) or executory (where obligations have still to be performed by both parties).
An executed contract is a contract where one party to the contract has performed its side of the bargain.
An executory contract is one in which both parties to the contract have obligations still to be performed.
Formation
This method of classification depends on the way in which a contract is formed. As you now know, a contract can exist in the absence of a written agreement and can be written, verbal or a combination of both. Contracts can als be formed expressly or impliedly, or independently of the wishes of the parties by operation of law
TYPES OF CONTRACT METHOD OF FORMATION
Express contracts Written or spoken words
Implied contracts Conduct or actions of parties
Quasi contract By operation of law
Express contracts
Contracts formed expressly are created by express words, either written or spoken. For example, a contract for the sale of a house for $300,000 is created by a standard form of written contract. An example of an express verbal contract would be an agreement made by Sandra to Peter's portrait for $750.
Implied contracts
A contract created impliedly is created not by words, either written or spoken, but by the conduct or actions of the parties. The conduct of the parties leads to the implication that there is a contract. For example:
• Suzanne selects a magazine in a newsagency, takes it to the counter and gives the seller money to buy the magazine. Though no words are spoken, a contract is created impliedly by Suzanne's actions in tendering payment and the acceptance of the payment by the seller.
• Monica hails a taxi on a street corner. By this act, the law implies Monica will pay the fare and the taxi driver will take to her destination.
Quasi-contracts
A third way of creating a contract is to create it independently of the wishes of the parties, by operation of law. These contracts are known as quasi-contracts. The term 'quasi-contract' refers to the remedy provided by the common law compelling payment of money from one person to another when justice requires. For example, where money has been paid by a person under duress, quasi-contract will allow the person who has paid the money under duress to recover it. Formal contracts and simple contracts
Contracts can also be classified into simple and formal contracts.
Formal contracts must be in a particular form but do not have to possess consideration. They are enforceable because of their form. Formal contracts can be divided into two broad categories: contracts of record and contracts under seal (deeds). A deed is a written document that is signed by the parties. In ancient times, it was 'signed, sealed and delivered'. A deed without consideration is enforceable. Common law and statutes require some contracts to be in the form of a deed. For example, a gratuitous promise is a promise made without consideration. To be enforceable, it can be put in the form of a deed.
Simple contracts are all those contracts that are not formal contracts. They are not required to be in any particular form but are required to have consideration to be valid. As the name suggests, simple contracts require few formalities.
One significant difference between the two forms of contract relates to the rights of enforcement if a contract is breached. Under a formal contract, contractual rights are enforceable for a longer period of time than is the case for simple contracts.
 
Lesson 5 of 11
2.1 Analyse Legal Matter Involving Contractual Issues using Principles of Contract Law
As briefly mentioned, certain contracts are required to be in writing, or to be evidenced in writing, in order to be valid. The following kinds of contracts are required by statute to be in writing:
• Bills of exchange and promissory notes (Bills of Exchange Act 1909 (Cwlth) )
• Cheques (Cheques Act 1986 (Cwlth))
• Assignments and mortgages of life insurance policies (Life Insurance Act 1995 (Cwlth))
• Assignment (transfer) of copyright (Copyright Act 1968 (Cwlth))
• Contracts for marine insurance (Marine Insurance Act 1909 (Cwlth))
If these contracts are not in writing, the general effect is that the contract is void.
The historical origin of the requirement for contracts to be evidenced in writing was by way of the English Statute of Frauds passed in 1677. The rationale behind the requirement of written evidence was to reduce fraud and ensure enforceability of an agreement that had substance. Section 4 of the Statute of Frauds was embodied in many statutes passed in Australia. However, in recent years, this requirement has been removed with respect to some transactions, notably contracts for the sale of goods. This is the case in New South Wales, Victoria, Queensland, South Australia and the Australian Capital Territory. In the Northern Territory the requirement applies to contracts for the sale of goods for a value of $50 and upwards.
The requirement for a contract to be in writing, or to be evidenced in writing, implies that all the terms of the agreement will be contained in one written document. However, it is not usual for this evidence to be found in several written documents. The written documents are not the contract itself but written evidence of the contract.
Matters that must be evidenced in writing:
• The names of the parties
• The subject matter
• The consideration
• A signature of the person against whom the contract is sought to be enforced
In most states and territories, legislation requires contracts for the sale of land or other interests in land to be evidenced in writing. Examples of interests in land other than a sale include a lease or mortgage of land. The documents evidencing a contract for the sale of land might include letters passing between the parties, a receipt for the deposit and a cheque signed by the purchaser. These documents, collectively, are written evidence of the contract. A failure to produce written evidence does not render the contract void, but simply unenforceable.
A verbal contract for the sale of land may be enforceable despite the lack of written evidence.
Reliance can be placed on the equitable doctrine of part performance. A person can enforce a contract if it can be shown they have performed certain acts that are in reliance upon promises made by the other parry to the contract. Several criteria must be satisfied before the doctrine can operate:
• The acts of part performance must be such that they have been performed in reliance on the contract alleged and not on another arrangement.
• The acts must be such as to render it a fraud if the defendant were to take advantage of the contract not being in writing (i.e. it would be a fraud (and inappropriate) for the defendant to say there was no contract because there was nothing in writing).
• There must be parol (i.e. verbal) evidence of the contract that is allowed into evidence by the acts of part performance. The parol evidence rule provides that where a contract is wholly in writing, the courts are reluctant to go beyond the document itself to show the meaning of the words. It will not be admissible for parol or oral evidence to add words to, or alter the words of, a written document. This rule is subject to qualifications and exceptions, but they are outside this scope.
When analysing a legal matter involving contractual issues consider:
• Is it the type of matter which requires the contract to be in writing, or to be evidenced in writing?
• What type of contract is it (i.e. verbal (spoken), written or a combination of both)?
• What are the terms and conditions of the contract (i.e. what is required under the contract)?
• Does the contract contain all key elements?
• What is the validity, performance and formation of the contract?
 
Lesson 6 of 11
2.2. Evaluate Key Issues Arising from Contractual Issue
if you identify contractual issues, you need to evaluate the impact of those contractual issues on the legal matter and discuss these with your client.
A contract is regarded as at an end or terminated when the word 'discharged' is used. There are several circumstances that will result in the discharge of a contract. Below outlines the ways in which a contract is discharged:
TYPE OF DISCHARGE MEANING
Performance of the contract Obligations completed
By Agreement All parties agree
Provision for discharge contained within the contract Contractual right
Discharge by operation of law Legal right
Frustration of contract A supervening event makes contract completion impossible
Breach of contract One party fails or refuses to perform ONE or more condition
The discharge of a contract can lead to, termination of the contract, damages, equitable remedy (e.g. injunction or restitution).
We will discuss each of the ways in which a contract can be discharged in turn. The applicable remedies will be discussed in a later part of this unit.
Performance of the Contract
If all the parties to a contract perform their obligations under the contract, it will be regarded as discharged.
For example, Daniel agrees with Ernst to sell him his Ford car for $5000. If Ernst pays the sum of $5000 and Daniel transfers possession of the car to Ernst, the contract has been performed and is discharged.
Performance can take two forms: actual performance or tender (attempted performance).
• Actual performance
Performance can be by the payment of money. If money is to be paid, the creditor is entitled to be paid in legal tender. Legal tender is the amount of money that a creditor is bound to accept in payment of a debt. Since the introduction of decimal currency, notes of any amount have been legal tend but there is a limit with respect to coins. The Currency Act 1965 (Cwlth) states that $1 and $2coins are legal tender for payment of an amount not exceeding ten times their face value. For $1 coin the amount will be $10 and for $2 coins it will be $20. Coins of the denominations 50 cents 20 cents, 10 cents and 5 cents are legal tender for an amount not exceeding $5.
An absolute payment is one made by legal tender or where a bill of exchange is taken in absolute satisfaction of a debt. In contrast, a conditional payment is one made not in the form of legal tender-for example, payment by a bill of exchange or a cheque. If payment is made in this and the cheque or bill is not met on presentation, then the acceptance of it is deemed conditional and the payee is placed in their original position under the contract, or the payee may sue the cheque or the bill. However, if a party to a contract takes a bill of exchange or cheque in discharge of an obligation and it is not paid, then that party should sue on the bill or cheque and not on the contract itself. If a creditor takes a cheque or bill of exchange as absolute payment, then the creditor takes the risk of it being dishonoured. If the cheque or bill of exchange is dishonoured, then the creditor can sue only on the instrument and not on the contract.
Performance other than by the payment of money occurs when the parties each perform their promises. For example, Brody agrees to mow Teagan's lawn if Teagan trims Brody's hedge. The performance of these acts by both parties we amount to performance of the contract and thus the contract would be discharged.
• Tender
Tender is attempted performance, where one party to the contract attempts to perform its obligations but the other party refuses to accept. If the attempt is made according to the terms of the contract: and at a reasonable time and place, then a person's contractual obligations will be discharged (except the obligation to pay money). The contract will be regarded as discharged.
If the payment of money is the act that is required pursuant to the contract, payment will still be required. However, the debtor is not required to seek the creditor out to make the payment.
Performance must correspond exactly with the terms of the contract in order for the contract to be discharged. If correspondence is not exact, one party to the contract will not have complied with its contractual obligations. The rule requiring exact performance can sometimes lead to unfair results
Cutter v Powell (1795) 6 TR 320; 101 ER 573
Facts : Cutter signed on as second mate on the ship Governor Parry, which was sailing from Jamaica. The contract provided that he was to be paid 30 guineas 'provided he proceeds, continues and does his duty ... to the port of Liverpool'. Three-quarters of the way through the voyage, Cutter died. His widow sued to recover a proportion of the wages of 30 guineas.
Decision: Cutter's widow failed in her action. The court said that Cutter's contract was 'entire', meaning that he had to serve the full voyage before he became entitled to any part of the 30 guineas. As he had not performed the whole voyage (exact performance), his widow was not entitled to any payment.
The courts have developed a number of exceptions to the rule that performance must be exact. These exceptions overcome the harshness of the decision in Cutter v. Powell.
The exceptions are as follows:
• Severable contracts
Contracts can be classified as either 'entire', as was the case in Cutter v Powell, or 'divisible' or 'severable'. Divisible or severable contracts are those where some performance, although less than the whole contract, may confer rights on the party who has performed. Such contracts will often provide that payment will become due from time to time.
Building contracts, where payments are made by instalments, are examples of severable contracts. Payment will be required after certain work is completed-for example, laying the slab and erecting the roof. In such contracts, if default is made part way through, the builder will not lose all rights. The builder is entitled to be paid for the work already completed.
The question of severance also often arises in relation to clauses that are in restraint of trade. Often harsh clauses would be included in a contract but it would also provide that if the harsh term was deemed unenforceable a lesser restraint would be imposed. The aim was to ensure if the onerous restraint was severed from the contract the remainder of the contract would be enforceable. To counter this development, the New South Wales Restraints of Trade Act 1976 was enacted. Section 4(1) of the Act provides that a clause in restraint to trade is valid to the extent that it is not against public policy whether or not the contract is in severable terms. The effect of the Act is to uphold a reasonable restraint of trade.
• Substantial performance
Where there has been substantial performance of an agreed obligation, the defaulting party may still be able to retain and enforce all the rights conferred by the contract. The courts will usually award to the innocent party an amount of damages as compensation because performance was not exact, if loss has been caused by the breach.
• Acceptance of partial performance
If there has been a free and willing acceptance of partial performance of the contract, then it is permissible for the contract to be discharged if the party receiving the benefit is willing to accept something less than has been agreed.
• Obstruction of performance
If one party is prevented from performing, the other party may regard the contract as at an end. The party that is prevented from performing is released from any further obligations pursuant to the contract.
By Agreement
The parties to a contract can decide to terminate the contract. There are two main ways in which this can be done: agreeing to cancel the original agreement or substituting a new agreement.
Cancellation of the original agreement
The parties to a contract can terminate a contract by cancelling the original contract by agreement.
Where both parties still have obligations to perform pursuant to the contract, they can mutually agree to end their contract. This is called mutual discharge. No new agreement is entered if mutual discharge occurs.
Where one party to a contract has completed its contractual obligations and the other party has not, the latter can be released from further performance by agreement. Consideration is required: therefore, release can be by an agreement under seal (deed) or by the party providing some further consideration for the promise to be released from further obligations. The consideration must be more than the party is already legally obliged to do. For example, Michael agrees to mow Angela's lawns for $30. He completes the task but Angela fails to pay Michael the $30. Angela be released from her obligation to pay the $30 by entering an agreement under seal (a deed) or by providing some consideration for the promise to be released. Angela may promise Michael that she will wash his car. This promise must be sufficient to release Angela from her obligations.
Substitution of a new agreement
Parties can discharge a contract by replacing the original agreement with a new one.
Novation is one example of a method by which a contract can be discharged and replaced by another contract. Novation is an agreement involving three parties. A contract between two parties is rescinded in consideration of a new contract being entered. The contract is between one of the parties and a third party. The terms of this contract are the same those of the former contract.
A common example of novation is where a creditor agrees, at the request of the debtor, to another person to become the debtor in the place of the original debtor. The contract with the original debtor is now discharged. For example, Andrea owes Boris $50. Boris agrees with Andrea that Charles will become his debtor in place of Andrea. The contract Andrea and Boris has been replaced by a contract between Charles and Boris. The contract between Andrea and is regarded as discharged.
If parties decide to substitute a new agreement it is not always necessary that the new agreement be in the same form as the old agreement. A written contract can be replaced by a contract. A verbal contract can be replaced with a written one. This is subject to the proviso that if a contract is required to be in writing, then the new contract must take that form.
Accord and satisfaction is another method of discharging a contract by creating a new contract. It is the release of party from its obligations under a contract by the substitution of a new agreement with new consideration. The accord is the new agreement, whereas satisfaction is the new consideration. A release, as discussed earlier, involves the giving of further consideration, then it will be called and satisfaction.
One party agrees to discharge the other from its obligations pursuant to a contract. It agrees to accept something different from the other party. The consideration must be different from the other party was already obliged to do in order for it to be satisfaction and discharge of contract
The law has created several rules that state what will amount to new consideration. The payment of a smaller sum of money than is owing is not regarded as new consideration: it must be accompanied by a further promise.
New consideration can be a different method of payment of an amount owing. For example, an agreement whereby payment was to be made by cheque can be replaced with an agreement to pay cash. Payment at a time earlier than agreed can amount to new consideration sufficient to discharge an original agreement.
It is not possible for a person to seek to rely on an act as consideration if they are already under a legal duty to perform it
It should be noted that once accord and satisfaction exist, then a new binding agreement is created between the parties. It would not be permissible for one of the parties to try to renege on the new agreement. In addition, the doctrine of promissory estoppel would prevent a party from doing so.
Provision for Discharge Contained within the Contract
A term of a Contract may provide for the discharge of the contract in certain circumstances. These terms fall into two main groups: options to terminate and conditions subsequent.
Options to terminate
Many Contracts will contain terms that give one or both of the parties the option to terminate the contract and therefore discharge it.
Contracts of employment normally contain an option to terminate. Employees are given the option to terminate their contract of employment. Usually this right is subject to the requirement of giving a period of notice
The length of notice will depend on the contract in question. An employer also has the right to terminate a contract, but this right is more limited than the employee's right. Termination can occur only if there has been a breach of the agreement or if other cause exists.
Conditions subsequent
Conditions subsequent are terms of a contract that allow a contract to be brought to an end on happening of a certain event or condition.
Discharge by Operation of Law
A contract can be discharged irrespective of the actions of the parties. The law will discharge a contract in certain circumstances, including bankruptcy, material alteration and merger, that will override any wishes of the parties. Discharge in these circumstances is said to be by operation of law.
Bankruptcy
A person who is obliged to pay money pursuant to a contract and becomes bankrupt pursuant to the Bankruptcy Act 1966 (Cwlth) is relieved from the obligation. The law regards the contract as discharged.
Material alteration
Where one party to a written contract makes a material alteration to the terms of the contract without the consent of the other party, then the other party has a right to regard the contract as discharged. The alteration must be material (i.e. important or significant). This rule applies to written contracts only
Merger
By operation of the law, a merger occurs where a right is extinguished because it coincides with or is incorporated into a greater right. This can be applied to contracts. For example, if a simple contract in writing is replaced by a deed (a higher form of contract) then the simple contract is said to merge in the deed. The simple contract no longer exists and has been discharged by merger (i.e. by all its terms being incorporated in the deed). This will only occur if the deed is made between the same parties on the same terms.
Frustration of Contract
Another method whereby a contract can be discharged is by the operation of the doctrine of frustration of contract. Put simply, 'frustration' means the impossibility of performance of a contract
A good definition of frustration is provided by Lord Radcliffe in Davis Contractors Ltd v. Fareham [1956] AC 696 at 729:
Frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract.
It is possible to divide the above definition into several parts. All parts must be present before a contract can be discharged by frustration. They are as follows:
• An event that is unforeseen must occur.
• The occurrence of the event must not be the fault of either party. The frustrating event must occur after the contract has been made.
• The frustrating event must make performance of the contract radically different from what was agreed by the parties.
A destruction of subject matter is an example of an event that is unforeseen by the parties to the contract. If the subject matter of the contract is destroyed after the contract is made, through no fault of either party, then the contract will be frustrated. For example, Geoff agrees with Victor that he will rent his flat to Victor for a period of six months. If, after the contract is made, through no fault of either party, the flat were to be destroyed by fire, then the contract would be frustrated. It is impossible to perform the contract (i.e. to rent a flat that had been destroyed). If the subject matter of a contract is destroyed prior to the contract being made -for example, at the offer and acceptance stage- this will not be frustration of contract because no contract exists. It will be a case of common mistake.
Another example of an event that can be unforeseen by the parties to the contract is the failure of a required event to take place. Sometimes the performance of a contract is dependent on the happening of a particular event. If the event is fundamental to the contract, and the event fails to take place, then the contract may be frustrated.
A contract of personal service is a common type of contract to be frustrated. A contract of personal service is a contract whereby a person will perform a particular task. If the person is unable to perform the task because of illness or death, the contract is regarded as frustrated.
A change in law may result in a frustrated contract as may government interference.
An event that increases the burden of performance placed on one party to a contract may also frustrate a contract if that burden is so great the other party must discharge the contract on the basis of frustration. However, an increase in the exposure or trouble that one party to the contract is subjected to will not be enough to frustrate a contract.
The below table provides a summary of different ways a contract can be frustrated:
Destruction of subject matter Failure of an event to take place Contract for personal services Change of law Government interference Increase in burden of performance
A car for sale is destroyed by fire before sale
occurs. A wedding reception was to be held and the wedding is
cancelled. An artist is engaged to sing but is sick and cannot
perform A property development that was once legal is no longer so because of a change in planning
laws. Government employees are prevented from working on a contract to assist with aid effort in overseas
country Must be more than substantial extra expense and trouble
Effect of frustration
Once a frustrating event has happened, a contract is terminated and discharged. The whole contract is brought to an end. The Latin expression in futuro is used in this context.
The contract is said to be 'terminated in futuro' .
If money has been paid pursuant to a frustrate contract, generally the money can be repaid. This is the case if there has been a total failure of consideration (i.e. no part of the contract and no consideration, has been effected). For example, a hall is booked for a wedding reception and a deposit of $200 is paid at the time of making the contract. If the hall is later destroyed by fire before the reception can be held, the deposit will be recoverable if there has been a total failure of consideration. However, this may be unfair where the party repaying money has performed some work preparatory to carrying out the contract.
Statutes dealing with frustration
The doctrine of frustration of contract is a common-law doctrine. However, in some jurisdictions, statutes that modify the common law have been passed. They include:
Victoria Frustrated Contracts Act 1959
New South Wales Frustrated Contracts Act 1978
South Australia Frustrated Contracts Act 1988.
These statutes have common features. Certain contracts are excluded from the operation of the Acts. They include contracts of insurance, contracts for the carriage of goods by sea or contracts to a charter party (with some exceptions). Another uniform feature is that they all apply under the relevant Sale of Goods Acts to a contract for the sale of goods, avoided because the goods have perished before the 'property' in goods has passed to the buyer.
Breach of Contract
Breach of contract occurs when a party fails to fulfill a term of a contract, or all contractual obligations. Certain breaches of contract will result in the other party being discharged from its obligations. The contract will be regarded as discharged.
A breach of contract may occur before performance of some or all of a party's contractual obligations. This is called an anticipatory breach. A breach occurring once the contract has commenced is called an actual breach.
Anticipatory breach
An anticipatory breach of contract occurs when one party, before fully completing its obligations pursuant to a contract, indicates it is not going to complete its remaining obligations. The term used to describe these actions is repudiation. The contract is said to have been repudiated by that party.
The innocent party does not have to wait for the threatened breach to occur. If one party advises the other that it wishes to terminate the contract, or does not intend to honour a condition, the other party can regard the contract as discharged. The injured party does not have to wait until a threatened breach becomes an actual breach.
Renunciation during performance
It sometimes happens that a contract has been partially performed when one party repudiates. This will occur when one party refuses to complete its obligations under the contract. If this occurs, the other party can treat the contract as discharged
Impossibility of performance
If one party makes it impossible for a contract to be performed, this will amount to a repudiation "the contract and the contract will be discharged”. The impossibility may be created by one party before the contract is due to be performed or during the performance of the contract.
An example would be where a person promises, in a contract, to transfer property to another, and before the contract can be performed, the person sells the property to someone else. As the person is no longer the owner of the property, the original contract has become impossible to perform.
This idea of impossibility of performance should not be confused with frustration of contract. Frustration is also an impossibility of performance but it is neither party's fault. Frustration of contract is the result of an unforeseen event that makes performance impossible. Here, on the other hand, impossibility of performance is caused by one party's breach.
Actual breach
An actual breach is a breach of a term of a contract. This may amount to a breach of contract, enabling the injured party to rescind the contract. It depends on the nature of the term that is breached. A breach of a condition entitles the injured party to terminate the contract and/or sue for damages. A breach of a warranty will not terminate the contract but it will enable an injured party to sue for damages. We discussed how to determine if a term is a condition or a warranty later in this unit.
 
Lesson 7 of 11
2.3 Assess Applicable Remedies
The methods given by the law to an injured party to enforce a right or to redress an injury are known as ‘remedies’.
There are a number of remedies for breach of contract. If a party breaches a contract, the other party will be entitled to:
• 1

Terminate the contract;
• 2
Damages (e.g. compensation);
• 3
Equitable remedy (e.g. injunction or restitution or affirmation of the contract)
We will discuss each of these remedies in turn.
Termination
Rescission of contract entitles a person to set aside a contract so that the person is restored to the position they were in before the contract was made.
A right to rescind for breach of contract will only be available if there is a breach of a condition.
A breach of warranty will not give the injured party a right to rescind, only a right to an action for damages.
A party's right to rescind will be in certain circumstances. These include:
• Where a party, after a breach, takes some action to affirm the contract
• Where a third party, acting in good faith, acquires a right in the subject matter of the contract e.g. a breach of contract has occurred and before the injured party has exercised its right to rescind, a third party, unaware of the breach, has purchased the subject matter of the contract)
• Where it is impossible to restore the parties to their pre-contractual positions.
Damages
The award of common-law damages as a remedy for breach of contract is an award of a sum money to the injured party. Damages are compensatory. The aim of damages is to compensate a person who has suffered because of a breach of contract. It aims to put the innocent party (i.e. the injured party) into the position it would have been in -in money terms at least- had the contract not occurred or had the contract been performed/carried out as agreed. A loss must be suffered before a party will be entitled damages.
Damages can be divided into three main categories:
• 1

Ordinary damages
Also called real damages. These represent an amount of money that reflects the actual loss sustained.
• 2
Nominal damages
These represent an award of a nominal or small amount of damages (nowadays $1). This award is an acknowledgment by the court that a legal right has been infringed but that no actual loss has been suffered.
• 3
Exemplary damages
Also called punitive damages. These damages do not aim to compensate but to punish. They will not reflect the actual loss that has been suffered but are awarded in addition to ordinary damages.
Quantum meruit
Where one party has fulfilled part of its contractual obligations and the other party breaches the contract, it may be appropriate for the injured party to seek the common-law remedy of quantum meruit. The literal translation of this Latin term is 'as much as he has earned'.
The remedy is available to a party that has performed part of a contract. The law says this party should receive something for the work performed. The amount will reflect the amount of work that has been done (i.e. 'as much as he has earned'). The rationale for this remedy is that party that has benefited from the contract being partly performed should have to pay a reasonable price for the benefit enjoyed.
The circumstances in which the remedy of quantum meruit can be applied are:
• Where one party prevents the injured party from fulfilling their contractual obligations
• Where the parties dispute the amount to be paid
• Where the parties dispute whether there should be a payment at all
Damages payable only for a foreseeable loss
A defendant will not be liable for every consequence that flows as a result of their breach of contract. Damages payable in the event of a breach of contract do not extent to losses that are too remote.
The court holds that damages for breach of contract are only recoverable for two types of losses that arise naturally from the breach of contract: losses that are actually occur and losses that are contemplated as a probable result of the breach of contract.
Losses that are contemplated as a probable result of the breach of contract are those which a ‘reasonable person’ might expect would result from the breach of contract. The issue of foreseeability is relevant when determining such a matter. A defendant will be liable for losses that could have been reasonably foreseen as a likely result of their breach of contract. The defendant will not be liable for damages which could not have been foreseen.
Duty to Mitgate Loss
A duty is imposed on a person claiming damages to take all reasonable steps to mitigate (minimize) their loss.
Liquidated damages
If a contract contains a term that specifies the amount to be paid in the event of a breach of contract, and this is a genuine pre-estimate by the parties of the loss in the event of a breach, then the damages are said to be liquidated.
If the amount of damages payable in the event of a breach is not stated in the contract, the damages are said to be unliquidated; a court must determine the damages on the available evidence.
Penalty clauses
Sometimes a clause is included in a contract to deter a person from a breach of contract. A clause will state the amount payable in damages should a breach occur. However, if a clause states a liquidated amount to be paid as damages that is out of proportion with the greatest possible loss that could flow from a breach-that is, the clause states an exaggerated amount-it will be classified as a penalty clause.
The courts will ignore penalty clauses and award damages that compensate for a loss.
Whether a clause is regarded as a penalty or as liquidated damages will depend on the facts of each case.
Equitable Remedies
Damages are a common-law remedy. They will not always be appropriate as compensation for a breach of contract. The law of equity provides other remedies that may be claimed when damages are inadequate. These remedies include specific performance and injunctions.
Specific performance
An order for specific performance is a court order that requires a party in breach of contract to exactly perform their obligations under the contract. This remedy is only available if damages cannot adequately compensate the injured party.
It is most often awarded with respect to contracts for the sale of land or for the purchase of rare or unusual items. It would be appropriate to claim specific performance in the circumstances described below:
Diana makes a contract to purchase an original painting by a well-known artist for the sum of $100 000 from Ian. Ian refuses to part with the painting. Paying Diana damages will not adequately compensate her, as she is unable to purchase this item elsewhere. An original painting is a rare item, and the appropriate remedy is specific performance. A court can order Ian to perform his part of the contract (i.e. to hand over possession of the painting).
Specific performance is often used as a remedy where there has been a breach of contract for the sale of land or an interest in land as land is unique. If a seller refuses to transfer land pursuant to a contract for sale, the buyer cannot go to the market place and obtain an equivalent. Damages are therefore not an appropriate remedy. The buyer wants the contract to be performed exactly as agreed and the appropriate remedy is an order for specific performance.
Injunction
An 'injunction' is a court order that prevents a person from performing or continuing to perform a particular act. It is a remedy that equity provides to a person who cannot be adequately compensated by an award of damages.
An injunction may prohibit a person from doing.
• Where the court is unable to supervise an order
• Where damages are adequate compensation
• Where an employment contract is involved
• Where the contract lacks consideration (e.g. a deed)
• Where it would be unfair or harsh to either party
• Where a contract requires personal performance
Injunction prevents:
• Repeating a wrongful act
• Continuing a wrongful act
• Committing a planned wrongful act
Injunctions can be awarded for reasons other than a breach of contract eg family law, trade practices etc.
Loss of Rights to Sue for Breach of Contract
A person may lose their right to sue for a breach of contract unless they act within a certain period of time.
Statutes of limitation in each state and territory limit the periods in which legal proceedings may be taken to enforce a right under a contract. These statutes aim to prevent the possibility of litigation continuing indefinitely. The rules can be summarised as follows:
• In the case of simple contracts, actions must be brought within six years from the date the cause of action arose (three years in the Northern Territory).
• In the case of contracts under seal (deeds), the time differs from state to state: twelve years in New South Wales, Queensland and Tasmania; fifteen years in Victoria and South Australia; and twenty years in Western Australia.
Once the time limit expires, a person is barred by statute from taking proceedings. The debt is still owing and payable but no proceedings can be issued in a court seeking its recovery. It is 'statute barred'.
The Doctrine of Privity of Contract
Only parties to a contract can enforce a contract. This is because of the doctrine of privity of contract.
The common-law doctrine of privity of contract provides that only the parties to a contract have rights and obligations under it and can sue or be sued on the contract. A person not a party to the contract cannot enforce or seek to enforce terms of the contract. This is so even if the contract is for the person's benefit. For example, Alf agrees with Brad that Brad will perform work on property belonging to Charles. If Brad fails to meet his obligations under his contract, only Alf can sue Brad for breach of contract. Charles has no right to sue Brad, as the doctrine of privity of contract states that only parties to a contract can enforce it. Charles is not a party to this contract, although it benefits him
Continuing operation of the doctrine
The doctrine of privity of contract has been firmly entrenched at common law since the decision of the House of Lords in Dunlop Pneumatic Tyre Co. Ltd v. Selfridge Co. Ltd [1915] AC 847 where Viscount Haldane LC at 853 stated:
... in the law of England certain principles are fundamental. One is that only a person who is a party to a contract can sue on it.
In the following decision of the High Court of Australia, the importance of the doctrine of privity of contract was considered. This case is important because of the comments made by a number of judges as to the value of the doctrine of privity of contract.
Trident General Insurance Co. Ltd If. McNiece Brothers Pty Ltd (1988) 165 CLR 107
FACTS: The defendant was the principal contractor for construction work carried out by Blue Circle Southern Cement Ltd (a subsidiary of McNiece Brothers Pty Ltd). This company had an insurance contract with Trident whereby Trident agreed to provide insurance cover to Blue Circle contractors and suppliers, with respect to liability for personal injury. A workman was injured in circumstances allowing him to sue McNiece Brothers for negligence. McNiece sought indemnity from Trident, who denied liability as McNiece was not a party under the policy.
DECISION: The court held that although the McNiece Brothers company was not a party to the policy. it was entitled to be indemnified. The majority held that the doctrine of privity of contract did not apply to contracts of insurance. In their judgments, Mason CJ and Wilson J stated that the established doctrine of privity of contract should be totally recognised, at least with respect to insurance contracts.
Gaudron said that she agreed with this view, but she made her decision without reference to the doctrine of privity. Toohey conceded that the doctrine was not so firmly entrenched that it could not be changed. The remaining judges, Brennan, Dawson and Deane, held the view that the doctrine was so entrenched in the law of contract that to change it would cause more problems than it was worth.
Exceptions
There are exceptions to the doctrine of privity of contract. It does not apply to contracts of Insurance. This is so at common law and pursuant to the Insurance Contracts Act 1984 (Cwlth). If it can be established that a contracting party entered a contract as an agent for another person (a principal), then that other 'person' can enforce the contract.
Another exception occurs where a contracting party can prove that it is acting as trustee for a third party.
Further exceptions to this doctrine occur where a party assigns its rights and liabilities to another, and where there is novation of a contract. In New South Wales these are called novation agreements.

 
Lesson 8 of 11
3.1 Review Analysis with Supervisor as Required
The law is an area where a little knowledge can be a dangerous thing.
If you have identified contractual issues, evaluated the impact of those contractual issues on the legal matter and assessed the applicable remedies, the prudent conveyancer would review their analysis with their supervisor as required and advise their client to seek legal advice where appropriate
A professional opinion from a qualified legal practitioner should always be obtained before a small problem grows into formal legal proceedings. For example, conveyancers cannot provide legal advice on the terms of loan documents and you should instruct your client to seek legal advice in relation to these types of documents.
Loan documents are but one special type of contract executed in business which you will come across during your conveyancing career. It is important that you can recognize different types of contracts and identify when to advise clients to seek legal advice. Other special type of contract executed in business which you will come across during your conveyancing career which may require you to review with your supervisor and/or advise clients to seek legal advice include:
Leases
A lease is a type of contract. It involves one party granting exclusive possession of property to another party for a certain period of time. The term is usually reserved for land, and the party granting the lease is termed the lessor or landlord. The party enjoying the benefit of the lease is called the lessee or tenant. It is usual for the lessee to pay rent to the lessor as consideration for the lease.
Hire purchase agreements
This is another specific type of contract. A hire purchase agreement exists where the owner of goods hires the goods in exchange for regular payments. After all payments have been made, the hirer becomes the owner of the goods.
In some states, the concept of a hire purchase agreement has been abolished by consumer credit legislation.
Note that in Western Australia hire purchase legislation still applies to non-consumer contracts.
In New South Wales commercial hire purchase contracts are still available as a financial device, with tax advantages to hirers who operate a business.
Franchise agreements
A franchise agreement is a special type of contract. It is made between two parties: the franchisee and the franchisor. It is an agreement made between a supplier of a product or service, or an owner of a trade mark or copyright (franchisor) and a reseller (franchisee). The basis of the agreement is that the franchisee agrees to sell the franchisor's product or service, or agrees to do business under the franchisor's name.
An important part of the franchising agreement is that the franchisor agrees to maintain a continuing interest in the business of the franchisee in areas such as marketing, training, product control, advertising and technical knowledge.
Four elements must be present before an agreement will answer the definition of a 'franchising agreement':
• 1

An agreement that may be in writing, oral or implied
• 2
The granting of a right to carry on a business under an existing scheme or marketing plan controlled by the franchisor
• 3
The business must be operating and be associated with a symbol or trademark
• 4
A fee is to be paid, or agreed to be paid to the franchisor which can include amounts incorporated into the price of goods sold to the business.
An example of a type of business that is suitable for franchising is a restaurant. A franchise agreement may be designed to protect a system or unique way of operating that business (e.g. a unique recipe). Such a business may become a chain of fast food restaurants offering the same standard of food, quality and service. KFC and McDonald's are examples.
Franchise agreements provide advantages for both the franchisee and the franchisor.
Advantages for the franchisor include the ability to penetrate markets quickly, access to capital resources of the franchisee and risk sharing. The franchisee receives the advantage of an instant reputation because the Franchisor's product is established in the market. The franchisee can also benefit from marketing' arranged by the franchisor and from the financial expertise of the franchisor.
The risk of failure is generally reduced because the franchisee is buying into an established business.
It is possible to classify a franchise agreement into one of three main categories, as set out in:
• 1
Product franchise
The franchisee acts as a distributor of a certain product. An example is a service station (e.g. BP or Mobil)
• 2
System franchise
A franchisor has developed a unique or individual manner of doing business and the franchisee can use that system (e.g. fast food outlets)
• 3
Processing or manufacturing franchise
The franchisor provides an essential ingredient or know-how to a processor or manufacturer (e.g. in the soft drink industry, where the franchisor provides the syrup that is the base for the soft drink)
The parties to a franchise agreement must comply with the Franchising Code of Conduct provisions. The Franchising Code of Conduct is a mandatory industry code under the Competition and Consumer Act 2010. The Code regulates Australian franchisees and franchisors.
The Franchising Code of Conduct came into operation on 1 July 1998 and has been amdend a number of time since. The Franchising Policy Council that represents both franchisees and franchisors developed the code. It applies to all new franchises and to the renewal, extension or transfer of existing franchises on or after I October 1998. The code has the force of law and is set out in the Schedule attached to the Trade Practices Act (Industry Codes-Franchising) Regulations 1998. The code is prescribed and is declared a mandatory industry code under the Consumer and Competition Act 2010.
Professor Allan Fels AO, then chairperson of the Australian Competition and Consumer Commission (ACCC), in a speech he gave in Melbourne on 1 September 1998 titled Administering the Franchising Code of Conduct', described the aim of the code as follows:
This Code was introduced to address serious market failure problems, particularly in terms of information failure and the transaction costs associated with franchisees gaining information or obtaining affordable redress when things went wrong in the course of the franchise agreement.
There have been some well-known cases where franchisees have lost their shirts as a result of the acts of unscrupulous franchisors. Apart from being a disaster for the franchisees in question, it reflects poorly on the franchising sector as a good place in which to invest.
Prior to the code being introduced there was a voluntary system of control. The fact that schemes are voluntary makes an effective control regime difficult. Those who most need to comply are usually those who do not comply if control is voluntary.
The Code imposes obligations on franchisors and establishes rights for franchisees. For example:
• Disclosure Requirements
A franchisor or a person transferring a franchise is required to give a disclosure document to the prospective franchisee within fourteen days of entering into the agreement, or before payment of non-refundable money in respect of the agreement. This document must contain full disclosure details.
A franchisor 'who proposes to enter, renew or extend a franchise with a turnover of less than $50 000 may choose to provide a short-form disclosure. This requires disclosure of only certain classes of information plus details of the commercial viability of the franchise. These amendments were introduced in October 2001.
Another amendment introduced at the same time was a replacement of the requirement that a franchisee selling to an incoming franchisee provide a disclosure statement with a requirement that a new franchise agreement be entered.
• ACCC Compliance Manual
The ACCC produces the Franchising Code of Conduct Compliance Manual: which assists franchise and franchisees in complying with the code. This contains a pro-forma disclosure document that may be used by parties to a franchise agreement.
• Cooling-off period
The code gives a franchisee the right to terminate a franchise agreement or an agreement enter into a franchise agreement:
• Within seven days of entering the agreement, or
• Within seven days of paying money under the agreement, whichever occurred first.
If an agreement is terminated during the cooling-off period, then the franchisor must refund all money paid by the franchisee within fourteen days.
The provisions regarding cooling-off do not apply to the renewal, extension or transfer of existing franchise.
• Copy of lease
It is quite common for a franchisee to lease premises to operate the franchise business either. From the franchisor or an associate of the franchisor. If this is the case they must be supplied with a copy of the lease.
• Association of franchisees
It is unlawful for a franchisor to prevent a franchisee from forming an association or association with other franchisees (provided their purpose is lawful).
• Prohibition of general release from liability
The code prohibits a franchise agreement from containing or requiring the franchisee to sign general release of the franchisor from liability towards the franchisee.
• Transfer of the franchise
The code prohibits the franchisor from unreasonably withholding consent to the transfer of franchise. The code lists the circumstances in which it would be reasonable to withhold consent:
• The proposed transferee is unlikely to be able to meet financial obligations under the franchise agreement
• The proposed transferee has not met the selection criteria of the franchisor
• The existing franchisee has not made reasonable provision to pay an amount owing to the franchisor
• The franchisee has failed to correct a breach of the franchise agreement
• Franchisor must receive documentation from the franchisee
The franchisor must not:
• Enter into, renew or extend a franchise agreement; or
• Enter into an agreement to enter into, renew or extend a franchise agreement; or
• Receive a non-refundable payment (whether payment of other valuable consideration) under a franchise agreement or an agreement to enter into a franchise agreement
unless the franchisor has received from the franchisee or prospective franchisee a written statement that the franchisee (or prospective franchisee) has received, read and had a reasonable opportunity to understand the disclosure document and the Franchising Code of Conduct.
Before a franchise agreement is entered, the franchisor must receive from the prospective franchisee, a signed statement that they have been:
• Given advice about the proposed franchise agreement or franchise business by an independent legal advisor, business advisor and an independent accountant, or
• Advised to obtain that type of advice but has decided not to seek it.
Termination of Franchise
• The code provides for termination of a franchise agreement in the following situations:
• Termination by the franchisor where there is a breach by the franchisee
If the franchisee breaches the franchise agreement it is open to the franchisor to terminate the agreement. Reasonable notice of intention to terminate the agreement must be given by the franchisor to the franchisee and the franchisee must be given a reasonable time to remedy breach of the agreement.
• Termination by the franchisor where there is no breach by the franchisee
A franchisor can terminate if there has been no breach by the franchisee, if the agreement provides it. However, the franchisor must give the franchisee reasonable notice of the proper termination and the reasons for it.
• Termination by the franchisee in special circumstances.
The agreement can be terminated by the franchisor without giving the franchisee reasonable notice if the franchisee:
• Voluntarily abandons the franchise
• Becomes bankrupt or insolvent under administration
• Is convicted of a serious offence
• No longer holds any licence necessary to conduct the franchise business and/or operates the franchise in a way that endangers public health and safety
• Operates the franchise business fraudulently
• Agrees to the termination.
• Resolution of disputes
The code requires that a franchise agreement entered after 1 October 1998 provide a complaint handling procedure for the resolution of disputes between the franchisor and the franchisee. The code requires the complainant (the person making the complaint) to inform the respondent (the person with whom the complainant has the dispute) in writing of:
• The nature of the dispute
• The outcome desired by the complainant
• The action the complainant thinks will settle the matter.
The code aims to allow the parties to resolve disputes. If the parties cannot agree within a period of three weeks the code provides that either party may refer the matter to mediation or ask the Office of the Mediation Adviser to appoint a mediator.
Attendance at mediation is comp and each party must send someone who is authorised to settle the dispute. If the mediation is successful the mediator will issue a certificate outlining the resolution. Unless there is an agreement to the contrary, the parties will bear the costs of the mediation hearing equally.
It is also possible for parties to commence legal proceedings under the franchise agreement. The code encourages alternative dispute resolution as the first option.
The ACCC was made aware of unconscionable conduct in relation to a franchise. A franchisor requires its franchisee to pay for all goods supplied by the franchisor unless the franchisee returned them within forty-eight hours of receipt. If the goods arrived on a Friday afternoon the franchisee was unable to return the goods within the required period and was liable to pay goods.
This was the case regardless of whether the franchisee was overstocked or the goods were inappropriate for that store. In this case it was the latter -heavy overcoats for a retail franchise in Townsville, Queensland.
Exceptions to the Operation of the Code
The Code will not apply to a franchising agreement when:
• An overseas franchisor uses only one franchise or master franchise in Australia
• The agreement is covered by another mandatory code
• Sales under the franchise are likely to provide no more than 20 per cent of gross turnover for the first year of the franchise and you have been supplying the same goods and services for more than two years immediately before entering the agreement.
Other statutory protection for franchisees include:
• Exclusionary provisions
• Exclusionary dealing
• Resale price maintenance
• Monopolies
• Misleading and deceptive conduct
• Unconscionable conduct
 
Lesson 9 of 11
3.2 Identify and Flag Unresolved Contractual Issues
If you have identified contractual issues, evaluated the impact of those contractual issues on the legal matter and assessed the applicable remedies, assuming your contract remains on foot (i.e. it has not been terminated), you must identify and flag unresolved contractual issues.
A common source of unresolved contractual issues are whether statements or representations are a term of a contract and, if so, whether they are a condition of the contract or a warranty under the contract.
Remember:
• Terms of a contract are its contents. The terms define the obligations of each party.
• A breach of a condition entitles the injured party to terminate the contract and/or sue for damages whereas a breach of a warranty will not terminate the contract but it will enable an injured party to sue for damages.
Tests for Determining the Terms of a Contract
Often it is easy to identify the terms of a contract. As previously discussed, terms of a contract can be written or oral, and either express or implied. But how do you determine if a statement or promise made during negotiations is a term of a contract? When a contract is negotiated, there may be much discussion between the parties. Not all statements made by the parties at this stage become part of the contract (i.e. become terms of the contract). The law draws a distinction between statements that are mere representations and statements that are terms of a contract.
An example of the latter includes a statement where a party promises or warrants that a statement is true. The distinction is important because of the remedies available if the statement is untrue. At common law, damages can be awarded for an untrue statement that is a term of a contract, but cannot be awarded for a breach of a mere representation. The matters considered by the law to be relevant to whether a statement has become a term of a contract are:
QUESTION CONSIDERATION
When was the statement made? Early stage of negotiations vs close to the time contract concluded
In what form was the statement made? Written vs terms oral terms
Was an oral statement included in a written contract? Oral terms
Was the statement made by a person with specific skills or expertise? Is it reasonable to rely on the statement
What was the intention of the parties? Parties must intend the statement to be a term
If the parties intend a statement to be enforceable, it will be regarded as a term. An objective test is used by the courts: namely, would a reasonable person say that the parties intended the statement to be enforceable and binding?
If a statement made prior to the contract being made is regarded as a 'mere representation rather than a term of the contract,’ this will leave the representee with no remedy to sue for breach of contract. In order to overcome this disadvantage the courts have created the concept of a collateral contract.
The court will recognise that the statement is not a term but was seriously made and without it the main contract may not have been entered. The statement or promise is regarded as being collateral to the main contract and may in certain circumstances be enforceable as a contract in its own right. The consideration for the collateral contract is the entering into of the main contract by the person to whom the statement was made.
Condition vs Warranty
The terms we have been discussing are called express terms of a contract. They are expressed either in writing or orally or by a combination of both. Express terms are classified by the law into two broad categories -a condition or a warranty- depending on their importance. Below illustrates the significance and remedies attaching to conditions and warranties:
TERM SIGNIFICANCE REMEDY IF BREACHED
Condition Heart of contract Rescission of contract and/or damages
Warranty Of less importance Damages only
Whether a term is a condition or a warranty must be determined by considering the facts of the case. If a party entered a contract because of the existence of a particular term, this will indicate that the term is a condition.
Note there are some situations, however, where a breach of condition can be treated as a breach of warranty. The difference between a condition and a warranty is dependent on the construction or analysis of a contract and the objective intention where the test applied could be that of essentiality.
If the breach is a condition, breach would justify repudiation - if not it would be a warranty breach which may only require an award of damages.
Terms may be implied to give business efficacy or make sense of the contract, i.e. from usage or custom, or previous dealings.
Conditions precedent and conditions subsequent
The word 'condition' is used by the law in another context, other than to denote an essential term of a contract. A contract may be subject to a condition. Conditions, in this sense, fall into one of two categories: conditions precedent and conditions subsequent.
A condition precedent is one that must be satisfied before the contract can exist and be enforced. For example, a prospective purchaser signs a contract for the purchase of a house 'subject to finance' (i.e. subject to a financial institution approving a loan). If the financial institution refuses the loan application, then the condition is not met, and no enforceable contract exists.
A condition subsequent is a term contained in a contract which provides that on the happening of a particular event the contract will terminate. That event may be either the happening of the named event or a particular act of a party to the contract.
If and where a term has more than one meaning, the contract is not necessarily void for uncertainty so long as it is capable of being given meaning by the courts or arbitrator.
Commercial or business agreements especially enable the courts to avoid narrow or pedantic approaches and to read in some form of ‘business sense’
Implied terms
Terms of a contract that are not express are implied. Terms of a contract can be implied as follows:
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Terms implied by courts
At common law, there are several types of contracts into which the law will imply terms. For example, in contracts of employment, the courts will imply a term that the employer cannot require the employee to do anything unlawful. In contracts for the hire of goods, the courts will imply condition that the goods will be reasonably fit for the purpose for which they have been hired.
It is possible for a court to imply a term into a contract where clearly the parties intended it to be a term but for some reason was omitted from the contract.
English courts created a test called the officious bystander test. In Shirlaw v. Southern Foundries the court held:
Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying so… if while the parties were making their bargain an officious bystander were to suggest some express provision for it in their agreement they would testily suppress him with a common ‘of course’.
However, the courts are reluctant to imply terms into contracts. Five conditions must be satisfied before the courts will do so. The implied term must:
• Be reasonable and equitable
• Be necessary to give business efficacy to the contract (i.e. the contract would be ineffective without it)
• Be so obvious that it goes without saying
• Be capable of clear expression
• Not contradict any express term of the contract.
Courts will not imply a term into a contract if it is apparent that the parties thought about, adverted to, the point but purposely declined to deal with it. In Chandler Bros Ltd v. Boswell 1936 3 All ER 179 the court held that a term in a main contract could not be implied into a collateral contract.
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2. Terms implied by statute
Some statutes imply specific terms into certain contracts. Examples are the State’s Sale of Goods Acts and the Competition and Consumer Act 2010 (Cwlth). These acts imply terms that goods will be of merchantable quality, correspond with their description and be fit for the purpose for which they have been purchased.
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3. Terms implied by custom or trade usage
Courts will imply terms into a contract where there is an established practice or custom in respect to certain agreements. Three requirements must be satisfied before a court will imply terms:

The custom or usage is certain, reasonable and notorious. Griffith C. explained this requirement in Young v. Tockassie (1905) 2 CLR 470 at 478 as: ' ... so well known that everyone making contract in the terms used must be taken to have contracted 'with respect to that [custom]'.

The custom or usage will not be implied if it is inconsistent with any express term in the Contract.

The custom or usage alleged must not offend any statutory principle.
Exemption terms
Often a party to a contract will seek to escape contractual liability by relying on a clause or term that exempts or excludes liability in certain instances. Exemption clauses can be divided into two categories:
• Exclusion terms
An exclusion term (also referred to as an exclusion clause) is one that seeks to exclude one party's liability completely. If a breach of contract occurs or a execution is committed, then the party can never be held liable.
• Limiting terms
A limitation term or limitation clause is similar to an exclusion clause but does not exclude liability completely. It limits to a fixed or determinable amount the liability of a party to the contract. If a breach of contract or a tort is committed, liability 'will be limited to the amount stated in the limitation clause.
As exemption clauses may have profound consequences for the parties to a contract, the courts have viewed such clauses conservatively and tended to interpret them against the party seeking to rely on them. A court's main concern is whether the clause seeking to be relied upon has become a term of the contract.
Before an exemption clause will be regarded as a term of a contract it must have been brought to the notice of the party against whom it is to be used. Unless a party relying on an exemption clause can show that the other party was aware of its existence and contents before the contract was made, the clause will not be able to be relied upon to exclude or limit liability.
The law recognises two types of notice that may be effective with exemption clauses: actual and constructive notice. The requirement to give actual notice is imposed whenever a reasonable person would not expect to find an exemption clause in a document.
Actual notice will occur when the existence and the contents of a clause are actually brought to the attention of the person against whom it is to be used. This may occur by a party reading the clause or by the person seeking to rely on the clause bringing it to the attention of the other party.
Constructive notice. occurs when a party is not aware of the existence and contents of the exemption clause but the party seeking to rely upon it has done all that was reasonably necessary to bring it to the attention of a reasonable person. Constructive notice will only be effective when exemption clause seeking to be relied upon is contained in a contractual document or where a clause is displayed in such a way that it obviously has contractual significance. This may be the case with signs posted at the entrance to a car park.
The nature of the document in which the exemption clause is contained will determine the type of notice required. Actual notice that is required if the exemption clause is contained in a document is a non-contractual notice, while constructive notice will be sufficient if the document is contractual in nature.
A document may be non-contractual in nature. For example, it may be a ticket, a voucher or a receipt. A person may not expect to find contractual terms on such a document. If such a document does contain an exemption clause then the law provides that the party seeking to rely this clause must show they have actually brought it to the attention of the other party; that is, they have given actual notice.
A document will be regarded as contractual in nature if a person who receives it knows that it is contractual or that it contains terms that governs their dealing with the other party. Alternatively a document of a kind which members of the public generally regard as contractual would be considered as a contract.
If a document is contractual in nature and contains an exemption clause, either actual or constructive notice of the exemption clause will suffice. If a party has signed a contract that contains an exemption clause, generally they will be bound by it.
A person who does not have actual notice of an exemption clause may still be bound by it if it can be shown the person has been given constructive notice. The person who seeks to rely on the exemption clause must satisfy a number of requirements to show constructive notice has been given. They are:
• The document containing the exemption clause must be such that a reasonable person would regard it as contractual
• The party seeking to rely on the exemption clause must take reasonable steps to give notice of the existence and contents of the clause to the party against whom it is intended to be used.
Those steps must be taken before the contract is entered into. 
Case Study 3 - Ben and Andy's Pool Overview
Facts: Ben and Andy put up their house for sale by auction. At the auction, after reading the current standard Contract of Sale of Land in your state or territory, the auctioneer asked those present for any questions.  Georgina asked: “In relation to the large in ground swimming pool and safety features, Including fencing, you elaborated on at length in your spiel, is there any form of pool safety certificate as I could not see any in the Contract.” The auctioneer turned to the vendors and they told the auction audience there was and they would provide it as soon as the auction was completed. Georgina was the successful bidder.  Before signing the contract she asked the vendors again “I have your assurance you will provide a form of pool safety certificate to the estate agent later today and he will give it to my conveyancer” The vendors and their auctioneer/ estate agent replied in the affirmative.  The Contract was signed by all parties and the deposit paid.
Subsequently, the vendors could not produce any form of pool safety certificate to the purchaser who then instructed her conveyancer that as she had been misled by the vendors she wished to withdraw from the contract and have her deposit refunded.
Question Which of the six elements of a Contract of Sale of Land did the Vendors fail to comply with in case 3? Give your detailed reasoning quoting contract law principles and case law to support your answer. 
Your answer should be 200-250 words. You MUST reference your sources. 
You may need to do additional legal research to provide a detailed answer.
hint Here, you need to advise us on which element the vendor failed. Again, correct you on your citations, especially for your case law, as I am unable to validate your work.