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Part 1
Key Cases:
Baltic Shipping Co v Dillon (1993) 176 CLR 344
Koufos v C Czarnikow Ltd [1969] 1 AC 350
####Alexander v Cambridge Credit Corp Ltd (1987) 9 NSWLR 310
Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 – damages
Howe v Teefy (1927) 27 SR (NSW) 301 – race horse
Damages in contract:
The object of damages for breach of contract is to compensate the plaintiff for the loss caused by the breach. Damages in Common Law are different from equitable compensation. Equitable compensation has the objective of institution in integrum. Damages in contract and tort attempt to put the plaintiff in a position they would have been in before the breach but it also looks at the future (loss of opportunity, etc). With Common law damages there doesn’t have to be a substantial loss on the part of the plaintiff – the right to damages is triggered by the breach not the loss. For minor losses nominal damages are awarded. The court will award damages that are substantial but where the loss in itself is probably non-existent where:
- the plaintiff has suffered a loss to their credit and reputation as a result of the defendant’s breach (eg, where a bank wrongfully dishonours a cheque, a person who suffers having a bank dishonoured can claim substantial damages for loss of credit and reputation). Where an employee or someone who is on a contract for services has their contract terminated by the other party and that results in a negative view of their reputation (eg, actor who works for the Sydney Theatre company, they terminate the contract and put out a press release about it – there is a denial of the right of response)
- where you have a contract for the sale of land the rule in Bain v Fothergill [1972] AC 1027 The rule holds that when a vendor of real estate (real property) refuses to complete the sale of land the plaintiff can only recover damages by way of the deposit paid and any costs associated with the purchase to date. They cannot recover loss of opportunity or expectation damages. This is an anomaly because with specific performance you will get specific performance on the basis that every block of land is unique.
The court will look at exactly how much the plaintiff is claiming – if the plaintiff’s claim is excessive/unreasonable/unjust the court has the discretion to limit the amount of damages payable. Similar to the maxim in equity that those who seek equity must do equity. Works to prevent outrageous damages claims.
The court must consider in a claim for breach of contract:
- Breach: in order to claim damages for breach of contract there has to be a breach – that is a matter of fact. Did the defendant breach the contract?
- Plaintiff has to produce evidence to the court on the balance of probabilities that the contract was breached. Generally it is fairly straight forward. There is generally no argument as to whether the defendant actually breached the contract
- Causation: Did the defendant’s breach cause the loss suffered by the plaintiff? Was there a causal link between the 2?
- Traditionally the court would apply the ‘but for’ test (would the plaintiff suffered loss but for the defendant’s breach?). In Australia the courts came to the decision that the ‘but for’ test was a non-exclusive test – there were other ways of establishing causation – principally through the application of common sense. The court looks at it and judges the circumstances from the point of view of common sense.
- Alexander v Cambridge Credit Corp Ltd (1987) 9 NSWLR 310, 351-350.
- Traditionally the court would apply the ‘but for’ test (would the plaintiff suffered loss but for the defendant’s breach?). In Australia the courts came to the decision that the ‘but for’ test was a non-exclusive test – there were other ways of establishing causation – principally through the application of common sense. The court looks at it and judges the circumstances from the point of view of common sense.
Facts: The appellants were the auditors of the respondent company. In their audit, the auditors failed to make sufficient allowance for a number of bad debts and losses resulting from investments. The respondent argued that as a result of these omissions, the company’s perilous financial position was not fully appreciated. The company continued to trade, making substantial losses and after three years went into liquidation. The trial judge awarded the company $145 million.
- Argument that if Alexander had prepared the accounts properly they would not have become insolvent.
- NSW court of appeal: if the bad debts had been taken into account would there have been any difference? Court looked at Cambridge’s trading history (the directors had made a number of bad trading decisions, poor management decisions, high risk, etc). None of that could be attributed to the accountants not placing bad debts in the accounts. The court determined that Cambridge would have gone into liquidation even if the bad debts were included therefore there was no causal connection between the omission and the liquidation. Court applied common sense
- Basically what you are doing in using common sense is to decide whether the breach was the material cause of the plaintiff’s loss and it depends on facts and circumstances. May look at ‘but for’ but not the main test.
- Remoteness: How close was the actual loss to the breach? What is the nexus between the loss and the actions of the defendant? Is the damage too remote?
- In assessing remoteness courts apply the rule in Hadley v Baxendale (1845) 9 Exch 341: H owned a mill and entered into an agreement with B to fix a broken crankshaft in a machine. B promised that a new part would be delivered the next day, but it was not delivered for seven days. H claimed damages for the loss of profits during the time the machinery was out of order.
- The court looked at the situation and it looked at H’s conduct. H had not told B that time was of the essence – that he needed the machine back. B used this to his defence. The court further learnt that B assumed that because a crankshaft is such an essential part to one of these machines H would have had a spare or asked for a spare as a replacement. Unless H told B it was urgent B was entitled to presume that it wasn’t. The court rejected H’s claim because it was unreasonable to expect B to know that it was urgent unless H had told him. You have 2 limbs:
- The plaintiff must show that the loss arises naturally, as a matter of course from the defendants breach – they must be interconnected.
- Because the damage occurred as a matter of course from the breach both parties must be reasonably supposed to be aware that at the time of the contract if there was a breach the particular type of damage that occurred would take place.
- The defendant is imputed to have knowledge that a reasonable person of the defendant’s expertise would have. B was merely a blacksmith and didn’t know anything about manufacturing. It would be unreasonable for him to understand the commercial realities of manufacturing. The test for remoteness is reasonableness – is it reasonable that you regard the damage as a natural result of the breach? Both parties must be reasonably aware that the damage will occur if there is a breach.
- The court looked at the situation and it looked at H’s conduct. H had not told B that time was of the essence – that he needed the machine back. B used this to his defence. The court further learnt that B assumed that because a crankshaft is such an essential part to one of these machines H would have had a spare or asked for a spare as a replacement. Unless H told B it was urgent B was entitled to presume that it wasn’t. The court rejected H’s claim because it was unreasonable to expect B to know that it was urgent unless H had told him. You have 2 limbs:
- Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528: The laundry ordered a boiler from the defendant. The defendant promised to supply the boiler in June, but it was not delivered until November. The Laundry sued for breach of an implied term of the contract claimed normal profits lost as a result of the lack of the boiler and also for losses occasioned by inability to fulfil dyeing contracts, entered into in anticipation of the delivery of the boiler. Laundry had decided to enter into dying wool on a commercial scale and in advance of getting the boiler they had entered into a number of contracts with cloth manufacturers to die their cloth. Claimed the loss of the dying contracts.
- The court looked at all of the circumstances and dismissed the claim. Firstly Laundry had not told Newman they needed the boiler urgently in order to begin a new business. Secondly it was not reasonable to presume that Newman industries knew the order was time sensitive.
- The second limb in Hadley requires that both parties be aware
- Where the plaintiff had particular requirements they should have informed the defendant.
- Mitigation: did the plaintiff lessen their loss in some way. Firstly the plaintiff has a duty to act reasonably in their own interest but only if it is possible. In assessing whether or not the plaintiff has mitigated they will look at; the circumstances of the plaintiff (can they afford to?), must be possible to mitigate (is it beyond their control?). Depends upon the facts and circumstances. The test is reasonableness – in the circumstances is it reasonable to expect the plaintiff to mitigate?
Date of Assessment:
Damages will be assessed from the date of the breach. However there may be circumstances where the plaintiff has expended money before the breach has occurred in reliance on the contract. The court will take pre-breach losses into account.
Once and for all rule:
Firstly all damages at Common law must be paid in a lump sum, not in instalments. Secondly once an award of damages has been awarded they can’t come back for more damages. This finally terminates the case. If the defendant pays in instalments the matter isn’t terminated. The rule applies to the plaintiff once the plaintiff has been given the judgement that is it the court says you get this and no more because if they can come back it is not terminating the issues between the parties.
Heads (categories) of Damage:
There is a division between liquidated damages and unliquidated/special damages. Liquidated damages are those that are able to be exactly calculated – you have receipts, bills, etc. Unliquidated damages are those which you cannot assign an exact monetary value to (eg, pain and suffering in tort). Mostly damages in contract under the various heads are liquidated – you can generally compute what they are going to be.
- Expectation damages: what they expected from the contract – look to the future (unliquidated)
- Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64: Amann and the Cth entered into a contract pursuant to which A would provide aerial coastal surveillance on Australia’s northern coast. However, the preparations for carrying out the contract took longer than expected, and A was unable to perform some of its contractual obligations. The Cth repudiated the contract and A terminated it. A claimed damages. At first instance the court awarded A $410,000, being the loss of profits. A appealed, claiming $6.6 million, being the cost of the preparations.
- Claimed $6.6M in expectation and reliance damages
- The court of appeal awarded it $6.6M. Cth appealed to the High Court. The High Court rejected the appeal on the basis that Amann was entitled to the $6.6M – expectation damages were what they should have received if the contract was not breached. Reliance damages were what Amann had spent on the reliance that the contract would be performed.
- Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64: Amann and the Cth entered into a contract pursuant to which A would provide aerial coastal surveillance on Australia’s northern coast. However, the preparations for carrying out the contract took longer than expected, and A was unable to perform some of its contractual obligations. The Cth repudiated the contract and A terminated it. A claimed damages. At first instance the court awarded A $410,000, being the loss of profits. A appealed, claiming $6.6 million, being the cost of the preparations.
- Reliance damages: what they have spent in reliance on the contract being performed by the defendant – look to the past (liquidated).
- Loss of opportunity: generally with contract it is a loss of a commercial opportunity (eg, Victoria Laundry – boiler not delivered there was a loss of opportunity for Victoria Laundry) – unliquidated.
- Mental distress: since Baltic Shipping v Dillon they have become more common. Only available where the plaintiff has lost the services or the contract involved the plaintiff’s relaxation/leisure/freedom of molestation of some kind.
- Baltic Shipping v Dillon: Ms Dillon booked a cruise with Baltic and she set sail on a boat. She had 8 days of relaxation on the 9th day the boat sank. Ms Dillon sued Baltic for restitution of the costs of the cruise and a number of heads of damages including mental distress. The court disallowed her claim for restitution because you can only claim where there is a total failure, not part performance – the contract had been partly fulfilled – she had 8 days on the boat. They awarded damages for mental distress – she didn’t expect to be floundering in the Atlantic when the boat sank and she was traumatised by that.
- Injured feelings and loss of reputation: comes with loss of reputation.
- Flamingo Park Pty Ltd v Dolly Dolly Creations Pty Ltd (1986) 6 IPR 431: FP was a fashion company controlled by Jenny Kee. It contracted with a specialist fabric printer for the supply of fabric printed with jenny Kee designs. The fabric printer supplied the fabric to other fashion houses, including DD. FP sued, inter alia, for damage to its reputation because the fabric had been used to produce inferior garments. Court held that FP was entitled to damages for loss of reputation on the basis it was a commercial contract. FP relied on their reputation to make a living, DD had breached the contract and that breach of confidentiality clause had caused loss to FP’s reputation.
The fact that it is difficult to assess damages does not mean to say the court can ignore the issue. In Howe v Teefy (1927) 27 SR (NSW) 301, Howe, who leased a racehorse, claimed loss of prospective winnings and stable commissions after the owner of the horse, Teefy, took it away in breach of the lease agreement. H sued for loss of prospective winnings, loss of stable commissions and loss of prospective bets he could have won on the horse. H appealed against the low amount of damages awarded by the jury, claiming that the jury had no basis upon which to assess the loss. The Court of Appeal, however, rejected the appeal, stating that if the plaintiff’s loss is calculable in monetary terms, then the jury must attempt to arrive at a figure. Teefy’s lawyers argued that in order to assess the damages it would impossible and therefore damages should not be awarded. It doesn’t matter how difficult it is to assess they must come up with an assessment. They must use common sense and reasonableness
- Court had trouble trying to work out the damages. The court upheld H’s claim and awarded him damages. T appealed on the grounds that it was impossible to assess what the loss was.
Contributory negligence:
In 2001 the NSW government enacted the Law Reform Miscellaneous Provisions Act which provided where there was a claim for breach of contract and the defendant raises contributory negligence as a defence if the court upholds the defence of contributory negligence the damages will be apportioned in accordance with the portion.
Hypothetical Problem:
Reliance damages: $20000 – because he relied on the contract being completed and spent money on that reliance.
Quantum meruit claim (restitutionary remedy) for the money that was spent after the formal termination of the contract up till the time when Bob gave up.
- where you have no enforceable contract between the parties the plaintiff has a quantum meruit claim for as much as they have done – Wal did more work after the contract at the insistence of Bob. The claim would be brought against Bob.
Expectation damages: for another $20000 – difference between the amount he can claim as reliance damages and the amount he would have got if he had have fulfilled the contract ($40000)
Loss of opportunity: loss of other business from seeing the big mozzie
Part 2
Important Cases:
### JC Williamson v Lukey & Mullholland (1931) 45 CLR 282 – leading authority in Australia for specific performance
Coulls v Bagot’s Executor & Trustee Co (1967) 119 CLR 460
Beswick v Beswick [1968] AC 58
Dougan v Ley (1946) 71 CLR 142
Blomley v Ryan (1956) 99 CLR 362
Patrick Stevedores Operations (No 2) Pty Ltd v Maritime Union of Australia (1998) 195 CLR 1
Orr v Ford (1988-89) 167 CLR 316
Specific Performance:
What is specific performance?
Specific performance is an order of the court used generally to call someone to do something in order to make someone uphold their end of a contract. It requires one party to complete their obligations under a contract. Specific performance shows one of the focuses of equity as the conscience of common law. Since the Judicature Acts, specific performance as a remedy has been taken over by the common law. If you apply for specific performance for breach the remedy can be applied in a common law court.
The intention of specific performance is to sever and complete the obligations of the parties.
There is debate about whether it can be applied for executed and executory contracts. an executed contract is where everything has been done (things that have to be done are formal things). Executory contracts mean that there is still something outstanding before it is completed. For example a contract for the sale of land will be executory until the transfer of registration has actually been registered. The argument is that specific performance is available for executed contracts only. There is debate as to whether it is available for executory contracts. It is argued that what you do apply for is a mandatory injunction (requires the defendant to complete their obligations. It is so close to specific performance that is it sometimes called specific performance, whereas with an executed contract it is called general specific performance). With specific performance the plaintiff asks for an order compelling the defendant to complete their obligations. Once the order has been given the issues between the parties have been finalised. With an injunction they are generally used to preserve the status quo between the parties and the matter hasn’t concluded until going to hearing. For all intents and purposes with a executory contract you are still applying for a type of specific performance. Whether or not specific performance is available for executed or executory contracts is purely an academic issue – it has no practical value. It is not relevant in court. The outcome is the same (defendant is required to complete their obligations under the contract).
Principles of specific performance:
Elements for specific performance:
- Enforceable contract
- Breach or potential breach of the agreement by the defendant
- Plaintiff must be willing, ready and able to perform their obligations
- Inadequacy of damages for the breach
- Agreement must be able to be performed. There is no point in a plaintiff applying for specific performance if the defendant cannot perform their obligations. Eg, plaintiff asks for specific performance of agreement where the defendant is selling the plaintiff a valuable artwork. If the painting is destroyed you can’t ask for specific performance because there is no valid consideration left.
- Defences
- Enforceable contract:
You must have the necessary elements of an enforceable agreement – offer, acceptance, consideration (essential because equity will not assist a volunteer), certainty of subject matter (meeting of the minds as to the nature of the contract). You have to have a valid contract – if you don’t have any of those you don’t have an agreement.
- Breach or potential breach:
Plaintiff must be aware that the defendant has failed to carry out obligations. If there is not an actual breach there must be a potential breach. For a potential breach there must be reasonable evidence by which the plaintiff can form the opinion that the defendant is going to breach. Waltons v Maher demonstrates an actual breach.
- Plaintiff must be ready, willing and able:
Must be ready, willing and able to fulfil their obligations if they have not already done so. Very close to this concept are 2 equitable maxims; those who seek equity must do equity and clean hands. If the plaintiff is going to court to seek an order for specific performance he/she must be prepared to be equitable as well. The plaintiff must have clean hands – if they don’t have clean hands they are not able to complete the contract because of the maxim.
- Damages are inadequate:
Specific performance will only be granted if damages are an inadequate remedy. This is why equity developed the remedy. If the plaintiff could be compensated through damages that is fine. If there is something about the agreement that makes the subject matter of the contract unique in some way then specific performance will be the only adequate remedy.
- Dougan v Ley – the plaintiff wanted to purchase a taxi and taxi license. There were a lot of soldiers in Sydney at the time without means of transfer. Taxi licenses were at a premium. The defendant agreed to sell the car and license to the plaintiff. The defendant wouldn’t hand over the license or the cab. The plaintiff went off and brought another taxi and license after he commenced action in court for specific performance. Defendant argued that damages would be an adequate remedy. The court looked at the situation and said that because there were not many taxis at that time there was an element of rarity that would make damages and inadequate remedy at the time. Even though the plaintiff had brought another taxi and license the court ordered specific performance.
The concept of the inadequacy of damages is why specific performance will always be granted in relation to the sale of land. The assumption is that all real estate is unique. The court holds therefore because all pieces of real estate are unique damages will be an inadequate remedy. You cannot replace something that is unique. Doesn’t matter if it is in relation to a sale or a lease – they work the same way.
- Agreement must be able to be performed:
Is it possible to order the defendant to specifically perform the agreement or has there been some intervening factor that has rendered completion of the contract unable. For example if a painting has been destroyed or stolen. The defendant may be dead – the court can’t call him in to give evidence if he is not there – it is possible he could take action against the estate but it depends on the circumstances.
- Defences:
Laches: where the plaintiff delays in applying to the court for a remedy. The time for laches starts to run from the date the plaintiff becomes aware that they have rights (Bester v Perpetual Trustee – Bester didn’t become aware that she had rights until just before she commenced proceedings). Equity assists the diligent not the tardy.
Hardship to the defendant or a 3rd party: Has to involve something more than lack of money. Not even bankruptcy would provide sufficient hardship to be a defence. May be that they would end up living on the streets. The court is a little more lenient when it comes to the hardship of a 3rd party (especially if it is a sale to a 3rd party without notice, bona fide, for valid consideration).
Acquiescence: the defendant could raise the defence that the plaintiff acquiesced to the non-performance of the agreement or to the defendants delay. If the plaintiff gave their consent they cannot apply for specific performance. Only if the plaintiff makes it clear to the defendant that they must complete within a certain time and the defendant fails can the plaintiff apply for specific performance.
Situations where specific performance will and will not be granted:
The court will always grant specific performance for contracts in relation to real estate. Because of the uniqueness of every block. This is really the only instance where the court will consistently provide specific performance.
For the sale of goods there is a general prohibition for granting specific performance because they can be replaced. This is unless they have an element of uniqueness (Dougan).
The court will never grant specific performance for contracts for personal services. This is because equity will not make a person a slave. This means that you lose your self-determination – you have no choice, you have to work. It is immoral and unethical to force the person to work for someone else. There are no examples of specific performance being granted for contracts of personal services in modern times. We are talking about individuals (natural person) – corporations are slightly different. The alternative remedy would be through damages.
Agreements which would require constant supervision of the court – specific performance will not be granted. Supervision in this context means that there is a likelihood that the defendant is going to keep breaching the order. When that happens the plaintiff goes to court again to seek enforcement of the orders. Instead of finalising the relation of the parties the parties are still locked in legal battles. The court will order damages instead in these cases.
- J C Williamson v Lukey & Mulholland – J C Williamson was a large theatre production company that had cinemas and theatres. Lukey was a confectioner (sold lollies, drinks, etc) and Lukey and JC Williamson entered into an agreement whereby Lukey would lease a small area in the foyer of the theatres to sell ice creams, lollies, etc. Then Lukey expanded his business in the theatre and he employed young women to go down the aisles in the theatre with a tray around their neck to sell the goods. They would walk the aisles. J C Williamson had given their permission to do this. However there were some complaints from customers about them walking the aisles as it posed a danger. J C Williamsn told Lueky to stop the selling down the aisles. Lukey took J C Williamson to court and requested an order for specific performance. The court looked at the circumstances including the original lease and the variations. Whilst the subject matter of the contract itself would lend itself to specific performance in this particular circumstance it would be an order that would need the constant supervision of the court. It would be probable that J C Williamson would continue to prevent the sale during performances and the court would need to keep intervening. Therefore specific performance was not granted.
The court will not grant specific performance if it is not an enforceable contract. This is where the contract is vitiated by unconscionable conduct, misrepresentation or mistake. Eg, Blomely v Ryan. Where you have a party that has acted in breach of equitable principles the agreement will not get specific performance because the agreement is voidable.
Where you have part performance of the contract it will be provided so long as the acts of the plaintiff are referable to the substance of the contract and that they constitute a major part of their obligations. Where there has been part performance specific performance will only be granted if the rest of the obligations of both parties can be specifically performed.
Specific performance will not be granted if it is futile. Where the subject matter or parties no longer exist the court will say that specific performance is futile (doesn’t exist).
Illegality – specific performance will not be granted for contracts that are illegal. Eg, the sale of a brothel where brothels were declared illegal by the state.
Tutorial Questions:
- Specific performance is usually not available if damages are an adequate remedy. However equity will normally grant specific performance in contracts for the sale of land. Why is land treated differently? In the case of goods is it enough that the goods are in short supply for damages to be inadequate?
Every plot of land is considered to be unique therefore you cannot adequately compensate for the loss through damages. The plaintiff decides to by the property because of the features of that specific plot.
In the case of goods in short supply they have to be unique in some way as well to constitute sp instead of damages.
- What does ‘contracts of services are not to be made contracts of slavery’ mean?
Contracts that will force someone to work for or continue to work for someone will not be granted specific performance. There is no freewill if the contract of service is enforced.
- It is often said that specific performance will not be ordered if the order requires constant supervision. How important an issue is this?
Constant supervision means constant court intervention – enforcement orders, etc. It is important in regard to court time and costs. It doesn’t allow for the finalisation of issues between the parties if they have to keep going back for enforcement orders.
- What is meant when it is said that a court will not specifically enforce a contract where mutuality is not present?
Both the plaintiff and the defendant must have the option of specific performance available to them in order for the plaintiff to apply for specific performance. There is no meeting of minds.
Part 3
Unfair contracts and statute
Key Cases:
Ford v Perpetual Trustees Victoria Ltd (2009) 75 NSWLR 42
West v AGC (Advances) Ltd (1986) 5 NSWLR 610
Nguyen v Taylor (1992) 27 NSWLR 48
Contracts Review Act:
Based on equitable principles and Common law. The Act is a state piece of legislation, enacted to enable parties to unjust contracts to seek the assistance of the court in having those contracts set aside. The concept of an unjust contract doesn’t appear either at Common law or in equity. At Common law the court can declare it void/voidable on the basis that the contract doesn’t fulfil the requirements of a contract (meeting of the minds, statute of frauds, duress – duress at CL is a much more extreme concept than at equity; it really does have to have some form of threat involved, illegality or misrepresentation – of grosser kind than equity). At Common law we have ways of having contracts declared void. With contracts at Common law there are very few ways a party can avoid their obligations. At equity we have a concept of something being unconscionable and the basis of having the contract rescinded is a breach of equitable principles (undue influence, unconscionable behaviour). The statute presents a slightly different aspect of unjustness in regard to contracts. The Act is there to enable a person to have a contract declared void/voidable. The Contracts Review Act in effect permits the judicial review of certain contracts and the granting by the court of relief where the terms of the contract are harsh, unjust, unconscionable in some way. The Act has a lower threshold than Common law or equity. In order for there to be a review of the contract the court will undertake a 3 step process:
- Is there a valid contract formed at law (offer, acceptance, consideration, meeting of the minds)
- The court will move on and applies s7(1) – provides that a contract or a provision of a contract is unjust in the circumstances relating to the contract at the time it was made. Is it unjust in all the circumstances or only some terms. All of the circumstances would include how it was formed, position of the parties, etc.
- If the court decides the contract is harsh, unconscionable, unjust it will give relief. Relief can be granted provided the court thinks it is just to do so. The objective of the relief is to avoid the unjust, unconscionable, oppressive effects of the contract. The court has discretion as to whether or not to grant relief.
Unjust means (s4 – talks about includes unconscionable, harsh or oppressive). A contract that which results in injustice is to be read as a contract that is unconscionable, harsh, oppressive. The term unjust was considered in the case of West v AGC:
- West v AGC (Advances) Ltd (1986) 5 NSWLR 610: Ms West borrowed $68K from AGC (finance company) at an excessive amount of interest. AGC secures the loan by way of mortgage of West’s property. West then proceeds to give $38K of the money to her husband’s boss (Mr Quiche). The purpose of the money was to enable Mr Quiche to develop the business. The deal was that West would not charge him interest for the loan but in return Quiche would pay the monthly instalments that were required by AGC. Quiche defaults, the business goes into liquidation. West cannot afford to pay the instalments herself. AGC applied to the court for the execution of the security. West in her defence raises the Contracts Review Act on the basis that the agreement (between West and AGC) was harsh, oppressive or unconscionable. The NSW Court of Appeal refused relief under the Contracts Review Act on the basis that although there might have been a high interest charge that was a market rate at the time, the repayments were not oppressive and Ms West had agreed to them at the time without any vitiating factor (duress, misrepresentation, undue influence, etc). The contract in itself was not harsh or oppressive. There was nothing that required her to make payments she couldn’t afford. West feel into difficulties in regard to the repayments because of what she did with the money – she was the author of her own fate. It was West who had given the money to Quiche. With unjust the court said there had to be a fairly liberal interpretation of the term unjust however unjust has to mean more than just a bit difficult. It must be more than unconscionable in the way that it is used in equity. It distinguished between 2 types of injustice:
- substantive injustice in contracts (terms) – occurs in the actual body of the contract itself, relates to the terms of the contract. Eg, we might have a contract that requires a borrower to pay an interest rate of 25%.
- Procedural injustice (method) – the way in which the contract is carried out (the way in which it was arrived at and the way the terms of the contract are applied). If there was a contract that should have a cooling off period and there isn’t that may be seen as unjust.
- Looked at all of the circumstances surrounding the contract and denied West any relief under the act. Nothing was substantively or procedurally unjust. Court refused to set the contract aside
- Nguyen v Taylor (1992) 27 NSWLR 48: The court takes an almost equitable approach. Mr Nguyen was a vendor of property and he was persuaded by the real estate agent to enter into an option to purchase. Mr Nguyen didn’t really want to do that. The real estate agent said he could withdraw from the contract if you decide to within 30 days and the option will be null and void (you will lose nothing). If you do wish to sell it you have a purchaser lined up. Nguyen signed the option – within the 30 day time limit he notified the agent and said he didn’t want to go through with it. The agent said sorry but it is binding – there is no cooling off period for an option. Nguyen was in a situation where he had to sell the property. He applied to the court on the basis that the option was unjust for the purposes of the Contract Review Act. The terms were unjust in that there wasn’t a cooling off period and it would be unconscionable to enforce the contract because the terms had been misrepresented by the agent. Firstly the court said the thing to remember is that the purchasers are innocent, bona fide purchasers for value. Secondly the terms of the contract itself (substantive aspects) were fair – normal contract with an option in it. Neither was it procedurally unfair – it was a binding contract that would proceed by the normal course of real estate contracts. There was no injustice in the contract to vitiate it. The court said the terms were misrepresented to him but the fact that he hasn’t got what he wanted must be balanced against the injustice to the plaintiffs that had done nothing wrong (they would be the ones to lose if the contract would be rescinded). Refused to apply act because there wasn’t injustice. The court considered the innocence of the other party and the fact Nguyen had other avenues against the real estate agent available to him (breach of fiduciary duty, misrepresentation). His remedies lie not in Contracts Review act but lies against the agent.
The court will take into account in assessing whether a contract is unjust, harsh or oppressive (s9(2)):
- Any inequality of bargaining power – where one party has a stronger position than the other. Eg, in relation to catching bargains – where you have young men in a position to inherit in the 18th century who would spend all their money and money lenders would lend them money at 40% interest where they don’t have to pay back until they inherit.
- whether provisions of the contract were subject to negotiation – similar to the Unfair Contracts Act. Arguably that applies to standard form contracts.
- was it reasonable for the party to negotiate alternate provisions or was it reasonable to reject some terms?
- reasonableness of the terms – are they substantively fair or are they substantively unjust?
- whether age, physical/mental capacity impaired a parties ability – unconscionable conduct seems to be incorporated into the act
- economic situation of the Plaintiff as well as their education and literary standards – important in regard to non-English speakers
- whether the contract was written in an intelligible manner (plain English) – is it easily understood
- whether one of the parties obtained expert/legal advice before they entered into the contract – if they did it somewhat vitiates their position
- was undue influence, pressure or unfair tactics used – equitable principles being brought through in statute
- setting, purpose and effect of the contract itself – what was the contract being used for
The relief that can be granted is purely discretionary but the remedies are incredibly wide. The court can order the complete rescission of the contract or it can refuse to enforce certain provisions of the contract (Eg, West v AGC – if the court had found an unjust contract it could refuse to allow AGC to foreclose on the property). It can require that certain terms in the contract are deleted, but the contract can still remain valid. Under the Act the court can in fact make any order in relation to the agreement it thinks fit to do justice to both of the parties.
Who does it apply to:
Applies to consumers. Therefore government departments, public or local authorities, or corporations cannot seek relief under the Act (s6). A person may not be granted relief if the contract was entered into for the purposes of trade, business or a profession. Eg, if I enter into a contract to obtain something for my chambers I can’t apply to have the contract reviewed under the act because it is for my profession. Dealing with ordinary, natural persons who are consumers of goods/services.
Australian Consumer Law:
The ACL was introduced in January 2011. Introduced to provide a national system of consumer law. It was envisaged a more comprehensive scheme of consumer protection that included more than the sale of goods, but the statute would encompass industry standards as well. It would encompass contracts as well. It is made up of 2 major statutes: The Unfair Contracts Act and the Competition and Consumer Act. The ACL works in conjunction with the state laws. There are a number of jurisdictions in which it operates (federal court, commonwealth tribunals, state courts and tribunals – works in with such things as the contracts review act, can be applied by the supreme, local, or federal court). Also applied by Commonwealth statutory bodies (ASIC – corporate regulation) and the ACCC.
Unfair Contracts Act:
Was passed in March 2010. Applies like Contracts Review Act to consumer contracts only. In the Act a consumer contract is a contract for the supply of goods or services or a sale or a grant of an interest in land to an individual whose acquisition is for predominately personal, domestic or household use or consumption. A consumer contract is void if the terms of the contract are unfair. We have substantive unfairness (actual terms). If it is a standard form contract in the context of the ASIC Act a contract is a financial product or a contract for the supply or possible supply of service that are financial services. In regard to a contract that is standard form or the provision of financial services.
A term will be unfair if the term causes a significant imbalance in the party’s rights and obligations under the standard form contract. Also if you have a situation where the obligations of a consumer outweigh their rights and all the rights are on the side of the person providing the service (eg, loan sharks). Most banking and telecommunication contract are standard form contracts.
It will be unfair if in the circumstances it is not really necessary to protect the party that would be advantaged by the terms. Where you have a standard form contract where all the obligations are on the borrower and all the rights are on the side of the lender and the lender doesn’t need the protection from the borrower.
An unjust term may be deleted or severed if the operation of the contract is not effective.
There is a rebuttable presumption that an unfair term of a contract is not necessary to protect the legitimate interest unless that party can prove otherwise. Where you have a consumer contract and all of the rights are skewed in favour of the provider the court automatically presumes that the term of the contract is unnecessary. The court automatically skews its bias toward the consumer.
Factors that the court considers in regard to unfairness – basically open slather. The Act gives wide discretion to the court – the court can consider any circumstance/facts that it views as relevant. Whatever factors are taken into consideration it must take into account the extent to which the facts cause a possible detriment to the party if the term is to be applied. It looks at the way in which a term of a contract will cause/may cause detriment to the consumer. The courts view is skewed in favour of the consumer. The court must consider the extent to which the term is transparent (how understandable is it by the average reasonable consumer). Is it a straight forward term or does it use more words than necessary, use legal jargon, needs interpretation even to an able English speaker. The court must consider the contract as a whole.
Examples of terms that are unfair – where only one party has the right of termination. You still have today contracts with banks where the right to terminate is solely given to the bank (eg, default on payments). Another unfair term is where the right of one of the parties to sue the other is limited – the contract attempts to limit the cause of action of the consumer. Another is where one party may assign their rights under the contract without the permission of the other (happens quite often in loan agreements). The right to vary the terms is limited to one party and the right to vary is able without the consent of the other party.
Standard form contracts – there is no definition in the Unfair Contracts Act. There are a couple of considerations the court must look at:
- The relative bargaining positions of the parties – because generally there is no negotiating (you either take it or leave it)
- The preparation of the contract – the way in which the contract is prepared (eg, contracts online where if you don’t accept the terms you can’t go any further). Eg, phone contracts that are pre-printed and simply signed by the customer
- The negotiation (if any) of the terms – generally none occurs because there is no bargaining process
- Whether any special characteristics of either party are taken into consideration by the contract – where you have fairly sophisticated financial institutions dealing with unsophisticated customers the court will scrutinise those circumstances. Also if a person has difficulty understanding the language, elderly, all of the factors brought up in Blomley v Ryan.
If you have a client who wants to challenge a contract you can use the Unfair Contracts Act together with the Contracts Review Act – they are not mutually exclusive.
The ACL as a whole has a whole range of remedies that can be applied by the courts which includes; damages, rescission of unfair contracts, specific performance, injunctions, rectification in regard to unfair contracts (severing of unfair terms), declarations in regard to the rights of the parties and the general remedies that were provided under the Trade Practices Act in relation to consumer guarantees.
