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Contracts Practise Questions
Contracts (University of Technology Sydney)
Studocu is not sponsored or endorsed by any college or university
Contracts Practise Questions
Contracts (University of Technology Sydney)
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Contracts | Problem Questions Albert (A) & Bashir (B) entered into a contract to redecorate Hotel Surry in Sydney. The contract specified that the total cost would be 1 million + GST. The redecoration included a completely new look with murals, fountains, an indoor garden and pool all in the theme of an Ancient Roman villa. They were so excited. Their idea had been featured in a recent vogue living spread who agreed they would come to the opening and do a story on it if it was finished in time for their June cut-off date. After that, a copy for the magazine was fully pre-arranged for 12 months in advance. A & B set to work but right from the beginning the project was beset with problems. First the NSW state government announced the route for their new light rail project and it was going to cut right through the street that Hotel Surry was on. This meant that during the day A & B could not receive any deliveries at all. In order to keep their project alive they had to pay an additional fee for night deliveries, and often also work into the night. At first this was working but then the residents cottoned on to what was happening and started complaining about the noise. To keep the residents happy A & B started to give them gifts and this added further to the costs of the job. Just when they thought things couldn’t get worse the light rail workers accidentally cut into some pipes and the whole street lost power and had to be closed down for 10 days. No work could take place and residents had to be moved for sanitary reasons. A & B went to their clients with their tale of woe and asked that the contract price be increased, but Hotel Surry would not hear of it. They insisted that any reasonable business person could have foreseen these problems and made necessary contractual adjustments to ensure it would still be profitable. A & B seek your advice. A & B can either argue that the contract contains an implied term to increase the contract price in consideration of the series of problems which have arisen. However, this is unlikely to succeed as A & B had a detailed and comprehensive contract with Hotel Surry and therefore, there is less ground for supposing that the parties failed to address the issue of such problems arising and therefore, little ground for implying terms that are ‘
so obvious it goes without saying’ (
Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982))
. The term would need to pass the BP Refinery Test in order to be implied in fact into the formal contract. The term must be reasonable and equitable, necessary to give business efficacy to the contract, be so obvious it does without saying, capable of clear expression and not contradict any express terms of the contract. In this situation, although the term might be reasonable, equitable, capable of clear expression and does not contradict any express terms, an implied term for an increased contract price is not necessary to give business efficacy to the contract. A & B can still complete their obligations under the contract however, they will make less profit than intended. If the contract can operate commercially without implying a term, the courts will not imply it (
Breen v Williams (1996)). Additionally, Downloaded by Zinphyo Swe (seanswe16@gmail.com)
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Contracts | Problem Questions given the response of Hotel Surry, it is unlikely that the term is so obvious ‘it goes without saying’. As the implied term will not satisfy the conditions of the test established in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977), and the existing agreement is very clear, detailed and comprehensive, A & B will need to successfully argue that the contract has been frustrated. This will mean that the contract is automatically terminated by law (
Scanlan’s New Neon Ltd v Tooheys Ltd
). If A&B can prove that the contract was frustrated when NSW state government announced the route for their new light rail project and by the events which followed as a result, they will not be required to finish the construction and will be entitled for payment up until the point of frustration as rights accrued up to the time of frustration remain binding and enforceable (
Joseph Constantine SS Line Ltd v Imperial Smelting Corp Ltd [1942]). A contract is frustrated when, without the fault of either party, a supervening event has rendered performance of the contract something radically different from that which was undertaken (
Codelfa Construction
v State Rail Authority (1982)). The fact that the event has merely made the contract more expensive or onerous is not sufficient to constitute frustration, A & B must prove that given the frustrating events, the obligations to be performed or the circumstances in which the obligations are to be performed are radically different to what was originally stipulated (
Ocean Tramp Tankers Corp v V/O Sovfracht [1964]). The objective of the contract was to redecorate the Hotel. This was still achievable in light of the problematic events however would just take longer and cost more. The fact that the redecoration had to be completed by June was with Vogue and therefore independent of and unrelated to the contract with Hotel Surry. The doctrine of frustration will not apply merely because the contract can’t be performed as expected (
Scanlan’s New Neon Ltd v Tooheys Ltd
). Therefore, given the facts, it is unlikely that the events of the light rail project will be considered as supervening events which radically changed the nature of the contract. Even if it was found that the contract was in fact radically different in light of the construction of the light rail, if a supervening event was foreseen it cannot frustrate the contract (
Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982)). Hotel Surry even said that “any reasonable business person could have foreseen these problems and made necessary contractual adjustments to ensure it would still be profitable”. Therefore, it will be found that problematic events which would make the contract more onerous and expensive were foreseeable. A&B will need to finish the redecoration of the hotel at the agreed price. Downloaded by Zinphyo Swe (seanswe16@gmail.com)
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Contracts | Problem Questions Gian was in love. He wanted to send a special message to Gina. He went to Arthur who was in the aerial advertising business. A sign on the door said “Arthur’s Aerial Advertising – Welcome”. Gian entered and spoke to Arthur himself at the front desk. A small sign on the wall behind and to the left of Arthur contained the following writing: All Aerial Advertising Contracts are subject to our usual terms and conditions – enquire at desk. Gian did not notice this sign. Arthur wrote on an ‘Order Form’ the details of what Gian wanted – date, time of, location for the flight and message: “Gina, I love you – will you be mine forever?” At Arthur’s request Gian paid the cost of $500 in advance and signed the ‘order form’. Before he walked out Gian asked Arthur whether it was possible to have a heart emoji written in after the message. Gian answered “no problem”. Finally Arthur also asked if there were any other possible costs he should be made aware. Arthur assured him there were not! As Arthur was very busy he subcontracted Gian’s job to Michael for $300. Michael was working from the order form and so did not add a heart emoji at the end of the message. On the way back from the successful flight Michael noticed Essendon playing their big Anzac day match against Collingwood and took his plane down to 500 feet where he did a victory loop to celebrate a goal. This breached air navigation regulations and resulted in Arthur and Michael each being fined $5000. The next day Gian received in the mail a demand from a solicitor that he reimburse both Arthur and Michael for these fines. Attached was a copy of Arthur’s usual terms and conditions, clause 12 of which read: The customer shall be liable for and shall reimburse Arthur for any loss or damages caused to or suffered by Arthur howsoever caused (including breaches of legislation, by negligent act or default) and the benefits of this clause shall extend to benefit equally any employee, agent or subcontractor of Arthur. Advise Gian whether he: 1) is liable to pay the $5,000 fine; and 2) can sue Arthur for breach of contract. Do not discuss illegality. Assume the breach of the regulation does not affect the enforceability of the contract Given the facts, it is clear that a contract was formed at the moment Gian paid the $500 and signed the order form. Therefore, Gian and Arthur are legally bound under the obligations within the contract. The issues affecting this contract are firstly, the incorporation and enforceability of exclusion clauses and secondly, whether or not it has been breached. 1. Gian’s lability for $5,000 payment Gian will be liable to pay the $5,000 fine if the exclusion clause is in fact, a term of the contract. Gian signed an order form however this did not include the exclusion clause, it was instead included on a sign on the wall in the office. Businesses who do not rely on signed contracts in their dealings can incorporate terms which govern the transaction through a notice. The displayed or delivered terms must be made available to the party before the contract was formed to be enforceable (
Oceanic Sun Line Special Shipping Co Inc v Fay
(1988)). The term stated ‘All Aerial Advertising Contracts Downloaded by Zinphyo Swe (seanswe16@gmail.com)
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Contracts | Problem Questions are subject to our usual terms and conditions – enquire at desk’. These specific terms and conditions however, including the exclusion clause, were not displayed. In this situation, reasonable steps must be taken to bring the terms to the notice of the party to be bound before the contract was form (
Thornton v Shoe Lane Parking Pty Ltd
[1971]). Gian did not notice the sign but if a reasonable person would have appreciated that the sign was a contractual term and inquired at the desk for the usual terms and conditions, it will have been incorporated. However, the prominence of the notice of displayed or delivered terms must be proportionate to the unusual nature of the harsh term (
Spurling Ltd v Bradshaw [1956]). The exclusion clause is quite harsh and Arthur should have bought it to the attention of Gian. The facts do not suggest any conduct on Arthur’s part attempting to bring these terms to Gian’s notice. The sign was also quite small. In addition to this, Gian asked Arthur if there were any other possible costs that he should be made aware and Arthur assured him there were not. At this moment, had Arthur offered Gian a copy of the usual terms and conditions they still would not have effectively incorporated into the contract as this conversation occurred after the contract had already formed. The terms can only be incorporated if they are made available to the party before the contract was formed, that is, before Gian had signed the order form (
Oceanic Sun Line Special Shipping Co Inc v Fay
(1988)). However, whether the reasonable notice required to incorporate delivered or displayed terms into a contract has been satisfied will depend on the circumstances of the particular case and the objective reasonable person test (Interfoto Picture Library Ltd v Stiletto Visual Programs Ltd [1989]). Given the facts, it is unlikely that it will be found that a reasonable person would have noticed the exclusion clause prior to formation, nor that Arthur took reasonable steps to bring the clause to Gian’s attention. Therefore, Arthur has no grounds to request payment from Gian. Nonetheless, for the purposes of problem solving, it will be assumed that clause 12 is incorporated. Under the deviation rule, parties can’t rely on the exclusion clause if they have acted against the stipulation of the contract (
Thomas National Transport Pty Ltd v May & Baker Pty Ltd (1996)). Therefore, Gian will be liable to pay the $5,000 term if it is construed that the fine incurred falls within the scope of the clause. The fact that Michael incurred the fine is irrelevant as the exclusion clause extends to subcontractors, this is clear. Issues arise as to whether the scope of the term extends to the way in which the fine was incurred. Michael breached air navigation regulations when he took his plane down to 500 feet above the Essendon after he had successfully posted Gian’s message. Michael was carrying out the contract in an unauthorised way and the infringement occurred after the message was posted. Therefore, Arthur can’t rely on the exclusion clause as it was incurred in an act which went against the stipulation of the contract. Gian is not liable to pay the $5,000. It is unlikely that clause 12 has effectively been incorporated into the contract and is therefore not enforceable. Even if clause 12 is incorporated, it would not be construed to cover the relevant circumstances. 2. Standing to sue for breach Downloaded by Zinphyo Swe (seanswe16@gmail.com)
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Contracts | Problem Questions As a breach is a failure to fulfil a contractual obligation, it must be determined if Arthur was contractually bound to add a heart emoji to the message. If adding a heart was a term of the contract, Gian can sue for breach. The contract formed at the moment Gian signed the order form and payed $500. The key terms were settled, there was a signature and money was paid. Therefore, the promise to include a heart emoji in the message is not a term of the contract. Once a term is formed, terms can’t be added. Gian can’t sue for breach. Downloaded by Zinphyo Swe (seanswe16@gmail.com)
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Contracts | Problem Questions Amy and Matt organise a driving holiday. They purchase a new car from Broadway Cars Pty Ltd. The car they purchased is a Subaru Outback, base model, the colour white. They chose the model and colour very carefully. They did not want any extra features because neither of them were particularly tech savvy and did not want a complicated car to drive. Furthermore they had researched the safety of cars in relation to the colour and this research had led them to conclude that white was the safest colour of cars to drive. They were very safety conscious, both having experienced bad car accidents in their lives. The car is purchased on 1 July 2017. Amy and Matt advise that the car must be ready for delivery by 25 July 2017 as they have arranged a holiday and time off work. They plan to leave on their holiday on 26 July. On the 26 they contact Broadway Cars and tell them that as the car had not arrived on time they no longer want to buy it. Bill, who is the person they have been dealing with, tells them that they are not able to get out of the contract. Amy and Matt are quite upset and really don’t know what to do. A week later he calls them to tell them that the car is ready to be picked up. Not really knowing what to do, they nevertheless go to the premises to look at the car and contemplate their decision. When they get there Bill takes them to their car and they are immediately struck with horror, the car is the wrong model and it is canary yellow. Bill explains to them that the model is superior to the one they ordered, they can have it at the same price and it comes with unlimited free classes on how to operate the systems it contains. He also tells them that he did some more research and found out that in fact yellow is the safest colour of car you can buy. Amy and Matt refuse to accept the car and seek your advice. Amy and Matt (A&M) will not be obliged to pay for the car if they can successfully prove that Broadway Cars has breached a condition of the contract, or seriously breached an intermediate term. A&M purchased a White base model Subaru Outback on the 1st of July and advised for it to be ready on the 25th of July. However, the car arrived after the 25th and was a different model and colour. Whether Amy and Matt can terminate for breach will depend on whether or not the model and colour of the car or the date of delivery were terms of the contract, and if so, what type of terms they were. The contract between A&M and Broadway Cars was formed at the point of purchase, that is, on the 1st of July. Although the facts indicate that a part payment is still due upon pick up, this is nevertheless when the contract formed. Breach - Car Model and Colour When A&M went to pick up their car, it was the colour yellow and the wrong model. Although the model was superior to the one chosen and offered to them at the same price as the base model, the model and colour of the car were terms of the contract as they were chosen before a purchase was made. If it is found that this term was a condition, then A&M will have the right to terminate and will not have to accept or pay for the car (
Associated Newspapers Ltd v Bancks [1951]). Whether the term is a condition depends on whether it is an essential term which goes to the Downloaded by Zinphyo Swe (seanswe16@gmail.com)
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Contracts | Problem Questions root of the contract (
Bettini v Guy
). Although the point of the contract was the exchange of a car for money, given that A&M did not want any extra features and did not want to drive a complicated car, it is plausible that they would not have entered into the contract unless they had been assured that the car they would receive would be the base model they requested (
Luna Park v Tramways
). Therefore, it is likely the term which detailed the colour and model of the car will be a condition and thus, as it has been breached, will give A&M the right to terminate. In the alternative, if this term is found not to be essential, A&M may still have a right to breach if they can prove that it was an intermediate term which has been breached to a severe extent (
Koompahtoo v Sanpine
). The car was a completely different colour to what was stipulated in the contract, yellow instead of white. The model was also superior to what was stipulated. This is therefore likely to be found to be a serious breach of an intermediate term. A&M will only need to prove the breach of one condition or the serious breach of one intermediate term in order to have the right to terminate. However, for the purposes of problem solving, assuming that the term stipulating the model and colour of the car is not a condition of the contract or it was an intermediate term but the breaching was not severe, A&M may still be able to argue that time was ‘of the essence’ and therefore, the fact that the car was not ready for delivery by the 25th of July is a breach of a condition (
Bunge Corp New York v Tradax
(1981)). Breach - Date If time is expressly made ‘of the essence’ then failing to perform by the time stipulated will be a breach of a condition. The subject matter of the contract was a sale of the car, this is mercantile contract and in such situations, terms regarding time are typically found to be of the essence given the nature of commercial dealings and the need for certainty. A&M advised Broadway Cars that they needed the car delivered by the 25th. The facts are unclear as to whether this was said before or after purchase was made. If this was said after purchase was made it will not be a term of the contract and thus can’t be breached. If a statement made during the negotiation of a contract was intended to become a term of the contract, is determined objectively (
Oscar Chess Ltd v Williams [1957])
. If the contract was not wholly in writing, the courts can look at whether or not the statement made was highly significant or important to A&M’s decision to enter into the transaction (
Van dan Esschert v Chappell
). The facts do not indicate if the contract is wholly in writing or not however given that it was the contract for the formal sale of a car, the fact that the contract was wholly in writing is assumed given there is no evidence to the contrary. Therefore, the date will not be a term. Conclusion A&M will only have a right to terminate for breach if they can prove that in giving them a yellow car of a different model, Broadway Cars breached a condition of the contract or seriously breached an intermediate term. Codi Construction Company ‘CCC’ has entered into a contract with the Local Council to refashion its town square. The new town square will consist of a garden which includes Downloaded by Zinphyo Swe (seanswe16@gmail.com)
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Contracts | Problem Questions some imported plants from the Amazon jungle and dotted with seats made from Portuguese marble, which CCC has promised to install. In consequence of this the existing retail precinct will be bulldozed. The Local Council has terminated all of the leases according to existing lease agreements. CCC’s contract with the Local Council specifies that the finishing time in the contract is essential. One of the shops in the existing town square is a jewellery workshop owned by the local artist Moonshine. Moonshine does not think that the way Local Council has terminated the leases is fair and so she leads a protest which seeks an injunction to prevent CCC from beginning the work on the project. A date is set for hearing the matter in 3 weeks time. During this time an interim injunction exists over work being conducted on the site. At the hearing Moonshine and all the other retailers lose their fight to stop the project. CCC is finally able to start work. CCC begin by ordering all of the materials that are to be imported and commissioning the art works from the local artists. Once this is done they begin bulldozing the site. As they are trying to make up for lost time they are working around the clock. The work is noisy and dirty and local residents complain bitterly about the noise at night and the dust. Some residents are experiencing health problems such as increased hay fever and asthma as a result of the increased dust in the area. Residents succeed in getting an injunction which limits the times of work for CCC to the hours of 8am to 6pm this will reduce the noise at night. As the work progresses the following series of unfortunate events occur. To reduce the dust CCC have had to buy some extra equipment and employ some extra labourers. Some ferns which CCC ordered to be imported from the Amazon jungle have been listed as endangered and can no longer be imported into Australia. These ferns were to be the main feature in the central are of the square. CCC have had to substitute these ferns with some common tree ferns found everywhere in Australia. The Portuguese marble which arrives is below the standard required to make safe seats and CCC now install seats that are made from Italian granite. CCC finish their contract one week late and present Local Council with the final bill. The Bill includes a claim for extra payment due to the increased expenditure listed above as well as the legal bills resulting from the court actions against them. Local Council does not see why they are being charged extra and are in fact unsure of paying anything at all as they think that CCC have breached the contract with them. Has CCC breached its contract with Local Council? If yes, can the Council terminate for any breach? What argument could CCC raise to avoid liability for breach of contract? 1. Breach of contract CCC has in fact breached its contract with the local council. The construction was completed one week late. The ferns which were meant to be from the Amazon were substituted for Australian common tree ferns. The Portuguese marble was below standard and therefore, CCC installed seats that were made from Italian granite. It is clear there has been a breach. 2. Right to terminate The law confers the right to terminate a contract when one of the parties has breached a condition or seriously breached an intermediate term of the contract. If it is found that CCC Downloaded by Zinphyo Swe (seanswe16@gmail.com)
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Contracts | Problem Questions did this, the local council, the council can terminate under the default rule. This would not apply if the parties had contracted to modify or exclude the default rule however this is not the case. CCC finished their contract one week late. Whether the the council can elect to terminate the contract for this breach depends on the the classification of the term which stipulates the time period. If time is expressly made of the essence, then failing to perform by the time stipulated will be a breach of a condition. The contract specified that finishing the finishing time in the contract is essential, this explicitly makes time of the essence. CCC completed the contract one week late. Therefore, CCC has in fact breached a condition of contract and the local council can terminate for this breach. 3. CCC Liability CCC would not be able to avoid breach by arguing that the term making time essential was not a condition. This is clearly a condition of the contract which makes time of the essence. However, CCC may seek to argue that the contract was frustrated. A contract is frustrated when, without the fault of either party, a supervening event has rendered performance of the contract something radically different from that which was undertaken (
Codelfa Construction
v State Rail Authority (1982)). A contract that is frustrated is automatically terminated at law and parties are automatically discharged from their obligations at the time the contract was frustrated. This would mean that CCC would not be liable for breach and could still claim payment for all work completed prior to the frustration. CCC may argue that the protest from retailers and the injunctions issued were supervening events which disrupted the performance of the contract. The protest was not the fault of CCC, it was caused when the local council terminated the retail leases. Evidence would need to be adduced as to whether the parties foresaw the strike as a reasonable possibility (
Codelfa
). All the leases were terminated according to the relative agreements. Additionally, it was not accounted for in the contract. Therefore, it is plausible that CCC and the council did not foresee the protest. This would mean that CCC and the council did not foresee having to work around the clock to makeup for time lost and thus, the injunction limiting the times of work for CCC was not foreseeable either. In order for CCC to succeed in arguing the contract was frustrated, they must show that the protest, injunction and related legal proceedings radically changed the circumstances in which the obligations were to be performed. The common objective of the contract was to have the town square constructed before a set time. The protest and associated legal issues caused a delay. In some circumstances a delay can constitute a frustration (
Bank Line Ltd v Arthur Chapel and Co [1919]). However, delay will only amount to a frustration if it amounts to a radical change. The purpose of the contract was to have the town square completed by a set date, the event meant that this was not possible. Therefore, the specific purpose of the contract was gone and thus the contract was frustrated (
Krell v Henry [1903]). Downloaded by Zinphyo Swe (seanswe16@gmail.com)
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Contracts | Problem Questions If the contract is frustrated, CCC will not be liable for breach. However, if CCC seeks to argue breach, they will only be able to seek payment for work completed prior to the frustration. The majority of the construction occurred after the relevant legal issues and injunctions. Downloaded by Zinphyo Swe (seanswe16@gmail.com)
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Contracts | Problem Questions Betty is 21 and about to graduate from art school. She is a painter. She has been considerably stressed about her future. She knows that it’s hard to make a living as a painter. She has no financial or emotional support from her family as they have disowned her for going to art school instead of following in their footsteps and becoming a hot shot commercial lawyer. While she is pondering her future over a cup of ginger tea at the local café her lecturer, Bruno joins her and discusses the possibility of opening a studio/gallery in the local area. Bruno explains that a friend of his is looking for someone to take a lease in a shop in the area which has been empty for a while and is therefore going very cheap. Bruno is 46, has known Betty since first year, knows of her insecurity about her future, and knows that her family have disowned her. He has in the past given Betty advice about her personal financial affairs, he has helped her with negotiating rental accommodation, procuring a loan to buy a car and helping her organize her travel documents. Betty was excited about the prospect of having her own studio and gallery, she told Bruno that she would do it. They immediately went to see Barbara, Bruno’s friend who was the landlord. Barbara asked Betty if she would like any of the terms of the contract explained to her, Betty said that if the contract was good enough for Bruno it was good enough for her and signed it without any hesitation. Following her exams Betty began establishing her business. Bruno was very helpful, giving lots of advice at every point of the business activities. One day he came to see Betty and proposed that they become business partners and split everything 50/50. Betty readily saw the benefits of this and agreed. A contract was drawn up which entitled Bruno to 70% of all profits of the business. Again Betty signed the document without reading it and without discussing it with anybody. The gallery begins to make a profit. Betty has grown considerably during this experience. She has become more confident in her abilities. Now that there is actually a profit she notices that Bruno is taking 70% of it instead of 50%. She challenges him about it and he directs her to the contract. She is outraged since she explicitly remembers Bruno’s words about splitting everything 50/50. Barbara too notices that the gallery is beginning to make a profit and decides to exercise the option she has of increasing the rent under clause 7 of the lease. Clause seven states that; ‘In the event of the gallery beginning to make a profit the rent will be increased to reflect that change in circumstances.’ Betty seeks your advice on all matters arising from these facts. 1. To avoid the contract with Bruno To avoid the contract, Betty must prove that her consent was vitiated, thus giving her a right to rescind the contract with Bruno despite all other formal elements being present. Option 1: misrepresentation Betty can argue that Bruno made a misrepresentation to her in an attempt to induce her into the contract and that she in fact relied on this misrepresentation in order to rescind. 1. Misrepresentation The common law requires a misrepresentation to be a false pre-contractual statement of past or present fact. Bruno stated that the contract would split everything 50/50 but then drew up a contract which entitled Bruno to 70% of all profits. This is a pre-contractual false Downloaded by Zinphyo Swe (seanswe16@gmail.com)
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Contracts | Problem Questions statement of fact. This element is therefore satisfied and this misrepresentation is actionable given the other elements of inducement and reliance are satisfied. 2. Inducement Betty must show that Bruno made the representation intending to induce her to enter the contract. The evidence that Bruno has misrepresented the way in which the profit will be shared under the contract evidences that he intended to induce Betty into the agreement. 3. Reliance The representation must have in fact induced the Betty into the contract (
Gould v Vaggelas (1985)). Betty readily saw the benefit of splitting everything 50/50 and agreed. She signed the document immediately without reading the terms. This evidences that she was relying on that specific agreement being in the contract. Causation is therefore satisfied.
Option 2: rescind based on unconscionable conduct Under the principle of unconscionable conduct, equity allows a clearly disadvantaged party who has been unfairly exploited by a stronger party to rescind a resulting contract. 1. Special disadvantage Commercial Bank of Australia v Amadio (1983) Betty must prove that she was at a special disadvantage, that is, one which seriously affected her ability to make a judgement according to her own best interest (
Amadio
). Betty had no emotional or financial support from her family, these factors may constitute a special disadvantage (
Blomley v Ryan (1956)). Additionally, special disadvantage can be situational rather than constitutional - deriving from features of a relationship between members of the transaction (
ACCC v Samton Holdings (2002)). Betty had relied on Bruno in the past for advice about her personal financial affairs and was potentially emotionally attached to Bruno, the stronger party within the transaction (
Louth v Diprose (1992)). This will ultimately be a finding of fact giving weight to all circumstances however it is open for the court to find that Betty was in fact, at a special disadvantage when dealing with Bruno. 2. Knowledge Commercial Bank of Australia v Amadio (1983) Assuming that Betty is at a special disadvantage, it must be shown that the stronger was aware of the disadvantage (
Amadio
). Actual knowledge, wilful ignorance or constructive knowledge must be shown (
Kakavas v Crown Melbourne (2013)). Bruno is 46, has known Betty since first year, knows of her insecurity about her future, and knows that her family have disowned her. He has in the past given Betty advice about her personal financial affairs, he has helped her with negotiating rental accommodation, procuring a loan to buy a car and helping her organize her travel documents. This evidences that Bruno was in fact aware of this disadvantage (
Amadio
), or at least should have been aware (
Kakavas v Crown Melbourne (2013)). 3. Predatory state of mind Kakavas v Crown Melbourne (2013) Finally, Betty must prove that Bruno had a predatory state of mind, that is, that he consciously took advantage of her (
Kakavas v Crown Melbourne
). Downloaded by Zinphyo Swe (seanswe16@gmail.com)
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Contracts | Problem Questions The contract was at a gross undervalue, Betty will only be receiving 30% of profits despite the fact that she had already established the business and was the producer of its key products. Additionally, she was under the impression that profits would instead be split 50/50. The value of this contract provides a strong inference of exploitation (
Amadio
). As Bruno gained significantly from the contract and was aware that Betty was at a significant disadvantage, it is open on the facts to find that his state of mind was in fact predatory. Option 3: rescind based on actual undue influence Equity will set aside a contract when it has been procured by undue influence and operates in fact situations wider than that of unconscionable conduct. Betty will be able to rescind if she can prove that the influencing party, Bruno’s, undue influence was, in fact, a cause of the influenced party agreeing to a contract
(
Johnson v Buttress (1936)). 1. Capacity to influence Betty must prove that the person who induced the transaction, Bruno, had the capacity to influence her (
Credit and Commerce International SA v Aboody (1990)). Betty had no emotional or financial support from her family. She had relied on Bruno in the past for advice about her personal financial affairs and was potentially emotionally attached to Bruno. The two had an unequal bargaining power within a personal relationship of trust and reliance. It is open on the facts that Bruno had the capacity to influence Betty. 2. Exercised undue influence Betty must show that Bruno did in fact exercise influence over her and that this influence was in fact, undue (
Credit and Commerce International SA v Aboody (1990)). Influence can take any form. Bruno was continuously giving Betty advice at every point of the business activities and was clearly very involved and present throughout the entire establishment process. Bruno then exercised this influence and came to Betty and asked her to sign a contract which entitled him to 70% of profits and Betty only 30%. The fact that Bruno disproportionately benefited from a contract which significantly disadvantages Betty evidences that she was subjected to undue influence. The fact that Betty signs the contract he gives her without reading it or discussing it with anybody else evidences the fact that Bruno unduly exercised influence over her. It is therefore established that Bruno did in fact exercise his influence over Betty in a way which was undue. 3. Causation Finally, Betty must show that by exercising undue influence, Bruno caused Betty to enter the contract (
Credit and Commerce International SA v Aboody (1990)). Betty readily saw the benefit of splitting everything 50/50 and agreed. She signed the document immediately without reading the terms. This evidences that she was induced to sign a contract, without reading it, by the influence which Bruno held over her. She did not discuss it with anyone as Bruno was her key mentor in establishing her business. Causation is therefore established. Downloaded by Zinphyo Swe (seanswe16@gmail.com)
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Contracts | Problem Questions 2. To avoid contract with Barbara Once the contract is signed, the parties will be bound by its contents even if they did not read the document before signing (
L’Estrange v F Graucob Ltd
). Betty will therefore be bound by the lease with Barbara unless there were vitiating factors present. Under the doctrine of third party of proprietary equity will allow rescission of a contract that has been procured by undue influence of a third party to a contract where the other party is aware of the third party’s undue influence and takes advantage. 1. Third party impropriety Betty can rescind the contract if she can show that it was entered into due to the actual undue influence of a third party, Bruno, which Barbara was aware of (
Khan v Khan (2004)). 1. Influence Betty must prove that Bruno had actual influence over her (
Khan v Khan (2004)). Betty had no emotional or financial support from her family. She had relied on Bruno in the past for advice about her personal financial affairs and was potentially emotionally attached to Bruno. The two had an unequal bargaining power within a personal relationship of trust and reliance. Bruno was continuously giving Betty advice at every point of the business activities and was clearly very involved and present throughout the entire establishment process and immediately took her to see Barabara to sign a lease. It is open on the facts that Bruno influenced Betty. 2. Lack of will Betty must show that Bruno exercised influence so that entering the contract was a result of the influence rather than her actual will (
Khan v Khan (2004)). The fact that Betty signed the contract without reading it and stated that “
if the contract is good enough for Bruno it was good enough
” for her and made no hesitation evidence that she did not sign the contract according to her actual will. 3. Knowledge Finally, Betty must show that Barbara unconscientously derived a benefit from the Betty’s conduct of signing the contract, knowing that this conduct was a result of Bruno’s influence and not her actual will. Although Betty was influenced by Bruno to sign a contract containing a term which was grossly disadvantageous, it will be difficult to prove that Barbara had knowledge of the influence and that Betty was not acting according to her actual will. Betty does state that “
if the contract is good enough for Bruno it was good enough
”. This could have alerted Barbara to the fact that Betty was being influenced by Bruno. However, Barabara asked Betty if she would like any of the terms of the contract explained to her and Betty refused. Downloaded by Zinphyo Swe (seanswe16@gmail.com)
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Contracts | Problem Questions It is therefore unlikely that, in fact, Barbara knew that Betty was being influenced by Bruno and conscientiously derived a benefit from this. Conclusion Therefore, Betty will not be able to rescind the lease with Barbara and will therefore be required to pay the increased rent price. Downloaded by Zinphyo Swe (seanswe16@gmail.com)
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Contracts | Problem Questions Kris and Eddie entered into a ‘lawn care’ contract for 26 weeks. Under this contract Eddie promised to pay Kris $50 per week and, in return, Kris promised: (a) to cut the grass; (b) to remove all grass clippings; and (c) to trim the lawn edges. Things went well for the first few weeks. However, in the fifth week she left the grass clippings on the front lawn. In week seven she failed to arrive. When she arrived for work on the eighth week, Eddie told her that the contract was at an end. Kris, having recently completed a course entitled ‘The law of Lawns’, replied ‘On the contrary, I terminate this contract because of your repudiation which, by definition is without legal justification.’ Please advise the parties of their rights and liabilities arising out of their contract. Introduction If Eddie can successfully prove he had a right to terminate for breach, then he has not repudiated the contract by calling it off after 8 weeks. Kris’s Breach Eddie will have a right to terminate if he can prove that Kris has breached either a condition (
Associated Newspapers Ltd v Bancks
) or seriously breached an intermediate term (
Koompahtoo v Sanpine (2007)). The terms of the contract require Kris to remove all grass clippings, which she failed to do in the fifth week. In the seventh week she did not arrive and thus did not cut the grass, remove the clippings or trim the lawn edges as required by the contract. A condition is an essential term which goes to the root of the contract (
Bettini v Guy
). The contract is an exchange of services, $50 per week to cut and maintain the grass. Therefore, the term which stipulates that Kris must cut the grass each week is a condition of the contract, as failure to perform it renders the performance of the contract different to what Eddie had stipulated (
Bettini v Guy
). In failing to cut the grass in the seventh week, Kris has breached a condition of the contract and Eddie has the right to terminate. Although she only failed to turn up once, breach of a condition provides the right to terminate no matter how minor or trivial the breach (
Bancks
). In the unlikely event that this argument does not succeed, Eddie will be able to show that Kris has breached an intermediate term of the contract. Eddie has contracted to have his lawn maintained every week, failure to turn up one week is therefore a breach which deprives Eddie substantially of the whole benefit of the contract. The whole benefit of the contract is to 26 weeks of regular lawn maintenance and Kris’s breach has deprived Eddie of this. Therefore, Kris’s conduct amounts to a serious breach of an intermediate term and Eddie, under the default rule, has the right to terminate the contract. Eddie can argue that failing to remove the clippings was a breach of a condition but this is unlikely to be successful as it does not appear to be an essential term which goes to the root of the contract. This conduct is also unlikely to amount to a serious breach of an intermediate term as the breach has not substantially deprived Eddie of the benefit of the Downloaded by Zinphyo Swe (seanswe16@gmail.com)
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Contracts | Problem Questions whole contract (
Koompahtoo
). This conduct is more likely to be deemed as a breach of warranty which will not give Eddie the right to terminate (
Hong Kong Shipping v Kawasaki
). Therefore, it is advised Eddie argue that the failure to show up in week 7 was a breach of a condition, or at the very least a serious breach of an intermediate term. This will give him the right to terminate. Eddie’s Repudiation If one party purports to terminate a contract where they have no right to this can amount to a repudiation (
Amann Aviation Pty Ltd v Commonwealth of Australia (1990)). However, if Eddie can prove he did have a right to terminate due to breach, his conduct will not amount to repudiation. As discussed above, Kris’s conduct in the seventh week of the contract is likely to amount to a breach of a condition, or in the very least, a serious breach of an intermediate therm. Conclusion Eddie has the right to terminate the contract for breach. In the 8th week of the contract he was not repudiating when he called it off as he had the legal right to terminate under the default rule. Downloaded by Zinphyo Swe (seanswe16@gmail.com)
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