Contract Law
Terms and Parties
Privity of Contract
Privity of contract is a principle requiring that contracts exist between the offeror and offeree only. Other parties affected by the contract are called strangers to consideration. Even if you enter a contract to benefit outsiders (for example, insurance to cover customers or sub-contractors), strict legality excludes them from enforcing the contract even if they are entitled to the benefits.
There are nonetheless, ways around this. Laws exist to allow or compel someone else into the benefits and obligations under a contract, or to obtain a remedy for conduct that would otherwise be in breach. These include such laws as:
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Agency,
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Negligence,
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Trust,
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Estoppel,
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Unjust enrichment,
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Misleading and deceptive conduct.
For an example of some of these foregoing principles, see the insurance case of Trident v McNeice. The High Court found that a sub-contractor which fitted within the class of entities covered buy an insurance contract should be indemnified and not required to take out their own insurance.
Hierarchy of terms
The main components of a contract – that is the terms defining the transaction for which the contract was entered into – are called the conditions or express terms. Terms of lesser significance, but which are not trivial, are called intermediate terms. Terms of minor significance are called warranties, or minor terms. (A warranty, here, has nothing to do with the right to return defective goods to a retailer). Just because a contract states which terms are express terms, is not conclusive. Their actual importance is of greater significance. If a breach of any terms is likely to deprive the counter party of their entitlements, then the term will probably be a condition.
If an express term is breached, the contract can be terminated and then other remedies, such as damages are available. But if a minor term is breached you cannot terminate: other remedies such as damages, injunctions and specific performance are available. Where a term is of intermediate significance it is dealt with according to its own importance under the circumstances, so a contract can be terminated for breach of an intermediate term, but not necessarily. Courts always try to keep a contract going if possible.
Interpreting and changing a contract
Contracts are interpreted in accordance with the apparent intentions of the parties. A written contract is interpreted first by reference to the document alone. That is, regardless of what is said or assumed in negotiation, accepted as fair, or known in common practice, the wording is paramount. For this reason one must always read the fine print when the stakes are high.
Where there is a lack of clarity or issues arising that are not covered in writing, then courts readily consider evidence of assumptions and verbal assertions, and common practice.
Courts DO NOT overrule or change terms for unfairness, unless there is evidence of deceit, coercion, or the like. If fairness was a forefront issue it would be very difficult to do business profitably as nothing could be bought or sold at anything other than a standard value.
Re-negotiation
If the terms are no longer suitable for any reason – a change in supply prices, the applicable laws, or market demand, for example, you may want to change the terms of the contract. The agreement with the other party remains as is, unless re-negotiated lawfully.
This normally requires detailed communication, signatures and so forth. But it is common practice for banks, utility providers and the like to send out amended terms by post expecting the customer to agree automatically. Classically the new terms are invalid, but the customer typically goes ahead and continues using the service or performing their obligations. In so doing they give implied assent to the new terms. (Think of Mrs Carlill’s implied acceptance of the original terms of her contract to use the smoke ball). Implied consent/assent is therefore a very powerful tool when doing business with a mass market, or seeking flexibility in business arrangements, or when trying to slip in something ‘special.’ A party to a contract dispute must be wary and be aware of the latest edition of their contract.
The good news is that the rules which apply to make certain contracts or terms invalid apply to re-negotiated contracts the same way.
Onerous terms
Whether forming an original contract or amending one, the offeree needs to be made aware of onerous terms that may deprive you of something important or obligate you to do something you don’t want to do. If a term of a contract is very harsh or highly unexpected, then its existence must be brought to notice first. In J Spurling Ltd v Bradshaw, Denning LJ said: ‘…[some] clauses which I have seen would need to be printed in red ink on the face of the document with a red hand pointing to it before the notice could be held to be sufficient.’
Exclusion Clauses
Exclusion clauses exist in contracts to limit liability. It may be liability for the breach of a contract term, or any other sort of liability. The limitation of liability for breaches of negligence law is common. These terms are usually valid, like any other contractual term. But courts usually interpret exclusion clauses narrowly, or where it is relevant to do so, against the party trying to rely on them.
If there is no signed contract, the norms of common practice play a role in what liability can be excluded. Statutory laws (which supersede common law) in the Federal Consumer and Competition Act make certain exclusion clauses in consumer contracts invalid.
Penalty Clauses
The party hurt by a breach of contract can sue for damages equalling the cost of the breach. Contracts may contain a pre-determined sum called liquidated damages. The amount must be a reasonable estimate of the cost of breach. It cannot be a larger, punitive sum. Only a court can determine larger demands and will only grant them if it finds one party has acted unreasonably.
Anything greater than a reasonable estimate is called a penalty and is invalid. An example is the ongoing bank fees litigation. Another is the $88.00 fee imposed by certain car parking companies which has the appearance of a fine rather than a literal cost for failure to pay $2.00.
Construction companies often incorporate what they call ‘penalties’ into their contracts with each other to enforce timely completion. As long as it is a genuine pre-estimate of the cost of delay, then it is enforceable. Mere terminology does not make a difference.
A old but important case on penalty clauses is Dunlop Pneumatic Tyre Co v New Garage & Motor Co in which a retailer selling Dunlop Tyres was misbehaving so as to damage Dunlop’s brand. Dunlop sued on a term in its contract demanding £5 per tyre sold. There was no evidence of a calculation to determine whether this was a real pre-estimate of the cost of brand damage. The court recognised there was great difficulty in establishing how great the cost of this ostensible brand damage would be. It ruled that as long as an estimate is reasonable then it is likely to be a genuine pre-estimate of the cost and is valid. Averaging of costs of breaches occurring in different ways was found to be permissible.
It is well to keep in mind, however, that these days things are done with greater sophistication, and there are mathematical tools and data available for creating a reasonably reliable estimate of something as nebulous as brand damage losses. A court may not be so permissive of rough guesses any longer, and plaintiffs with substantial technical resources may have some viable evidence to call upon.
Statements Made in Negotiations and Heads of Agreement
Statements made during negotiations prior to the formation of a final agreement ARE enforceable even if they are not part of the formal document in the end. To make a negotiation statement enforceable it must be promissory in nature and it must not be retracted prior to execution of the contract.
Non-promissory statements made in negotiation are called ‘representations’ and are NOT enforceable. (False representations are unlawful as misleading and deceptive conduct). In order to induce a party to enter a contract an entirely separate offer might be made. If accepted (eg: by entry into the main contract), this is called a collateral contract.
Trident General Insurance Co Ltd v McNiece Bros Pty Ltd [1988] HCA 44.
J Spurling Ltd v Bradshaw [1956] 1 WLR 461.
Consumer and Competition Act 2010 (Cth).
Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79.