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LAWS11030 Foundations of
Business Law
Contract Law II
Contractual Terms
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Lecture Overview
A. Express Terms
B. Implied Terms
C. Classifying Terms
D. Misrepresentation
E. Disclaimers
F. Termination of Contracts
G. Unenforceable Contract Terms

A. Express Terms
Are All Representations Terms of the Contract?
• Not all statements made by a party in the course of negotiating a
contract will be regarded as terms of the contract. It is necessary to
distinguish between statements that are:
1. ‘Mere’ representations which induced the contract
2. Terms of the contract.
• Whether a statement is a term of the contract depends upon the
intention of the parties and is determined objectively from all of the
circumstances of the case.
Ø Consider all the representations made in negotiations – complexity, time,
specifics, etc

Locating the Terms of a Contract
• Finding the express terms of a contract is guided
by the type of contract
1. Oral contracts
– Ascertained by determining the words actually used
by the parties when the contract was made
2. Written contracts
– The terms of the contract are found in the written
document or documents

Signed Written Contracts
• If a term is in a signed written contract and one party does not
read the agreement, the term is binding and enforceable:
L’Estrange v F Graucob Ltd [1934] 2 KB 394; Toll (FGCT) Pty
Ltd v Alphaphram Pty Ltd
(2004) 219 CLR 165
• Limited exceptions:
– ‘Cooling off’ periods: eg. franchise agreements
Non est factum: ‘not my contract’ – good reason for not reading the
contract (eg. illiterate, disability, cannot read English –
Petelin v
(1975) 132 CLR 355)
– Tricked into signing a contract on the belief it is non-contractual: eg.
sign a piece of paper for advertising (contained a disclaimer)
Mans Grand Prix Circuits Pty Ltd v Illiadis
[1998] 4 VR 661
Interpreting Express Terms in Commercial Agreements
• The meaning of commercial documents is determined objectively – what a
reasonable person in the position of the parties would have understood
them to mean:
Electricity Generation Corp v Woodside Energy Ltd
(2014) 251 CLR 640
– Relevant factors are the text, circumstances known to the parties and
the purpose of the transaction
• The terms agreed between the parties must be ‘
sufficiently cohesive and
to stand as a contract in their own right’: Kovan Engineering
(Aust) Pty Ltd v Gold Peg International Pty Ltd
(2006) 234 ALR 241
• A contract must have
certainty by containing all the essential terms: see
Thorby v Goldberg (1964) 112 CLR 597
– An ambiguous term will not be void for uncertainty unless it is so vague
as to be meaningless:
Malago Pty Ltd v AW Ellis Engineering Pty
[2012] NSWCA 227
The Parol Evidence Rule
• The parol evidence rule applies to a written document that is intended by the parties
to contain a complete record of their transaction and prohibits the admission of
extrinsic evidence to add to or vary the agreement contained in the written document:
Mercantile Bank of Sydney v Taylor (1891) 12 LR (NSW).
– The rule prevents the admission of parol evidence only where the contract is entirely in
• Exceptions to the parol evidence rule:
– Establish the written contract is invalid or unenforceable eg. involving fraud, duress or
undue influence
– Establish one party is an agent
– Explain a trade custom or technical terms
– There is a collateral verbal agreement relating to the same subject matter: see eg sale
of land contract that excluded white ants in
Van Den Esschert v Chappell [1960] WAR
– The written document was not intended to embody all of the terms of the transaction
but was intended merely to be a note

Collateral Contracts
• A statement that is not an actual term of the contract may be treated
by the court as a collateral contract and only damages can be
claimed for breach
– Residential lease and a promise the drains were not blocked and not in the
De Lasalle v Guilford [1901] 2 KB 215
– The collateral contract must not be inconsistent with the terms of the main
à consideration is entering the main contract
• Limitations on collateral contracts:
– The parol evidence rule may prevent recognition of a collateral contract.
– The statement was intended to have contractual effect:
Crown Melbourne Ltd v
Cosmopolitan Hotel (Vic) Pty Ltd
(2016) 260 CLR 1
– A ‘merger’ clause that states the written agreement is entire agreement:
McMahon v National Foods Milk Ltd (2009) 25 VR 251
B. Implied Terms
How are Terms Implied in a Contract?
• In addition to the express terms agreed upon by parties
other terms of a contract may be implied by:
1. A court – ‘business efficacy’ and special kinds of
2. Custom or trade usage
3. Statute

Terms Implied by the Court: ‘Business Efficacy’
• The power to imply terms in a contract is used sparingly by the
courts and in
BP Refinery (Westernport) Pty Ltd v Hastings Shire
(1978) 180 CLR 266, the Privy Council said that the term
implied must be:
– Reasonable and equitable
– Necessary to give business efficacy to the contract
– So obvious that “it goes without saying”
– Capable of clear expression
– Must not contradict any express term of the contract

Terms Implied by Custom or Trade Usage
• Where parties have contracted in a particular
trade, the customs or usages of that trade may
be implied into the contract.
– The custom or usage must be notorious, certain and
reasonable and not contrary to the express terms of
the contract.
• Examples: delivery/shipping, carriage by sea
Terms Implied by Statute
• Terms can be implied in a contract by statute
• The
Australian Consumer Law provides for statutory
guarantees in consumer contracts for the supply of
goods and services
– Key guarantees include title (ownership), correspondence
with description, acceptable quality and fitness for purpose
• State Sale of Goods Acts have similar implied terms
but limited scope and different enforcement

C. Classifying Terms
Classifications of Terms
• A term can be a:
1. Condition
2. Warranty
3. Intermediate term
• The distinction between these types of terms determines
what remedies are available for breaching a term:
1. Termination of the contract
2. Damages

Conditions and Remedies
• A condition is:
– An essential term of the contract
– A stipulation which “goes to the root of the matter; a failure
to perform it would render the performance of the rest of
the contract … different in substance from what the
defendant has stipulated for”:
Associated Newspapers Ltd
v Bancks
(1951) 83 CLR 322
• Remedy for breach allows the innocent party to
terminate the contract and/or claim damages

Warranties and Remedies
• A warranty is:
– A term of the contract but is not central to the main purpose of the contract
– Lesser significance or importance than a condition:
Bettini v Gye (1876) 1
QBD 183
– An opera singer contracted to perform an opera and be available for
rehearsals at least six days before the performance – singer became ill and
arrived two days earlier and the director attempted to terminate the contract
à court held the breach involved a warranty and remedy of damages:
Bettini v Gye
• Remedy for breach allows the innocent party can claim damages
only for the loss they have suffered as a result of the breach.

Intermediate Terms and Remedies
• In Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha
[1962] QB 62 the British Court of Appeals held that not all
contract terms be classed as a condition or warranty
– Some terms are capable of both a serious and minor breach –
intermediate terms
– The remedy for breach of an intermediate term is based on the
seriousness of the breach
• Intermediate terms were affirmed as part of Australian law by
the High Court in
Ankar Pty Ltd v National Westminster
Finance (Australia) Ltd
(1987) 162 CLR 549 and Koompahtoo
Local Aboriginal Land Council v Sarpine Pty Ltd
(2007) 233
CLR 115

D. Misrepresentation
What is a Misrepresentation?
• Misrepresentation is where the parties have agreed but one of them has
been motivated to agree by a statement as to some existing or past fact that
is not true
• A misrepresentation can be a:
1. Simple representation – of a fact not a term of the contract as it merely
induces the other party to enter the contract
2. Term of the contract – if the party making the statement promises the
truth of that statement by making it part of the contractual bargain,
then it is a term of the contract
• Remedies depend on whether the misrepresentation was:
1. Innocent
2. Fraudulent
3. Negligent (tort of negligence)

Innocent Misrepresentation
• An innocent misrepresentation is an incorrect statement of fact made without an
intention to mislead or deceive or without realisation of its untruth and can arise
from a non-disclosure of facts without the intention to deceive.
• Equitable remedies include rescission of contract + indemnity for expenses and
equitable right to resist order for specific performance
• Three exceptions that allow remedies:
1. If the subject matter is so different from what it would have been if the representation had been
true as to amount to a complete difference in substance between what the mistaken party
bargained for and what they will obtain if the contract is fulfilled, then the contract is void on the
basis of common mistake at common law:
Kennedy v Panama Royal Mail Co (1867) LR 2 QB 580
2. An agent is liable for damages if they wrongly represent that they have authority to sell property
when in fact they do not
3. If the representation is made a term of the contract – technically not a true exception

Fraudulent Misrepresentation
• According to Derry v Peek (1889) 14 App Cass 337 fraud exists
when it is shown that a false representation was made:
1. Knowingly; or
2. Without belief in its truth; or
3. Recklessly – careless whether it be true or false
• Fraudulent misrepresentation involves:
– A representation of fact that is untrue
– The party making the representation knows it is false, has no belief in its
truth or not care whether it is true or false
– The party who makes the representation must intend the other party to
act upon the representation, who then acts on the representation
– The claimant must suffer damage

Remedies for Innocent & Fraudulent
• The equitable remedy of rescission is available for fraudulent and innocent
misrepresentation – sets the contract aside and restores the parties to the
position they occupied before the contract was made
• Fraud makes the contract voidable but not void unless…
– the fraudulent misrepresentation resulted in no true agreement between the parties à the
contract may then be void on the grounds of mistake
• A person induced to enter into a contract by fraudulent misrepresentation
may bring an action for rescission of the contract or…
1. Perform the contract but sue for fraud and claim damages for any losses.
2. Defend any attempts to enforce the contract against them.

Negligent Misrepresentation
• In Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 the House
of Lords extended the tort of negligence to include negligent advice or
information that induces a person to enter into a contract
– The law will imply a duty of care when a party seeking information from a party possessed
of a
special skill, trusts them to exercise due care and that party knew or ought to have
that reliance was being placed on their skill and judgment
• The High Court extended this principle by recognising the liability of a local
council for negligent information provided by one of its employees in
response to an inquiry from a member of the public:
Shaddock & Associates
Pty Ltd v Parramatta City Council
(1981) 150 CLR 225
Statutory Misrepresentations
• The Australian Consumer Law (Competition and
Consumer Act 2010
(Cth)) (‘ACL’) provides statutory
prohibitions and remedies for certain misrepresentations:
1. Misrepresentations by a person that constitute ‘misleading or
deceptive conduct’: s 18(1) ACL
2. Misrepresentations made in connection with the supply of
goods or services: s 29(1) ACL
3. Misrepresentations made in relation to the sale or grant of an
interest in land are also prohibited: s 30(1) ACL

E. Disclaimers
What are Disclaimers?
• What is a disclaimer?
– A term of the contract that attempts to limit or exclude a liability
to which one party would otherwise be subject
à also known as
exemption or exclusion clauses
– The aim is to limit or exclude liability for breach of an express or
implied contractual obligation or negligence in the performance
of the contract.
• Disclaimers generally do not apply to acts outside the terms or
scope of the contract.

Examples of Disclaimers
• Common examples:
– Dry cleaner ticket – ‘The proprietor is not liable for any damage
to your clothes’
– Car park ticket or sign – ‘The proprietor is not liable for any loss
or damage to your car while parked in the car park’
– Signs at the entrance to buildings or venues that attempt to
exclude liability for injury on the premises

Enforceability of Disclaimers
• The person seeking to rely on the disclaimer must demonstrate that it has become part of
the contract by showing that it was included in a contract signed by the other party or:
1. If no signed contract that the exemption clause was brought to the notice of the other
party before or at the time the contract was made –
Thornton v Shoe Lane Parking Ltd
[1971] 2 QB 163 and Thompson v London, Midland & Scottish Railway Co [1930] 1 KB
41; OR
2. The parties intended to contract on the same basis as the terms used in a previous
dealing which had included an exemption clause:
Balmain New Ferry Co v Robertson
(1906) 4 CLR 379.
• If the nature of disclaimer is misrepresented to the other party who does not read it, the
party seeking to rely on the disclaimer cannot enforce the clause.
• A disclaimer is interpreted strictly and any ambiguity resolved against the person enforcing

F. Termination of Contracts
Termination by Performance
• When the parties to the contract fulfil their obligations to one another
the contract is terminated by performance
• Complete performance with the terms of the contract is needed to
prevent breach but in some situations substantial performance may
allow payment for the part of the contract that was performed
• Contracts can be:
1. Entire contract – full payment after full performance
2. Divisible contracts – part payment after each stage of performance
• Time requirements of performance
– Performance should occur in the set time or within a reasonable time
– If not performed in the specified time, can claim damages
– If ‘time is of the essence’ a party can terminate the contract due to breach of condition
Termination by Agreement
• Termination under the original contract:
1. Express power – contract stipulates termination will
occur at a specific time
2. Implied right – court can imply a right to terminate after
a reasonable amount of time
• Termination my also occur when a new agreement is
– Example: parties can mutually agree to terminate or vary
the original contract

Agreement and Conditional Contracts
• The parties to a contract may make the performance of their
contract conditional upon the occurrence of a specified event or
conditional upon an event not occurring. There are two forms of
1. Condition precedent
– A condition that a certain event must occur before performance
of the contract
– Example: sale of a house is subject to land inspections or
2. Condition subsequent
– A condition in a contract that upon the occurrence of an event
the contract will be terminated
When can a Contract be Terminated by a Breach?
• A breach of contract may allow a party to
terminate a contract in two situations:
1. Where one party repudiates the whole contract by
act or deed.
2. Where one party breaches a condition (or
sometimes an intermediate term) of the contract.

Breach and Repudiation
• Where a party is unable or unwilling to perform their obligations under the
contract the contract is repudiated and the innocent party can either end the
contract and sue for damages or insist on performance of the contract
• Forms of repudiation:
1. Anticipatory breach
– One party makes clear that they will not be performing their obligation
before the time for performance
à innocent party can sue as soon as
informed of the anticipatory breach
2. Conduct amounting to a breach
– Examples: a party expressly states they are unwilling or unable to
perform the contract, words or conduct in the absence of an express
statement and insolvency
Breach of a Term and Remedies
• Termination by breach of a term provides different remedies
depending on the type of term:
1. Condition
• Innocent party can terminate the contract and/or sue for damages: Associated Newspapers v
(1951) 83 CLR 322
2. Warranty
• Innocent party can sue for damages: Bettini v Gye (1876) 1 QBD 183
3. Intermediate term
• A term that may be classed as condition or warranty à a serious breach of such a term
allows termination and less serious breach damages:
Hongkong Fir Shipping Co Ltd v
Kawasaki Kisen Kaisha Ltd
[1962] QB 26; Ankar Pty Ltd v National Westminster Finance
(Australia) Ltd
(1987) 162 CLR 549
Termination by Frustration
• After a contract is made an unforeseen event may occur which results in such a
fundamentally different situation from that contemplated by the parties at the time of
entering into the contract that the law regards them as being discharged from any
further obligation under the contract – the contract is
• An unexpected change in the law makes performance of the contract illegal:
v Bowden
(1857) 7 EI & BI 763; travel contracts and Covid-19 in 2020, 2021
• The anticipated event that gave rise to the contract does not occur:
Krell v Henry
[1903] 2 KB 740
• The conditions for which one of the parties is obliged to perform their obligations
change dramatically:
Codelfa Constructions Pty Ltd v State Rail Authority (NSW)
(1982) 149 CLR 337
• Performance is not required to be impossible but substantially different to what was
agreed. Increased difficulty or expense do not frustrate a contract:
Davis Contractors
Ltd v Fareham UDC
[1956] AC 696.
Rules of Frustration
• Legal effect of frustration:
1. The contract automatically terminates
2. Future obligations are discharged, however there are still legal
responsibilities for performance that has already occurred
3. Payments made in anticipation of performance of the contract must
be returned – adjusted to account for benefits obtained before
termination or losses incurred before termination
• Limitations on recognition of frustration:
1. The contract provides for such an event occurring
2. The event is not foreseeable by the parties
3. Fault or self-induced frustration
4. Statute – Victoria, New South Wales and South Australia
Termination by Operation of Law
• In certain situations a contract is terminated by
the operation of the law – parties have no choice
• Examples:
– Bankruptcy – the bankrupt is relieved of certain
– Merger – a simple contract is replaced (‘merged’) with
a deed where the parties and subject matter are the
G. Unenforceable Contract

Which Contracts are Illegal?
• A valid contract must not involve an act prohibited by law
and a contract may be ‘illegal’ under:
1. Statute.
2. Common law.
• ‘Illegal’ contracts fall into two categories:
1. Illegal – so serious they are illegal in the strict sense eg.
agreement to commit a crime
2. Void – less serious eg. restraint of trade agreement

Illegality Under Statute
• In Yango Pastoral Co v First Chicago Australia Ltd (1978) 139 CLR
410 at 413, Gibbs ACJ outlined four different ways in which a statute
may render a contract illegal:
1. The contract may be to do something which the statute forbids.
2. The contract may be one which the statute expressly or impliedly
3. The contract although lawful on its face may be made in order to affect
a purpose which the statute renders unlawful.
4. The contract although lawful according to its own terms may be
performed in a manner which the statute prohibits.
• The prohibition may be express or implied in the statute
Contracts Illegal as Formed or Performed
• A statutory prohibition may make a contract:
1. Illegal as formed
A contract was prohibited, either expressly or impliedly, from its inception
2. Illegal as performed
– Contracts that are legal when formed but become illegal when one or both of the
parties intend to perform it in an illegal manner or for an illegal purpose

Contracts Void by Statute
• A statute may not make a particular contract illegal but void
and unenforceable
• Eg. Legislation in most Australian States provide that gaming or
wagering contracts are void and cannot be enforced in the courts except
for lawful forms of gambling
• A contract will be void if it undermines statutory rights that are
conferred in the public interest:
Westfield Management Ltd v
AMP Capital Property Nominees Ltd
(2012) 247 CLR 129
‘Illegal’ Contracts at Common Law
• Courts refuse to enforce agreements that are ‘contrary to
public policy’ and there are two basic categories:
1. Contracts described as ‘illegal’ because of their more
reprehensible character
à contracts to commit a crime,
contracts to pervert the course of justice (Lawyer X in Victoria)
2. Contracts described as void because of their less serious

Contracts Void at Common Law
• Two categories of contract are usually regarded as void
at common law for being contrary to public policy
1. Contracts to oust the jurisdiction of the
Dobbs v National Bank of Australasia Ltd
(1935) 53 CLR 643
2. Contracts in restraint of trade

Classes of Contract that Restrain Trade
• At common law restraint of trade contracts can be divided into three groups:
1. Contracts for the sale of a business
• Made when a business is sold and protects the purchaser’s goodwill against undue competition by
the vendor
2. Contracts of employment or restrictive covenants
• Made with an employee to restrain the employee after the termination of their employment from
performing a specified occupation, in a certain area and for a specified time
3. Other restrictive trading agreements
• Examples: price maintenance agreements and end of a franchise agreement
• Many types of anti-competitive agreements are also prohibited by State/Territory and
federal consumer legislation but a restraint that does not contravene legislation may
be an unlawful common law restraint of trade

What is the Common Law Restraint of Trade Doctrine?
• A contract which is in restraint of trade is void as being contrary to
public policy unless the court is satisfied that it is reasonable in the
• In
Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894]
AC 535 the common law test for a valid restraint of trade requires the
restraint to be:
1. In the public interest.
2. Reasonable in protecting the covenantee’s interests – no wider
than is reasonably necessary in terms of scope of activity,
geographic area and duration.
Ø Some courts have assessed the relevant bargaining position of the parties in
determining the validity of a restraint:
A Schroeder Music Publishing Co Ltd v
[1974] 1 WLR 1308 à application to other industries?

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