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Australian Contract Law & Precedents

steven — Wed, 21 Jul 2010 09:46:08 +0000

Disclaimer: I’m not a lawyer and I have no claim that this advice should be taken as legal advice in replacement of seeking out professional help. What I hope to do is educate you over a series of small posts published here between 7 November, 2009 and 20 November, 2009. The articles discuss what constitutes a contract with the intention that you should be able to figure out when you might need to see a real lawyer. This series is in the Australian context.

Australians, Please Ignore Contract Law on US Television

How many times have you heard people insist that such-and-such was law because they saw it on American television. That’s kind of funny but it’s not cute at all when you’re in business. The series of articles linked to below provide an overarching view of Australian Contract Law (note the disclaimer on your way into each one) that draws from a number of credible and authoritative resources (noted at the end of this page).

Australian Contracts 101: The Series

Who Should Read this Series?

If you’re a freelancer, think you’re ever going to be a freelancer, if you’re a business person, entrepreneur or just a curious bastard in need of some refuge in the interminable boring world of contract law… then have I got the goods for you. All jokes aside, you need to know when and when not to respect contracts… what constitutes a contract in the eyes of the Australian legal system… and how to assess whether or not you need to employ a lawyer before things get past the point of crisis. This post can save you money off your bottom line… so bookmark it.

Links to precedents have been included to assist you in at least having a cursory ability to enter a discussion about a contract – it’s bamboozle proofing.

Resources for this Series

The bulk of this information is obtained through Australian Business Law 26^th edition by Paul Lattimer, Managers and the Law: A guide for Business Decision Makers by Lynden Griggs, Eugene Clark and Ian Iredale, A Guide to Business Law thirteenth edition by John Carvan, John Gooley and Evelyn McRae, Law in Commerce third edition by Brendan Sweeney and Jennifer O’Reillly, as well as through the MBA unit BFA682 Law for Managers taught at the University of Tasmania by Simone Watson in 2009. These resources are highly recommended for improving your understanding about these issues. Many case files hyperlinked within this series are directly accessed via the Austlii database (Australia) and the BAILLI database (United Kingdom).

Business Academics: Stop Promoting the Pinto Myth

steven — Sat, 13 Mar 2010 09:47:03 +0000

In late 1977 the Ford Pinto became infamous as a result of a controversial Mother Jones magazine article by Mark Dowie titled Pinto Madness. Dowie denouncing the 1970s Ford sub-compact as a firebomb vulnerable to fatal explosions caused by rear end collisions. Dowie also claimed that Ford chose economics over human life – but that is an outright lie. Dowie’s so-called facts were debunked 20 years ago by Rutger’s Law Review.

The Pinto Case is cited widely in the academic literature of business management, organisational behaviour, management ethics and related disciplines. My question is why? The facts of the case are well documented in law journals – yet the Pinto myth maintains traction in business schools around the world. One article wrote that if it was untrue then it is the very case that an ethics course would invent. In that light, it is time for the Myth of the Pinto to be pushed aside by the actual facts of the case.

The Ford Pinto Myth as Espoused by Business School Professors

The case of the Ford Pinto, in the early 1970s, is usually put forward to students as a matter of fact. The young Turk Iacocca, rising on the success of the Ford Mustang, pushed for a sub-compact car to cost no more than $2000 and weigh no more than 2000 pounds. The production schedule of the Pinto was only 25 months, whereas industry standard was 43 months. In crashes over 25 miles per hour the fuel tank always ruptured spilling fuel onto the road, the low fuel tank was situated behind the differential and would get rammed into it on collision causing a spark and then ignition. At the same time, a rear end collision would cause the doors to jam shut and the result was a deadly fireball which incinerated its occupants.

The story gets more sinister when it turns out that the Capri’s tank was higher and therefore did not suffer the same problem. The Pinto’s fuel tank problem went unfixed for several reasons: Iacocca wanted the Pinto in showrooms by 1971; Iacocca would not suffer negative reports so nobody told him this flaw had been identified during testing (safety was not a Ford priority); and, a cost-benefit analysis of loss of lives compensation versus the cost of fixing the Ford Pinto’s fuel tank meant it was cheaper for Ford to ignore the problem and pay off the victims.

The cure would have been a simple $11 per vehicle fire prevention device… and an alternative bladder could have achieved the safety requirement for a mere $5.08 per vehicle. At around this time the academic has their student morally enraged.

The story is BULLSHIT and it is time that academics from the business schools stop spreading it around as the truth.

The Pinto Myth Debunked in Rutger’s Law Review, 1991

Enter another professional body who have well and truly debunked this myth a good 20 years ago – Myth of the Ford Pinto Case is from Rutger’s Law Review, 1991 volume 43:1013. You can download the Myth of the Ford Pinto Case from PointofLaw (link on the right side of their page). You can also read Grimshaw v Ford Motor Company (1981) online.

Over a wide range of reading about the Pinto case several things came to light. Lee Iacocca was not the great villain of all time, he went to revive the Chrysler Corporation in the 1980s and became a legendary working man’s hero. There was never any evidence Iacocca knew of anything regarding those fuel tank allegations. The Pinto’s fuel tank was not an unusual configuration for a sub-compact at that time in the US market, it was no safer or more dangerous than other cars of it’s type. Sub-compacts are an inherently more dangerous vehicle than a larger car, it remains a fact of life today. We compromise safety and luxury for economy and convenience. One key reason for the controversial low fuel tank placement was that the Pinto was a hatchback, the fuel tank needed to be lower by necessity (common practice in its market of the early 1970s). At the same time, European cars had the higher tank which caused splashing of fuel onto back seat passengers in accidents – so the espoused cure was another compromise of safety.

Dowie’s facts in the Mother Jones article were blatantly wrong and clearly sensationalised to meet Dowie’s agenda. The offending cost-benefit analysis Dowie mentioned was never undertaken in the context of evaluating the Ford Pinto’s fuel tank in isolation. All Ford product lines were represented in the analysis and the cost of a human life was determined not by Ford but by a relevant government administrative body much earlier. This so-called damning cost-benefit analysis had been created for the insurance body, on request. It was not performed for the assessment of Pinto deaths by fire in rear-end collisions, as espoused by Dowie.

There was never any evidence to support the claim that the Pinto production schedule was 25 or 38 weeks… it may have been grossly mistaken by Dowie.

The US government openly asks designers to compromise between economics and safety. After all, the safest car in the world would never be built so trade-offs are essential to achieve product viability and industry competitiveness.

Why Do Business Academics get this so Wrong?

I won’t get into the nuts and bolts of this case beyond asking you, the reader, to pass this information around to every academic you encounter who insists on passing the Pinto Myth along the academic food chain. The practice is sheer laziness with the facts and should be contested wherever the Pinto Myth raises its ugly misinformed head.

My question to academia is why? If Rutger’s Law Review debunked this myth in 1991, why is there a business school obsession with professors quoting the Pinto case as fact in academic literature over multiple disciplines? In each and every case I encountered, a fast backtrack through the referenced articles traced genealogically back to the Dowie article in Mother Jones. Even today, in a Strategic Management lecture, several students passionately raved about the Pinto Case as fact because another MBA professor had used it as a case study.

The Pinto Myth is BULLSHIT and does not belong in serious academic literature. Further, it does not even belong in our living room. Academic articles should never trace back to a popular published magazine article, because the source is generally unsafe… otherwise dig much deeper independently.

Curiously, there is also a complete divergence between management and business literature and the law literature. How can this be so? Business academics need to take this as a call to caution in their research, they must read more widely. The Pinto Case, as espoused, is wrong and easily unfolded. I can see no excuse.

What Books are on my Office Bookshelf?

steven — Wed, 17 Feb 2010 03:52:31 +0000

Here’s an interesting question and I’m sure its going to rivet everybody to their office chairs… what books are on my office bookshelf? Only the candid reporting of actual facts will be enough to assuage the curiosity of other information addicts. Just remember, information addiction is not a crime – its an illness. Treat us nicely.

Text Books – Management

Fundamentals of Management (Pacific Rim Edition) by Danny Samson and Richard L. Daft
International Business: Managing in the Asia-Pacific (3rd Edition) by Greg Fisher et. al.
Strategic Management: Competitiveness & Globalisation (Asia Pacific Third Edition) by Hanson et. al.
Cold Steel: Lakshmi Mittal and the Multi-Billion-Dollar Battle for a Global Empire by Tim Bouquet and Byron Ousey
Managers and the Law: A Guide for Business Decision Makers by Lynden Griggs, Eugene Clark and Ian Iredale
Essential Foundations of Economics (4th Edition) by Robin Bade and Michael Parkin
Accounting 4: An Introduction by Atrill et. al.
Principles of Managerial Finance by Gitman, Juchau and Flanagan
Organisational Behaviour on the Pacific Rim (2nd Edition) by Steven McShane and Tony Travaglione
Organisational Behaviour (5th Edition) by Robbins et. al.
Marketing Principles & Best Practices 3e (International Student Edition) by Hoffman et. al.
Internet Marketing: Strategy, Implementation and Practice by Dave Chaffey et. al.
Human Resource Management: Strategies and Processes (5th Edition) by Alan Nankervis, Robert Compton and Marian Baird
Writing for Journalists (2nd Edition) by Wynford Hicks et. al.
Editing Made Easy by Bruce Kaplan

Text Books – Computing

Artificial Intelligence: Structures and Strategies for Complex Problem Solving by George F. Fluger
Operating System Concepts (7th Edition) by Silberschatz, Galvin and Gagne
Your UNIX: The Ultimate Guide (2nd Edition) by Sumitabha Das
Data Communications and Networking (4th Edition) by Behrouz A. Forouzan
PHP and MySQL Web Development (2nd Edition) by Luke Welling and Laura Thomson
Java Software Solutions: Foundations of Program Design (3rd Edition) by Lewis & Loftus
Data Abstraction and Problem Solving with JAVA: Walls and Mirrors (International Edition) by Frank M. Carrano and Janet J. Prichard
Data Structures and Algorithm Analysis in C (2nd Edition) by Mark Allen Weiss
Object-Oriented Software Engineering: Using UML, Patterns and Java (2nd Edition) by Bernd Bruegge and Allen H. Dutoit
The C Programming Language (2nd Edition) by Brian W. Kernighan and Dennis M. Ritchie
Computer Confluence: Exploring Tomorrow’s Technology (IT Edition) by George Beekman and Eugene J. Rathswohl

Text Books – Not Mine (But Read)

Management Information Systems: Managing the Digital Firm (International Edition) by Kenneth C. Laudon and Jane P. Laudon
Electronic Commerce: A Managerial Perspective 2006 by Efraim Turban et. al.

Non-Fiction Purchases (Web Development)

Designing with Web Standards by Jeffrey Zeldman
The Zen of CSS Design by Dave Shea and Molly E. Holzschlag
Transcending CSS: The Fine Art of Web Design by Andy Clarke
Bulletproof Ajax by Jeremy Keith
DOM Scripting: Web Design with JavaScript and the Document Object Model by Jeremy Keith
DHTML Utopia: Modern Web Design Using JavaScript and DOM by Stuart Langridge
The PHP Anthology: 101 Essential Tips, Tricks & Hacks by Davey Shafik et. al.
Core MySQL: The Serious Developer’s Guide by Leon Atkinson

Non-Fiction Purchases (Other)

Sketching User Experiences: Getting the Design Right and the Right Design by Bill Buxton
Here Comes Everybody: The Power of Organizing without Organizations by Clay Shirky
Monkeyluv: And Other Stories on our Lives as Animals by Robert M. Sapolsky
Confessions of an Eco-Sinner: Tracking Down the Sources of My Stuff by Fred Pearce
What the Dog Saw: And Other Adventures by Malcolm Gladwell
Outliers: The Story of Success by Malcolm Gladwell
The Limits of Power: The End of American Exceptionalism by Andrew J. Bacevich
The Accidental Guerrilla: Fighting Small Wars in the Midst of a Big One by David Kilcullen
No Standing Only Dancing: Photographs by Rennie Ellis, National Gallery of Victoria
Impossible Nature: The Art of Jon McCormack by Jon McCormack et. al.
The Fabulist: The Incredible Story of Louis De Rougemont by Rod Howard

Electronic

Blue Planet Run: The Race to Provide Safe Drinking Water to the World by Rick Smolan and Jennifer Erwitt
The Public Domain: Enclosing the Commons of the Mind by James Boyle
Remix by Lawrence Lessig
The Future of Ideas by Lawrence Lessig
Code: version 2.0 by Lawrence Lessig
Web Form Design: Filling in the Blanks by Luke Wroblewski
Mental Models: Aligning Design Strategy with Human Behaviour by Indi Young
Build Your Own Ruby on Rails Web Applications by Patrick Lenz
The Art and Science of CSS by Cameron Adams et. al.
The Principles of Successful Freelancing by Miles Burke
How to Make a Book by the Blurberati
Street Photography for the Purist by Chris Weeks
The Photoshop Anthology: 101 Web Design Tips, Tricks and Techniques by Corrie Haffly
Tribes: We Need You to Lead Us by Seth Godin
The Dip by Seth Godin
99 Cows by Seth Godin
Bootstrapper’s Bible by Seth Godin
Unleashing the Idea Virus by Seth Godin

Fiction

The Collectors by David Baldacci
Hannibal Rising by Thomas Harris
A Most Wanted Man by John LeCarre
All the Colours of Darkness by Peter Robinson
Red Rabbit by Tom Clancy
The DaVinci Code by Dan Brown
Velocity by Dean Koontz
The Darkest Evening of the Year by Dean Koontz

Never do Business with Litigious Assholes

steven — Thu, 03 Dec 2009 07:48:01 +0000

Its interesting to see how many people would rather get into an expensive stouche over their pride rather than make a simple change and walk away. The first rule: never do business with someone you know is a litigious person. A litigious person, by the way, is somebody who likes, or threatens, to sue people’s arse in court for the slightest little conflict. Often they’re wrong. But never will they be somebody you can trust in a business sense.

Rule 1 – we’ll call it the Primary Litmus Test – is therefore to avoid arseholes who throw the word sue around the ballpark even as an idle threat in casual conversation. At best they are bullies – at worst they will cost you a fortune. Its just not good business having them around. Rule 2 is simply to always apply the Primary Litmus Test (Rule 1) to your business relationships. Do unto others…

Its not about who feels vindicated and what some old man in a white wig says when its all said and done – who gives a flying crap about being right or wrong in business? Seriously. What you care about is the fact that even if its something relatively trivial then you’ll have to employ legal counsel and defend yourself in court. How much is that going to cost you? How much business are you going to miss being tied up with that rubbish between reading case files, meeting cousel and appearing in court?

The best you can come out from court is breaking even. The judge may even award a token dollar! Wow, awesome. But even if you’re right the things you stand to lose are your business and your house and other possessions. The only winners in court are generally the lawyers, remember that.

So every time you see or hear or rub shoulders with some asshole who goes on about having to sue somebody over absolute rubbish then put them onto your personal never to do business with again list. I recall ditching a business association cold one night several years ago for that very reason. Even mention sueing me and I’m out of your life like a rocket. I don’t do business with assholes who might sue me over rubbish. Neither should you.

And always tell yourself that court is the last resort. Always. And only if its worth it as a return on investment. Never make it about pride and ego.

Contracts 101 – Conclusion: Protect your Business

steven — Thu, 19 Nov 2009 20:47:41 +0000

Disclaimer: I’m not a lawyer and I have no claim that this advice should be taken as legal advice in replacement of seeking out professional help. What I hope to do is educate you over a series of small posts about what constitutes a contract and you should be able to figure out when you might need to see a real lawyer. Although this series is in the Australian context many of the principles apply in other countries.

Throughout the Contracts 101 series there has been a central theme that has been driven home – contracts are not flippant agreements that we should be self-authoring. In the web development profession, of which I would claim a token place, there is strong industry-wide promotion of the cost savings for self-authored contracts. Therefore my main point, if you take anything away from this series, is to appreciate the complexity of the simple contract under Common Law.

Avoid Potential Catastrophic Costs

First, there should be an appreciation for why we make contracts. My personal opinion is that a contract is not primarily entered with the motivation of forcing the other party to comply. I would contest that you enter a contract to protect yourself from having to hire lawyers and defend yourself within your own country’s legal system or abroad in other legal systems. The potential catastrophic cost of being held accountable for a misunderstanding between contract parties far outweighs the big stick mentality that most small businesses appear to associate with contractual relationships. Particularly under Common Law systems there needs to be a detailed contract drawn up that covers a lot more than you would need in a Civil Law juristiction.

Only enter Win-Win Contracts

Second, there needs to be an appreciation that contracts should always be worth the cost of creating and performing to your business. By that I don’t mean to denegrate contracts or suggest that you should omit them from your business processes. However, I do mean that flippantly signing contracts that you cannot afford to defend or enforce seems to be a waste of your business time. In other words, negotiation of the contract and ensuring that both parties come to a fair win-win outcome is far more important than the documentation that you walk away with after the agreement is struck. Because the court will not enforce one-sided unfair contracts that you bullied others into entering. And, when you think about it, the unhappy party in a win-lose contract may take your case to court for a judicial outcome – which is expensive and may take months to a decade before resolution.

Know When to Consult a Lawyer

Third, there needs to be an appreciation that hiring a lawyer is a business expense that we need to be prepared to endure. If you cannot justify the expense then the contract is probably not worth your while to take on board. Do you hire an architect? A database engineer? A doctor? An accountant? Then why does it seem to be a catch-cry of the web development industry that we self-author contracts? Hire a legal professional as the need arises – with a view to the potential losses of not hiring them. This boils down to a simple business risk-management decision. Or, more succinctly, if you write your own contracts then employ a legal professional to offer you advice to it’s flaws and validity under Common Law.

Thankyou and Acknowledgements for this Content

Finally I need to reinforce upon you that I am not a lawyer. However, the resources used to collate the Contracts 101 series are taken directly from the University of Tasmania’s MBA program. To that extent, these installments were taken directly from my personal study notes taken early in 2009 and due to the nature of those notes there may, and probably will, be paragraphs or examples directly taken from several of the following resources. As such the sources need to be given and appreciated and I thank the respective authors in advance for their understanding that this information is not repeated in a commercial context.

There is a strong hope on my part that small businesses, particularly web developers, might take this series on board and become a lot smarter about how we deal with contracts.

Resources for this Series

Installments in Contracts 101

Contracts 101 – Part 14: Ending the Contract

steven — Thu, 19 Nov 2009 19:28:28 +0000

Disclaimer: I’m not a lawyer and I have no claim that this advice should be taken as legal advice in replacement of seeking out professional help. What I hope to do is educate you over a series of small posts about what constitutes a contract and you should be able to figure out when you might need to see a real lawyer. Although this series is in the Australian context many of the principles apply in other countries.

In the previous installments of the Contracts 101 series the discussion covered the six elements required of a contract: the agreement, consideration, capacity, legality of object, possibility of performance and genuine consent. Following this outline the subject turned to promissory estoppel, the breach of the promise where there is no contract in material terms. This installment of the series looks at five ways that we can end the contract.

Breach
Frustration
Performance
Operation of the Law
Agreement

1. Breach

The breach occurs in situations where you might contract to have a shed built and the hired party fails to start work in reasonable time thereby leaving you on the completion date with an unbuilt shed. In other words, the breach of contract involves failure to fulfil the actionable details of the contract.

2. Frustration

Frustration occurs in situations where you might sign a contract selling your house to another party. However, prior to the money changing hands a cataclysmic storm makes the house unlivable and it has to be demolished. Frustration means that the contract could not be completed. There was an example within this series of a contract to paint a bridge which got demolished. No bridge = no contract. The possibility to paint the bridge no longer exists and the contract is frustrated.

3. Performance

The ideal ending of a contract is with performance. An example is the sale of a car where the purchaser drives away with signed papers of ownership and the seller has the money in exchange.

4. Operation of Law

Operation of law involves those situations where you might contract a party to do something which, before they can do so, is legislated as illegal. For example, were you to contract a party to create a neon sign for your shop, but before the party can start work on the sign there is a change in the law that forbids such signs being used. Thus, the operation of law ends the contract to make the sign.

5. Agreement

By agreement the contract can be brought to an end such as when somebody is leasing a car for 12 months and they find another person to take over the lease for the remainder of the period. All parties can agree that the original contract is ended and the new arrangement is contracted.

Issues and Items of Note

Performance must be precise and exact… Bolton v Mahadeva (1972), although the exception is when the work is divisible (such as with wages). Where minor omissions or defects exist the court normally allows recovery under the doctrine of substantial performance… Hoenig v Isaacs (1952). And a tender for performance of goods or services (described as an attempt at performance) amounts to discharge of the performance… Startup v Macdonald (1843).

Agreement can only take place where both parties have yet to perform their end of the bargain under the contract (otherwise this would amount to a gift if one person had performed and the other was let go from that responsibility – there would be no consideration).

In defining frustration there must be a supervening event that was not contemplated by either party and therefore performance is no longer possible… Davis Contractors Ltd v Fareham UDC (1956).

It might be worth stressing that one cannot recover for remote losses… Victoria Laundry (Windsor) Ltd v Newman Industries Ltd (1949), meaning that a direct causal link needs to be established rather than a broad brush that may or may not be assumed by the complainant. If your piano is not delivered to Queensland for a concert you can claim that you were unable to perform for your audience, but you would probably lose money trying to claim damages against the transport company because the piano you used instead fell over and broke your leg.

If you are aware that there will be a loss due to a breach you must do your best to mitigate the loss. Further, you cannot recover for loss which is avoided… British Westinghouse Co v Underground Electric Railway Co of London (1912).

On form contracts, liquidated (agreed) damages must be genuine and realistic pre-estimates (as covered in the Hire Purchase legislation).

Remedies for breach of contract most commonly consist of damages to put the innocent party into the same position as though the breach did not occur. Where there is no actual loss then only nominal damages will be awarded (perhaps $1) rather than the full actual cost. The court may also order specific performance or injunction, meaning the court can order either party to carry out the contract, or put in place an injunction to prevent the act from being carried out (both equitable remedies).

It should be obvious that the ending of the contract is an area well worth the business owners time and attention. As ending the contract is the final lesson in the Contracts 101 series the next post will draw some major points and conclusions which will hopefully be of value to the reader.

Note: Resources used for this series are identified in the first installment – Contracts 101 – Part 1: Outline.

Installments in Contracts 101

Contracts 101 – Part 13: Promissory Estoppel

steven — Wed, 18 Nov 2009 20:42:36 +0000

Disclaimer: I’m not a lawyer and I have no claim that this advice should be taken as legal advice in replacement of seeking out professional help. What I hope to do is educate you over a series of small posts about what constitutes a contract and you should be able to figure out when you might need to see a real lawyer. Although this series is in the Australian context many of the principles apply in other countries.

In the previous installments of the Contracts 101 series the discussion covered the six elements required of a contract: the agreement, consideration, capacity, legality of object, possibility of performance and genuine consent. However, there are situations where the lack of a contract will be addressed by the court. This is the area of contract law called promissory (or equitable) estoppel.

In short, promissory estoppel can be thought of as a breach of promise. It would become an issue for the court where somebody was led to believe that a contract would become reality but the other party reneges – in which case the court has the power to estopp the other party (prevent them) from using the lack of a contract as a defence. In which case it would be as though there was a contract in place. To prove a case of promissory estoppel six criteria need to be met.

The assumption of a particular legal relationship by A with B
B was responsible for the assumption
The actions or inactions of A were based on that assumption
B intended A to act
A suffered losses if their assumption was not fulfilled
B has taken no steps to put that assumption to rest as being false

In cases where these six criteria are met… Walton Stores (Interstate) Ltd v Maher (1988); Sword v Shiel – High Trees (1947); Commonwealth v Verwayen (1990); Giumelli v Giumelli (1999), the court has the power to estopp the other party from contesting there was no signed contract in the dispute. In effect, the offending party will be held to their promise as there has been an unfair loss to the injured party which was avoidable given the forgone opportunity to put them straight about their wrong assumption.

Promissory estoppel also applies to situations where one party to a contract, either through their words or actions, leads the other party to believe that some legal right under a contract will not be enforced, and where the other party alters their position based on that assurance. However, for example, where rent has been agreed to be accepted below the contract rental, with due notice the party which promised the reduced rent can resume the suspended right to claiming the full rental under the original contract, if the contract is one which is ongoing (not a one-off)… Tool Metal Manufacturing Co Ltd v Tungsten Electric Co Ltd (1955). Although this may be a matter of whether there had been a change in the lessee’s position… Je Maintiendrai Pty Ltd v Quaglia (1980), or there had not been a change of position… Gollin & Co Ltd v Consolidated Fertilizer Sales Pty Ltd (1982). The promissee has to show they have suffered a material loss, having altered their position, in reliance on the promise, and because of it there would be an injustice to let the promiser renege from their word… Chin v Miller (1981).

Similarly, promissory estoppel may also involve situations where promises to land are created or encouraged by another person (such as the mother in Australia promising title to her house if her son and daughter-in-law migrated from England, then reneged when they arrived), resulting in the handing over of the promised land… Riches v Hogben (1986).

Be aware that it is not sufficient to just have a reliance and a loss; there also needs to be an encouragement from the party making the promise… Commonwealth v Verwayen (1990); Giumelli v Giumelli (1999).

In the next installment of the Contracts 101 series the issue of ending a contract will be explored.

Note: Resources used for this series are identified in the first installment – Contracts 101 – Part 1: Outline.

Installments in Contracts 101

Contracts 101 – Part 12: Genuine Consent

steven — Tue, 17 Nov 2009 20:29:30 +0000

Disclaimer: I’m not a lawyer and I have no claim that this advice should be taken as legal advice in replacement of seeking out professional help. What I hope to do is educate you over a series of small posts about what constitutes a contract and you should be able to figure out when you might need to see a real lawyer. Although this series is in the Australian context many of the principles apply in other countries.

Following through the Contracts 101 series from the agreement, consideration, capacity, legality of object and possibility of performance, this installment discusses the sixth and final element of the simple contract – genuine consent. In fact, genuine consent also comprises of five elements with which the business operator should become familiar:

mistake
misrepresentation
undue influence
duress
unconscionability

1. Mistake

There are a number of ways that a mistake can occur when committing to a contract:

Common mistake… Leaf v International Galleries (1950); The Saints Gallery Pty Ltd v Plummer (1988)
Mutual mistake… Couturier v Hastie (1956); Raffles v Wichelhaus (1864); Smith v Hughes (1871)
Uni-lateral mistake… Taylor v Johnson (1983); Ingram v Little (1960)
Mistake about the identity of the party… Cundy v Lindsay (1878); Lewis v Averay (1971)
Mistake to the nature of the document itself (non-est factum)… Petelin v Cullen (1975); Pt Ltd v Maradona Pty Ltd (1992)

Be aware that in Gallie v Lee (1969) Lord Denning stated that if somebody signs a document relying on the word of another or to its character or content then they cannot back away from their agreement. Therefore the oops factor defense probably won’t get you very far in a court. You still need to read and sign the document with due care and diligence (including consultation with a legal professional).

The law of mistake has also been simplified in recent years and the court will be unlikely to set aside a contract on the grounds of unilateral mistake. The important thing to note about mistake is that it does not refer to the simple error of judgement definition – in this sense, mistake may be something like the mutual mistake in Couturier v Hastie (1836) where both parties contracted to trade corn which had unbeknown to them been spoiled at sea. Or it could be a mistake where both parties misunderstood each other and therefore there was no real contract.

Also note that to claim non-est factum you must show that the document signed is radically different than that which was contemplated at the time. Questions to concern yourself with at the time of contractual agreements with a client, for example, might include their level of literacy and their competency to understand the contract.

Common Law remedies for mistake include rescission of the original contract, restitution of payments already made, specific performance directives from the court and rectification of the contract by the court. However, the Trade Practices Act provides further powers to the court above those provided by Common Law and provides the ability to impose penalties and fines and order corrective actions (all unavailable under the Common Law solution).

2. Misrepresentation

Misrepresentation consists of four elements:

A false statement was made
It was addressed to the person
It was a statement intended to induce them into entering the contract, and
It did induce them into the contract

Also, misrepresentation can either be innocent, negligent or fraudulent, and there are differences in the court’s response under Common Law to any breach. However, note that if it was only opinion that was offered then it is not misrepresentation… Bisset v Wilkinson (1926).

Remedies for misrepresentation include:

If innocent then the court may refuse to fulful the contract or provide equity
If fraudulent then there may be a liability for damages

Again, this also comes under the Trade Practices Act as misleading or deceptive conduct (s52), and false or misleading representation (s53), and could result in an injunction (s80), damages (s52) or ancilliary remedies (s87).

3. Undue Influence

Undue influence exists where one party uses their dominance in a relationship in such a way as to result in a situation where the weaker party loses their ability to act freely and voluntarily… Johnson v Buttress (1936). Relationships that inherently warrant attention in this regard include parent-child, doctor-patient, solicitor-client, religious advisor-devotee… Allcard v Skinner (1887). Although the courts do not limit themselves to these identified relationships. Therefore, the very nature of a relationship could affect the ability of the other party to provide genuine consent to the contract.

4. Duress

Again, contracts signed under duress lack genuine consent. Duress occurs where an illegitimate pressure is placed on the party to enter the contract… Scolio Pty Ltd v Cote (1992). As a test, the duress must be present and effective but it does not have to be the sole factor at play – duress can simply be a contributory factor… Barton v Armstrong (1976), and can include economic duress… Crescendo Management Pty Ltd v Westpac Banking Corp (1988); CTN Cash & Carry Ltd v Gallagher Ltd (1992).

5. Unconscionability

Unconscionability is a step further than undue influence or duress. Whereas undue influence is based on the use of influence in a relationship of uneven weight, and duress is based on direct illegitimate pressure to sign the contract, unconscionability involves the direct taking advantage of someone… Schroeder Music Publishing Co Ltd v Macaulay (1974); Commercial Bank of Australia v Amadio (1983); Louth v Diprose (1992).

In assessing unconscionability there must be an identified special disadvantage such as illness, ignorance, inexperience, impaired faculties, financial need or something other than the circumstances, that affected their ability to look after their own interest. This could include the inability to read and write English.Section 51AA-51AC of the Trade Practices Act cover unconscionable conduct with section 51AB(2) covering factors to take into consideration. Remedies include injunctions (s80), damages (s82), non-punitive orders (s86c) and other orders (s87).

Trade Practices Act and Fair Trading Act

The Trade Practices Act and the Fair Trading Act have extended the court’s power to address genuine consent in the context of a contract. The Trade Practices Act applies to corporations and the Fair Trading Act applies to firms and individuals. Therefore they have powers that exceed the Common Law constraints.

Conclusion

As the sixth and final element of the simple contract the genuine consent of parties is critical to the successful outcomes of our associated business objectives. Understanding that the court will not only consider what you are contracting, but also with whom and under what circumstance, can be a potentially business saving tool in your business arsenal. To anybody who has read the preceding installments of the Contracts 101 series there should be an apparent theme – the court will not enforce unfair or illegal contractual arrangements. Even more important to realise, a badly written or unenforceable contract has the potential to cost your business in major league court and lawyer fees over a number of years. So it is critical to business that we utilise lawyers where appropriate, rather than penning our own destinies to save a few dollars. After all, smart business is efficient business.

In the next installment of Contracts 101 the discussion will move to the situation where you may not have a signed contract – promissory estoppel. It may be easiest to picture this in your mind around the common idea of a breach of promise.

Note: Resources used for this series are identified in the first installment – Contracts 101 – Part 1: Outline.

Installments in Contracts 101

Contracts 101 – Part 11: Possibility of Performance

steven — Mon, 16 Nov 2009 20:37:00 +0000

Disclaimer: I’m not a lawyer and I have no claim that this advice should be taken as legal advice in replacement of seeking out professional help. What I hope to do is educate you over a series of small posts about what constitutes a contract and you should be able to figure out when you might need to see a real lawyer. Although this series is in the Australian context many of the principles apply in other countries.

Up until this point in the Contracts 101 series there has been substantial information at each step of the process of explanation of simple contracts. However, element five of the contract is often under-represented in our minds as to its importance.

Possibility of performance means the contract must be possible to complete because legally binding contracts cannot be undertaken to peroform an impossible act. This is not to say that an entrepeneur on hiring a contractor is going to be confronted at year’s end by the contractor stating that their sub-contractors had difficulties and there was too much rain in July. No, that does not constitute a barrier to possibility of performance in regards to the contract – more likely than not, such a situation would simply be mismanagement or bad luck. Neither of which the court is open to addressing as a get out of jail free card for businesses.

For impossibility of performance there must be no way in living hell that the contract could be achieved – for example, you could not legally contract somebody to remove a large stadium in a week if you knew full well that it could not be achieved in less than two weeks due to physical and process constraints. And you cannot contract people to locate and return an item or person that does not exist. The contract must be possible to complete, otherwise the court will not treat it as valid in the eyes of the law.

It is worth noting, were the impossibility of performance to arise following the point the contract is entered into then the contract would be considered frustrated and would usually be discharged. For example, were you to contract somebody to paint the Sydney Harbour Bridge but after the second week there was a disaster that destroyed the bridge – well, you can see the dilemma. No bridge, no possibiliity of performance = no contract.

In Contracts 101 Part 12 the discussion moves to the sixth and final element of the contract – genuine consent.

Note: Resources used for this series are identified in the first installment – Contracts 101 – Part 1: Outline.

Installments in Contracts 101

Contracts 101 – Part 10: Legality of Object

steven — Sun, 15 Nov 2009 19:26:32 +0000

Disclaimer: I’m not a lawyer and I have no claim that this advice should be taken as legal advice in replacement of seeking out professional help. What I hope to do is educate you over a series of small posts about what constitutes a contract and you should be able to figure out when you might need to see a real lawyer. Although this series is in the Australian context many of the principles apply in other countries.

Following from the first three elements of the contract – the agreement, consideration and capacity – the fourth element is legality of object which covers Common Law and Statutes involving illegal and void contracts, including restraint of trade… G. W. Plowman and Son Ltd v Ash (1964); Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978). Generally, illegal contracts will not be enforced by the court – including those contracts which contravene public policy, crimes or torts; contracts which promote sexual immorality; contracts which prejudice the status of marriage; contracts which involve trading with an enemy country, promote corruption, or pervert the course of justice; and contracts which involve the performance of illegal acts in a foreign and friendly state.

Contracts illegal by Statute include those which the government deems must include particular terms or details such as licenses or particular clauses. To this extent, it is important to be aware that certain contracts are unenforceable void contracts or they may even be downright illegal. However, for the illegal contract, the illegal factor must be fundamental to the contract… Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978). In the case of Yango Pastoral, in the previous hyperlink, Yango contested that due to First Chicago Australia Ltd being unregistered under Australian Statute that Yango should be able to not repay their loan. The court found that the illegality of being unregistered was not fundamental to the case of the loan and ordered Yango to repay the loan.

A restraint of trade is where one party is restricted in liberty by another party in the future… Petrofina (Great Britain) Ltd v Martin (1966). However, with regard to restraint of trade, if a contract is reasonable it may be upheld by the court. To this end it should be noted that restraint of trade contracts should be considered as void unless reasonable with consideration given to the interests of the parties and the interests of the general public – including geographical area and time duration. It is not the court’s intention to stifle honest economic development nor to stop people from earning a living.

So, where it is deemed reasonable, there may be grounds for restraint of trade within something like an employment contract. It may be fair to restrain an employee or contractor from soliciting work from your clients for the next 12 months… but it would be unreasonable to include a contract that enforces some condition such as that they may not be a web developer within the boundaries of Tasmania for the next five years. It is imperative that if such conditions are included into a contract then it can be justified as reasonable and in the public interest before it will be enforced by the court.

The takeaway point of the legality of object element of a contract is that we need to be careful with the nature of the contract. The court will not support anything that is grossly unfair or illegal, and it will not stifle trade, promote immoral behaviour or allow the public interest to be compromised. Therefore, before entering into a contract it is a wise move to pass it before lawyers who are in a position to assure the legality of the deal at hand.

While, at least in the web development industry, there is a tendency to write our own ad-hoc contracts with one-sided powers and constraints – be aware these may be unfair in the eyes of the court. Further, and more seriously, these self-authored contracts may have fundamental flaws that make them not only worthless to our business objectives but also put us at risk of having to defend ourselves within the costly court system if we are sued by the other party. So my advice is to stop treating contracts as flippant agreements where you get sub-contractors to sign on the dotted line. The truth is that you could lose your house, your marriage and your business if you get it wrong. One objective of this series is to impress upon the business owner the need for professional help from a trained lawyer when it is deemed appropriate. Contracts are critical business processes – so value them.

The next installment of Contracts 101 will include a brief discussion of the fifth element of the contract – possibility of performance.

Note: Resources used for this series are identified in the first installment – Contracts 101 – Part 1: Outline.