Foundations of Business Law

Week 6
Contract Construction
Chapter 19: Construction of the Contract

Now that we have a contract, there may be
some question about what the parties have
actually agreed to.
INCORPORATION: what terms were agreed?
INTERPRETATION: what did the terms mean?

Terms of the contract
What do we cover today?
1. Terms and representations
2. The Parol Evidence Rule
3. Collateral Contracts
4. Conditions and Warranties
5. Incorporation of Implied Terms
6. Exclusion Clauses

1. Terms or representations?
A statement in and around a contract could be:
A term which will create contractual obligations
between the parties, a breach of which will
result in the unhappy party being able to sue.

OR

A mere representation which may have
induced an offeree to enter into the contract but
was never intended to be part of the contract.
What did the parties agree to?
Whether something is a term and not
a mere representation is determined
via an objective test
What would a reasonable person,
aware of the circumstances of the
case, believe to be the parties
intentions regarding the contractual
force of the statement?
There is no remedy in the event of a
breach of a representation (unless there
has been some misrepresentation, in
which case there may be a remedy under
the Misrepresentation Act 1972 (SA)).





Breach of a term means a breach of
the contract, and the more serious
the breach the greater the remedies
available to the aggrieved party (next
week).
Its time to look at some cases, all of
which involve express terms
Hopkins v Tanqueray (1854) 15 CB 130
Seller of horse (T) saw the purchaser (H)
inspecting the horse before auction.
Seller: He is perfectly sound in every
respect.
T later bought the horse at auction. Horse not
good. Could the buyer get out of the sale?
Held: statement was just a representation.





Ross v Allis-Chalmers (1980) 32 ALR 561
Purchaser of harvester wanted an
assurance of the capability of the
harvester.
Seller: In my experience the best this one
could do is 90 acres per day.
The harvester failed to do 90 acres per day.
Could the buyer sue?





Ross v Allis-Chalmers (1980) 32 ALR 561
No.
Held: The 90 acre comment was not a term.
Just a representation; a statement of
opinion not meant to be binding.





Oscar Chess v Williams [1957] 1 All ER 325
Purchaser of car (a dealer) thought he was
getting a 1948 model when in fact it was a
1939 model.
Was the age of the car a TERM or a
representation?
Held: a representation. The dealer should
have known, as he had some expertise.





Terms
When does it become more like a
TERM?
Time lapse?
Could the innocent party have checked?
How important was it to the overall result?
Did one of the parties have special
knowledge?





Terms
Dick Bentley v Harold Smith [1965] 1 WLR
623
A dealer sold a car stating that it had only
done 20,000 miles. Had actually done
100,000 miles
Was the mileage a TERM or a
representation?
Held: a TERM, therefore a breach of
contract. The dealer should have known.




Terms
Allied Express Transport v Hill (unrep NSWSC
1997)
Hill was to be paid up to 800 km per week for
his driving duties.
What if there are more? There wont be.
Hill found he was doing many more than 800
kms per week. Was the comment meant to
be just an opinion (representation) or did it
amount to a term?
.




Terms
Allied Express Transport v Hill (NSWSC 1997)
Held: The statement was more than a
representation; it was a term.
Hence, compensation was payable to Mr Hill
for all his travel over 800 kms.




2. The parol evidence rule
A rule of evidence: the words rule
A written document expresses the whole
contract (contains all of the applicable terms)
and thus other oral words, said in
negotiations, are not terms.
The parol evidence rule
There are a number of exceptions:
Partly written/partly oral contracts
Or if an oral assurance is given immediately
prior to the written agreement being entered
into.




Van den Esschert v Chappell [1960] WAR 114
At the time of signing of a written contract for
the sale of a house the purchaser asked the
seller any white ants? No.
Contract then signed.
Held: A verbal assurance that there were no
white ants could be incorporated as a term of
contract.
The parol evidence rule
The parol evidence rule is usually re-stated in
written contracts by parties putting in an
entire clause, this document contains the
entire agreement between the parties and
nothing has been agreed that does not appear
in this written agreement.
If an entire clause appears, it is very difficult
to assert that any oral statements have
become terms.
3. Collateral contracts
Oral promises made by the parties prior to entry
into the main contract, which are not terms, may
form collateral contracts.
Sit SIDE BY SIDE the original contract.
They must be a contract in themselves, and the
consideration is the entering into the main contract.

Collateral contracts
de Lassalle v Guildford [1901] 2 KB 215
Lease agreement. Question asked about drains.
No worries was the answer, but then the house
flooded.
Held: the promise about the drains was contained
in a collateral contract.




For a collateral contract to exist:
Requirements:
Promissory
Not inconsistent with the main contract
Not something you would expect to find in the
main contract
Collateral contracts
Evans v Andrea Merzario Ltd [1976] 2 All ER 930
Cargo not put in the hold as promised. Container
swept overboard. Did the exclusion clause protect
the shipper?
Collateral contracts
Held: NO. The location of the container
was guaranteed by the collateral
contract. Thus the exclusion clause
(which was contained in the main
contract) did not apply to the collateral
contract.
4. Classification of Terms
Conditions and warranties
A condition is a term that is vital to the contract.
Breach of a condition entitles the affected party to set
aside the contract and sue for monetary
compensation.
A warranty is a term that is of lesser importance to
the contract. If breached, the affected party can claim
compensation but they cannot get out of the contract.
Whether a term is a condition or a warranty depends
on the intention of the parties. The parties should
make their intention clear, otherwise the court will
apply an objective test to decide for them.

Conditions
Associated Newspapers Ltd v Bancks
(1951) 83 CLR 322
Cartoonist
Always had his cartoon on the front page, as agreed.
2 years later it was moved to page 3 and after a few weeks Bancks
claimed breach of contract and signed with another publisher.
Was the position of the cartoon a CONDITION or a WARRANTY?
IF THE FORMER . He could shift to the other publisher
IF THE LATTER . He couldnt and could only claim (nominal)
compensation.


Conditions
Associated Newspapers Ltd v Bancks
Held: Front page was a condition. Bancks would not
have entered into the contract if there had not been
this promise of location.
Warranties: opera singers!
Poussard v Spiers & Pond [1876] 1 QBD 410
Poussard hired to sing, and she promised to perform,
but the music was late, and then she fell ill. She
would only be available after the first week.
She was replaced. Was her failure to make the first
night a breach of a condition or warranty?
If the former: she could be replaced.
If the latter: she could rejoin the show.





Warranties: opera singers!
Poussard v Spiers & Pond [1876] 1 QBD 410
Held: her promise to perform was a condition; her
failure to perform was therefore a breach of condition
and she could be replaced.





Warranties
Bettini v Gye [1876] 1 QBD 183
This time the singer promised to rehearse for 6 days,
but due to illness could only make the last 2 days of
rehearsals.
Gye tried to repudiate the contract for breach of
condition.
Was the late arrival a breach of a condition or
warranty?




Warranties
Bettini v Gye [1876] 1 QBD 183
Held: a breach of warranty only.

Why different?
Depends on looking at the contract as a whole
availability for a season / replacement is more crucial
than missing a few rehearsals.




Innominate terms
Some judges think that trying to
distinguish between conditions and
warranties is artificial far better simply
to determine whether the innocent party
has missed out on a substantial benefit
of the contract.
If so, it is a breach of contract leading to
the end of the contract
Lets look at 2 cases:
Innominate terms
Ankar v National Westminster (1987) 162
CLR 549
Contract to hire machinery.
The owner of the machinery required the hirer
to provide a surety and agreed to notify the
surety if the hirer was in default (in which case
the surety would confer with the hirer). The
hirer defaulted but the surety was not
contacted.
Did this allow the surety to be discharged from
his obligations?
Intermediate or innominate terms
Ankar v National Westminster (1987) 162
CLR 549
Held: yes.
The requirement under the contract to
advise the surety was a condition (even
though it was not called a condition): it
was a substantial and important part of
the whole surety process.
Intermediate or innominate terms
Hong Kong Fir v Kawasaki [1962] 2 QB
26
Ship sale. But promises about its
readiness were not fulfilled. Were these
promises a substantial part of the benefit
of the contract?
Intermediate or innominate terms
Hong Kong Fir v Kawasaki [1962] 2 QB
26
No. The ship was still delivered. It was
just delivered late. The only remedy was
compensation, not repudiation of the
whole contract.
Condition precedent
Another way of determining conditions
and warranties is to look at whether if the
contract can still go ahead if the promise
is not fulfilled
Perri v Coolangatta (1982) 149 CLR 537
Sale of house where it was bought
subject to sale of their other house.
Time passed! Seller sought to terminate
the agreement (and keep the deposit)
because of the failure of a condition
precedent.
Condition precedent
Perri v Coolangatta (1982) 149 CLR 537
Held: Contract validly terminated.
Reasonable time had passed, and the
amount of time was a condition.
Condition subsequent
Head v Tattersall [1871] LR 7 Exch 7
Horse purchased, but the contract said
that if the horse could not hunt with
hounds then it could be returned.
The horse was injured BUT the
purchaser then found out that it had
never hunted with hounds anyway.
Was the contract able to be repudiated?
Condition subsequent
Head v Tattersall [1871] LR 7 Exch 7
Held: the horse didnt match the
description and that was a condition, and
thus the contract was at an end!
4. Incorporation of implied terms
Not expressed, but still intended to be
part of the contract. Term will be implied
to give commercial meaning to the
contract where
it would be just and equitable to do so
it goes without saying
it can be clearly expressed
it does not contradict any express
term
Dockside Fitness v Brian Woods (unrep SCTas) 1996
DF agreed to sponsor BWs yacht if a son of DF could
be included as crew.
Son was sea-sick, so taken off BW yacht. Dispute
arose about the consequences of this for the
sponsorship.
Could DF imply a term that said no crew, no $?
Held: Yes, hence sponsorship could be withdrawn.
Nothing was said but it was IMPLIED that if the son
couldnt stay on, then the money would not be paid.





Implied terms
The courts will imply a term into a contract by
custom or trade usage:
Pelly v Royal Exchange Assurance (1757) 97
ER 342
P put tackle into storage where it was destroyed by
fire. Was it covered by insurance?
Held: Putting of the ships tackle in a warehouse is
a normal mercantile practice (usage) of
shipmasters and understood.

Implied terms by statute
The Sale of Goods Act 1895 (SA) and the
Australia Consumer Law imply statutory
terms that protect the buyer in contracts
for the sale of goods, and some contracts
for services. These terms include
merchantable quality and the fitness for
purpose of goods supplied
Cannot be excluded even by agreement.

Terms implied by court: fairness
Implied promise that the parties will
act in good faith, honestly and
reasonably.
Burger King Corporation v
Hungry Jacks Pty Ltd (2001) 69
NSWLR 558
Burger King tried to engineer their
arrangements with Hungry Jacks in
a manner that was most unfair. The
court said that they could not.
Terms implied by courts to give business
efficacy
To cure an obvious oversight which, if left
uncorrected, would defeat the presumed intentions
of the parties.
The Moorcock (1889) 14 PD 64
Ship damaged when it hit riverbed when tide went
out.
Held: it was reasonable to imply that the parties
would expect the wharf would be safe for ships to
dock at even at low tide, although this term was
not expressly stated in the contract.
Codelfa v SRA NSW (1982) 149 CLR 337
C contracted with SRA to excavate tunnels.
Both parties assumed C would be able to work
3 shifts per day, 7 days a week. Local residents
were annoyed with the noise. C was restricted
to working 2 shifts, thus Cs costs increased
C claimed that there was an implied term that,
if C was prevented from working as planned,
SRA would indemnify these costs.
Implied terms: business efficacy
Held: it must be necessary to imply a
term to give business efficacy to the
contract. In this case, it did not go
without saying and would have
hampered the SRAs ability to get the
tunnels built. So the term could not be
implied. C had to meet the contractual
demands within its tender price.





Uncertain terms: previous dealings
and standard dealings
Hillas & Co Ltd v
Arcos Ltd (1932) 147
LT 503
Agreement (option) to buy
extra timber. But no
agreement as to shipment
of the extra.
Held: contract went ahead
on terms as per standard
dealings in the trade.
Option was enforceable.
The court will imply into the
contract a term of which the
parties are deemed to be aware
as a result of prior dealings:
Balmain New Ferry Co Ltd v
Robertson (1906) 4 CLR 379
Mr R had travelled on the ferry
many times before so he was
bound by the terms of the
conditions of travel.
Vague terms
General rule is that words will be given their
ordinary meaning in the context of the
contract at the time of making the contract
Courts will try to save an agreement as long
as the common intention of the parties can
be maintained
But could not save vague hire-purchase
terms see Scammell v Ouston [1941] 1 All ER 14
Meaningless terms
If the term has no meaning, the courts will sever
it if at all possible and leave the rest of the
contract valid:

Fitzgerald v Masters (1956) 95 CLR 420
The contract referred to the usual conditions of
sale from the NSW REI but they didnt exist. So
that clause was severed from the contract (and
the contract was able to survive).
Clauses which limit or exclude
altogether the liability of one party for
breach of an express or implied term
For example, no liability for any
damage, however caused.
When will they apply?
How will they be interpreted?

6. Exclusion clauses
We begin with
The rule in LEstrange v Graucob
[1934] 2 KB 394
Sale of vending machine. The
signatory was deemed to have
read, understood & agreed to the
terms of the contract
It is called constructive notice. It is
irrelevant that the signatory has
not read the document.
If the words are clear, then the
parties are bound by the clause.
Photo Production v Securicor [1980] AC
827
PP burnt down by S agent
Could S rely upon the clause?
Held: Yes. The clause was precise and had
been cleared by PPs lawyers.


Incorporation of terms
Toll P/L v Alphapharm P/L (2004) 210 CLR
165
Document said that the agreement was
subject to terms on the reverse side.
The representative didnt turn the page over.
Was he bound?
Held: Yes. His attention was drawn to the
terms. His choice to ignore them was his
alone.

Hutchins v Australian Grand Prix (SC Vic) 1996
(unrep)
Save Albert Park protesters were tossed out of the
Grand prix for waving their flag.
Condition of entry on a board by the gate, referred
to on the ticket, gave F1 right to eject anyone
with reasonable cause.
Held: Ejection was valid. The clause had been
incorporated as part of their contract of
admission to the track.

But the exemption clause / exclusion
clause will not apply in circumstances
where it has not been drawn to the
attention of the person who is
supposed to be bound by it.
It will not have been
INCORPORATED into the contract

Le Mans Grand Prix v Iliadis [1998] 4 VR 661
Mr Illiadis was a patron of a go-kart track. He was
asked to sign a licence headed TO HELP WITH
OUR ADVERTISING which he didnt read. In fact,
it said that he accepted all risks. He was injured in
a crash. Sued (in contract)
Held: the licence did not make it clear that it was a
binding contract and even if it was, the clause had
not been drawn to his attention. It was also
unintelligible, and wrongly titled.
Dillon v Baltic Shipping Co (1991) 22 NSWLR 1
Cruise ship sank. The shipping company
claimed an exclusion clause protected them
from the losses. The question was whether
the exclusion clause had been incorporated
as a term of the contract.
Held: No. The holiday-makers had not been
made aware of it. It did not apply because it
had not been incorporated as a term.

Exclusion clause in unsigned
documents
Car park cases
When are the terms
incorporated, if at all?
Exclusion clause in unsigned
documents
Thornton v Shoe Lane Parking [1971] 2 QB 163
T was injured when he went to collect his car.
Could he sue?
Held: the fine print on the ticket and the exclusion
clause on the pillars in an inconspicuous corner in
the car park were not binding unless they are the
same as the terms of offer on the ticket machine.
So he could sue: the exemption was useless.
Sydney v West (1965) 114 CLR 481
Car park. Thief fooled attendant.
Could Sydney CC rely upon the exemption
clause?
Held: the SCC failed to meet their side of the
contract therefore could not rely upon the
clause in the contract to exempt them.


John Dorahys Fitness Centre v Buchanan (SC
NSW 1996, unrep)
B signed on at the fitness centre and was then
injured while on faulty equipment.
There was an exclusion clause. Did it bind her?
Held: the fitness centre did not maintain good
equipment, hence was in breach of their contract;
hence could not rely upon the contractual term
limiting their liability.
Terms contained elsewhere than in the main
contract
Olley v Marlborough Court [1949] 1 KB 532
O arrived at MC hotel. On one of the walls of Os
room was a notice that the hotel would not be
responsible for lost goods unless they were
handed over for safe keeping. Os room key was
taken by a 3
rd
party and Os goods were stolen.
Could MC rely upon the clause in the room?

Held: The contract for staying in the hotel
was completed at the front check in
counter.
The hotel could not introduce the exclusion
clause after the contract had been
completed. Thus the hotel could not rely on
the exemption clause.

Exclusion / exemption clauses are treated carefully
by the courts. How are they to be interpreted?
Where there is clear ambiguity, the courts will
apply the contra proferentem rule
This rule is simply that any ambiguity is
interpreted against the party seeking to enforce
the clause (the one who drew it up)
It thus protects the vulnerable party
TNT v May & Baker (1966) 115 CLR 353
M & B contracted with TNT to deliver packages. TNT
subcontracted to Mr Pay. Pay took packages home,
truck caught fire. TNT sought to rely upon exclusion
clause for loss while packages in storage or transit.
What did that mean?
Held: storage or transit didnt make it clear whether
that included OTHER parties. The exclusion clause
was interpreted against the party seeking to reply
upon it. It didnt apply here, and thus TNT were liable
for M&Bs losses.

Contract and tort
White v John Warwick & Co Ltd [1953] 1
WLR 1285
W hired a bike to do his deliveries. Its saddle
was defective and W fell off.
Held: the exclusion clause protected JW
because they carried out the contract in the
way it was intended to be carried out.
But, as it happens, the exclusion clause
did not protect JW in negligence.

Statutory protections
Deletion of unreasonable terms:
Statutory modifications
Commonwealth and state/territory legislatures
have intervened in the area of exclusion
clauses sale of goods and consumer
protection legislation such as the Australian
Consumer Law.

Distinguish representations from terms
Identify express terms and implied terms
The courts will not apply terms that are too
vague
An exclusion clause can only apply if it is
incorporated into the contract, and once there,
it is interpreted against the person who drew it
up if theres an ambiguity

SUMMARY
Next lecture (after the break)
Contract law rights of the parties,
discharge of contract and remedies
for breach of contract
Read: Chapters 20 and 21