Introduction

Illusory, Incomplete Or Uncertain Contracts

NB REFERENCES TO "HPH" OR JUST TO A PAGE NUMBER ARE TO HEFFEY, PATERSON AND HOCKER CONTRACT COMMENTARY AND MATERIALS 8TH ED 1998 (LBC INFORMATION SERVICES)

Overview

We turn now to a somewhat different enquiry. Assuming that an offer has been accepted it may be that nevertheless a problem emerges about the supposed deal that has been made. The problem relates to the terms or a term which turns out to be meaningless, to lack content, or to require further agreement. This type of problem is far more common in practice than anything we have seen so far. You can imagine that it must be a constant problem in contractual dealings that the parties disagree about the meaning or effect of contract terms.

This part of the course is split into three headings. Briefly illusory consideration or promise is about a promise in the contract which turns out not to be a promise at all. We saw something like this in the judgment of Barwick CJ in the MacRobertson Miller case. You remember that he considered that an exemption clause in the ticket effectively meant that the airline company was not undertaking (or promising) to do anything. If a "promise" turns out not to be a promise, either because it is badly drafted or because there is an express reservation either in the so-called promise itself or elsewhere in the contract, which renders the supposed promise optional, then it is said to be illusory. Thus if I say to you "I promise to deliver the goods if I feel like it" that is not a contractual promise.

The second heading refers to incompleteness. The law takes a rather strict line, saying that, if you make a contract then you have to finalise all essential matters. You cannot leave some things to be agreed later. So, the general principle is that an agreement to agree is not a form of contract recognised by the law. This rule does not suit business convenience because it is often the case, particularly with long-term contracts, that a particular matter needs to be left to be decided later. There are ways that this can be done so as to avoid the prohibition on agreements to agree. The courts will allow agreements to agree so long as the contract itself provides some way of sorting out a failure to agree. Thus, it is possible to put an agreement to agree clause in a contract if it is backed by either an arbitration clause, referred to as a "machinery" clause in your guide, or disagreement can be sorted out by reference to a formula.

The third heading is about bad drafting. Where a clause is uncertain, that is, it cannot be given a meaning, then it may have to be struck out. If the clause is central to the whole contract, then the whole contract may be declared to be void. The courts are obviously loathe to declare a contract to be void and so they try their best to give some meaning to a clause which is badly drafted. They do this by applying the objective test.

Let us turn to the problem of illusory consideration.

Illusory Consideration/Promise

Remember that this is about what appears to be a promise turning out not to be a promise: "I promise to do it but I am not obliged to do it". Or "I promise to do it but you can't have any remedy if I don't". Broadly, what appears to be a promise is discretionary when it is examined more closely. This problem is sometimes linked to the uncertainty issue in that a court may deal with it as an uncertainty problem which may have the effect of rendering the contract void or else the court says there is simply no consideration which has the same effect, viz no contract. This point is made by Kirby P on p 114 "The case law on..."

The case which illustrates this kind of problem is

Biotechnology Australia Pty Ltd v Pace (HPH 112) In this case Pace entered into a contract of employment with Biotechnology. The contract provided that Pace would be able to participate in the company's equity sharing scheme. This is a scheme which allows employees to have shares in the employer company. There was at the time no such scheme and no scheme was ever instituted. Pace ended his contract and then claimed that he was owed money representing the benefits which he should have received under the scheme. His claim was ultimately unsuccessful. The NSW Court of Appeal held by a majority of 2-1 that the term relating to the scheme was either uncertain or illusory. In the course of the judgements the law and policy in this area was given a thorough airing.

Kirby P. He was one of the majority judges. His judgment is worth reading because it reflects a certain, and very well articulated, view about contract and the role of the courts in contract disputes. You will see Kirby's philosophy on this score on p 114. Having pointed out on p 113 that the courts face a dilemma in this kind of case, namely, that they cannot write the contract for the parties and yet they are reluctant to be the destroyers of bargains, he goes on to say that nevertheless it is not for the courts to mend bargains that are irretrievably defective. How would a court do this if it was willing to? It would have to replace the parties' imperfect bargain with one which the court devised. Naturally this would be what was reasonable and fair. Kirby's response to this is that the courts should not get into this game. See p 113 (3rd last line) "To do so...by the law of contract." and "It is an attribute of a free society...parties themselves."

Kirby then goes on to give a text book analysis of the law in this area, starting on p 114. He sets out a number of principles:

1. The intention of the parties has to be ascertained objectively. If there is a lack of clarity in the way they have expressed themselves, then extrinsic evidence may be used to attempt to clear up an ambiguity or whatever is unclear. (We saw the problem about the extent to which extrinsic evidence is admissible in the Air Great Lakes case.)

2. The courts will, so far as possible, endeavour to uphold the validity of contracts.

3. But they will only do this if it is possible. In Kirby's view the courts must not, as we have seen, get into the business of writing contracts for the parties.

4. Views will differ about the appropriate analysis which is applied to the kind of problem being here considered. Is it a case of illusory consideration or is it really about uncertainty? - and so forth.

5. He acknowledges that judges differ about the extent to which they are prepared to intervene in the contract.

6. In dealing with uncertainty or illusory consideration issues the courts look to:

(a) whether a third party has been given power to arbitrate the issue;

(b) whether the issue can be resolved by one of the parties. This may or may not acceptable. It may effectively mean that one of the parties is given a discretion.

(d) whether the contract provides a range of possibilities. If it does, then the court will require the party affected to comply with at least the minimum stipulation.

Having set out these principles, Kirby P then turned his attention to the present problem. You can see that he poses the problem in terms of alternative analyses on p 116 "But was it so devoid of meaning...evidence?" He came to the conclusion that the term in question - the term about the equity sharing scheme - was both illusory and uncertain. It was illusory because it could only have content on the say-so of one of the parties to the contract, namely, the company. It was uncertain because it simply did not mean anything in the context. There was no way of ascertaining what it could mean and what its contents would be. There was no external standard which could fill out the details of such a scheme. So, Kirby applied his belief about the court's proper role in cases of this sort, namely, not to write the contract for the parties. It is not, according to Kirby, the job of the court to give effect to the presumed intention of the parties.

Now you will see statements by judges quite to the opposite effect, namely, that it is the job of the court to give effect to the presumed intention of the parties. The dissenting judge, Hope JA, in this case takes exactly that approach.

All this goes to show that the law about uncertainty is uncertain.

McHugh JA. The extract from McHugh's judgment focuses mainly on whether there was some ascertainable external benchmark or standard by which the scheme could be determined or else Mr Pace's damages could be ascertained. He concluded that there was no such standard. This was a new, high-risk company. In such companies the remuneration packages varied enormously. McHugh then asked whether the company had promised that a scheme would be brought into existence and concluded that there was no such promise. Even if there was such a promise, its breach might only result in nominal damages because of the difficulty of putting a value on such a scheme.

Hope JA. He was the dissenting judge. He, in other words, was prepared, on the same facts, to take a completely different approach to what the court 's task is in a case like this. He looks at recent cases and concludes that courts are prepared to go a long way to find that there is an enforceable contract "where that is what the parties intended" (p 120). He then turns his intention to what the company was obligated to - see 2nd para p 121. He says that Biotech were bound to make a bona fide offer which gave Pace an opportunity to choose something of real value. This must be determined by applying a standard of reasonableness. On bottom p 121 Hope JA says quite plainly

"Trying, as in my opinion the court is bound to do, to give effect to the intention of the parties...."

He then concludes that the Court of Appeal cannot determine on the evidence what is reasonable and that therefore the case must be sent back to the lower court for the determination of damages. This can be done if expert evidence is adduced which shows what would have been a reasonable remuneration package in the circumstances - see p 122.

So, this case shows how very different approaches are adopted by different judges when confronted with uncertainty problems.

Incompleteness

Agreements To Agree We move on to the second issue which can arise in this area. The courts will not allow agreements to agree.

What this means is that if two parties attempt to make a contract which contains a clause which leaves something that is important or central to the contract to be agreed between the parties later, then this is not enforceable. But this type of clause can be supported if it is backed by either machinery or a formula which can resolve any failure to agree. An example is a clause in a lease which contains an option to renew the lease in, say, three years' time and the clause says that the future rent, if the option is exercised, will be at "a rent to be agreed by the parties". By itself it cannot work. It can work, however, if it is accompanied by a clause which says something like: "In the event of a failure to agree, the rent will be determined by the president of the Real Estate Institute." (a machinery clause) or "In the event of a failure to agree the rent will be determined by the following formula..." and then follows a formula based, for example, on the CPI (a formula clause). If there is a clause of this kind, the agreement to agree is really an agreement to negotiate plus an agreement to abide by the result of applying the machinery or formula if negotiations do not work.

The prohibition on agreements to agree does not apply to sale of goods. There is a special provision in the goods legislation (for example Sale of Goods Act 1923 (NSW) s 13) which allows the price to be agreed later. If there is a failure to agree then the legislation provides that a reasonable price shall be paid, that is, a market price.

An Agreement To Contract An agreement to agree is not to be confused with an agreement or contract to make a contract. I have already said that, despite some statements which say that a contract to make a contract is not possible (see eg Masters v Cameron p 25 3rd main para), it is perfectly OK to have a contract to make a contract. It is OK so long as the second contract has already been worked out, that is, its terms are finalised. Examples are: the first category in Masters v Cameron itself; and auctions when it is contemplated that a formal written agreement will be entered into immediately after the auction. The contract occurs when the hammer falls but a term of that contract is that a formal written contract will be entered into afterwards. An Agreement To Negotiate There is a third possible category under this heading and that is an agreement to negotiate. This, too, has been traditionally regarded as impossible, but this traditional view may be changing. An agreement to negotiate is distinguishable from an agreement to agree because it is a more limited exercise and would be used as a preliminary attempt in a complex negotiation to ensure that both sides negotiate towards the conclusion of a contract (though they may not succeed) whereas an agreement to agree is more often used during the course of an already existing commercial relationship, such as the lease already mentioned.

The possible breakthrough in this category came with

Coal Cliff Collieries v Sijehama Pty Ltd (HPH 123) The case involved a long and complex negotiation for a joint venture. The parties signed an agreement which was designed to be a commitment by the parties to keep negotiating. In the end one of the parties pulled out of the negotiation. It was said by Kirby P (with Waddell JA agreeing) in this case that a contract to negotiate was a contract recognised by law but they went on to hold that in this particular case the parties had not made such a contract. You can see the extract from Kirby's judgment reproduced on p 123 "I reject the notion..."

Now, if we just think about this new recognition of the possibility of a contract to negotiate - what does it involve? Suppose such a contract is made. One needs to think about what obligations it imports. You can see from Kirby's judgment that it requires the parties to negotiate in good faith. How would you detect a breach of this obligation? Is calling off negotiations necessarily a breach of this obligation? In Coal Cliff itself, Kirby, being a careful judge who knows that his decision may be appealed, went on to say that even if he was wrong in holding that there was no such contract in this case, he would have held that there had been no breach.

So, the recognition of a possible contract to negotiate does not involve very onerous obligations. It would be necessary to show that the person who had pulled out of negotiations had done so for some extraneous or irrelevant reason. This would be difficult to prove.

As we saw earlier in Hughes Aircraft Systems Inc v Airservices Australia (1997) 76 FCR 151; (1997) 146 ALR 1, Finn J held that a process contract could be agreed upon by parties, which requires the parties to a tendering process to carry out that process according to the agreed terms and according to a general implied duty to act in good faith and deal fairly in eprforming such contract. this supports the view that agreements to negotiate in a particular manner are potentially enforceable and may create important obligations.

In England the traditional approach was adopted by the House of Lords in

Walford v Miles (HPH 123) Here it was reiterated that there is no such thing in the law of contract as an agreement to negotiate. However, the House of Lords was prepared to recognise what is called a lock-out agreement. This is an agreement not to negotiate with anyone else for a certain time. So long as there is a consideration for such an agreement, or there is a deed under seal, it is legally valid. It, too, involves limited obligations. It obliges the person not to negotiate with anyone else. It does not oblige the person to negotiate with the other party to the lock-out agreement. The House of Lords went on to hold that the "lock-out" agreement was not enforceable as it was too uncertain - the parties had not specified the period of time of the lock-out. The conclusion that the lock-out agreement was uncertain is odd, for where parties have failed to specify a time limit, the courts have generally been fairly ready to imply that a "reasonable" time was intended by the parties.

The recognition by the House of Lords of the validity of a lock-out agreement whilst, at the same time, continuing to say that an agreement to negotiate is not recognised by the law is odd. I suggest that an Australian court would not take such a pedantic and restricted view of a lock-out agreement. It must, to give it business efficacy, involve an obligation to negotiate with the very person who had secured that agreement. Otherwise it would be futile.

"Machinery" Clauses In Agreements To Agree We have seen that an agreement to agree is perfectly OK if the contract itself contains a way of resolving a failure to agree. One way in which this can be done is to appoint a third party to arbitrate. But we see from the next case that the arbitrator must have something to arbitrate on. Whitlock v Brew (HPH 124) (The editors description is not correct when it says that the trial judge entered judgment for Brew. That should read "Whitlock".)

The problem in this case arises out of Special Condition 5 which specified that the purchaser of land must enter into a lease agreement with the Shell Co or its nominee "upon such reasonable terms as commonly govern such a lease". By itself, this clearly is uncertain, either because it is simply too vague or because it is an agreement to agree. But the clause does then attempt to deal with the problem of a failure to agree by referring to an arbitration machinery. The question which the court had to decide was whether the contract could be saved despite the uncertain clause. If the contract could not be saved, then it was void, that is, it was a nothing from the start. If so, the deposit paid would have to be returned to Brew the purchaser. If, on the other hand, the contract could be saved (it was held not to be void from the beginning) then Brew, who pulled out of the deal, would forfeit the deposit.

There were two ways in which the contract could be saved.

1. The uncertain clause could be severed from the rest of the contract. This is what the trial judge decided. Or

2. The arbitration part of the clause could be invoked to determine the missing terms of the proposed lease.

You will see in the judgments of the High Court both these ways were considered but, in the end, the contract could not be saved. The result was that the contract was void and Brew could get his deposit back. The High Court judges, arguably, took a rather pedantic view.

There was no doubt that there was uncertainty here. A lease must contain certain basic elements if it is to be valid. Two of those elements are the rent and the term, that is, the length of time that the lease will run for. Both of these were missing. Kitto J then considered (p 125) whether the arbitration part of the clause could work and came to the conclusion that it could not. One has to look to what it is the arbitrator must arbitrate on. Kitto concluded that the arbitrator could only arbitrate on a disagreement between the parties about what terms were reasonable and what would commonly govern such a lease. It did not give the arbitrator power to effectively write the lease for the parties.

Nor, according to Kitto J, was the special condition severable. He thought that it was not because the contract contemplated that the purchaser should not get vacant possession of the land. To put a blue pencil through the special condition would alter the contract fundamentally.

The other judges took the same approach. It seems that an arbitration clause must carefully spell out what precisely the arbitrator can arbitrate on and that this must be closely linked to the matters on which the parties may fail to agree.

But, as I said, already, it is arguable that the High Court took a somewhat pernickety approach in this case as far as the arbitration machinery was concerned.

A more constructive approach to this type of problem is shown by the High Court in

Council Of The Upper Hunter County District v Australian Chilling And Freezing Co Ltd (HPH 127) Here the problem clause dealt with possible price escalation. The basic contract provided for price variation in certain events. Clause 5 then attempted to deal with the possibility of a variation arising from other events not covered by the specific clause. Clause 5 used the phrase "supplier's costs". It was argued that this was too vague. Barwick CJ's approach in this case has been cited very many times in subsequent cases. He said that the expression "supplier's costs" was capable of having a meaning. On page 128 he said that the court's task is to construe the contract by ascertaining what was the intention of the parties. See "The question..." He then goes on to say that the court in undertaking this task should not adopt a "narrow or pedantic approach". "In the search..."

Barwick CJ then goes on to say that in any case there was an arbitration clause here. See p 128 "In this case..." If the words "supplier's costs" were completely meaningless, then the arbitration clause could not work. But they were not meaningless, as we have already seen.

Failure Of The Machinery Note the section in the casebook on page 137 which deals with the machinery failing. We have already seen in Whitlock v Brew that the machinery might fail because it is not sufficiently well drafted to cover the type of disagreement which may arise. But, in addition, the machinery might fail because the machinery clause itself may require agreement between the parties. This is commonly the case where the clause provides for an arbitrator who must be agreed upon by the parties. Supposing they cannot agree on an arbitrator? Another way in which the machinery may fail is if they agree on an arbitrator but the arbitrator then refuses to act. What then?

In sale of goods cases, there is, again, a special provision found in the goods legislation. See, for example, Sale of Goods Act 1923 (NSW) s 14 (noted on p 137) which deals with the machinery not working because the arbitrator cannot or will not act. If this happens then the agreement can be avoided. This provision was used in a case not dealing with sale of goods. The High Court in George v Roach (1942) 67 CLR 253 followed the statutory rule so that it is also part of the common law as a result.

The differing approaches of the courts to problems of incompleteness, which we have already observed, is borne out by the editors' discussion of the cases on pp 137-141.

Sudbrook Trading Estate Ltd v Eggleton (HPH 137) The House of Lords was far more ready to find a solution in the event of a failure of machinery in this case than the High Court was prepared to do in the George v Roach case. The House of Lords said in Sudbrook that the court should step in and arbitrate in such a case. See the quote from Lord Fraser on top of p 138 "I recognise the logic...". In a subsequent High Court case Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (HPH 138) there is the same attitude shown by the majority as was shown in George v Roach but at least Brennan J was prepared to take a more helpful line.

The discussion on pages 138-141 covers a number of matters, some of which we come back to later. One such matter is: in what circumstances will a court imply a term into a contract? The discussion partly explains why courts will in some cases step in and fill the gaps in an incomplete transaction and in other cases they will not. In some kinds of transactions which are familiar and routine, such as conveyances of real property, the court will more readily step in and fill the gaps. But in complex, one-off commercial transactions, the courts are far less likely to do so.

"Formula" Clauses In Agreements To Agree This is the other way in which an agreement to agree is allowed. The formula is built in to the contract in order to resolve any dispute the parties may have. I gave an example earlier concerning a renewal of a lease at a rent to be agreed. If the contract then provides that, in the event of a failure to agree, the rent shall be based on an intelligible formula (eg present rent as a base with adjustment reflecting the increase in the CPI), then a court will simply apply the formula. The formula must itself be sufficiently certain.

The approach of Barwick CJ in

Council Of The Upper Hunter County District v Australian Chilling And Freezing Co Ltd (HPH 127) is indicative of the way in which a court would approach a somewhat vague formula nowadays. Remember that Barwick CJ was prepared to find a meaning for the expression "supplier's costs" in that case.

The more creative or helpful approach of the courts to a vague clause is shown by the High Court's treatment in Meehan v Jones, a case which we will come back to under the heading of uncertainty.

Uncertainty

Types Of Uncertainty And Their Possible Resolution. I have already indicated that problems arising from uncertainty - that is, where the language of the contract is unclear, ambiguous or meaningless - are very common. You can imagine that it is very predictable that the parties to a commercial relationship will start bickering about what the contract says. There are as many ways in which this type of problem can arise as there are bad draftspeople in the world. There are thousands of cases dealing with these sorts of problems. We look at a tiny sample.

Remember that the courts should approach this type of problem with a good will and in an effort not to frustrate the expectations of the parties. Again, Barwick CJ's approach in the Upper Hunter case is generally thought to be the right approach and that short passage from the case ("...no narrow or pedantic approach is warranted...") has been quoted very many times in subsequent cases.

Remember that the way in which the court approaches the uncertainty is to attempt to ascertain the intention of the parties as disclosed by the document (and possibly surrounding circumstances). This, of course, must be ascertained objectively. What would a reasonable observer have thought that this meant? The first case that we look at under this heading is an odd one. It is a case where the objective test simply does not yield a result. This is not because the language used was simply unintelligible - in that sort of case the objective test will not yield a result - rather, the reason why the objective test did not work was because the expression used was perfectly ambiguous. The case is

Raffles v Wichelhaus (HPH 141 but more fully on 377) In this case there was a contract for the sale and purchase of a quantity of cotton described as "ex Peerless from Bombay". The Peerless was a ship in which the cotton was being transported from India. The purchaser was to pick up the cotton from the quay once it had been unloaded. Now this appears to be a perfectly adequate description of the goods. There was, however, a problem: there were two ships called the Peerless coming from Bombay, one which sailed from Bombay in October and one in December. The purchaser claimed that he understood the cotton that he was buying was that carried on the October ship. The seller understood the cotton to be the cotton on the December ship. The seller refused to deliver the October shipment to the buyer and the buyer refused to accept the later cotton. (There must have been a fall in the price of cotton, so that it was advantageous for the buyer to pull out.)

Now, what happens if we apply the objective test? The answer is that a reasonable observer could not come to any conclusion about which cotton was being bought and sold. The description was, as I have said, perfectly ambiguous. The report of the case is taken up with the arguments put to the court by the barristers. The judgment is very short, namely, "There must be judgment for the defendants." The court was convinced by the argument that in this case there was no consensus ad idem, meaning there was no meeting of minds in the bargaining process. Normally this kind of argument cannot be used because it depends on using a subjective test. But in this case there really was no alterative but to use a subjective test because the objective test does not work. Once we use a subjective test it is indeed true that there was no consensus.

This case is categorised in different ways in the text books. It is sometimes said that it is a case of mistake; or of latent ambiguity; or of simply an application of the rules of offer and acceptance. This type of case is unusual because in most cases the objective test will either yield a result or the language is beyond hope.

The courts, as I have indicated, have had to deal with very many types of uncertainty. The court's powers range from correcting obvious slips to having to interpret complex, interacting clauses. An example of an obvious slip is

Fitzgerald v Masters (1956) 95 CLR 240 (discussed HPH 126 and extracted 820) In that case a clause in the contract provided that "the usual conditions of sale in use or approved by the Real Estate Institute of New South Wales relating to sales by private contract of lands held under the Crown Lands Act shall so far as they are inconsistent herewith be deemed to be embodied" in the contract. It was clear that the words "so far as they are inconsistent with" should have read "so far as they are not inconsistent with" or "so far as they are consistent with". The High Court read the clause in that way. However, as it turned out, the clause was meaningless anyway because there were no such terms and conditions and so the High Court severed this part of the contract.

There are many other cases where simple corrections are made by the courts to deal with obvious slips.

A more difficult problem was posed for the High Court in

Meehan v Jones (HPH 130) In a contract for the sale of land there was a subject to finance clause. This is very commonly inserted for the benefit of the purchaser and its effect is to allow the purchaser to pull out without penalty if he or she is unable to obtain finance. The problem in this case was that the clause (Special Condition (b)) was couched in somewhat vague language. See p 130 "(b) The Purchaser or his nominee..." The clause could be invoked by the purchaser if he could not obtain finance on "satisfactory terms and conditions". Here lies the problem. Rather strangely, it was not the purchaser who tried to take advantage of this clause. The purchaser in fact did find suitable finance and notified the vendor that he was ready to go. But the vendor wanted to pull out of the contract and argued that the inclusion of Special Condition (b) rendered the whole contract void for uncertainty. The vendor put his argument in 3 ways (see p 131 2nd para). 1. The clause made the contract void for uncertainty because it left vital matters to be agreed between the parties. It was therefore an agreement to agree.

2. The words in the clause were simply meaningless or imprecise.

3. The clause effectively left it to the discretion of the purchaser whether or not available finance was satisfactory and therefore left it to the discretion of the purchaser whether to perform. In short, it rendered the consideration illusory.

As to the first argument, it is pretty clear that it was misconceived. The clause did not require further agreement between the parties but instead required only one party to be satisfied with an external contract, namely, a finance contract.

Most of the judges' analysis focused on the second argument, namely, that the clause was just too vague. They were concerned about how a court could give meaning to this clause. Did it involve a purely subjective satisfaction by the purchaser? Did the purchaser have to be satisfied as a reasonable person would be? It would have been easy for the judges to simply throw up their hands and say that it was all too difficult and that the clause was irremediably uncertain. But they did not do this. They tried to give it some content.

In giving the clause some content there were two possible stages. First the purchaser would have to actually go out and look for finance: he could not just sit on his hands and then say "I did not find satisfactory finance". Secondly, once some finance packages had been found, the purchaser would have to make a decision about whether any one of them was satisfactory.

Gibbs CJ thought that the clause required the purchaser, when considering various finance packages that were on offer, to act honestly. In other words, the purchaser had to be subjectively satisfied. See p 132 2nd last para "Such a condition.." Gibbs acknowledged that this might then give rise to a problem which comes out of the third way in which the vendor argued, namely, the illusory consideration point. He returned to that later. Rather oddly, Gibbs CJ went out of his way to say that the purchaser was not obliged to make reasonable efforts to find finance. See p 132 2nd last para "However, it does not seem..." This view is not in accordance with the views expressed by the other judges and in other cases.

As to the illusory consideration argument, Gibbs CJ thought that this was not a problem because the satisfaction of the purchaser was not so much the consideration as a condition which had to be satisfied. He compared this to an option (p 133 2nd para). This reasoning is not altogether satisfactory because, if the only obligation cast on the purchaser under this clause is to be honestly satisfied (as Gibbs maintains), then it does appear to give the purchaser a discretion as to whether to go ahead with the contract or not.

In any case, Gibbs CJ did not see the clause as either too uncertain or rendering the consideration illusory.

Mason J adopted a slightly different analysis. He inclined to the view that, in line with Gibbs CJ, the purchaser had to act honestly in deciding whether or not finance which was on offer was satisfactory. See page 135 3rd para. In other words the purchaser does not have an unfettered discretion. He cannot whimsically decide that finance is unsuitable. Mason was a bit ambivalent about whether the purchaser has to act reasonably as well as honestly when making a decision about the suitability of finance - see p 135 last 2 paras. But Mason went further than Gibbs and said that the purchaser must also make reasonable efforts to find finance - see p 136 3rd para. Because the clause therefore imposes certain obligations on the purchaser, it is not illusory.

You will see in the discussion some reference to conditions precedent and subsequent. These expressions have been used imprecisely in some cases. The issue is: what is the effect if the condition is not fulfilled? In some cases, like Masters v Cameron the condition ("subject to contract") is a condition precedent to formation. Until it is satisfied, there is no contract. In Meehan v Jones the condition was a condition precedent to performance, that is, if it was not satisfied, the contract would come to an end. This type of condition is sometimes called a condition subsequent. In this type of case there is a contract and there are certain obligations which can be broken. In the Masters type of case there is no contract at all.

It is important when dealing with these types of conditions to be very clear how they relate to the contract. It is best always to say "condition precedent to... [whatever]".

So, in Meehan v Jones the subject to finance clause was held to be a condition precedent to performance and it involved obligations on the purchaser's part to make reasonable efforts to find finance and then an honest appraisal of the finance which was on offer.

Severance We have seen that if a clause in a contract is too uncertain - no amount of goodwill and objective testing can render it meaningful - then the court may be able to sever the clause and leave the rest of the contract intact. This applies whether the clause is uncertain or incomplete i.e. an agreement to agree. Obviously severance is preferable to striking down the whole contract and declaring it to be void. The issue which arises in connection with severance is simply: can the clause be severed?

This is answered by testing to see how central the clause is to the contract as a whole. An example which we have seen already of a clause which turned out to be meaningless is the case of Fitzgerald v Masters where the clause referred to non-existent terms and conditions. The Court in that case decided simply to sever the clause, saying that it could not possibly have been the intention of the parties that the whole contract should hinge on this clause.

Another example of successful severance is

Life Insurance Co Of Australia Ltd v Phillips (HPH 375) The extract on pages 375-377 is concerned entirely with what sort of evidence is admissible to clarify an ambiguity in a contract. The case involved a life insurance policy with an add-on benefit, namely, a loan facility. There was disagreement about what the terms of the loan facility entailed. The Court held that, if the loan facility part of the package was uncertain, then it could simply be severed. This was because it was just an add-on and it could be removed without affecting the rest of the life insurance package.

On the other hand in

Whitlock v Brew (HPH 124) it was held that the stipulation that the purchaser must lease part of the land purchased to the Shell Company was central to the whole deal and could not be severed with the result that the whole contract was rendered void.