Terms - identification of the terms

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)

For the moment, we move to the contract itself and start to make inquiries about what it is the parties have agreed to. We now have to concern ourselves with the contents of the contract. For example, if the parties have engaged in a somewhat vague commercial arrangement (which is very commonly the case) it may become necessary to answer questions about exactly what it is they have committed themselves to. If the parties have fallen out, allegations and counter-allegations will be made about what one said and what the other thought was agreed to and so on. This part of the course examines the legal rules which attempt to answer these kinds of problems.

We will see that, if the parties have gone about the business of making a contract in a formal way and have signed a written contract, then the law tends to say that that document is the deal which the parties have made. But there are many other ways in which people enter into contracts and the law has then to deal with somewhat more complicated circumstances to answer the question: exactly what is it that they have agreed to?

We start our enquiry by trying to identify the express terms. We will see later that there may also be implied terms, that is, terms read into the contract even though the parties did not expressly agree to them.

Express terms

Many things are said during the negotiations for a contract. We will see when we look at misleading or deceptive conduct and misrepresentation that a number of legal consequences flow from things that are said by one party, which do not form part of the contract, but which were nevertheless an influence in persuading the other party to enter the contract. If these things that were said were incorrect - they were misleading statements or misrepresentations - then there are remedies (either cancellation of the contract - called "rescission" - and/or damages). In addition to, and quite apart from, misrepresentations which are not actually part of the contract but which are inducing factors, there may be promises made by one party to the other. If so, the other party will argue that such promises are actually part of the contract and if the promises are not kept then there is a breach of contract. This is a quite separate argument leading to a quite separate remedy from the inducing misrepresentation.

If the allegation is that a promise was made during negotiations, this leads to two questions.

We turn to the first of these two questions: - was it a promise?

The law draws a distinction between promises, which may then become contractual terms, and statements not amounting to promises which may possibly give remedies for misleading conduct or misrepresentation or may be of no legal significance. Broadly one can talk of a hierarchy of types of statements:

We need to now consider how the law differentiates between the top two, promises and representations.

How do the courts answer the question: was this statement a promise? Not surprisingly they apply the objective test - what would a reasonable person, hearing or reading the statement in question, have concluded as to its status? So, the language of the statement is important. But so may the context in which it is made. If someone looks very earnestly at you, in fact gazes deeply into your eyes, and says "Jemima, you have my word", probably the only possible interpretation of that is that the person making the statement was intending to make a promise.

The cases show that the objective test is applied to answer this question.

Here we have a sale of a heifer at auction. The sale catalogue stated that the heifer was "unserved". The catalogue also stated the conditions on which lots were sold. You can see a form of exemption clause on p 426 in the first indented quote. This clause referred to further conditions which were displayed on signs. There is a similar clause in these displayed terms reproduced on p 426 2nd indented quote. The plaintiff buyer was an insistent sort of fellow and he asked both the auctioneer and the defendant seller specifically if they could confirm what was in the catalogue, namely, that the heifer was unserved. He received a positive answer from each. He then bid for the heifer and was successful. Later it was found that the heifer was pregnant and she died from carrying a calf at too young an age.

He brought an action against the defendant seller. Initially he was unsuccessful before the trial judge because of the exemption clause. Even if the seller gave a positive assurance, it was nullified by the clause, according to the trial judge.

In the English Court of Appeal a different result ensued. Scott LJ started by stating the orthodox position. The advertised terms bound any bidder who bid at the auction. In other words, the advertised terms stated the basis on which offers were made by bidders. But Scott LJ does say "in the absence of some special agreement to the contrary", the orthodox analysis will prevail. He then goes on to analyse the effect of the special assurance that the buyer sought and was given. You will see towards the bottom of p 427 the alternative interpretations of that conversation. First, it could have meant that the buyer was seeking merely an honourable assurance, knowing full well (because of the exemption clause in the catalogue) that he could not do anything about it if the honourable assurance was incorrect. The alternative interpretation was that the bidder was saying "I don't accept your basis for bidding and I want to bid on my terms." Scott LJ preferred the second interpretation. He said (top p 428) "...the plaintiff was not a lawyer, but he knew what he wanted, and he got it: so did the vendor and he gave it."

The case is instructive about consumer rights. People who are assertive about their rights and who ask questions may be able to build a legally advantageous position on their assertiveness.

Now, what we get from this case is mostly unstated. The court's task is to try to ascertain the intention of the parties. This the court does by reaching a conclusion about what is a reasonable and sensible interpretation of what was intended. The court did not explicitly use the reasonable observer test but that is in effect what the court was doing.

The case does not directly deal with the question of what is a promise but it demonstrates the technique used to solve that kind of problem. The case answered the question: on what terms was the bidder bidding in this case?

The next case more directly deals withe specific question of ascertaining whether someone is promising.

The defendant traded in a car when buying a new car from the dealer, Oscar Chess Ltd. The defendant described the trade-in as a 1948 Morris. This was what appeared in the car's log book. It turned out later that the car was in fact a 1939 model and was worth some £115 less than the dealer had allowed as a trade-in. The defendant was quite innocent. Both parties were the victims of some unknown person who had altered the registration book. The explanation for how someone, even a dealer, could mistake a 1939 for a 1948 car is that the model had not changed during the war years.

Could the dealer recover the £115? On what basis could the dealer recover this amount? One has to get into the habit of thinking strategically in contract cases. What does the plaintiff want? How can he or she get it? In this case, the dealer may want either to cancel the whole deal or may be content with damages to make up the difference.

The trial judge said that the defendant had promised that the car was a 1948 car and that there was a breach of this promise. In short, one of the terms of the deal was that the car was guaranteed to be a 1948 model. Breach of this promise would entitle the dealer to damages.

In the Court of Appeal, Denning LJ noted one way of getting out of the deal altogether, that is, cancelling (or rescinding) the contract. That might have been possible on the basis of mistake - both parties were mistaken about what model car it was. But this remedy is only available for a limited time and it was too late in this case to cancel on the basis of mistake.

This left the possibility of damages for breach. To get damages, it was necessary to show that the description of the car was a promise or term of the contract. Denning LJ used slightly different language. He used the word "warranty" but he explained what he meant by that. The word can be used in a technical way which we will look at later. It can mean a term of the contract which when broken allows damages but does not allow termination for breach. This is contrasted with the word "condition" which, when used in a technical sense, means a term of the contract which if broken allows the other party to terminate the contract. All this is explained by Lord Denning on p 429 3rd para.

Denning LJ made it clear that he was not using the word "warranty" in this technical sense but, instead, was using it in its popular sense as one word to describe a promise. As he pointed out on p 429 the crucial question in this case was: "was it a binding promise or only an innocent misrepresentation?" (The trial judge had gone off on a confusing path muddied by the technical condition/warranty analysis, just mentioned.) If it was only an innocent misrepresentation, then the dealer would not be entitled to any remedy in the circumstances of this case.

This then leads to the question: how do you know if it was a promise? On the bottom of page 429 Denning LJ stated the objective test in clear terms of the intelligent bystander (top p 430). He then went on to say that the words used are very important and he gave two contrasting examples in the 2nd para on p 430, one a statement of belief, the other a warranty or promise. Turning to the facts of the present case, Lord Denning then applied the intelligent bystander test and concluded that the description of the car by the defendant was not intended as a promise. He does this in the 3rd para on p 430 and you can see that the decision is very fact specific and is, to some extent, guided by assumptions which the intelligent bystander is presumed to have made.

One factor which had some influence in this case is that the person making the statement was a non-expert when compared with the dealer who was the recipient of the statement and, presumably, an expert. This tends to support the view that the non-expert would be unlikely to be promising something which was in the other party's area of expertise.

Note the dissenting judgment of Lord Morris which goes to show that people may well differ on how the objective test applies to particular facts. What persuaded Lord Morris was that the car was described in the invoice as a 1948 Morris. The dealer did not get any such thing and so, according to Lord Morris, there was a breach.

The third case dealing with this general enquiry is an Australian one.

The purchaser of a house wished to claim damages for the cost of connecting the house to the sewer mains. The house was sold through the Multilist Bureau and was described in the booklet as sewered. In fact the house was connected only to a septic tank. The question was whether the seller promised that it was connected to the sewer or whether this was merely a representation. An old dictum, mentioned by Lord Denning in Oscar Chess, is that an affirmation at the time of sale is a warranty (that is, a promise), provided it appears on evidence to be so intended (see Lord Holt in Crosse v Gardner) is sometimes used as a starting point in these cases but it really does not say very much more than that the court must try to ascertain the intention of the parties.

Here, Bray CJ applied the objective test (3 lines down from top of page 432) and concluded that the seller was warranting that the house was sewered. Again, the differential expertise of the two parties is a relevant factor. The seller should know whether the house is sewered and so it is more likely that a statement that the house is sewered is a promise.

In the judgment of Zelling J there is a reference to a statement made by Lord Denning in the Dick Bentley case to the effect that if someone makes a statement innocently (that is, without fraud or carelessness) then the statement will not be treated as a promise. This was criticised in the Cambridge Law Journal and both Zelling and Bray make it clear that they agree with the criticism. The objective test is not about attributing fault but is about deciding whether someone has taken a certain position, namely, promising. If the person making the statement turns out to be wrong, it is irrelevant to the question - promise or no promise? - to ask whether the maker of the statement was guilty of fault or not. The only relevant question is: was he or she promising?

Having decided that a particular statement is a promise by using the objective test, the next question is to ask whether that promise is actually part of the contract. The answer to this, again, is a matter of ascertaining the parties' intention by reference to what a reasonable observer would conclude. If parties have negotiated, for example, for the purchase and sale of a used car, the buyer might have made a very specific enquiry about, say, the gear box. If the seller responds to this enquiry by making a promise - such as, "you have my word that the gear box is sound" - then the question whether this is part of the deal is fairly easily answered. The answer would be that the seller is selling a car with a gearbox warranted to be sound and not just selling a car as is.

The question about what promises form part of the contract starts to get a bit more complicated if there is some document involved in the transaction, for example an order form or a delivery slip. Sometimes the document will contain terms which attempt to regulate what terms are part of the contract or at least attempt to control the legal consequences of certain promises. One purpose of such clauses is to try to ensure that loose promises made during negotiations cannot become part of the deal. These are commonly called entire agreement clauses or integration clauses. (A good example can be found on p 410 of the case book - see cl 18.9.) The clause says something along the lines: "all the terms governing this commercial relationship are to be found in this contract and nowhere else. Anything said during negotiations, whether by way of a promise or representation does not form part of the deal." So, sometimes the contract itself answers the question: is the promise made during negotiations part of the deal?

In answering the question - which promises are part of the contract? - the courts have developed a rule which is concerned with contracts which are reduced to writing. This rule is called the parol evidence rule. The assumption underlying the rule is that if the parties have deliberately reduced their contract to a formal written document, in other words it is not some vague arrangement where one has to try to infer what the parties have agreed to, then the courts say that the written document is the sole repository of the parties' rights and liabilities.

So, assume there is a written contract of the sort which would be the result of solicitors advising the parties and drawing up several drafts and then finally settling on an agreed draft which each party signs. What the parol evidence rule says is that extrinsic evidence, that is evidence outside the document itself, cannot be used to add to, vary or contradict the terms of that document. There is a good statement of the rule in the extract from the great American contract scholar, Corbin, on p 385. He explains that the name "parol evidence rule" is misleading. "Parol" means oral or spoken. The rule applies to all extrinsic evidence not just spoken words. So, for example, the rule could be used to exclude a promise that was in a letter written by one party to the other during negotiations.

To illustrate: supposing two parties are negotiating to buy and sell a used car. The buyer makes a specific enquiry about the gearbox and the seller gives a specific promise about the soundness of the gearbox. The buyer insists on drawing up a written contract with the specific promise about the gearbox incorporated into the document. A week after the sale goes through, the engine packs up and the buyer recalls that the seller had said something about the engine as well but that this statement was not incorporated into the written contract. Assume that the seller's statement about the engine was that the engine was extremely reliable and would be good for another 50,000 kms. The buyer now wishes to rely on that promise. The seller's response would be: "That was never made part of the deal. We put everything we agreed to in the document. You can't now try to add to the terms. If you had insisted on an engine warranty, I would have charged more." The law would back the seller's argument on the basis that the parties had agreed to reduce their deal to writing and that, if one party wanted a particular term to be part of the deal, he or she should have insisted that it go into the document. In other words the parol evidence rule would operate to exclude the promise about the engine.

There have been very many cases about the parol evidence rule. I have stated it in its barest form. The rule is in fact quite complicated and hedged around with many qualifications and exceptions. One of the problems with the rule is that it is based on the assumption that the parties have reduced their agreement to a comprehensive written document. But answering this question - is this a case for the application of the parol evidence rule, that is, have the parties deliberately reduced their agreement to writing? - is often difficult. It is not difficult in the paradigm situation which I outlined above, namely, where the parties have gone about the process of making a contract on advice from solicitors and then a contract is signed. But it is much more difficult to answer the question - have they reduced their contract to writing? - when there just happens to be some document floating about. It is possible for a contract to be partly in writing and partly oral. If so, then the parol evidence rule does not apply and it is not to the point to argue that an oral promise should be excluded.

The next case extract provides some guidance on the way the courts handle the parol evidence rule.

Here we have a contract which allowed Heath to use advertising space on the railway's hoardings. Have a look at cl 6 which gave the SRA the right to terminate the agreement on 1 month's notice. Heath's representative was not too happy about clause 6 and tried to get it changed or struck out. But the SRA rep said that he had no authority to change the contract. He did, however, make some statements about the way in which cl 6 was usually invoked, for example, where an advertiser had not paid or where there was objectionable material in an advertisement. Mr Giles, the Heath rep, then signed the contract.

In addition to the conversation about cl 6 there was also a letter relied on by Heath - see p 386. Heath argued that this letter made it clear that Heath could advertise for 5 years. This, it was argued, overrode the written terms, including cl 6. McHugh's response to the letter was that it was quite consistent to make a contract for 5 years but at the same time to agree that one party can terminate by giving 1 month's notice.

What about the conversation? McHugh JA explains the operation of the parol evidence rule on p 387 4th and 5th paras.

There is the threshold question: is this a case where the parties have reduced their agreement to writing thus attracting the operation of the parol evidence rule? In order to answer that question it is logically necessary to look at the whole of the dealings between the parties. Some courts and some writers, such as Williston (another great American contract scholar) answer the question by looking at the document and saying that if it looks like a complete contract then one cannot look any further. The case of Thorne v Borthwick is mentioned by McHugh. That was a case where the court took a very narrow approach to the use of the parol evidence rule. If one party says: "This is a partly written and partly oral contract" the other can say: "No, there is a document. Therefore any evidence of an oral promise cannot be admitted." If the latter argument is allowed then it prevents the first party from being able to show that this is a case where the parol evidence rule should not apply because he or she is prevented from adducing evidence of oral promises - the very evidence which shows that the parol evidence rule should not apply.

McHugh prefers the more sensible approach whereby the court looks at the totality of the dealings between the parties and then makes a decision about whether this is a suitable case for the application of the parol evidence rule. McHugh expresses his preferred approach on p 387, quoting from the English Law Commission. In dealing with this case, McHugh concluded that the conversation could not be relied on to change what was in the document. This was not so much because the oral statement had to be excluded by the operation of the parol evidence rule as because the overall intention, understood by both parties, was clear, namely that the conversation could not modify cl 6 because the SRA person said so explicitly.

McHugh's view of the parol evidence rule was endorsed in a later case Norwest Beef briefly noted in the casebook on p 388.

Note that the English Law Commission (p 388) is of the view that the so-called parol evidence rule is merely a circular statement: if the parties have agreed to the terms in a written contract, then they have agreed to those terms.

There are many exceptions to the parol evidence rule. We will come across a number of them as we proceed through the course.

One such exception is a somewhat artificial device called collateral contract. A collateral contract is a separate contract which exists alongside or parallel to the main contract. One use of collateral contract is to get around the parol evidence rule.

Suppose two parties have made a contract and they have reduced their agreement to writing. Suppose one party alleges that an important promise was made which did not find its way into the contract. The short answer to that kind of argument is the parol evidence rule: you cannot add an extra term to the written document. If it was so important, then it should have been put into the written agreement. One answer to this might be that the extra promise was not really part of the original agreement. It was separate and distinct from the written agreement. It therefore does not infringe the parol evidence rule because the party wishing to rely on the extra promise is not attempting to add to the written agreement but is, instead, arguing that there is a second and distinct agreement.

You will see this collateral contract device illustrated in the case book on p 398 in the example of a written lease which is silent about the state of the drains (based on the facts of De Lassalle v Guildford). The tenant, before signing seeks an assurance from the landlord. "Can you guarantee that the drains are in proper working order?" The landlord replies that they are. The tenant then goes ahead and signs the lease contract which has nothing in it about the drains. It turns out later that the drains are in poor condition and the tenant is put to expense in having them put right. The tenant wants to sue for damages for breach of contract.

The classic statement which recognises that it is possible to base such a claim on collateral contract is the English case of Heilbut Symons & Co v Buckleton [1913] AC 30 at 47 (Lord Moulton). See p 398 "It is evident, both on principle and on authority,..." Note that the consideration for the collateral contract is the act of entering into the main contract. This can be seen from the example of the lease and the assurance about the drains. The tenant, with pen poised above the main agreement, asks the crucial question and receives a positive reply. Satisfied with this, the tenant then goes ahead and signs. Entering into the main agreement is given in exchange for, and in response to, the extra promise about the state of the drains.

It is therefore possible, as the case book points out on 398, to employ two different strategies for getting around the parol evidence rule. The first is to argue that this is not a case where the rule should apply. In other words the contract is a single contract, partly written and partly oral. The second is to argue for two contracts, using collateral contract. On p 399 the case book points out that language used by judges in this area is not always precise and that sometimes confusion is caused by calling an oral warranty in a partly written and partly oral single contract a "collateral warranty". The case book editors reckon that the extract on p 399 from De Lassalle v Guildford is an example of a single contract analysis. I would have thought it was a good example of a 2-contract analysis. So, opinions differ about how to analyse this kind of case.

The onus of establishing a collateral contract is a heavy one. It is clearly a somewhat artificial device and Lord Moulton made it clear that a court would require clear and convincing evidence to prove the existence of a collateral contract. It is easier to prove a collateral contract if its subject-matter - that is, the promise - deals with something quite separate from the main contract, particularly if it deals with something you would not expect to find in the main contract. An example is

In that case Shepperd was buying a house from the local council. The council said in a pamphlet that parkland near the house which Shepperd was proposing to buy would remain as parkland. This was obviously an attractive feature and Shepperd went ahead with the purchase. The contract of sale made no mention of parkland. The council later wished to build on the parkland and Shepperd sought an injunction to stop it. The argument was that there was a collateral promise concerning the park land and this had induced Shepperd to sign the sale agreement. The High Court was prepared to accept this argument, stressing that the heavy onus of establishing a collateral contract is more easily discharged when the subject-matter of the alleged collateral contract is something quite separate from the main agreement and which you would not expect to find in the main agreement.

In Australia, there is a restrictive rule concerning collateral contract and that is the so-called rule in Hoyt's Pty Ltd v Spencer. This was a High Court case which said that a collateral contract cannot stand if it contradicts the main agreement. This was not a problem in Shepperd because the subject-matter of the collateral contract was separate from the subject-matter of the main agreement.

In Hoyt's, on the other hand, the alleged extra promise was a modification to the main contract. This was a contract of lease under which the landlord reserved the right to terminate on 4 weeks' notice. The landlord did give notice under this clause. The tenant, Hoyt's, argued that the landlord had said before the lease was executed that he would not use this clause to terminate the lease except in certain defined circumstances. Hoyt's argued that these circumstances had not arisen and that therefore the landlord was in breach of this promise not to exercise his right to terminate under the clause.

The High Court held that an alleged collateral contract cannot operate when it contradicts the main agreement. The reasoning of Isaacs J was that if the main contract is the consideration for the collateral contract, then it is logically impossible for the collateral contract to detract from that consideration. The person wishing to rely on the collateral contract has by definition agreed to the main contract. Isaacs J states simply that he or she must have agreed to the main contract in its entirety. This argument is stated in various ways and somewhat repetitively on pp 403-404.

The opposing view is stated by Ferguson J who dissented in the court below - see pp 404-405. He argued that there is simply no reason why the conflicting main and collateral agreements should not exist side by side. If the landlord exercises a right under the main agreement contrary to what is promised in the collateral agreement, then there is simply a breach of the collateral contract.

This is a controversial matter and it may be that the High Court will one day accede to a request which I made many years ago to get rid of the rule in Hoyt's v Spencer (see note 1 on p 405). This has not happened yet. The rule does not apply in the United Kingdom - see the note 1 on p 405. The rule may be outflanked by estoppel in an appropriate case. If a collateral contract which contradicts the main contract cannot be enforced, then maybe an estoppel could be used to enforce the collateral promise instead. In Waltons Stores there was a passing reference to my article which may be some indication that estoppel could be used. The Whittet v State Bank of NSW case on p 406 discusses the possibility of estoppel being used. The discussion in this case does show that the use of estoppel to outflank the rule in Hoyt's is controversial and, as yet, unsettled.

My principal argument in favour of getting rid of the rule in Hoyt's v Spencer is that it is unconscionable to give an assurance about how a particular clause will operate and then to renege on that assurance. Often, in negotiations, the spoken word is actually more important than the written word, particularly if a standard form contract is used. The sort of result that we saw in Couchman v Hill, where primacy was given to the oral promise over the standard terms, is more in accordance with ordinary people's expectations.

There is a quite separate type of collateral contract which has nothing to do with what we have just been talking about and which is not affected by the rule in Hoyt's v Spencer. It is called tri-partite collateral contract and, is, in a sense, more related to the privity problem. Suppose a manufacturer in an advertisement made you a promise that a product would perform in a certain way. You are impressed and you go off to the shops and buy the product. It turns out that it does not perform as advertised. You have a contract with the shop but not with the manufacturer who made the promise. Can you sue the manufacturer in contract? The answer is, rather strangely, that you can. The illustrative case is

The manufacturer of paint made some definite assurances about its suitability for painting a pier. The pier owner then told the painter to use that paint. It turned out to be quite unsuitable. The pier owner sued the paint company successfully. It is said that the consideration for the promise made by the paint company is the act of buying the paint from a third party which is, of course, a benefit indirectly to the paint company. This is the tri-partite collateral contract. It would be better if it was called something else because, as you can see, it has absolutely nothing to do with two-party collateral contract.

There is in fact now a similar mechanism available under the Trade Practices Act 1974 (Cth) s 74G but it is only available in favour of "consumers" as defined in the Act (s 4B). A consumer does include someone who has bought an item which costs $40,000 or less whether or not it was intended to be used for ordinary household use or consumption. So a business purchase of an item for under $40,000 is included in this definition. Another possibility to deal with advertising claims and so forth is another section of the Trade Practices Act, namely s 52 which prohibits misleading or deceptive conduct. We will examine this section later in the course.

There are other uses for tri-partite collateral contract, apart from enforcing advertising promises and the like. See para 3.7 of Cheshire & Fifoot's Law of Contract (7th Aus ed 1997).

Continuing with the focus on written contracts, the next issue is: what is the effect of signing a contract? We have already seen that not signing a contract may not matter: remember Eric in the Empirnall case. But what about when someone does sign a contract? The answer to this is that the law accords with the expectations of ordinary people who know that you do not sign something unless you mean it. Of course, this does not necessarily mean that people read contracts or other documents before they sign them, but they probably accept the consequences of signing even when they have not read the document. It is in fact very common for people to sign documents without reading them.

The classic authority for the proposition that a person is bound by what he or she has signed, whether he or she has read it or not is

The facts are not very important but they involved the purchase of a cigarette vending machine. The purchaser signed a form which contained a sweeping exemption clause. The machine did not work properly. The trial judge felt sorry for Mrs L'Estrange and said that the form was printed in too small type and that the drastic exemption had not be drawn to her attention. The Divisional Court held that the purchaser had no remedy because she had signed the document with the exemption clause in it.

It has been said in an earlier case that signature is "irrefragable evidence of assent" - see Lord Denning in the case of Curtis on p 378 (9 lines down from beginning of his judgment) where he uses this old-fashioned language.

In L'Estrange v Graucob Ltd counsel for Graucob, the seller, was one Mr Denning. He has told a story that the case was not officially reported. As a barrister he had it printed privately and went around the courts flourishing this case and winning case after case. He then became a judge and spent quite a lot of his time trying to undo the effect of L'Estrange v Graucob Ltd.

Broadly, the case still stands as good authority. But we will see that in the right circumstances, there are many exceptions to the rule. For example, in the case itself Mrs L'Estrange tried to argue misrepresentation but this was not successful. The particular practice of including a sweeping exemption clause has to a large extent been eliminated by consumer protection legislation. For example the Trade Practices Act 1974 (Cth) s 68 prohibits the use of exclusion clauses to attempt to displace the implied terms of quality which are found in the TPA.

We turn to the first exception to the rule in L'Estrange v Graucob Ltd in the next case.

Here Mrs Curtis took her wedding dress to be dry cleaned. She was asked to sign a receipt. Mrs Curtis, like the farmer in Couchman v Hill, was an enquiring sort of person and wanted to know why she had to sign the receipt. She was told that the dry cleaners would not accept certain risks and the dry cleaning person specifically mentioned the beads and sequins on the wedding dress as being something which the dry cleaners could not take responsibility for. Mrs Curtis then signed. In fact the exclusion clause was very wide-ranging and covered much else besides the beads and sequins being damaged. See the clause on p 378 at the end of 1st para of the facts.

When Mrs Curtis went to recover her wedding dress the beads and sequins were fine. There was, however, a stain on the dress. She complained and the dry cleaners pointed to the clause which she had signed which was perfectly general and covered any type of damage. She sued them for damages. The trial judge found in her favour, saying that the shop assistant had misled Mrs Curtis about the scope of the exclusion clause and that the dry cleaners could only rely on the clause as it was represented not as it actually was.

In the English Court of Appeal the same analysis was adopted by Lord Denning. He makes the point on p 379 that the dry cleaners had innocently misled Mrs Curtis and that they could only rely on the exclusion clause in relation to damage to the beads and sequins but not in relation to other types of damage. Another way of looking at this is on the basis of estoppel, though this was not used in the case itself. Mrs Curtis relied to her detriment on the assurance that the clause had limited scope. It would be unconscionable for the company to rely on the full scope of the clause after representing that it had a more limited scope.

Suffice it to say that the case demonstrates, as does Couchman v Hill, that it is always a good thing to be assertive and to ask questions.

We have seen what is the effect of signature. It is generally "irrefragable evidence of assent" to the document. What if a document is not signed? There are many contracts in which there is a document, a ticket or a sign displayed on the wall which contains contractual terms (usually including exclusion clauses) and where it is not appropriate or expected that there will be a signature. How does a court decide whether someone has agreed to those terms when the most obvious indicator of agreement - signature - is lacking? The answer to this is that it is more complicated and the test for answering this question is more difficult than in signature cases. These cases are called the "ticket" cases, meaning all those cases where there are written but unsigned terms, even though not every case is in fact a case involving a ticket as such. So, for example, a displayed sign at a car park would come within the "ticket" cases.

The test for answering the question: is this person bound by the terms in the ticket or sign? - is that he or she must have been given reasonable notice of the terms, usually at the time of or before entry into the contract. What amounts to reasonable notice varies, depending on the type of ticket or sign. Broadly, if it is obvious that it contains contractual terms, then it is reasonable notice just to display the sign or hand over the ticket. If it is not so obvious that the ticket or sign contains contractual terms then more has to be done to draw attention to the terms. The cases seldom answer the question: what more has to be done? because in such cases the court almost invariably says that not enough was done and does not then go on to say what would have been enough. But we will see that in some cases the courts do attempt to say what needs to be done.

The classic authority on this is

The facts of the case are not very important. The plaintiff deposited a bag at a railway station cloakroom. He was given a ticket. When he came back to reclaim it they had lost it. They claimed to be protected by an exclusion clause on the ticket.

The issue to be decided was: did the terms in the ticket bind the plaintiff? From the three judgments, it is not easy to extract a rule. It is clear that if it can be shown that the plaintiff actually knew there were contractual terms and read them, or decided not to bother, then the plaintiff is bound by them. The more usual case is that the plaintiff may have been aware that there was writing on the ticket but was not aware of its significance and had not read it. In such a case the question then is: is this a transaction where a reasonable person would expect to find contractual terms in a ticket? If the answer is Yes, then the plaintiff is bound by them because he or she is deemed to have had reasonable notice. This is illustrated by the contrasting examples put forward by Mellish LJ on pp 412-413 - the turnpike ticket (no-one would expect to find terms) and the bill of lading (any reasonable person would expect to find terms). (A bill of lading is the contract used for contracts of carriage of goods.)

If someone is ignorant, or not acquainted with the ways of the world, then that makes no difference. The test is objective. The question whether the transaction is one where a reasonable person would expect to find terms is a question of fact in each case. In the end, we do not know what the result was in Parker because the judges thought that there should be a new trial because the trial judge had misdirected the jury.

The case is a bit of a mess because no very clear test emerges from the judgments. Further, there are contradictory statements within the judgments. For example Mellish LJ, having stated an objective test, says on p 413 that if the person depositing a bag did not see or know that there was any writing on the ticket, then h/she is not bound. But this cannot be right if the ticket was one which one would normally expect to find conditions on.

There have been many ticket cases where the Parker test, that is, the objective test, has been applied. A more recent application of this test can be seen in the next case.

Here we have another dry cleaning case but this time the docket was not signed. (Remember Mrs Curtis was asked to sign the docket.) The question for the court was whether an exemption clause which was in the ticket given to the customer protected the dry cleaners in respect of damage that had been done to an article of clothing. You will see in the judgment of Herring CJ that he referred to the old cases, including Parker. Herring said more or less the same things that were said in Parker about how if the customer actually knows that there were terms there in the ticket, then he or she is bound by them. But, of course, the usual case is where the customer is not actually aware of the terms and has not read them. Note that Herring CJ talked of an estoppel on p 416 (2nd para of judgment), meaning that the customer is deemed to have had reasonable notice of the terms or the customer is estopped from denying that he or she knew of the terms. Herring CJ spelt out the test in the middle of p 417: the dry cleaning company "must show..." etc This then led to the question: would a customer depositing an article of clothing at a dry cleaners expect the ticket to contain contractual terms or would the customer simply think of the ticket as a voucher or receipt? Herring CJ answered this question by simply saying that a dry cleaning docket is a type of ticket where a reasonable person would not expect to find terms. This was despite the fact that the dry cleaners in this case had used a ticket with terms for some years. I suppose the dry cleaners would have to show by evidence that all or most dry cleaners had terms on their tickets in order to discharge the onus of proof. In any case, the finding that the ticket was not one where the customer would expect to find terms meant that the dry cleaners could not rely on the exclusion clause in the ticket. It was not part of the contract between the parties.

What is the position to-day regarding dry cleaning tickets?

Note one brief point at the end of Causer namely that Herring CJ mentioned that the clause would not have protected the dry cleaners anyway, even if it had been part of the contract. This foreshadows a topic we will come to later, namely, the way the courts approach the intepretation of exclusion or exemption clauses.

The next case raises an interesting point. Supposing one of the terms in the ticket or docket is grossly unfair or at the least very surprising in its effect. Does this make any difference to the way in which the Parker test is applied? This was touched on by Bramwell LJ in Parker itself (see p 415 last para of judgment) who said that a ridiculous term would not be binding. But the basis of this statement was not very clear. Was it not binding because there was no reasonable notice of it? Or was it not binding because a court has some kind of overriding discretion simply to rule out unfair terms? The cases show that the courts do not have an overriding discretion to rule out unfair terms unless legislation, such as consumer protection legislation, has specifically conferred that power on the courts. So, as a matter of common law, the courts do not directly override unfair terms. However, there are indirect ways in which the courts can achieve the same effect. In one case which is in your case book, Thornton v Shoe Lane Parking Ltd (HPH 419), Lord Denning modified the ticket case test and said that the requirement of reasonable notice was more stringent, the more stringent the terms were. In that case he referred to what he had said in an earlier case (Spurling v Bradshaw referred to on p 424 of case book), namely, that it would be necessary to have a red hand printed next to the stringent condition pointing at it so the customer could not miss it.

The next case takes up this problem of the apparently very unfair term.

In this case Interfoto provided transparencies to customers. Stiletto was one such customer. The terms of the contract contained a rather stringent condition. Condition 2 said that if the customer held on to a transparency past the day for its return, then the customer had to pay £5 plus tax per day per transparency. Stiletto borrowed 47 transparencies. They were delivered with a delivery note which contained the conditions. Stiletto was 14 days late in returning the transparencies. Interfoto claimed £3783.50 under condition 2. Imagine if ordinary libraries had such a policy!.

Bingham LJ signalled a definite change in this case, taking up the red hand theme. The idea that courts should not directly interfere when they come across a very unfair term is almost entirely rejected in favour of an overt power to strike down unfair clauses. But this is, again, through the use of a more stringent ticket case test. See his analysis in the middle para on p 425 where he reckoned that a contract was formed when the transparencies arrived and Stiletto took them out of the jiffy bag and saw the delivery docket. Bingham LJ pointed out that the docket was undoubtedly contractual in character - so on the old ticket case test that would be the end of the story. He said explicitly that, to the extent that the terms were usual terms to be expected for this kind of transaction, then Stiletto was bound by them. But he went on to say that Interfoto had not done what was necessary to draw attention to "this unreasonable and extortionate clause", that is clause 2. Therefore the clause was not incorporated into the contract.

As already noted, this case represents a significant change in the ticket cases. It is necessary to apply the reasonable notice test to the specific clause, rather than to the document (or notice) as a whole.

Implied Terms

We are concerned to find out what it is the parties have agreed to or, as we see from the ticket cases, what the parties must be treated as having agreed to. So far we have focused on express terms either spoken, or in a signed written document, or in an unsigned written document. We now turn to implied terms, that is, terms which will be read into the contract and which were never the subject of express agreement. At first sight in seems strange and somewhat alarming that parties to a contract might be bound by terms which they never agreed to. But, the idea of implying terms into a contract is well-established and serves a number of different purposes.

There are various types of implied terms, ranging from an implied term argued for because the contract is simply silent about some important matter to those implied into certain types of contracts because legislation - usually consumer protection legislation - so provides.

We turn to the first type - the term implied by law because of the nature of the contract. What this means in practical terms is that one party alleges in a court case that there is such an implied term while, of course, the other party denies this. If the court decides that there is such an implied term, then it was always so, and the party denying that there was such a term is, as it were, retrospectively in breach.

Terms implied into a contract by a court to give business efficacy to a contract fall into various sub-groups. It might be argued nowadays that there is an overarching group of implied terms which stands on top of the various sub-groups. In this top category are implied terms which might be read into all contracts of all types. This is discussed in Cheshire & Fifoot's Law of Contract (7th Aus ed 1997) in paras 10.39-10.43. Thus it would be possible to read into any contract a duty to co-operate, a duty to act reasonably and a duty to do all that is necessary to achieve the contractual objective, etc. Priestley JA in Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 (the case is mentioned on p 441 of the case book) and Finn J in Hughes Aircraft Systems International Inc v Airservices Australia (1997) 146 ALR 1, have argued strongly that there is a duty to act in good faith in all contracts. But this is a controversial suggestion and has not been accepted by some judges.

Underneath this overarching category are contracts of a certain type, such as tenancy contracts or contracts of carriage or sale of goods. It may be possible to say that in all contracts of that type there are certain implied terms. Within this category are contracts within a particular trade or industry where it may be possible to say that custom or trade usage dictates that a particular term is implied in each transaction in that particular trade or industry.

The courts have had some difficulty in deciding what is the proper basis for implying a term into a contract. The test for doing this has been variously stated. The business efficacy test (discussed below) may only be appropriate to terms implied in fact or on an ad hoc basis (see below). You will see in the quotation from Hope JA on p 437 taken from the Castlemaine Tooheys case a discussion of some of the difficulties associated with this question, namely, what is the proper test for the courts to use when they imply terms into contracts?

One very important rule about terms implied by operation of law is that a court will not imply a term if it contradicts an express term in the contract. (This rule does not apply to statutory, consumer-protection type terms which are compulsory.)

Another category of implied term is what is referred to in the reading guide as an ad hoc implied term, or one "implied in fact". What this means is that in a particular contract some unforeseen problem has arisen. The express contract is silent about this problem and it is argued, by one of the parties at least, that the court should fill the gap. It is very difficult to argue for this type of implied term and such an argument is sometimes said to be the last refuge of desperate barristers and law students. A term will only be implied into a particular contract in order to give "business efficacy" to the agreement. In order to establish this type of implied term five criteria must be satisfied - all five. These come from an Australian case which went to the Privy Council BP Refinery Pty Ltd v Hastings Shire Council which you will see referred to on p 435 of the case book.

As to criterion number 3 - it must be so obvious that it goes without saying - this is aided or supplemented by what is sometimes called the "officious bystander test". This presupposes that the parties are negotiating their contract and an officious bystander says: "What about this matter?" and then specifies some point overlooked by the parties and they both turn on the officious bystander and "testily" dismiss his suggestion with an "Oh of course". A shortened version of this test can be seen on the bottom of p 435.

These 5 criteria were adopted by the High Court in

The facts are set out on pp 740-741. What the case came down to essentially was that Codelfa was contracted to build the Eastern Suburbs railway in Sydney. They had tendered to do the work on the basis that they would be able to work a three-shift day. This meant that they would work through the night. Disaster struck in the form of an injunction obtained by disgruntled citizens who did not like the noise which Codelfa was making at night. This, of course, undermined the commercial basis of the contract. The contract itself was silent about this event occurring, though the negotiations had contemplated the possibility of an injunction. Codelfa tried to argue that there should be an implied term read into the contract which catered for what had happened. The term should be that they should be paid more for doing the job because it was now more expensive. Alternatively, they argued that the contract had been frustrated - a doctrine which we come to at the end of the course.

As far as implied term was concerned, the High Court rejected Codelfa's argument. In terms of the five criteria set out on p 743 Codelfa ran into trouble with 3 and 4. Mason J pointed out that if the parties had tried to draft a term to cater for the event which happened, any number of possible solutions might have been found - see p 749. Aickin J came to a similar conclusion on p 757. It was therefore not possible to say that the implied term argued for went without saying or was capable of clear expression.

The court went on to hold that the contract was frustrated. This is Australia's leading case on frustration and we will return to it later in the course.

Both terms implied in law or in fact are considered in the case of

This case is about employment law. Of course there is a contract between employer and employee and some of the rules of contract law apply. The employment contract, however, is a special type of contract and, in addition, there is an overlay of statutory provisions and awards (industry-wide sets of terms and conditions). The extract in the case book focuses on the question whether terms can be implied into a contract by the so-called "business efficacy" test. In this case the dismissed employees wanted to argue that there was an implied term that an employer would not dismiss an employee in a manner which was harsh, unjust or unreasonable. This was in fact in the award (which has statutory force) - see cl 11(a).

What is not made clear in the case book is that the reason why the employees wanted to argue for an implied term in the contract was that the remedy of damages would then be available to them whereas under the legislation dealing with awards the only sanction was a possible financial penalty imposed on the employer.

BrennanCJ, Dawson and Toohey JJ simply held that there was no such implied term in the contract because the award dealt with the matter of harsh dismissal. There was, in their opinion, no need to import the award condition into the contract.

McHugh and Gummow JJ discussed the principles which apply to implied terms. They looked at whether the claimed term should be implied in this case, either on the basis that it was necessary to give business efficacy to this contract (under the heading "Business efficacy") or whether it should be implied on the basis that in all employment contracts there should be such a term (under the heading "Implication independent of intention").

On the question whether the term should be implied in this particular case - referred to as an "ad hoc" implied term in the reading guide - the test for this is found in the BP Refinery case. This fivefold test has been applied in many cases. It is necessary to satisfy all five criteria set out from that case (see end of 1st para p 435). It is therefore very difficult to satisfy this test.

McHugh and Gummow JJ make the point that where a contract is fully written then the BP Refinery test is applied with its full rigour. In a case where the contract is oral or otherwise not fully expressed (as is common with an employment contract), there may be room for applying the test less rigorously. Fairly obviously, if the parties have left much unexpressed then there is much more room for implication of terms. Terms may then be implied from custom or trade usage or from previous dealings between the parties or because they are so obvious that they go without saying. But it is always necessary to satisfy the requirement, according to McHugh and Gummow JJ, that the term is "necessary for the reasonable or effective operation of the contract in the circumstances of the case" (p 436 top para). Ultimately the court's task is to try to ascertain the presumed intention of the parties. They then go on to find that the particular term argued for by the employees should not be implied for the various reasons set out on p 436 viz. it was not so obvious that it went without saying, it was not necessary for the reasonable or effective operation of the contract, the employer would be subjected to two types of liability if the clause was imported into the contract, there was no "gap" in the contract which required the implication of the term argued for.

The judges then go on to consider whether such a term ought to be implied irrespective of the presumed intention of the parties. (Remember that the court cannot imply a term if there is an express term to the contrary; hence the focus on the presumed intention of the parties.) In some types of contracts, it is established either by legislation (such as the Trade Practices Act) or by the common law that certain terms are to be implied into certain types or classes of contracts. The common law has, over the years, developed certain terms implied by law into certain types of contracts. Some of these classes of contracts are mentioned on p 437 in the quotation from Hope JA in the Castlemaine Tooheys case. An example is mentioned on p 438 3rd para: the term implied into all lease contracts that the tenant has the right to quiet enjoyment. Another example, again from landlord and tenant law, is Liverpool CC v Irwin [1977] AC 239 case in which the House of Lords held that there is an implied term in public housing tenancy contracts involving high rise apartments, that the landlord will make reasonable efforts to maintain the common areas such as lifts, stairways, etc.

Should there be a term implied in all contracts of employment that the employee should not be dismissed in an unfair, harsh or unreasonable manner? Again, the judges came to the conclusion that no such term should be implied.

It can be seen that this latter type of implied term, such as the House of Lords found in the Liverpool CC case, is tantamount to legislation. For this reason the courts are very wary before coming to the conclusion that a term should be implied for all contracts of a particular class.

There are many terms implied into contracts by various statutory provisions, the broad purpose of which is to provide consumer protection. We cannot study the myriad of statutory provisions of this type. You will come across some in the property law course in connection with leases and mortgages. Also in commercial law courses you may deal with the credit laws and sale of goods, in both of which there is specific legislation which implies certain terms into those types of contracts. There are many others eg used car sales by dealers, door to door sales, lay by sales, residential tenancy and others.

The sale of goods implied terms exist in State and Territory sale of goods legislation but have also been incorporated into the Trade Practices Act 1974 (Cth) Part V Div 2.

Another category of implied term which I adverted to earlier is a term implied from custom or trade usage. This is perhaps a sub-set of the type which we saw in the Liverpool City Council case, although categorisation of implied terms is notoriously difficult. The basic argument in this category is that everyone in the industry or trade knows (or ought to know) that there are certain unstated terms or assumptions. In order to establish this kind of implied term the same, somewhat stringent, test is applied by the courts as we saw in the Codelfa case. The term which is argued for must be notorious in the particular trade or industry. What this requires is that the party alleging the implied term has to produce industry experts as witnesses who can testify to the existence of the alleged implied term.

This type of implied term is discussed by the High Court in

The problem in this case was that Con-Stan employed a dodgy insurance broker to obtain insurance for Con-Stan. The broker did find suitable insurance cover with Norwich. Con-Stan then paid the premiums to the broker who did not pass them on to Norwich. The broker went bust and Norwich claimed that it was still owed the premiums by Con-Stan. Con-Stan argued that it had discharged its liability to pay the premiums once it had paid the broker. As a matter of agency, it is well established that an insurance broker is the agent of the insured and not the insurance company. This meant that the broker was Con-Stan's agent and that, on the face of it, any money paid to the broker was not received by the broker on behalf of Norwich, the insurance company. Con-Stan nevertheless tried to argue that it was a custom in the insurance industry that brokers were responsible for the payment of insurance premiums and that payment by the insured to its broker was a discharge of the insured's obligation to pay the premiums.

This argument, based on alleged custom, was not successful. There is a heavy onus on the person trying to argue for custom or trade usage. This onus was not discharged in this case. The High Court said that it was not unequivocally established that payment of the broker discharged the insured's responsibility and in fact it was sometimes the case in the industry that an insurance company would look to the insured rather than the broker when a broker was involved.

The case serves to provide an authoritative statement from the High Court about what is required to meet the high standard of proof when someone is alleging a term implied from custom or trade usage. You will see 4 points made on pp 448-449 which you can read for yourselves.

Finally, under the topic of implied terms, it is possible to imply a term or set of terms in a particular transaction even though the document has not been signed or, if it is a ticket case, there has not been reasonable notice. This is possible if it is clear from a regular course of dealings that one party knows or ought to know that there are terms because of the many times that he or she has dealt with the other party.

So, for example, supposing a company regularly used the same carrier to transport its products. On each occasion an invoice with terms written on it is sent after the item has been transported. Obviously, on this occasion it is not possible to say that the terms form part of the contract because they are delivered with the invoice after the contract has happened. But if this happens again and again, there must be a certain point reached when the company knows that the carrier has a set of terms and it can no longer say that the terms are not part of the contract.

The case law on this is not entirely satisfactory. The basic test should be in cases of this sort an objective one along the lines: must the person who received the invoice (or whatever) be treated as knowing about the terms? - a test not very different from the ticket cases. This is certainly the sort of test that emerges from the English case law. The answer to the question - must this person be treated as knowing that there are terms? - is determined by whether there has been a sufficient previous course of dealings. What is sufficient depends on the circumstances and is a question of fact.

Here we have a typical case where it is appropriate to try this argument, namely, terms implied from a previous course of dealing. Marley regularly hired a mobile crane from Mewett. You can see from the facts that a document was produced after each job was done. The document had terms and conditions on the back of it, including an indemnity clause. The indemnity clause would allow Mewett to claim from Marley if an accident happened and someone was injured. This in fact happened and Mewett wished to rely on the clause. The question was whether Marley was bound by the clause.

As is typical with ticket cases, the evidence showed that the relevant person (Mr Marley in this case) was probably aware that there were conditions on the docket but had never read them and probably had never addressed his mind to them. That should be sufficient if an objective test were applied. But the judge, Hogarth J, applies a rather different test. See the question he poses on p 444 4th para "The question resolves itself..." If it is necessary to show that the other party was aware of the particular term then it would be very difficult to argue for a term implied from a previous course of dealings. We have seen in the ticket cases that there is an argument that reasonable notice must be given of a particular term where the term is particularly stringent or draconian. This was the red hand test discussed in the Interfoto case. But the usual test is more general, namely, must the relevant person be treated as knowing that there are terms affecting the contractual relationship?

Hogarth J drew support for the more precise test from some English authority, particularly what Lord Devlin said in McCutcheon v David MacBrayne Ltd. Lord Devlin used a subjective test: does this person actually know of the term? But there has been subsequent House of Lords authority - the SAPPA case mentioned on the bottom of p 444 - where a more general test was applied.

Hogarth J also referred to a Victorian case (bottom p 445) Hill v Wright where the Victorian Full Court had decided that a delivery docket regularly supplied by a carrier was not to be imported into a particular transaction, despite the fact that there had been a regular course of dealing. The reasoning of the Victorian Court is not easy to follow but what they appear to be saying in the extract on pp 446-447 is that the docket in that case was never seen as a contractual document. It could not therefore be part of a particular contract, however many previous dealings there had been. Hogarth J then said on p 447 that he did not agree that the delivery docket in Hill v Wright was not a contractual document but he nevertheless went on to say that he felt he should follow what the Victorian Full Court said in Hill v Wright and held in this case that the docket was not part of the contract.

This is a very flawed analysis. He started by suggesting that the particular clause must be brought to the attention of Mr Marley - an actual knowledge test - but in fact ended up applying a test which was to do with whether Mr Marley knew that there were conditions generally. He concluded that Mr Marley could not be treated as if he was aware of the conditions despite the fact that he knew that there were conditions. This is because of a Victorian case where an entirely different type of docket was held not to be a contractual document - a question of fact and of no relevance to the present case - and a finding which Hogarth J expressly disagreed with!

The upshot of this is that the Australian law on previous course of dealings is in a bit of a mess. It is suggested that the correct test is: must the relevant person be treated as being aware of conditions having regard to the previous dealings which have taken place? This question can only be answered by looking to the relevant document where the conditions are found, the course of dealings between the parties (for example, was it sufficent?) and any other relevant factors such as whether this was a business dealing or was the person someone who could not be expected to know of conditions.

An article in (1996) 10 Journal of Contract Law 173 endorses the objective test just outlined.