BSBLEG522 course notes-1-20

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BSBLEG522 Apply Legal Principles in Contract Law Matters Unit Overview This unit describes the skills and knowledge required to analyse and evaluate information from a variety of sources and supply solutions to contractual issues in a legal environment. This unit applies to individuals who provide support in a range of legal service settings with a degree of responsibility to plan and complete investigations. It also applies to individuals in a range of work environments that a required to apply a basic understanding of contract law principles. Its application in the workplace will be determined by the job role of the individual and the legislation, rules, regulations and codes of practice relevant to different jurisdictions. No licensing, legislative or certification requirements apply to this unit at the time of publication. 1.1 Confirm Task Requirements The legal system is the framework in which the law operates; the law creates standards of conduct and the courts enforce those standards. The legal system involves those who: - • Make the laws • Apply the laws • Enforce the laws • Advise on the laws • Administer the law • Teach and research the law The legal system 'works' when its laws are: - • Certain • Flexible • Known • Reasonable For a legal system to work, its laws must be respected, observed, obeyed and the authority of the lawmaker must be respected and supported.
Contracts are used within the legal system to protect the rights of parties that reach an agreement or a mutual understanding. Both the common law and statutory laws have application to contracts. The rules with respect to the essential elements of a contract are predominantly common-law based, but some have been modified by statute. For example, there are numerous statutes protecting consumers. The majority of these are state rather than federal statutes, because the Commonwealth Constitution restricts the law-making of the federal parliament to certain matters. One important piece of legislation also discussed later, is the Trade Practices Act 1974 which was replaced by the Competition and Consumer Act 2010. There has been a steady increase in legislation over the centuries to a point where it rivals the common law as a source of law governing contract law. Legislation law, statute law, made by Parliament, is a particularly important source of law because, apart from its volume (at all levels in Australia), the rule is that if common law and statute law conflict, the latter prevails. Furthermore, we turn to Parliament to pass laws that are required to deal with social change because the common law moves at a snail's pace by comparison. An understanding of the law of contract is of fundamental importance to the functioning of the legal system in the context of business practices and conveyancing. What is a Contract? A 'contract' is defined in The Law of Contract (9th edn, Sweet & Maxwell, London, 1995) as 'an agreement giving rise to obligations that are enforced or recognised by the law'. Put simply, a contract is a promise or set of promises which the courts will enforce. When you agree to buy something now and pay for it later or take out a loan, you enter into a contract. The contract is between you and the person or organisation that you bought or borrowed from. However, contracts differ from a mere agreement that you might make with a friend or family member as a contract (unlike a mere agreement) is legally binding and can be enforced be the courts. As a contract is a legally binding agreement between two or more people or businesses, contracts are considered to form the foundation of all business. Task Requirements
Contracts can be complex. It is important that you fully understand the terms of a contract and any task requirements under the contract. There is no specific format that a contract must follow. Generally, it will include some terms, either expressed or implied, that will form the basis of the agreement. The terms of a contract are its contents. The terms define the obligations of each party and outline contract conditions or contract warranties (i.e. what is required under the contract/ task requirements under the contract). Contracts may follow a structure that can include, but are not limited to, the following items: • Details of the parties to the contract, including any sub-contracting arrangements • Duration or period of the contract • Definitions of key terms used within the contract • A description of the goods and/or services that your business will receive or provide, including key deliverables • Payment details and dates, including whether interest will be applied to late payments • Key dates and milestones • Guarantee provisions, including director's guarantees • Damages or penalty provisions • Renegotiation or renewal options • Complaints and dispute resolution process • Termination conditions • Special conditions Always read every word of a contract, including the fine print, to identify the terms and conditions of the contract and confirm these with your client to ensure: • The contract reflects the terms and conditions that were negotiated • You and your client understand what is required under the contract. • Sometimes it is necessary to also determine whether a statement or representation is a term of contract and, if so, whether it is a condition of the contract or a warranty under the contract. We will discuss this in further detail later in the unit. 1.2 Identify Type of Contract Contrary to what people think, a contract can exist in the absence of a written agreement.
Contracts can be verbal (spoken), written or a combination of both. Some types of contracts, such as those for buying or selling real estate or finance agreements, must be in writing. We deal with these types of contracts in further detail later in this unit. Written Contracts Written contracts may consist of a standard form agreement or a letter confirming the agreement. They are a formal document which clearly sets out the details of what was agreed between parties in writing. It is advisable (where possible) to make sure your business arrangements are in writing, as a written contract will give you more certainty, minimise your business risks by making agreements clear from the outset and enable you to avoid the problems associated with trying to prove a contract existed. Verbal Contracts Verbal contracts rely on the good faith of all parties and can be difficult to prove. They are a simple form of contract between parties where parties have merely verbally agreed to do certain things. For example, a handshake agreement is a verbal contract. Verbal contracts can lead to uncertainty about each party's rights and obligations. A dispute may arise if you have nothing in writing explaining what you both agreed to do. A handshake agreement may be enforced by a court (though often with difficulty). Part Verbal, Part Written Contracts There are circumstances where a written contract does not contain the whole of the agreement between the parties. This is where part verbal, part written contracts come in. An obvious example of a part verbal, part written contract is when a written offer is accepted verbally. In this scenario, the contract between the parties is both in writing and verbal. When identifying the type of contract, always confirm your client's understanding of the agreement. This will enable you to understand whether the contract is verbal, written or a combination of both! 1.3 Research Key Elements of Contract Regardless of whether an agreement is verbal or written or a combination of both, before the law will regard an agreement as a legally binding contract, a number of essential elements must exist.
Not all agreements form legally binding contracts which are enforceable by law. For a contract to be legally binding (and therefore valid and enforceable), it must contain: • 1 1. An offer - an offer is made by one person to another 2. An acceptance -an offer made by one person is freely accepted by another 3. An intention to create a legal relationship - the people entering the contract must intend the contract to be binding 4. Consideration (usually money) -some price (money, right or benefit) is paid in return for a promise. However, a contract may still be considered invalid (and therefore unenforceable) if it: 1. Entices someone to commit a crime, or is illegal 2. Is entered into by someone that does not have the legal capacity, such as a minor or bankrupt 3. Was agreed through misleading or deceptive conduct, duress, unconscionable conduct or undue influence 4. Breaches other legal requirements So, to have any legal significance, a contract must have the following six essential elements: 1. Offer and acceptance 2. Intention to create legal relations 3. Consideration and/or form 4. Legality of objects 5. Legal capacity 6. Genuine consent An easy way to remember the above six elements is to remember the word FROLIC: F form and/or consideration R reality of consent O offer and acceptance L legality of object I intention to create a legal relationship
C capacity of parties We will now discuss each of these elements in turn. Offer and Acceptance Offer and acceptance requires a meeting of minds. There must be an offer made by one party and an acceptance of that offer by another. An offer is a proposal. When it is accepted, it creates a legally binding agreement-a contract. All the terms of an offer must be communicated. For example, a condition may be that the offer will only remain open for a specified period. An offer may specify conditions to be followed by the offeree. It may, for instance, specify that acceptance must be made in writing to the offeror. Invitation to treat - An offer must be distinguished from an invitation to treat. An invitation to treat invites people to make offers. The main difference between an offer and an invitation to treat is that a person making an offer intends to be bound, whereas a person making an invitation to treat does not intend to be bound. An item that appears in a shop 'window with a price tag on it is an invitation to treat. For example, a pair of trousers with a price tag of $75 (or an item in an advertising catalogue) is regarded by the law not as an offer but as an invitation to treat. This is an invitation for persons interested in buying the article to make an offer to purchase. In the above example, if a person takes the trousers to a counter in order to purchase them they are making an offer to purchase. The offer can be accepted or rejected by the seller. Advertisements can be an offer to treat. In some cases, an advertisement can be an offer if that is the intention of the advertising. Circulars - If a circular contains a request for a person to send money it may be regarded as an offer, as illustrated by the following case example. Re Mount Tomah Blue Metals (1963) 4 FLR 478 - FACTS : A circular requested shareholders in a company to subscribe money for conduct of the company's business and the discharge of its liabilities.
DECISION : The court held this was a request that would result in the performance of an act-the act being acceptance by shareholders. Therefore, it was an offer and not an invitation to treat. The company was requesting a loan and offering debentures to those who sent money to the company. Auctions - When an auctioneer calls for bids at an auction, this is only an invitation to treat. He or she is inviting those present at the auction to make an offer. A bid is regarded as an offer, it is then up to the auctioneer to either accept or reject that bid. When there is no reserve price, the auctioneer will accept the highest bid and, once the hammer has fallen, a contract has been made. An advertisement stating that an auction will be held is generally regarded as an invitation to treat. Online auctions - It is now commonplace for people to buy and sell goods on the Internet using online auction sites such as eBay. When goods are listed for sale on sites such as eBay the listing is generally regarded as an offer that can be accepted by any bidder who agrees before the auction closes, to pay the reserve price or the highest price above the reserve, as illustrated by the following case example. Smythe v. Thomas (2007) NSWSC 844 - FACTS : Vin Thomas owned one of the few restored World War II Wirriway Fighter planes in the world. On 15 August 2006 he listed the plane for sale on eBay. The plane was listed for a seven-day auction period with a reserve price of $150 000. eBay's terms and conditions provided that Thomas was obliged to sell to any person who lodged the minimum bid or above by the close of the auction. In addition, Thomas listed the plane for sale at $275 000 under eBay's fixed price 'Buy Now' section. On 13 August Peter Smythe phoned Thomas asking, 'If I enter the winning bid would you accept a $10000 deposit within 7 days and the remainder within 6 weeks?' Thomas responded: 'Yes, but the final payment must occur within that time. This is non- negotiable. You should also be aware that I would like to get $250000 and I have received an expression of interest for $220 000 from a Queensland collector'. On 15 August Smythe lodged a bid of $150 000 (the only bid received) only 10 seconds before the auction closed. He received an email from eBay saying 'Congratulations, the item is yours. Please pay now'. On 27 August Thomas advised Smythe that he would not sell for $150,000. Smythe sued for breach of contract and for an order for specific performance. Thomas claimed he was not in breach of contract because:
• No contract existed between them. They both had a contract with eBay but not with each other. • There was no agreement because the listing on ebay was an invitation to treat not an offer. Smythe's bid was an offer that could be either accepted or rejected. • Even if the auction did involve an offer and an acceptance, all the terms were not agreed upon because the parties had not agreed on the specific time or payment. DECISION : The court held that a binding contract had been made which Thomas was obliged to specifically perform because the goods in question were unique. Thomas was obliged to sell the plane to Smythe for $150 000. The court expressed the view that an online auction differs from a traditional auction in a number of ways. First, eBay does not take on the role of a traditional auctioneer. It does not act for the seller. Secondly, it does not enter a contract on behalf of the seller. The court decided that when the parties agreed to be bound by eBay's terms and conditions they agreed to enter a contract that would be formed if and when a minimum bid was lodged by the deadline and the bidder was advised that he or she had 'won'. Despite the fact that parties had not agreed on specific payment terms, the court held that on balance the parties entered a binding agreement when the bid was accepted. Tenders - An advertisement for tenders is usually considered to be an invitation to treat. Any tender received following the advertisement will amount to an offer. A binding contractual obligation may arise if the invitation to tender specifies the exact needs of the person placing the tender and their tender is then accepted by the person who invited tenders to be submitted. Sometimes tenders are called for in respect of the supply of goods or material that may or may not be required. If a tender is submitted to supply goods on an 'if required' basis it is called a standing offer. Termination of an offer - There are several ways in which an offer can be terminated. An offer may be terminated due to: • Lapse of an offer • Revocation of an offer • Rejection of an offer • Death of the offeree or offeror • Non-occurrence of a condition For example, if acceptance of an offer is not made within the time stated or, where no time is stated, if the acceptance of an offer is not made within a reasonable time, the offer will lapse and can no longer be accepted.
The meaning of a 'reasonable time' will be considered objectively. If perishable goods are the subject matter of a contract, then a 'reasonable time' will be far less than for goods that are not perishable It is permissible for an offeror to say that an offer will remain open for a certain time and then to withdraw the offer before the expiry of that time. This is allowed as long as no acceptance has been made. It is important to remember that an offer will also be terminated if a counteroffer is made. If a counter offer is made, the original offer will lapse. A counter offer is a rejection of an offer by the putting of an alternative offer. For example, Paul offers to sell his car to Bob for $5000. Bob says he will buy it for $4500. This is a counteroffer. The original offer lapses: it is no longer in existence and cannot be accepted. Acceptance of an Offer by Post (Contracts by Post) - Special rules apply where an acceptance is to be made through the postal system. An acceptance that is made through the post is effective when the letter of acceptance is placed in the postbox. Provided the letter has had its postage fees paid and is addressed correctly, acceptance occurs on posting. This is the case even if the letter is mislaid and never reaches the offeror. This rule is called the postal rule. The postal rule developed in England in the late 1800s when the postal system was the principal means of communication. There were no instantaneous communication systems such as telexes, facsimile machines and email. The postal rule applies only if the postal system is contemplated as a mode of acceptance of an offer. This will usually be the case if the offer itself was posted. It is possible to exclude the operation of the postal rule. The offeror can specify that acceptance will not take place until actual receipt of the notification of acceptance occurs. The postal rule only applies to acceptances, not to offers. An offer made through the post will not be effective until it is received and read by the offeree. It is possible for an offer made by post to be revoked by the offeror. However, revocation will be ineffective unless it is communicated to the offeree before the letter of acceptance is posted Instantaneous Acceptance of an Offer - The postal rule does not apply to means of communication that are virtually instantaneous (e.g. telex, telephone, facsimile machines or email). Unless there is actual communication, no contract will be created. The postal rule does apply to telegrams, which are treated as letters and not as instantaneous communications. The Electronic Transactions Act 2003 provides that where parties have agreed on the conditions for electronic communication, emails and other electronic communications are deemed to be sent when they enter a single communications system outside the sender's control. Therefore, the time of acceptance would be the time the acceptance is received by the offeror's server. Acceptance must be in reliance of an offer
- A person cannot accept an offer unless they are aware of it. Acceptance may occur simply by the doing of an act-for example, returning property pursuant to a reward. If the person returning the property to its owner has no knowledge of the reward, they therefore have no knowledge of the offer. Their action of returning the item cannot amount to acceptance as this act was not done in reliance of the offer. Sometimes a person may accept an offer, but their act of acceptance is not in reliance of the offer. It may have been made for some other reason. Acceptance must be unqualified - To create a valid contract, an offer must be accepted without qualifications. If acceptance is qualified, the law will generally regard it as a counteroffer. For example, Ian offers to sell his refrigerator to Francesca for $300 and she accepts but says she can only make payment in three payments of $100, then this is a qualified acceptance. It will be regarded as a counteroffer. Conditional acceptance - A conditional acceptance is not an effective acceptance unless the offeror agrees to the condition. A common condition is for the acceptance to be subject to obtaining finance. If finance is subsequently arranged, the condition will be satisfied and a contract will be created. A tentative agreement between parties is a form of conditional acceptance. Often the expression 'subject to contract' is used (i.e. the party agrees subject to a contract being drawn up). Whether a binding contract exists depends on the intention of the parties as disclosed by the language used. Acceptance can only be made by a party to the contract - Acceptance can only come from an offeree-that is, a person who has received an offer. For example, if Amy makes an offer to Boris, it is not possible for Craig to accept the offer as an offer was not made to him. Revocation of acceptance - An acceptance, once given, cannot be revoked unless the offeror consents. This is because a bargain has been concluded-that is, a contract has been made, provided the other essential elements required to form a contract are present. Time - Acceptance must take place within a prescribed time. If no time is prescribed, then acceptance must take place within a reasonable time. Intention to create a legal relationship The parties to the contract must intend their agreement to be legally enforceable.
Not all agreements give rise to legally enforceable obligations. People who make agreements must intend the agreement made will give rise to a legally enforceable obligation. To determine whether there is an intention to create legal relations, the law looks at the nature of the agreement. If an agreement is of a social or domestic nature, the law has created a presumption that such agreements do not have an intention to create legal relation. A presumption is a conclusion or inference about the truth of some fact. Social and domestic agreements - Social agreements are made between friends. A domestic agreement is one made between members of the same family or household. For example: • Two friends agree to play tennis next Saturday. If one person fails to arrive at the agreed time, the law presumes the agreement was not intended to create legal relations. The person who breached the agreement could not be sued for breach of contract. • A husband agrees to cook dinner for his wife and, in return, she will do the dishes. The husband fails to cook the dinner. The law presumes this type of agreement is not intended to create legal relations. The wife cannot sue the husband for failing to cook dinner. The reason for the existence of this presumption is simple and sensible. The courts would be flooded with litigants if every social or domestic agreement gave rise to a legally enforceable obligation. The presumption can be rebutted or negated by producing evidence that there is a business or commercial flavour to the agreement, even though it is made between family or friends. Business agreements - Agreements of a business or commercial nature are treated differently from social or domestic agreements by the law. Business or commercial agreements raise a presumption that there is an intention to create legal relations. Again, this presumption can be rebutted if evidence is produced to show there was clearly no intention to create a legally binding agreement. If an agreement is made in the course of business dealings, then in the absence of express words to the contrary, the courts will say that legal relations were intended. This presumption can be rebutted by evidence showing no intention was envisaged. Harley v. McDonald's Australia Ltd (2000) ATPR 41-741 - FACTS: In 1999 the plaintiff entered the 'Monopoly Me Match and Win Competition'. There were two conditions attached to awarding prizes to the winners. Winners were ineligible for prizes if they failed McDonald's security and verification checks and McDonald's decision on all matters arising from the competition was final.
DECISION : Entering the competition created a valid contract between Hurley and McDonald's under which McDonald's was legally obliged to award a prize to the winner if the conditions described above were satisfied. Charitable activities - The issue may arise as to whether participation in charitable or voluntary organisations will give rise to contractual rights and obligations. The following case example deals with this matter. Teen Ranch Ply Ltd v. Brown (1995) 87 IR 308 - FACTS: Brown was injured while working as a volunteer at a camp for teenagers run by Teen Ranch Pty Ltd, a non-profit Christian organisation. Brown argued a contract of employment existed between him and the organisation and therefore he was entitled to workers' compensation. DECISION : The court held no contract of employment existed between the parties as there was no indication that legal relations were contemplated by the parties. Accordingly, Brown was not entitled to workers' compensation. The decision in the above case example can be contrasted with the decision of the High Court in the following case. Ermogenous v. Greek Orthodox Community of SA Inc (2002) 209 CLR 95 - FACTS: Archbishop Spiridon of the Greek Orthodox Community in Adelaide applied for annual leave and long service leave from the defendant. The plaintiff claimed that there was no contract between the parties as the agreement lacked an intention to create a legal relationship. DECISION: The Archbishop had rebutted the presumption that the appointment of a minister of religion is spiritual and not presumed to give rise to a legal relationship. He was successful in his claim for annual leave and long service leave on the basis that his relationship with the community organisation was more than an agreement and that it gave rise to a contract of service. Consideration and/or Form For an agreement to be regarded as a contract, it must be supported by consideration. Consideration can be defined as a mutual promise; something done or promised by one party in exchange for something done or promised by the other party. Both parties must provide consideration. Mutual promises are the basis of consideration. Consideration can be described as an exchange of value for value.
A contract lacking consideration may be valid if it is in the form of a deed (i.e. a contract under seal). The terms 'promisor' and 'promisee' are used to describe the parties to a contract in which consideration is present. The promisor is the person undertaking to perform the consideration; the promisee is the recipient of the consideration. In contracts where both parties provide consideration, each party will be both a promisor and a promisee. Consideration can be classified as 'executory' or 'executed'. Consideration that is still to be performed is termed executory. Consideration that has already been performed is said to be executed. The following are examples of consideration: • Martin agrees to mow John's lawn and John agrees to pay Martin $15. • Bill agrees to fix Anton's lawnmower if Anton services his car. Promises not supported by consideration are gratuitous promises. They are gifts and are not enforcable unless in the form of a deed. A deed is a formal written contract that does not require consideration. Rules with respect to consideration - Consideration is essential to every contract. There are a number of rules with respect to consideration. Consideration: • Can be present or future, but not past • Must be of some value but need not be adequate • Must be definite, not vague • Must be capable of being performed • Must not be illegal or unlawful • Must be more than a person is already required to do • Must move from the promisee • Cannot be satisfied by part payment of a debt When a party under a pre-existing contractual obligation promises to do something beyond its existing obligation in exchange for payment, this amounts to consideration. The new agreement will be enforceable. A person cannot seek-to rely on an act as consideration for a contract if they are already under a legal duty to perform that act. A promise to carry out a pre-existing obligation may create valid consideration if it satisfies the 'practical benefits test'. This requires the promisor to provide some extra consideration. The key aspects of this test are: • Two parties enter a contract
• One party has strong obligations for refusing to carry out its contractual obligations • The other party to the contract responds by promising to alter the contract • The first party relies on this promise and agrees to carry out the terms of the contract • The compromise means the second named party avoids a detriment or gains a benefit • No fraud or economic duress is involved. Generally, part payment of a debt will not be adequate consideration to discharge a debt. For example, Ian owes Diana $500. Diana agrees to accept $400 from Ian in full satisfaction of the debt. Ian may argue that Diana cannot later sue him for the outstanding $100. Legally this argument would be unsuccessful. There is no consideration passing from Ian to Diana in return for her promise not to sue. The law has created several exceptions to this rule: • Payment of a smaller sum along with something else (e.g. agreement to perform labour) will discharge the debt. • Payment of a smaller sum before the debt is due will be enforceable. • Payment of a smaller sum at a different place or in a different currency can operate as a legally enforceable discharge of a debt. • Signing a deed of release may discharge the debt. • Payment may be made by a" third party who is not bound by the contract. • Agreeing to perform any other act that the debtor is not bound by the contract to perform may result in a legally enforceable discharge. • By relying on the defence of promissory estoppel, in some circumstances a contract can be altered despite a lack of consideration being provided for the altered promise. This is due to the doctrine of promissory estoppel (see the definition below) that requires several elements • To be satisfied: • The promisee has altered their position in reliance on a new promise • It would be impossible for the promisee to return to their original position without detriment • I would be unfair for the promisor to renege. The doctrine of promissory estoppel was developed in the following case. Central London Property Trust Ltd v. High Trees House Ltd [1947] KB 130 - FACTS: In 1937 in England, the plaintiff leased a block of flats to the defendant for ninety-nine years at £2500 per annum. War broke out and it became difficult to fill all the flats. The plaintiff agreed to reduce the rent to £1200 for the duration of the war. When the war ended, the rent reverted to £2500, but the plaintiff claimed the full rent for the whole period.
DECISION: The court held the plaintiff was not entitled to claim the full rent for the whole period (including the war years), despite the fact the defendant had given no consideration for the plaintiff's promise not to demand the full rent entitlement. Where one party to a contract, by its behaviour, leads the other party to the contract to believe a certain state of affairs exists between them, the courts will support that state of affairs rather than the terms of the contract. It is not possible at a later time for one party to seek to deny the state of affairs. This is called the doctrine of promissory estoppel. The High Court of Australia confirmed the doctrine applied in Australia in 1983 Legality of Object The purpose or object of a contract must be legal. Contracts may be illegal either at common law or pursuant a statute. The factors relevant to the question of legality are: • Contracts illegal at common law • Contracts illegal by statute • Effect of illegality Contracts illegal at common law - There are a number of contracts that are illegal at common law. These contracts are either against public policy or involve the commission of an illegal act. The major categories are: • Contracts designed to defraud the government of revenue • Contracts intending to defraud the state or federal authorities of revenue (e.g. contracts intending to defraud in respect of liability for land, sales or income tax). • Contracts that hinder the administration of justice. For example, a contract made between parties is illegal where one person agrees not to reveal information that could assist in the investigation of a crime. Public Service Employees Credit Union Co-operative Limited If. Campion (1984) 75 FLR 13' - FACTS : Campion guaranteed repayment of a loan, advanced by the plaintiff credit union to his son, on the understanding the credit union would not report his son to the police for misappropriation of funds from the credit union. DECISION : The guarantee was an illegal contract as it amounted to an agreement to stifle the prosecution of an indictable offence. Example of contracts that are illegal at common law include: • Contracts that are prejudicial to the institution of marriage An agreement where the parties to a marriage agreed, before they were married, not to live together when married would be against public policy. Marriage brokerage
contracts-where one party undertakes to find a marriage partner for another in exchange for a fee-are also illegal. • Contracts that are sexually immoral A contract between a prostitute and a client would be illegal. Note that in some states: territories, prostitution has been legalised by statute in certain licensed premises. • Contracts that promote corruption in public life • Contracts that involve the corruption of a public official (e.g. bribery) are illegal. • Contracts that involve a conflict of private interest with duty Employees or agents who allow their interest, financial or otherwise, to interfere with their duty may be guilty of a breach of duty to their employer or principal. • Contracts in unreasonable restraint of trade Contract in restraint of trade is one that restrains or hinders a person's ability to undertake their trade or profession. Such contracts are unenforceable unless they are reasonable. In addition these contracts must also be supported by some consideration. A contract must be reasonable in the interests of the public and between the parties to the contract. The restriction can be no wider than is reasonable to protect the person for whose benefit the contract is made. In determining whether a restraint is reasonable, Courts must consider the duration and the extent of the restraint. They also consider whether the restraint is in the interests of the parties to the agreement, and whether it is in the public interest. The duration of the restraint is how long it will be operative. The extent of the restraint refers to the geographical extent of the restraint. There are two broad categories of contracts in restraint of trade: 1. Contracts for sale and purchase of a business These contracts will often include a clause restraining the seller from setting up a competing business nearby. For example, Anna and Peter operate a service station. They decide to sell the business and so enter a contract of sale with Rodney and James. The sellers agree that they will not operate a service station within three kilometres of the old station for three years. This clause is one in restraint of trade, since it restricts Anna and Peter from trading freely. However, this clause could be regarded as reasonable, since it protects the goodwill the purchasers have paid for. When confronted with a clause in restraint of trade, the court will ask if it is reasonable between this particular seller and buyer. The court will also ask if the restraint is in the public interest. In determining whether the clause is reasonable, the court will consider
the duration of the restraint (three years in the above example) and the extent of the restraint (3 km). It will ask whether the restrictions are reasonable in protecting the goodwill that has been purchased. It is difficult to lay down rules for determining if the duration and extent of a restriction are reasonable. The court will need to consider the facts in each case. Remember: reasonable terms = enforceable contract unreasonable terms = unreasonable terms cannot be enforced 2. Contracts for employment made between an employer and employee These contracts will often include a clause restraining the employee from engaging in a competing business while in employment or after termination of employment. It is common for contracts of employment to include a clause restraining employees from carrying on their trade or profession in competition with their employer while in employment or after termination of their contract of employment. Courts are reluctant to enforce such restrictions. However, a person can be prevented from disclosing an employer's trade secrets. Large companies that have valuable intellectual property upon which their goodwill and reputation are based are much more likely to have such a contract enforced-for example, companies such as Microsoft and Coca-Cola Amatil. The test of reasonableness will be applied, as in contracts for the sale of a business. However, courts are reluctant to enforce agreements in restraint of trade between employer and employee. They will construe them less favorably than those made in connection with the sale and purchase of a business, because of the unequal bargaining position of the parties. The employer will always be in the more dominant position. Remember: reasonable terms = enforceable contract unreasonable terms = unreasonable terms cannot be enforced Contracts illegal by statute - Often a statute will prohibit certain conduct. The prohibition may be on the making of certain contracts. Some examples of contracts prohibited by statute are: • Agreements to share the proceeds of a robbery • Contracts void only against certain persons. For example, contracts to alter the incidence of income tax are void against the Commissioner of Taxation • Certain dealings by an insolvent person. These dealings will be void against the insolvent person's trustee in bankruptcy
• Certain betting and wagering contracts. The table below outlines the state and territory legislation that expressly prohibits these contracts. STATE/TERRITORY RELEVANT LEGISLATION New South Wales Unlawful Gambling Act 1998 Victoria Gambling Regulation Act 2003 Queensland Racing Act 2002 South Australia Lottery and Gaming Act 1936 Western Australia Gaming and Wagering Act 1987 Tasmania Racing and Gaming Act 1952 Australian Capital Territory Games, Wagers and Betting-Houses Act 1901 Northern Territory Racing and Betting Act 1983 • Restrictive trading agreements. It is common for agreements made between manufacturers, retailers and wholesalers of goods and services to contain restrictive clauses (e.g. placing a restriction on the price at which goods may be resold). The Competition and Consumer Act 2010 regulates such conduct. If a statute regulates only the way in which the contract is performed, the contract will generally not be regarded as void. The contract will be enforceable by an innocent party. It is valid, and there will be a fine or sanction for non-compliance. When the court is determining the effect on a contract of conduct that is prohibited by statute it will take into account the intention of the parliament in enacting the legislation. This is illustrated by the following case example. Buckland v. Massey [1985]1 Od R 502 (Fe) - FACTS : Pursuant to s. 6 of the Motor Vehicles Safety Act 1980 (Qld) it was an offence to sell a second-hand motor vehicle without a certificate of roadworthiness. The seller and buyer of a second-hand vehicle agreed that the seller did not need to obtain the required certificate but that the buyer would do so. The seller sought to recover the balance of the purchase DECISION : The court held that the whole of the Motor Vehicles Safety Act was concerned with ensuring that the motor vehicles for use on the road are roadworthy. The Act clearly implied that contracts for the sale of second-hand vehicles without obtaining a roadworthiness certificate were prohibited. The contract made between the parties was held to be implied prohibited by the Act and therefore was unenforceable. Effect of illegality - The effect of a prohibition on the validity of contracts needs to be considered. Some contracts will be rendered void (i.e. have no legal effect) while others will be rendered illegal and unenforceable. In the latter case, there is still a contract but it is unenforceable, while in the former case there is no contract.
It may be possible to enforce part of a contract. The illegal part of a contract may be severed and the legal part enforced. This can only happen if the contract is capable of being severed. This is often referred to as the blue pencil test: the illegal portions are deleted with a blue pencil and, if a valid contract remains, then it has passed the test. It is common for money to be paid pursuant to an illegal contract. Money paid pursuant to an illegal contract is generally not recoverable. Money that is paid under a contract that is merely void as opposed to being illegal is generally recoverable. This is illustrated by the following case. Hermann If. Charlesworth [1905] 2 KB 123 - FACTS: Charlesworth agreed to introduce a certain gentleman to the plaintiff, who was an unmarried woman, with a view to marriage for an initial fee of £52 and a later payment of £250 if marriage took place. A number of gentlemen were introduced to the plaintiff and the defendant wrote to a number of others on her behalf but no marriage resulted. DECISION : The plaintiff was entitled to the return of her £52 since payment had been made under a void contract and was recoverable. Capacity - The parties to a contract require capacity or ability to contract. Not all people have the capacity to make contracts. Some people are under a disability when it comes to making contracts (e.g. minors); for these people, their capacity to contract is restricted. Minors - As mentioned in previous units, a minor is any person who has not reached the age of eighteen years. Another term to describe such a person is an 'infant'. When a minor reaches the age of eighteen years, they are said to have attained 'the age of majority' or to have 'reached majority'. The age of majority in each state and territory of Australia is eighteen years. The below table contains the titles of the relevant state and territory legislation which set out the age of majority in each state and territory of Australia. STATE/TERRITORY RELEVANT LEGISLATION New South Wales Minors (Property and Contracts) Act 1970 Victoria Age of Majority Act 1977 Queensland Law Reform Act 1995 South Australia Age of Majority (Reduction) Act 1971 Western Australia Age of Majority Act 1972 Tasmania Age of Majority Act 1973 Australian Capital Territory Age of Majority Act 1974 Northern Territory Age of Majority Act 1974 The law protects minors and has developed special rules that apply to contracts made by them. The rules are predominantly common-law based, with some statutory modifications. This is so in all jurisdictions except New South Wales, where common-
law principles have been completely replaced by the provisions of the Minors (Property and Contracts) Act 1970. At common law, contracts made with a minor fall into one of the three categories. Valid voidable void A number of contracts that are made by minors are regarded as valid/binding. They are: • Contracts for necessaries Necessaries are goods and services suitable to the 'condition in life' of a minor. The test is a subjective one: are the goods and services necessaries for a particular minor? They may not be necessaries for minors in general, but they may be necessaries for the minor in question. They must be necessaries at the time of the sale. Necessaries will include such items as food, clothing, shelter and medicine. However, they are not restricted to absolute necessities. Whether a contract is for the supply of necessaries will be a question of fact in each case. • Beneficial contracts of service Contracts that are beneficial to the minor-in the sense that they provide some form of education, employment or instruction will be binding. A contract of apprenticeship falls into this category. • Cash transactions Minors who pay cash for goods or services will be bound by the contract. This is so even if the contract is not for the purchase of necessaries or is not a beneficial contract of service. If no price has been agreed on by the parties, the minor is obliged to pay a reasonable price. A contract made with a minor that is neither for necessaries nor a beneficial contract of service may be voidable. At common law, there are two types of contract that fall into this category: 2. Contracts binding unless repudiated Contracts that will be binding on a minor during their majority, unless repudiated by the minor during their minority or within a reasonable time of attaining their majority, are voidable. To 'repudiate a contract' means to reject it and to decide not to be-bound by it. Contracts that fall into this category are those involving continuing obligations. They are contracts of a permanent nature (e.g. contracts involving land, leases or partnerships, or contracts for the purchase of shares in a company).
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