Lecture Fundamentals of business law (7/e): Chapter 9 - M.L Barron

Chapter 9 - Contract law 3. At the end of this chapter you should understand: the tests that determine whether a statement is a term of a contract, the difference between a condition and a warranty, conditions precedent and conditions subsequent and be able to provide examples,...

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CONTRACT LAW 3

CHAPTER 9

• the difference between a condition and a warranty

• conditions precedent and conditions subsequent and be able to provide examples

• express and implied terms

• the doctrine of privity of contract

• the circumstances that will discharge a contract

• the doctrine of frustration of contract and examples

Learning objectives (cont.)

• the doctrine of frustration and examples of its

application

• what is meant by breach of contract and

remedies available for the injured party

• the definition of specialty contracts

• the definition and regulation of franchise

agreements

• Franchising Code of Conduct and the recent

amendments.

• Once a contract has been made, assuming that

all six essential elements are present, it may be

necessary to consider in some detail the terms

contained in the contract.

• These terms can be either express or implied.

• Terms can be enforced, but only by a party to a

contract—this is the doctrine of privity.

• A contract can end or be terminated.

Terms of a contract

• The terms of a contract are its contents They define the obligations of each party

Determining whether a statement or

representation is a term in the contract can sometimes be difficult.

• The terms of a contract can be express or

implied.

Tests for determining the terms of

Classification of express terms

contract Rescission of contract and/or damages

Express terms of contract

statements (made throughout negotiations)

Resulting in Mere representation Term of contract

No damages Breach Damages

Warranty Condition

i.e term of vital

importance

TEST: Did party enter contract

because of term? No Yes

Damages Damages (rescinds contract)

Conditions precedent and

conditions subsequent

Precedent condition

• A term that must be satisfied before the

contract can be enforced.

Subsequent condition

• A term that will terminate the contract due

to either the occurrence of a particular

event, or a particular act of a party to the

contract.

Implied terms

By courts (officious bystander test)

• Reasonable and equitable

• Contract ineffective otherwise

• So obvious it didn’t need to be included

• Clearly expressible

• Not contradictory to other terms

By statute law

• Sale of Goods Act 1895 (SA)

By custom or trade usage

• Certain, reasonable, notorious

• Not contradictory to express terms

• Not contradictory to statutory restrictions

Exemption clauses

• A term contained in a contract that

attempts to reduce or exclude one

party’s contractual liability to the other

party in certain instances.

• Can be divided into two categories:

– Exclusion terms

– Limiting terms

Requirements to give notice of

exemption clause

• Courts have viewed such clauses

conservatively and tend to interpret them

against the party seeking to rely upon them.

• The court will ascertain whether the

exemption clause seeking to be relied upon has become a term of the contract.

• For this to have occurred, it must have been brought to the attention of the party against whom it will be used.

• Did the other party have notice of it?

Exemption clauses

• Actual notice and constructive notice

• Types of notice required

• Documents that are contractual in nature

• Non-contractual documents:

– Ticket cases

The doctrine of privity of

contract

• Only parties to a contract can sue or be

sued on the contract.

Exceptions:

Insurance Contracts Act 1984 (Cwlth)

• Person(s) acting as agent or trustee

• Person assigning rights and liabilities to

another

Discharge of a contract

• A contract is regarded as at an end

when the word discharged is used.

• There are several circumstances

that will result in the discharge of a

contract:

– performance

– agreement between parties

– provision for discharge

– operation of law

Exceptions to the rule that

performance must be exact

• Severable contract—allows for payment by instalments

and confers some right on the party that has partially

performed the contract.

• Substantial performance—confers the right for the

defaulting party to enforce the entire contract but entitles

the innocent party to recover damages from any loss

caused because a performance was not exact.

• Acceptance of partial performance—requires free and

willing acceptance of partial performance of the contract.

• Obstruction of performance—if one party is prevented

from performing, the other party may regard the contract

Accord and satisfaction

Release one party for new agreement with further consideration

Discharge of contract—

provision for discharge

Options to terminate Conditions

subsequent

Discharge of contract—

operation of law

Bankruptcy Material alteration Merger

Discharge of contract—

Frustration (i.e impossibility of performance

of a contract through no fault

Contract

of personal service

Change in law Government interference

Increase in burden of performance

An event that is

unforeseen must

occur

The frustrating event must occur after the contract has occurred

Remedies for Breach of

Contract

Condition

Right to rescind Damages (reasonably

foreseeable) Specific performance

Injunction

Quantum meruit Ordinary Nominal Exemplary

(mitigate losses)

Specialty contracts

• Lease

– One party grants exclusive possession of property to

another party for a period of time.

• Hire purchase

– The owner of goods hires the goods in exchange for

regular payments to the hirer Title passes after all

payments have been made.

• Franchise agreement

– Agreement between a supplier of a product or service,

or an owner of a trade mark or copyright (franchisor),

and a reseller (franchisee).

Franchise agreement

• A marketing tool and means by which,

through a contract, the franchisor grants

the franchisee a right to the use of:

– a product

– services

– a trade mark

– copyright, etc.

Advantages of franchising

• For franchisor (seller)

– Ability to penetrate markets quickly

– Access to capital resources

The Franchising Code of Conduct

• Disclosure document

• Cooling-off period

• Copy of lease

• Association of franchisees

• Prohibition of general release from liability

• Transfer of the franchise

• Franchisor must receive documentation

from the franchisee

• Termination of a franchise

• Resolution of disputes

Amendments to Franchising Code

of Conduct—March 2008

• Aims to increase the transparency, quality and

timeliness of disclosure to franchisees.

• Places more onerous disclosure requirements on

franchisors, including that all details must now be

given in full.

• Disclosure includes comprehensive details of

franchisor and their officers’ own business

dealings, past franchisees, and a history of the

franchise site.

• Foreign franchisors are no longer exempt from

the code.

Amendments to Franchising Code

of Conduct—July 2010

• Amendments applicable to franchise

agreements commenced, transferred,

renewed or extended on or after 1 July 2011.

• Matters including novation, notices of

renewal and methods of dispute resolution

addressed.

• Disclosure document provided by franchisor

to franchisee must include:

– statement that franchise could fail

Amendments to Franchising Code

of Conduct—July 2010 (cont.)

– make reference to any unforseen capital expenditure

to be made by the franchisee

– inform franchisee of cost contribution obligations for dispute resolution

- disclose any unilateral variations to franchise

agreements imposed by the franchisor in any

franchise agreements since July 2010

- inform franchisee regarding confidentiality obligations

- inform franchisee as to obligations or options for

renewal at conclusion of franchise agreement.

Competition and Consumer Act

2010 (Cwlth)

• Section 45: Exclusionary provisions

• Section 46: monopolies

• Section 47: exclusionary dealing

• Section 48: resale price maintenance

• Section 20: unconscionable conduct

• Section 18: misleading and deceptive

conduct