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Module 5: Operation, termination and remedies for breach of contract

Introduction

In this module we consider, in effect, the various ways in which the expectations of contracting parties may be disappointed in relation to the due performance of the various promises they have made under the contractassuming a contract is established in the first place. Or to use economic jargon, the difference between the ex ante promises/expectations of the parties and what then occurs ex post during the life of the contract. But though in this module we largely focus on things that can go wrongand then the legal consequences and remediesit is generally the hope and expectation of contracting parties that performance will run smoothly through to completion! As Rabin (1997) points out, human beings are more responsive to the likelihood of adverse risk and losses than gains. Translated into the arena of contracts, this means that contracting parties tend to pay more attention and devote more resources to avoiding the likelihood of contractual failure than striving to ensure the best possible contract outcomes.

The law imposes a primary obligation upon the contracting parties as to the due performance of all promises, failing which they have a secondary obligation to pay damages. In reinforcement of that primary obligation, the courts have, for example, the discretionary remedy of specific performance. Although it cant be pretended that the remedies for contractual wrongs and failures are entirely systematic. They are in effect, a slightly ad hoc collection of common law contract law principles, discretionary equitable remedies, and remedies under the broader law of obligations, e.g., restitution. However, they do work remarkably well and offer at almost every stage, a range of options to the wronged party or promisee that can be used strategically and tactically, in order to secure and advance their legitimate selfinterest in relation to the contract.

See the Appendix for a 2005 term assignment contract law problem and accompanying marking guide solution.

Objectives

On completion of this module you should be able to:

explain and illustrate four ways in which contracts can be discharged

describe the two conditions under which breach occurs

list and describe common law and equitable remedies for breach

analyse sample cases for frustration and breach.

Readings

Textbooks Turner & Trone 2013 Chs 1012

Davenport & Parker 2012 Chs 1012

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Privity of contract

The doctrine

At common law only a person who is party to a contract may seek contractual remedies by reference to it. That is, only a party to a contract can sue on it, or be sued on it.

A case illustrating the point is Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847. Here the plaintiff, a tyre manufacturer, had sought to impose a price maintenance scheme in respect of its products. It supplied tyres to distributors pursuant to a contract specifying price floors, and required the distributor to enter into a contract with the retailers with a like specification. Ultimately the defendant retailer sold below the list price.

The plaintiff failed in an action for breach of contract against Selfridges. First, there was not privity between the parties. Dunlops contract was with the distributor. Selfridges contract of purchase from the latter was quite independent. There was no implication of agency; that is, that the distributor was acting as agent of the retailer. Second, the requirement that consideration must have moved from the party seeking to enforce a contract was likewise unsatisfied in this case.

In Scruttons Ltd v Midland Silicones [1962] AC 446, a shipping company agreed to carry drums of chemicals belonging to Midland Silicones from America to England, the contract limiting liability to $5000 per drum. The shipping company hired a firm of stevedores to unload the ship, and due to the stevedores negligence the chemicals were damaged to the value of $1800 per drum.

Midland Silicones were successful in their tort action against the stevedore company, recovering their full loss. The court held that the stevedore company could not rely on the exemption clause in the contract between Midland Silicones and the shipping company because they were not a party to this contract, nor were they protected by a similar exemption clause in their contract with the shipping company because Silicones were not a party to this contract. That is, there was not privity of contract.

The privity doctrine works reasonably well in most cases, but there are exceptions to its operation where the results of applying it would be unjust or unreasonable. The application of the privity doctrinepremissed on the consideration requirementcan also become complicated when there are multiple parties, and/or one party expressly contracts on behalf of, cojointly, or plans for the contract to benefit a third party, a contract defined as, an agreement between two or more parties under which legal relations and obligations are created which will be enforced in the courts (Turner and Trone 2013, p. 46). The basic principle being that, It must be accepted that, according to our law, a person not a party to a contract may not himself sue upon it so as directly to enforce its obligations: Coulls v Bagots Executor and Trustee Co Ltd (1967) 119 CLR 460, per Barwick CJ (in Carter and Harland 2002, para. 901). There are various combinations, permutations and possibilities which defy a simple application of the privity principle:

Joint promisees/parties. Privity of contract/consideration requirements are satisfied if consideration is made by one of the joint promisees to the other party/promisor(s) as recognised in the Coulls case (Carter & Harland 2002, p. 363). Otherwise stated, where there are two or more persons receiving a benefit under the contract (joint promisees) it is sufficient that consideration passes from one of them (Pentony et al. 2003, p. 61).

That one party contracts as Agent on their behalf as named principals so that the contract is theirs jointly, in which case standard agency law principles apply.

A leading party contracts as Trustee on behalf of third persons so that the contract is made exclusively for their benefit as third party beneficiaries or even

That after contracting, a party assigns their contractual rights to some third party(s), assuming that assignment is permitted by the contract.

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Terminations or discharges of contract

There are five ways by which the rights and obligations of the parties may come to an end:

1. performance

2. agreement

3. frustration

4. operation of law

5. breach.

Performance

The primary obligation of the parties to a contract is due performance, failing which, their secondary obligation is to pay damages for the breach of a primary contractual obligation (Carter & Harland 2002, p. 816). Though strictly speaking, they have the right to all the remedies available at common law and equity. Those remedies include rescission, termination, restitution (for example, unjust enrichment on a total failure of consideration), specific performance and injunction. The availability of these remedies may depend on whether there was a breach of a contractual condition or warranty. Damages are awarded not to punish but rather to compensate the innocent party and put them in the same financial position as if the contract had been duly performed (loss mitigation excepted). The discretionary equitable remedy of specific performance (now a statutory remedy in some cases) which is available when the contract is still afoot and hasnt been terminated is obtainable when a breach of contract has happened (i.e., it relates to executory obligations):

Generally, specific performance is not ordered until a breach of contract has occurred. Since there is a remedy in damages, it is only if that remedy is inadequate to protect the plaintiff that a court will order specific performance.

(Carter & Harland 2002, para. 2402)

Whilst an injunction is available to stop a threatened or continuing breach of contract and, is concerned with securing contractual performance in specie (Carter & Harland 2002, para. 2413). Specific performance has been frequently used in relation to land transactions since real property interests are generally unique, but more infrequently in the case of the sale of goods on the basis that chattels are generally common items of commerce.

Thus when both parties have performed their obligations, the contract is extinguished. Generally performance must be complete and exact, thus a party who does not precisely perform the contract will be in breach. In Re Moore and Co and Landauer & Co [1921] 2 KB 519, a supplier of tinned fruit agreed to supply the goods in cases containing 30 tins each. When he delivered the goods about onehalf were packed in cases of 24 tins each. The correct total amount of tins were delivered, and the market value of the goods supplied was unaffected, however, clearly there had been a breach of contract.

Held: the buyer could accordingly reject the whole consignment.

Exceptions

There are six exceptions to this rule:

1. Several contracts

Where a contract can be divided into several parts, payments for parts that have been completed can be claimed. In Roberts v Havelock (1832) 100 ER 145, the plaintiff agreed to repair a ship. The contract did not state when payment was to be made.

Held: the plaintiff was not bound to complete the repairs before claiming some payment.

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2. Acceptance of part performance

Where A has accepted the partial performance of B, having an option to reject, a promise to pay is implied and a quantum meruit may be claimed by B. A quantum meruit action is a claim for a percentage of the contract price in direct proportion to the percentage of work done. In Sumpter v Hedges [1898] 1 QB 673, the plaintiff agreed to build a house for the defendant for 565. He partially erected the building, doing work to the value of 333. He then stopped because he ran out of funds.

The defendant, using the plaintiffs materials that had been left on site, finished the job himself. The plaintiff claimed 333 for work done plus the value of his materials used by the defendant.

Held: he failed in his claim for the 333 because although the defendant had accepted the plaintiffs part performance, the defendant had no optionit is impossible to reject a halfbuilt house since the status quo cannot be restored. The plaintiff however obtained judgment in respect of the materials that the defendant had used to complete the house.

3. Prevention of performance

Where one party is prevented by the other from completely performing the contract they may bring a quantum meruit action to claim for the work done.

In Planche v Colbarn (1831) 8 Bing 14, the plaintiff agreed to write a book on costume and armour which was to appear in serial form in the defendants periodical. The plaintiff was to be paid 100 on completion. After the plaintiff had done some research and written some of the book, but before he had completed it, the defendant stopped publishing the periodical. Held: the plaintiff had been wrongfully prevented from performing the contract, and he was entitled to a quantum meruit.

4. Substantial performance

Where a contract has been substantially performed, an action lies for the contract price less a reduction for the deficiencies. This exception only applies when the defect relates to the quality of performance. If the fact concerns quantity, for example of goods supplied, the general rule applies.

In Hoenig v Isaacs [1952] 2 All ER 176, the plaintiff agreed to decorate and furnish the defendants flat for 750. The furniture had several defects which could have been made good for 55. The defendant argued that the plaintiff was only entitled to reasonable remuneration for work done under the contract.

Held: that the plaintiff was entitled to the full contract rate, less the cost of making the defects good, since he had substantially performed the contract.

By contrast is Bolton v Mahadeva [1972] 1 WLR 1009. A plumber agreed to install a central heating system for 560. His work was defective in that the system did not heat adequately and it gave off fumes. The defects cost 174 to repair. The plumber failed in his action to recover the price less a reduction of 174, since he could not be said to have substantially performed the contract. He therefore recovered nothing and the defendant got a 560 heating system for 174. Obviously the courts have to draw a line so as not to encourage bad work.

5. Time of performance

At common law, a party who failed to perform their obligations within a given time was in breach of contract. The equitable rule, which now prevails, is that time is only of the essence of the contract if:

the parties expressly state, or if

a party who has been guilty of undue delay is notified by the other party that unless they perform within a reasonable time, the contract will be regarded as broken.

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In Rickards v Oppenheim [1950] 1 KB 616, a contract for the sale of a car provided for delivery on March 20. The car was not delivered on that date but the buyer continued to press for delivery. On June 29 he told the seller he must have the car by July 25 at the latest.

Held: that the buyer could not have refused delivery merely because the original date had not been met, but he could do so on giving the seller a reasonable time to deliver. Here the notice did give a reasonable time, so the buyer was justified in refusing delivery after July 25.

6. Tender of performance

1. Where an obligation under a contract is to deliver goods or render service, tender of the goods or services, which is refused, discharges the party tendering them from further obligation and entitles them to damages for breach.

2. Where money is tendered it must be legal tender and it must be the exact sum (change cannot be required).

3. If the debtor sends money in the post and it is lost they will have to pay again unless (a) the mode of delivery was requested by the creditor, and (b) the debtor took reasonable care.

4. Appropriation of paymentswhen a debtor makes a payment to a creditor which is insufficient to discharge all amounts outstanding, the payment is appropriated as follows:

(a) The debtor may tell the creditor which debt or debts should be discharged by the payment.

(b) If the debtor does not do this then the creditor may appropriate the payments to debts as they choose including statute barred debts.

(c) If the debtor pays the exact amount of a particular debt, it is presumed that the payment is in discharge of the debt of that amount.

(d) If there is a current account, it is presumed that the payments are appropriated to the oldest debts first.

Agreement

Bilateral discharge

Bilateral discharge occurs when the contract is executory or partly executory on both sides (both parties have obligations outstanding). The consideration requirement is automatically present since both parties will surrender something of value, that is, the right to insist on the other partys performance. Cases of waiver, (forbearance of the right to insist on performance at the agreed time), fall within the principle of equitable estoppel, as in Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130.

Unilateral discharge

Where one party only has rights to surrender. Where one party has completely performed their side of the contract, that is, it is wholly executed on one side, any release by them of the other party must be under seal, or supported by fresh consideration. Where there is a release supported by fresh consideration there is said to be accord and satisfaction.

1. The accord is the agreement by which the obligation is discharged.

2. The satisfaction is the consideration which makes the agreement effective.

3. The satisfaction may be executory.

Novation

This can also discharge a contract by agreement, for example, A owes B $100 and B owes C $100. A agrees to pay C, if C will release B from his obligation to pay him. All three parties must agree to the arrangement.

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Conditions subsequent

Sometimes a clause in a contract will provide for its discharge if a particular event occurs in the future, that is, subsequent to the formation of the contract.

Frustration

The basis of the doctrine

The general rule is that if a person contracts to do something he or she is not discharged if performance proves to be impossible. In Paradine v Jane (1647) Aleyn 26. A tenant who was sued for rent pleaded that he had been dispossessed of the land for the last three years by the kings enemies.

His plea failed. It was said:

When a party by his own contract creates a duty or charge upon himself, he is bound to make it good, not withstanding any accident by inevitable necessity, because he might have provided against it by his contract.

This severe rule is mitigated by the doctrine of frustration, which, if it applies, automatically discharges the contract. In general, if an event is to frustrate a contract it must be:

1. not contemplated by the parties, when the contract was formed

2. one which makes the contract fundamentally different from the original contract

3. one for which neither party was responsible

4. one which results in a situation to which the parties did not wish originally to be bound.

The application of the doctrine

Frustration can occur:

(a) If the whole basis of the contract is the continued existence of a specific thing which is destroyed.

In Taylor v Caldwell (1863) 3 B & S 826, the defendant contracted to let a music hall to the plaintiff for four days. Before the first day the music hall was accidentally burned down. The plaintiff claimed damages, but it was held that the defendant was discharged from his obligation when the music hall burned down. The contract was frustrated.

(b) By a change in the law.

In Rayneon (NZ) Ltd v Fraser [1940] NZLR 825, under a contract of hire made in 1936, a neon sign was erected by Rayneon for Fraser who was a dentist. The sign was to be leased for five years at a monthly rental. In 1938, this form of advertising by dentists was made illegal. It was held that the contract was discharged and that an action for the rental must fail.

(c) If either party to a contract of personal service dies, becomes seriously ill, or is called up for military service.

In Condor v Barron Knights [1966] KB 293, the plaintiff was the drummer in a pop group. Owing to illness he was forbidden by his doctor from performing more than a few nights per week. Since the nature of the work required him to be present seven nights a week, the contract was held to be frustrated.

(d) If the whole basis of the contract is the occurrence of an event which does not occur.

In Krell v Henry [1903] 2 KB 740, the defendant hired a flat in Pall Mall for the purpose of viewing the coronation procession of Edward VII, although this was not expressly stated in the contract. He paid 25 at the time of the agreement and was to pay a further 50 two days before the procession was to take place. Before the 50 had been paid the procession was cancelled owing to the illness of the king.

Held: the contract was frustrated, accordingly the plaintiffs claim for the balance of 50 failed, and the defendants counterclaim for return of the 25 also failed.

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By contrast is Herne Bay Steamboat Co v Hutton [1903] 2 KB 683, where a boat was hired for the purpose of viewing the naval review and for a days cruise around the fleet. The review was to form part of Edward VIIs coronation celebrations, but it was cancelled because of his illness. The fleet was however still assembled.

The contract was held to be not frustrated, since it was construed merely as a contract for the hire of a boat, which could still be performed even when one of the motives of the hirer was defeated.

(e) If the government prohibits performance of the contract for so long that to maintain it would impose on the parties fundamentally different obligations from those bargained for.

In FA Tamplin Steamship Ltd v AngloMexican Petroleum Products Co Ltd [1916] 2 AC 397, a ship was requisitioned by the government for use as a troopship. The charter party under which the ship was hired was for five years and there were 19 months left to run. The owners claimed the contract was frustrated by the war and requisition, and that they and not the hirers could claim the government compensation which exceeded the price of the charter party.

Held: the contract was not frustrated, since there were still some months to run, and the charterers were still prepared to pay the agreed price.

The limits to the doctrine

A contract is not frustrated if it becomes unexpectedly more expensive or burdensome to one of the parties. If the contract is to be discharged performance must become radically different. In Wilkins & Davies Construction Co Ltd v Geraldine Borough [1958] NZLR 985, the plaintiffs agreed to construct part of the defendants sewage treatment plant for 12 500. It was claimed by the plaintiffs that the contract was frustrated when certain difficulties that had not been foreseen made it a more onerous contract. The plaintiffs claimed a further 4 118 to compensate them for their additional costs.

Held: there was no such change in the obligations for the plaintiff that made performance a different thing than what was contracted for.

A party cannot rely on a selfinduced frustration, that is, frustration due to their own conduct. The Eugenia [1964] 2 QB 266 concerned a charter party who, in breach of contract, ordered a ship into a war zone. The ship was detained.

Held: that the charterer could not rely on the detention as a ground for frustration.

The effect of frustration

The contract is discharged automatically as to the future, but it is not made void from the beginning. At common law the loss lay where it fell, that is, money paid before the frustration could not be recovered as seen in Krell v Henry [1903], and money payable before the frustration remained payable, unless there was a total failure of consideration: Fibrosa SA v Fairbairn Lawson Combe Barbour Ltd [1942] 2 All ER 122. A purchaser of machinery for 4 800 paid 1,000 on placing the order. The machinery was to be delivered to Poland. Shortly after the contract was made war broke out and Poland was occupied by Germany. It was therefore impossible to deliver the machinery. The plaintiff succeeded in his action to recover the 1 000 since he had received nothing in return for his 1 000, that is, there was a total failure of consideration.

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It is as noted above, well established law that the doctrine of frustration will not apply merely because a contract unexpectedly becomes less profitable or more onerous to perform: The Eugenia [1964] 2 QB 226; Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337. However, the case law is arguably inconsistent on the issue and effect of foresight. If the relevant event(s) is clearly foreseeable (a standard risk or a nonstandard but specific type of risk the parties have knowledge of) but not specifically provided for in the contract then the parties might be assumed willing to bear the risk of its occurrence and its unpredictable impact on them. However such a strict requirement would limit the potential application of the doctrine of frustration which can most usefully operate by way of a convenient default residual catastrophic risk clause to cover incomplete contracting. It can cover risks foreseen but not expressly/impliedly provided for in a contract, as well as unforeseen risks, the issue arguably being largely one of contractual construction (Carter and Harland 2002, pp. 778779).

Breach

Definitiona breach occurs:

(a) If a party fails to perform one of their obligations under a contract. For example, if they do not perform on the agreed date, or they deliver goods of inferior quality, or

(b) If a party, before the date fixed for performance, indicates that they will not perform on the agreed date. This is an anticipatory breach.

Breach does not automatically discharge the contract, breach of warranty only entitles the innocent party to damages. Breach of condition entitles the innocent party to damages, and gives them an option to treat the contract as subsisting or discharged.

If the innocent party elects to treat the contract as still subsisting, and can complete their side without the cooperation of the other, they are entitled to do so, and claim the whole sum due under the contract: White and Carter (Councils) Ltd. v McGregor [1962] AC 413. An advertising contract for three years was made between the parties. The advertiser repudiated the contract almost immediately, but the repudiation was not accepted by the contractor, who continued to display advertisements for the period of the contract.

Held: that the contractor was entitled to recover the full contract price and was not obliged to accept the repudiation and merely sue for damages. He chose to affirm the contract and it remained in full effect. However the innocent party may elect to end the contract, in which case they are not bound to accept further performance, and they can sue for damages at once.

Similarly in the case of an anticipatory breach, the innocent party can elect to treat the contract as discharged, and can sue for damages at once: Hochster v De La Tour (1853) 2 EL & BL 678, where the defendant employed the plaintiff as a courier his employment to begin on June 1. Prior to that date the defendant said he would not after all employ the plaintiff. The latter treated this as renunciation of the contract and sued for damages. He was successful, the fact that the defendant might have changed his decision prior to June 1 did not prevent the plaintiff recovering damages.

If the innocent party elects to treat the contract as still subsisting, they keep it alive for the benefit of both parties, so that frustration may intervene to release the party at fault from further liability: Avery v Bowden (1855) 5 EL & BL 714. The defendant chartered a ship from the plaintiff to carry goods from Odessa. The charter allowed 45 days for loading. During this period the defendants agent told the captain (the plaintiffs agent) that he had no cargo and that he would be wise to leave.

The captain, however, remained in Odessa and pressed for performance. Before the 45 days had expired the Crimean War broke out and frustrated the contract. If the plaintiff had accepted the defendants anticipatory breach immediately he could have sued for damages. Since he did not do so, he kept the contract alive for the benefit of both parties, so the frustration operated to relieve the defendant from liability. The plaintiffs claim for damages therefore failed.

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Remedies for breach of contract

There are both common law and equitable remedies for breach of contract. The common law remedies are:

damages

an action for an agreed sum

a quantum meruit claim.

The equitable remedies are:

injunction

specific performance

recession

rectification

restitution.

Common law remedies

Damages

A claim for damages raises the questions of:

remoteness of damage

measure of damages

mitigation of loss

liquidated damages and penalties.

In summary, the common law imposes a primary obligation upon the contracting parties as to the due performance of all promises, failing which they have a secondary obligation to pay damages, subject to the discretionary remedy of specific performance. Whilst the role of damages is to equalise the innocent partys financial position, after the breach (i.e. ex post facto) with full performance of the original (ex ante) contractual obligations, subject to remoteness and mitigation rules etc., in effect reimbursing them for expectation losses and/or reliance losses: Hadley v Baxendale (1854) 9 Ex 341; Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 1 All ER 997; Darbishire v Warren [1963] 2 QB 323; Commonwealth of Australia v Amann Aviation [1991] HCA 54; Vermeesch and Lindgren (2005, pp. 319323).

In Amann Aviation, Mason CJ and Dawson J (at paras. 2325) noted that the general rule at common law accepted and applied in Australia was as stated by Parke B. in Robinson v Harman (1848) 1 Ex 850, that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same position, with respect to damages, as if the contract had been performed. While the issue of their remoteness was addressed by Anderson B in Hadley v Baxendale (1854) 9 Ex 341 (see below). Furthermore, in Amann Aviation, Mason CJ & Dawson (at para. 28) observed that, the corollary of the principle in Robinson v Harman is that a plaintiff is not entitled, by the award of damages upon breach, to be placed in a superior position to which he or she would have been in had the contract been performed. That is, they may not over recover: TC Industrial Plant Pty Ltd v Roberts Queensland Pty Ltd (1963) 180 CLR 130. To that end if required, the courts will scrutinise individual heads of claim, dismissing patently extravagant or untenable claims and radically revise, reduce or vary itemised accounts submitted: McRae v Commonwealth Disposals Commission [1950] HCA 12.

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Remoteness of damage

Damage is not too remote if it is:

... such as may fairly and reasonably be considered either as arising naturally, according to the usual course of things from the breach itself, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract, as the probable result of the breach.

Hadley v Baxendale (1854) 9 Exch 341, the plaintiffs mill shaft broke and had to be sent to the makers at Greenwich to serve as a pattern for a replacement. The defendant agreed to transport the shaft to Greenwich, but in breach of contract delayed delivery causing several days loss of production at the mill. The plaintiff claimed 300 in respect of lost profit.

Alderson B. stated the rule quoted and applied it as follows:

(a) the loss did not arise naturally since the defendant could not foresee that his delay would stop the mill

(b) the loss could not have been contemplated by both parties at the time of the contract as the probable result of the breach. The defendant had not been told that delay would stop the mill, therefore the plaintiff could not be compensated for loss of profits.

The rule formulated by Baron Alderson can be analysed into two parts: loss naturally arising and loss in the contemplation of both parties.... as the probable result of breach. Examples are: Pinnock v Lewis [1923] KB 340, where the seller of poisonous cattle food was held liable for the loss of the cattle to which it was fed. This loss arose naturally from his breach. In Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 1 All ER 997, the plaintiffs who were launderers and dyers, ordered a boiler from the defendant in order to extend their business. It was arranged that the boiler be installed on June 5. The boiler was damaged when being dismantled and delivery was not made until November 8. The defendant knew the nature of the plaintiffs business and had been told that the boiler was required urgently. The plaintiffs sued for loss of profits and was successful.

Frozen Products Ltd v Adams Bruce Ltd [1954] NZLR 486. Peanuts were stored by Adams Bruce in Frozen Products cool store. They became infected with mould and were seriously damaged. Adams Bruce Ltd sued for the loss of sale of the damaged peanuts, the higher cost of their replacement and loss of profits, and was successful. As to loss Archer J stated that this was a case where liability for loss of profits flowed directly from a breach of the contract. The defendant knew that damage to the peanuts would be likely to affect the plaintiffs business and were accordingly liable.

Measure of damages

The general rule is that the plaintiff recovers their actual loss (in respect of damage which is not too remote), that is, they are placed in the same position as if the contract had been performed.

In Thompson (WL) Ltd v Robinson (Gunmakers) Ltd [1955] 1 All ER 154, the defendant purchased a Standard Vanguard car from the plaintiff and later refused to accept delivery of it. The plaintiffs profit on the sale would have been 61, but the defendant argued that they were not liable for this amount since the profit would still be made when the car was sold to another customer. The court rejected this argument since the supply of this model exceeded the demand. Therefore if the plaintiff had found another customer he could have sold a car to him in addition to selling a car to the defendant.

In assessing the award of damages the court may take into account inconvenience and annoyance: Jarvis v Swan Tours Ltd [1972] 3 WLR 954, where the plaintiff paid 63 for a twoweek winter sports holiday. It differed vastly from what was advertised. There was very little holiday atmosphere, the hotel staff did not speak English, and in the second week he was the only guest at the hotel. The plaintiff recovered 125 damages for his upset and annoyance due to having his holiday spoilt.

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Mitigation of loss

The plaintiff must do what is reasonable to mitigate their loss, and cannot recover any part of it which the defendant can prove has resulted from failure to mitigate, that is, the plaintiff cannot recover for a loss that they ought to have avoided. In Darbishire v Warren [1963] 2 QB 323, the plaintiff owned a car of which he was particularly proud. Although it was old, he maintained it in excellent condition. It had a market value of about 85. The car was damaged by the defendants negligence and the plaintiff was advised it would cost him 192 to get repaired. The plaintiff went ahead with the repairs and claimed 192 from the defendant. His claim failed. The court held that the expenditure on repairs was not justified. The plaintiff should have mitigated his loss on buying a replacement vehicle on the open market. As Carter et al. (2007, p. 830) observe, while not precise, the concept of mitigation concerns (i) steps the plaintiff took to minimise the loss and (ii) steps the plaintiff ought to have taken. Furthermore, there is no positive duty to take steps to minimise loss, rather it is a duty not to act unreasonably (p. 832). Or as Loke (1996, p. 8) describes it:

The mitigation doctrine finds expression in two principles. First, the plaintiff is expected to take reasonable steps to reduce his losses. If he does not do so, the avoidable losses will not be attributed to the defendant Second, the plaintiff should not take unreasonable steps in seeking to mitigate his losses. If he does the defendant will not be responsible.

The burden of proving failure to mitigate losses is on the defendant. As Lord McMillan said in Banco dPortugal v Waterlow & Sons [1932] AC 452 at 506:

Where the sufferer from a breach of contract finds himself in consequence in a position of embarrassment the measures which he may be driven to adopt in order to extricate himself ought not to be weighed in nice scales at the instance of the party whose breach of contract occasioned the difficulty. (cited in Downs Investments v Perjawa Steel [2000] QSC 421 by Ambrose J.)

There is also an interesting but problematic line of authorityincluding The Solholt [1983] 1 Lloyds Rep 605surveyed by Carter and Harland (2002, pp. 850851) that requires, in a rising marketwhere an innocent party has accepted wrongful repudiation, especially by anticipatory breachthat party to pro-actively mitigate losses by accepting a subsequent offer from the party in breach. But whatever its correctness, logically it cant operate where that wrongful (threatened) reputation constitutes economic coercion.

Liquidated damages and penalties

The parties to a contract may, at the time of entering into it, provide that in case of breach the party in default is to pay to the other a sum certain, specified or ascertainable from the contract. Where however this is a penalty the plaintiff can only recover their actual loss in respect of damages which is not too remote: Kemble v Farren (1829) 6 Bing 141. Here an actors contract provided that if either he or the theatre management broke their contract then the party in breach must pay the other 1 000 as liquidated damages. This was held to be a penalty clause because it was disproportionate both to the actors daily fee of 3 6s 8d, and to the greatest possible loss that would result from the breach.

Action for an agreed sum

A contract will often provide for the payment by one party of an agreed sum in exchange for performance by the other, for example goods sold for a fixed price. Provided the duty to pay the price has arisen, the innocent party may sue the contract breaker for the agreed sum. Such an action is different from an action for damages, since the plaintiff recovers the agreed sum, neither more no less.

Quantum meruit

Quantum meruit means as much as they deserve. It is a claim for reasonable payment for work done or goods delivered. It is distinct from an action for damages and will arise if in a contract for the performance of work there is no expressly agreed rate of remuneration.

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Equity remedies

Injunction

An injunction is an order, issued at the discretion of the court, restraining a person from doing some act. These are of two kinds: a mandatory injunction which orders a person to take action to undo a breach of contract, and a prohibitory injunction which is an order of the court which prohibits a person from doing something.

In Warner Brothers v Nelson [1936] 1 KB 209, the defendant, an actress, agreed not to act for anyone else during the period of the agreement without the plaintiffs, written consent. It was held that she could be restrained by an injunction from breaking this undertaking. This did not of course force her to act for the plaintiffs nor did it prevent her from obtaining different types of work.

Specific performance

Specific performance is a decree issued by the court which orders the defendant to carry out their obligations. It is a remedy which:

(a) is discretionary, although the discretion must be exercised within well-established principles

(b) is not normally awarded if damages would be an adequate remedy. It is most likely to be awarded in contracts for the sale of land

(c) must be available to either party. Thus it is not available to infants in respect of a contract not enforceable against them

(d) is not available in respect of certain types of contracts, such as those requiring personal services, for example, as a servant, or contracts which require extensive supervision, for example building contracts.

Lumley v Wagner (1852) 1 De GM & G 604. Wagner was engaged to sing exclusively at Lumleys theatre. During the currency of the contract she agreed to sing for a competitor and refused to sing for Lumley. Being a contract for personal services, the court did not issue specific performance, but issued an injunction restraining Wagner from singing elsewhere during the term of her contract with Lumley.

Recission

The circumstances when recision as a remedy will be granted have never been precisely defined. In general it will only be granted if the party seeking to rescind was not at fault, and provided justice can be done to the other party by imposing conditions.

In Grist v Bailey [1967] Ch 532, the contract concerned the sale of a house which was occupied by a tenant. Both parties believed that the house was subject to rent control, and they agreed on a price of 850. In fact the house was not subject to rent control, and so was worth 2 250. The contract for sale at 850 was rescinded in equity with the condition imposed that the vendor should give the purchaser first option to buy the house at the correct market price.

Rectification

Where there has been a mistake, not in the actual agreement, but in its reduction into writing, equity will rectify the written document so that it coincides with the true agreement of the parties provided:

the terms were clearly agreed between the parties

the agreement continued unchanged up to the time it was put into writing, and

the writing fails to express the agreement of the parties.

In Commerce Consolidated Pty Ltd v Johnstone [1976] VR 274, a term in a written contract for the sale of land provided that the purchaser should pay interest on the balance of the purchase price calculated from May 1 1975. It was found on the facts that the common intention of the parties prior to the written contract was that interest was to be calculated from May 1 1974, the date the purchaser was to enter into possession of the property, and that insertion of the date 1975 had been made by mistake.

Held: that the written contract should be rectified by substituting 1974 for 1975.

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In Weeds v Blaney [1976] 2 KB 327, the plaintiff orally agreed with the defendant to sell him a farmhouse and some land. The plaintiffs solicitor in error prepared a contract which included further land owned by the plaintiff. The error was not noticeable and the land was transferred to the defendant who became the registered owner.

It was held that the plaintiff was entitled to rectification of the contract and the transfer.

Restitution

This is a very important independent right of action in commercial law. It is now accepted that underlying and giving effect to the general law of obligationsvoluntary and involuntaryis the right of restitution or law of unjust enrichment, interacting with the law of contract, tort, equity and trusts. It has two parts: autonomous unjust enrichment, e.g., paying money or transferring money to the wrong person; and restitution for civil wrongs. Key questions arising in restitution law include: has the defendant been enriched, was it at the expense of the defendant, is it unjust and should money or property be returned or paid for, the sort of recovery rights available and the availability of defences. Sheehan (2004, p. 1) usefully provides the following classification of its application according to intention and policy issues:

I didnt mean it (mistake, duress, undue influence, ignorance)

I only meant it if (failure of consideration)

Mummy says give it back (recovery of overpaid taxes, levies, statutebases payments).

The basis and operation of the law of restitution can be briefly stated.

1. That restitution concerns one partythe defendantbeing compelled to restore something (money or the value of some other benefitwork done, good supplied or services rendered) to the person from whom it was obtained (the plaintiff) at least where it would be unjust to allow the defendant to keep it.

2. The underlying principle/concept is that of unjust enrichment. So that, the defendant is ordered to restore money or other benefit that he or she has received from the plaintiff . because otherwise he would be unjustly enriched at the plaintiffs expense (i.e., this is a zerosum noncooperative contest for money or property).

3. That restitution isnt a remedy in contract but is appropriate in a contract in two cases: a claim for money paid in error (of fact or law); or where the plaintiff is claiming reasonable remuneration for work done, goods supplied or services rendered under void, invalid or partially performed services (Graw 2002, pp. 430431).

There are at least five classes of transactions that readily attract an application of the law of restitution.

1. Claims for reasonable remunerationthe quantum meruit claims

2. Money had and received by the defendant for the use of the plaintiff

3. Money paid under mistake of fact or law

4. Money paid by the plaintiff for the defendants benefit

5. Money paid by the plaintiff to the defendant under compulsiondue to any type of duress (Vermeesch & Lindgren 2005, pp. 333335).

One critical recent development has been an abandonment of the troublesome distinction between errors of fact and law. Astonishingly, it wasnt previously possible to recover money paid due to an error of law, but in David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353, the High Court of Australia made a long overdue correction:

If we accept the principle that payments made under a mistake of law should be prima facie recoverable, in the same way as payments made under a mistake of fact, a defence of change of position is necessary to ensure that enrichment of the recipient of the payment is prevented only in circumstances where it would be unjust. This does not mean that the concept of unjust enrichment needs to shift the primary focus of its attention from the moment of enrichment. From the point of view of the person making the payment, what happens after he or she has mistakenly paid over the money is irrelevant, for it is at that moment that the defendant is unjustly enriched.

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However, the defence of change of position is relevant to the enrichment of the defendant precisely because its central element is that the defendant has acted to his or her detriment on the faith of the receipt . (per majority judgment of Mason CJ. et al. at para. 58)

References

Carter, JW & Harland, DJ 2002, Contract law in Australia, 4th edn, LexisNexis Butterworths, Chatswood.

Graw, S 2002, An introduction to the law of contract, 4th edn, Law Book Co, Sydney.

Pentony, B, Graw, S, Lennard, J & Parker, D 2003, Understanding business law, 3rd edn, LexisNexis Butterworths, Chatswood.

Rabin, MR 1997, Psychology and economics, Berkeley Department of Economics Working Paper No. 97251, University of California at Berkeley, viewed 6 May 2002, http://emlab.berkeley.edu/users/rabin/wpapers4.htm

Sheehan, D 2004, The law of restitution, viewed 29 January 2013, http://www.ucc.ie/law/restitution/archive/reading_lists/sheehan.doc

Vermeesch, R & Lindgren, KE 2005, Business law of Australia, 11th edn, LexisNexis Butterworths, Chatswood.

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Appendix

2005 Term assignment question & marking guide solution

Queensland Dairy Exporters Pty Ltd (QDE), a private company based in Brisbane Australia, was established in 2001 to take advantage of the growing demand worldwide for Australian HolsteinFriesian (HF) dairy cows with superior genetics. On 28 February 2004, QDE signed a very lucrative US $4.5 million contract (all amounts hereafter are in US dollars) with the New Zealand company KiwiCows, to supply it with 3,000 HF dairy cows in two equal shipments during May and July 2004 with KiwiCows to take delivery at the Port of Brisbane for loading. The contract was signed by both parties in Brisbane at the law firm of Fitzroy, Herbert & Partners and is expressly made subject to Australian law. KiwiCows was so eager to obtain the contract that it agreed to pay QDE the full $4.5 million on signing the contract.

In order to fulfil its contract with KiwiCows, QDE developed a standard form contract for the purchase of HF dairy cows Australiawide: purchase direct from individual dairy farmers; through agents; by bidding at auction sales, and, from specialist HF breeding firms. This standard form contract mentionswith KiwiCows express permissionthat QDE was buying these cows in order to supply KiwiCows, under contact, as stated above.

To obtain 1,500 HF dairy cows for the first shipment scheduled for 15 May 2004 from the Port of Brisbane, QDE undertook the following transactions.

It entered into contracts with 10 farmers in Queensland for the supply of 100 HF dairy cows each, at a price of $800 per cow, with those farmers being responsible for delivery to the Port of Brisbane on 15 May 2004 between 8 am and 12 noon.

It entered into contracts with two breeding firms (Vic1 and Vic2) in the state of Victoria, for 100 cows each at $900 per cow, for delivery to Brisbane as detailed above.

It entered into one contract with a dairy cow Agent, Cowlick & Partners (Cowlick) based in Sydney New South Wales, for 200 HF dairy cows at $1,000 per cow and delivery as above.

At an auction sale of HF dairy cows on 12 May 2004 in South Australiain a market where demand far exceeded supplyit bought a further 235 HF dairy cows at an average price of $2,500 each with QDE itself assuming responsibility for delivery arrangements.

In each of these transactions, QDE paid the full amount on agreeing to purchase the HF dairy cows, up to two months in advance of delivery, even though in terms of its standard form contract it wasnt strictly bound to pay until taking delivery at the Port of Brisbane. Under QDEs contractin order to meet KiwiCows express contractual specificationsa seller had to supply QDE with HF dairy cows registered with the HolsteinFriesian Breeders Association of Australia & New Zealand (the HFBA) that were either (a) on its purebred register or (b) registered as Grade 13 cows (Grade 45 cows being of a lower standard). On sale, the seller had to supply QDE with a recent certificate (at most 12 weeks old) from the HFBA of their cows registration status at a cost of $25 per cow.

However, the due performance of QDEs purchase contracts as well as its twoshipment supply contract with KiwiCows was affected to some extent, by the following unexpected events:

1. A Queensland dairy farmer (QF1) in order to save money, forged a certificate from the HFBA although the 100 cows he supplied in fact exceeded the required certification standards. After shipment, QDE discovered the forgery and advised KiwiCows immediately. KiwiCows then contacted the Australian and New Zealand branches of the HFBA which combined to properly certify QF1s HF dairy cows at an additional cost of $7,500. KiwiCows wants to recover this amount either from QF1 or QDE.

2. One breeding firm, Vic1, advised QDE one week prior to shipment that it wasnt going to supply the 100 HF dairy cows promised unless it received an extra $250 per cow because export prices had risen sharply. Under protest, QDE agreed to pay Vic1 the additional $25,000 a week after delivery on condition it signed a secrecy agreement. However, it later refused to pay Vic1 this amount.

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3. Cowlick delivered its 200 HF dairy cows as the Agent of a patriotic NSW dairy farmer Dave Rudd, who had expressly told Cowlick (his sole agent for 25 years) that he did not want supplied for export. The QDE contract, however, expressly stated that it was buying cows for export.

4. QDE did not have time to obtain the necessary HFBA certification for the 235 HF dairy cows it had bought at auction just three days prior to shipment. KiwiCows then agreed in a telephone conversation with QDE on 13 May 2004 to waive its certification requirements (identical to those in QDEs standard form contract) since it was confident that HF dairy cows bought for such high prices at auction would meet these requirements. In fact, 100 of these 235 cows were only of Grade 4 standard which KiwiCows later discovered on having them tested by the New Zealand branch of the HFBA. KiwiCows then sought to rely on a liquidated damages clause of $1,000 per cow (a total of $100,000) for the supply of dairy cows failing to meet the agreed certification requirements. You may assume that $250 per noncompliant dairy cow would be a more reasonable adjustment in the circumstances.

5. QDE finally delivered 1,635 HF dairy cows to KiwiCows at the Port of Brisbane on 15 May 2004. But while KiwiCows was happy to accept the extra 135 cows, there was no specific clause in the contract that dealt with additional payment in these circumstances.

6. Then on 1 June 2004, the Commonwealth Government of Australia as anticipated by the industry since December 2003, introduced a stricter national standard code for livestock exports (the Australian Code). But quite unexpectedly, in order to protect the genetic stock of Australian dairy cows, the Government also introduced a levy on genetic exports equal to $250 per dairy cow. These two measures had the immediate effect of reducing the average price of export quality HF dairy cows by $350.

KiwiCows wishes to rely on the Governments regulatory intervention and its dissatisfaction with some aspects of the first shipment of HF dairy cows in order to take advantage, from June 2004, of the lower price of export quality HF dairy cows and the falling value of the US dollar. It would achieve this by:

cancelling the remainder of the contract (the second shipment)

recovering $2.25 million from QDE (subject to adjustments for the first shipment)

negotiating a new lower priced contract for that second shipment with QDE.

Required (24 marks: 6 parts at 4 marks each)

A. Is QDEs requirement of HFBA certification a contractual condition or warranty and if it is a condition, can QDE elect to treat it as a warranty?

B. Does KiwiCows, applying the doctrine of privity of contract, have the right under contract law to sue QF1 for forgery of the HFBA certificate? Does QDE have contractual rights against QF1 in relation to the forgery?

C. Can Vic1 recover the extra $25,000 QDE promised to pay it for delivery of the 100 HF dairy cows as previously agreed upon? Has Vic1 given good consideration for this additional promise by QDE?

D. Does QDE have a valid contract with Dave Rudd for the sale and purchase of 200 HF dairy cows as arranged through his agent, Cowlick?

E. Has KiwiCows varied its contract with QDE by waiving its certification requirement for the 235 HF dairy cows QDE bought at auction? And if KiwiCows has not in fact waived that requirement and can rely on its liquidated damages clause, would the sum likely payable per noncompliant dairy cow be $1,000, $250 or some other amount?

F. Does intervention on 1 June 2004 by the Commonwealth Government of Australia constitute a frustrating event giving KiwiCows the legal excuse it wants for avoiding the remainder of its contract with QDE? You may answer this question with reference to any statutes relevant to frustrated contracts.

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Marking guidesolution

Disclaimer: please be advised that these are not model answers

2A

There is a common HFBA certification stipulation in QDEs standard form purchasing contract and its agreement to supply KiwiCows which underlines its fundamental importance. Since the quality and characteristicsand therefore the priceof HF dairy cows evidently vary, this stipulation is a quality assurance device or in terms of the Sale of Goods Acts, operates by way of a sale/purchase by description, a breach of which would allow contractual rescission and/or damages. There are three main types of contractual terms: conditions, warranties and indeterminate or innominate terms. Contracts are in essence a (mostly) private regulatory mechanism or device allowing the parties to construct their own regulation in terms of the contract . (Collins 2004, p. 24). So that the role of the courts in contractual interpretation is to ascertain the meaning of all implied and express contractual terms at the moment at which offer and acceptance crystallise into a binding relationship with reference to the five core principles of objectivity, loyalty to the contractual language, a holistic approach, the contextual dimension and the purposive approach (McMeel 2003, pp. 272, 276277). After ascertaining what the terms of a contract are, their relative importance must be decided. Turner (2003, p. 159) cites Bettini v Gye (1876) 1 QBD 183 for the well established propositions that:

A condition is an essential term of the contract: it is a stipulation that goes to the root of the matter, so that a failure to perform it would render the performance of the rest of the contract . a thing different in substance from what the defendant has stipulated for . A warranty, although a term of the contract, is regarded as subsidiary to the main purpose of the contract, that is, it is of lesser significance or importance than a condition.

Accordingly, Turner (2003, p. 159) states that, whether a term of a contract is a condition or warranty depends on determining the intention of the parties. In the case of the breach of a condition, the promisee has a twofold remedy: to terminate the performance of the contract and to claim damages for its breach (Carter & Harland 2002, para. 726). The Sale of Goods Act 1925 (NSW) in s. 5 makes the difference clear. In the case of a breach of a warrantydefined as a term collateral to the main purpose of a contractthere is only the right to claim for damages not to repudiate the contract and reject the goods.

The HFBA certification stipulation is, on the facts stated, clearly a condition not a warranty of QDEs standard form contract and with respect to which strict compliance is necessary in order for it to satisfy in turn KiwiCows exact same requirements. However apart from the further issues of waiver, substantial compliance, estoppel and accord and satisfaction, since contracts are mostly private for profit agreements the parties may as sanctioned by the courts generally exercise their rights in a selfinterested efficient strategic manner, and choose a lesser remedy where to their economic benefit. Accordingly, a party to a contractin this case QDEcan choose, if to its advantage to treat a breach of its HFBA certification condition as a breach of warranty and elect to obtain an adjustment by way of damages.

Since the two sets of contracts are commercially linked, a breach of one of QDEs purchase contracts in relation to HFBA certification is likely to lead to a breach of its KiwiCows supply contract. Whether flowon damages would be available is a moot point since its standard form purchase contract specifically mentions its primary contract with KiwiCows. In light of its suppliers express notice of that KiwiCows contract, the prospect of an exceptional flow on supply loss would seem not too remote, and within contemplation: Hadley v Baxendale (1854) 156 ER 145; Victoria Laundry [1949] 2 KB 528 (see Turner 2003, pp. 197198).

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2B

With some complications, since the legal device of the simple contract is the product of two or more parties voluntarily entering into a well defined, delimited bilateral arrangement involving mutual promises, and something approximating a subjective exchange and equality of value (i.e. consideration) only those parties can subsequently be subjected to the defined claims, liabilities and benefits arising under it. This demarcation or exclusive contractual conjoint benefit/liability principle is expressed as the privity of contract doctrine, stated as follows by Barwick CJ. in Coulls v Bagots Executor and Trustee Co Ltd (1967) 119 CLR 460:

It must be accepted that, according to our law, a person not a party to a contract may not himself sue upon it so as directly to enforce its obligations I would find it odd that a person to whom no promise was made could himself in his own right enforce a promise made to another. (cited in Carter & Harland 2002, para. 901)

Fraud in contract law however attracts a distinct set of rules: Derry v Peek (1889) 14 AC 337. The act of tendering the forged certificate in the execution of the contract by QF1 amounts to fraudulent performance, constituting a blatant breach of its contractual obligationa condition in factto obtain and supply to QDE a bone fide recent HFBA certificate. The law allows the same remedies for fraud concerning all the terms of a contract, whether a condition or warranty: Alati v Kruger (1955) 94 CLR 216. In this case, since the fraudulent/innocent act/misrepresentation relates to an express condition in the two QF1QDE and QDEKiwiCows contracts, the standard remedies would apply for the breach of condition: rescission (subject to contract execution and third party involvement) or election to affirm a contract plus the right to damages (Graw 2002, pp. 286295). The relevant time line events are as follows.

T1: Initial contract formed between QDE and QF1 for supply of 100 HF dairy cows together with bone fide current HFBA Certificateboth conditions of the contract. No fraudulent act/misrepresentation at this stage.

T2: Supply by QF1 of dairy cows plus the forged HFBA Certificate to QDEa fraudulent act/misrepresentation in contract executionin breach of contract condition allowing rescission or election to affirm plus damages.

T3: Onsale by QDE to KiwiCows of QFIs 100 cows plus transfer of QF1s forged Certificate in 1st shipment of 1635 HF dairy cows. QDE innocently misrepresents that QF1s Certificate is bone fidethis is a nonetheless the breach of an express contractual condition.

T4: KiwiCows discovers the forgery but apparently elects to affirm and not rescind the supply contract (otherwise wholly executed) and expends $7,500 to obtain bone fide HFBA Certification for the QF1 cows which otherwise exceed contractual specifications.

KiwCows would be able to recover from QDE the $7,500 it expended to remedy the situation, assuming it incurred no other expenses. However, on a practical basis, it would setoff this $7,500 claim against the cost of the additional 135 cows purchased. And in turn QDE would have an action against QF1 for that $7,500 amount.

QDE could also assign its cause of action against QF-1 to KiwiCows if this was a more cost-effective way to recover the $7,500 relating to the forged certificate. However KiwiCows is most efficiently reimbursed by the set-off outlined above, with QDE in turn recovering that amount from the fraudulent QF-1. Forgery is also a criminal offence and wouldif QDE, KiwiCows or the HFBA made a formal complaint to the relevant Queensland authoritiessubject QF-1 to sanction under ss. 180185 of the Queensland Criminal Code 1995. In which case, QDE & KiwiCows could possibly negotiate with QF-1 for a payment of say $20,000 plus legal costs in settlement under Deed of QDEs outstanding claim in contract, for non-disclosure and for their joint-promise not to lodge a criminal complaint in Queensland in relation to the fraudulent HFBA Certificate. The HFBA would probably be a party to that settlement under Deed as well at QF-1s request.

2C

Under QDEs standard form contract, Vic1 agreed to deliver 100 HF dairy cows in exchange for payment of $90,000 on delivery, though QDE exceeded this contractual stipulation by advance payment. In this simple executory written contract, adequate consideration has therefore moved between the two parties in the form of an exchange of mutual future promises, varied (orally or in writing) by advance/executed payment made and received.

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For Vic1 to have a legal right to the additional $25,000, it would have to establish there had been a Variation of Contract (VOC) or new promise made and prove it had supplied further consideration. It being trite law that a mere restatement of or reliance upon existing promises (here contract delivery) is inadequate: Wigan v Edwards (1973) 1 ALR 497 per Mason J (cited in Graw 2002, p. 118). Signing a Secrecy Agreement could arguably provide adequate nongratuitous consideration since QDE would obtain a clear commercial benefit from it, i.e. preventing possible contagion to its other suppliers under contract. However, a different characterisation is possible. It is arguable that the VOC was exclusively for Vic1s benefit, and that the Secrecy Agreements role was just to delimit the total net cost to QDE of that variation. Relevantly, Carter and Harland (2002, para. 389) argue that, consideration will not be present where a variation is exclusively for the benefit of one party. If this argument is sustainable at law, then Vic1 hasnt provided the requisite additional consideration and its claim would fail.

However, QDE could rely upon two alternate strategies. First, a threatened refusal of delivery at a future date constitutes an egregious breach of a primary contractual condition attracting a variety of legal remedies including recovery of its money. It could either move to rescind the contract (though undesirable here) or seek the discretionary equitable remedy of specific performance to enforce it on the basis that: (i) while it concerned the sale of goods, the standard remedy of damages would not be adequate in the circumstances, time being of the essence and an alternate market supply of HF dairy cows not being available at the contract price; and (ii) a court would likely exercise its discretion in favour of granting this remedy.

In fact as Carter and Harland (2002, para. 2405) note, while it has previously been argued that the equitable remedy of specific performance was unavailable in relation to ordinary articles of commerce, the position was more correctly stated by Jacobs J in Aristoc Industries [1965] NSWLR 581 at 588, to the effect that, .... if damages at law are an inadequate remedy then there is no principle which will prevent the interference of the court of equity simply because the subject matter is a chattel.

Secondly, even having agreed to pay $25,000 by VOC, that it had done so under economic duress. Economic duress which is arguably a class of unconscionable behaviour was described by Issacs J in Smith v William Charlick Ltd (1924) 34 CLR 38 in terms of compulsion being, a legal wrong, and the law provides a remedy by raising a fictional promise to repay (cited by Moccata J. in North Ocean Shipping [1978] 3 All ER 1170 at 1180). There is also no effective difference in the remedies visvis payments and agreements to pay under duress.

In our case, the VOC is voidable even if Vic1 had provided adequate consideration in the form of the Secrecy Agreement. In North Ocean Shipping v Hyundai [1978] 3 All ER 1170 at 1182, Mocatta J followed and applied Kerr J. in The Siboen and the Sibotre [1976] 1 Lloyds Reports 293who in turn drew on Australian case lawfor the proposition that whether or not purely nominal but legally sufficient consideration was paid or not didnt matter, since:

If it had, the contract was voidable and equity would allow rescission and order repayment [i.e. restitution of unjust enrichment];

while if not the contract was void and payment recoverable in quasicontract.

The issue of paying or agreeing to pay under protest is a little problematic: failing to protestor protesting but not clearly keeping the protest alivemay raise issues of whether an agreement or variation has been affirmed, thereafter disentitling that party from avoiding liability (the outcome in North Ocean Shipping). However, the Australian view regarding the presence/absence of protest is that it is not conclusive but rather that it is an evidential issue, relevant to the question of whether the victim acted freely or under compulsion (Carter & Harland 2002, para. 1325).

In our case, QDE would not seek rescission of the main contract (which by this stage would have been performed) but rather, defend the later action by Vic1 under the purported but voidable VOC. And finally, since economic duress is a wrong or tort, QDE could recover any financial damage or losses it suffered due to Vic1s illegitimate efforts to obtain the $25,000: (see Carter and Harland 2002, para. 1329). If QDE in fact purchased 100 additional expensive (at $2,500 each, $1,000 above the KiwiCows supply price) but noncertified HF dairy cows at auction on 12 May 2004 in case Vic1 did in fact refuse to deliver, then it should have an action in damages to recover additional expenses or loss of profit incurred as a result, which might include any foreseeable costs/losses imposed by KiwiCows in relation to their supply.

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2D

Cowlick is presumably in business as an independent, general agent buying/selling dairy cows for its principals/clients primarily for the domestic market but also for export. The facts stated dont suggest it undertakes agency work for export on an exceptional basis though this is possible. Absent special instructions from a principal, the scope of Cowlicks generalised actual authority would therefore be to operate in all facets of the dairy cow trade in NSW at least and that would include all acts within the ordinary course of its agency profession. There is however a direct inconsistency here between Rudds express instructions and Cowlicks acts as his agent to be resolved.

As a general dairy cow agent, Cowlick has apparent or ostensible authority via its principals representations by conduct to contract e.g. with QDE, on behalf of those either named or existing but unnamed principals with the resulting contracts being that of such principals and not Cowlick personally. Apparent or ostensible authority is the authority of an agent as it appears to others: Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549 at 583 per Lord Denning (cited in Turner 2003, p. 222). Cowlick is contracting on behalf of Rudd, not on its own behalf. As Turner (2003, pp. 232233) notes where the agent discloses either the name or fact of the principal, the contract is deemed to be that of the principalsprovided such agent does not in fact contract qua agent.

Since Cowlick is acting with the scope of its apparent authority and QDE evidently has no direct contact with Rudd or actual/constructive notice of his express instructions and furthermore has expressly stated in its standard form contract that HF dairy cows are being purchased for export, there is a valid binding contract between Rudd and QDE via Cowlick for the sale and purchase of 200 HF dairy cows. The issue and prospect of ratification does not therefore arise for consideration not does the matter of a breach of warranty of authority to QDE that Cowlick had at least apparent authority to act. However, Cowlick is in breach of its contractual obligations to Rudd by failing to follow his explicit instructions and as a result Rudd could terminate the presumably at will agency and/or sue for damages arising from the breach. However Rudd may well have gained rather than lost from Cowlicks deviation from his instructions if export prices were higher than domestic pricesor at least not lowerin which case only nominal damages might be recoverable.

Where there has been an infringement of a legal right, for example a breach of contract, but the plaintiff is unable to establish that he or she suffered any actual loss, only nominal damages will be awarded, that is, a token sum of, say, $1: Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286. (Turner 2003, p. 202)

Finally, there seems only a slim possibility that Rudd, in an action against Cowlick, could obtain even nominal damages for his injured feelings on the discovery that his dairy cows were now being depastured in New Zealand rather than Australia. Because, generally the common law does not allow compensation for vexation, mental distress, disappointment and frustration or for loss of reputation or publicity except, where the contact expressly promises publicity or enhancement to reputation (Carter & Harland 2002, para. 2153).

2E

The wording of this question is perhaps a little misleading since KiwiCows has likely either:

entered into a bilateral variation of its existing contract requiring mutual consideration; or

unilaterally agree to lose or waive rights under the existing contract for QDEs benefit, with possible estoppel and election issues arising too.

A variation of contract (VOC) in this way is described by Graw (2002, p. 373) as, a partial discharge of the existing contract through agreement to vary or modify its terms. Variations of contract as Carter and Harland (2002, para. 390) note, may incipiently involve a potential benefit and a potential detriment to each party. In such case, consideration is clearly present for each partys agreement to the variation. The term waiver is broad enough to include election and estoppel. In the case of waiver by election, though entitled to terminate the contract for breach, the promisee elects to affirm it and require the promisor to undertake it. While in a waiver by estoppel, the stress is on the fact of the promisor having detrimentally changed its position in reliance on the promisees words or actions. Further, waiver is independent of consideration, so that in the case of waiver by election, rights may only be suspended not lostunless involving a necessary choice between inconsistent rights. While a waiver by estoppel involves only a temporary suspension of contractual rights, unless it is inequitable to allow their revival on notice (Carter & Harland 2002, paras. 388393).

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After noting that distinguishing between waiver and variation can be problematic, Graw (2002, p. 376) suggests that waiver can be identified as follows:

(a) the alteration is usually to the rights of only one party

(b) the alteration usually benefits only one party and often occurs as the request of that party

(c) the alteration does not substantially change the terms or the operation of the contract

(d) the alteration is freely agreed to (even if somewhat reluctantly).

On the facts stated, there has likely been a Variation of Contract since the parties congeries of rights and liabilities have been modified and enlarged, with mutual consideration, as follows:

QDE will supply KiwiCows with an extra 135 HF dairy cows for a total 1st shipment of 1635, with KiwiCows being liable by default to pay QDE at least a further USD 1,500 each for thema total of $202,500

KiwiCows appears to have accepted a substitute for HFBA certification from QDE for 235 cows100 already contracted for and the extra 135 it has agreed to accepton the basis that the high price QDE has paid ($2,500 each or $1,000 above the contract price it is paying) should be a good indicator of and virtually warrant their superior quality and is thus apparently voluntarily assuming the adjudged low risk of such cows proving to be of inferior quality; and in which case

KiwiCows has therefore impliedly restricted the application of its Liquidated Damages Clause (LDC) for noncompliance to 1400 HF dairy cows. It will not apply to the 235 HF dairy cows QDE obtained at auction.

On this analysis, KiwiCows cannot rely on its LDC and claim $100,000or some other amountin relation to the 100 noncompliant cows. However, on a different analysis it could if for example, the parties expressly agreed that the LDC would apply despite the HFBA certification waiver in the VOC. This would seem a not unreasonable outcome, coupled perhaps with a requirement for QDE to reimburse KiwiCows for the expense of HFBA certification in New Zealand. There are actually various possibilities here. In any event, the law relating to liquidated damages was well articulated in the leading case of Dunlop Pneumatic Tyre Co v New Garage & Motor Co Ltd [1915] AC 79, to the effect that:

Where an amount is mentioned in the contract as the amount to be paid by the defaulting party on a breach of the contract, it will be construed as liquidated damages if the amount is a genuine preestimate of damages for loss sustained through breach of the contract. Otherwise it will be construed as a penalty, that is to say a sum inserted merely in terrorem in order to deter the other party from a possible breach. (Turner 2003, p. 202)

The LDC which exacts a charge of USD 1,000 per noncomplaint cow67% of the per cow contract price of USD 1,500can be adjudged a penalty since it is disproportionate, and perhaps extravaganteven exorbitant and unconscionable. As a result, the LDC would be struck out or red pencilled from the contract and KiwiCows since damages would then be unliquidated, have to prove its actual losses resulting from this breach of condition as governed by the common law principles for the assessment of damages: (Carter & Harland 2002, Chapter 21; Graw 2002, pp. 401408; Turner 2003, pp. 196202).

If on application of those principles, KiwiCows could only establish actual losses per noncompliant cow of $250, then it would be limited to that amount. In total, $25,000, which it could then setoff against the $202,500 payable for the extra 135 cows purchased, for a net additional amount of $177,500 payable to QDE for the first shipment.

2F

(e) There is no frustration of the contract on the facts stated

It is well established law that the doctrine of frustration will not apply merely because a contract unexpectedly becomes less profitable or more onerous to perform: The Eugenia [1964] 2 QB 226; Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 (Carter & Harland 2002, para. 2017).

Regulatory intervention by Government on 1 June 2004, on the facts supplied, has clearly not frustrated the remainder of the contract with reference to the doctrine of frustration, its rules and principles at common law and/or under statute. No supervening illegality has occurred, performance is still possible, the contracted for

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HF dairy cows havent been stolen and processed into beef sausages or given the wrong artificial insemination treatment, the common objective is still obtainable and isnt rendered radically different from that contemplated by imposition of the Australian Code for livestock exports and the export levy. Nor has there been a failure of consideration or common mistake (Carter & Harland 2002, paras. 20012037; Graw 2002, pp. 377389; Pentony et al. 2003, pp. 128134; Turner 2003, Chpt 11).

The case law is arguably inconsistent on the issue and effect of foresight. If the relevant event(s) is clearly foreseeable (a standard risk or a nonstandard but specific type of risk the parties have knowledge of) but not specifically provided for in the contract then the parties might be assumed willing to bear the risk of its occurrence and its unpredictable impact on them. However such a strict requirement would limit the potential application of the doctrine of frustration which can most usefully operate by way of a convenient default residual catastrophic risk clause to cover incomplete contracting. It can cover risks foreseen but not expressly/impliedly provided for in a contract, as well as unforeseen risks, the issue arguably being largely one of contractual construction (see Carter & Harland 2002, pp. 778779). So, the fact of the Australian Code being a foreseeable risk which the parties might have expressly provided for but didnt, would not stop reliance upon and application of the doctrine of frustration if it did in fact have a severe effect of the operation of the contract. While imposition of the unforeseen export levy if similarly somehow catastrophic would also attract the doctrine of frustration. But the severable contract has not been frustrated by either of or the combined impact of these two government measures.

The impact of these two government measuresone anticipated, the other notis purely financial and only potentially affects KiwiCows indirectly by way of an opportunity cost (the chance to buy HF dairy cows cheaper had it structured its contract differently). If prices had risen by $350 per dairy cow then conversely, QDE could have experienced the same loss by way of opportunity cost. KiwiCows in effect, entered into a futures contract as part of its bargain with QDE to fix in advance the price of HF dairy cows, thereby avoiding the risk of higher prices QDE was to provide in two distinct (potentially severable) supply contracts. But while KiwiCows wouldnt complain if prices had risensince its fixed price contract contains that riskit now asymmetrically seeks to avoid its futures price contract since prices have unexpectedly fallen. Having earlier elected to structure its purchase contract in this wayand pay the full contract price in advanceit is arguably prevented in commercial practice and good faith dealing from trying to avoid the second half of the contract in this way.

But alternatively if frustration did occurthe consequences are:

Technically, since there is no Queensland frustration law statute (unlike NSW, Victoria and SA) then Queensland common law would seem to apply including the English case of Fibrosa Spolka Akcyjna [1943] AC 32 to terminate the contract from the point of frustration (1 June 2004, after completion of the 1st shipment and before the 2nd shipment) but existing, accrued rights and liabilities would remain. If the contract was not severable or divisible and only partial frustration had occurred (i.e. only a partial failure of consideration) then KiwiCows could not obtain restitution of the balance of its money paid. But since the contract is arguably severable into supply via two instalments (shipments) and accrual rights to payment for each shipment are arguably distinct (though perhaps complicated by KiwiCows voluntary full payment in advance) then KiwiCows would have an action by way of unjust enrichment to recovery its $2.25 million relating to the 2nd instalment on the basis of (i) total failure of consideration and/or if necessary (ii) total and not just partial frustration of that second severable part following termination of the contract. As Carter and Harland (2002, para. 2321) explain the common law position, unless the contract was severable, and the payment was made for a severable part of the defendants performance obligations, there is no unjust enrichment if the failure is less than total.

While if any of the Frustrated Contracts Acts of NSW, Victoria and South Australia were applicablerather than the common law in relation to frustrationthey would more readily allow an apportionment and recovery of the remaining monies paid in advance by KiwiCows. But since the contract is readily severable or divisible as noted above into two discrete partspre- and post frustrationif in fact frustration had occurred, then an application of these statutes should produce much the same result: recovery of $2.25 million from QDE subject to adjustment and setoff claims in relation to the 1st shipment.

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References

Carter, JW & Harland, DJ 2002, Contract law in Australia, 4th edn, LexisNexis Butterworths, Chatswood.

Collins, H 2004, Regulating Contract Law, in C Parker, S Scott, N Lacey & J Braithwaite (eds) Regulating law, Oxford University Press, Oxford, Chapter 1.

Graw, S 2002, An Introduction to the law of contract, 4th edn, LawBook Co, Sydney.

McMeel, G 2003, Prior negotiations and subsequent conductthe next step forward for contractual interpretation, The Law Quarterly Review, vol. 119, pp. 272297.

Pentony, B, Graw, S Lennard, J & Parker, D 2003, Understanding business law, 3rd edn, LexisNexis Butterworths, Chatswood.

Turner, C 2003, Australian commercial Law, 24th edn, LawBook Co, Sydney.