Contract: Terms and Remedies (Modules 5–6)
Overview of contract and module goals
Contracts are central to business; five key questions to assess enforceable deals:
What is a contract?
How do you form a legally enforceable contract?
What circumstances might make a contract unenforceable despite having the elements?
What is in the contract (the terms)?
What are the consequences for not honouring the contract?
This module focuses on putting in place a simple apparent contract and understanding terms, representations, and remedies.
Session objectives (summary)
Explain what is meant by the word “term” and the different kinds of terms (or obligations) in a contract.
Explain how to distinguish contractual terms from non-contractual representations.
Outline the special case of disclaimers.
Outline the main remedies available if a term is breached.
Apply these legal principles to resolve business-context issues.
Key terminology: promises and how they are classified
Representations: statements made during negotiations that are not intended to be terms of the contract; breach can lead to misrepresentation or other remedies.
Conditions: terms of fundamental importance; breaching a condition allows termination and may lead to damages.
Warranties: terms of lesser importance; breach entitles damages but does not automatically allow termination.
Intermediate/innominate terms: a middle category where the consequence of breach depends on the breach’s seriousness; may or may not allow termination depending on context (Koompahtoo principle).
For business purposes, think in terms of big promises vs small promises (Conditions vs Warranties).
Terms, Conditions and Warranties: core concepts
After contract formation, the obligations are the “terms” of the contract (also called clauses, stipulations, or provisions).
Two kinds of terms:
Conditions: fundamental terms; breach allows termination and damages.
Warranties: less important terms; breach leads to damages but not termination by default.
Determination of whether a term is a condition or a warranty is objective, considering conduct and context.
The words “Condition” and “Warranty” have special contract-law meanings that may diverge from everyday usage.
Condition vs. Warranty: examples and cases
Condition: a term of fundamental importance; breach allows termination or damages. Example: Associated Newspapers Ltd v Bancks (1951) 83 CLR 322.
Warranty: a minor term; breach leads to damages but not automatic termination. Example: Bettini v Gye (1876) 1 QB 183.
Note on innominate terms: a term not clearly a condition or warranty; consequences depend on breach seriousness (Koompahtoo).
Express terms and implied terms
Express terms: terms explicitly agreed, in writing or verbally; can be in a mixture of both.
Implied terms: terms not expressly stated but inferred to give effect to the parties’ intentions; can be implied by:
Trade usage or industry customs
Prior dealings between the parties
Business efficacy (implied to make the contract workable)
Statute (statutory terms, e.g., Australian Consumer Law)
Representations: statements surrounding the contract that do not form part of the terms; breach may lead to remedies other than contract breach (e.g., misrepresentation).
Express terms: identification and classification principles
Three key principles to classify if a statement is an express term:
Parol Evidence Rule (PER): generally excludes evidence of terms outside the written contract when the contract is intended to be the entire agreement.
Writing evidence: a term contained in a signed written document is strong evidence of agreement to that term.
Test for representation vs term in partially written or verbal contracts: assess whether a statement is intended as a term.
The Parol (oral) Evidence Rule (PER)
When contract is in writing and intended as the entire agreement, the written document determines the terms; parol evidence (oral or prior writings) cannot modify or add terms.
Mercantile Bank of Sydney v Taylor (1891) 12 LR (NSW) 252: If a contract is reduced to writing and appears entire, the writing contains all terms; evidence of prior or contemporaneous agreements that would add or vary terms is not admitted.
Rare exceptions to PER include:
Custom or local usage
Clarification of ambiguity
Unclear subject matter or identity of parties
If it is not an entire contract
PER covers mismatches where there is a signed written contract that appears complete; if both written contract and verbal representations exist, proving a non-PER situation is difficult and often requires clear evidence of an agreement outside the written contract (whole-of-agreement clauses attempt to prevent this).
Practical note: many modern contracts include “whole of the agreement” clauses to prevent the exception from being used. Outside common-law courts, consumer-law remedies (e.g., misrepresentation) may still address issues.
Readings on reading the contract and “reading small print”
If a contract is signed, terms are binding even if a party hasn’t read them (Maugham JL; recognition that long/complex contracts can place important clauses in small print).
Modern example: Toll v Alphapharm (as cited) and L’Estrange v Graucob Ltd illustrate that signed documents bind parties to their terms, regardless of awareness.
Verbal terms, multiple documents, and representations
Agreements can be oral or involve emails/letters; the key is distinguishing contract terms from negotiations.
If a representation is made during negotiations and is not intended as a term, it is a non-contractual representation; breach may give rise to remedies like misrepresentation or collateral contracts, not breach of contract.
Distinguishing a representation from a term: the Dick Bentley test
To determine whether a statement is a term, apply a reasonable person test (Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd [1965] 1 WLR 623):
What would a reasonable person, aware of the circumstances, believe about the parties’ intention?
Considerations:
Time lapse between statement and final agreement: longer time suggests not a term.
Importance attached to the statement: more important statements are more likely to be terms.
Special skills or knowledge of the person making the statement: greater skill increases likelihood of term.
Is a statement a term? a practical decision-tree
If there is a signed, written document that is the whole agreement, the statement is generally a term if it is within that document (L’Estrange v Graucob).
If there is no signed document or the statement is not in the contract, apply the PER test to determine if a term exists; if no term, it may be a representation unless a collateral contract or misrepresentation applies.
Diagrams/flow can be used in teaching: the statements flow into terms if they are within the agreement or satisfy the Dick Bentley/D'Estrange criteria.
When a representation is not a term: possible remedies
If a representation is not a term, breach cannot be sued as a contract term breach, but remedies may include:
Breach of collateral contract
Misrepresentation (including vitiating factors)
Australian Consumer Law – Misleading and Deceptive Conduct (s18 ACL)
Collateral contracts
A collateral contract is a secondary contract whose consideration is the entry into the main contract.
If a representation turns out false, the other party can sue for breach of collateral contract, not for breach of the main contract.
Main contract remains intact; damages may be recovered for breach of collateral contract (De Lasalle v Guildford).
Implied terms: how courts read terms into contracts
Implied terms are those not spoken or written but inferred to give effect to the parties’ intentions.
How terms are implied:
Trade usage or industry customs
Previous dealings between the parties
Business efficacy: implied to make contract sensible/operable
Statute: statutory terms may be implied by law; statutory terms override common law terms
Most important statutory terms for business are in the Australian Consumer Law (ACL).
BP Refinery (Westernport) Pty Ltd v Shire of Hastings [1977] UKPC 13: test for implying terms in fact includes several conditions (overlaps possible):
It must be reasonable and equitable
It must be necessary to give business efficacy to the contract
It must be so obvious that it goes without saying
It must be capable of clear expression
It must not contradict any express term of the contract
Disclaimers: what they are and how they work
Disclaimers (exclusion clauses / exemption clauses / limitation of liability clauses) attempt to limit liability in a contract.
Contra proferentem rule: when a disclaimer is effective, the clause is interpreted against the party who relies on it (usually the business).
Rationale: to prevent the weaker party from being unfairly exposed to a disclaimer that hides in standard-form contracts.
Examples: no liability for loss or injury; no liability if goods are stolen or missing.
What makes a disclaimer effective?
Three key aspects for BSB250:
Disclaimers must be part of the contract (see: signed contract; reasonable notice; prior dealings)
Disclaimers are interpreted narrowly (Four Corners Rule)
Disclaimers must not misrepresent
Disclaimers must form part of the contract
A disclaimer is part of the contract if:
It is in a written contract signed by the parties (L’Estrange v Graucob Ltd)
It is brought to the attention of the other party by reasonable notice before contract formation (Thornton v Shoe Lane Parking)
It is implied into the contract due to prior dealings (Balmain New Ferry)
Key cases: Thornton v Shoe Lane Parking, Balmain New Ferry
Narrow interpretation: the Four Corners Rule
Council of the City of Sydney v West (1965) 114 CLR 481 establishes the Four Corners Rule: if the disclaimer’s scope is unclear, prefer the narrower interpretation.
This rule is applied to consumer contracts to ensure fair interpretation.
Misrepresentation and disclaimers
Even if a disclaimer is brought to attention, it cannot shield misrepresented effects (Curtis v Chemical Cleaning & Dyeing Co [1951] 1 KB 805).
ACL: additional factors (not examinable for this course, but relevant context)
ACL provisions can affect disclaimers beyond common law:
s64: consumer guarantees cannot be excluded
s64A: liability can be limited only in prescribed ways (and not for personal use goods)
Unfair Contract Terms (UCT) regime (Part 2-3 ACL) may void one-sided standard-form disclaimers and can carry penalties for the party that inserted them
Remedies for breach of contract
If a term is breached and not protected by an effective disclaimer, possible remedies include:
Damages
Equitable remedies: Specific Performance, Injunction
Termination of the contract in appropriate circumstances
Not all remedies are available in all circumstances; must be appropriate to the breach and the terms breached.
Termination of the contract
Termination is not automatic on breach.
Termination is generally permissible for breach of a condition, not for breach of a warranty (breach of warranty typically requires continued performance and damages for breach).
Exceptions permitting termination include:
Repudiation (one party signals they will not perform)
Serious breach of an intermediate term
Express termination clause within the contract
Damages: purpose and scope
Damages are the most common remedy for breach:
Compensate for losses caused by breach
Include damages for breach of collateral contract and potentially for misrepresentation (tort) depending on the facts
Damages must be mitigated by the injured party (mitigation principle).
Remoteness of damage: damages must be not too remote; typical reference is Hadley v Baxendale.
Note: Misrepresentation damages may arise in tort (negligent misrepresentation) or under ACL s236 for misleading conduct; implications depend on fault and the factual context.
Equitable remedies
If damages are insufficient or unsuitable, courts may grant:
Specific Performance: order to fulfill contractual obligations; limitations include inapplicability to employment and personal service contracts.
Injunction: prevent a party from engaging in behavior that breaches rights or the law.
Review and connections
Recap five key questions for enforceable deals covered in the module:
What is a contract?
How do you form a legally enforceable contract?
What circumstances might render a contract unenforceable despite having the elements?
What is in the contract (the terms)?
What are the consequences for not honouring the contract?
These notes align with the module’s objectives and provide a detailed framework for identifying terms, distinguishing representations, applying the PER, and evaluating remedies and disclaimers in business contexts.
Mentioned Cases
Associated Newspapers Ltd v Bancks (1951) 83 CLR 322: Condition vs. Warranty (example of a condition)
Bettini v Gye (1876) 1 QB 183: Condition vs. Warranty (example of a warranty)
Koompahtoo principle: Intermediate/Innominate terms (consequences depend on breach seriousness)
Mercantile Bank of Sydney v Taylor (1891) 12 LR (NSW) 252: Parol Evidence Rule (PER) (written contract as entire agreement)
Toll v Alphapharm: Reading the contract / "reading small print" (signed documents bind parties)
L’Estrange v Graucob Ltd: Reading the contract / "reading small print" (signed documents bind parties); Disclaimers must form part of the contract (in a signed written contract); Is a statement a term? (signed, written document as whole agreement)
Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd [1965] 1 WLR 623: Distinguishing a representation from a term (reasonable person test)
De Lasalle v Guildford: Collateral contracts
BP Refinery (Westernport) Pty Ltd v Shire of Hastings [1977] UKPC 13: Implied terms (test for implying terms in fact)
Thornton v Shoe Lane Parking: Disclaimers must form part of the contract (reasonable notice before contract formation)
Balmain New Ferry: Disclaimers must form part of the contract (implied into contract due to prior dealings)
Council of the City of Sydney v West (1965) 114 CLR 481: Narrow interpretation / Four Corners Rule for disclaimers
Curtis v Chemical Cleaning & Dyeing Co [1951] 1 KB 805: Misrepresentation and disclaimers (disclaimer cannot shield misrepresented effects)
Hadley v Baxendale: Damages (remoteness of damage)