LECTURE 8

CERTAINTY & COMPLETENESS: PART 2

&
PRIVITY

ILLUSORY PROMISES

1. What is an illusory promise?

A promise will be illusory in one of two situations:

(a) If one party to a contract has an unfettered discretion as to whether to perform a
promise:
 Kitto J in Placer Developments; or
(b) If an exemption clause is so sweeping in its effect that it effectively deprives the promise
of any force:
 MacRobertson Miller Airline Services:
o clauses set out in the airline ticket gave the airline the right to cancel a
flight or cancel a booking without incurring any liability. Any implied
promise that the airline would have to carry a passenger was illusory.

2. Enforceability

An illusory promise will not be enforceable. There are two separate analyses for why this is
so:
(a) An illusory promise will not constitute good consideration for a counter-promise made
by another party – eg – Macrobertson Miller Airline Services. Therefore, if one party
makes only illusory promises, then the entire contract will fail due to the absence of
consideration.
(b) A contract containing an illusory promise may be regarded as incomplete. The entire
contract will be regarded as illusory where an essential term has been left to be

1
 determined by one of the parties. An agreement for the sale of land, for example, will
not be binding if it leaves the price to be determined by the buyer or the seller.

Placer Developments v Commonwealth

Facts:
 Placer and the Cth formed a timber company to operate in Papua New Guinea.
 Clause 14 of the agreement provided that, if customs duty was paid on the importation
of the company’s products into Australia the Cth would pay to the timber company a
subsidy at a rate to be determined by the Cth, but not exceeding the amount of customs
duty paid.
 For four years the Cth paid a subsidy equal to the amount of duty paid. Thereafter no
subsidy was paid.
 The parties stated a case for the High Court - the question to be considered being:
o whether the Cth’s promise was illusory due to the fact that it had a discretion
to perform it (as it could have set the amount to be paid at $0);
o whether clause 14 implied an obligation that the Cth would act reasonably in
determining the subsidy, thereby overcoming any uncertainty?

Held:
Kitto J (in the 3:2 majority):
 “The general principle is that wherever words which themselves constitute a promise
are accompanied by words showing that the promisor is to have a discretion or option
as to whether he will carry out that which purports to be the promise the result is that
there is no contract at all.”
 As the Cth had retained a right to review and vary the amount of the subsidy, the
promise was illusory:
“The Commonwealth's promise is, in substance, a promise to pay such subsidy if any
as may be decided upon from time to time by or under the authority of the
appropriate repository of Commonwealth power, namely the Parliament. It
therefore does not create any contractual obligation.”

2
 Menzies / Windeyer JJ (dissenting)
 Cth WAS under an obligation to determine the amount of the subsidy and pay it.
 The discretion ONLY related to the amount not to the obligation to pay it – therefore,
the promise was not uncertain or illusory.
 Where no amount is specified, courts will require payment of a reasonable amount.
 However – in the circumstances of this particular case, there was no objective criteria
against which reasonableness could be measured.
o QUERY – doesn’t that make the promise uncertain in any event?!?!
 Therefore, the minority thought that the Cth was not excused of a certain obligation to
determine an amount and pay it – such an obligation could be enforced by way of
damages or specific performance.

3. Exceptions to the general rule

(a) Conditions

Discretion will not render a promise illusory where:

 The discretion relates to a condition subsequent/precedent to the performance of the
contract:
o Eg - subject to finance clauses - no obligation comes into effect until a certain
precondition is met.

Meehan v Jones

Facts:
 Jones agreed to sell land to Meehan.
 A contract was executed, subject to the following conditions:
o Meehan entering into a satisfactory agreement with Ampol for the supply of a
“satisfactory” quantity of oil; and
o Meehan receiving approval for finance on “satisfactory” terms and conditions.

3
  If these conditions were not satisfied by 31 July 1979 then the agreement was null and
void.
 Jones claimed the contract was void for uncertainty and, on 23 July 1979 sold the
property to another person.
 Subsequently (before 31 July 1979) Meehan gave notice that satisfactory arrangements
with Ampol had been made and finance obtained.
 Meehan sought specific performance of the contract.
 Trial judge and Full Court of Supreme Court refused specific performance on the basis
that the contract was void for uncertainty.
 Meehan appealed.
 Court had to consider whether the parties intended to be legally bound and whether
the promise to sell the land was illusory.
 Jones argued that there was no binding contract because:
o There was only an agreement to agree:
 the word “satisfactory” in both paras referred to the satisfaction of
the vendors as well as to that of the purchaser and the nominee, so
the clause left essential matters to be agreed between the parties; so
there was no more than an agreement to agree.
o The conditions used imprecise / indefinite language such that a Court would
not be able to discern what events would satisfy the conditions described.
o The condition rendered the promise of sale illusory:
 the clause left it to the discretion of the purchaser whether he would
perform the obligations which the contract described.

Held:
 That the promise was not illusory and the contract for sale was enforceable thereby
entitling Meehan to the property.

Agreement to agree:
 Argument rejected.
 Only the purchaser need be ‘satisfied’, not the vendor.

4
  Therefore, any discretion lied solely with the purchaser and not both parties.
 Clauses not indicative of future rights.

Imprecise / indefinite language

 Subject to finance clauses are generally not void for uncertainty.
 The purchaser is obliged to act honestly (but not necessarily reasonably):
o They have to make some honest attempt to find and obtain finance;
o The test is subjective, the condition is fulfilled if the purchaser honestly thinks
that the finance is satisfactory — this means the condition is not uncertain.
It is a simple question of fact.

Illusory promise
 Argument rejected.
 Gibbs CJ – the promise will not be illusory where the discretion relates to a condition
on which the contract depends as opposed to the contractual obligations themselves.
o Point of difference with Placer – there was no condition to performance in
Placer (Cth had sole discretion over what figure to set) - here, if the condition
is satisfied, there is no discretion left to either party as to whether the
contractual obligations be carried out.
 Mason J (Wilson J agreeing) – the implied obligation of honesty means that there is
sufficient certainty as it removes the purchaser’s discretion as to whether finance is
actually sought.
o Point of difference with Placer – the promise here could be determined with
objective criterion of honesty.
 Murphy J – “Subject to the purchaser obtaining satisfactory finance” clauses, or
adaptations such as “subject to satisfactory finance” or “subject to finance” do not
render the contracts illusory.
o The transactions are conditional contracts in the nature of options to
purchase. On classical concepts of consideration, the purchaser's
consideration is the obligation to pay a deposit or other obligations (even if
they are conditional).

5
 Godecke v Kirwan

Facts:
 Godecke (purchaser) and Kirwan (vendor) signed a document headed “offer and
acceptance” setting out terms of an agreement for the sale and purchase of land.
 The vendor refused to proceed and the purchaser lodged a caveat (notice that prevents
sale of the property).
 The vendor commenced proceedings to have the caveat removed, alleging the terms of
the agreement were uncertain. The alleged uncertain terms were:
o Clause 3 – possession shall be given and taken on settlement upon signing
and execution of a formal contract of sale within 28 days of acceptance of the
offer;
o Clause 6 – purchaser required to execute an additional agreement containing
any additional covenants / conditions as the vendor’s solicitors might
reasonably require.
 Trial Judge ordered removal of the caveat on the basis that the agreement was not
binding:
o Given the agreement contemplated that the formal contract would contain
additional terms, it fell within the third class of cases mentioned in Masters v
Cameron.
 The purchaser appealed.

Held:
Walsh J (Mason J agreeing):
 Clause 6 – construed as limited:
o To permitting the insertion of covenants / conditions not inconsistent with
those contained in the offer;
o By reference to the reasonableness of requiring the inclusion of the
covenants / conditions.
 Therefore, Clause 6 does not mean that if the solicitors themselves believe something
is reasonably required, that they could require it - it means that what is required must

6
 be reasonable in an objective sense, and should a dispute arise, the Court is capable of
assessing the reasonableness of any inserted terms.
 So Clause 6 is not an agreement to agree later upon additional provisions to govern the
bargain. It is an agreement by the purchaser to presently “accept as part of the bargain
such additional provisions, if any, as are required, provided that they satisfy the
requirements of consistency with the other terms and of reasonableness to which I
have referred.”

Gibbs J:
 Clause 6 did not necessitate that the parties should agree as to further terms.
 Rather, inclusion of additional terms depended on the unilateral requirement of the
solicitors for the vendor, subject to the qualification that the requirement must be
reasonable. And it is well established that parties to a contract may leave terms — even
essential terms — to be determined by a third person.

SEVERANCE OF INCOMPLETE, UNCERTAIN OR ILLUSORY TERMS

 If the terms are essential terms, then the contract must fail.
 If the relevant term is not essential, the Court will consider whether it can infer an
intention that the agreement should be valid in the absence of the relevant term.
 If such an intention can be inferred, then the term can be severed, leaving the
remainder of the agreement enforceable.

Fitzgerald v Masters

 Considered an agreement for sale of a half-interest in a farm. The essential terms were
set out, but the agreement included a clause purporting to incorporate the “usual
conditions of sale in use or approved by the Real Estate Institute of New South Wales
relating to sales by private contract of lands held under the Crown Lands Act”.
 The Clause was meaningless because there were no such terms.

7
 The High Court held that it was severable from the rest of the contract because the
clause was merely an appendage to the agreement.
 It was clear that the parties intended their agreement to subsist even if the clause
should fail to incorporate any additional conditions.

WAIVER OF INCOMPLETE, UNCERTAIN OR ILLUSORY TERMS

 Such terms in a contract can be waived by the party for whose benefit those terms were
inserted.
 Where performance of a contract is subject to fulfilment of a condition which has not
been fulfilled, there is no doubt that the party for whose benefit that condition was
inserted can waive fulfilment of the condition and enforce the contract.
o Where a contract for the sale of a house is made subject to the purchaser
obtaining finance from a particular lender, for example, the purchaser may
choose to proceed with the transaction even if finance has not been obtained
from that lender.

Grime v Bartholomew

 A party cannot waive an uncertain clause that is essential to the contract because the
uncertainty means the parties failed to reach an agreement at all. Since there is no
contract, no right of waiver can arise. This is a technical argument.

Bradford v Zahra

 Converse to Grime.
 A purchaser successfully waived the benefit of an uncertain “subject to finance” clause
and thereby “removed” the uncertainty.

8
 George v Roach
 It is possible to waive the benefit of a failed machinery provision, provided it is entirely
for the benefit of one party and is not essential to the operation of the agreement.

9
 PRIVITY

 The privity rule stipulates that only a person who is a party to a contract can enforce
the contract and incur obligations under it.
 2 aspects to the rule:
1. A contract cannot confer an enforceable benefit on a non-party.
2. A contract cannot impose an enforceable burden on a non-party.
 The privity rule is separate from the rule that consideration must move from the
promisee.
 Accordingly, a person who wishes to enforce a contract must establish that he or she:
1. Is a party to (that is, privy to) the contract; and
2. Has provided consideration.
 The privity rule is often criticised for the fact that it can leads to unfair results. As such,
there are a myriad of exceptions to the rule:
o Another issue – how do you know who is a party and who is not?

1. Identifying the contracting parties

 To avoid the operation of privity doctrine, an alleged “third-party” may argue that he
or she is in fact a party to the contract.

Coulls v Bagot's Executor & Trustee

Facts:
 Coulls granted a company the right to quarry stone from his property in return for
royalty payments.
 The agreement was headed “Agreement between Arthur Leopold Coulls and O’Neill
Construction Pty Ltd.”
 The agreement provided that Coulls authorised the company to pay all royalties to Mr
and Mrs Coulls as joint tenants.

10
 The agreement was signed by both Mr and Mrs Coulls (as well as the representative of
O’Neill).
 When Mr Coulls died, his executor sought directions from the court as to whether
O’Neill was bound to pay royalties to Mrs Coulls (or whether the royalty payments
should be made into Mr Coulls’ estate).
 Therefore the Court had to consider whether Mrs Coulls was a party to the agreement.

Held:
 The majority found that Mrs Coulls was not a party to the Agreement:
o The contract expressed to be made between Mr Coulls and O’Neill;
o The wording of the only clause that referred to Mrs C was such as to suggest
that she was not a party:
 “I authorise payment to Mrs Coulls” - implies that Mrs Coulls was not
a direct payee under the agreement;
 The clause implicitly recognises that it is the right of Mr Coulls to
collect the money, and that the royalties are ultimately his.
o The fact that Mr Coulls had given permission to the company to provide some
royalties to Mrs Coulls is indicative that this right is revocable, and mitigates
against Mrs Coulls being a direct party.
o Consideration also a problem:
 Mrs Coulls gave no promise to O’Neill Construction, unlike Mr Coulls,
who provided land.

 The minority found that Mrs Coulls was a party to the agreement:
o She had signed the agreement;
o The relevant promise was made jointly (and consideration given jointly);
o It is possible for a person to be a party to a contract without giving
consideration when the other party has presumed consideration to be
provided on their behalf by the person who is a party and the consideration
is given jointly;

11
  Here, Mrs Coulls presumed that consideration had been provided on
her behalf by Mr Coulls, who gave consideration jointly.

Taylor and Owen JJ:

 Criticised the approach of the minority:
o Admit they are satisfied that Mr Coulls intended Mrs Coulls to receive royalty
payments on his death, but held that this intent was not correctly expressed.
o Rejected the notion that consideration could be provided jointly - Mrs Coulls
had to have provided her own consideration.
 Joint consideration not provided expressly cannot be assumed to
have been provided by both parties.

2. Non-application of the privity rule

 2 circumstances where a party not directly involved in a contract’s formation might

still be a party to the contract:
o Where one of the parties who is involved acts as agent for the non-involved
party; and
o Where one of the involved parties transfers contractual benefits to the non-
involved party by way of an assignment or novation of the contract (basically
transferring all duties and obligations onto a new party).

3. Circumventing the Privity Rules

 There are several ways in which the privity rule may be circumvented by a person
seeking to take the benefit of a contract which they are not a party to:
o Promisor - person making a contractual promise to benefit a third party;
o Promisee - the other party to the contract;
o Beneficiary – third party trying to enforce the contract.
 Ways the privity rule may be circumvented:
o The promisee may hold rights under the contract on trust for the beneficiary.

12
o The beneficiary may be entitled to assert an estoppel against the promisor.
o The beneficiary may be entitled to claim damages for misleading or deceptive
conduct.
o The beneficiary may be entitled to claim damages in tort.

13