Enterprise Law

Unit 700254

Topic 3: Contract Law

PART III

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Topic outcomes
On completion of this topic, you should be able to:
◦ explain the concept of ‘privity of contract’
◦ recognise and explain the methods by which a contract is
ended, including:
◦ By performance
◦ By agreement
◦ By frustration
◦ By breach
◦ understand the remedies available to the plaintiff for breach
of contract

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Privity of contract
◦ As a general rule, only the parties to the contract can take
action for breach of contract:

◦ Lumley v Gye (1853)

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Lumley v Gye (1853)
118 ER 749
Wagner, a well known opera star, had been engaged by Lumley to sing
exclusively at the Queen’s Theatre in London for a three month season.
Before the start of the opera season, Gye persuaded her to break her
contract and sing for him at another theatre.
Lumley successfully obtained an injunction to stop Wagner from singing
elsewhere and also attempted to sue Gye for damages.
No right of action in contract generally exists against a person who is
not a party to a contract. In this case, however, the court held that Gye’s
intentional and unjustified actions in inducing Wagner to break her
contract with Lumley amounted to a direct and malicious interference
with contractual relations and that an action in tort was available
against him for damages for inducing the breach of contract

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Discharge by Performance
◦ The most common way of discharging a contract

◦ To discharge the contract by performance the parties must

carry out as closely as practicable the terms of the
contract:

◦ Re Moore & Co Ltd and Landauer [1921]

◦ cf Shipton, Anderson & Co v Weil Brothers & Co [1912]

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Re Moore & Co Ltd and Landauer
[1921] 2 KB 519
An order was placed for tins of canned fruit to be delivered in cases
of 30 tins per case. When the goods arrived, the correct quantity was
delivered, but half of the cases contained 24 tins.
As the fruit was not packed in the manner stipulated by the contract,
the buyer could reject all of the goods should he wish to do so. The
manner of packaging was an essential part of the contract
description.
Whilst this may seem a trivial matter, it may be that storage costs
were a factor, with 24-tin cases costing more to store than 30-tin
cases. If the product had a low profit margin, extra costs may turn a
profit into a loss.

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Shipton, Anderson & Co v Weil
Brothers & Co [1912] 1 KB 574
Under a contract for the sale of 5,029 tonnes of wheat, the
supplier sent 25 kg too much. They only claimed the
contract price, but the buyer attempted to reject the whole
shipment, arguing that the shipment did not satisfy the
exact contract requirements.
The Court held that the variation was so trivial that it should
be ignored and so ordered the buyer to accept the
shipment.
Unlike Re Moore’s case, space wouldn’t be an issue given
the size of the order.

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Discharge by agreement
A contract created by agreement can be undone by
agreement:
◦ Mutual Discharge where both parties abandon their
original agreement while the contract is still “executory”;
◦ Release/unilateral discharge where one party has
performed their obligations and releases the other from
completing performance of their obligation.
◦ Must have consideration or be in the form of a deed

◦ .

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Discharge by agreement
◦ Waiver
◦ One party leads the other party to reasonably believe that
strict performance will not be insisted on.
◦ Promissory estoppel.
◦ Substitution
◦ Where the parties wish to continue with a contractual
relationship,
◦ but on terms differing from those in the original agreement,
◦ a new agreement can be substituted.
◦ they were bound to do under the original contract.
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Discharge by agreement
◦ Accord and satisfaction
Where one party has performed their obligations,
◦ And, by agreement (accord),
◦ the defaulting party is relieved of their obligations
by doing something different (satisfaction) to that
which was agreed.

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Discharge by frustration
Frustration can only arise where:
1. an unforeseen event outside the control of the
contracting parties has significantly changed the
obligations of the parties from their original intentions;
2. neither party caused the supervening event; and
3. neither party contemplated the supervening event; and
4. the new circumstances would make it unjust to hold the
original parties to their original contract.

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Discharge by frustration
◦ Cases involving this doctrine fall into five categories:
1. physical impossibility because of destruction of the subject
matter (Taylor v Caldwell (1863) 122 ER 309);
2. physical impossibility under a contract of personal services;
3. a change in the law rendering performance impossible
(Horlock v Beal [1916]);
4. impossibility due to the non-occurrence of an event basic to
the contract (Krell v Henry [1903]);
5. where the particular state of affairs ceases to exist (Codelfa
Construction Pty Ltd v State Rail Authority (NSW) [1982])

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Taylor v Caldwell (1863) 122 ER 309
A building had been hired to Taylor, who wished to hold a concert
there. Before the date of the concert, the hall was destroyed by fire.
The hirer claimed damages against the owner for his failure to
complete his part of the agreement.
The contract was frustrated because there was a reasonable
expectation that the contract was based on the continued existence
of the music hall.
Had the hall been burnt down without the knowledge of either
party whilst they were still negotiating, and they subsequently
entered into a contract it would be void ab initio for a common
mistake.
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Horlock v Beal [1916] AC 486
Horlock was a seaman on one of Beal’s ships, which was
detained in a German port at the outbreak of WW2.
Horlock’s wife sued Beal for the wages due to her husband
under the two-year contract.
Her claim failed, as the capture and holding of the ship by
the Germans amounted to a frustration of the contract,
which made performance impossible.
Note that, if intervening events make the performance of
the contract less convenient or more costly, the Courts will
not be prepared to allow a plea of frustration to succeed
because the contract will still be possible.
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Krell v Henry [1903] 3 KB 740
Henry hired a room from Krell for the purpose of watching
the coronation procession of King Edward VII. The
procession was postponed because of the illness of the
King, but Krell claimed the rent of the room.
As it was no longer possible to achieve the substantial
purpose of the contract, that is, to watch the procession,
the contract was frustrated by the non-occurrence of the
event.
As the contract was for hire of a room, what difference did it
make whether there was a procession or not?

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Codelfa Construction Pty Ltd v State Rail
Authority (NSW) [1982] 149 CLR 337
Codelfa entered into a contract with the NSW SRA to excavate an underground
railway tunnel for the Eastern Suburbs rail link in 130 weeks. To achieve this, both
parties were aware that Codelfa would need to work 24/7, however the noise
and vibrations were so great that local residents obtained an injunction to
restrict the amount of noise at night and reducing the working week to 6 days.
This caused Codelfa extra costs and a loss of profit.
The contract was treated as frustrated by the injunction because of the
fundamental change of circumstance which forced a radical amendment to
operations. Codelfa was entitled to a claim of quantum meruit.
Frustration will not occur in instances where:
1. the contract specifically provides for the change in circumstances;
2. the change in circumstances was reasonably foreseeable;
3. the change in circumstances was self-induced.

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Discharge by breach
◦ Where one party fails to perform their obligations as agreed
they are liable for breach of contract.
◦ Breach may be:
◦ Actual breach
◦ Where a party fails to perform at the time required by
the contract.
◦ Anticipatory breach
◦ Where a party threatens not to perform prior to the
time required by the contract.
◦ See Foran v Wight [1968] HCA 51.

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 Foran v Wight (1968) 168 CLR 385
A contract for the sale of land included a ‘time is of the essence’ clause. Two days
before settlement date the vendor’s solicitor advised that settlement would
have to be postponed. On the due date, settlement as specified in the contract
did not take place. The purchaser signed a notice of rescission on the settlement
date, rather than on the anticipatory breach 2 days earlier.
As happens, the purchasers were unable to obtain finance and did not tender
performance of their side of the contract on the settlement date.
Even though the purchasers were not able to complete on the agreed date, the
notice given by the vendor 2 days earlier of non-performance of an essential
term amounted to an anticipatory breach and entitled the purchasers to rescind.
They were also able to recover their deposit as consideration had wholly failed.

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Discharge by breach
The effect of breach depends on the importance of the term that
is broken.
◦ If one party indicates that they will not be performing their
part of contract prior to time of performance:
◦ the innocent party can immediately treat the contract as
at an end and sue for breach; and
◦ there is no need to wait until the actual breach occurs.
◦ Under the ACL, remedy is determined according to whether
the problem is a minor or major failure.

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Remedies at common law
Termination
◦ Does not require the intervention of the court.
◦ Termination is only available for breach of a condition.
◦ Not available for breach of a warranty.
◦ It releases both parties from future performance but rights
and obligations arising prior to termination are enforceable.

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Remedies at common law
Termination
◦ The injured party can elect either to affirm the contract or
accept the breach and bring it to an end by terminating.
◦ If the injured party elects to terminate the contract, it must
be made clear by words or conduct to the other party;
◦ The innocent party also may sue for damages.

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 Remedies at common law
Damages

◦ The main remedy under contract law.

◦ Damages are a common law remedy and awarded as of right.
◦ Purpose is to compensate for loss rather than punish by placing
the injured person in the position they would have been in had
the breach not occurred, and if the contract had been performed
as originally intended.

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Remedies at common law
Damages

◦ Principles on which damages are based:

1. whether there was a breach;
2. causation;
3. remoteness of damage;
4. amount of damages; and
5. mitigation of damages.

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Remedies at common law
Causation

◦ Is there a causal connection between the breach and the loss

suffered?
◦ The plaintiff must show that the breach of contract by the
defendant was the cause of the loss.
◦ The plaintiff may not be able to recover if an additional factor
unconnected with the defendant’s breach breaks the causal
chain between the defendant’s action and the plaintiff’s loss
or damage: Alexander v Cambridge Credit Corporation (in
rec) (1987)

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Alexander v Cambridge Credit Corp
(in rec) (1987) 9 NSWLR 310
The receiver of Cambridge Credit alleged that the auditors had negligently
certified the company’s accounts as being a true and fair view of its financial
position in 1971. If the auditors had not been negligent, the company’s
debenture holders would have been alerted to the true financial position of the
company and would have acted to appoint a receiver immediately. The auditors
argued that Cambridge’s losses had bee caused by three factors: government
policies, the collapse of the land boom and the company’s own business
decisions.
The Court held that the auditors were not liable because no causal connection
could be established between their breach in 1971 and the loss suffered by the
company as a result of its collapse, or even that the company had ever relied on
the audit report in any way.

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Remedies at common law
Remoteness
◦ The loss or injury must not be too remote.
◦ The court must consider whether the loss
suffered by the injured party is a usual and
reasonably direct consequence of the breach
of contract, and this is a question of fact.

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Remedies at common law
Remoteness

◦ Hadley v Baxendale (1854) indicates two types of loss are

recoverable:
1. loss arising from the breach in the usual or normal
course of things; and
2. loss arising from special or exceptional circumstances
where it can be shown that the defendant had actual
knowledge of the plaintiff’s needs: Victoria Laundry Ltd v
Newman Industries Ltd (1949)

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Hadley v Baxendale (1854) 9 Ex 341
Hadley, a mill owner, had to stop work in the mill because of a broken
crankshaft. The shaft had to be sent back to the manufacturer because a
pattern had to made for a new shaft. Baxendale, a carrier, promised Hadley that
the crankshaft would reach the manufacturer on the following day. His
negligence, however, resulted in a delay, and the mill was out of operation for
longer than it should have been.
Hadley sued for damages for loss of profits caused by the delay. The carrier’s
defence was that he had no way of knowing that the delay in delivery of the
shaft would cause the mill to be shut down.
It was held that the carrier was not liable for the loss of profits as the loss did
not arise directly from the breach. It was too remote to have been foreseen by a
reasonable person. This would have been a different case if the carrier had
been advised of the urgency before entering into the contract.

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Victoria Laundry Ltd v Newman
Industries Ltd [1949] 2 KB 528
Newman Industries contracted to deliver a boiler to the plaintiffs. They
knew that the plaintiffs required the boiler urgently to enable them to take
advantage of favourable trading conditions, and to undertake expansion of
their business. What Newman didn’t know was that the plaintiffs had
successfully negotiated a lucrative government dyeing contract.
The boiler was damaged in the course of delivery by Newman and was 5
months late in installation. The plaintiffs claimed loss of profits from trade
they would have made had the boiler been delivered on time as well as
loss of profits from the dyeing contract.
The lost profits from normal business operations were recoverable, as they
were reasonably foreseeable, however the loss on the dyeing contract was
not. There was no way for Newman to know of this lucrative deal.

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Remedies at common law
Amount of damages
◦ The aim of damages is to put the injured party back as close
to the position they would have been in had the breach
never occurred.

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Remedies at common law
Amount of damages
Ordinary damages are recoverable for provable/economic losses as
well as:
◦ Expectation losses
◦ Reliance losses Amann Aviation Pty Ltd (1991)
◦ Loss of a chance Amann Aviation Pty Ltd (1991)
Where no loss can be established then only nominal damages can
be claimed.

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Commonwealth of Australia v Amann
Aviation Pty Ltd (1991) 104 ALR 1
Amann agreed to provide the Commonwealth with aerial surveillance for Australia’s
northern coastline. Amann had to purchase and modify planes for the project and it was
anticipated that this would take 6 months.
Before the 6 months had expired, it became obvious that Amann would not be able to
undertake its contractual obligations, so the Commonwealth terminated the contract on
the basis of a breach by Amann. The contract, however, contained a clause that
specified, that, in the event of a breach, the Commonwealth must serve a notice on the
defaulting party to show cause why the contract should not be terminated, and this had
not happened.
By the time the matter reached the High Court, it was agreed that the Commonwealth
had wrongfully terminated the contract, and quantum of damages was the only
question.
HCA ruled that regard must be had for the expenditure incurred by Amann, and awarded
them $6.6 million in reliance damages, holding that the situation was not too remote to
fall under the second limb of Hadley v Baxendale
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Remedies at common law
Mitigation of damages
▪ The plaintiff must take reasonable steps to minimise or mitigate
their loss.
▪ Failure to do so can result in a reduction of damages:
Burns v MAN Automotive (Aust) Pty Ltd (1986)
▪ Mitigation is a question of fact and the onus of proof is on the
defendant.
▪ A plaintiff must act with the interests of the defendant in mind,
as well as their own, but they are only required to act reasonably
which is not a high standard.

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 Burns v MAN Automotive (Aust)
Pty Ltd (1986) 161 CLR 653
Burns was a hauler and MAN sold prime movers. MAN arranged the sale of a
fully reconditioned prime mover, which was financed under a hire-purchase
agreement. MAN had warranted that the engine had been fully reconditioned
prior to the sale, when, in fact, it hadn’t.
MAN was aware that Burns had bought the truck for interstate haulage, and
that he was not in a good position financially. Within a year Burns learnt that
the prime mover had not been reconditioned, but he was not in a position to
afford a reconditioned engine. He continued to use the truck for interstate
haulage until it was repossessed because he could not meet the payments.
Damages for loss of earnings could not be obtained after it was discovered
that the engine had not been reconditioned, despite MAN being aware of the
situation. The loss was too remote, as any damage suffered after the date the
true condition of the engine was discovered could not be said to be within the
reasonable contemplation of the parties.
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Remedies at common law
Types of damages

▪ The type of damages that will be awarded will be determined

by the seriousness of the breach and whether the contract has
specified the amount of damages to be paid in the event of
breach.

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Remedies at common law
Types of damages
▪ Nominal damages – legal rights have been infringed but they
have suffered no actual loss: Charter v Sullivan [1957]
▪ Ordinary damages – loss suffered by the plaintiff as a result of
the breach and can be either general or special damages.
▪ Exemplary damages – punitive and may be awarded for non-
economic loss; not normally available in contract.

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Charter v Sullivan [1957]
2 QB 117
Sullivan agreed to buy a new Hillman Minx motor car from
Charter. Subsequently, he got better terms from another
dealer and withdrew from the purchase from Charter.
Charter sold the vehicle to another purchaser at the same
price 10 days later.
The trial judge awarded Charter the full dealer’s profit of
₤97 on the retail price fixed by the manufacturer.
The Court of Appeal held that Charter had failed to prove its
loss, particularly in the light of the evidence of Charter’s
sales manager that it could sell all Hillman Minx vehicles
that it could get.

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Remedies at common law
Types of damages

▪ Liquidated damages: Awarded where a plaintiff is

able to sue for a specified sum, which must be a
genuine or bona fide pre-estimate of the actual loss
that will flow from the breach.
▪ Unliquidated damages: Awarded where an injured
party has no fixed sum in mind and leaves the court to
decide the amount.

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Remedies at common law
Types of damages

▪ Penalty: A threat to ensure performance and not

enforceable because they are not a genuine pre-estimate
of the damage that will result from the breach: Dunlop
Pneumatic Tyre Co v New Garage and Motor Co Ltd [1915]

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Dunlop Pneumatic Tyre Co v New
Garage and Motor Co Ltd [1915] AC 79
Dunlop sold some tyres and other motor accessories to the
defendants who agreed not to sell them below the prices
stipulated by Dunlop. The defendants also agreed that, in the
event that they should breach the agreement, they would pay five
pounds for each breach by way of liquidated damages.
They subsequently sold a tyre in breach of the agreement, and the
Court was asked to determine if the sum involved was an unlawful
penalty, or a genuine pre-estimate of loss by Dunlop.
It was held to be a genuine pre-estimate of loss flowing from the
breach and so was recoverable.

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Equitable Remedies
▪ Discretionary remedies at equity and only granted where
damages are not an adequate remedy.

1. Specific Performance

2. Injunction

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Equitable Remedies
Specific Performance
▪ A remedy compelling performance. It is only granted at
the court’s discretion where the court can supervise the
implementation of the contract.
▪ It is not available in contracts involving personal services
because the court is unable to adequately supervise the
task: JC Williamson Ltd v Lukey & Mulholland (1931)

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JC Williamson Ltd v Lukey &
Mulholland (1931) 45 CLR 282
Williamson entered into an oral agreement with Lukey and
Mulholland giving them an exclusive right to sell sweets in his
theatre for 5 years. Under the Statute of Frauds, such an
agreement had to be evidenced in writing, but no note or
memorandum was ever made of the agreement. After Lukey and
Mulholland commenced business, Williamson repudiated the
agreement, and the defendants sought an order for specific
performance to compel Williamson to fulfil his obligations.
The order for specific performance was not granted, because the
Court would need to constantly supervise the parties to ensure
that its terms were met.

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Equitable Remedies
Injunction
▪ An injunction is a restraining order which prevents a person
from breaking a contract.
▪ It is a discretionary remedy and aims at enforcing negative
promises.
▪ It normally cannot be used where it would achieve the same
result as specific performance: Lumley v Wagner (1852)

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Lumley v Wagner (1852) 42 ER 687
While the Court could not grant an order for specific
performance to compel Wagner to sing at Lumley’s
theatre, it could enforce the negative promise “not to
sing elsewhere’ by granting an injunction against
Wagner, preventing her from singing anywhere else
during the term of the contract.
This is similar to a finding of the NSW Supreme Court in
Curro v Beyond Productions Pty Ltd (1993) 30 NSWLR
337.

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