Ending the Contract

Problems and Answers

Freddie Fish
Freddie Fish runs a successful scuba diving business, where he leads groups of tourists diving the
Great Barrier Reef. He charges each tourist $500 for the experience. However, s 20 of the
Queensland Tourism Act provides that

No person may lead a diving expedition without a current license. Penalty $50 000.

Flora, who has enjoyed several of Freddie’s diving expeditions in the past, has discovered Freddie
has never had a current license, and wants to get her money back.

REQUIRED: Referring to the relevant principles of contract law, advise Flora.

Issues:

Has the statute been breached?

Is the contract illegal?

Is the contract illegal as performed or as formed?

What is effect of illegality on:

- Recovery of payment
- Payment to Bubbles

Rules and Application - Fiona

Freddie has breached s 20 and will be liable for the $50k penalty. The purpose of s 20 is to protect
the public from unqualified dive leader. The contract between Flora and Freddie is not expressly
forbidden by statute (Re Mahmoud & Ispahani). The contract for the sale of a car without a RWC as
occurred in Buckland v Massey was unenforceable as the purpose of the legislation was to protect
the public. Therefore the contract between Flora and Freddie is unenforceable. The incidental
illegality as occurred in Yango Pastoral Co v First Chicago Australia (1978) is distinguished.

Rules and Application -Bubbles

S 20 does not expressly prohibit the sale of airtanks. Applying Fitzgerald v Leonhardt it is unlikely
that incidental illegality implied from a ban on unqualified dive leadership would extend to a sale on
goods where the goods could also be used for solo dives

Conclusion

Contract with Fiona is illegal as formed. Contract is unenforceable – neither party can enforce it
Flora will not be able to get her money back. Contract with Bubbles is enforceable and Bubbles must
be paid by Freddie.
Cyril’s Salon
Cyril owned a small hairdressing salon ‘Cyril’s Salon’ in the centre of Melbourne which was very
popular with his clients, who travelled from all over Melbourne to have Cyril cut their hair. One
particularly cold winter, Cyril decided to sell up and move to the Gold Coast. He sold the salon to
Clive, who insisted the following clause be inserted in the contract of sale:

The vendor, Cyril, agrees that he will not for a period of 5 years own or be employed in a hair
salon, or any other service industry within a 100 km radius of ‘Cyril’s Salon’.

After six months, Cyril had had enough of the Gold Coast and missed his old clients. He returned to
Melbourne and set up a new salon 30 km south of the centre of Melbourne.

REQUIRED: Advise Clive as to what action he can take against Cyril, by referring to relevant legal
principles.

Riley Constructions
Riley Constructions Pty Ltd enters into a fixed price contract of $500,000 with Allan for the
construction of a block of office premises. When the offices have been built to window height, Riley
Constructions Pty Ltd finds that it will be uneconomic to continue.

Required: Advise whether Riley Constructions Pty Ltd may obtain payment for work done and the
materials used thus far. Would your answer be different if Riley Constructions Pty Ltd had built the
whole block of office premises but had failed to put tiles in the staff kitchenettes? Refer to relevant
principles of contract law in your answer.

Lou the Lawyer

Lou is in her final year of her law degree and is looking for a job. She sees advertised a position with
a small accounting practice which reads: “Wanted: A qualified early career lawyer. Please telephone
Tom to discuss the beginning of your career”.

Lou telephones Tom. Tom tells Lou that the job is for a graduate & pays $3500 a month. Tom also
tells Lou she needs to arrive at the office by 8.30am everyday. Lou does not tell Tom she has not yet
graduated.

Lou commences work and is very capable. After 29 days of arriving to work punctually, Lou arrives
at 10am. Tom becomes very angry and refuses to pay Lou her salary. He tells her, “I owe you
nothing. You are too late for work and I have known for a while that you lied about being a lawyer.
You are fired”.

Required: Advise Tom. Refer to relevant principles of contract law in your answer.

ISSUES
 1. Whether the representation that Lou was a graduate was a misrepresentation
to induce Tom to enter the contract, whether it formed a collateral contract
(breached) or it was a term of the contract
2. whether the term requiring Lou to attend work at 8:30 am can be classified as a
condition or a warranty
3. whether Tom had the right to terminate the contract
4. whether Lou has substantially completed the contract

RULES

1. A misrepresentation must be one of fact, be false and be intended to be relied on by

the other person who must have suffered damage (Derry v Peek). Misrepresentation
can also be by silence.
2. A condition is a term of the contract having fundamental importance. A breach of a
condition entitles the aggrieved party to terminate the contract and seek damages:
Poussard v Spiers & Pond (1876). A warranty is a term of the contract with lesser
importance. A breach of a warranty entitles the aggrieved party to damages only:
Bettini v Gye (1876).
3. A misrepresentation will entitle the misrepresentee to rescind the contract, but this
right will be lost if they affirm the contract.
4. Generally, a contract must be performed exactly (Cutter v Powell), but a party who
has substantially performed the contract can claim the contract price less damages:
Hoenig v Isaacs (1952).
5. A representation that indices someone to enter a contract may be a collateral
contract: De LaSalle v Guildford

APPLICATION

A contract was formed as objectively, the elements of ICLR, consideration and agreement were
present.

Whether a term of a contract is a condition or warranty is governed by the root of the contract test:
Bettini v Gye. The requirement that Lou be a graduate lawyer is likely to be a condition, as lawyers
are required to be formally qualified. In general, without the parties emphasising in a contract that
‘time is of the essence’, punctuality is likely to be a warranty.
Lou’s late arrival is a breach of warranty and Tom will not be able to terminate the contract on this
basis, but will be able to claim any damages arising from Lou’s late arrival.

Lou has represented herself as having graduated when in fact, she is in her final year. This is
objectively either a negligent or fraudulent misrepresentation and may entitle Tom to rescind the
contract and claim damages. It can also be seen as a condition of the contract.
Alternatively, Lou’s claim that she was a graduate lawyer can also be regarded as a condition of a
collateral contract, which has been breached by her.
The breach of condition that Lou be a graduate lawyer (as well as the misrepresentation) may entitle
Tom to terminate the contract. However, Tom’s statement that he has known for some time that
Lou was not a graduate may amount to an affirmation of contract, in which case his right to
terminate has been lost. Lou has substantially performed the contract (29 days in a month).

CONCLUSION

If the representation that Lou is a graduate lawyer amounts to a misrepresentation, Tom may
be able to rescind the contract if he acted early. If the representation is a condition, then Lou
has breached the contract and Tom may also rescind if he acted once he became aware.

However, it appears that Tom may have affirmed the contract and so may have wrongfully
terminated the contract by firing Lou. Lou may be entitled to be paid out her monthly wage less
the days not performed.

The dead racehorse

Black Pearl is a prize-winning thoroughbred racehorse kept in country Victoria by her owner,
Nina. Nina offers to sell Black Pearl to Kai in Singapore for $50 000. Kai considers the offer,
accepted it and paid a deposit of $5000. After Kai accepted the offer, but before the time for
performance of the contract is due, the horse was struck by lightning and died.

Required: Discuss the likely outcome with reference to relevant legal principles.

Issues

The legal issue is whether the contracts between Nina and Kai has become frustrated. If it is
found to be frustrated, the question arises of how costs and expenses will be allocated between
the parties.

Rules

To establish frustration, four elements must be satisfied: Davis Contractors Ltd v Fareham Urban
District Council.1 The first element is whether the contractual position of at least one party has been
radically altered. Second, the event was not within the contemplation of the parties at the time the
contract was entered into. Third, the event was not caused by either party to the contract. Fourth, it
would be unjust to hold at least one party to the original contract.

Once frustration has been established, the effect of frustration on the rights of the parties under
common law means that the contract is valid until the moment of frustration. Losses remain where
they fell at the moment of frustration. The exception to this is where the other party has not
performed any part of the contract, as it is then void for lack of consideration.

Application and Conclusion

The contractual position has been radically altered by the death of Black Pearl, it is not possible for
Nina to replace Black Pearl. The death by lightning was not caused by either party and is a
supervening event outside of the contemplation of the parties. The contract has not become more
difficult to perform, it has become impossible. The contract is therefore frustrated.

1
[1956] AC 696.
Since Nina had not yet begun to perform the contract, she will be obliged to return Kai’s deposit.

The Missing Surfer

Bells Surfboards engages a world famous board rider, Justin for a series of surf riding exhibitions
using Bells surf boards. Justin and Bells Surfboards agree that a commercial film "Endless Summer"
will be made of the exhibitions. Two days before the exhibitions were to be held Justin informs Bells
Surfboards that he is going to move to Bali to surf professionally there. Consequently the exhibitions
have to be cancelled.

Bells Surfboards sue Justin for breach of contract, claiming damages for:

loss of profits because of a reduced sale of surfboards arising because of the cancellation;

i. promotional expenses;

ii. loss of profits on the projected film "Endless Summer" &

iii. loss of profits on a radio feature which Bells Surfboards had negotiated with 6DA, a radio
station.

Which of the above will likely to be assessed for damages, and why?

Whether Bells Surfboards can succeed against Justin for breach of contract for each of the four
claimed items depends upon determining the issue of remoteness of damages.

This is covered by the rule in Hadley v Baxendale which allows a plaintiff to claim damages for
breach of contract if either of the following two limbs is satisfied. Damages may be claimed:

1. where they naturally arise from a breach of contract or occur in the usual course of
things; or
2. as may reasonably be supposed to have been in the contemplation of both parties at the
time when they made the contract.

In relation to the four items of claimed damages:

(i) the loss of profits on the reduced sale of surfboards is a natural consequence of the
cancellation of the exhibition and (at least) falls within the first limb above

(ii) promotional expenses also arise naturally or in the usual course of things when
organising an exhibition

(iii) while making a film may not be a natural consequence of the exhibition, it was clearly
contemplated by both parties at the time of contracting. Accordingly the profits on the
film “Endless Summer” are claimable as damages under the second limb.

(iv) Bells Surfboards is unlikely to succeed in its action for loss of profits on the radio feature
negotiated with 6DA. Profits from a radio feature do not arise as a natural consequence
(or in the ordinary course of things) of a surf-riding exhibition. Thus the action will fail
 under the first limb of Hadley v Baxendale. Also, since Justin Marvin was not aware of the
proposed radio feature, it cannot be said that these damages were reasonably
contemplated (under the second limb of Hadley v Baxendale) at the time of contracting.

The Hair Disaster

Flora was getting married. She attended Cyril’s Hair Salon the day before the big event so Cyril could
colour her hair. When she booked the procedure she told Cyril:

‘Please make sure you do your best – she day after the wedding I have this great
modelling job!’

On the morning of the appointment, Cyril received a desperate call from his sister, whose babysitter
had let her down. Cyril agreed to look after her twin three year old at his salon. However, this meant
that Cyril was distracted and as a result the colour bleach was too strong and Flora’s hair was
coloured a vibrant green. Driving home, Flora was so distracted by her image in the rear view mirror
that she drove into a tree, causing damage to her car. Flora decided to postpone the wedding and
the client cancelled the modelling assignment. Flora has been in a state of depression ever since.

REQUIRED: Referring to the relevant principles of contract law, advise Flora as to what damages she
may be able to claim from Cyril.

Answer Guide

The object of damages is to restore someone to the position they would have been if the breach had
not occurred: Robinson v Harman.

Remoteness of damage is considered in accordance with the rule in Hadley v Baxendale. The damage
will be considered not too remote if it can reasonably be considered to

- Arise naturally according to the normal course of things from the breach
- Be in the contemplation of the parties at the time they made the contract
Under the first limb, Flora will be able to claim for the damage to her hair and the cost of remedial
work. Under the second limb, she could claim the costs involved in rescheduling the wedding and
the loss of the modelling assignment, however she is under a duty to mitigate her losses. Perhaps
she could have repaired her hair before the wedding.

Generally, damages for mental distress not available: Baltic Shipping.