It appears that today, the emphasis appears to have shifted away from the notion of coercion of the will of the plaintiff to the lack of legitimacy in the pressure or compulsion (Crescendo Management Pty Ltd v Westpac Bank Corporation). 2. Types of Duress There are three types of duress – threats to the person, threats to personal property and economic duress. a) Threats to person: The traditional common law concept of duress was limited to actual or threatened violence to the person of the plaintiff of their family (Farmers’ Cooperative Executors & Trustees Ltd v Perks).
Where a threat is made against a party’s life and was one of the reasons for that party entering into a contract, relief should be granted for duress. It is immaterial that there may have been other reasons (including good business sense) if the threat contributed to that decision (Barton v Armstrong). This notion extends to actual or threatened imprisonment or confinement (Barton v Armstrong).
In contrast, a contract resulting from a threat of criminal prosecution for which there is sufficient ground will not amount to duress, provided that the person being threatened is provided valuable consideration for entering the contract and there is no agreement to prevent the plaintiff from informing the police (ie. to stifle prosecution) (Scolio Pty Ltd v Cote). For example, if A says to B that he must repay stolen monies or the police will intervene, this will not amount to duress as there is consideration, that is, A giving B time to repay the debt. ) Threats to personal property: Where money is paid in order to avoid the wrongful seizure of goods or in order to obtain the release of goods wrongfully seized may be classified as duress to personal property. These goods may be recovered in what is known as restitution as ‘money had and received’ (Astley v Reynolds). Where conduct amounting to duress to personal property is a reason for the plaintiff entering into a contract, that conduct will enable the plaintiff to avoid the contract (Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd).
No express threat to the goods needs to be made if the defendant’s conduct makes the plaintiff reasonably believe that their goods are in danger (Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd). Note: Also, there is no distinction between recovery of money paid under compulsion in order to get possession of goods wrongfully detained and money paid under a contract made under duress to goods (Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd). ) Economic duress: A contract entered into under pressure to a party’s economic interests is voidable on the grounds of duress (Universe Tankships Inc v International Transport Workers’ Federation). Economic duress may therefore be defined as actual or threatened conduct harmful to the plaintiff’s economic interests. The proper approach to determine whether there has been an economic duress, is to ask: (Crescendo Management v Westpac Banking Corp) 1. Was any pressure applied to induce the victim to enter into the contract? ; and 2. Did the pressure go beyond what the law was prepared to tolerate as being legitimate?
Pressure may be illegitimate if it consists of unlawful threats or amounts to unconscionable conduct. Although these categories are not closed, even overwhelming pressure not amounting to unconscionable or unlawful conduct will not necessarily constitute economic duress (Crescendo Management v Westpac Banking Corp). For the purposes of economic duress, ‘unconscionable conduct’ refers to the effect of the pressure, upon the quality of the consent of the pressured party, rather than the quality of the conduct of the party against which relief is sought (Westpac Banking Corporation v Cockerill).
Economic duress may include a threat to break a contract unless it is renegotiated without any legal justification for doing so (North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd (The Atlantic Baron)). Contract Modification Cases: Cases involving contract modification may be difficult to resolve in practice. It has been suggested that a threat to breach a contract unless it is modified may be distinguished from a warning, request or offer. • A threat is a proposal to bring about an unwelcome event unless the recipient of the proposal does something (Atlas Express Ltd v Kafco Ltd). A warning is a prediction that an unwelcome event will happen or that it will happen if circumstances arise – this is different to a threat, as the speaker has no control over the unwelcome consequence (Williams v Roffey Brothers and Nicholls). o For example, subcontractors whose costs rise dramatically midway through the contract sometimes advise the head contractor that unless they are paid more, they will be forced to breach the contract. If as a result of higher costs such subcontractors eally cannot complete the contract because they face bankruptcy if they continue, then they may only be giving a warning that they do not have the resources to finish the job. But subcontractors who make such statements when they are in fact able to complete the contract might be seen as making a threat • A request occurs where a party to a contract merely asks for new terms – perhaps combined with an explanation of the reason for change. No unwelcome consequence is proposed, nor is an unwelcome consequence made conditional on non-performance of some action. An offer occurs where a person making the proposal is attempting to alter the recipient’s behaviour, but the difference is that the proposal is not unwelcome. Mere commercial pressure, even where it is taken to the extreme, does not amount to illegitimate pressure (Smith v William Charlick Ltd). Normally, a threat to do something that is lawful is not illegitimate (Westpac Banking Corporation v Cockerill). Therefore, a threat to commence legal proceedings will not usually amount to duress (Tejani v Gerrard).
However, there may be circumstances in which such a threat is combined with an unlawful demand and therefore may be regarded as illegitimate (Kaufman v Gerson). While an unlawful at, such as breach of contract or commission of a tort (Cadbury Schweppes v Australian Liquor Hospitality & Miscellaneous Workers’ Union), or threat an unlawful act would be illegitimate, there is no need in such a case for the defendant to be aware that it is unlawful (Spira v Commonwealth Bank of Australia).
The presence or absence of protest is a relevant consideration when deciding whether the victim has acted voluntarily or the pressure was illegitimate (Mason v New South Wales). Given this, it has been recognised that there may be circumstances where the victim has failed to object when the pressure is at its maximum (Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd). 3. Causal Connection The alleged illegitimate pressure must be a material cause of the contract being formed. The pressure only needs to be a material cause; it need not be the sole or even the dominant inducement.
It will be immaterial that there was a reason other than the threat, such as good business reasons (Barton v Armstrong). Illegitimate pressure will have no effect on the contract unless it had a material part to play in its formation, no matter how extreme. 4. Remedies A wronged party can seek redress through rescission, restitution or damages: a) Rescission: As a contract entered into under duress is rendered voidable, not void, the principle remedy for duress is rescission of the contract (North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd).
The limits on the right to rescind the contract still operate in the case of duress: affirmation, lapse of time, impossibility of restitutio in integrum, innocent third party rights have interfered or execution of the contract. b) Restitution: In an appropriate case, restitution may offer an alternative remedy in the form of an action for recovery of money paid (Hawker Pacific v Helicopter Charter). The modern basis for such a restitutionary claim is unjust enrichment at the plaintiff’s expense.
However, the restitutionary claim is not available while the contract under which the payment was made remains on foot. Therefore, it is first necessary for the contract to have been either discharged or rescinded before a claim in restitution may be made (The Evia Luck). c) Damages: There are conflicting views about whether damages may be recovered for duress. It has been suggested that duress is a tort if it causes damage or loss and thereby gives a right to claim damages (Universe
Tankships of Monrovia v International Transport Workers’ Federation (the Universe Sentinel)). It has also been suggested that while the particular form taken by economic duress in a given case may itself be a tort, conduct does not have to be tortious in order to constitute duress (Universe Tankships of Monrovia v International Transport Workers’ Federation (the Universe Sentinel)). 5. Duress under Statute The Trade Practices Act 1974 (Cth) and Fair Trading Act 1989 (Qld) prohibit certain forms of duress: For example, the statutes prohibit the use of physical force or undue harassment or coercion in connection with the supply or possible supply of goods or services to a consumer or the payment for goods or services by a consumer (s 60 TPA & s 55 FTA). • There is also a prohibition against physical force or undue harassment or coercion in connection with the sale or grant, or the possible sale or grant, of an interest in land or the payment for an interest in land (s 53A(2) TPA & s 40A(2) FTA). In cases where the statutes have prohibited duress, they make available a wide range of remedies, including: o injunctions (s s 80 TPA & s 98 FTA) o ancillary orders including rescission, restitution, and variation of the contract (s 87 TPA & s 100 FTA). o Additionally, unlike the common law, there is also no doubt that the court may award damages in the appropriate case (s 82 TPA & s 99 FTA). UNDUE INFLUENCE 1. Generally
The basis of the equitable jurisdiction to set aside a contract on the ground of undue influence is the prevention of an unconscientious use of any special capacity or opportunity to affect the victim’s will or freedom of judgment that may exist or arise (Johnson v Buttress). ‘Undue influence’ involves one person who occupies a position of ascendancy or influence over another improperly using that position for the benefit for themself or someone else, so that the acts of the person influenced cannot be said to be his or her voluntary acts (Johnson v Buttress).
The party in the position of ascendancy falls under a duty containing fiduciary characteristics, since it is that person’s duty to use the position of influence in the interests of no one except the person governed by the ascendant person’s judgment or who trusts the ascendant person (Johnson v Buttress). 2. Classes of undue influence If one party induces the consent of the other by undue influence the contract is voidable in equity. There are two classes of undue influence (Allcard v Skinner).
The first class is where the court is satisfied that the transaction is the result of actual undue influence exercised by a party in a position of ascendancy over another for the purpose of inducing the transaction. The second is where the relationship between the parties at the time of the transaction – or shortly before – is such as to raise the presumption that the ascendant party exercised influence over the other (Farmers’ Co-operative Executors & Trustees Ltd v Perks; Johnson v Buttress). i) Class 1 – Actual undue influence This class concerns a transaction which has been entered into as a result of actual undue influence. Where there is no special relationship between the parties in which case the party alleging undue influence must prove that he/she was subjected to influence which excluded his/her free consent (National Westminster Bank v Morgan; Johnson v Buttress) The elements required are as follows – (Bank of Credit & Commerce International SA v Aboody) • One party (ascendant party) to the ransaction has the capacity to influence the other (trusting party) • That influence was exercised • Its exercise was undue • Its exercise brought about the transaction Note: Circumstances that constitutes duress would also establish a case of actual undue influence. For example, an agreement entered into under a threat that failure to do so would result in the party’s son being prosecuted was held to constitute undue pressure and was the equivalent of actual undue influence (Public Service Employees’ Credit Union Co-operative v Campion). (ii) Class 2 – Presumed undue influence
Where there is a special or confidential relationship between the parties, it is presumed that undue influence induced any transaction between the parties. The onus is on the party in who confidence was reposed to show that undue influence was not used. There are two subclasses under this class – a) Class 2A – Recognised relationships: This contains well-defined categories accepted as naturally giving rise to a relationship of influence (Johnson v Buttress). These include the following relationships – • Trustee and beneficiary (Dougan v MacPherson) • Solicitor and client (McPherson v Watt) Doctor and patient (Bar-Mordecai v Hillston) • Parent and child (Phillips v Hutchinson) • Guardian v ward (Taylor v Johnston) • Spiritual advisor and devotee (Norton v Relly) • Man and fiancee (at least in the past) (cf. Zamet v Hyman) Common Characteristics The characteristic common to all these relationships appears to be that the first-named person in each relationship is reasonably expected to advise and give guidance to the other, in and for the purpose of such relationship, solely in the interests and for the benefit of the other (Union Fidelity Trustee Co of Australia v Gibson).
Parent-Child Relationships In the case of a parent-child relationship, no presumption arises where the child is emancipated from the control and authority of the parent (Lamotte v Lamotte). This is a question of fact, taking into effect the same kind of considerations as are relevant to deciding whether there was a class 2B case of proven relationship of influence (Powell v Powell). Also, no presumption arises where a child is the dominant party and the parent is the claimant, unless it is a class 2B proven relationship of influence (Whereat v Duff).
Whether presumed undue influence will arise in these situations will require a consideration of the matters listed below. Spiritual Relationships Cases of a religious kind may be difficult, since such influence may be both powerful and hard to detect (Allcard v Skinner). However, the power of religious impressions under an ascendant spiritual adviser may be seen as more powerful than anything inherent in the authority of a guardian (or even parental authority) with its ability to work upon passions, fears, hopes and consciences (Huguein v Baseley).
Whether in any particular case a relationship in a religious context will be sufficient to found a presumption will depend upon whether the evidence establishes a reliance, dependence or trust on the part of the claimant leading to a corresponding ascendancy which makes the ascendant party capable of influencing making of the gift or transaction in question (Quek v Biggs). Excluded Relationships There is authority to exclude such relationships as husband and wife (Bank of Montreal v Stuart), banker, accountant or financial adviser and client (Cowen v Piggot). ) Class 2B – Relationships attracting presumption: The category of relationships in which undue influence is not closed. It rests upon principle, which applies whenever one party occupies or assumes towards another a position that naturally involves an ascendancy or influence over that other, or a dependence or a trust on his or her part. When examining whether a relationship gives rise to a presumption of influence, the court will take into account such matters as – (Union Fidelity Trustee Co of Australia v Gibson): The standard of intelligence, education, character and personality of the claimant • The age, state of health, and blood relationship of the claimant • The experience or lack of it in business affairs of the claimant • The length of friendship or acquaintanceship between the claimant and the other party in the intricacy of their business affairs • The relevant strength of character and personality of the dominant party • The opportunity afforded the dominant party to influence the claimant in business affairs
A party who is seeking to avoid the transaction on the basis of undue influence which is not in one of the well established categories should first establish that in the circumstances, undue influence ought to be presumed. The onus of proof will then shift to the party who is trying to rebut the presumption. Where the party alleging undue influence is unsuccessful in showing that undue influence ought to be presumed, they will be left to actual proof of undue influence in the circumstances.
Excluded relationships giving rise to a presumption of influence Although the relationship between husband and wife is generally not regarded as a class 2A relationship that automatically gives rise to a presumption of influence, a particular husband-wife relationship may nevertheless be held to have that character (Farmers’ Co-operative Executors & Trustees v Perks). not rebutted on the evidence.
Similarly, the relationship of banker and customer may become one in which the banker acquires a dominating influence, thus giving rise to a presumption of undue influence. If the banker does acquire a position of dominance and a manifestly disadvantageous transaction is proved, there would be room for a court to presume that it resulted from the exercise of undue influence (National Westminster Bank v Morgan). 3. Rebutting the presumption
Where the parties stand in a relationship in which undue influence is presumed, the party in the position of influence must try to rebut the presumption by satisfying the court that they did not take advantage of the claimant and that the transaction was the independent and well understood act of a person in a position to exercise a free judgment based on information as full as that of the recipient (Johnson v Buttress).
The facts that must be proved to show the court that the trusting party was freed from influence may be different for different relationships, as influence may arise in different ways and to different degrees (Johnson v Buttress). However, relevant factors may include – (Johnson v Buttress): • the trusting party’s age • standard of intelligence • character • experience The ascendant party may rebut the presumption of undue influence by proving that the trusting party – (Lancashire Loans Ltd v Black): 1.
Knew and understood what he or she was doing; and 2. Was acting independently of any influence arising from the ascendancy Acting Independent of Influence In relation to the second element, it is not necessarily sufficient to prove that the proposal to make the gift or transaction came from the trusting party (Spong v Spong) or that the ascendant party took no active steps to procure the transaction (Allcard v Skinner).
Proof that the trusting party had independent advice (which goes against the trusting party) may be relevant to rebutting the presumption but it is not conclusive (Inche Noriah v Shaik Allie Bin Omar). Where advice is given, it must be both independent and effective for the purpose of enlivening the client’s appreciation of the transaction, its legal effects and the alternatives (if any) that are open to the client (Bester v Perpetual Trustee Co Ltd).
If the trusting party receives independent advice and either misunderstands the advice or is given erroneous advice, resulting in their failure to appreciate or realise the effects of the transaction (financial implications and detriment to themselves inherent in the transaction), equity may still refuse to set aside the transaction if the trusting party otherwise understood the nature of the transaction and acted in relation to it in the full exercise of his or her will (Jenyns v Public Curator).
Where the court is satisfied that the independent advice would have had no effect on the transaction, evidence that the trusting party received advice may be disregarded (Linderstam v Barnett). 4. Undue influence and third party sureties The actual or presumed influence may result from the conduct of a third party. In such a case, beneficiaries who have notice of the circumstances may have the onus cast upon them of proving that the transaction was a free, voluntary and well understood act of the trusting party (Bank of New South Wales v Rogers).
The ‘rule in Garcia v National Australia Bank’ It may be unconscionable to enforce a security provided by a wife as a surety to secure her husband’s debt to a lender where it turns out that the wife did not understand the purport and effect of the transaction. In such a case, the lender must either take steps to explain the transaction to her or reasonably believe that the transaction had been explained to her by a competent, independent and disinterested stranger. Unconscionability may be seen as arising from a combination of the following circumstances, viz that: In fact the surety did not understand the purport and effect of the transaction; • The transaction was voluntary, in the sense that surety obtained no gain from the contract between the debtor and the creditor that is being guaranteed; • The lender is assumed to have understood that the wife as surety may have placed trust and confidence in the husband debtor in business matters and therefore to have understood that the husband may not have fully and accurately explained the purport and effect of the transaction to his wife; and • The lender nevertheless did not itself take steps to explain the transaction to the wife, or find out whether a stranger had explained it to her The ‘purport and effect’ of a transaction means at least the fact of liability, the general extent of the liability and the possible consequences of default (Yerkey v Jones).
It will be insufficient if the wife only misunderstands the degree of risk, or the improvidence of the use to which the borrowed money is put (Yerkey v Jones). Instead, the wife’s misunderstanding must be of a matter material to the liability that the lender is seeking to place upon her (State Bank of New South Wales v Chia). The rule does not apply where the surety is not a volunteer, in the sense that she or he obtains advantage from the transaction (Commonwealth Bank of Australia v Cohen). Mere incidental benefit generally accruing to the wife’s family is not a ‘real benefit’ for these purposes (Armstrong v Commonwealth Bank of Australia). In this respect, the surety may still be a volunteer despite even being a director and shareholder of the debtor company where the ompany is a business run by and under the control of her husband an in which she takes no active interest (Warburton v Whitely). By contrast, a wife has been held not to be a volunteer where the loan secured by the mortgage pays out an existing mortgage on property jointly owned by the husband and wife (Westpac Banking Corp v Paterson). It is yet to be finally resolved whether it is sufficient for the surety to be a volunteer in part only (Elkofairi v Permanent Trustee Co Ltd – where loan has joint and several obligations with the amount discharging the existing mortgage distinct from the balance which the husband uses for his own business, wife might be regarded as a volunteer as to the business portion). 5. Remedy
Where actual undue influence is shown or where it is presumed and cannot be rebutted, the contract is rendered voidable. The limits on the right to rescind still operate in the case of undue influence where: Even where a right to rescind has been lost, a court may still be prepared to order equitable compensation (Mahoney v Purnell) or order an account of profits made on any resale to a third party (Haywood v Roadknight). UNCONSCIONABLE CONDUCT 1. Generally Equity also exercises jurisdiction to set aside a contract which may be described as harsh and unconscionable. The notion of unconscionability is extremely difficult to define. The doctrine of unconscionable conduct was defined as being a ground of relief whenever one party by reason of some ondition or circumstance is placed at a special disadvantage in comparison with another and unfair or unconscious advantage is taken of the opportunity created (Commercial Bank of Australia Ltd v Amadio). The critical element of unconscionable conduct is the defendant’s conduct, which in the circumstances is not consistent with equity or good conscience (Commercial Bank of Australia Ltd v Amadio). In contrast, the focus of undue influence is the plaintiff’s overborne will. Thus, in relation to unconscionable conduct, there is no suggestion that the party seeking to have the transaction set aside did not bring a free, voluntary, and independent judgement to the making of the contract.
Unconscionable conduct is seen as conduct which takes advantage of another’s special disability or disadvantage, in a way that is harsh or oppressive (Commonwealth v Verwayen). 2. Unconscionable conduct in equity Equity will grant relief for unconscionable conduct where the following elements can be proven – (Commercial Bank of Australia v Amadio): • One party is in a position of special disadvantage to which the other party creates circumstances of unfair advantage; • The other party knows or ought to know of that special disadvantage and exploits the other’s weakness in some morally culpable manner; • The resulting transaction is oppressive. Special disadvantage – definition:
This is an advantage which seriously affects the ability of the innocent party to make a judgment as to his own best interests, when the other party knows or ought to know of the existence of that condition or circumstance and of its effect on the innocent party (Commercial Bank of Australia Ltd v Amadio). Relevant circumstances include – (Blomley v Ryan): • poverty of any kind • sickness • age • sex • infirmity of body or mind • drunkenness • illiteracy or lack of education • lack of assistance or explanation where assistance or explanation is necessary. However, this list does not cover all of the situations in which relief will be granted for unconscionable conduct (Commercial Bank of Australia Ltd v Amadio). Emotional dependence, or being subject to emotional influence, is a relevant disadvantage that might constitute a ground to set aside a transaction as unconscionable (Louth v Diprose).
Additionally, special disadvantage might exist not only in ‘constitutional disadvantage’, such as age or infirmity, but also in ‘situational disadvantage’, such as disadvantage arising out of an intersection of the legal and commercial circumstances in which the plaintiff may find themselves (Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd). Special disadvantage – distinguished from simple disadvantage: ‘Special advantage’ must be distinguished from simple disadvantage – a person will not be in a position of special disadvantage just because of a mere inequality of bargaining power. There is a difference between unconscientiously exploiting another person’s inability or reduced ability to protect this own interests and taking advantage of a superior bargaining position. Good conscience does not demand that a party forfeit any advantage or neglect his or her own interests. (Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd).
Commercial vulnerability, no matter how extreme, on its own does not amount to a special disadvantage (Australian Competition and Consumer Commission v Samton Holdings). Where a professional adviser, such as an accountant, enjoys considerably greater financial analytical skills than the client, the client may be at a disadvantage but will not be in a position of ‘special disadvantage’. A different conclusion may follow, however, if the professional adviser were to seek to take advantage of that relative technical superiority by inducing the client into a course of action that the adviser understands to not be in the best interest of the client (Gartner v Ernst & Young (No 2)).
Actual knowledge of special disability is sufficient, but not necessary (Cf. Westwill Pty Ltd v Heath). Special disability must be ‘sufficiently evident’ to the defendant (CBA v Amadio). A defendant cannot shelter behind a ‘wilful ignorance’ as precluding knowledge of the special disability (Owen and Gutch v Homan). However, relief will be refused where the stronger party neither knows nor ought to know of the weaker party’s special disadvantage (Melverton v Commonwealth Development Bank of Australia). It is not necessary for the stronger party to have created the special disadvantage under which the weaker party is labouring (Louth v Diprose). Causal connection
It is necessary for there to be a causal connection between the stronger party’s unconscientious taking of advantage and the resultant contract (Louth v Diprose). No relief may be granted where the stronger party’s exploitative conduct was not a material cause of the contract. Note: standard-form contracts: • Typically used by parties who are in such a strong bargaining position that they are able to prescribe the terms on which they are prepared to contract, ie. a ‘take it or leave it’ basis • Unconscionability may be capable of relating not only to formation of contracts (‘procedural unconscionability’) but also to the substantive terms in a contract (‘substantive unconscionability’) • If this proves to he base, a Court may deem terms of a contract so unreasonable that they represent the stronger party taking advantage of a disability on the part of the weaker party – perhaps because of a pressing need for the goods or services. ? For example, Familiar Pty Ltd v Samarkos – Held: The ‘administration fee’ of $50,000 in respect of a loan of $50,000 set aide on the grounds that the payment was unconscionable. 3. Justification Once the two elements are established by the weaker party, the onus shifts to the stronger party to justify the conduct by showing that the transaction was ‘fair, just and reasonable’ (Commercial Bank of Australia v Amadio). Proof that the weaker party had the benefit of receiving independent advice may be one way of showing that the transaction was far, just and reasonable.
However, this is not conclusive (Commercial Bank of Australia v Amadio). 4. Remedies The main remedy will be rescission of the contract, although partial rescission (rescission to the extent of the unconscionability) may be possible in some cases (Commercial Bank of Australia v Amadio). The limits on the right to rescind still operate in these circumstances (i. e. affirmation, lapse of time, impossibility of restitutio in integrum, innocent third party rights have interfered or execution of the contract). In an appropriate case, an account of profits may be an alternative remedy (McKenzie v McDonald) or perhaps equitable damages (Hill v Rose).
A remedy for unconscionable conduct may be refused on discretionary grounds, such as unclean hands or laches (unreasonable delay) (Adenan v Buise). 5. Unconscionable conduct under statute Unconscionable conduct is now also dealt with in a variety of ways under statute. There are unconscionability provisions in the Trade Practices Act (ss 51AB, 51AC, 51AA) and Fair Trading Act (s 39). The only remedy available for a breach of any of these sections is resort to s 87 of the Act which provides an order for compensation. Damages under s 82 will not be available. The position is the same under the Fair Trading Act in relation to s 39 – a remedy may be obtained under s 100 but not s 99. Expanded remedies under the Trade Practices Act 1974
Section 51AA of the TPA provides that a corporation must not, in trade or commerce, engage in conduct that in unconscionable under the unwritten law. The concept of unconscionability is arguably to be found at two levels in the unwritten law – (ACCC v CG Berbatis Holdings Pty Ltd): • The generic level which forms the fundamental principle according to which equity acts (elements in Commercial Bank of Australia v Amadio (i. e. one party unconscionably taking advantage of the special disadvantage of another)). There is also the specific level at which the usage of “unconscionability” is limited to particular categories of case (a narrow interpretation). • It is the second sense that is the focus of s 51AA.
It has been held that the primary objective of the provision is to make available the extensive and flexible remedies contained in the Act for conduct that otherwise constitutes unconscionable conduct in equity. In particular, the section enables the court to grant an injunction under s 80 or sone of the wide ranging orders under s 87, which provides for the making of such orders as the court thinks appropriate. Although damages under s 82 are not available for unconscionable conduct under the TPA, an order for compensation may be made under s 87. • A statutory action must be brought within two years, rather than the usual six-year limitation period in contract cases: TPA s 87(1CA). What is the scope of conduct that is unconscionable under the ‘unwritten law’ for the purposes of s 51AA?
Section 51AA was not restricted to cases of unconscionably taking advantage of special disadvantage but may extend to other aspects of unconscionability covered by other equitable doctrines (ACCC v Samton Holdings), such as – o equitable estoppel (Waltons Stores (Interstate) Ltd v Maher) o relief against forfeiture and penalty on the basis of harsh and oppressive exercise of rights (Legione v Hateley) o relief for unilateral mistake where there has been ‘sharp practice’ (Taylor v Johnson) o setting aside as against third parties where there has been defective comprehension, influence and want of independent advice (Garcia v National Australia Bank Ltd) It is clear that s 51AA does not extend to any form of unconscionability not recognised by unwritten law: it does not create a new species of unconscionability (ACCC v Samton Holdings).
Whether as a matter of law corporations can be under a special disadvantage so as to be able to claim a remedy under s 51AA may depend on the basis of factors such as: • corporation size • resourcing • measure of advice • overall ability to act to protect its interests The Act expressly states that s 51AA does not apply to conduct engaged in relation to financial services, nor does it cover the conduct caught by either s 51AB or s 51AC. Unconscionable conduct in the supply of goods or services Both sections 51AB and 51AC of the TPA deal with unconscionable conduct relating to the supply of goods or services (and in relation to the supply of goods or services to a consumer: Fair Trading Act 1989 (Qld) s 39). Section 51AB
Section 51AB of the TPA and s 39 of the FTA prohibit unconscionable conduct in trade or commerce in connection with the supply of goods or services to a consumer. In other words, the goods or services supplied must be ‘of a kind ordinarily acquired for personal, domestic or household use or consumption’. This may include a bank lending money to enable a person to buy a private residence (Begbie v State Bank of NSW). However, it has been held that the sections do not apply, for example, to radio bookings supplied to taxi drivers (Venning v Suburban Taxi Service). The Act also expressly provides that s 51AB does not apply to the supply/possible supply of financial services: s 51AAB(2).
When determining whether the prohibition against unconscionable conduct has been contravened, the court may have regard to a number of factors as guidelines (s 51AB(2) TPA), which are not conclusive: • the relative strengths of the bargaining positions of the parties • whether as a result of the conduct engaged in by the corporation, person or supplier, the consumer was required to comply with conditions that were not reasonable necessary to protect the legitimate interests of the corporation, person or supplier • whether the consumer was able to understand any documents relating to the supply or possible supply of goods or services • whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the consumer by the corporation, person or supplier • the amount for which and the circumstances under which the consumer could have acquired identical or equivalent food or services from some other person The remedies for breach of s 51AB of the TPA and s 39 of the FTA are an injunction (s 80 TPA) or ancillaries remedies as the court deems appropriate (s 87 TPA). Section 51AC s 51AC is designed to provide protection for small business consumers or suppliers from unconscionable conduct in business transactions. The section has two main provisions – one prohibiting certain unconscionable conduct by ‘a corporation’ (ss(1)) and the other prohibiting certain unconscionable conduct by ‘a person’ (ss (2)). The conduct relates to the supply (or acquisition) of goods or services in trade or commerce.
The section prohibits four types of unconscionable conduct in trade or commerce, namely that by: • a corporation in connection with the supply of goods or services to a person (other than a listed public company: ss (1)(a); • a corporation in connection with the acquisition of goods or services from a person (other than a listed company): ss (1)(b); • a person in connection with the supply of goods or services to a corporation (other than a listed public company: ss (2)(a); and • a person in connection with the acquisition of goods or services from a corporation (other than a listed public company) (ss (2)(b). The section only applies to a supply or acquisition of goods or services at a price of $3,000,000 or less: s 51AC(9)-(10). This section provides factors relevant to determining whether the supply or acquisition should be deemed unconscionable: • the requirements of any applicable industry code (eg.
Automasters Australia v Bruness: Franchising Code of Conduct) • any unreasonable failure to disclose that the supplier’s (or acquirer’s) conduct might affect the interests of the small business consumer (or supplier) or involve risks to the small business consumer (or supplier) • the extent to which the supplier (or acquirer) was willing to negotiate the term and conditions • the extent to which the parties acted in good faith Additional Notes (ss 51AB and 51AC: • The conduct will be ‘in connection with’ the supply of goods where it ‘accompanies, goes with or is involved with’ the supply of goods (Monroe Topple & Associates Pty Ltd v Institute of Chartered Accountants in Australia). For example, making a call on a letter of credit issued under a supply agreement will be ‘in connection with’ the supply of goods (Boral Formwork & Scaffolding v Action Makers) • For conduct to be ‘unconscionable’ for the purposes of the sections, serious misconduct or something clearly unfair or unreasonable must be shown. The sections are not limited to conduct that would fall within the ambit of the principle stated in CBA v Amadio or that would attract a remedy under s 51AA (ACCC v CG Berbatis Holdings) • The sufficient conduct requires some moral fault or responsibility or fault to be shown, and normally will be expected to involve either a deliberate act or at least a reckless act (ACCC v 4WD Systems Pty Ltd) • Mere unreasonableness or unfairness may not be sufficient, at least in the absence of some moral fault (ACCC v 4WD Systems Pty Ltd) • ‘Unconscionability’ has been held under s 51AC to be demonstrated by behaviour described as ‘unreasonable, unfair, bullying and thuggish’ (ACCC v Simply No-Knead (Franchising) Pty Ltd). • Circumstances other than merely the terms of the contract are required to exist before ss 51AA, 51AB or 51AC can be applied (Hurley v McDonald’s Australia Ltd). Additional Miscellaneous Notes: 51AA TPA – corporation trade/commerce engage in conduct which is unconscionable ‘under the unwritten law’ narrow version (Amadio case elements) equitable estoppel? Drunkenness, mental incapacity, sharp practice (wider version) * More remedies available compared to common law – greater range, not just rescission e. g. injunction s 51AB TPA – unconscionable conduct relating to consumers consumers being protected (vulnerable section of community) lists things taken into account when deciding whether or not there has been unconscionability refer to textbook – unconscionable conduct in the supply of goods or services?? s 51AC TPA – small businesses ccess to remedies list of factors to take into account when determining whether or not there has been unconscionability MISTAKE 1. Generally Only operative mistakes can have the effect of vitiating the contract. A mistake is ‘operative’ when it is made by one or both of the parties prior to or at the time the contract is formed. 2. Types of mistake There are three possible types of mistake – common mistake, mutual mistake and unilateral mistake. • Common mistake: this occurs where both parties make the same mistake. • Mutual mistake: this occurs where both parties are mistaken, but each party makes a different mistake. The parties are at cross purposes. Unilateral mistake: this occurs where only one of the parties is mistaken and the other party knows or ought to know of the mistake. 3. Effect of mistake An operative mistake may give rise to a remedy at common law or in equity. a) Common Law: A mistake may operate to void the contract ab initio (from the beginning). Hence, the parties are treated as if there had been no contract between them – any money or property transferred between them must be returned. Further, the contract will be insufficient to pass title, therefore, the right of a third party who has acquired interest in the subject matter of the contract will be defeated. b) Equity: In equity, a more flexible approach is taken to mistake – a mistake renders the contract voidable, not void.
Thus, the contract can be rescinded by the mistaken party or the contract may be set aside by the court. However, the right to rescind is still subject to the limitations (i. e. affirmation, lapse of time (Solle v Butcher), impossibility of restitutio in integrum, innocent third party rights have interfered – but execution of the contract is not a limit: Lukacs v Wood). Alternatively, the court may refuse a grant of specific performance at the request of a party seeking to take advantage of the mistake (Goldsborough Mort & Co Ltd v Quinn), or may rectify the text of a contract where there has been a mistake in the recording of its terms (Maralinga Pty Ltd v Major Enterprises Pty Ltd). 4. Common mistake Common Law
A contract is void at common law for mistake in only two circumstances – where there has been a common mistake as to the existence of the subject matter (res extincta) and common mistake as to title (res sua): Couturier v Haste. a) Res extincta: This is where unknown to both parties, the subject matter of the contract no longer exists so that the contract is impossible to perform and is accordingly void (Dell v Beasley). For example, if A agrees to buy B’s car, but unknown to both, the car is destroyed earlier that day. Section 9 of the Sale of Goods Act 1896 (Qld) provides that where there is a contract for the sale of specific goods, and without the seller’s knowledge the goods have perished at the time the contract was formed, the contract is deemed to be void.
Res extincta may be distinguished from 2 other situations: i) Adventure: where the contract is for an ‘adventure’, it is a question of construction whether the purchaser has agreed to take a chance on whether or not the subject matter is in existence, or ‘for goods lost or not lost’ (Couturier v Hastie). Here, the true subject matter of the contract is not the goods themselves but the chance of their existence. ii) Warranty: where there is a warranty as to the subject matter’s existence: if the goods are either no longer in existence or never existed, that party may be liable in damages for breach of contract (McRae v Commonwealth Disposals Commisssion). A party to a contract can, of course, guarantee or warrant the existence of the subject matter. In such cases a non-existence will not be grounds for having the contract set aside (McRae v CDC). ) Res sua: This is where unknown to both parties, the buyer or the lessee of the property is already the owner of that property (Bell v Lever Bros Ltd). In such a case, the contract is void since the seller or lessor has nothing to sell or lease and performance of the contract is impossible due to the absence of any subject matter. Common mistake as to the qualities or attributes of the specific subject matter of the contract, does not make the contract void at common law (Svanosio v McNamara). Equity Those contracts declared void for mistake at common law will also be regarded as void in equity (Bell v Lever Bros). In otherwords, in equity, where res extincta or res sua applies, the contract will be treated as having no effect.
It has been held that there are, however, two other instances in which equity will intervene. Therefore, the equitable response to common mistake goes further than the common law’s limited approach of rendering a contract void. In the appropriate case, equity may set aside the contract as it sees fit (rescission) (Cochrane v Willis), rectify the contract or refuse specific performance. a) Rescission: It may declare the contract voidable where the common mistake relates to the fundamental nature or quality of the subject matter and the party alleging mistake is not at fault (Solle v Butcher). In order for the contract to be set aside for common mistake, three elements must be shown – (Solle v Butcher): a common misapprehension as to facts or as to the parties’ rights • which is of a fundamental nature – a mistake may be described as ‘fundamental’ if it affects the nature or quality of the subject matter; this includes a mistake concerning the value of the subject matter (Grist v Bailey). • absence of fault on the part of the party who is seeking to rescind the contract The requisite equitable fraud (unconscionability) may be satisfied by a party seeking to uphold the bargain when he/she is receiving an unexpected windfall under the contract due to the mistake (Lukacs v Wood). If rescission is available, the limits on the right to rescind still operate (i. . affirmation, lapse of time, impossibility of restitutio in integrum, innocent third party rights have interfered) (Hudson v Jope). b) Rectification: In order to rectify a common mistake in the recording of an agreement (e. g. A and B enter into a contract but when their contract is written down on paper, a mistake is made unknown by both parties) the following elements must be shown – (Maralinga Pty Ltd v Major Enterprises Pty Ltd): • There was a prior concluded agreement and the parties then erroneously record that agreement in a written document – or at least a common intention to continue down the execution of a contract (Slee v Warke).
Further, it seems that it is sufficient if the parties can use other means to prove the common intention, including pre- and post- contractual facts (NSW Medical Defence Union Ltd v Transport Industries Insurance Co Ltd); or • There is evidence or ‘convincing proof’ that the written document does not give effect to the parties’ common intention or that the document differs from the parties’ common intention. • A bona fide (innocent) third party’s rights are not prejudiced (Smith v Jones). Relief will not be denied simply because a party did not read the contract prior to signing it (Coset No 15 Pty Ltd v Blagojevic). Rectification will be refused in the following circumstances: Where there is a change in the common intention and the document in fact accurately reflects the final agreement between the parties. • Where the parties are mistaken as to the meaning or the practical effect of the words they used, as there is no disagreement between the words used and the common intention (Frederick E Rose (London) Ltd v William H Pim & Co Ltd). • Where the parties are acting under a common mistake that something can be done when it is impossible, but the written word gives effect to that common intention (The Club Cape Schanck Resort Co Ltd v Cape Country Club Pty Ltd). • Where rectification would affect the rights of third parties (Smith v Jones Coolibah Pastoral Co v Commonwealth).
Onus: The party seeking rectification of the instrument bears a heavy onus of proof – there must be ‘convincing proof’ that the document differs from the parties’ common intention: • The omitted ingredient must be capable of such proof in clear and precise terms (Warburton v National Westminster Finance Australia Ltd). • They must be able to show precisely the correction that is needed (Pukallus v Cameron). • The court will not assume the task of making the contract for the parties (Pukallas v Cameron). • Without such proof, the certainty of contracts may be placed in jeopardy by a party seeking to assert prior negotiations as representing the true position (Anfrank Nominees Pty Ltd v Connell). Limits: Where a court orders a document to be rectified, it is treated as having been in its rectified form as from the date of execution (Issa v Berisha). Accordingly: A court will not order rectification where it would affect the rights of third parties (Coolibah Pastoral Co v Commonwealth) • Although authority suggest that a party who seeks to rely on the unrectified document is not deemed to have ‘affirmed’ the contract and thereby prevented from seeking rectification (Market Terminal Pty Ltd v Dominion Insurance Co of Australia), it may be that asserting the document with knowledge of the mistake could from the basis of an estoppel preventing that party from seeking the remedy (Cf. Standard Portland Cement Pty Ltd v Good). For the purposes of rectification, evidence of a common intention not recorded in the final document is treated as an exception to the parol evidence rule. Note: A document may be rectified if, by an honest mistake, incorrect material is inserted (Warburton v National Westminster Finance Aust. ) ) Refuse specific performance: Even where the circumstances do not involve a common mistake of fundamental nature, the court may, in its discretion, refuse a decree of specific performance where it would be a hardship on the promisor to specifically enforce the contract (Dell v Beasley). 5. Mutual mistake Common Law The position at common law depends upon whether any meaning may be objectively ascribed to the parties’ apparent agreement. The court must try to ascertain the sense of the promise from an objective point of view; that is how would a reasonable person understand the contract? (Smith v Hughes). If it is not possible for a reasonable third party to prefer one meaning over the other, the mutual mistake will render the contract void (Raffles v Wichelhaus).
On the other hand, where the parties’ agreement may bear a particular meaning objectively, that meaning will be imputed to it (Houlahan v Australian and New Zealand Banking Group Ltd), and the contract (given that meaning) is valid and binding on both parties (Goldsborough Mort Ltd v Quinn). Equity In equity, as neither party knows or ought to know of the other’s mistake, there is no unconscionability to justify relief in equity (Riverlate Properties Ltd v Paul). At most, equity may withhold specific performance where particular hardship would result from holding a party to a contract (Malins v Freeman). Since equity generally follows the law, where the common law assigns a meaning, that meaning will also be assigned in equity (Tamplin v Jones). 6. Unilateral mistake
This is where one party is mistaken and the other knows, or ought to know of the mistake (Hartog v Collin & Shields; Smith v Hughes). The appropriate test is the objective test and that in applying such a test, the contract is not void at common law (Taylor v Johnson). However, the contract may be voidable where the conduct of the party not mistaken amounts to “sharp practice” (Taylor v Johnson) Common Law Under common law, there is no remedy for a unilateral mistake except in special cases of mistaken identity and non est factum. Therefore, the common law does not render a contract void for unilateral mistake unless one of the two exceptions can be proved (Taylor v Johnson). ) Mistake as to identity: Generally, when a party is mistaken as to the identity of the other party to the contract, the issue is one of the proper construction of the offer. Where one party claims to be mistaken as to the identity of the other party, the agreement will be void where: 1. At the time of the apparent agreement, the identity of the other party was material (Boulton v Jones) 2. There was an intention to contract, not with the other party, but with a separate entity (Cundy v Lindsay) 3. This intention was known or ought to have been known to the other party The effect of a unilateral mistake as to identity is to render the contract void (Porter v Latec Finance (Qld) Pty Ltd).
Therefore, in no circumstances will a third party dealing with a rogue (who is in on the scam) acquire good title in goods that the rogue may have obtained under a contract formed by mistaken identity. A contract may also be void for mistaken identity where a plaintiff does not want to contract with someone but is deceived by a rogue into doing so (Said v Butt). Face to face dealings – where a contract is made by parties in each other’s presence, there is a rebuttable presumption that the contract is concluded with the person who is present (Phillips v Brooks Ltd). The steps necessary to rebut the presumption will depend upon an assessment of the particular circumstances of the case. The question will turn on the evidence and its sufficiency to rebut the presumption: ) Mistake as to the nature of the contract (non est factum): This plea seeks to accommodate two competing policy considerations – the injustice of holding a person to a bargain to which they have not consented to and the necessity of holding a person to a promise after they have signed the document. In order to plead non est factum, three conditions are necessary: 1. The claim must belong to the class of persons able to recover under the plea. Lord Reid suggested that the plea is available to “those who are permanently or temporarily unable through no fault of their own to have without explanation any real understanding of the purport of a particular document, whether that be from defective education, illness or innate capacity”: Saunders v Anglia Building Society. 2.
The claimant must show that the document was signed in the belief that it was radically different from what in fact it was. 3. As against innocent persons, the failure of the claimant to read and understand must not be due to carelessness on his part (Petelin v Cullen) The claimant’s mistake may be as to the character of the document or as to its contents must not as to its legal effect (Gallie v Lee). There is a heavy onus on the person seeking to rely on the plea (Petelin v Cullen). The plea is often argued in circumstances where a rogue misrepresents the nature of the document and thereby obtains a benefit that he or she may then try to transfer to a third party.
Where the plea is successful, the contract is void ab initio, therefore no title passes to the rogue and any third party interests would be defeated. On the other hand, where the plea is not established, the right to rescind the contract is still limited by the limitations on the right to rescind – hence, the right must be exercised promptly (e. g. before a third party’s rights have interfered). (1) Relevant class The relevant class is restricted to those who: • Are unable to read, through blindness or illiteracy, and who must rely on others for advice as to what they are signing; or • Through no fault of their own are unable to have an understanding of the purport of the particular document (Petelin v Cullen).
The class may include a foreign person who is unable to speak English very well (Lee v Ah Gee); or it may include one who is suffering from a mental incapacity, provided that the effect of the incapacity is that the claimant is neither minded nor intending to sign a document of that character or class (Gibbons v Wright). On the other hand, the plea will fail where the effect of the mental incapacity is that the person signing the document has no ability to understand or evaluate the document. In such a case, the contract is only voidable (i. e. the contract can be set aside or rescinded), not void (Gibbons v Wright). In an exceptional case, it was held that the class included a person of full capacity who had been misled by a trusted friend to believe that they were merely witnessing the friend’s signature on highly confidential documents that had material parts covered up (Lewis v Clay). (2) Radically different
Whether a document is radically or fundamentally different from what the signer thought it to be is a question of fact to be determined subjectively (Petelin v Cullen). The document must be ‘essentially different in substance or in kind from the transaction intended (Gallie v Lee). However, the plea will not succeed where the document, while differing from what the signer believed it to be, is essentially the same (Saunders v Anglia Building Society). document actually signed. (3) Carelessness of claimant This third element is only operative in some circumstances and refers to a mere failure to take reasonable precautions in ascertaining the character of a document before signing it (Petelin v Cullen).
Where a document is signed with blank spaces to be filled in at a later date, there may be an indication that the signer has been careless, thereby excluding the plea, even though the first two elements of belonging to a relevant class and believing the document to be radically different have been demonstrated. Equity In equity, the contract may be treated as voidable, it may be rectified or the remedy of specific performance may be withheld. a) Voidable contract: Equity will set aside the contract in the case of unilateral mistake where the court is of the opinion that there has been ‘sharp practice’ – that is, it is unconscientious for parties to have the legal advantage they have obtained by virtue of the contract (Torrance v Bolton).
Special circumstances are ordinarily required before it would be unconscientious for one party to enforce it against another party who was under a mistake as to its terms or subject matter (Taylor v Johnson). Three elements must be shown – (Taylor v Johnson): • A party enters into a written contract under a serious mistake about its contents in relation to a fundamental term • The other party is aware or has reason to be aware that circumstances exist that indicate the first party is entering the contract under some serious mistake or misapprehension • The other party deliberately sets out to ensure that the first party does not become aware of the existence of his or her mistake or apprehension
What amounts to ‘sharp practice’ may depend upon the individual circumstances of the case. ‘Sharp practice’ is not limited to the formulation in Taylor v Johnson. Equitable relief may be granted wherever it would be unconscientious or inequitable to hold the mistaken party to the contract. For example: • Something less than actual knowledge of the mistake may suffice, such as a strong suspicion (Misiaris v Saydels Pty Ltd) or having ‘reason to know’ (Everglades Country Club Ltd v Eadie) of the mistake. • Wilful blindness or wilful failure to make enquiries that an honest and reasonable person would also suffice: Commission for the New Towns v Cooper (Great Britain). In some cases, silence coupled with knowledge of the mistake, if not amounting to ‘deliberately setting out to ensure’ the mistaken party does not become aware, may nevertheless be unconscientious in the circumstances (Leibler v Air New Zealand Ltd). Limits: Once again, the limits on the right to rescind still operate (i. e. affirmation, lapse of time, impossibility of restitutio in integrum, innocent third party rights have interfered). b) Rectification: Equity may rectify a written document where only one party mistakenly believes that the document accurately reflects the parties’ agreement and the party who is not mistaken engages in unconscionable conduct or ‘sharp practice’ (Riverlate Properties Ltd v Paul).
The elements for rectification are as follows – (Thomas Bates & Son Ltd v Windham’s (Lingerie) Ltd): • The plaintiff wrongly believes that the written document contains a particular term or does not contain a particular term • The defendant is aware of the plaintiff’s wrong belief • The defendant says nothing to correct the plaintiff’s wrong belief • The mistake either provides an advantage to the defendant or is a detriment to the plaintiff Although the elements are cast in terms of actual knowledge, it seems that it is sufficient if the defendant ‘must have known’ or ‘strongly suspects’ that the plaintiff is making a mistake (Misiaris v Saydels Pty Ltd).
It is yet to be determined whether the Court should be entitled to give the party not mistaken the option of having the contract rectified (thus preserving the contract) or set aside (thus destroying the contract) (Garrard v Frankel; Paget v Marshall; Coxon v Masters). VOID AND ILLEGAL CONTRACTS 1. Introduction Certain contracts, or classes of contract, are regarded as void or illegal. This may be by virtue of contravening public policy at common law or by virtue of a provision in a statute. There are therefore four broad divisions in this area: 1. Contracts void by statute 2. Contracts void at common law on the grounds of public policy 3. Contracts illegal by statue 4. Contracts illegal at common law on the grounds of public policy 2. Void Contracts
Contracts which contravene a provision in a statute or are contrary public policy at common law, but to which the ex turpi causa principle (neither party may sue on or obtain rights under the contract) does not apply. (i) Contracts void by statute A statute may expressly provide that a particular contract is void. For example, the Trade Practices Act 1974 (Cth) provides that clauses purporting to exclude, restrict or modify the liability of a corporation are void. The effect is a question of statutory interpretation. (ii) Contracts void on the grounds of public policy There are three categories which are void at common law on the grounds of public policy – contracts in restraint of trade, contract containing clauses that attempt to oust the jurisdiction of the court and contracts prejudicial to the status of marriage. ) Contracts in restraint of trade: A restraint of trade is a promise by one party (the covenantor) to give up a freedom that he or she would otherwise enjoy, for the benefit of another party (the covenantee) (Amoco Aust v Rocca Bros Motor Engineering Co). Two main examples of restraints of trade have been restraints in: • Contracts for the sale of a business (vendor agrees with the purchaser that he/she will not set up a rival business within a particular radius for a period of time): Nordenfelt v Maxim Nordenfelt Guns Ltd • Contracts of employment (employee agrees with employer that should the employment end, the employee will not work with a rival employer for a period of time): Curro v Beyond Productions Pty Ltd. • They may also exist in a wide array of other contracts, including: o Partnership agreements (Bridge v Deacons) Franchise agreements (KA & C Smith Pty Ltd v Ward) o Agreements to take supplies from one source, and ‘salary caps’ and ‘player drafts’ used by sporting organisations to encourage fair competition (Buckley v Tutty) All contracts for the restraint of trade are prima facie void (Nordenfelt v Maxim Nordenfelt Guns & Ammunition). This presumption may be rebutted by showing that the restraint was justified. A restraint may be justified if it is reasonable in the interests of: (Buckley v Tutty) • both parties, having regard to the transaction as a whole; and • the public The burden of proving reasonableness in the parties’ interests usually lies on the covenantee (the party benefiting from the restraint).
The onus then shifts, and the burden of proving unreasonableness in the public interest is usually on the covenantor (the party subject to the restraint): Amoco Aust v Rocca Bros Motor Engingeering Co. Reasonableness Justifying a restraint: (1) Reasonableness with reference to the interests of the parties First step in attempting to justify a restraint of trade is to determine whether it is reasonable in the interests of the parties to the particular restraint. Whether a restraint is reasonable is a question of law for the judge. Reasonableness as interests between the parties involves a consideration of two issues: (Amoco) • Whether the person seeking to rely on the restraint (covenantee) has a legitimate interest; and • Whether the restraint goes no further than necessary to protect that interest
Whether the person seeking to rely on the restraint has a legitimate interest to protect depends on the nature of the contract: • Sale of business – legitimate interest will be to protect the goodwill of the business from competition by the seller (Bacchus Marsh Concentrated Milk Co v Joseph Nathan & Co). • Employment contract (restraint on the subsequent employment of a former employee/partner/franchisee) – legitimate interest may be in the nature of goodwill, the prevention of solicitation of clients or customers (Peters American Delicacy Co v Patricia’s Chocolates and Candies), or confidential information such as secrets of the business, processes and products (Bacchus Marsh Concentrated Milk Co v Joseph & Nathan Co). A legitimate interest may also be found in ensuring the stability of a business or industry (Qld Co-Operative Millin Association v Pamag) – or, in the case of a sporting association employing a ‘salary cap’ or ‘players draft’, a legitimate interest in having an even competition between the participating teams (Buckley v Tutty). • In contracts, purchaser of capital equipment – no legitimate interest in preventing competition from a later purchaser of similar equipment from the same supplier (ICT Pty Ltd v Sea Containers Pty Ltd: covenant by builder of seagoing catamaran ferries not to sell similar ferries to covenantee’s competitors struck down). Whether the restraint does no more than to provide protection of the legitimate interest depends on balancing a number of factors which taken into account all the terms of the agreement and all of the circumstances (Amoco case): The scope of the restraint, in terms of area and duration – the wider the restraint geographically and the longer the restraint time wise, the more likely that the restraint will be unreasonable (Butt v Long) • The activities covered by the restraint – if the restraint purports to restrict activities that are unrelated to the covenantee’s interest, the restraint is more likely to be unreasonable (Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co) • The relative bargaining power of the parties – it will be relevant, but not conclusive, if the covenantee is in a stronger bargaining position than the covenantor (A Schroeder Music Publishing Co v Macauley). The court may show greater latitude (leeway) where the parties have equal bargaining powers (Amoco) although a restraint may still be unreasonable in this case (Creamoata v Rice Equalization Association) • The consideration paid in exchange for the restraint – the court may be prepared to allow a greater restraint where the covenantor has received a large consideration for the restraint (Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co) • The context of the contract – the setting in which the contract takes place may be an important consideration.
For example, a restraint may be upheld where it is inserted into a partnership agreement between solicitors who were experienced in restraints (Bridge v Deacons) The courts tend to take different attitudes to the assessment of the various relevant considerations depending up on the type of contract. Examples of contracts containing restraints on trade: • Master and servant agreements As between master and servant, interests which the master is entitled to protect are his/her trade secrets, including manufacturing processes (Foster Ltd v Suggett), and his/her business connections, if any, of which the servant has knowledge (Herbert Morris Ltd v Saxelby).
The period and area of restraint are particularly relevant: Mason v Provident Clothing Co. A restraint for life is not necessarily void: Fitch v Dewes. • Contracts of exclusive service A contract for exclusive service is not necessarily invalid (Warner Bros. Pictures Inc. v Nelson). An agreement between employers restricting the employment of each other’s former employees may be void (Kores Co Ltd v Kolok Co Ltd). Relief may be granted against both an employer and an association of employers (Eastham v Newcastle United Football Club Ltd; Buckley v Tutty). A restraint imposed upon rugby league players when transferring was considered justified and reasonable (Adamson & Others v New South Wales Rugby League Ltd and Others).
Because employees often have only their labour to trade, the courts normally adopt a strict approach to judging reasonableness of a restraint in an employment contract that restricts the activities of former employees (Forbes v NSW Trotting Club Ltd). However, while an employer is entitled to protection against having its clients solicited or enticed away by a former employee, it cannot claim protection against competition as such. General skill and knowledge that an employee obtains in the course of employment do not qualify as ‘trade secrets’ capable of being protected by a reasonable restraint (Drake Personnel Ltd v Beddison). • “Solus” or exclusive dealing agreements
A “solus” (single source of supply) agreement may be in restraint of trade (Esso Petroleum Co Ltd v Harpers Garage Stourport Ltd). This occurs, whereby, a retailer agrees to take its supplies exclusively from a particular manufacturer. The courts tend to uphold the restraint where the parties have bargained at arm’s length. However, factors such as the length of the restraint and an obligation to purchase minimum quantities regardless of market conditions may render an exclusive dealing arrangement unreasonable: • Contracts for the sale of a business A restraint imposed on the vendor of a business is more readily upheld by the courts than one imposed on a servant.
Without such a restraint the vendor would not get a fair price and the purchaser would not get the benefit of his purchase (Esso Petroleum v Harper’s Garage). But there must be a genuine sale (Vancouver Malt Ltd v Vancouver Breweries Ltd). The purchaser is only entitled to protect the business bought (Nordenfelt v Maxim Nordenfelt Guns Ltd). Again, the area and duration of the restraint are relevant. Justifying a restraint: (2) Reasonableness with reference to the interests of the public It is rare that a restraint satisfies the first requirement (reasonable in the interests of the parties) but is not reasonable in the interests of the public (Amoco).
The validity of a restraint must be decided as at the date of the agreement imposing it (Lindner v Murdock’s Garage). Accordingly, the Court will take into account the probabilities of what might have occurred, rather than what actually occurred (Amoco case). Restraints of trade in statute: Restraints of trade may also fall within the ambit of s 45 TPA which prohibits corporations in trade or commerce from entering into or giving effect to any contract arrangement or understanding which is an exclusionary provisions or which has the purpose or would likely to have the effect of substantially lessening competition. However, s 51(2) provides that s 45 will not apply in certain types of contractual provisions including: A provision in a contract of service or for services restricting the work in which a person may engage during or after termination of the contract (s 51(2)(b)) • A provision in a contract of partnership relating to competition between the partnership and a partner before or after cessation of the partnership (s 51(2)(d)) • A provision in a contract for the sale of a business that is solely for the protection of the purchaser in respect of the goodwill of a business (s 51(2)(e)) The effect of s 51(2) is that a restraint of trade provision which falls in one of these categories will not breach s 45 unless it is an unreasonable restraint of trade at common law. ) Attempts to oust the jurisdiction of the court: At common law it is contrary to public policy to attempt to deny access to the courts by one or both parties. Thus, a contract which purports to destroy the right to submit questions of law to the courts is void at common law on the grounds of public policy (Baker v Jones; Lee v Showmen’s Guild of G. B. ). For example a contract providing that disputes will be resolved by arbitration in London and no where else is an attempt to oust the jurisdiction of the court and will be contrary to public policy. However, the parties are still entitled to agree that any dispute arising between them may be settled by a particular person or body, provided that recourse to the courts remains open for determination of questions of law.
Thus, a clause requiring disputes to first be referred to arbitration, which are upheld: Scott v Avery; s 10(1) Arbitration Act 1973). A clause seeking to oust the jurisdiction of the court is confined to the clause itself and has no capacity to detrimentally affect the contract as a whole. Therefore, the clause can be severable, leaving the remainder of the contract binding on the parties (Lee v Showmen’s Guild of Great Britain). c) Clauses prejudicial to the status of marriage: Contractual provisions that are deemed prejudicial to the status of marriage are regarded as being contrary to public policy (Newcastle Diocese Trustees v Ebbeck). Thus, for example, a total restraint on marrying is void (Lowe v Peers).
Contracts held prejudicial to the status of marriage and thus void, included: • Contracts imposing a total restraint on marriage (Lowe v Peers); • Contracts providing for future separation of married couples (Money v Money); and • Marriage brokerage contracts pursuant to which money is paid in return for the organisation of a marriage (Hermann v Charlesworth) This is a category of public policy of diminishing significance in modern society, almost to the point of irrelevance. 3. Illegal contracts Illegal contracts are strictly defined as those to which the ex turpi causa principle applies. This may occur where the contract is expressly or impliedly prohibited by statute, or where there is a contravention of public policy at common law where the contract is for an illegal or immoral purpose.
Where there is a statutory prohibition, the questions to be addressed are – (Fitzgerald v FJ Leonhardt Pty Ltd): • Does the statute expressly prohibit the contract as formed or because of the way it was performed? • If not, does the Act, by necessary inference, prohibit the contract as formed or because of the way it was performed? • If not, should the court, as a matter of public policy allow the plaintiff to invoke its process to enforce the contract? Questions one and two are questions of construction. Where no statute is involved, the only question to be addressed is whether, as a matter of public policy, the court will lend its process to the plaintiff. (i) Contracts illegal by statute
A contract may be rendered illegal by statute expressly or impliedly. Express prohibition A contract may be expressly prohibited by a statute as formed (eg. a statute states “contracts entered into for the capture of stray dogs are prohibited”) or as performed (eg. a statute states “contracts entered into for the capture of stray dogs are prohibited in the absence of the catcher possessing a current licence): Re Mahmoud and Ispahani. A rule of thumb regarding the difference between a prohibition as formed or as performed is that: • A prohibition as formed could not have been performed without infringing the prohibition • A prohibition as performed can be performed without infringing the prohibition
A statute may expressly provide that a contract in breach of its terms, as formed or performed, is rendered illegal (Anderson Ltd v Daniel). Similar, a statute may expressly prohibit the formation of a contract by forbidding some element in its formation, such as ‘agreeing’, ‘offering’, ‘selling’, or ‘undertaking’ (Burmic Pty Ltd v Goldview Pty Ltd). Implied prohibition In some cases, although the statute does not expressly prohibit a contract, a court may be prepared to hold that by its terms, the statute impliedly prohibits the contract, as formed or as performed. Whether a contract, or its performance, is impliedly forbidden is a question of construction of the statute (St John’s Shipping Corp v Joseph Rank).
The effect of the legislation must be derived from its language and its objective (St John’s Shipping Corp v Joseph Rank). Relevant factors in construing a statute include: • Where a penalty for contravention is imposed, if the object of the penalty was to increase the revenue, the contract is probably legal (Cope v Rowlands) • Where the object of the penalty was to protect the public, the contract is probably illegal (Pretorius v Muir & Neil). • Whether the scope and purpose of the statute will be sufficiently served by the penalties imposed and the inconvenience to the public or to commercial life, if the contract is held to be void (First Chicago Australia v Yango Pastoral Co). Any inconvenience to the public or to commercial life (as opposed to the parties to the contract) if the contract is held to be void (First Chicago Australia v Yango Pastoral Co). (ii) Contracts illegal on grounds of contravening public policy The old approach was to set out a number of distinct “heads” of public policy, which, if contravened, rendered the contract illegal. No new “heads” could be added to the list, but those on the list could sometimes be stretched to accommodate a worthwhile case. Today, the High Court seems to favour a flexible discretion whether to refuse to enforce a contract on the ground that it is immoral or illegal and therefore contrary to public policy at common law (Fitzgerald v Leonhardt).
The old fixed list of “heads” may now serve as useful examples of cases held to be immoral illegal and therefore contravene public policy. A non-exhaustive list of examples includes: a) Contract to commit a crime or tort or a fraud on a third party – This type of contract would be regarded as contrary to public policy and is therefore illegal. Thus, for example, no action may be brought on a contract for the murder of a person (Cowan v Milbourn). It is immaterial whether the criminal offence is one created by common law or by statute (Electric Acceptance v Doug Thorley Caravans) and it appears that knowledge of the particular law contravened is not necessary (Waugh v Morris).
However, the commission of the offence must be more than incidental or subsidiary to the foundation or central purpose of the contract (Neal v Ayers). Public policy will also be offended by a contract for the deliberate commission of a tort – as where a contact is designed to defraud a third party (North v Marra Developments Pty Ltd), or to print material known to be defamatory (Apthorp v Neville & Co). b) Contracts to defraud the revenue – Where a contract is designed to defraud the revenue, it is considered to defraud the general public. Thus, where the parties drafted a lease in two separate documents in order to defraud the revenue authorities, the documents will be held to be illegal (Miller v Karlinski). ) Contracts prejudicial to the administration of justice – Contracts that have a tendency to affect the administration of justice are contrary to public policy (A v Hayden). This may include a contract that has the effect of concealing a crime, withholding evidence from a trial or stifling a prosecution for a public offence (Clegg v Wilson). Where an offence is of a public nature, the public has an interest in seeing it prosecuted. Accordingly, a contract to provide compensation for any harm done to a victim by the accused will be regarded as contrary to public policy. The public interest in having the offender prosecuted outweighs the private benefit of the victim in being compensated for his/her injury. On the other hand, where the offence is regarded as being of a private ature, a valid contract may still be made to pay compensation or other consideration in return for the victim promising not to pursue any prosecution for the offence (Kerridge v Simmonds). Contracts involving ‘maintenance’ (a third party who has no interest in the proceedings and no recognised motive for providing advice giving assistance or encouragement to a party to a litigation) (Clyne v NSW Bar Association) and ‘champerty’ (a stranger to proceedings agrees to maintain the action in return for a share in the proceedings or subject matter of the action) (Re Trepca Mines (No 2)) are regarded as being contrary to public policy and therefore illegal. ) Contracts tending to corrupt public officials – Where a contract interferes with the impartial judgment of a public official, it will be regarded as contrary to public policy (Wilkinson v Osborne). It is sufficient if there is merely a potential for conflict of interest – actual corruption need not be shown (Horne v Barber). Public official will include but is not limited to members of parliament or local councillors (Wilkinson v Osborne). e) Contracts prejudicial to national security or foreign relations – Contracts prejudicial to national and even international security are regarded as being contrary to public policy as there is a public interest in the preservation of both (A v Hayden).
This may include a contract entered into with a national country at war with Australia (Ertel Bieber & Co v Rio Tinto Co), or with a person from that country or enemy occupied territory (Anglo-Czechoslovak & Prague Credit Bank v Janssen). Public policy may also be contravened where a contract is entered into for the purpose of assisting a person acting against the laws of a friendly state (Foster v Driscoll). f) Contracts promoting sexual immorality – There is old authority supporting the proposition that contracts involving immorality are contrary to public policy (Pearce v Brooks). This concept requires the court to apply the moral standards of the day. A more relaxed attitude has been shown towards prostitution and the contracts that facilitate it due to society’s changed attitudes (Barac v Farnell).
However, a court may nevertheless deem a particular case to offend contemporary standards and consequently hold the agreement contrary to public policy (H v H – spouse swapping agreement). In the case of contracts illegal at common law, it is sometimes easy to mask the illegality behind a contract that appears on its face (ex facie) to be illgal. For example, A and B might enter a contract for the sale of A’s house, but with an ulterior motive of A avoiding tax. This might be seen as a contract ex facie lawful but nevertheless illegal because it was designed to defraud the revenue. If a contract is ex facie unlawful, eg. a contract to assassinate someone, the contract is regarded as illegal as formed.
If a contract is ex facie lawful (as in the contract between A and B), an additional question is asked whether the intention to break the law is shared – in which case the contract is illegal as formed – or only held by one party (say, A) – in which case the contract is regarded as illegal as performed. (iii) Consequences of illegality Mostly, the same principles apply whether the illegality arises by virtue of statute of by reason of being contrary to public policy. Ex turpi causa principle – no action on the contract: Where a contract is illegal by statute or common law, the ex turpi causa rule applies, that is, no court will lend its aid to someone who founds their cause of action upon and immoral or illegal act. The court says that there is no right to be assisted. Therefore, where a breach of an illegal contract occurs, there is no action available (Holman v Johnson).
In particular: • No damages may be recovered (Adelaide Development Co v Pohlner) • Amounts due under the contract cannot be recovered (Adelaide Development Co v Pohlner) • The contract cannot be terminated for breach (Gerrarty v McGavin) • Specific performance will not be ordered (Robertson v Admans) • An injunction compelling observance of a negative promise will not be ordered (A v Hayden) • Other equitable remedies such as rectification will be refused (DJE Constructions v Maddocks) However, a person who has rendered services under an illegal contract may be able to recover a quantum meruit for those services (Clay v Yates). While illegality may render a contract unenforceable, it has no effect on the passage of title.
Therefore, title to goods delivered or money paid may pass under a contract despite any illegality (Taylor v Chester). Where a transaction is illegal, the rights of a person who is not a party to the illegal contract are not affected by its illegality unless they are a knowing participant in the illegality (Cannon v Bryce). Where a contract is illegal, it is possible for that illegality to taint a wider scheme or enterprise of which it forms part. The question will be whether the illegal dealing was an integral part of the whole arrangement entered into, which could not have been performed without that illegal dealing (DJE Constructions Pty Ltd v Maddocks). Exceptional cases where a remedy is allowed: