Tuesday, June 8, 2010

Contracts - Certainty

Introduction

  • Two aspects to uncertainty
    • Lack of completeness
    • Lack of clarity
  • Only affects essential terms
    • Which must be clear and complete. If not, the contract is said to be ‘void for uncertainty’
    • Essential terms tell the parties what their essential rights and obligations are. They are terms which are at the heart of the agreement.
    • If the terms are complete but their meaning is unclear, it is difficult for courts to establish what constitutes performance and breach.
  • Unclear inessential terms may be:
    • Severed
    • Ignored
  • Uncertainty can be quite closely linked to separate issue of intention to create legal relations because the more uncertain the terms are, the less likely it is that the parties intended for their agreement to be immediately binding.
  • Contracts incomplete in inessential respect
    • Can [occasionally] imply terms


Consequences of Uncertainty

  • Contract a nullity – ‘void for uncertainty’ – NO LEGALLY BINDING AGREEMENT
    • Neither of the parties have to perform their obligations so parties can walk away with impunity.
      • Uncertainty is often used by one of the parties who don’t want to perform the contract
    • Parties can recover monies already paid in restitutionary action for monies had and received on a total failure of consideration [cf TA Sundell v Yannoulatis]
  • When courts attempt to resolve uncertainty disputes, they have to find a balance between certain policy considerations. Biotechnology per Kirby J
    • They want to uphold bargains, particularly when the parties themselves thought they had made an agreement and intended for it to be legally binding
      • So a desire to give effect to the agreement if they can
    • BUT no justification for holding parties to an agreement that they have never objectively settled the terms of.
      • So the courts will draw the line at re-writing the terms of the contract.

Incompleteness

  • Where parties have failed to include all the essential terms they need for the agreement
  • Must be agreement on all essential terms

Examples of Incompleteness

  • Omissions Aiton
    • They may not have realised that a particular term was essential
  • Parties still negotiating
    • Agreement in principle ANZ v Frost
    • Agreements to agree Booker Industries
  • Parties:
    • leave term to one party to decide Godecke
    • give one party unfettered discretion Placer Developments; Biotechnology; Ipex

Incompleteness due to Omissions

  • Omission of essential terms = contract void for uncertainty
  • Whether or not a particular term will be found to be essential depends on the nature of the agreement
    • A term that is so central that they would not have agreed to enter the contract without it


Examples of Essential Terms

  • These terms have been historically found to be essential.
  • Leases – rental (the amount of rent)
  • Contracts for sale and purchase of land, parties, subject matter and price.
    • Hall v Busst, Aiton Industries v Transfield
      • They had a construction contract and had a falling out
      • Aiton sued Transfield for contravention of s 52 TP Act
        • S 52 TPA prescribes deceptive or misleading conduct
      • The problem was that the contract included dispute resolution procedures which required the parties to first negotiate any dispute in good faith and failing that to mediate their dispute before they could issue proceedings
        • Cl 28.1 = negotiation clause
        • Cl 28.2 = mediation clause
      • Transfield sought stay of proceedings and argued that the parties first had to submit to dispute resolution
      • Absence of term relating to payment of mediator’s fees = mediation clause unenforceable and because it was linked to the negotiation clause, they both fell to the ground so they were able to continue with their legal proceedings

Recognised Cases of Implication at Law

  • Courts can sometimes imply terms which are normal or usual for particular kinds of contract.
  • EXAMPLES
  • Contracts for sale and purchase of land
    • Sufficient if parties, subject matter and price
    • All other factors including things such as the settlement date can be supplied by law.
      • “An informal or “open” contract, not dealing expressly with …matters in detail, may be made and be binding…law and equity may fill in the details, providing for whatever is necessary” Cavallari (1952) 85 CLR 20, 5
  • With contracts for the sale and purchase of goods, if the contract does not include a price the court will imply that the price will be a reasonable one.
    • Goods Act 1958 (Vic) s 13
  • The reason for not implying the price of land is because all land is supposed to be unique.
  • Apart from these standard omissions, implication is generally not available to cure omissions that would otherwise prove fatal.

Implication to Cure Omissions

  • Implication on ad hoc or one–off basis may cure omission if meets rules for implication
  • Requirements for ad hoc implication include:
    • Necessary to make contract work
    • So obvious that goes without saying
      • Not met in Aiton
        • Transfield argued that to cure the omission, the costs should be split between the parties
        • But Einstein J rejected this because this particular term was not so obvious that it went without saying
        • In addition it wasn’t possible to sever the mediation clause from the Dispute Resolution cause because they were so closely interrelated and neither term could stand alone. So both clauses were unenforceable.
    • See High Court of Australia in BP Refinery (Westernport) v Shire of Hastings (1977) 180 CLR 266
      • ‘For a term to be implied, the following conditions (which may overlap) must be satisfied:
        • 1) It must be reasonable and equitable
        • 2) it must be necessary to give business efficacy to the contract
        • 3) It must be so obvious that it ‘goes without saying’
        • 4) It must be capable of clear expression
        • 5) It must not contradict any express term of the contract.

Incompleteness because Parties still Negotiating

  • Three scenarios
    • Agreement “in principle” followed by further negotiations. They may think they have reached agreement but their subsequent conduct demonstrates that they still seem intent on negotiating the essential terms.
      • This is more an example of parties not even getting to first base.
    • Agreements to agree in future or agreements to defer agreement
    • Agreements to vary terms in future

Agreement in Principle: ANZ v Frost (1988)

  • Frost offered to design a bicentennial calendar for the bank
  • Involved a case for the offer to design and supply calendars for the bank
  • The parties had been negotiating on this for quite some time
  • The contract was seemingly formed in 1986, but the bank then pulled out after it did some market research telling it it wasn’t likely to be viable
  • Frost brought an action for breach of contract
  • FOUND: Despite the fact that the bank had confirmed its involvement on 16/4/1986, it had also made clear that it wanted a more prestigious product
  • Subsequent to that date, Frost had upgraded the calendar and more discussions ensued, so as at April, the parties had not resolved a whole range of issues
    • Size, paper type etc.
  • HELD: It may have looked like the bank was involved but in fact their subsequent conduct demonstrated that they were still negotiating
  • When courts are looking to see whether or not a contract has been formed or not, it is always possible to look at the circumstances leading up to the conclusion of the contract but also to look at subsequent events in order to establish that the contract was in fact formed. This is often the only way you can know with certainty when the magic moment occurs. Extrinsic evidence is admissible to establish that contract has been formed or varied. See [Brambles]
  • Agreements to Agree

    • Parties “agree to agree” in future [i.e.-defer agreement] on issues such as lease arrangements and rent
      • Lease contains option to renew lease for further 3 years at rent to be decided
    • Parties agree to vary terms in future
      • Contract to supply 60 bikes per month for 6 months and thereafter the number to be determined by parties
    • In both these cases the parties are deferring agreement on essential terms and in both cases the agreement is unenforceable because the parties have not in fact reached agreement at all.
      • At best, there is nothing more than an agreement to agree, a commitment to try and agree, but no enforceable agreement.
    • There are times when agreements to agree can be enforced. (See also below)
      • It is possible to defer agreement on an important issue provided that the contract contains a default mechanism i.e. a mechanism for settling the terms should the parties fail to agree.
        • E.g. a lease with right of renewal, where the parties must settle the terms of their new lease, but in case of failure to do that, it will be settled by a 3rd party arbitrator


    Mechanisms for Settling Terms

    • Agreements to agree enforceable if parties:
      • include default mechanism
        • Booker Industries v Wilson Parking; Godecke v Kirwan
        • Booker
        • The parties had entered into a lease for the building for a car park
        • The lease contained an option for the renewal of the lease
        • Clause 4.01
        • The lessee shall have the right to be granted a further lease of the demised premises for the term of Three (3) Years…upon the same terms and conditions as are herein contained save and except that the rental to be paid by the lessee during such renewed term shall be such rental as may be mutually agreed between the Lessor and the Lessee and failing agreement then such rental as may be fixed by an arbitrator nominated in accordance with the provisions of Clause 3.05 (b) but in any event the rental shall not be less than the rental payable in the last year of the first term. [Clause 4.01]
        • Wilson Parking sought to exercise the option to renew the lease, but Booker Industries wanted out, so they sought to argue that the above clause was unenforceable
        • High Court of Australia accepted that the parties to a contract can in fact leave terms to be settled in the future even essential terms like the rent, provided that, in default of agreement, the rent can be settled by an independent third contract.
        • So have to include a mechanism in options to allow a third party to resolve the contract.
      • include objective formula to regulate future changes
        • BUT the formula itself must be sufficiently clear, so it must be clear in its terms and objectively capable of bearing some interpretation
        • Wenning v Robertson; Upper Hunter
        • This was a contract for the sale and purchase of a closing business for 1350 pounds + stock and trade at valuation (a common term)
        • Court held that the phrase ‘at valuation’ meant a reasonable price and so the phrase was enforceable
      • Formulae can also be very useful where parties want to vary their terms in the future.

    Upper Hunter County District Council v Australian Chilling &Freezing

    • Upper Hunter was a council purchasing electricity at the source and then on-selling it to a range of customers including Australian Chilling
    • The contract contained a price variation clause which was intended to allow the council to pass on to its customers any price increases that were put on it by the electricity providers. So there were a range of clauses including things like CPI, but they were in dispute about clause 5
      • Clause 5 - Price Variation Clause
      • It is agreed that during the term of this agreement if the supplier’s costs shall vary in other respects than has been hereinbefore provided the supplier shall have the right to vary the maximum demand charge and energy charge by writing to the purchaser not less than 14 days before…
    • High Court of Australia HELD that whilst the concept of supplier’s cost was capable of being of being applied in a number of different ways, it was something that nevertheless was capable of being settled by reference to business practice
      • SO, it may not have been the perfect clause, but it wasn’t uncertain
      • The concept of the cost of doing something provided a sufficient criterion by which the rights of the parties could be determined.

    Other Examples of Incompleteness

    • Vital matter left to one party to determine – a corollary of agreements to agree
      • So not permissible for parties to enter into lease at a rent to be set by the landlord
      • Godecke v Kirwan per Gibbs J
    • Promise to perform accompanied by words which show promisor has unfettered discretion to perform
    • When a party has completely unfettered discretion to perform an aspect, it can be seen as an example of incompleteness because it is not possible that the party will not perform at all.
      • If the term is an essential one, then can be used to argue whole contract is void for uncertainty
        • Placer Developments
      • Can also be used to argue consideration illusory
      • So a particular term may be unenforceable because for that term a party hasn’t provided good consideration
        • [so no consideration for counter-promise]
    • SO you can use either uncertainty or illusory consideration to analyse terms that give a party unfettered discretion. The way that you choose will be dictated by what you are looking to achieve.

    Qualification to Discretion Principle

    • Acceptable if discretion involves latitude of choice as to the manner in which they will be carried into effect
    • So there must be parameters on the exercise of that discretion. i.e. as long as its not completely unfettered
      • Thorby v Goldberg; Ipex (Transfer of I.T. business case)
    • Contrast “contract to paint a portrait in style chosen by artist” with “contract to paint portrait if painter feels like it.”

    Uncertainty in Meaning

    • Nearly every case involves some interpretation dispute.
    • Basic approach is to favour an interpretation which will uphold contracts Upper Hunter; Whitlock v Brew
      • These principles were applied in Upper Hunter
      • Australian Chilling attempted to argue that a particular clause was uncertain because it wasn’t clear what the meaning of the word costs involved, and how those costs could be quantified
      • HELD: the mere fact that the clause could produce in its application more than one result did not mean that it was void for uncertainty
      • The question of what things could cost could be sorted out by ‘ordinary business concepts’
      • No narrow or pedantic approach was justified
      • Demonstrates that courts were bending over backwards to maintain the contract.
      • Also demonstrates it is easier to run an argument if you are on the high moral ground
    • Ambiguity not same as uncertainty in meaning Upper Hunter

    o Clause must be ‘so obscure and incapable of any definite or precise meaning that court unable to attribute to parties any particular contractual intention’. G Scammel and Nephew Ltd v HC & JG Ouston [1941] AC 251, 268

    Whitlock v Brew

    • The High Court of Australia found that the contract was void despite the fact that the purchaser was simply looking for a way out of the contract to get his money back
    • This was a simple contract for sale and purchase of land between Whitlock and Brew
    • The land had been used for a long time as a petrol station
    • Beforehand, Whitlock had had ongoing leases with Shell for the use of the land as a petrol station
    • Independently of those leases, he had given a guarantee to Shell that the land would continue to be used as a petrol station for the next 20 years
      • When you sell a block of land and the land is tenanted, you have two options
        • To sell it subject to an existing tenancy
        • To sell it with vacant possession
          • If you do that and have given an undertaking to a third party as to how the land will be used, then you have to be sure that there is something in the terms of sale to ensure that you yourself won’t be in breach
    • In this instance, the contract of sale contained a clause which compelled Brew to enter into a lease with Shell
      • Without which Whitlock would have been in breach of its guarantee with Shell
    • Clause 5 provided that the purchaser would enter into a lease with Shell Oil upon such reasonable terms as commonly govern such a lease.
    • But there are no terms in common use that govern such a lease
    • High Court of Australia HELD: it wasn’t clear what the rent would be and it wasn’t clear how long the lease would have to last
      • So a critical term
      • As a consequence the contract was a nullity
      • Kitto J, ‘The contract would have been enforceable, if a set of general terms had in fact been in common use but this had not been established by the vendor.’
      • So this was not enough to tell us how much rent should be paid and how long the lease should last for.
    • Sometimes it can be possible to sidestep an unclear term by including an arbitration clause, and this contract included one, but it only enabled the arbitrator to resolve disputes relating to the interpretation or operation of clause 5
      • SO does this enable the arbitrator to make decisions about how much rent or how long the lease should last for? (Could this be made clearer?)
    • HELD: this clause didn’t go far enough in allowing the arbitrator to substitute his/her decision in deciding the amount of rent or the length of the lease
      • SO again, fine to leave things to a third party but have to make sure that you give them enough power to prevent the contract being found void for uncertainty

    Severance of Inessential Terms

    • If a term is uncertain, the contract will be struck down if it is essential (it goes to the heart of the contract)
    • Court can sever or ignore inessential uncertain terms (peripheral or non-critical)
      • Whitlock v Brew; Fitzgerald v Masters
    • How does one establish whether a clause is essential or not?
      • No test depends on the parties’ subjective intentions but rather on these intentions as objectively construed
      • So enables the courts to look at
        • The nature of the contract
        • The relationship between the parties
        • The subject matter
        • All the surrounding circumstances
      • And determine what a reasonable party to this contract would have considered an essential term
        • So enables the court to take a wide-ranging view as to what is/isn’t essential
      • Whitlock v Brew
        • So in determining whether a term is essential or not then you look at the intentions of the parties
        • BUT when you are attempting to garner the intentions of the parties you should only be able to look at the terms of the contract themselves
          • THIS IS REALLY OLD-FASHIONED
    • Today, a court will definitely have regard to the overall factual matrix of the agreement, the circumstances surrounding its execution including the nature and object of the agreement in order to work out whether a term is essential or not.
      • BUT Whitlock v Brew would a contract shorn of a particular term be a different contract to the one actually contemplated by the parties?
        • This was not a case where the parties were arguing that the clause should be severed, but it is clear that they would not have entered into that agreement without that clause so that’s why the court found that the particular term was essential
    • SO Depends on intention of parties to be gathered from instrument as whole [not extrinsic/external evidence]
      • Is contract shorn of offending clause different sort of sale from that which parties contemplated?

    When terms are severed or ignored

    • Sometimes it can be found that a particular term is not essential so can be severed or ignored

    Fitzgerald v Masters

    • Contract for sale and purchase of half interest in farm on terms
      • It was a terms contract: one where the parties agree on a price, pay a deposit and then the balance is paid in instalments
      • In a terms contract, the purchaser gets an equitable interest in the land. They’re not the legal owner but they still have a right in relation to that land which courts of equity will protect, in particular through an action for specific performance
    • Purchaser brought an action for specific performance of that contract 26 years after the sale was concluded
      • Purchaser gets equitable interest in land on signature
      • Legal title does not pass til final payment [settlement]
    • FACTS After the initial purchase, the purchaser moved his family onto the farm for about three years after which it became apparent that it was not big enough so the vendor asked his friend to leave
    • The vendor then died, 26 years later the purchaser brought an action for specific performance
    • At that time the farm was worth a lot more money, so the executors were trying to argue that the contract was unenforceable, partly because some of the terms were unenforceable
    • The parties had drawn up their own agreement, but they wanted to be able to rely on terms in another professionally drafted contract to supplement their own terms (incorporating terms by reference)
    • In this instance they wanted to include the part of the Real Estate Institute’s terms relating to sale of land under the Crown Lands Act
      • Cl 8 - The usual conditions of sale in use or approved of by the Real Estate institute of New South Wales relating to sale by private contract of lands held under Crown Lands Act shall so far as they are inconsistent (sic) herewith be deemed to be embodied herein.”
    • Two Problems
    • Incorporation of standard form terms only to extent inconsistent with parties’ own terms
      • courts can supply, omit or correct words to avoid absurdity or inconsistency Fitzgerald v Masters at 436-7
    • Non-existence of standard form contract in place relating to sale of land under Crown Lands Act
      • BUT Held: court could sever as not essential term
      • This was supplementary to their original agreement
      • It is ridiculous to think that they intended these kinds of terms to over-rule their own terms, they were intended simply to ensure the performance of their normal terms
      • It was an inessential term so they were going to ignore it.

    Other Issues [not covered in lecture]

    • Had parties intended to abandon contract in 1932?
      • Equitable interest not lost by mere inaction
    • Was it inequitable to grant specific performance?
      • Delay of 25 years
      • Purchaser’s non-payment of balance of price

    That had been done at the vendor’s request

    Waiver

    • Waiver = one party electing not to enforce clause in their favour
    • Party can waive an uncertain term but only where uncertain clause inserted exclusively for benefit of one party, can be waived. Whitlock
      • You can’t waive a term that is there for both parties’ benefit
        • Because that is an effort to alter the terms of the contract
    • Waiver of clause 5 not practical option for vendor given contract of guarantee with Shell – he had to guarantee that the land would be used as a lease with shell.
      • [Unclear whether can waive only inessential terms]
        • Grime v Bartholomew [1972] 2 NSWLR 827-no
          • If a term in the contract is uncertain and the term is essential then the contract is a nullity, so nothing there to waive
        • But cf Bradford v Zahra [1977] Qd R 24-yes
          • Contained a contingent condition (a term which made the contract subsequent to the purchaser’s ability to raise funds)
          • That term was drafted in such an obscure way that it was meaningless, the vendor waived it and the court upheld the contract
          • Because the purchaser had found funds
    • Waiver is something that will seldom be applied in cases of uncertainty

    Godecke v Kirwan

    • This case demonstrates that where there is a will to uphold a contract, there is a way
    • Preliminary agreement for sale and purchase of land
    • Agreement provided that parties to execute further more formal contract

    Key Provisions

    • Possession shall be given and taken on settlement upon signing and execution of a formal contract of sale within 28 days of acceptance of this offer. [Clause 3]
      • Indicates that the parties intended that a more formal agreement would be entered into by them
    • If required by the vendor/s I/we shall execute a further agreement to be prepared at my costs by his appointed solicitors containing the foregoing and such other covenants and conditions as they may reasonably require. [Clause 6]
      • (The vendor’s solicitor might reasonably require)???
    • Parties also sought to incorporate other terms into their contract by reference
      • Terms Incorporated by Reference
      • Offer “subject to conditions of Twenty-sixth Schedule of Transfer of Land Act 1893”

    Issues

    • Vendor wanted not to go ahead with the preliminary agreement and attempted to argue that it was unenforceable
    • Did parties intend preliminary agreement to be immediately binding?
      • He argued no, because it was a preliminary pre-contractual bargain
    • Was preliminary agreement an “agreement to agree”?
      • So unenforceable? They were leaving it to the vendor’s solicitor to add terms to the contract
    • Were terms clear in meaning and content?
      • Preliminary agreement was uncertain in meaning because the terms the parties had included were inconsistent with the 26th schedule

    HC held:

    • As to first issue, language bespoke intention to be bound immediately
    • As to second issue, it was not an agreement to agree, it was acceptable to leave terms to third party solicitor.
      • In addition, it argued that cl. 6 did impose some parameters, they had to be ‘objectively reasonable’
        • So you can leave it to a third party to do whatever you like
        • A contract will not be void for uncertainty because a 3rd party has been granted unfettered discretion
    • As to third issue, court will incorporate terms by reference only to extent that consistent with express terms
    • SO demonstrates when one intends to run uncertainty you have to be very certain and ensure that that is not your only stilt. Courts don’t like shirkers.

    Agreements to “negotiate”

    • Is an agreement to negotiate in good faith enforceable? – This is a very factually dependent situation.
    • Two options:
    • 1) Agreements to negotiate a further contract in good faith. May be enforceable but not always
    • Because courts don’t enforce agreements to agree, courts in the UK do not enforce agreements to negotiate towards a substituted agreement
    • In Australia, the case is a little different
      • Coal Cliff Colleries
        • Two members of NSW CA, accepted in some cases an agreement to negotiate might be upheld
        • BUT it will depend ultimately on the particular terms of that agreement
        • Justification: agreements to negotiate are not agreements to agree
        • Rather they are agreements to try and reach an agreement
        • SO rationale parties are not agreeing that they will reach a further agreement.
        • This means that if the parties do in fact go ahead and negotiate and fail to reach an agreement, then neither party will be in breach of an agreement to negotiate provided that they’ve acted in good faith
        • Good faith = act reasonably
        • So an agreement to negotiate is potentially enforceable but will depend on the specific terms of the agreement under review
    • 2) Agreements to negotiate a dispute in good faith enforceable
    • This is where a dispute is already on foot but parties have agreed that they must negotiate in good faith before they issue legal proceedings
    • A contract which contains a clause which commits the parties to an ADR forum before proceedings to litigate
    • These are now in common usage and the courts have found them to be enforceable
      • Aiton Industries
        • Einstein held that agreements to negotiate in good faith are not uncertain
        • But all discussion in this case is obiter
      • Computershare v Perpetual Registrars
        • Warren CJ Confirmed that agreements to negotiate in good faith are also enforceable

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