Course Notes J McMullan

7/23/2019 Course Notes J McMullan

1/159

1

U i it f M lb

UNIVERSITY OF MELBOURNECOURSE NOTES

ENGINEERING CONTRACTS AND PROCUREMENT

(ENGM90006)

2015

10 August 2015 Principles of contracts for engineering delivery

17 August 2015 Forms of contract

24 August 2015 Documentation, terms & conditions, remedies

31 August 2015 Quality, defects, default, termination

7 September 2015 Payments and variations

22 October 2015 Contract dispute resolution & negotiation

J McMullan

7 August 2015


2/159

University of Melbourne

Engineering Contracts and Procurement

INDEX

PRINCIPLES OF CONTRACTS FOR ENGINEERING DELIVERY

1 CONTRACT PRINCIPLES 1

1.1 Formation Of the Contract 1

1.2

Terms of the Contract 71.3

Misrepresentation 12

1.4 Mistake 13

1.5 Duress/Unconscionable Contract 15

1.6

Contract Remedies 16

2 NON-CONTRACT REMEDIES 20

2.1 Negligence 21

2.2

Misleading and Deceptive Conduct/Competition and Consumer Act 2010 (Cth) 31

2.3

Restitution/Quantum Meruit 35

2.4

Promissory Estoppel 44

FORMS OF CONTRACT

3

FORMS OF CONTRACT 50

3.1

Types of Contract 50

3.2 Fixed Price/Cost plus Contracts 54

3.3

Design & Construct Contracts 57

3.4

Design Build Operate Contracts 65

3.5

Alliance Contracts 72

DOCUMENTATION, TERMS & CONDITIONS, REMEDIES

4

CONTRACT DOCUMENTS 77

4.1

Standard Form General Conditions of Contract 774.2 TendersPost-Tender Correspondence 78

5

THE SUPERINTENDENT 80

5.1 Dual Role of the Superintendent 80

5.2 Functions of the Superintendent 83

5.3

Liability of the Superintendent 87

6 TIME 90

6.1 Practical Completion 90

6.2

Extension of Time 91

6.3

Liquidated Damages 95

6.4

Delay Costs 986.5 Program 99

6.6 Time Bars 100

PAYMENTS AND VARIATIONS

7 PAYMENT 102

7.1

Progress Claim/Progress Certificate/Progress Payment 102

7.2

Cash Retention/Bank Guarantee Security 104

7.3 Valuation of Progress Claims 107

7.4 Variations 110

8

SECURITY 114


3/159

2

U i it f M lb

8.1 Cash Retention/Bank Guarantee 114

8.2 Security to Remedy Default 116

8.3

Conversion of Security to Cash 116

9 SECURITY OF PAYMENT 120

QUALITY, DEFECTS, DEFAULT, TERMINATION

10 QUALITY 125

10.1 Contract Requirements 125

10.2

Defects 127

10.3

Quality Assurance 129

10.4 Defects Liability Period 122

11 INSURANCE 134

11.1

Care of the Works 134

11.2

Types of Construction Insurance 136

11.3

Who effects the insurance: principal or contractor? 138

12 DEFAULT/TERMINATION 142

12.1

Default by the Contractor 142

12.2

Default by the Principal 145

12.3 Remedies 146

12.4

Wrongful Termination 149

CONTRACT DISPUTE RESOLUTION & NEGOTIATION

13 CLAIMS 151

13.1

Types of Claim 151

13.2

Quantification of Claims 152


4/159

University of Melbourne

Engineering Contracts and Procurement

1 CONTRACT PRINCIPLES/CONTRACT TYPES

1.1 FORMATION OF THE CONTRACT

"A contract is a promise or set of promises which the law will enforce."1

The common law of contract has evolved substantially in the last few years.

Some principles remain intact (for example, that there must be consideration for a contract to be

formed) whereas other principles have diminished in significance (for example, the doctrine of

privity whereby the courts will only enforce contracts between the two parties to that particular

contract). Most importantly, there have been a number of major incursions into "black letter

contract law" in recent years (for example, the action in "promissory estoppel" to which we refer

briefly below).

The purpose of this topic is to introduce the reader to the general principles of contract, to give

the reader an insight into the way that contract law is developing in Australia in the 1990s, and toprepare the reader for further consideration of detailed topics relating to liabilities under the

contract and outside the contract.

Offer and Acceptance

The critical feature of a contract is that there is a "meeting of the minds" between the two parties

to the contract.2 In practice, this requires the making of an offer (by the "Offeror") and

acceptance of that offer (by the "Offeree").

There is a great deal of law as to what constitutes offer and acceptance for these purposes.

For example:

An "offer" is to be distinguished from a mere "invitation to treat".

If, for example, a person offers to sell his car for $1,000 to another person, that is an

offer by the Offeror, which is capable of acceptance by the Offeree. If, however, the

owner of a car yard displays prices on the windscreens of cars in his lot, it is usual to

regard this as mere "invitations to treat" which invites commercial discussions in relation

to the purchase of the vehicle (as opposed to being offers which are capable of

acceptance). If a prospective customer sees the figure of $1,000 displayed on the

windscreen of one of the cars in the allotment, he is not able to unilaterally "accept" the

price and demand immediately delivery of the car. In fact, the law would regard the

customer's statement to the owner of the car yard (that he was prepared to purchasethe car for $1,000) as an offer, capable of acceptance or not by the owner of the car

yard.

Pharmaceutical Society of Great Britain v. Boots Cash Chemists (Southern) Ltd [1953] 1

QB 401 A self service store included certain pharmaceutical goods on its shelves which

were required by law to be sold under the supervision of a registered pharmacist. A

1Chitty on Contract - General Principles, (25th Ed.), T.1, Citing Pollock, Principles of Contract(13th

Ed.).

2This is usually referred to as the parties being "ad idem".


5/159

2

U i it f M lb

pharmacist was present at the cash desk. The Court had to decide whether the owner of

the self service shop had contravened the Pharmacy & Poisons Act. The Court concluded

that the display of goods on the shelves, with prices marked, was a mere invitation to

treat, and that the bringing of the goods to the cash desk and offering to purchase the

goods was the "offer" for the purpose of the transaction which was "accepted" by the

self service store when it took the money.

An offer may be to a particular person or to the public at large, and "acceptance" may be

constituted by acting in the manner required by the Offeror.

Carlill v. Carbolic Smoke Ball Co.[1893] 1 QB 256 The Carbolic Smoke Ball Company had

advertised in a number of newspapers that a 100 reward will be paid by them to any

person who contracts the flu or colds after using the carbolic smoke ball for two weeks

according to certain printed directions. The plaintiff thereafter bought a smoke ball and

used it as directed for over eight weeks when she was attacked by flu. The Court had to

decide whether there was a binding contract. On appeal, the Court held that the Plaintiff

was entitled to claim her reward because the advertisement was an offer intended to be

acted upon, and when accepted and the conditions performed, there was sufficient

consideration for a binding contract.

A tender is an example of an invitation to treat. The calling of tenders is, effectively, a

request that tenderers put in a detailed quotation in accordance with the terms of the

tender. That tender is then capable of "acceptance" by the person calling for the

tenders. A contract is formed at the moment at which acceptance is made of the

tender.3

An offer is capable of acceptance in accordance with the strict terms of the offer, unless

previously withdrawn, or unless the Offeree has already rejected the offer. The offer can

be withdrawn at any time, at the will of the Offeror.

A counter-offer does not result in the formation of a contract, however acceptance ofthe counter-offer may do so. If, for example, A offers to sell his car for $1,000 and B

replies that he is willing to purchase it but only for $700 then, at that point, in the

absence of further communication, there is no contract in existence (either to purchase

the car for $1,000 or to purchase the car for $700). If, however, A then accepts the

counter-offer of $700 a contract is formed.

Acceptance may sometimes be inferred from conduct. Where, for example, an offer is

made and, though never formally accepted, the parties then proceed to act on the basis

that the offer has been accepted, a court may infer, depending on the circumstances,

that a contract has been formed.

Rust v. Abbey Life Ins. Co.[1979] 2 Lloyd's Rep.335 The Plaintiff applied for and paid fora property bond insurance policy which was issued to her. The Plaintiff retained the

document for seven months and then claimed the return of the premium saying that a

contract had not been formed. The Court held that the issue of the policy had

constituted acceptance by the insurer of the Plaintiff's offer. The Court further held that

even if the issue of the policy on the terms contained within that policy constituted a

"counter-offer", the conduct of the Plaintiff in doing and saying nothing for seven

3The practice of public authorities formally "accepting" tenders by a letter of acceptance is, in

practice, outdated. The usual process is to call tenders but then, prior to accepting any particular

tender, negotiate with preferred tenderers to finalize/clarify/improve the terms of the tender prior

to formation of the contract.


6/159

3

U i it f M lb

months constituted an acceptance of that counter-offer.

Correspondence between parties seeking to enter into a contract, each enclosing their

respective standard forms, has been described from time to time as "the battle of the

forms". The analysis of the final terms of the contract will depend on the respective

communications.

Butler Machine Tool Co Ltd v. Ex-Cell-O Corp (England) Ltd [1979] 1 All ER 965 The

plaintiffs quoted a price for the supply to the defendants of a machine. The quotation

included a number of terms, including a price variation clause. The defendant then made

an order, which was stated to be subject to its own terms. The defendant's terms did not

include a price variation clause but was attached with a tear-off acknowledgment slip

stating that the sellers would accept the buyers' terms. The plaintiffs acknowledged the

order and returned the completed slip to the defendants. When the machine was

delivered the plaintiffs claimed an additional 2892 under its price variation clause. The

Court had to decide whose terms applied to the concluded contract. It was held that in

most cases when there is a "battle of forms" there is a contract as soon as the last of the

forms is sent and received without objection.

Silence does not usually constitute acceptance.

Felthouse v. Bindley(1862) 11 CB (NS) 869; 142 ER 1037 The defendant was the

auctioneer for the plaintiff's nephew. Prior to the auction sale, the plaintiff had a

discussion with his nephew about the purchase of a particular horse from the latter. The

plaintiff in fact misunderstood the price and wrote to his nephew a letter to the effect

that if he did not hear from him, the horse will be considered sold at that price quoted by

the plaintiff. The plaintiff's nephew did not reply but instructed the defendant that the

horse had been sold. The defendant then sold the horse to a third party by mistake. The

issue was whether ownership of the horse had vested in the plaintiff at the time of the

auction sale. The Court held that the plaintiff's nephew had intended his uncle to have

the horse at the price quoted by his uncle, however he had not communicated hisintention to his uncle nor done anything to bind himself.

The rules of "offer and acceptance" are not capable of precise definition. They in fact do no more

than give effect to the notion that for a contract to be formed the two parties must be "ad idem".

It is necessary for the two parties to, ultimately, clarify the terms of the proposed contract and

then agree to enter into the contract on those terms.

Consideration

The courts have always required, as a pre-condition to a contract coming into existence, that

there be "consideration" for a promise if a contract is to be formed.

In this context, "consideration" means something of value passing from each party to the other.

For example, a promise to give one's car to a person will not be enforceable, in contract, by a

court. In contrast, a promise to sell one's car to another person for an agreed amount would be

enforced by the courts.

A number of points might be made:

Consideration may be a mere promise to do something. For example, A may sell his

car to B for $1,000 on the basis that B promisesto pay A $1,000 at some later date.


7/159

4

U i it f M lb

Consideration may be constituted by a conduct. For example, in Carlill v. Carbolic

Smoke Ball Co.4, Mrs Carlill purchased the smoke ball and acted in accordance with

the terms set out in an advertisement. The Court held that this constituted

consideration for the promise by the smoke ball company to pay her the sum of

100 if she subsequently contracted influenza.

Consideration must be linked to the promise.

Australian Woollen Mills Pty Ltd v. The Commonwealth(1954) 92 CLR 424 The

plaintiff was a manufacturer of worsted cloth who had purchased large quantities of

raw wool from the Australian Government during the second world war, at prices

lower than that normally paid to growers. Due to a return to normal wool sale prices

in July 1947, the Australian Government implemented a subsidy scheme for local

manufacturers. When the subsidy scheme was subsequently discontinued, the

plaintiff demanded for the subsidy due to him. The Court held that the payment of

subsidy and the purchase of wool were not related in such a way that the one was a

consideration for the other. The subsidy scheme did not flow from a commercial

interest but was created to overcome the problem with wool prices caused by war.

Agreement to compromise a debt for a lesser sum may be unenforceable for lack of

consideration. For example, if A agrees to accept $500 in settlement of a debt for

$1,000, the agreement to accept a lesser sum may be unenforceable because there

was no consideration for his promise to accept that lesser amount.

Compromise of a claim to avoid litigation, however, may be sufficient consideration.

For example, if A has a claim against a contractor, albeit that the claim is disputed,

his agreement to compromise the claim in return for a lesser sum of money, to avoid

the risks of litigation, would usually be regarded as consideration for his promise to

accept the settlement sum.

Consideration must be present, though it need not be sufficient. For example, if Aagreed to sell his land, worth $100,000, for the sum of $1, arguably consideration

has been provided and the contract is enforceable. (In fact, there are difficulties

with such token consideration. A court could conclude that consideration had not

been provided. This is a discussion beyond the scope of this topic.)

Past consideration is no consideration. If A agrees to transfer his land to B, and,

subsequently, after the transfer has been effected, B promises to give A his car, the

gift of the car will not be consideration for the transfer of land on the basis that the

sale is passed. Accordingly, A would not be able to enforce the delivery of the car.

A promise to do something which one is already bound to do does not constitute

consideration. For example, a promise to pay a fee to a witness who has alreadybeen served with a subpoena was held unenforceable on the basis that there was no

consideration.5

The absence of consideration has, historically, often resulted in a court finding that a contract

does not exist in particular circumstances. The modern evolution of the doctrine of promissory

estoppel may, in certain circumstances, have the effect of reducing the impact of such a legal

argument. (We refer to this, briefly, further below.)

4[1893] 1 QB 256.

5

See Collins v. Godfrey(1831) 109 ER 1040.


8/159

5

U i it f M lb

Intention to Create Legal Relations

The courts have always distinguished between promises which were intended by the parties, at

the time of making those promises, as being capable of creating a legal relationship, and promises

(typically, promises made between family members or in a social rather than business context)

which were not intended at the time to be enforceable in a court.

For example, if A agrees to build a barbeque for B, a friend, while drinking with him at a hotel,

albeit that B promises, in return, to pay A with one dozen bottles of beer, and A subsequently fails

to comply with the terms of his promise, that promise would probably not be enforced by a court.

The court would probably conclude that the promises were made in a social context, and that the

parties at the time had not intended those promises to result in an enforceable contract.

Historically, such cases have involved family members, however the circumstances can be wider

that this. In Cohen v. Cohen(1929) 42 CLR 91 prior to his marriage to the plaintiff in 1918, the

defendant had promised to pay the plaintiff 100 a year as a dress allowance. When the parties

separated in November 1923, the plaintiff claimed that the defendant had not paid her since

January 1920. The Court held that there was no contract as the parties did not intend to createlegal relations but rather the arrangement was a proposal for the plaintiff's regular allowance in

the circumstances of their marriage.

Cases involving intention to create legal relationships often arise out of domestic relationships.

Commercial agreements can sometimes be expressed not to form a legal agreement. In Rose and

Frank Co v. J R Crompton & Bros Ltd[1923] 2 KB 261 the plaintiffs were a New York company

dealing in carbonising tissue topic and the defendants were English manufacturers. After a series

of agreements, they entered into agreement whereby the plaintiffs were to have exclusive rights

of sale in certain areas and the defendants were to sell exclusively to the plaintiffs. It was

provided in the agreement that the arrangement was not entered into as a legal agreement but

was only a record of the parties' intention. On appeal, it was held that the parties have clearlyintended that the agreement shall not have legal consequences nor be legally enforceable.

The question for the courts will be the intention of the parties at the time of making the contract.

The critical issue is whether, in the eyes of an objective observer, the parties intended to create a

legal relationship.

Certainty

The courts will enforce contracts where some terms are not sufficiently expressed provided that

those terms can be sufficiently identified (for example, where the price is to be ascertained by

reference to a car buyers' guide).

The courts will not, however, enforce contracts which are "uncertain" as to material terms.

For example, if A agrees to sell his car to B for a price to be determined by adopting the value

expressed in the 1995 Used Car Buyers' Guide published by a particular organization, the court

will give effect to that contract. If, however, A agrees to sell his car to B for a price "to be agreed

later", the court will not enforce that contract as there is no agreement on a material term (the

price). Such a "contract" would be said to be void for uncertainty.

The following issues arise in this context:

There is a difference between uncertainty and difficulty of interpretation.

Bowes v. Chaleyer(1923) 32 CLR 159 The plaintiff agreed to sell pieces of silk by a


9/159

6

U i it f M lb

contract which provided for shipment "half as soon as possible and half two months

later". The defendant purported to cancel the contract three months later but the goods

were subsequently shipped in various lots after six months of the defendant's purported

cancellation. The defendant refused to accept the goods and the plaintiff claimed

damages for non-acceptance. On appeal, it was held that the parties have expressed

their agreement in plain words and the court will not consider whether they meant to

stipulate for something different.

The court may sometimes cure obvious errors in the contract.

The contract price is usually considered to be a material term in this context. There may,

however, be remedies other than in, (for example, in restitution or pursuant to

legislation) where the price has not been agreed though the contract has been

performed.

Goods Act 1958 (Vic) S.13

(1) The price in a contract of sale may be fixed by the contract or may be

left to be fixed in manner thereby agreed or may be determined by the course of

dealing between the parties.(2) Where the price is not determined in accordance with the foregoing

provisions the buyer must pay a reasonable price. What is a reasonable price is

a question of fact dependent on the circumstances of each particular case.

Sometimes a third party may be identified in the contract, and given the role of fixing

certain terms.

The use of the words "subject to contract" may or may not be fatal.

Masters v. Cameron(1954) 91 CLR 353 The parties signed an agreement for the sale of a

farming property which stated that the agreement was made subject to a formal

contract of sale. On the same day the defendant purchaser paid a deposit to the vendor'sagent, the plaintiff. The vendor and purchaser then tried to claim the money held by the

plaintiff. On appeal to the High Court, it was held that although all the essentials of a

contract existed, it has well been recognised that the words "subject to contract" create

an overriding condition, so that what has been agreed upon will be regarded as the

intended basis for a future contract and not constituting a contract.

The courts have always assisted parties to enforce their bargain, however, they will not make the

bargain for the parties.

Some Contracts Must Be In Writing

There is no general rule of contract law that contracts must be in writing to be enforced.Legislative intervention, however, over the years, has resulted in certain categories of contract

being unenforceable unless they are in writing.

The Statute of Frauds 1604was the first such enactment. That Act provided that certaincontracts

must be in writing to be enforceable. That legislative enactment has followed through the

centuries and is presently contained in the Instruments Act 1958 (Vic)which provides, so far as

relevant, as follows:

An action must not be brought to charge a person upon a special promise to answer for

the debt, default or miscarriage of another person or upon a contract for the sale or other

disposition of an interest in land unless the agreement on which the action is brought, or

a memorandum or note of the agreement, is in writing signed by the person to be


10/159

7

U i it f M lb

charged or by a person lawfully authorised in writing by that person to sign such an

agreement, memorandum or note.

In addition, new legislation from time to time makes further categories of contract unenforceable

unless in writing. For example, the House Contracts Guarantee Act 1987 (Vic)introduced the

requirement that building contracts on residential dwellings (and now on certain residential

renovations) must be in writing if such contracts are to be enforceable.

The key point is, however, that contracts need not generally be in writing. It is only where a

contract is expressly required by legislation to be in writing if they are to be enforceable that this

requirement occurs.

1.2 TERMS OF THE CONTRACT

Oral/Written/Implied

Terms of a contract may be oral, may be written, may be implied, or may be any or all of the

above.

Many written contracts expressly exclude any terms which are not included within the written

document.

Such terms, however, rarely succeed in excluding, for example, terms implied by statute (for

example, in relation to the merchantability of goods under the trade practices legislation).

Further, there may be a dispute over interpretation of the contract where one of the parties

asserts that oral and/or implied terms formed part of the contract despite the written exclusion of

such terms.

A common law rule of evidence referred to as "the Parol Evidence Rule" has, historically, had the

effect of excluding evidence of extrinsic terms (usually oral extrinsic terms) where the document

is expressed to be wholly in writing.

In Codelfa Construction Pty Ltd v. State Rail Authority of New South Wales (1982) 149 CLR 337

the State Rail Authority engaged Codelfa to excavate tunnels as part of the construction of the

Eastern Suburbs Railway. Codelfa had to complete the work within 130 weeks. Codelfa initially

worked three shifts per day until local residents obtained an injunction. Codelfa then claimed

increased costs from the Railway Authority. On appeal, the High Court refused to imply a term for

statutory immunity from injunction. An implied term cannot derive its character from extrinsic

circumstances unless it is necessary for the construction of the contract.

The effect of the High Court's decision in Codelfahas been to ameliorate the previously

sometimes harsh rule of evidence which excluded the leading of evidence as to oral terms which

were to form part of the contract. The High Court in Codelfaeffectively reasoned that evidence

of extrinsic terms may be lead where that evidence is necessary to clarify, or clear up ambiguity in

relation to, the terms of the contract but may not be lead where the extrinsic oral terms are in

conflict with and/or vary the written terms.

Incorporation of Terms

From time to time the parties, in making their contract, expressly refer to documents containing

terms which are to be incorporated into the contract. For example, the standard form conditions

of contract prepared by the Standards Association of Australia (AS2124-1992) are often adopted

on public sector construction contracts.


11/159

8

U i it f M lb

On other occasions, there may be terms of a contract incorporated into any subsequent contract

by the particular circumstances. For example:

a notice of the conditions imposed by a car park, posted near the entrance.

standard conditions of contract printed on the back of an order form.

terms incorporated into the contract by a course of dealing.

In such instances, it would usually be a question of proof as to what terms, if any, are to be

incorporated into the contract.

Order of Precedence

Where terms of a contract are contained in more than one document, or are contained partly in a

document, and are partly oral, there may be terms which are either:

(a) inconsistent; or

(b) ambiguous;

leading to issues of interpretation of the contract.

The usual method adopted by draftsmen on large contracts to avoid difficulties arising betweenterms contained in more than document is to include an order of precedence clause to assist a

person coming to the contract by expressly providing which document is to be preferred over

another.

Conditions/Warranties

Some terms of the contract will be intended by the parties to be so critical to the contract that

their breach would entitle the injured party to terminate the contract (in addition to an

entitlement to damages), whereas other terms of the contract may be less significant and,

accordingly, the parties intend that a breach of those conditions would lead to damages but not

termination.

In this context, the word "condition" (meaning a term the breach of which would entitle the

injured party to terminate the contract) is distinguished from the word "warranty" (meaning a

term the breach of which would usually entitle the injured party to only sue for damages). The

word "condition" has several possible contexts. For example, it may mean a term of a contract

something more serious than a mere warranty (the distinction being the remedy available to the

party if breached). Alternatively the word "condition" may mean something which is to be

fulfilled before some other matter may occur, for example a "condition precedent".

Ultimately, the remedy available for breach of a particular term will be a matter of interpretation

of the intention of the parties at the time of entering into the contract.

This distinction was recently spelt out by the High Court in Ankar Pty Ltd v. National WestminsterFinance (Australia) Ltd6. The High Court considered that a promise may be either:-

(i) a condition; or

(ii) a warranty; or

(iii) an "intermediate term".

"Conditions" were terms which were so serious that their breach would entitle the other party to

terminate the contract, "warranties" were terms which were such that their breach would only

entitle the injured party to claim damages (but not the right to terminate the contract), and

6

(1987) 162 CLR 549.


12/159

9

U i it f M lb

"intermediate terms" were terms which might permit the injured party to terminate the contract

in addition to claiming damages, depending on the seriousness of the breach.

The critical issue in determining whether terms are "conditions" or "warranties" in this context is

the intention of the parties at the time of entering into the contract.

In many instances, the parties expressly provide that the breach of a particular term will entitlethe injured party to terminate (for example, a payment clause).

In other circumstances, the contract may be silent as to whether the breach of a particular clause

would entitle the injured party to terminate the agreement rather than to merely sue for

damages. In such circumstances, the Court would attempt to interpret the intention of the

parties from the pre-contractual negotiations, pre-contractual correspondence, the conduct of

the parties up to the moment of entering into the contract, and other matters relevant to the

interpretation of the contract.

Implied Terms

It is common for contracts to consist of terms which are partly written, partly oral, and partlyimplied.

Terms can be implied into a contract in a number of ways including:

(i) terms implied in the circumstances;

(ii)

terms implied by statute (for example by the Trade Practices Act 1974 (Cth));

(iii)

terms implied at common law (for example, an employee's obligation to exercise

proper or reasonable care in an employment contract).

The Privy Council in BP Refinery (Westernport) Pty Ltd v. Shire of Hastings7considered the five

necessary factors to imply a term into a contract. (This test is now universally adopted in respect

of implied terms). The five factors are:

(1) the term must be "reasonable and equitable";(2) the term must be "necessary" to give "business efficacy" to the contract;

(3) the term must be so "obvious" that it "goes without saying" that the term must be

implied;

(4) the term must be "capable of clear expression"; and

(5) the term must not "contradict" any express terms of the contract.

All of these five factors must be established if the term is to be implied into any contract.

Certain terms are implied by statute. For example, section 17 of the Goods Act 1958 (Vic)

provides, so far as relevant, as follows:

In a contract of sale, unless the circumstances of the contract are such as to show adifferent intention, there is:-

(a) an implied condition on the part of the seller that in the case of a sale he has a

right to sell the goods and that in the case of an agreement to sell he will have a

right to sell the goods at the time when the property is to pass;

(b) an implied warranty that the buyer shall have and enjoy quiet possession of the

goods;

(c) an implied warranty that the goods shall be free from any charge or

encumbrance in favour of any third party not declared or known to the buyer

before or at the time when the contract is made.

7

(1977) 16 ALR 363.


13/159

10

U i it f M lb

Finally, there are certain terms which will be implied at common law. For example, where a lease

for a flat in an apartment building is silent as to an obligation by the landlord to keep the common

parts of the building in good repair, one would expect a court to imply such a term (albeit at the

tenant's pro-rata expense).

Collateral Contracts

A "collateral contract" is a contract which may be formed supplementary to the main contract. It

is usually formed pursuant to the negotiations leading up to the creation of that main contract.

For example, in Sheppard v. Ryde Corporation8a purchaser of land entered into a contract to

purchase the land relying on a promise by the vendor to maintain an area of land nearby as a

park. The High Court held that the purchaser had entered into the vendor/purchaser contract on

the basis of the collateral contract with the vendor that the vendor would maintain the park area.

The Court has required, however, that for a collateral contract to be formed, the collateral

contract must not be inconsistent with the main contract.

In Hoyt's Pty Ltd v. Spencer(1919) 27 CLR 133 the plaintiff leased premises from the defendant.The lease agreement allowed the defendant to terminate the lease on four weeks' written notice.

Prior to the lease being signed, the defendant had promised that he would not exercise his right

to terminate unless required by the head lessor. The defendant then terminated the lease

without any request from the head lessor. The plaintiff claimed damages for breach of contract.

On appeal to the High Court, it was held that a collateral contract, whether oral or in writing, is

valid and enforceable only if it is consistent with the main contract.

In some instances, the collateral contract may be formed between one of the parties to the

contract and a third party not a party to the main contract.

For example, when Mrs Carlill purchased the smoke ball from the pharmacist, the contract was

entered into on the basis of the collateral contract between Mrs Carlill and the smoke ballmanufacturer to the effect that they would pay any person who used the smoke ball and

subsequently contracted influenza.

Exclusion/Limitation Clauses

The courts have always attempted to read down exclusion clauses.

This might be seen, on one view, as a restriction on the freedom of contract. The courts have,

nevertheless, in interpreting contracts, traditionally preferred an interpretation which did not give

effect to exclusion clauses which, in their view,unfairly excluded liability.

The courts have achieved this in several different ways:

The "contra proferentem" rule. The courts have traditionally applied the rule that such

clauses will be strictly construed against the party relying on the exclusion clause.

Darlington Futures Ltd v. Delco Australia Pty Ltd(1986) 161 CLR 500 The defendant was

a commodity broker who entered into a written contract with the plaintiff for tax

straddles. The Contract did not allow the defendant to operate a discretionary account.

The defendant without authority from the plaintiff, engaged in dealings by way of "day

trading", which later resulted in heavy losses. When sued by the plaintiff, the defendant

relied on two exclusion clauses. On appeal to the High Court, it was held that the

8

(1952) 35 CLR 1.


14/159

11

U i it f M lb

exclusion clause applied to all claims arising out of or in connection with the relationship

of the parties, whether authorised or not.

A court would usually infer that where a breach of contract is extremely serious, the

parties could not have intended that an exclusion clause would operate in such

circumstances.

The Council of the City of Sydney v. West(1965) 114 CLR 481 The plaintiff parked his car

at a parking station owned by the defendant. He received a ticket containing three

clauses headed "Parking Conditions", one of which stated that the Council (defendant)

does not accept any responsibility for the loss or damage to any vehicle however such

loss or damage may arise. The plaintiff's vehicle was stolen by a thief who had tricked the

defendant into issuing a duplicate ticket and was damaged when later found. On appeal

to the High Court, it was held that in the performance of the council's obligations under

the bailment contract, the exclusion clause does not provide an excuse for negligence by

the council's servants in doing an unauthorised act.

There has, from time to time, been a view in the courts that certain breaches are

"fundamental breaches" and that there is a presumption that exclusion clauses do notapply to such breaches. (This, perhaps, has not been favoured by Australian courts who

have preferred the view that such questions are ultimately questions of construction of

the contract, rather than applying artificial rules as to "fundamental" or "non-

fundamental" breaches.)

Photo Production Ltd v. Securicor Transport Ltd [1980] AC 827 The defendants agreed

to provide a night patrol service at the plaintiff's factory. An exclusion clause provided

that the defendant will not be liable for any default unless such default could have been

avoided by the exercise of due diligence. One of the defendant's employees deliberately

started a fire which caused a loss of 615,000 to the plaintiff. On appeal, the House of

Lords held that although the arson was a fundamental breach, the exclusion clause was

enforceable because the parties are free to agree to the exclusion of all types ofobligations.

The courts have traditionally been reluctant to interpret a contract as excluding

negligence.

Davis v. Pearce Parking Station Pty Ltd (1954) 91 CLR 642 The plaintiff sued the

defendant for loss or damage suffered from a breach of a contract of bailment. The

receipt stated that the vehicle was "garaged at owner's risk and that the defendant

would not be responsible for loss or damage of any description". The vehicle was stolen

from the parking station and later recovered in a badly damaged condition. On appeal to

the High Court, it was held that the exclusion clause was enforceable although the Court

stated that an exempting clause must be construed strictly and that clear words arenecessary to exclude liability for negligence.

White v. John Warwick & Co. Ltd.[1953] 2 All ER 1021 The defendants agreed to supply

and maintain a tradesman's tricycle to the plaintiff to deliver newspapers. The contract

provided that the defendants would not be liable "for any personal injuries to the riders

of the machines hired". When the machine needed repair, the defendants supplied a

replacement which later caused injury to the plaintiff. On appeal, it was held that an

exemption clause will be construed as exempting the defendants from liability in

contract but not from liability in tort.

In addition to rules of interpretation which the courts have preferred in relation to exclusion

clauses, some legislation, typically consumer legislation, is expressly directed at exclusion clauses.


15/159

12

U i it f M lb

For example, section 68 of the Trade Practices Act 1974 (Cth)provides, so far as relevant, as

follows:

(1) Any term of a contract (including a term that is not set out in the contract but is

incorporated in the contract by another term of the contract) that purports to

exclude, restrict or modify or has the effect of excluding, restricting or modifying:(a) the application of all or any of the provisions of this Division

(b) the exercise of a right conferred by such a provision;

(c) any liability of the corporation for breach of a condition or warranty

implied by such a provision; or

(d) the application of section 75A;

is void.

(2) A term of a contract shall not be taken to exclude, restrict or modify the

application of a provision of this Division or the application of section 75A unless

the term does so expressly or is inconsistent with that provision or section.

There are similar provisions in certain state legislation, for example the Fair Trading Act 1985

(Vic), and the Goods Act 1958 (Vic), all of which impose restrictions on the effect of exclusionclauses.

The legislation is usually strictly confined, however, to particular categories of contract.

1.3 MISREPRESENTATION

Representation or Term

Statements made prior to entry into a contract may or may not eventually be incorporated into

the contract as a term.

For example, a statement that a car is a 1985 model, made prior to the sale of the car, may or

may not ultimately become a term under the contract. This would be relevant to the available

remedies if, subsequently, the car is found to be a 1983 model car.

The factors which may be relevant to whether a statement constitutes a "term" or a "mere

representation" are set out conveniently by J.W. Carter9as follows:

(i) the form of the statement;

(ii)

the time that it was made;

(iii)

the content of the statement;

(iv)

whether there is a written memorandum of the contract;(v) the knowledge and expertise of the parties.

The critical question of interpretation will be whether or not the parties intended that the

statement was to be incorporated into the subsequent contract as a term which, if ultimately

wrong, would give rise to a contractual right to either damages or termination to the injured

party. Ultimately, this will be an issue of proof. For example:

Couchman v. Hill[1947] KB 554 The plaintiff sued the defendant for breach of contract at an

auction, where the plaintiff was told that a heifer was unserved but it later died from the strain of

9Outline of Contract Law in Australia,J.W. Carter, Butterworths (1st Edition) 1990.


16/159

13

U i it f M lb

carrying a calf. On appeal, it was held that although the sale catalogue provided that the

defendant did not guarantee the accuracy of information and that all lots must be taken subject

to errors of description without compensation, the parties clearly intended the oral offer to be a

warranty overriding the printed condition.

Dick Bentley Productions Ltd v. Harold Smith (Motors) Ltd [1965] 1 WLR 623 The plaintiff sued

the defendant for breach of contract for the purchase of a car where he was told that the car hadtravelled only 20,000 miles since the fitting of a replacement engine and gearbox but was later

found to have travelled nearly 100,000 miles. On appeal, it was held that there was a warranty

because the defendant had stated a fact that should be within his own knowledge.

Effect of Misrepresentation

The remedies available to a person affected by a misrepresentation depend, in general, on

whether the misrepresentation is:-

(i)

innocent;

(ii)

negligent; or

(iii)

fraudulent.

Further, there is a distinction between a misrepresentation as to a matter of fact, and a

misrepresentation as to a matter of law. At common law, a person was entitled to rescind the

contract for innocent misrepresentation but was not entitled to bring an action for damages.

The position has been affected, however, in certain cases by legislation. For example, section

100(1) of the Goods Act 1958 (Vic)provides, so far as relevant, as follows:-

Where a buyer enters into a sale of goods after a misrepresentation that is not

fraudulent is made to him and, if the misrepresentation had been fraudulent, the

buyer would have been entitled to rescind the sale by reason of the

misrepresentation, the buyer may rescind the sale by notice given to the sellerbefore, or within a reasonable period after, acceptance of the goods.

When a misrepresentation is negligent, in addition to any right under the contract to rescind, the

injured party may or may not have a potential action in negligence (provided that the elements of

negligence are made out in respect of that misrepresentation).

Where the misrepresentation was fraudulent, the injured party would have an entitlement to

rescind the contract or sue for damages or both.

1.4 MISTAKE

The remedies available to a party who has entered into a contract on the basis of mistake will

depend on whether the mistake may be classified as:

(i)

common;

(ii) mutual; or

(iii) unilateral.

Common Mistake

Where both parties to a contract enter into that contract on the basis of a common mistake (for

example where both the vendor and purchaser of land are operating on the basis of the mistaken

belief that the vendor is in fact the owner of the land whereas, as a matter of law, the land is

owned by a third person) the contract maybe void from the outset.


17/159

14

U i it f M lb

Certain legislation has this effect. For example, section 11 of the Goods Act 1958 (Vic)provides,

so far as relevant, as follows:

Where there is a contract for the sale of specific goods, and the goods without the

knowledge of the seller have perished at the time when the contract is made the contract

is void.

In other cases, it will be a matter of interpretation. In McRae v. Commonwealth Disposals

Commission (1951) 84 CLR 377 following an advertisement inviting tenders to purchase an oil

tanker containing oil at a certain location, the plaintiffs offered to pay 285. The tender was

accepted by the defendant and the plaintiffs started to search for the tanker. It then transpired

that no tanker ever existed at the location stated in the advertisement or the defendant's letter.

On appeal to the High Court, it was held that the defendant had promised that there was a tanker

in the position specified. The defendant may not rely on any mistake to avoid the contract

because the mistake was induced by a reckless misrepresentation.

In some circumstances, the contract may not be void though there may be a right of rescission.

For example, if A buys a painting from B, both believing the painting to be by a master and worth$1 million, whereas in fact the painting is a copy and worth only $1,000, the contract might not be

void, however, the buyer may have a right to rescind the contract on the basis of common

mistake. In such circumstances, the courts have concluded that the right of the rescission arises

where the mistake was sufficiently "fundamental".

In Solle v. Butcher[1950] 1 KB 671 the plaintiff and defendant were partners in a real estate

business. The defendant took a long lease of a flat and let the flat to the plaintiff for seven years.

The parties believed that the flat was not subject to a controlled rent. The plaintiff later sought

repayment of overpaid rent on the basis that a certain Act applied. On appeal, it was held that the

lease could be set aside because a common mistake which was fundamental had been made.

Mutual Mistake

Where both parties enter into the contract on the basis of a mistaken belief, but a different

mistaken belief, (presumably neither knows of the other's mistake), the best view may be that no

contract was ever formed because no sufficient offer and acceptance occurred.

For example, if A intends to sell the contents of a wheat silo to B, and B believes that he is being

sold the wheat in a different silo, it is unlikely that A and B were ever sufficiently of one mind to

form a contract.

The effect of such mutual mistake, therefore, would usually be that no contract was ever formed

and, accordingly, the parties are entitled to be reimbursed monies paid, goods provided .....

Unilateral Mistake

The position is more complex, however, in respect of unilateral mistake.

The general rule at common law is that a party who enters into a contract under a mistake has no

entitlement to any remedy in contract (in the absence of that mistake being contributed to by the

other party).

Taylor v. Johnson(1983) 151 CLR 422 The plaintiff granted an option to the defendant to

purchase two five acre pieces of land for $15,000 but later claimed the price to be $150,000.

There was evidence that the value of the land was $50,000, and $195,000 if a proposed rezoning

was effective. On appeal to the High Court, it was held that the contract was void because a

fundamental mistake had been made by the plaintiff and the defendant was aware of it.


18/159

15

U i it f M lb

Smith v. Hughes(1871) LR 6 QB 597 The plaintiff showed a sample of English oats to the

defendant's manager. The defendant paid for the oats but when delivered, complained that the

oats were new and not old. It was held that there was no contract because the parties were not

ad idem; the plaintiff intended to sell new oats and the defendant intended to buy old oats. The

mistake was not induced by fraud or deceit by the seller.

1.5 DURESS/UNCONSCIONABLE CONTRACTS

The common law has always recognized that contracts entered into by coercion or under "duress"

were able to be vitiated by reason of that coercion. The position was that such a contract was

able to be rescinded at will by the innocent party.

A recent development in the area of duress is the use of economic threats as a possible ground

for rescission for duress.

North Ocean Shipping Co Ltd v. Hyundai Construction Co Ltd(The Atlantic Baron) [1979] 1 QB705 The defendants agreed to build a tanker for the plaintiffs at a price fixed in US dollars payable

by instalment. Due to a devaluation in the US dollar, the defendant requested for an increase of

payment which was paid by the plaintiffs under threat. It was held that by delaying in rescinding

the contract, the plaintiffs had affirmed the contract - they could not recover the payments

although the contract was affected by duress.

There is a major difficulty in such cases in distinguishing between "economic duress" which might

ultimately result in one of the parties being entitled to rescind the contract, and legitimate

economic pressure. For example, where a vendor threatens to sell property on the open market

unless a purchaser agrees to his price, one would usually regard such behaviour as acceptable

economic pressure.

A more complex area, again, arises in the area of "unconscionable contracts". The old cases

recognize that an unconscionable contract might be set aside. The modern type of

unconscionable contract case, however, is potentially, extremely far-reaching.

The Amadio Decision

In Commercial Bank of Australia Ltd v. Amadio(1983) 151 CLR 447, the defendant bank agreed

to reopen the company account of the plaintiffs' son on condition that the overdraft was secured

by a mortgage on property owned by the plaintiffs. The plaintiffs were old and had only a limited

knowledge of written English. The company became insolvent and the plaintiffs sought to be

released from the deed. On appeal to the High Court, it was held that the bank was guilty of

unconscionable conduct in failing to properly advise the plaintiffs in view of their disadvantage.The Court allowed the contract to be set aside.

The effect of the High Court Amadio decision has been dramatic. (For example, lending contracts,

now, usually require independent legal advice to be obtained by a person in a position of Mrs

Amadio.)

The critical factor in the Amadiodecision, and no doubt in future cases, will be the inequality of

bargaining power between the parties.

This is a major example of the development of contract beyond "black letter contract law" in

recent times, based upon the conduct of the parties rather than the strict enforcement of the

original agreement.


19/159

16

U i it f M lb

1.6 CONTRACT REMEDIES

1.Damages

A party's right to sue for damages usually arises in addition to other remedies (albeit that the

quantum of damages would be affected depending on whether other remedies are available to

the injured party).

The assessment of damages in contract is based upon the amount necessary to compensate the

injured party for the loss or damage suffered. In contract, this will usually mean the money which

the injured party might have been entitled to receive had the contract been properly performed

by the other party.

For example, if a vendor enters into a contract to sell land to a purchaser for $100,000, but the

purchaser refuses to complete the contract, the vendor would usually be entitled to sell the land

and recover the difference between the eventual sale price and the original $100,000 (taking intoaccount any monies paid by the defaulting party to that time).

In this respect, the assessment of damages in contract differs from the assessment of damages in

tort. (In tort, the injured party is entitled to recover damages to reflect the loss or damage

suffered, whereas in contract the injured party is entitled to recover damages equal to the benefit

of the bargain which he would have received had the contract been properly completed.)

McRae v. Commonwealth Disposals Commission(1951) 84 CLR 377 Following an advertisement

inviting tenders to purchase an oil tanker containing oil at a certain location, the plaintiffs offered

to pay 285. The tender was accepted by the defendant and the plaintiffs started to search for

the tanker. It then transpired that no tanker ever existed at the location stated in the

advertisement or the defendant's letter. On appeal to the High Court, it was held that thedefendant had promised that there was a tanker in the position specified. The defendant may not

rely on any mistake to avoid the contract because the mistake was induced by a reckless

misrepresentation.

The entitlement to damages is limited to damages which are "caused" by the breach.

Reg Glass Pty Ltd v. Rivers Locking Systems Pty Ltd(1968) 120 CLR 516 The defendant installed a

door for the plaintiff's shop to provide security from burglary. Thieves later broke in by forcing the

door out of position and stole the plaintiff's stock. It was held that the defendant's business was

to provide a reasonably fit burglar-proof protection, however the plaintiff was entitled only to

nominal damages because there had only been a partial breach of the contract.

The court also imposes a "remoteness" test on damages.

For example, the failure to deliver a printing machine to a factory might lead to a claim for

damages for loss of business. There is a limit, however, on the extent of such "consequential

damages" which might be recovered, depending on how "remote" such damages might be.

Koufos v. C Czarnikow Ltd[1969] 1 AC 350 The plaintiff chartered a vessel to the defendant for

loading sugar and selling the sugar at Basrah. The voyage then deviated four times and the

journey took an extra nine days, causing a reduction in sugar prices. On appeal, the House of

Lords held that the parties would have contemplated punctual delivery to the port of discharge

which has a market in sugar, and that there was a real danger that a delay would result in a loss to

the charterer. Damages claimed must be the natural consequence of the breach or in the


20/159

17

U i it f M lb

contemplation of both parties.

H Parsons (Livestock) Ltd v. Uttley Ingham & Co Ltd [1978] 1 QB 791 The plaintiffs sought

damages for breach of contract from the defendants in the purchase of a hopper required to feed

pignuts. The defendants installed the hopper but failed to adjust the ventilator causing the nuts to

become mouldy. This led to the death of 254 pigs. It was held that where the breach of contract

causes physical damage, the test of remoteness is that of torts. The contractor would be liable forlosses that are reasonably foreseeable as a possible consequence of the breach. Here, the

defendants were liable for the loss of the pigs but not for loss of profit in future sales or future

opportunities.

2.Rectification

In certain circumstances, a party might assert that the contract, as ultimately documented, did

not reflect the contract which was made by the parties at the time.

For example, a party might discover, (to his dismay), twelve months after signing the contract,

that the contract failed to provide for an interest rate, or some other detail which had, in fact,

been agreed during the pre-contract negotiations, but, through inadvertence, had not beenincorporated into the contract documents.

In such circumstances, the court may grant the equitable remedy of "rectification" to amend the

contract to incorporate the term which had been agreed between the parties at the time of

entering into the contract but not subsequently incorporated into the contract documentation.

The court imposes strict tests in relation to that remedy.

In particular, it is necessary for the person asserting the entitlement to establish the exact

agreement that was subsequently not incorporated into the contract (usually, by reference to

pre-contract correspondence or other similar documentation).

3.Specific Performance

In certain circumstances, the court might order the equitable remedy of specific performance.

For example, where a vendor sells land to a purchaser for $100,000, but is later offered a greater

price he may seek to breach the earlier contract so that he is free to sell the land at the higher

sum. In such circumstances, the purchaser might be able to persuade the court to direct the

vendor to complete the contract (i.e. that he "specifically perform" the contract) rather than

merely award the purchaser damages arising out of the vendor's failure to complete the contract.

There are a number of restrictions which are usually observed by the Court before it will give such

a remedy including:-

(i) a court will not usually order specific performance where a remedy in damages would

suffice;

(ii) a court will not usually order specific performance where that would result in an ongoing

degree of supervision being required of the court, (for example, it would not usually

order an employer to give an employee back his job).

4.Injunction

In some circumstances, a party to a contract may seek an order from the court restraining the

other party to the contract from doing certain things.


21/159

18

U i it f M lb

This remedy differs from specific performance in that the party seeking the remedy does not wish

the court to order that the contract be performed, but rather that the other party to the contract

be restrained from doing certain things not necessarily the subject matter of the contract.

For example, a distributor of goods from a manufacturer, who is asserting that he has an

exclusiveright to distribute those goods, might seek an order from a court restraining the

manufacturer from manufacturing other goods, similar to those the subject matter of thedistribution agreement.

Again, the court would usually be reluctant to order such a remedy where a remedy in damages

would suffice.

Further, as in the case of all equitable remedies, certain considerations will apply relating to the

conduct of the parties, the balance of convenience and whether the party seeking the remedy is

prepared to give an undertaking as to damages, pending the outcome of the final determination

of the issues between the parties.

5.Termination/Rescission

In certain circumstances, one of the parties to the contract may become entitled to terminate

and/or rescind the contract.

The difference between the two remedies relates to whether the contract is to be terminated

from that moment, or whether the contract is to be rescinded i.e. set aside from the beginning

and the parties placed back in their original positions.

Most contracts provide an express procedure for terminations. Where, however, the contract is

silent in respect of termination generally, or is silent in respect of particular breaches which might

give rise to termination, the injured party will have, in addition to any express right of

termination, a common law right to terminate the contract.

It is critical that a party, prior to terminating the contract, strictly comply with any express terms

of the contract in relation to such termination. A failure to strictly comply with the terms of such

a clause may ultimately result in the termination being ineffective and, itself, becoming the

grounds for the other party to terminate the contract.

The usual consequences of a properly executed termination of the contract will be:

(i) the end of the operation of the contract from that moment;

(ii) a right to take such reasonable steps as are available to complete the contract

(including employing others to complete the contract); and

(iii)

a right to recover such damages as reasonably arise out of the failure by the

defaulting party to complete the contract.

6.Frustration

In certain circumstances, a party may be able to get out of the contract on the basis that the

contract is "frustrated".

The leading Australian authority on frustration happens to relate to an engineering contract.

In Codelfa Construction Pty Ltd v State Rail Authority of New South Wales10the High Court had

to consider whether a large construction contract, originally proposed to be performed on a 6-day

10(1982) 41 ALR 367


22/159

19

U i it f M lb

triple shift basis, had become frustrated when neighbours obtained an injunction preventing work

between 10pm and 6am.11The High Court, in the leading judgment delivered by Mason and Aitkin

JJ, recited with approval the reasoning in an earlier English authority:-

"....frustration occurs whenever the law recognizes that without default of either party a

contractual obligation has become incapable of being performed because the

circumstances in which performance is called for would render it a thing radicallydifferentfrom that which was undertaken by the contract...."( emphasis added)12

Mason J further reasoned:-

"....the critical question then is whether the situation.....is fundamentally different from

the situation contemplated by the contracton its true construction in the light of the

surrounding circumstances..."( emphasis added)

Where the circumstances are so "radically different" or "fundamentally different", the contract

will be deemed to be at an end.

11The Court concluded that the contract was, in fact, frustrated. The commercial effect of that conclusion was to give the a

restitutionary quantum meruit claim.

12

The earlier decision was Davis Contractor's Ltd v Foreham UDC [1956] AC 696 at 729.


23/159

20

U i it f M lb

2 NON-CONTRACT REMEDIES

2.1 NEGLIGENCE

The principal liability which occurs on engineering projects outside the Contract will usually be in

negligence. This topic will introduce the general concept of negligence, and in particular the law

relating to professional negligence in the construction industry.

This topic will also discuss misleading and deceptive conduct under so-called "fair trading"

legislation in Australia, in particular, the application of the Commonwealth and State legislation,

and a brief explanation of the definitions and some of the concepts involved. The key concepts

will then be considered with examples from decided cases applicable to the construction industry.

The topic will also address the remedies of restitution and estoppel.

The conduct of parties to a contract may, in recent times at least, result in remedies not

otherwise available under the contract (or near contract). In particular, in certain circumstances, a

party who has performed work at the request of another party, in the absence of any contractual

entitlement to be paid for that work, may be able to recover a reasonable sum in restitution.Alternatively, the party may be to assert that the other party is estopped from certain actions.

Elements of an action in Negligence

The law of negligence is a reasonably recent development of the English and Commonwealth

countries. Its genesis can be traced back to the 1932 decision of Lord Atkin in Donoghue v.

Stevenson13. In this decision the House of Lords concluded that a general duty of care existed,

independent of contract, on all citizens to take care to avoid acts and omissions which an

individual can reasonably foresee would be likely to injure persons who are closely and directly

affected by such acts.

The elements of an action in negligence are usually said to be:

1. a duty of care owed by the Defendant to the Plaintiff;

2. a failure to meet the requisite standard of care; and

3. damage.

I now turn to each of these elements in turn:

Duty of Care

The most complex question arising in negligence cases may often be whether a duty of care isowed by one particular to another, in the particular circumstances.

Lord Atkin in Donoghue v. Stevenson, formulated the "neighbour principle", to the effect that

each member of the community owes a duty to his "neighbour". Lord Atkin observed as follows:

"Who then in law is my neighbour? The answer seems to be - persons who are so

closely and directly affected by my act that I ought reasonably to have them in

contemplation as being so affected when I am directing my mind to the acts or

omissions which are called into question."

13

[1932] AC 562.


24/159

21

U i it f M lb

Proximity

The courts have always been sensitive to the potential scope of the general formulation of the

duty as indicated in Donoghue v. Stevenson. In recent times, this has been expressed as a

question of "proximity". The general concept of when a person is sufficiently "proximate" to

another person as to owe that person a duty of care has been discussed by the Hight Court

several times in recent years.14

In Hawkins v. Clayton, the High Court considered the concept of proximity with respect to cases

involving physical damage. At page 256, Deane J. reasoned:

"...it is not necessary for the existence of a relationship of proximity in some other

categories of case for there to have been any physical proximity between the parties

concerned. Indeed, a relationship of proximity can exist, and a duty of care can be

owed to, a class of persons which included members who are not yet born, or who are

identified by some future characteristic or capacity which they do not yet have. Cases

involving damage by reason of a latent defect in property demonstrate the point.

Thus, a relationship of proximity ordinarily exists between the architect and builder of

a residential building (eg. a maternity hospital) and the members of the class ofpersons who will in future years be born or housed in it. That relationship of proximity

is such as to give rise to a duty of care to avoid a real risk of injury by reason of faulty

design of the building. The duty of care is owed to each member of the class. If by

reason of the negligence of the architect or builder, the building subsequently

collapsed and a particular baby was injured, that baby would have a cause of action

from the damage sustained by reason of the breach of a duty of care which may have

been owed to him, and broken, by a person who has died before he was born."

Economic Loss

The most relevant limitation for the construction industry relates to the ability to recover pure

economic loss (as opposed to physical damage).

There have been a number of reasons advanced why the courts are reluctant to allow full scale

recovery for all economic loss, including:

(a) the floodgates argument - the concern that by generating a wide class of action for

economic loss the courts would be flooded by cases which would overtax judicial

resources and lead to unacceptable delays in the finalisation of cases;

(b) there has to be some priority given between the various types of loss which may be

sustained by an individual, and the law should be more sensitive to the rights of an

individual where his personal health and safety has been adversely affected;

(c) economic loss is not subject to any physical constraints so that the Defendant's

potential liability is unpredictable.

Courts have concluded that damage to a structure as a result of faulty design, which does not

result in further physical damage to other property apart from the structure so designed, is a

specie of economic loss, notwithstanding that it has a physical manifestation. Accordingly, if an

architect or engineer is negligent in the course of designing a building, and the building then

suffers distress, the damage suffered by the owner of the building will be characterised as

economic rather than physical.

14 For example, in Hackshaw v. Shaw(1984) 56 ALR 417; Jaensch v. Coffey(1986) 58 ALJR 426;Hawkins v. Clayton(1988)

62 ALJR 240.


25/159

22

U i it f M lb

In Hawkins v Clayton, Deane J. discussed when a duty of care was owed in relation to pure

economic loss. At page 255:

"In the more settled areas of negligence involving direct physical injury or damage

caused by negligent act, the reasonable foreseeability of such injury or damage is, of

itself, commonly an adequate indication that the relationship between the partiespossesses the requisite element of proximity... That cannot, however, be said of cases

in the area where the Plaintiff's claim is for pure economic loss. In that area, the

categories of case in which the requisite relationship of proximity is to be found are

properly to be seen as special in that they will be characterised by some additional

element or elements which will commonly (but not necessarily) consist of known

reliance (or dependence) or the assumption of responsibility on a contribution of

the two."(emphasis added)

Accordingly, for a duty of care to arise in respect of economic loss it would usually be necessary to

demonstrate that:

(a) it is reasonably foreseeable that if care is not taken such damage may follow;

(b) there is some "special" aspect of the relationship between the Plaintiff and Defendant

which gives rise to a higher degree of proximity than would be required for a claim for

physical injury or damage.

Such a special relationship might arise, for example, from:

(a) known reliance or dependence;

(b) an assumption of responsibility;

(c) the terms of any contract between the parties.

In coming to a conclusion that there is sufficient proximity it is necessary to consider all facts

relevant to the relationship between the Plaintiff and the Defendant.

The State Swimming Centre case

In the State Swimming Centrecase, a firm of engineers was sued by the State government in

relation to the design of a building reconstruction project at the State Swimming Centre in

Batman Avenue, Melbourne.

The engineers, based on legal issues arising out of the terms of their retainer, denied that they

owed a common law duty of care to their client. The trial judge Mr Justice Nathan, who at thetime was the Supreme Court Judge in charge of the Building Cases List, found that a duty of care

existed both in tort andas an implied term arising out of the retainer between the engineer and

the client.

In the State Swimming Centrecase, the Full Court considered a number of issues relating to

professional negligence in the construction industry, including:

1. the circumstances in which a professional engineer owes a duty of care to his client;

2. what constitutes a breach of that duty of care;

3. the operation of limitation clauses in professional retainers;


26/159

23

U i it f M lb

4. the limitation period (where there is a latent defect in design);

5. what constitutes "damage" for the purpose of an action in negligence.

There has never been any genuine dispute that a professional engineer owes his client a duty of

care.

At page 36 of the trial judgment, His Honour said:

"I am... satisfied that it was a necessary term and condition of the retainer that the

engineer act with the care and diligence required of consulting design engineers,

expert in the field. I shall deal with this implied term when I come to tortious duty of

care as its ambit is confluent with that duty."15

And at page 94:

"I am satisfied that a necessary term to be implied into the contracts or retainers

includes a condition that the engineer act and perform the works with due care, skill

and diligence. An implied condition to this effect was not disputed by the engineer,and it complies with the tests for the necessary imputation of implied terms in

contract.

I have already noted the agreement between counsel, and in my view a proper one,

that the standard of care required to discharge the engineer's obligation to PWD is

confluent or the same in scope as the implied term in the contract. As to the

concurrency of the duty of care and breaches of contractual terms to act carefully, see

Voli v Inglewood [1963] 110 CLR 74 at 85 and Hawkins v Clayton [1988] ALR 69 per

Mason, C.J. and Wilson J. p71 who accepted the reasoning of Deane, J. 100 et seq.

Also McPherson & Kelly v Prunty [1983] 1 VR 513."

The Full Court reasoned likewise. They concluded at page 31 of the Full Court report:

"In our opinion the Respondent did owe the appellant a duty of care..."

At page 35, the Full Court referred to the "holding out" basis for the duty of care:

"It is common ground that the respondent held itself out to be a competent civil

engineer, with experience in the construction of large water-retaining structures,

including swimming pools."

And then at page 39, the Full Court dealing with the submission, made at the appeal, that there

was no duty of care:

"Before returning to the issue of negligence in fact we should say something about a

submission briefly made on behalf of the respondent which, if accepted, would make

it unnecessary to consider the matter at all. Mr Dwyer, for the respondent, referred

to D & F Estates Ltd v Church Commissioners for England [1989] AC 177 and Murphy v

Brentwood District Council [1991] 1 AC 398. In reliance on them he suggested that

the respondent owed the appellant no duty of care to prevent the damage the subject

of the first action. As to this it is enough to say, without referring to the divergence

between English and Australian Authority on the recoverability of economic loss, that

15The full reference to the trial judgment is Ronald William Walsh and the State of Victoria v Gutteridge Haskins & Davey

Pty Ltd and Anor, 9 May 1990, Nathan J, unreported.


27/159

24

U i it f M lb

the House of Lords in those two cases, although concerned with liability of builders in

tort, was not concerned with their liability to persons with whom they had a

contractual relationship. Then Mr Dwyer suggested, in reliance on the Australian

authorities, that before the respondent could be said to owe a duty of care in tort to

the appellant as alleged in the first action, the circumstances creating a relationship

of proximity must be proved. In particular he referred to Opat v National Mutual Life

Association of Australasia Ltd [1992] 1 VR 203, contending that it showed a necessityfor the appellant to allege and prove that it had relied upon the respondent. We think

that decision relevant, if only because it was not suggested below that it was for the

appellant to plead and prove alliance. Had the submission been put, the course of the

trial might have been different, the appellant seeking leave to amend and adduce

evidence on the point. In any event, ever since Voli v Inglewood Shire Council ... it

has been clear that an architect or engineer may be liable to his client in tort as well

as in contract. We refer also to McPherson & Kelly v Kevin J Prunty and Associates...

especially at p. 580, per Lush J., where it is said that the view is no longer tenable that

concurrent liability in tort exists only where some physical damage or injury is likely to

result. Moreover, it is apparent that the matter of "reliance", which may often be

important in determining existence of relevant proximity, need not be pleaded or

proved where there is a relationship of a professional man and his client. A duty ofcare is implicit in such relationship, as is perhaps reliance itself: Sutherland Shire

Council v Heyman [1985] 157 CLR 424, at pp. 497 and 502, per Deane J. It is, in any

event, manifest beyond argument that the appellant, as a client, in fact relied on the

respondent as the designer of the centre."(emphasis added)

This, it seems, is definitive. The mere combination of circumstances, namely the engineer holding

himself out as a person able to do the work and the client entering into the relationship with the

engineer on that basis, will always establish the requisite duty of care.

Bryan v Maloney

In 1979 a Mr Allan Bryan built a house pursuant to a building contract for a Mrs Minion at 2Winter Cole Court, Launceston. Mrs Manion sold her to a Mr and Mrs Quittenden, who

eventually sold the property to Mrs Judith Maloney in 1986.

At the trial, Mrs Maloney gave evidence that she inspected the house three times before she

purchased it and that she thought it would be built properly and that it was a good solid

house. Within six months the house developed cracks and the footings were estimated to

require approximately $34,000 of rectification works.

Mrs Maloney sued the builder (with whom she had no contract) and, surprisingly, for there were

no similar cases where a subsequent purchaser had proceeded in an action against such a builder

in Australia, succeeded in the Supreme Court of Tasmania. The Builder appealed and loss 3-0 in

the Full Court of Tasmania. He then appealed to the High Court and failed, again, 4-1.

The High Court, in a majority judgment from Mason CJ, Dean J (the new Governor-General), and

Gaudron J, with Brennan J dissenting, reasoned that the builder owed a subsequent purchaser a

duty to take reasonable care in the house and was liable to her in damages to an amount equal to

the decrease in value of the house resulting from the inadequacy of the house.

The significant finding in the majority judgment was that the builder owed Mrs Maloney a duty of

care at all. Previously, there was a view that a builder did not owe a duty of care to a person with

whom he had no contract, whom he had never met, and who, at worst, even if the building works

were defective would only suffer economic loss.

The majority reasoned:


28/159

25

U i it f M lb

As was pointed out in the recent majority judgment in Burnie Port Authority v

General Jones Pty Ltd ..., the overriding requirement of a relationship of proximity

represents the conceptual determinant and the unifying theme of the categories of

case in which the common law of negligence recognizes the existence of a duty to take

reasonable care to avoid a reasonably foreseeable risk of injury to another. There is

no decision of the Court which directly determines the question whether the

relationship between Mr Bryan, as the builder of the house, and Mrs Maloney, as asubsequent owner of it, possessed the requisite degree of proximity to give rise to a

duty, on t he part of Mr Bryan, to take reasonable care to avoid the kind of economic

loss sustained by Mrs Maloney. Necessarily, as has been indicated, the resolution of

that question requires the articulation of both the factual components of the relevant

category of relationship and the identification of any applicable policy considerations.

Ultimately, however, it is a question of law which must be resolved by the ordinary

processes of legal reasoning in the context of the existence or absence of the requisite

element of proximity in comparable relationships or with respect to comparable acts

and/or damage. Accordingly, it is appropriate to approach the question through a

consideration of some related situations.16

The majority, therefore, reasoned that the range of relationships which might or might not giverise to a duty of care was not precisely defined, but was a matter which was to be resolved by

the ordinary process of legal reasoning in each instance.

The majority reviewed the nature of the duty of care first discussed by Windeyer J in Voli v

Inglewood Shire Council17, in particular, the circumstances in which a duty of care was owed by a

man who followed a skilled calling. The basis for such a duty of care, the majority noted, was

that the skilled person embarked on the task, rather than there be any precisely defined category

of duty of care pertaining to such a person.

Toohey J, in a separate judgment in which he also concluded that the builder owed a duty of care

to a subsequent purchaser, reasoned similarly:

The weight of authority in this Court is that for an action to lie in negligence there

must be a relationship of proximity between plaintiff and defendant..

In Burnie Port Authority v General Jones Pty Ltd, where the earlier decisions are noted, Mason CJ,

Deane, Dawson, Toohey and Gaudron JJ said of proximity:

As a general conception deduced from decided cases, itspractical utility lies

essentially in understanding and identifying the categories of case in which a duty of

care arises under the common law of negligence rather than as a test for determining

whether the circumstances of a particular case bring it within such a category, either

established or developing..The question whether the appellant is liable turns upon

the degree of proximity between the negligent act (strictly speaking, the class ofnegligent act) relied upon by the respondent and the king of damage sustained by

her.... Gibbs CJ observed in Sutherland Shire Council v Heyman...In deciding whether

the necessary relationship exists, and the scope of the duty which it creates, it is

necessary for the court to examine closely all the circumstances that throw light on

the nature of the relationship between the partiesIf the facts fall into a category

which the authorities already recognize as attracting a duty of care, then, as Gibbs CJ

acknowledged..., this process will not be necessary. But in the present case the facts

do not fall into a category which this Court, at any rate, has recognized as attracting a

duty of care.18

16(1994) 182 CLR 609, at 619.

17(1963) 110 CLR 74.18n.1,ante.,at p.656.


29/159

26

U i it f M lb

Toohey J, therefore, concluded, as had the majority that the builder was sufficiently related to a

subsequent purchaser as to owe her a duty of care.

The more complex judgment (with which, respectfully, one could find much to agree with) came

from Brennan J. The dissenting view expressed by Brennan J, in a reasoned judgment derived

substantially from the Courts earlier judgment in Sutherland Shire Council v Heyman19, inparticular the discussion in that judgment of the nature of defects in a building and the person

who would suffer loss as a result of such a defect. His Honour said at page 643:

...it is artificial to classifydefects in a building as pure economic loss. Defects in a

building are physical defects

Documents

Course Notes J McMullan