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Commercial Law - Question 1

Issue:-

Acme Pvt. Ltd wants to put an exclusion clause in the Contract that Acme will not be liable for the damage if the car is parked in the Acme car park. So Acme wants to make an exclusive contract for the same which sets out the clause of exclusion in the contract.

Law Applicable:-

The contract Laws of Australia.

Legal Analysis:-

A Contract is an agreement between two parties which is bounded by law. When an agreement is legally enforceable it becomes a contract. The essential elements of a legally binding contract are as follows:-

  • An offer;
  • Accepting the offer or acceptance of the same;
  • A consideration (generally monitory amounts).

An exclusion clause is a term of a Contract by which the contract excludes a liability for a contractual breach. An exclusion clause in a contract exclusively defines that what are the clauses for which the contract will not be liable. So, in the same way Acme Pvt. Ltd wants an exclusion clause in the Contract that the company will not be liable for the same..

Exclusion clauses are the labels that are applied that are applied to a contract which excludes or limit a liability by implication or by the course of action.

These clauses ate very common in the contract which helps in increasing the effectiveness and the efficiency of a contract. In the case of Limited V Delco Australia Pty Ltd it was held that while interpreting or constructing an exclusion clause it should be read as a whole with the contract thereby giving the whole meaning of the contract as a whole and constructing the clause in the case of ambiguity[1]

There are many ways by which the terms of s contract may be defined. The two methods that are widely used to define the terms of a contract are as follows:-

  • Terms that are classified as Conditions and;
  • Terms that are classifies as warranties.

It is very common for the business at all the levels whether they are big or small to try and limit their liabilities in the contract. This is done by inserting clauses in the contract for the same which are known as limitation of liability or exclusion of liability clauses. They reduce the liability of the party of a contract and explain the responsibilities and the amount of money that a person needs to pay in compensation.[2]

In most of the situations, whenever a contract is drafted by either of the party, an exclusion clause is always excluded to exclude or restrict the rights of a party. More often a party includes a clause to exclude all liability of a certain thing that can go wrong, and the party does not want to be held liable for the same. If the purpose of an exclusion clause is to deny the negligence of a duty, so the work that is stated should be precisely clear so that the interpretation of the clause can be done correctly[3].

The correct approach as to how to interpret an exclusion clause has been explained by the court in the case of Darlington futures Limited v. Delco Australia Pty Ltd where the High Ciurt of Australia stated that whenever the exclusion ccluase of a contract is interpreted, it should be interpreted in such a way so as to read in light the content as a whole thereby explaining it correctly as to why the exclusion clause has been made and the clause appears including the nature and object of the contract and wherever it is appropriate , constructing the clause in case of an ambiguity.[4]

If the exclusion clause is made by the party in order to deny the liability for negligence so the words should be very clear and precise in order to avoid any confusion that may arise in the future while interpreting the clause of Exclusion or no liability. Hence, the clause should be drafted in a very clear language and it should be able to identify the liability that has been included in the clause and the liability that has been excluded from the clause.

If a dispute comes over, regarding the exclusion codes, whether it was a part of a contract or not, it comes as the responsibility of the Judiciary to see the intention of the parties. If the intention of the parties is not clear as to the terms of the contract then the Judicial System will consider the following rules while interpreting the contract:-

  • The exclusion clause is interpreted against the party to rely on it.
  • If the exclusion clause related to the main course of the agreement, then the clause is less likely to be effective.
  • If the exclusion clause does not related to the main purpose of the contract that is the clause is inconsistent with the main purpose of the contract then the court may held the clause to be ineffective . Therefore whenever an exclusion clause is drafted in the contract, it should directly relate to the whole purpose of the contract.

While inserting the exclusion contract the party must be careful that the clause is directly related to the sole purpose of the contract. (Arts Law center for aAustralia ). A well drafted exclusion clause is the core of many contracts. Moreover in today’s world, exclusion contract have become an incident of contracts, especially in the field of Business sector.

Exclusion clauses restrict the right of the party for example imposing fine from the damage caused by the breach of the contract. (Briston, 1998)

A strong exclusion cause must fulfill the following standards- it should include all the implied conditions that are permitted by law, clearly address the liability for negligence if the partied intend to limit and exclude the type of losses that could lead to large amount of monitory or physical loss, the clause should also not include the type of liability for the work that is beyond their field of expertise or the work performed is over and above the conduct that is required by the contract . The exclusion clause should be drafted for all the types of work or liability that cannot be excluded to the extent possible and provide indemnity for the benefit of the consultants.[5] When a document containing a legal document is signed, so the party signing it is bound by the contract whether the party has read the document in whole or not.[6]

The exclusion clause can only be enforceable if it is property inserted and drafted in the contract. The word used in the clause should be clear and should cover the obligations and the liability for which the clause had been drafted up in order to avoid any confusion or misinterpretation of the clause.[7]

Conclusion:-

Therefore from the above discussion it is very clear that- what an exclusion clause is, who are the parties to the clause, what is the purpose of drafting an exclusion clause in the contract and the amount of compensation that needs to be paid when there is a breach of contract. Acme Pty Ltd wants to have an exclusion clause in the contract so they can have it. But while drafting the same the company needs to follow few guidelines which are:-

  • At the time of drafting the exclusion clause, the party must be very clear and precise that what things are excluded for the same. The words used should be very clear and precise so that the clause can be interpreted easily.
  • The clause should be made up keeping in mind that what is the main purpose of the contract. The clause should be made in respect of the whole purpose of the contract and the clause should be clear and state clearly that for what things and issues the company will be held liable and for what conditions that company will not be held liable.
  • The Clause should be framed at the time when the contract is framed.
  • The Clause must be drafted up keeping in mind the whole purpose of the contract which means that the clause should form a part of the contract only. The exclusion clause must be stated up for the purpose of excluding some liability form the contract.

Hence, the clause should be drafted in a very clear language and it should be able to identify the liability that has been included in the clause and the liability that has been excluded from the clause.

Commercial Law - Question 2

Parties to the Contract:-

The parties to the Contract are as follows:-

  • Ernie – The salesperson that was present in the shop at the time when the flooring was selected by Cathy and Josh.
  • Vinyl Plank Flooring - the Company who was given the allowance of $4500 for the flooring of the house which was chosen by Cathy and Josh.
  • Well-built House Pvt Ltd – The Local builder with whom Cathy and josh have entered into a fixed price contract.
  • Cathy and Josh who are Building House in Ballarat.

Remedies available for Cathy and Josh:-

The facts of the case Clearly Specifies that Cathy and Josh exclusively came into a contract with the local Builder, wellbuilt Homes Pty Ltd for the consideration of $205,000 and an amount of $4500 was included in the contract for Vinyl Plank through the house.

The Australian Contract law defines mistake as when a mistake is dome by a party to a contract it is the legal remedy for the other party to provide compensation for the same. Even if the mistake occurred is fundamental it will not provide the right to the other party to escape from the same. The party who has made the mistake will be held liable to compensate the other party to pay for the same. As per the Law there are four types of mistakes that provide contractual remedy for the same. So the mistakes that provide remedies are as follows:-

  • Common Mistake: - A common mistake takes place when both the parties of a contract have done a mistake for the same thing. If the parties of a contract make a common mistake and the court comes up to a conclusion that the contract was not conditional then the contract will not be void.[8] A common mistake which undermines a contract renders the contract to be void.[9] A Doctrine of ‘Mistake in Equality’ for which a common mistake in contract formulating a short of understanding the contract would give an right to the affected party the right to rescind the contract.[10]
  • Mutual Mistake – A mutual Mistake takes place when both the parties of a contract are at a fault but, but about different things.
  • Unilateral Mistake- These types of mistake take place when one party is being held mistaken for one part of the contract, but the other is not. It is not easy for the law to provide remedy for the same. Many times this is the case there will be some sort of misleading conduct involved where the other party becomes aware of the fact that the mistake has taken place. It is also known as a one-sided mistake. If one of the part breaks the contract the other party can be held responsible to pay for the damages in the form of:- Recession, Damages, Equitable remedies and Statutory Remedies. As per the facts of the case the other party was in the position of Partial failure to perform the contract. A part is said to have partially perform the contract when they comply with few conditions but they are not able to comply with many other conditions. As per the Law, partial failure to perform a contract is also considered as a breach of contract and the other party is held for compensation for the same.

The other ways by which a contract can end up between the parties are as follows:-

  • By an agreement between the parties to end the contract;
  • By frustration which simply means that the contract between the parties is not working anymore because of the unforeseen events which were not in control of the parties.
  • For convenience which means that the situation which allows either of a parry to terminate the contract at any time, providing notice to the other party and;
  • Due to a breach which means that where either one of the party or both of the parties are not able to fulfill the essential conditions of a contract then the party who is not guilty has the right to terminate the contract and seek compensation for the same.

Doctrine of Privity of contract:-

Privity of Contract is a fundamental law related to the concept of contracts prevailing in the State of Australia. The Common rule states that only the parties that are the part of the contract will have rights or obligations under the contract.

As per the above Diagram if there is a direct contract between A and B they cannot legally impose any obligations on the third party C which is not a direct party to the contract. This Doctrine is applicable only to contractual rights and obligations. In the case of Trident General Insurance Co. Ltd v McNiece Bros Ltd the court held that if there is a contracting damage it won’t be suffered by the third party and specific performance is discretionary and may not be granted in these situations.[12]

Moreover section 11 of the Goods and Services act 1958 implies that whenever there is a contract for the sale of specific goods and the goods without the knowledge of the seller have been perished at the time so the contract which is made will be held as void.[13] Section 58 of the same act deals with specific performance of a contract which states that when a breach of a contract to deliver specific goods or ascertain goods then the court may if it thinks fit on the application, the court can give the other party to retain the goods on the payment of damages. Specific Performance means to specifically perform the action for which the contract was made and if the other party fails to do the same , then the party is held liable for the same.

Therefore the facts of the case mentioned clearly states that that one of the party was a t a fault partially. Cathy and Josh were the partied who were purchasing the house and they paid for the same. They were at no fault. The other party Wellbuilt Homes Pvt Ltd gave compensation to vinyl plank flooring to floor the house $4500. So here the flooring party was the third party to the contract. It was not the party that was directly the part of the contract.

The Principle of Doctrine of Privity of contract will be applicable and the third party will not be sued for the breach of contract. Hence the third party which was given the task of setting up the flooring will not be held liable for compensation, on the contrary the Well-built House Pvt Ltd – The Local builder with whom Cathy and josh have entered into a fixed price contract will be held liable to compensate Cathy and Josh on account of the failure to provide with the flooring that they needed.

Statutory terms applied by the Goods Acts 1958:-

If Cathy and Josh signed some fine print that the statutory terms implied by the Goods and services Act did not apply to this Contract, then the third party in this case which is Vinyl plank would not be held liable for the breach of the contract because as per the contract law, Vinyl plank was acting as a third party and a contract is an agreement formed by the mutual consent of two parties. There is no involvement of a third party. Hence if there is a breach on account of third party then the contract between the parties is said to be void. Hence the contract between the parties will be held to be void; the third party would not be liable to pay compensation for the same. Since it was a contract between Cathy, josh being the first party and Well-built House Pvt Ltd being the second party so in case of a breach of a contract the third party will not be liable to pay for the compensation. The sales of the Goods and Services Act 1958 specifies the obligation of the party to perform its duty in the course of specific performance ad if the part is not able to do the same, then the party will be held liable for compensation.

Hence we can conclude from the following situation that if Cathy and Josh would have signed an agreement which implies that the goods and services Act, is not applicable to the following contract then only the second party to the contract which is Well-built House Pvt Ltd would be held liable for compensation on account of the bad flooring done at the house premises and the third party Vinyl Plank services would not be held liable as the contract Acts stated that if there is a wrong on account of the Actions of the third party then the Third party will not be held liable and the contract would be a void contact.

Bibliography for Commercial Law

Laws Applicable:-

The Contract Act of Australia and;

The Sale of Goods and Services Acts, 1958.

Case laws:-

Davies v Pearce Parking Station Pty Ltd. (1984) 91 CLR 353.

(1986) 161 CLR 500, at 510.

L’Estrange V Graucob [1934] 2KB 394. https://www.lawteacher.net/cases/exclusion-clauses-cases.php

Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107. https://www.australiancontractlaw.com/cases/trident.html

Bell v. Lever Brothers [1932] A.C. 161 https://www.lawteacher.net/cases/bell-v-lever-bros.php

McRae v Commonwealth Disposals Commission (1951) 84 CLR 577.

Books, Articles and Journals:-

Legal Vision – What are Exclusion and Limitation of Liability Clause? Apr 2019. https://legalvision.com.au/australian-consumer-law-affect-exclusions-limitations-liability-clauses/

Jorem Schimmelfelder, Nicholas Pascoe, Minter Ellison – Issues in the Drafting and use of exclusion clauses in Commercial Agreements. Aug 2006. http://www.austlii.edu.au/au/journals/AUConstrLawNlr/2006/51.pdf

Quickkguides 18 June 2019 – Limitation and Exclusion of Liability. https://www.ashurst.com/en/news-and-insights/legal-updates/quickguide-limitation-and-exclusion-of-liability

Capper, D. (2009). COMMON MISTAKE IN CONTRACT LAW. Singapore Journal of Legal Studies, 457-473. Retrieved September 24, 2020, from http://www.jstor.org/stable/24870526

[1] (1986) 161 CLR 500, at 510.

[2] Legal Vision – What are Exclusion and Limitation of Liability Clause? (Apr 1 2019). https://legalvision.com.au/australian-consumer-law-affect-exclusions-limitations-liability-clauses/

[3] Davies v Pearce Parking Station Pty Ltd. (1984) 91 CLR 353.

[4] . (1986) 161 CLR 500, at 510 http://www.austlii.edu.au/au/journals/AUConstrLawNlr/2006/51.pdf

[5] Jorem Schimmelfelder, Nicholas Pascoe, Minter Ellison – Issues in the Drafting and use of exclusion clauses in Commercial Agreements. Aug 2006. http://www.austlii.edu.au/au/journals/AUConstrLawNlr/2006/51.pdf

[6] L’Estrange V Graucob [1934] 2KB 394. https://www.lawteacher.net/cases/exclusion-clauses-cases.php

[7] Quickkguides 18 June 2019 – Limitation and Exclusion of Liability. https://www.ashurst.com/en/news-and-insights/legal-updates/quickguide-limitation-and-exclusion-of-liability/

[8] McRae v Commonwealth Disposals Commission (1951) 84 CLR 577.

[9] Bell v. Lever Brothers Ltd. [1932] A.C. 161 https://www.lawteacher.net/cases/bell-v-lever-bros.php

[10] Capper, D. (2009). COMMON MISTAKE IN CONTRACT LAW. Singapore Journal of Legal Studies, 457-473. Retrieved September 24, 2020, from http://www.jstor.org/stable/24870526

[11] https://www.australiancontractlaw.com/images/lawcases/privity01.jpg

[12] Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107. https://www.australiancontractlaw.com/cases/trident.html

[13] Section 11- Goods and Services Act , 1958. http://classic.austlii.edu.au/au/legis/vic/consol_act/ga195876/s11.html

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Law Assignment Help

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