BTC1110 Commercial Law

Mid-semester test C
Issues Guide
Introduction: to assist you as you consider your mid-semester test paper we are providing below
an ‘issues-based’ answer guide that indicates the main issues we were expecting you to discuss,
with supporting authorities. Obviously your mark reflects not only whether you focused on
the relevant issue(s) but also the quality of your answer and your use of cases supporting your
answer. Your tutors were also able to recognise and reward answers that did not discuss these
issues (or did not do so in sufficient detail) but raised alternate arguments that were plausible,
coherent and well-supported.

PART B - 15 Marks
Question 1 (8 marks)
Pedro bought a holiday house with an ocean view at Apollo Bay. During his meeting with the
vendor, Maria, prior to sale, Pedro asked if there was any serious rust affecting the steel frames
in the house as a result of the salt air. Maria assured him that she had had the property inspected
by engineers before she listed it on the market and it did not report any structural rust. Pedro
noticed that the contract of sale did not mention an engineer’s report, but was happy with
Maria’s verbal assurance. After living in the house for six months, Pedro discovers significant
rust to the steel frame, caused by the salt air. Referring to the contract of sale, Maria refuses to
compensate Pedro for (a) the costs associated with replacing the steel frames affected by rust
(b) the loss of holiday rental she was expecting during the summer holiday period (when the
steel frame was replaced).
(a) Advise Pedro whether he could seek damages for breach of contract. (5 marks)
The main issue concerns the effect of an oral statement followed by a written contract (which
does include the oral statement). Students should explain the effect of a signature on a
document that looks to be complete – it may attract the parol evidence rule (students expected
to explain the rule and its effect) so that evidence of the oral statement regarding rust would
not be admissible in the event of a dispute. The parol evidence rule was however developed
to prevent fraud, not protect it and therefore there are devices that courts have developed to
mitigate the effect of the rule. One such device is the collateral warranty: students should
explain the essence of the rule and the three criteria that must be met in order for it to be
effective. Students to discuss each element and cite Van den Esschert (re promise and
consideration), Hoyts (on consistency with main contract) and Crown (a clear promissory
statement required – not a vague assurance) and conclude that it is likely that this promise is
a collateral promise. The remedy available for breach of a collateral warranty. Pedro should
succeed and be awarded damages.

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(b) Assume for the purposes of (b) only that Maria has breached a warranty of the contract.
Advise Maria whether she may have to compensate Pedro for the any or all of the losses he has
suffered (3 marks).
Part (b) raises the issue of damages and in particular whether Pedro may be compensated for
any or all of his losses. Students should begin by discussing the compensatory principle of
contractual damages (the principle in Robinson v Harmen established that an award of
damages is intended to compensate the plaintiff for the expectation losses he or she has suffered
– what he expected to receive out of the contract – or to quote R v H ‘to put P in the position
he would have been in if the contract had been performed’. To succeed P needs to show
causation – ‘but for’ the breach the loss would not have occurred but that is not an issue here.
Then the plaintiff needs to prove on the balance of probabilities that the losses are not too
remote from the breach that has occurred. This is usually done via the Hadley v Baxendale
analysis – two limbs: – first limb (losses ‘naturally arising’) would permit recovery for the cost
of replacement of frame. The claim for rental foregone (unlikely because notice not given to
Maria).

Question 2 (7 marks)
Sophia operates a large transport business. Drillers Ltd is a large oil and gas rig operator in
Western Australia. Drillers Ltd has used Sophia many times in the past. This time, Drillers Ltd
asks her whether she would transport some very expensive rigging equipment from Perth to
Broome. Sophia agrees to do the job for an agreed price. She is aware of the value of the
equipment she is carrying. When Sophia arrives to pick up the goods, she provides an
employee (as usual) with an invoice that he signs. On the reverse side of the invoice there is
the following exclusion clause:
“All goods are handled, lifted or carried at the owner's risk. The Contractor (Sophia) shall not
be liable for any loss or damage of property and/or goods of the Client (Drillers Ltd) whether
such damage was caused by any act, default or negligence on the part of the Contractor, and/or
his servants.”
Although Drillers Ltd has used Sophia many times, the company is unaware of the existence
of the exclusion clause.
All goes well on the long drive until Sophia decides to spend a couple of hours swimming with
the dolphins at Monkey Mia. Unfortunately she leaves the truck unattended and, during her
swim, some of the equipment is stolen.
Advise Drillers Ltd of any contractual rights it may have.

Answer Guide

The main question here is whether the exclusion clause is effective in protecting ie – whether
it’s incorporated and, if so, whether, as a matter of construction, it works. Good students
should indicate awareness that the traditional judicial antipathy towards exclusion clauses is
reserved for consumer contracts (not commercial ones) so, at both the incorporation and the

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interpretation stages, the general principles of interpretation apply…what would a reasonable
person say in respect of this (commercial) contract?
Incorporation – it is important that students identify that the critical factor in determining
whether the clause has been incorporated is to determine when the contract is formed (students
to explain why this is important – notice (actual or constructive) must be given at or before the
time when the contract is made - citing Olley or Thornton etc).
The facts here indicate that the contract has been formed when the parties communicated - as
they have a prior course of dealings/conduct and have agreed on the main terms, including
price and goods, it is reasonable to argue that a contract is made at that time and not when the
invoice is signed. On this analysis, notice is too late and the clause would be not included:
Olley/Thornton/Almeddine.
The alternate approach is to focus on the effect of the signature on the invoice. We put quite a
bit of emphasis on this point (citing Toll etc) and it is acceptable for students to argue that the
signature on a written contract constitutes assent to the contract, including the exclusion clause
that appears on the invoice: Toll/L’Estrange. Alternatively, again focusing on the signature
as the crucial moment, students may argue that a signature does not constitute assent where
the document that is signed is not a contractual document but, rather, an invoice or similar
(Causer/Illiadis).
Students who argue either position on the issue of incorporation were rewarded, provided the
argument was made coherently and was supported by case authority
Interpretation – the next issue is of equal importance. Students were expected to consider
whether the clause, if incorporated, would cover a breach of this kind that caused property
loss? On the face of it, the clause does indeed cover this loss but the real issue is whether
Sophia’s actions (in swimming at Monkey Mia) constitute a fundamental breach or breach of
the 4 corners rule (as in Sydney CC v West)….students to discuss the meaning of ‘fundamental
breach’ or the 4 corners rule (conveying the idea that the courts have said that, as a matter of
interpretation or construction, not as a rule of law, a clause – even a broad clause – may not
cover conduct that a reasonable person would say was beyond what the parties would have
considered possible under the contract. Use Sydney CC as an example. In commercial
contracts the courts are less likely to rely on the fundamental breach concept (cite Photo
Productions v Securicor). Having discussed the issue, students to apply to these facts: it is
more likely than not that the detour and the lengthy swim would be conduct outside the scope
of the contract, and if this is so, the clause would not protect Sophia. However, the alternate
view is possible (especially because this is a commercial contract (ie contra proferentum rule
loses its force) and provided the argument is coherent and well-supported, marks are given.