Termination of contract on the grounds of frustration

NB REFERENCES TO "HPH" OR JUST TO A PAGE NUMBER ARE TO HEFFEY, PATERSON AND HOCKER CONTRACT COMMENTARY AND MATERIALS 8TH ED 1998 (LBC INFORMATION SERVICES)
We now come to the last phase of the contracting process. We are now concerned with things going wrong, either because some disaster has overtaken the contract which cannot be said to be any ones fault (the subject of the doctrine of frustration) or because one of the parties has committed a breach. We will certainly pay some attention to breach which is a very common problem and of great practical significance. But before we look at breach it is necessary to look at the doctrine of frustration. t is important to understand the effect of either frustration or serious breach which brings a contract to an end. !he contract is terminated by, for e"ample, frustration. !his should be distinguished from rescission. Termination occurs during the running of a contract and the contract just stops so that rights and liabilities in the future no longer apply. #ccrued rights and liabilites (those that have already fallen due before the terminating event) are perfectly enforceable. !his is to be contrasted with rescission where the contract is treated as if it had never been. t is a pre$re%uisite of rescission that it must be possible to go back to the situation before the contract was made. t is logically impossible to sue for breach of a contract that is successfully rescinded. &emember, rescission is the remedy available when something has gone wrong during the negotiations for the contract, such as misrepresentation or misleading conduct, unconscionable dealing, undue influence, duress or mistake. !ermination is the remedy available where either the contract has been frustrated or one party has committed a breach which is so serious that it justifies the other party putting an end to the contract by terminating it. 'aving said all this, it must be pointed out that the usage of these two terms (termination and rescission) is often muddled. (udges %uite fre%uently talk of rescission when they mean termination. !he doctrine of frustration $ which is effectively a court order that the contract is no longer binding on either party (the contract just stops in its tracks) $ is very rarely considered by the courts. !he usual way in which the doctrine is raised is where some disaster has overtaken the contract and one party then fails to perform. !he other party then complains that the first party is in breach. !he answer to this may be that failure to perform is not a breach because the contract has been frustrated as a result of the disaster. n short, frustration, if successfully argued, is an e"cuse for failure to perform. !he doctrine, as have said, is rarely argued successfully. !his is because the courts have taken the view that one function of contract is to allocate risk and that, if something does go badly wrong, then this is just a risk which the contract ought to have contemplated. )ee the passage on p *+, last para from the case of Paradine v Jane in -.,* which reflects the idea that contract promises should be kept, whatever the circumstances. n other words, at the very moment that one party finds it very hard to perform, the other party wants an assurance of performance, or at least damages in lieu, because this is what contract is all about. /eople are paid to take the risk

of difficult performance. !he law nevertheless did allow some softening of this absolute principle and developed a doctrine of frustration. !his treatment of frustration will not be as detailed as most of the other areas of the law of contract which we have e"amined. !his is partly because, as already noted, it is a rare in practice and also because we are limited in the time left to deal with the remaining topics in the course.

The development of the doctrine of frustration

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!he case book outlines briefly the history of the development of frustration. !he beginning of the doctrine is said to be the case of Taylor v Caldwell in -0.1, a case involving the hire of a hall. Before the day on which the hirer was to use the hall, it burnt down. !his was held to be a frustrating event which caused the contract to be terminated and neither party was in breach. 2rustration cases since then have involved a number of different types of frustrating event. !he key %uestion is always3 is this an event which e"cuses the parties from further performance or is it an event which is the type of risk which the contract e"pressly or impliedly contemplated4 f the latter then the contract is not frustrated and, if a party does not perform, he or she is in breach.

The theoretical basis for frustration

!he courts over the years have had a great deal of difficulty in deciding what is the proper theoretical basis for the court intervening in the contract and declaring it to be frustrated. !he theories have varied and there have been fashions over the years. !he three headings below reflect the three phases or fashions, with the last one being the one which courts tend to adopt to$ day.

Implied term
!he first theory was that declaring a contract to be frustrated was simply another aspect of the courts ability to imply a term into the contract. f an officious bystander had asked the parties just before they committed themselves to the contract3 5What is the result if such and such happens45 the parties would have dismissed the bystander, testily, with an 56f course our contract would be at an end.5 !his was the basis for the decision in

Taylor v Caldwell

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7ou can see that the judgment of Blackburn ( on pp *1,$*1. is centred on an implied term analysis. 'e concludes on p *18 +nd last para that the e"istence of the subject$matter of the contract is an implied basis for the continuing of the contract. 7ou can see that this has some parallels with the mistake cases. #s was pointed out when we studied mistake, the difference between frustration and mistake is when the disaster struck. If before formation, then it is a mistake case; if after, then a frustration case. !he problem, as always, with implied terms is that it may be very difficult to arrive at a clear conclusion as to what the alleged implied term should be. &emember that it has to be capable of clear e"pression and it must be so obvious that it goes without saying. 6f course the parties will differ about these matters.

As a matter of construction

!he second theory is based on construing the obligations in the contract and limiting them to normal circumstances and not to e"traordinary circumstances. !his is really not very different from implying a term. But instead of adding an implied term, the techni%ue is to construe the e"press terms. !his approach is described by 9ason ( in his judgment in the Codelfa case, the leading 'igh :ourt case on frustration. 'e refers to ;ord &eids approach in

Davis Contractors v Fareham UDC

;ord &eid '/' *,< where the implied term theory is rejected and instead it is said that the parties never agreed to carry out their obligations in the type of circumstances which have eventuated. !his is a matter of construing the principal obligations of the contract. !he same idea is reflected in the words of ;ord Wright in

Denny Mott and Dickson Ltd v James B Fraser & Co Ltd (indented) para.
t is appropriate at this stage to return to

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Codelfa Construction Pty Ltd v tate !ail "uthority of # $ *,<

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We looked at this case before when we were e"amining implied terms. t will be recalled that the building of the eastern suburbs railway in )ydney was overtaken by disaster when residents obtained an injunction which prevented work being done at night. :odelfa, the contractor, had %uoted on the basis of being able to work a three 0$hour shift day. t attempted unsuccessfully to argue that an implied term should meet the new circumstances whereby :odelfa obviously could not finish on time and there were e"tra costs incurred as a result of the new arrangements. !he 'igh :ourt was however prepared to order that the contract had been frustrated. !he result was that the contract came to an end once the injunction was granted. n fact :odelfa finished the work. !his work had to be paid for on the basis of a fair and reasonable remuneration, that is, on the basis of restitution, because there was no longer any contract to determine how much :odelfa should be paid for the work. n the course of discussion about the proper basis for the operation of the doctrine of frustration, 9ason ( made it clear that the courts task is to compare performance of the contract under the new conditions with the performance contemplated by the contract before the changed circumstances. f performance is radically different, then the contract is frustrated. n this case, this was so even though there was a clause $ cl 0(+)(c) discussed on p *8+ $ which appeared to cover the events which arose. But 9ason ( said that it was not intended to cover such a radically disruptive event $ a court injunction $ which prevented the basic system of work from being employed.

As a matter of justice and reasonableness

!his is really another way of e"pressing the previous theory. !he court will intervene and declare the contract to be frustrated when it would be %uite unreasonable to e"pect the parties, or one of them, to perform under the changed circumstances. !he key to this is found at the end of the -st para on p *80 in an e"tract from ;ord &adcliffes judgment in Davis Contractors v Fareham UDC 5 t was not this that promised to do.5 (ust completing the e"amination of the Codelfa case, note that 9ason ( e"amined the %uestion whether an arbitration clause survives the termination of the contract because of a frustrating

event. !here was a mistaken view that termination of the contract meant that everythin% came to a halt, including an arbitration clause. !his view is now not correct. !here are certain matters provided for in the contract which do survive the termination of the contract.

Some e amples
We cannot possibly canvass all the frustration cases. nstead we can only get a feel for the sorts of events which might be argued to be frustrating events. 7ou will see a list on pp *00$*0< of the casebook. /articular caution must be e"ercised in relation to number 1. t is not enough to argue that performance has turned out to be difficult or even e"tremely difficult. 2or e"ample in Davis Contractors v Fareham UDC (described on p *0*) the contract was to build *0 houses for a fi"ed price in 0 months. Because of labour shortages and bad weather the time it took to build the houses was ++ months. t was held by the 'ouse of ;ords that the contract had not been frustrated.

&rell v 'enry

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!his is generally regarded as the high water mark of frustration cases, that is, the court taking the most liberal view of the operation of the doctrine. !he contract was for the hire of a room overlooking the coronation route for the coronation of >ing ?dward @ . !he coronation was cancelled because of the >ings illness. !his was held to be a frustrating event. 7ou can see from this case that it is necessary to adduce e"trinsic evidence in order to argue frustration, a point specifically made by 9ason ( in Codelfa. 6n the face of it this was just a contract to hire a room. !he defendant got what he bargained for. 7et he was successful in arguing frustration with the result that he did not have to pay the balance supposedly owing under the contract. &rell v 'enry has been the subject of critical comment but probably it would be decided the same to$day in the light of what was said in the 'igh :ourt in Codelfa( Aevertheless, it is by no means easy to say what is the correct solution to these kinds of cases. n &rell v 'enry one might ask3 who should take the risk of the coronation being cancelled $ the landlord or the person hiring the room4 !he answer is not self$evident but it would not be harsh to suggest that the person hiring the room should take the risk (with the conse%uence that a court would say that the contract had not been frustrated). #fter all we all risk disappointment when we buy tickets to events, particularly outside events. 6n the other hand, in the Codelfa case, involving a large infrastructure project, it seems only fair that the government body should bear the risk rather than the contractor (and so the ruling that the contract had been frustrated produced the right result) (

Bris)ane City Council v *rou+ Pro,ects Pty Ltd

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n this case Broup /rojects (B/) owned some land which it wanted to develop. !he land needed to be reConed. t came to an agreement with the Brisbane :ity :ouncil that B/ would carry out certain work both on the land and off the land when the land was reConed residential. What happened was that the land was compulsorily resumed by the government for use as a school. !he Brisbane :ity :ouncil argued that, to the e"tent that B/ had promised to do development work off the land, it was still bound to do so. B/ argued that the whole deal had been frustrated because the very basis for its ability to make a profit had been removed when the land was compulsorily resumed. !his case raises the interesting %uestion whether it can be said that frustration e"ists when the commercial underpinnings of the contract have been removed. !hose members of the 'igh :ourt who considered the issue had no difficulty in this case in holding that the contract had been frustrated because of the resumption of the land. 7ou can see the conclusion of )tephen ( on p *.. ,th para and an interesting commentary in the ne"t para on p *.. on the law about frustration and how uncertain it is. 'e talks of the cases providing little more than single instances of solutions to the %uestion of frustration.

#ational Carriers Ltd v Panal+ina -#orthern. Ltd

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!his case was important because, before it was decided, it was generally thought that the doctrine of frustration could not apply to real estate, including leases. !his is because real estate is land and land is for ever. !he #ational Carriers case involved a commercial lease of a warehouse. !he only access to the warehouse was cut off by a local authority order which closed the street because of the unsafe state of a building in the street. !he lease was for -= years. !he street would be closed for about -0 months. !he tenants argued that the lease was frustrated. Why should the doctrine of frustration not apply to real estate (the traditional position)4 n this case, the tenant had the premises the subject of the lease agreement. t does not matter what happens, it could be argued $ even if a building is totally destroyed $ the interest in the land continues on. But this is a somewhat unrealistic view of the commercial realities. n the #ational Carriers case the 'ouse of ;ords said that the doctrine of frustration could indeed apply to a lease but stressed that such cases would be rare. 6n the facts of this case they came to the conclusion that the lease was not frustrated because the tenants deprivation was relatively small compared with the term of the lease (-0 months in -= years).

Self!induced frustration
6ne limitation on the doctrine of frustration is that a person cannot argue frustration if he or she has caused the frustrating event. !his is called self$induced and is no frustration in law. t may be possible to escape this rule if the person who has apparently caused the event can argue that it was not his or her fault. !he rule about self$induced frustration is discussed in a rather odd setting in

FC he+herd & Co Ltd v Jerrom

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!he case is odd because of the way the argument was put. !he contract in %uestion was a contract of apprenticeship. !he apprentice was convicted of an offence which had nothing to do with his work. 'e was sentenced to a term in Borstal $ a type of prison for young offenders. When he got out he asked to resume his training but the employer refused. !he apprentice then brought an action for unfair dismissal. !he employer argued that the contract had been frustrated by the sentence to Borstal and that therefore he had not been dismissed. !he apprentice argued that frustration could not work because it was self$induced frustration. !he usual way in which self$induced frustration arises as an argument is illustrated by the Jose+h Constantine case which is mentioned on p *.0 +nd last para. n that case a ship e"ploded. !he owners argued that the contract of chartering had been frustrated. !he charterers argued that the e"plosion was caused by the negligence of the owners and that therefore the contract had not been frustrated. n fact it was not clear what caused the e"plosion. t was held that the onus of proving self$induced frustration rests on the person alleging fault and that in this case the charterer must prove that the e"plosion was caused by default on the part of the owner. !his the charterer could not do and so the argument that the frustration was self$induced failed. 6f course, the present case does not really raise the issue of self$induced frustration and, indeed, ;awton ;( said as such in the +nd para of p *.<. What the apprentice was trying to argue here was that the contract was not frustrated so much as it was subjected to a default by himself which would then re%uire some response by the employer viC dismissal. n other words this case was about breach. !his, at least, so it was argued, prevented the employer from arguing frustration because breach and frustration are mutually incompatible. #lternatively, frustration could not be argued because the event which was the basis for frustration was self$induced. t is said in the cases that frustration can only work if the event in %uestion happened without fault on either side.

!his is turning around the self$induced frustration argument. n the end, these arguments did not work. !he court resorted to basic statements of principle such as a person cannot take advantage of his own wrong. !here are still unresolved %uestions relating to self$induced frustration3 what degree of fault is re%uired to attract the rule4 s negligent conduct enough4 2or e"ample, it was never suggested in the Codelfa case that that was a case of self$induced frustration. But why not4 !he contractor caused the event which was held to be a frustrating event by making sufficient noise to constitute a legal nuisance (a tort). !his merely illustrates that the concept of self$induced frustration has not been fully worked out.

The conse"uences of frustration

At common law
f it is established that there has been a frustrating event, then the contract stops from that moment on. !hat means that all obligations up to the moment of frustration are enforceable and that all obligations relating to performance after that moment are no longer binding. )ome contract terms survive frustration, as we saw in the Codelfa case where 9ason ( held that an arbitration clause survived. 6ther types of terms which would survive would be an e"clusion clause and a clause imposing a duty of confidentiality. f the contractor is permitted to do further work after the frustrating event, then, unless a fresh agreement is made, the contractor is not doing work pursuant to the contract. Aevertheless, the contractor must be paid a fair remuneration for any work done, on the basis of "uantum meruit or restitution. !his may be more or less than the contract rate. !his is in fact what happened in the Codelfa case. Basically, then, the loss lies where it falls. !his can cause hardship. 2or e"ample, suppose a periodic payment is due to be made on the -=th 6ctober and this payment relates to work that has been done over the last month. )uppose the contract is frustrated on the 0th 6ctober. !his means that the amount is no longer due and payable and yet the work has been done. #nother situation which can cause injustice is where money is paid in advance and then the contract is frustrated before the person who has paid the money gets any return for it. )ome of these problems are illustrated by

Fi)rosa +olka "kcy,na v Fair)airn Lawson Com)e Bar)our Ltd *<.

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n this case a /olish company ordered a machine from an ?nglish company. !he /olish company was obliged to pay D-.== up front when it sent in its order. t paid D-=== of this. !he ?nglish company started work on making the machine. !hen war broke out and the contract was frustrated. !he /olish company claimed its D-=== back. !he ?nglish company said that it had already done a considerable amount of work on the machine. !he 'ouse of ;ords applied a restitutionary principle which dictates that if there has been what is called a total failure of consideration, then any money paid in advance can be recovered. !he e"pression 5total failure of consideration5 has nothing to do with the doctrine of consideration. t does not mean that there is no consideration so that no contract has been formed. What it means is that one party has got nothing under the contract. n that circumstance, if he or she has already paid money up front, the money can be recovered. We have come across this idea before when we looked at the judgment of ;ord #tkin in Bell v Lever Bros. !he principle only applies if the

party has got nothing under the contract. !he failure must be total. f the party has got something under the contract, however small, then the principle does not work and any money paid up front cannot be recovered, even if it far e"ceeds the value of what has been received. )o, in this case, the /olish company had received nothing for its money and it could therefore recover the D-===. But this was not a satisfactory result for the ?nglish company because it had performed work. 9aybe it could find another buyer for the machine but this would depend whether it was a one$off machine or one which was readily saleable. )o the overall result of the common law principles which apply if a contract is frustrated are sometimes not very satisfactory. t is always possible for the parties to specify in the contract what should be paid if the contract is terminated but often the parties do not enter into a commercial relationship with a view to it failing and so they do not provide for such events. t is because the common law conse%uences of frustration can be unfair that legislation has been passed in some jurisdictions to attempt to allow adjustments to be made.

Statutory modifications

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n three jurisdictions in #ustralia legislation has been passed to try and deal with the problem of frustrated contracts, that is, the 5mopping up5 after a contract has been frustrated. !he legislation attempts to allocate the conse%uences of the contract being frustrated in a way which is more satisfactory than the piecemeal common law. ?ach #ct is different from the other. !he @ictorian #ct is modelled on the ?nglish legislationE the )outh #ustralian #ct is modelled on the legislation of British :olumbia (:anada)E and the Aew )outh Wales #ct is a thing unto itself and is virtually incomprehensible. !he best and simplest model is the )outh #ustralian #ct. !he legislation is described very briefly on p *<<. # full e"ploration of each #ct would be a very time$consuming e"ercise. We cannot embark on such an e"amination. Basically, the legislation is designed to achieve a fair and just settlement between the parties to a frustrated contract.

A #rief $istorical %verview

NB REFERENCES TO "HPH" OR JUST TO A PAGE NUMBER ARE TO HEFFEY, PATERSON AND HOCKER CONTRACT COMMENTARY AND MATERIALS 8TH ED 1998 (LBC INFORMATION SERVICES)
2or a useful guide to the historical development of the law of contract, see )eddon, A and ?llinghaus 9 Cheshire & Fifoot/s Law of Contract (*th #us ed -<<*) ch +.. !he early law was primarily concerned with keeping the peace. 6ut of this concern developed the action for trespass which was designed to give a remedy to someone who was wronged so that they would not resort to self$help remedies. 7ou learn about this and associated remedies in the !orts course. But the wrongs which were the subject of early legal remedies were limited and what characterised the early common law was the writ system whereby you had to be able to fit your particular grievance to a particular formula or writ. f you could not, then you could not get a remedy. n relation to contract$type claims, the law was relatively unsophisticated. t allowed a remedy if someone did something badly (misfeasance) but not if he or she did not do it at all (nonfeasance).

!here was an e"ception to this, namely, when someone had failed to pay money. 9oney claims $ called an action in debt$ could be brought by a seller if goods had been delivered and not paid forE but a claim could not be brought by a buyer if the goods were not delivered at all. n such a case all that the buyer could was get his or her money back. 6rdinary trading e"changes were therefore covered in a fashion. But you can see that the law had not adapted to the needs of a sophisticated trading economy which, as we have seen from the supermarket e"ample, re%uires the ability to make enforceable promises about the future $ called e"ecutory promises. f you wanted to be sure that someone would do something in the future, the only way was to get them to promise in a deed under seal. !he action was called an action on a covenant. !his was the only way of getting a remedy for nonfeasance. t was not until the -*th century that a general contractual remedy (called assumpsit) was developed to cover nonfeasance. )o, the development of a general contract remedy was slow in coming. )pecific areas of activity had special rules. !his can be seen in the ne"t part.

&'th (entury )aternalism

Before the industrial revolution, society was stratified, each person with his or her own status. !hus in feudal times a personFs status was determined by birth and relations between people were principally governed by status rather than contract. What is meant by this is that a person could not really change his or her status by enterprise or endeavour. /roperty rather than enterprise was the principal source of wealth. !his is not to say that there was no trading. !here was but traders developed their own special rules, called the 5law merchant5, which had universal application amongst traders but was otherwise not applicable to day to day life. t was not the common law but rather a private system of law. :ontract played a minor role and was mainly concerned with transferring of property. )ome contract$like obligations were imposed, not because a person had agreed to them, but because they arose automatically, such as the obligation to pay a physician for services rendered. ?ven if the parties had agreed to a specific price this was not necessarily binding if it did not conform to community standards. )o, obligations would arise in these times irrespective of the partiesF wills or intentions.

* ecutory )romises
!he most important feature of early contract law was the fact that e ecutory promises were not enforceable. !hus any promise to do anything in the future could not be enforced by simply making an agreement as it can to$day. 6bligations arose in early contract law because something had already been done. !hus the obligation to repay a debt arose because the borrower had had the benefit of the loan. !he obligation to pay a builder arose because the work had been done. !he basis of imposing an obligation was that one party would be unjustly enriched at the e"pense of the other if the obligation was not fulfilled. #s already noted, it was possible by a special method to make e"ecutory promises binding and that was to use a formal document called a deed under seal. !hus, if there was sufficient ceremony and formality it was possible to create promises binding in the future. Geeds still e"ist to$day and are used in certain special transactions or to achieve a particular purpose. !he first transformation of the law of contract was to develop a way of enforcing e"ecutory promises. !his it did by developing an action called assumpsit. f one person promised another to deliver a ton of gravel ne"t 2riday, payment on delivery, such an agreement would not have been enforceable. f the supplier failed to show up on 2riday, no remedy was available unless the agreement was enshrined in a deed. !he action of assumpsit was developed to meet this type of case. t was enough, in order to create a binding agreement, merely to e"change promises. !his was of profound importance in the world of industry and commerce which was just starting to take off at the beginning of the industrial revolution. t enabled entrepreneurs to plan ahead. !rading no longer consisted of instant e"changes. 2actories and other entrepreneurial enterprises

became comple" organisations in which reliable forward planning was essential for efficiency. :ontract law, through the action of assumpsit, developed to meet this need. Before turning to the -<th century, it is worth noting that much has been written about the basis of making binding promises. We have already started to e"plore this %uestion. t is all very well to say that the action of assumpsit laid the ground work for sophisticated forms of e"change. But basic %uestions have to be asked about the business of promising. What is it that makes a promise binding4 ?"actly when does it become binding4 !he doctrine of consideration, as have already indicated, was about this problem. 6riginally the word 5consideration5 probably meant motive or reason for imposing a binding obligation on someone. !hus the law was searching for a good reason to make promises binding. 9uch of the early law of contract was concerned with this %uestion with different points of view holding sway at different times. !his is discussed in the e"tract from Breig and Gavis ('' pp .$-=).

The +oral %bligation Theory ,ejected

n the end the law of contract rejected a moral theory, championed by ;ord 9ansfield, as being the good reason for making promises binding but instead adopted a theory of e"change or bargain $ that is, promises were binding if they were part of a process of e"change, but not otherwise (deeds apart). t was not enough merely to promise.

0astwood v &enyon
!he decision in 0astwood v &enyon (-0,=) -- # H ? ,10E --1 ?& ,0+ was an important land mark because it set the seal on the consideration or e"change theory and put paid to the moral obligation theory which had achieved some success in ;ord 9ansfieldFs time. !he case involved someone who as e"ecutor of a deceased estate had taken on himself the task of looking after the deceasedFs daughter until she became an adult. n doing so he had spent a lot of money and even had had to borrow money at one stage. !he daughter, when she came of age and her husband when she married, promised to reimburse the plaintiff. When he was not reimbursed he sued on this promise. !he court said that the promise to reimburse was a purely moral obligation. t was not supported by consideration. !his was because it was not part of an e"change. What he had done in the past could not constitute part of an e"change. We will see that this idea is reflected in one of the rules of consideration which we will e"amine, namely, the rule that past consideration is no consideration.

A -.ood- (onsideration
We will see that much of the doctrine of consideration is about what amounts to a good consideration in the eyes of the law. t is here that there are some somewhat curious rules. !he courts had to face the task of trying to define what they meant by consideration.

Th !"#$% $& " '"# (h"( (h ) h"& (* ! "+ ,%h"+- *. #*/ (h$+- ) %*-+$# & (* ! " %*+#$& )"($*+ $+ 0"' ! (' + (h 1")($ # 'h + (h 2 /"& "+ "-) / +(3 Th$# $#, *. %*4)# , %$)%40")3 Th #%"1 .)*/ (h %$)%0 '"# 1)*5$& & !2 (h "%%4/40"($*+ *. ,1 )$ +% .)*/ (h %"# #3 I+ - + )"0 ( )/#, " %*+#$& )"($*+ '"# #*/ (h$+- 1)*5$& & !2 (h 1)*/$# ((h 1 )#*+ ()2$+- (* +.*)% (h 1)*/$# ) 'h$%h '"# $(h ) " ! + .$( (* (h 1)*/$#*) *) " & ()$/ +( (* (h 1)*/$# 3 A+ ,"/10 *. " ! + .$( (* (h 1)*/$#*) $# " 1)*/$# *. " #4/ *. /*+ 23 A+ ,"/10 *. #*/ (h$+- 'h$%h $# " & ()$/ +( (* (h 1)*/$# $# " 1)*/$# (* -$5 41 " )$-h( *) (* .*) -* "+ *11*)(4+$(23 O.( + (h %*+#$& )"($*+ $# both " ! + .$( (* (h 1)*/$#*) "+& " & ()$/ +( (* (h 1)*/$# , #4%h "# " 1)*/$# !2 (h 1)*/$# (* 1"2 /*+ 2 (* (h 1)*/$#*)3

Th .*00*'$+- %"# #h*'# " %4)$*4# ,"/10 *. h*' (h %*4)(# #()4--0 & '$(h (h %*+% 1( *. ! + .$( "+& & ()$/ +(3 hadwell v hadwell
!he peculiar nature of what the law considered to be a detriment and a benefit is revealed by the case of hadwell v hadwell (-0.=) < :B (A)) -8<E -,+ ?& .+. n this case an uncle promised his nephew an annual sum of money if he married one ?llen Aicholl. !he nephew duly married ?llen Aicholl and the money was paid for some time. !he uncle died and his e"ecutor refused to pay the money. t was argued that this could not be a contractual obligation. What was the consideration provided by the nephew4 Gid he provide a benefit to his uncle or did he suffer a detriment4 t does not seem so. 7et the court was prepared to say that when young ;ancey $ for that was the nephewFs name $ actually married ?llen Aicholl he was providing a consideration which made the uncleFs promise binding. t was said that the nephew had either incurred a detriment by marrying ?llen Aicholl or had conferred a benefit on his uncle. What benefit4 t was thought that the uncle must have wanted his nephew to marry ?llen Aicholl and that therefore it was a benefit to him when ;ancey married her. !he case is, to say the least, peculiar.

Carlill v Car)olic moke Ball Co

('/' 1*)

#nother taste of the mysteries of consideration is the famous Car)olic moke Ball case. wonFt go into the case in detail now because we will return to it. n that case 9rs :arlill responded to an advertisement by buying the defendantFs product, a carbolic smoke ball, which was touted as a wonder cure for all sorts of maladies. !he advertisement promised D-== to anyone who used the ball and yet contracted influenCa. 9rs : duly obliged and sued for the D-== which the company had refused to pay. !he case raised a number of basic issues about formation of contract. :an an advertisement be the basis of a contract4 :an 9rs :Fs buying the smoke ball be consideration for the companyFs promise4 &emember that her buying the smoke ball was a consideration for the smoke ball itself. Was getting the Fflu the consideration4 and so on. 9rs : won her case and thereby provided law students for the ne"t century at least with a taste of the mysteries of the law of contract. !he case is important in establishing that a contract does not necessarily involve the e"change of e"ecutory promises. !his type of contract, where only one party comes under an enforceable obligation $ the company in this case $ is called a unilateral contract. t takes the form3 if you do this then promise to do something in return, usually pay you money. !he promisee is never under any obligation to do anything. 'e or she can take it or leave it. !he promisor, on the other hand, is under a contractual obligation once the promisee has responded appropriately to the offer.

&/th (entury 0aisse1 2aire

#s a reaction to the stratified society of the -0th century and earlier, a new philosophy took hold. !he philosophy of liberalism supposed that an individual should not be allocated a status at birth but instead should be free to compete e%ually with his or her neighbour. )uch a person should not be hampered by oppressive laws. !hey should be kept to a minimum. )ociety was to break away from hierarchical organisation. ;aw was to play its most significant and strictest role at the level of the state. Bovernment was subject to strict rules so as to prevent despotism. ;aw would then have a diminishing role as it descended through society. t would play a small role in industry and commerce and almost no role at the level of the family. !hese ideas were taken up by economic thinkers whose place in society became increasingly important as economic activity started to burgeon.

9any of the principles of contract law which you will be studying reflect the philosophy of last century, what came to be known as laisseC faire which means 5leave alone5. ts modern e"pression is 5de$regulation5 and the view that government should not interfere in the market place. ;et the market decide who wants what. !he economists call this the theory of perfect competition which envisages a market in which buyers and sellers are free agents, each of whom cannot influence the price or %uantity of goods. !he price of, say, tomatoes is determined by supply and demandE if there is an oversupply the price will fall, an undersupply the price will rise. f it rises too far people will stop buying but at the same time more suppliers will turn to tomato growing and supply will increase, thus bringing the price down again. !his e%uilibrium was praised by -<th century economists and by free market adherents to$day as providing the perfect system for distributing goods and services. !he %uantities and prices of goods and services were determined by the very many individuals in the market who acted freely and rationally in making choices which were both in their own individual best interests and in the overall interests of the economy. 9uch of this is dealt with in the ;aw in :onte"t course. By contrast, other systems of distribution of goods and services, for e"ample, by state direction were thought to be inferior. n communist countries there was traditionally no free market and the state determined who should get what and at what price. Bound up with the philosophy of -<th century laisseC faire were various beliefs which concerned the welfare of the individual. # person, free of constraints, acting rationally would be able to determine for himself or herself what he or she should buy and sell. !he idea of individual autonomy was e"tolled to be the best state for people. !hey were free to make choices and free to make mistakes. f they made too many mistakes, then they would fall by the wayside and more talented people would come to the fore. !he system thus ensured that the competent succeeded, with every person in theory having an e%ual opportunity to compete and to succeed. !his was survival of the fittest, something which, in the natural world, Garwin had discovered in the -<th century and which had such a huge impact not just on science but also on philosophy. When two people came together to make a deal, they would determine what was the fairest e"change. !hey could write into their contract whatever they pleased, free of state intervention or imposition. !his became to be known as the will theory whereby the sole task of courts was to give force to the partiesF intentions as disclosed by their agreement. t was not the courtFs job to write the contract for the parties or to impose a just solution on them. (ustice was 5blind5. (!his symbol of justice is still used to$day). !he e"pression 5freedom of contract5 was the catch cry for this approach, namely, that the parties and not the state should determine the contractual arrangement. !he idea was that a contract was a voluntarily assumed set of obligations. !his is to be contrasted with other areas of the law, particularly torts. #n obligation arises in tort because the law says so $ the obligation is imposed. n contract, on the other hand, the parties, acting as free agents, decide for themselves what obligations they are prepared to take on. !hat was, at least, the theory. # good statement of the will theory can be found on p ++ of Breig and Gavis Law of Contract in the %uotation from :ohen (-<11) 'arv ; &ev 881 at 880. !his, too, reflects the -<th century philosophy of laisseC faire. #nother aspect of the -<th century view of commercial relations was that the rules under which business people operated should be very clear and as precise as possible. t was thought that business efficiency would be promoted with a legal system which promoted certainty and security in transactions. We will see that, for e"ample, the rules of offer and acceptance are very precise and assume a certain degree of orderly and predictable behaviour. t was thought that certainty was more important than justice if the two values competed. )o, for e"ample, the rule that you are bound by a contract which you have signed, whether you have read it or not, promoted certainty at the e"pense of those who were unsophisticated or naive and either did not read or could not understand what they were signing.

!he individualistic creed could not in practice survive in a pure form. !he theory of perfect competition in which each player in the market is an individual who cannot by himself or herself e"ert any influence on supply or demand had to give way in the face of increasing concentration of economic power. ;arge corporations used their bargaining power to e"tract or impose conditions which were far from ideal on both employees and consumers. 2reedom of contract meant freedom to e"ploit. 2or e"ample, large railway companies could e"empt themselves from liability in the event of an accident. !he passenger had no choice but to accept the conditions imposed by the railway company. !he result was that legislation was passed to curb the e"cesses of the railway companies (!ailway and Canal Traffic "ct -08, (I>)). !his was the beginning of the consumer revolution. # similar thing happened at the beginning of this century in #ustralia with the passing of the ea1Carria%e of *oods "ct -<=, (:th), documented by Breig and Gavis Law of Contract on p 1-, which curbed shipowners from unreasonably e"empting themselves from liability. )o the idea of freedom of contract and the idea that obligations were voluntarily assumed by free agents did not match the reality of economic power which, in effect allowed big players to dictate to little players. )tandard form contracts were imposed by the powerful and if you wanted to do business with them you could take it or leave it. 7ou could not bargain. )tandard form contracts have been called a form of private legislation. n fact, the -<th century was far from a time of laisseC faire. !he principal reason for this was that there was an early revulsion against the e"cesses of the entrepreneurs. n particular, the commodification of labour, that is, the treatment of people as a commodity $ just another in$put to the manufacturing process $ e"cited political response. ?arly in the -<th century laws were passed to control the employment of children in factories, to control hours of work and safety conditions.

34th (entury Social 5elfare

!he spirit of the -<th century has given way in part to a more paternalistic concern for the individual. t is no longer assumed, as it was in the -<th century, that the individual is a free agent who can protect his or her own best interests. !he market can be a cruel mechanism. /eople in a market model are merely units of production. !here was a natural revulsion against this view and its conse%uences. !he changes could be seen in legislation initially. Bovernments were prepared to intervene in the contract relationship in certain areas. !he overall effect of such intervention was to protect the underdog against undue e"ploitation. !hus in the field of safety at work the onus was shifted from the worker to the employer to maintain proper standards. :ompensation for injuries suffered in the workplace was assured by workersF compensation statutes. !he common law changed too so that, for e"ample, the complete defence of voluntary assumption of risk which prevented injured workers from claiming successfully, was greatly circumscribed. ;andlords no longer had the freedom to impose whatever conditions they liked. 2inance companies were controlled in their lending practices. /eople who sold goods had to guarantee certain minimum standards of %uality. #nd so on. Aow there are to be found legislative provisions which actually say in broad terms3 you must make fair contracts. We will e"amine this legislation in this course. !he judges were slower to respond to the new spirit of welfarism. 9any cases in the +=th century reflect the older views of laisseC faire. 6ne area where judges did respond to the facts of economic life, namely, that big corporations tended to wield their power to the detriment of consumers, was in the area of e emption clauses. (udges employed all sorts of tricky devices to strike down harsh e"emption clauses. But it is significant that they never said3 5that is not allowed because it is unfair5. nstead they would find that the e"emption clause had not been properly drafted or that it had not been sufficiently drawn to the attention of the person whose rights were taken away by the clause. !hus 5freedom of contract5 still operated as the basic principle in that a business could e"empt itself from liability if the clause was well enough drafted.

n the last ten years or so in #ustralia the 'igh :ourt has shown an inclination to develop the law along more welfarist lines. t could be said that this is a delayed reaction. !he movement for de$ regulation, for returning to a more market$oriented economy, is strong in the political sphere. 7et the judges are arguably moving in the opposite direction. We will see some %uite remarkable e"amples in this course of how the law of contract is moving from the cut$and$dried, survival of the fittest, -<th century model to a softer, more uncertain law which e"pects commercial people to behave fairly towards each other. #nother curious phenomenon is that perfect competition, so beloved of economists, often does not work. Business people actually try to make sure that it does not work by combining together in cartels. )uch practices are now illegal under the !rade /ractices #ct -<*, (:th). )o in one part of the !rade /ractices #ct (/art @) you will find consumer protection provisions which are needed to protect consumers against the power of big business and in another part of the #ct (/art @) you will find sections which consciously promote competition by forbidding anti$competitive practices. t is ironic that government intervention in the form of legislation is needed to promote free markets.

Intention to create legal relations

NB REFERENCES TO "HPH" OR JUST TO A PAGE NUMBER ARE TO HEFFEY, PATERSON AND HOCKER CONTRACT COMMENTARY AND MATERIALS 8TH ED 1998 (LBC INFORMATION SERVICES)
We now come to what is sometimes referred to as the third essential ingredient for formation of contract. t is, however, doubtful whether it is an essential ingredient. !he reason for this is that it is very rarely an issue and that the intention to create legal relations goes without saying in the vast majority of contracts. t has even been argued (by the Inited )tates contract writer Williston) that this is not so much an ingredient of formation of contract so much as part and parcel of the doctrine of consideration. We saw something along these lines in the "ustralian $oollen Mills case where the 'igh :ourt argued that what #ustralian Woollen 9ills did was not an acceptance nor was it a consideration. !he :ourt did not mention intention to create legal relations. )o, this %uestion of intention is not of much practical significance. We need to have an overview of this area. 7ou will see from the reading guide that there are four areas dealt with. 2irstly, in ordinary commercial contracts, there is a strong presumption that intention is present. t is possible to displace this presumption, but it is very difficult to do so. )econdly, in domestic and family arrangements there is a weak presumption that there is no intention to create legal relations. !his presumption can be easily displaced. !hirdly, certain types of government arrangements, of which the wool subsidy scheme in the "ustralian $oollen Mills case is an e"ample, do not generate contractual relations. But, of course, ordinary government contracts are just contracts in the usual sense. 2inally, there is a bit of a problem in analysing what goes on when a club or other voluntary association makes a contract. # voluntary association which has not incorporated is not a legal entity. t is a collection of individuals. !here are problems of contractual analysis when this collection of individuals deals with the outside world and when they make rules for the conduct of their own, joint enterprise.

#usiness arrangements
t is here that there is a very strong presumption that there is an intention to create legal relations. 2or anyone to come along after they have made an ordinary commercial contract and argue that there was no intention to create legal relations would be wasting their time. 2or such an argument to succeed there must be a very clear and e"plicit statement. 6ne way in which this can happen is if parties who are negotiating for a contract want to make absolutely sure that their negotiations do not inadvertently become a contract. We looked at this issue earlier when we e"amined

Masters v Cameron

-'/' +1)

!he way to do this is to use the words 5subject to contract5 in all correspondence or on any documents which may be used to help the negotiating process, such as a 'eads of #greement document, or suchlike. We saw what the effect of the use of the words 5subject to contract5 were and that there is a very strong presumption that they delay the creation of contract until a formal document is e"ecuted. !he words represent a condition precedent to formation of contract. #nother way in which intention may be displaced is to include a clause in the agreement itself saying that this agreement is not intended to be a contract. 6f course, why anyone would want to do this is a bit of a puCCle but there is at least some authority for this being a possibility. !he case is

!ose and Frank Co v J! Crom+ton & Bros Ltd -<8)

(Giscussed '/'

!his case is discussed in 0dwards v kyways Ltd. n !ose and Frank the three parties entered into agreement in which the following clause appeared. 5!his agreement is not entered into, nor is this memorandum written, as a formal or legal agreement, and shall not be subject to legal jurisdiction in the law courts either in the Inited )tates or ?ngland, but it is only a definite e"pression and record of the purpose and intention of the 1 parties concerned to which they each honourably pledge themselves with the fullest confidence, based on past business with each other, that it will be carried through by each of the 1 parties with mutual loyalty and friendly co$operation.5 6ne of the parties broke this agreement. t was held by the court that the clause was effective to displace contractual relations. !his type of arrangement is sometimes called a 5gentlemanFs agreement5. t has been said by a judge (@aisey () that 5a gentlemanFs agreement is an arrangement which is not an agreement entered into between two persons, neither of whom is a gentleman, with each e"pecting the other to be strictly bound, while he himself has no intention of being bound at all.5 !here is a problem if someone drafts a clause like the one in !ose and Frank. t is illegal to attempt to oust the jurisdiction of the court. n other words, it is not possible to make a contract and then say that it is not possible to enforce it in a court. 7et, it is perfectly legitimate to say that the agreement is not a contract. !he line between these two can be very fine. n fact, the trial judge in !ose and Frank thought that the clause was illegal and void.

!here is one area where attempts have been made to ensure that no contract comes into being and that is with such things as football pools. !he terms relating to the competition include an 5honour clause5 and such a clause has been held to be effective to e"clude contract. !he ne"t case which illustrates the intention issue in the commercial conte"t and which underscores the point that it is very difficult to argue that there is no intention to create legal relations in this conte"t is

0dwards v kyways Ltd

('/' -<,)

!he airline company promised to make an 5e" gratia5 payment to its redundant airline pilots. !his followed on from an industrial dispute in which B#;/#, the pilotsF union, represented the pilots. !he payment was described as 5appro"imating to the companyFs contributions for each member of the pension and superannuation fund.5 'aving made this promise, )kyways then decided not to make a payment to the pilots. !he issue was whether the promise to make the e" gratia payment was a legally binding promise. t was conceded that there was a consideration for the promise. What was it4 !he argument used by )kyways was that there was no intention to create legal relations because of the words 5e" gratia5. !here was also an argument that the payment was supposed to be a non$contractual payment because it was intended that there would be no ta" payable by the pilots when they received it. 9egaw ( rejected these arguments. 6n p -<8 end of middle para 9egaw ( makes the point that the person who is trying to argue that there is no intention in a commercial setting bears a heavy onus. !he use of the words 5e" gratia5 was not, according to 9egaw (, significant. !hey are often used in settlement or compromise agreements yet they are clearly legally binding. )ee p -<. top para. n the +nd para on -<. he turns to an argument that 5e" gratia5 here had a special meaning because of the ta" implications. t was argued that everyone knew and intended that the payments should not be legally binding so that they would not attract ta". But this argument failed too on the basis that the supposed intentions of the parties which was asserted was simply not proved in evidence. !he fourth case in this category is rather different. have mentioned from time to time that parties who are in the process of negotiating for a contract use various types of documents, such as memoranda of understandings, heads of agreements, letters of intent, etc. !he general position is that these types of documents are not contracts, though in a particular case it may be that the surrounding circumstances indicate that such a document is intended to create a contractual relationship. )uch a case was the "ir *reat Lakes case. n the ne"t case we deal with a document of this kind, but a rather special kind of document which is called a letter of comfort. # letter of comfort is a :laytonFs guarantee. t can be used in a variety of situations but a typical situation is where a bank is seeking a guarantee from a parent company to support a loan made to a subsidiary company. !he bank asks for a guarantee but the parent company refuses to give one. !he bank may be content to be given a letter of comfort instead. !his letter usually says things like the parent company stands behind its subsidiary and it is the policy of the parent company to ensure that its subsidiary can at all times meet its obligations, etc.

!he issue which arises with a letter of comfort (as with all documents of this ilk) is whether it has any legal effect. Basically, the answer is Ao. #fter all, it is not a guarantee. #nd, indeed, there have been a number of cases where the courts have decided just that. 2or e"ample, the ?nglish :ourt of #ppeal decision in the &leinwort Benson case, which is discussed on p -<0, is an e"ample. #nother e"ample of a case where a letter of comfort was found not to have any legal content was Commonwealth Bank of "ustralia v TL2 Mana%ement Pty Ltd mentioned on p +=+.

Ban3ue Brussels Lam)ert " v "ustralian #ational 2ndustries Ltd ('/' -<*)
!his case involves a letter of comfort but, it should be noted, it does not conform to the usual result in cases of this kind. &ogers :( decided that the letter used in this case did give rise to legal liability. n this case )pedley )ecurities wanted a loan facility from the bank. !he bank wanted some kind of assurance from #A which owned ,8J of )pedleyFs parent company, )pedley 'oldings. # letter of comfort was provided by #A to the bank. !he terms of the letter are set out on p -<*. 7ou will see that #A gave some reasonably precise undertakings, namely, that it would provide notice to the bank if it (#A ) intended to sell its shareholding in )pedley and that, if this did happen, then the debt would become immediately payable. !he letter also said that #A would ensure that )pedley could meet its financial obligations. What happened was that #A sold its shareholding in )pedley without giving the bank notice and )pedley then went bust. BB; (the bank) then tried to enforce the letter of comfort. #A argued that there were no promissory statements and no intention to create legal relations. &ogers :( surveyed the somewhat uncertain legal position concerning letters of comfort, including how they are treated in countries such as 2rance and Bermany. 'e turned to the claim based on contract, that is, that the letter contained contractual promises in +nd para of p +==. &ogers :( referred to the 0dwards v kyways case pointing out the heavy onus which rests on a person who tries to argue no intention in a commercial conte"t. 'e then let fly in the +nd para on p +==, starting with a somewhat obscure reference to something apparently said by ;ord (ustice )crutton 5there will be no #lsatia in ?ngland5. !his is a reference to a precinct in ;ondon (White 2riars) where thieves and debtors were able to have sanctuary from the law. n other words an area where the normal processes of law did not apply. n the present conte"t, the reference is pertinent to the en%uiry whether there are legal conse%uences flowing from the letter of comfort. !he passage in the same para starting 5!here should be no room in the proper flow of commerce for some purgatory...5 is &ogers :( at his best. !his still left the problem of whether the language in the letter was sufficiently promissory. f, for e"ample, it was merely a statement of intention or of policy, then it could not be the basis of contractual obligation. &ogers :( pointed out that it was a mistake to subject such a letter to a minute te"tual analysis and then proceeded to subject this letter to a minute te"tual analysis. 'e dealt with this on p +=- and concluded that there were, indeed, promissory statements. &ogers :( also considered the possibility that the letter generated legal liability on the alternative grounds of estoppel and under s 63 of the Trade Practices "ct but these passages are not e"tracted in your case book.

7omestic arrangements
Where an agreement is reached between family members or friends in a domestic conte"t, then the presumption is that there is no intention to create legal relations. !his presumption is,

however, a weak one and is easily rebutted. t is rebutted, in particular, if husband and wife are in the process of splitting up. We saw an e"ample in Po+iw v Po+iw where, you may recall, the husband and wife had separated and they then made an agreement that he would transfer to her an half share interest in the family home if she returned to live with him. !he courts will very readily accept that such an agreement is intended to create legal relations. #n e"ample of a case where the presumption against an intention to create legal relations was not rebutted is

Balfour v Balfour

('/' +=+)

7ou can see from the e"tract from #tkin ;(Fs judgment on p +=1 that a promise by a husband to pay his wife an allowance, even if it could be said that there is a consideration for the promise, is not binding because neither party intended that such a promise should generate legal liability. !his case is the one which is always cited to support the presumption that domestic or family agreements do not amount to contracts. !here are a number of different domestic arrangements which have come before the courts. 6ften the issues are not just whether there was an intention to create legal relations, but also issues of uncertainty or possibly consideration. !his is because these types of arrangements are often somewhat vague and ill$defined. #n e"ample was a -<th century @ictorian case called Dunton v Dunton (-0<+) -0 @;& --, where a husband promised his estranged wife an allowance so long as she conducted herself 5with sobriety, and in a respectable, orderly and virtuous manner5. !here was no doubt about intention to create legal relations in that case. nstead, the issue was whether there was a consideration. !he majority judges concluded that she had provided a consideration, dwelling with some relish on what she might have got up to in the absence of such a promise. !he truth is that in many of these cases the last thing that was in the partiesF minds was the possibility of legal conse%uences. But, when they %uarrel, then legal issues arise and, if they are not settled, then a court has to do its best to sort out the mess. Isually, a court will not just dismiss the case on the basis of no intention to create legal relations. #nother group of cases is where someone who is old and unable to look after himself or herself asks another person to live in and look after him or her in e"change for being left the house in the old personFs will. n these sorts of cases, the courts have been prepared to interpret the arrangement as a contract. ()ee Cheshire & Fifoot/s Law of Contract (*th #us ed -<<*) para 8.*)

.overnment schemes
!here is really no need to spend any time on this point. !he "ustralian $oollen Mills case is the best illustration of this point. !here are some types of government dealings where it is simply inappropriate to pin the label of 5contract5 on the arrangement. !here have been other, similar cases one of which is mentioned in your reading guide, namely,

"dministration of Pa+ua #ew *uinea v Leahy

('/' +=1).

n this case the government carried out a tick eradication scheme. Bovernment officers carried out the necessary work but the landowner had to provide labour for mustering the cattle. t was alleged that the spraying was done very badly and that this was a breach of contract. !he claim failed on the basis that the arrangement was simply not a contract.

#nother e"ample is given on top of p +=, of '/'. Where a local council provides information or does something else which it is re%uired to do by statute and it charges a fee for the service, this is not a contract. Coshott v $oollahra MC illustrates. # further e"ample, is where the government hands out money to individuals or groups to achieve certain public purpose. 2or e"ample, money is granted to community law centres to provide free legal services to people who cannot afford a private solicitor. !hese grants usually have detailed conditions attached. )uch grants on conditions are almost certainly not contracts. !he government would not be able to sue for damages if the conditions of grant were broken and the recipient would not be able to sue for the money if the government failed to pay. !he government, of course, does have the ultimate sanction, namely, not to grant money in the ne"t round of grants. But, remember that in any other respect the government makes contracts just like anybody else, although there are some problems which are peculiar to government contracts (as to which see A )eddon, *overnment Contracts4 Federal5 tate and Local (2ederation /ress -<<8)).

8oluntary associations
!he principal problem here is whether the rules of a club, political party or other voluntary, unincorporated association are binding legally on their members. !he traditional answer is that they are not legally binding and that the internal disputes of such bodies are matters for them to sort out and not for the courts.

Cameron v 'o%an ('/' +=,)

illustrates this approach. !his was a case involving the #ustralian ;abor /arty. n more recent times this hands$off approach has been %uestioned. 7ou can see the detailed criticism of that approach in

Mc&innon v *ro%an ('/' +=8)

where Wootten ( says that it is simply not good enough for the courts to opt out of disputes in important institutions, such as political parties or large sporting clubs. n that case Wootten ( was at least prepared to make a declaration $ an e%uitable remedy whereby the court simply declares what the legal position is $ as to the membersF rights. # similar approach was adopted in a more recent case of Baldwin v 0verin%ham K-<<1L - Md & -=. !he whole problem can be avoided by incorporating such bodies under legislation which has been specifically designed to meet this kind of problem. !he legislation e"ists in each )tate and !erritory and is called the #ssociations ncorporations legislation. 7ou can see an e"ample on p +=.. !he legislation first of all constitutes the club (or whatever) as a legal entity $ a legal person. !his solves the problem of making contracts with the outside world. !he contract is with the incorporated legal entity and not with a shifting collection of individuals. !he other important feature to note is that the rules of the club (or whatever) are binding between all the members as if they had entered into a deed under seal $ see s --(+) of the "ssociations 2ncor+oration "ct -<01 (A)W).

!hat is all am going to say on the subject of intention to create legal relations.