Defences in Contract Law 101
Defences are an essential element in the world of contract law. They act as a counterbalance to the presumption that parties are bound by the contract terms they have agreed to. Under English law, once a contract comes into existence, parties are generally expected to abide by the terms. However, there are several situations where even the most tightly drafted agreement may not be enforceable.
Defences can broadly be broken down into three categories: Parties may raise a defence if something has happened that renders a contract unenforceable even after the parties have entered into it. For example, it may be that there has been an offer and acceptance, but the contract formed between the parties was not one in which the agreement was freely negotiated. For instance, the claimant may allege, and lead evidence to show, that any agreement it entered into with the defendant was vitiated by misrepresentation. The elements of a claim for misrepresentation require that the claimant show: (i) that there has been a statement of fact; (ii) the statement was made by a party to the contract; and (iii) that the statement induced the claimant to enter into the contract .
An example of this type of defence is in relation to frustration of contract. If the contract becomes impossible to perform or it becomes illegal to perform the contract after formation over which neither party has any control, then the doctrine of frustration of contract may come into play. This can arise when, for example, the contract is to perform an act which has become impossible to carry out due to an unforeseen change in circumstances or where the contract has become illegal to perform due to the introduction of legislation. Parties will be discharged from performance of a contract if it falls within the doctrine of frustration.
Defences based on the contract itself are often complex and considered on a case-by-case basis. In a recent case, the court found that the doctrine of promissory estoppel could be invoked by the defendant to defeat the claim. The essence of this defence is that if a party encourages another to believe that he agrees to surrender a right, then the latter cannot later go back on what he has assumed to be the position by asserting the right in question against the former if it would be unconscionable to do so.
Defences at Common Law
A fundamental defence to each and every breach of contract claim is that no binding contract had ever been formed in the first place. A party seeking to defend a breach of contract case will be keen to demonstrate that it never agreed to form a contract, or that a factor which prevented the formation of a contract was fatal to any alleged agreement.
One example of when a party might seek to defend a breach of contract claim on the grounds that the parties never actually entered into a contract is when one party held a mistaken belief about what the terms of the contract were. Before 27 September 2017, the common law provided for a defence to a claim upon the grounds that each party made a common mistake as to a fundamental fact of the contract. However, in such cases where parties were both unaware of a fundamental mistake, only a limited range of relief was available.
In order to obtain relief in this circumstance, a claimant would have to establish that the mistake is: Whilst this was a relatively high barrier to prove, on or after 27 September 2017, a claimant would also have to demonstrate and argue that it would be contrary to an existing public policy rule for the court to grant the relief sought.
Another example of a common law defence that might be raised in a breach of contract claim, is once again based upon the element of mistake but of a slightly different nature. In this instance, the defendant may look to argue that although a fundamentally binding agreement may have been formed, the formation of the contract was vitiated by the claimant either deliberately or negligently inducing the defendant to enter the contract upon the basis of a false statement thereby amounting to misrepresentation.
In such circumstances, a contract may be voidable upon the basis of misrepresentation if the defendant is able to achieve the necessary balance of probabilities between either: Finally, it is also possible for a defence to a breach of contract claim to be made upon the fairly rare circumstance where, through no fault of its own, one party has been forced into entering the contract due to threats made by the other party amounting to duress.
A threat will be regarded as amounting to duress if "an actual or threatened unlawful act of one party causes a counterparty to a commercial contract to peruse that contract to the prejudice of its interests and contrary to its intention". In this instance, the defendant must show that: Although all three of the common law defences discussed above are relatively unlikely to be used in a typical breach of contract case, their importance in preparing for any case brought against a defendant should not be underestimated.
Defences in Equity
The equitable defences are estoppel, laches and unclean hands. The key difference between equitable and common law defences is that the equitable defences are discretionary. Where a defence to a breach of contract is equitable, the court has discretion as to whether to allow the defence. The factors influencing the court’s discretion include:
Estoppel
Where one party to a contract induces another to act or abstain from acting in relation to his legal rights, to which they are entitled, then afterwards, the party who was induced seeks to enforce these rights, the court may be so persuaded by equity, as to be precluded from allowing the action to succeed. In order to establish an estoppel of this kind, it must be shown that: In Estoppel Clothing Co Ltd v. Gorringe [1970] 1 All ER 773, a dispute arose when G sued E under a forfeiture clause contained in a contract. The property in question had been leased to E by G for an initial five year term with the option of extension for a further five years at the end of the term. The agreement also provided that if in any of the five years, E failed to pay two months rent, G could terminate the agreement and re-enter at the end of that year. In 1961, E failed to pay this rent and G gave notice of termination, but did not re-enter. E continued to occupy the property after the expiry of the first five year term until 1968 when G purported to exercise its right to re-enter at the expiry of the five year term. E contended that G’s initial notice had been a waiver of its right to re-enter. It was held that the notice was not a waiver and that estoppel did not apply. The court was satisfied that G’s notice had been a statement of its intention and not a promise by G not to re-enter. G had not acted equitably by not re-entering the property at the end of the five year term.
Laches
The equitable defence of laches arises where a party has failed to do something necessary to protect their own interest. By late neglect, a party is now prejudiced by a third party and the court is persuaded by equity not to grant the remedy sought. The remedy of laches can be applied in a variety of ways, such as dismissing the claim, refusing to enforce a term, discharge of a lien, cancellation of a mortgage, refusing an injunction. In the case of Topping & Sons Ltd v. Alleyn esley, Murray & Company Ltd, the Court of Appeal held that the doctrine of laches applied because one party had been in breach of contract and had insisted on its strict legal rights for a long time, causing the other party to suffer prejudice without the ability to do anything about it.
Unclean Hands
The equitable defence of unclean hands requires a court of equity to deny its assistance to a litigant who ignored his obligations or have been guilty of illegal or improper conduct in relation to the matters before the court. The principle is also known as the doctrine of "ex turpi causa non oritur actio". The defence is based on the principle that the court will not assist an immoral or illegitimate claim. The defence is not available to a party guilty only of inequitableness (however improper their conduct may be for other purposes). For a court to apply the defence of unclean hands, the offending behaviour must be sufficiently serious and connected the matters in dispute. In Jarrett v. Nat West Bank Plc, the claimant formed an Association with the objective of purchasing land. The association had to obtain a loan, of which the claimant agreed to act as a guarantor. The loan was successfully secured, but it was later discovered that the land had never actually existed. The claimant brought an action against the bank to not pay back the loan because the association had become the victim of fraud. The bank argued that the claimant should be precluded from relying on the defendant’s wrongful conduct to validate an otherwise unenforceable contract. It was held that the claimant was precluded from relying on the defendant’s wrongful conduct, because the fraud was alleged to have been committed wholly against others and not the claimant.
Statutory Defences
Beyond common and equitable defences, in limited circumstances, a third party may be able to rely on other statutory defences, which arise under specific statutory provisions, such as consumer protection or certain other legislation.
The following legislation, which applies only to consumer contract law defences, is relevant to statutory defences for specific circumstances: Defences and unfair contract terms: Under the ACL, if a clause in a consumer contract is unfair, the clause is void. Consumer guarantees: The ACL also gives consumers a number of guarantees which cannot be contracted out of. This means that, in addition to common law rights and equitable remedies that a consumer may have against a supplier, the ACL gives the consumer more rights to protect the supply of goods and services. A supplier of consumer goods will give a guarantee that the goods will: The consumer also guarantees that the goods are fit for any purpose which the supplier represents them to be fit for. If a consumer uses the goods for any other purpose, they can still rely on the guarantee that the goods can pass a particular purpose which was represented.
Certain provisions of the Australian Consumer Law dealing with misleading conduct state that any waiver or release of all of part of a consumer’s right to sue for breach of the ACL is void. These defences are strictly construed and do not permit party waiver of a consumer’s rights under the ACL, no matter how expressly the parties attempt to exclude feedback in the contract.
Defences and misleading or deceptive conduct: The definition of "misleading or deceptive conduct" is a broad concept. Parties can use a number of different arguments as defences against a claim of misleading or deceptive conduct, including evidence and proof of ‘due diligence’, a defence of unclosure of material circumstances or indulgence or waiver of the conditions.
Establishing a Defence in Litigation
Once a defence to an action is identified, the defendant may, through the course of litigation, be required to prove that the defence is valid and therefore should win the day. This process is known as the onus of proof. The onus of proof is the obligation of a party to a dispute to prove the truth of a matter they are asserting. The onus of proof in all civil matters lies on the party that asserts the truth of a matter. This means that the defendant has the onus of proving a defence to an action, while the claimant has the onus of proving the truth in their allegations against the defendant. Hence, as the action will have been commenced by way of close with a statement of claim, the burden lies on the defendant to prove the facts that demonstrate or support the defence being asserted.
General principles
As the standard of proof in civil matters is the balance or probabilities, to succeed, the defending party must establish a defence to the action to the requisite standard of proof. In other words, the defendant must prove that it is more likely than not that the defence being asserted is established on the evidence and therefore must be accepted by the court . This also means that if there is a reasonable doubt about whether the defence is established, the defendant will fail and judgement will be given against the defendant; i.e., the defence will fail.
Application to contract law
A party defending an action in contract does not have to prove all the elements of a defence to the same standard of proof. When seeking to prove a defence to an action on a contract, the defendant must be able to point to reliable and relevant evidence for each element of the defence being asserted. While saying this, each element of the defence should be proved by a preponderance of the evidence and there is not a separate level of evidence required for each element of the defence. Hence, if each element of the defence being asserted is proved to the preponderance of the evidence, the defendant will be successful. Where even one element of the defence cannot be proven to the preponderance of the evidence, judgement will be entered against the defendant; i.e., the defence will fail.
Practical Applications and Notable Cases
To further illustrate the practical applications of contract defences, we shall consider notable case studies. The defence of frustration has received intensive judicial consideration over the years and two key cases bear mention. The original classic case of frustration is the 1863 case Toynbee v. Sanderson, where the claimant had agreed to lease a house for 21 years from the defendant. The claimant obtained planning permission for development which would have required extensions to the property which were prohibited by the terms of the lease, and thus sought to terminate it. The defendant argued that contract ought to be terminated due to frustration. The court held no defence of frustration arose, as the contract had not been frustrated. The reason why was that the loss of profits and loss of the right to develop were inherently risks contemplated by the claimant at the time of the signing of the contract and thus he could not found an argument of frustration on those grounds. This case has become the leading case in frustrations defence in contract law and is regularly revisited by the courts. The second case is the House of Lords decision in National Carriers Ltd v. Panalpina (UK) Ltd (1981), an example of the application of both the doctrine of frustration and the defence of illegality. A tenant entered into an agreed fixed term leasing arrangement with the sub-lessor which provided for the deposit of rent payments in advance which were to be secured against performance bonds. The industrial area leased by the parties also became subject to a traffic management order restricting the size of vehicles that could enter into the area and because of this, the lease was frustrated on the grounds of illegality, as it would have been illegal for the sub-lessor to have used a container larger than 30 metres in length (a corner length). As such the defence of illegality was also successfully pleaded in this case. As a result of the frustration and illegality, the tenant was relieved of the liability to pay damages for breach of contract protections.
Emerging Trends in Defences
Emerging trends in contract defences include the increasing use of technology to drive efficiencies, propel new ways to enter into contracts and seek to safeguard the intelligent automation of contracts which will in all likelihood morph over the next two or three decades and therefore be a plausible area for the pre-emptive claim defence. In the short term, recently enacted Australian legislation such as the Independent Review of the Legal Services Act (Subordinate Legislation 2017, No. 22/2017) which took effect in October 2017 and the Electronic Transactions Amendment (Electronic Execution of Documents) Bill 2018 (No. 14 of 2018), enabling electronic signatures to ‘execute’ deeds, will impact upon the utilisation of and defence of contracts.
Technological moves into blockchain, digital currencies and the like will likely impact upon the scope of legalising act of acknowledgement of signature on corporate documents from not only the CEO to the board of directors but potentially also extend to shareholders and as such, the directors and possibly workers of corporates.
Other potential legislative changes may also impact on the area of franking credits whereby both the state and commonwealth governments see value in extending the powers of the Taxation Office and business registration services , facilitating the ability to register all company activity from one portal. Possible merger between ASIC and the Australian Financial Complaints Authority may similarly modify the apprehension of a range of contract claims and defences for corporations.
Collaboration and teamwork as well as increased usage of social media channels may further impact upon whistleblowing reporting duties where contracts of business are at the core of what business is undertaken. The fundamental change and acceleration of value and messages into workplaces from 2010 and beyond may alter the centre of gravity of the outcome of litigated contractual breaches. Frustration, breach and retaliation may be positioned for investigation by whistleblowing functions inside corporates.
The workplace landscape is constantly evolving with the advent of smart technologies to monitor contract activity from planning, contracting and execution of service delivery which may shift the sentiment and course of interpretation and application of section 36 of the Australian Contracts Act 1974 (Cth). Australian businesses will need to analyse their processes and contract activity to understand their exposure to claims and/or the utility of a defence and align to correct advice related to proper performance under the contract.
The volume of defences and claims for breach of contract may also shift with the introduction of value-based damages into the equation for the supply of services and/or goods. The utility of this element of claims and defence will require review of position by corporate stakeholders and application of the defence to the breadth of contract activities potentially resulting in a range of potential claims for damages.