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Contract Problem Solving Law Issues
  • 12

  • Course Code: 2105AFE
  • University: Griffith University
  • Country: Australia

Problem-Solving Assignment – Contracts

Read the following scenario and answer the questions which follow. Format your advice in respect of each party using the ILAC methodology of ‘Issue, Law, Application of law and Conclusion’. 

Scenario

Ulysses wants to buy a new motorcycle.  Ulysses visits Fagan’s Motorcycles Pty Ltd on the ‘Magic Mile’ and takes a demonstration model 2018 Triumphant Bonneville motorcycle for a ride to the Gold Coast and back. 

Impressed with this bike but not with its high price, Ulysses then takes a second-hand naked (ie. without fairings) red and white 2010 Triumphant Bonneville, sporting a fuel-injected 865cc engine, a sissy bar for a passenger or to support luggage, and new white wall tyres once around the block. 

The very enthusiastic salesman, Roger tells Ulysses that this 2010 motorcycle is in excellent condition, has had (so far as he recalls) only one owner, has genuinely low kilometres (3.900km); that it comes with a full 12-month registration; and has been fully maintained. Roger adds, “This could all be yours, Ulysses, for a ‘drive away’ price (including stamp duty and transfer fees) of only $11,000. That includes our special rebate of $500 for all purchasers over 60 years of age, which you obviously are.

Alternatively, we have finance available on the best terms you'll ever get in Australia, even from the banks. If you decide on that option, you can save some money - not that this baby will burn a hole in your budget anyway.

We give you special low-cost servicing on all the bikes we sell, and we guarantee that we have every spare part that you could ever want here in-store. And if you do decide to change your mind (you’d be crazy to, of course), there’s a ‘cooling off’ period of 24 hours after you’ve signed the purchase contract.” 

Ulysses tells Roger that he just wants a good reliable motorcycle for daily commuting as well as long distance country driving, and that the two bikes seem to him to be essentially the same. Roger smiles and nods but does not contradict him and, based on this response, Ulysses decides to purchase the 2010 Triumphant Bonneville and pays a deposit of $500.

An ever-smiling Roger presents Ulysses with a number of documents, all of which Ulysses, who is neither commercially savvy nor financially literate, signs. The first is a Notice, which states:
•    the motorcycle’s make (Triumphant), model (Bonneville), year of manufacture (2010); 
•    the amount of Ulysses’ non-refundable deposit of $500; 
•    that the motorcycle had two owners previously, and that neither the odometer nor the engine has been replaced; and 
•    that the ‘class B’ statutory warranty (which protects Ulysses from financial loss if the motorcycle is faulty and has a built date of more than 10 years before the day of its sale) expires after 1 month or the first 1,000km, whichever occurs first.

The second document is a Sale Agreement, which includes:
•    a description of the motorcycle - naked (ie. without fairings) red and white 2010 Triumphant Bonneville (VIN FATTJ9109G9999007), with a fuel-injected 865cc engine;
•    a notice about the 24-hour cooling off period; 
•    a statement confirming that Ulysses has clear title to the vehicle; 
•    a safety certificate (previously called a roadworthy certificate); and  
•    a clause limiting the liability of Fagan’s Motorcycles Pty Ltd’s to ‘the supply of equivalent goods.’  

The third document is a Finance Agreement, which states that Ulysses must pay $370 per month over the next five years. It makes no mention of an annual equivalent interest rate for the finance. 

A proud Ulysses mounts his newly acquired Triumphant Bonneville and rides it around to his friend Jenny’s place to show it off. Jenny lives only about 2 kilometres from the Fagan’s dealership.

Jenny is very impressed and, being a motorcycle enthusiast herself, wants a ride. She becomes concerned when the electronic ignition does not fire, so that the motorcycle cannot start.

After about 15 minutes, however, the two of them get the engine going, and Jenny sets off to ride around the block. As she is riding from her driveway onto the road, both she and Ulysses hear a loud clunk. She brakes, bringing the motorcycle to a stop, and looks behind her. The sissy bar and one of the rear-view mirrors have fallen off the motorcycle and are lying in the gutter.

Another loud clunk comes from the engine, and the motorcycle snuffs. Neither Jenny nor Ulysses can start it again. 

Neither Jenny nor Ulysses owns a phone. An hour later, a hot and sweaty Ulysses arrives at the Fagan’s dealership, pushing his newly acquired motorcycle. Unfortunately, the dealership has closed, and Roger has apparently gone home for the weekend. Ulysses is incensed, because he is working shift work at nights for the next three days, and will not be able to come back to the Fagan dealership until four days’ time. 

On the fourth day, Ulysses returns to the Fagan's dealership, only to be told by Bruce, the mechanic in the adjacent workshop, that the motorcycle has probably not been ridden since 2010, and that the rubber seals inside the engine may well have corroded.

Bruce adds that the bike may even have been flood damaged, although it is impossible to tell at this point in time. He advises Ulysses that motorcycle could be repaired, but the cost would probably exceed $21,000, and that Ulysses may well be better off spending that money on a new bike.

Ulysses confronts Roger, who smiles benignly and says to Ulysses, “That's the luck of the draw with a second-hand bike, mate! ‘Buyer beware’ and all that! Oh – I’ve only just found out that there's an outstanding charge over your bike, and that MegaBank wants to repossess it because the previous owner failed to pay off his loan on your bike.”

Now Ulysses is very worried, since not only is he unable to afford the $21,000 to repair the bike, but he thinks that MegaBank might repossess his bike anyway, leaving him with nothing. 

(a)    Advise Ulysses as to his rights, and Fagan’s Motorcycles Pty Ltd’s and/or Roger’s obligations, under the common law of contract. (Do NOT discuss the Australian Consumer Law or torts in your answer).

(b)    Advise Ulysses about any defences which Fagan’s Motorcycles Pty Ltd and/or Roger might be expected to raise, and whether (and how) Ulysses could rebut those arguments. (Again, do NOT discuss the Australian Consumer Law or torts in your answer).

(c)    Advise Ulysses of any common law remedies he may have in this case. (Again, do NOT discuss remedies under the Australian Consumer Law or torts in your answer).

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Question a

Issue 

•    Does the portrayal of the motorcycle’s condition, history, and the number of previous owners by Roger (“Facts”, p.1) amount to a misrepresentation? This is critical as it could potentially impact the validity of the contract established between Ulysses and Fagan’s Motorcycles Pty Ltd (“F”).
•    Does this inconsistency between verbal assurances provided by Roger (“Facts”, p.1) and the written information handed to Ulysses (“Facts”, p.2) qualify as a breach of contract under the common law in Australia?
•    Thirdly, the discovery of the actual condition of the motorcycle (“Facts”, p.3) and the revelation of an undisclosed outstanding charge (“Facts”, p.4) raise questions about the implications on Ulysses' rights and the obligations of Fagan’s Motorcycles Pty Ltd and/or Roger (“FR”).
•    Lastly, considering Ulysses' reliance on the given information (“Facts”, p.1) and the ensuing problems with the motorcycle (“Facts”, p.3), is Ulysses entitled to seek any remedies under the Australian common law of contract?

Law

•    For misrepresentation Horsfall v Thomas (1862) (“HT1862”) establishes that for misrepresentation to be actionable, it must have induced the entering of the contract, and must be a significant factor influencing the aggrieved party's decision to commit to the contract.
•    Koompahtoo Local Aboriginal Land Council v Sanpine Pty Limited (2007) 233 CLR 115 (“KS2007”) posits that a serious breach of contract grants the aggrieved party the right to terminate the contract, highlighting the importance of fulfilling contractual obligations.
•    The doctrine of caveat emptor, illustrated by Hall v Simons (2002) (“HS2002”), signifies "let the buyer beware". This principle is not absolute and has limitations when misrepresentation or professional negligence is involved.
•    Regarding remedies, Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272 (“TB2009”) delves into specific performance and damages (contingent on the breach's circumstances), aiming to restore the injured party to the position they would have been in if the contract had been performed satisfactorily.

Application

In applying “HT1862”, the portrayal of the vehicle’s condition and singular past ownership (“Facts”, p.1) raises questions – were these inaccuracies or deliberate misrepresentations intended to induce Ulysses to enter the contract?

Turning to “KS2007”, the scenario presented warrants a detailed investigation. The stark discrepancies between Roger’s verbal assurances and the actual information provided in writing (“Facts”, p.1-2), along with the subsequent revelation of the motorcycle’s true, deteriorated condition (“Facts”, p.3), suggest a clear and substantial breach of contract. This necessitates a closer scrutiny of the representations made and the obligations that were seemingly breached.

The application of the caveat emptor principle, as outlined in “HS2002”, is also challenged in this scenario. The traditional onus placed on the buyer to ascertain the suitability of goods is put to the test – can Ulysses still be held fully accountable when there is a strong indication of being misled by Roger’s statements? This situation calls for a nuanced reevaluation of the responsibilities and liabilities of the buyer in the presence of potential misrepresentations.

Considering remedies as per “TB2009”, the nature and extent of Roger’s potential misrepresentations and breaches will significantly influence the determination of appropriate remedies for Ulysses. Whether specific performance or damages are warranted, and to what extent, requires a thorough and critical examination of the facts and the impact of the breaches on Ulysses’ position.

Conclusion

Potential misrepresentation by Roger as per “HT1862”, significantly influenced Ulysses' decision, casting a shadow on the contract's validity. The disparity between Roger’s verbal assurances and the motorcycle’s actual state, when viewed through the lens of “KS2007”, raises questions about a breach of contract.

This situation also prompts a re-evaluation of the doctrine of caveat emptor (“HS2002”), challenging the extent of Ulysses’ responsibilities in the face of potential misinformation.

Determining appropriate remedies necessitates a thorough exploration guided by the insights from “TB2009” focusing on the specific nature of the breaches and their ramifications on Ulysses.

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Question b

Issues

•    Did Roger’s failure to correct Ulysses’ misconceptions about the motorcycles being essentially the same (“Facts”, p.1) amount to misrepresentation by silence? Can Fagan’s Motorcycles Pty Ltd and/or Roger (“FR”) employ defenses based on the nature of these representations?
•    Were the contractual terms regarding liability limitations and warranty (“Facts”, p.2) clear and fair? How might these terms be contested by Ulysses, and what defenses could be raised by “FR”?
•    Can “FR” invoke the caveat emptor principle, asserting that Ulysses had a duty to verify the information and the motorcycle's condition?
•    Could the omission of the annual equivalent interest rate in the Finance Agreement (“Facts”, p.2) serve as a defense for Ulysses or “FR”, considering Ulysses’ lack of financial literacy?
•    Will “FR” argue that the pre-contractual statements made by Roger (“Facts”, p.1) were not relied upon by Ulysses or were not intended to be contractually binding?
•    How will the revelation of an outstanding charge and the potential repossession by MegaBank (“Facts”, p.4) shape the defenses of “FR”, and how might Ulysses counteract them?

Law

•    With v O’Flanagan (1936) (“WO1936”) establishes that a failure to disclose material changes can amount to misrepresentation.
•    Taylor v Johnson (1983) 151 CLR 422 (“TJ1983”) says silence can amount to misrepresentation if there is a duty to disclose.
•    Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd (1989) (“IS1989”) emphasizes the importance of bringing unfair or unusual terms to the notice of the other party.
•    Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 (“TA2004”) discusses the incorporation and fairness of contractual terms.
•    Caveat emptor posits “buyer is expected to exercise due diligence”, as established in Hall v Simons (2002) (“HS2002”).
•    Laidlaw v. Organ (1817) (“LO1817”) highlights exceptions to this doctrine, particularly where the seller actively conceals faults.
•    Contracts Review Act 1980 (NSW) (“CRA”) provides for the review of unjust contracts, which may include terms related to disclosure in finance agreements.
•    Oscar Chess Ltd v Williams (1957) (“OW1957”) illustrates the distinction between representations and contractual terms, and the reliance placed on them.
•    Ecay v Godfrey (1947) 80 Ll L Rep 286 (“EG1947”) emphasizes the importance of reliance on pre-contractual statements for them to be binding.
•    Personal Property Securities Act 2009 (Cth) (“PPSA”) regulates security interests in personal property, impacting the rights of parties in cases of outstanding charges and repossession risks.

Application

“WO1936” posits Roger had no duty to disclose or correct Ulysses’ misconceptions since no material changes to the motorcycle’s condition or history necessitated additional disclosure. Ulysses could counteract this defense by demonstrating that he significantly relied on Roger’s initial representations about the motorcycle’s condition and ownership history, which were crucial in influencing his decision to enter into the contract.

In relation to the contractual terms and liability, “IS1989” and “TA2004” asserts that the terms were adequately clear and brought to Ulysses’ attention. Ulysses might challenge this by arguing that the limitation of liability and warranty terms were not sufficiently highlighted or explained, particularly given his lack of commercial savvy and financial literacy.

Ulysses had a duty to exercise due diligence and verify the motorcycle's condition and the information provided, as per the principles in “HS2002” (Caveat Emptor). Ulysses could leverage the exceptions of “LO1817”, arguing that there was an active concealment of the motorcycle’s faults and Roger’s conduct amounted to “implied warranty” of quality.

The agreement was just and compliant, with no statutory obligation to disclose the annual equivalent interest rate. However, Ulysses could seek relief under the “CRA”, arguing that the lack of disclosure amounted to unjustness, especially considering his lack of financial literacy.

“OW1957” and “EG1947” posits that Roger’s statements were mere sales puffery and not intended to be relied upon as contractual (pre-contractual statements and reliance) terms. Ulysses could challenge this by demonstrating reliance and arguing that the nature of the statements and the context in which they were made implied contractual intention.

Addressing the outstanding charge and repossession risk, “FR” might argue that they were unaware of the outstanding charge and that the risk of repossession was not within their control. Ulysses could explore his rights and the obligations of the involved parties under the “PPSA”, potentially challenging the legitimacy of the sale and seeking remedies for any losses incurred.

Conclusion

Potential defenses of “FR” (asserting no duty to disclose and invoking the doctrine of caveat emptor) present significant challenges for Ulysses. Ulysses has robust counterarguments, fortified by principles from cases like “WO1936”, and legislations including the “CRA” and “PPSA”, which illuminate potential inconsistencies and ambiguities in Roger’s representations and contractual terms, offering Ulysses avenues to challenge the contract's fairness and clarity.

Question C

Issues

•    Can Ulysses claim remedies for misrepresentation under common law, given the significant discrepancies between Roger’s statements about the motorcycle’s condition, history, and the facts?
•    How do the principles of inducement and reliance come into play in determining the availability of remedies for Ulysses?
•    What specific breaches of contractual terms and obligations have occurred, and what are the corresponding common law remedies available to Ulysses against Fagan’s Motorcycles Pty Ltd and/or Roger (“FR”)?
•    How does the limitation of liability clause impact the available remedies?
•    Given the apparent inadequacies and potential lack of disclosure in the Finance Agreement, does Ulysses have grounds to seek remedies under common law?
•    How does Ulysses' lack of financial literacy influence the evaluation of fairness and disclosure in the agreement?
•    With the revelation of an outstanding charge against the motorcycle and the potential risk of repossession, what common law remedies can Ulysses pursue?
•    How does the non-disclosure of such a charge influence the determination of remedies?
•    Are there any equitable principles that may be invoked to provide relief to Ulysses, given the disparities in knowledge and the potential imbalance of power between the parties?
•    Could Ulysses seek specific performance or damages to redress the alleged breaches and misrepresentations, and under what circumstances would these remedies be appropriate?

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Law

•    Damages, as per Robinson v Harman (1848) (“RH1848”), aim to compensate the injured party, placing them in the position they would have been in had the contract been performed.
•    Remedy highlighted in Dougan v Ley (1952) (“DL1952”) is discretionary and compels the breaching party to fulfill contractual obligations, typically when damages are inadequate.
•    In Car & Universal Finance Co Ltd v Caldwell (1965) (“CUFCvC1965”), rescission allows for the annulment of the contract in cases of misrepresentation, reverting the parties to their pre-contractual positions.
•    Injunctions, discussed in Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) (“ABCLGMPvL2001”), are court orders compelling or prohibiting certain acts, granted based on the balance of convenience and the inadequacy of damages.
•    In Pavey & Matthews Pty Ltd v Paul (1987) (“PMPvP1987”), quantum meruit allows compensation for services rendered when there is no enforceable contract.
•    Reliance loss, considered in McRae v Commonwealth Disposals Commission (1951) (“MCvCDC1951”), compensates for detriment suffered due to reliance on misrepresentation.
•    In Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) (“MPvME1973”), reformation was applied to correct the written contract to reflect the true agreement of the parties.
•    Warman International Ltd v Dwyer (1995) (“WIvD1995”) requires the wrongdoer to relinquish unlawfully gained profits, especially in breaches of fiduciary duty.

Application

Ulysses could seek damages, relying on the foundational principle in “RH1848”, aiming to recover the loss incurred due to the defective motorcycle and Roger’s misrepresentations. This would be to restore him to the position he would have been in if the contract was properly executed.

While the doctrine of specific performance, outlined in “DL1952”, is a potential remedy, its application may be constrained given that the motorcycle isn’t a unique item and damages might suffice. Rescission and restitution, following the precedent set in “CUFCvC1965”, emerge as viable options, given the evident misrepresentations. This would allow Ulysses to revert to his pre-contractual position.

An injunction as per “ABCLGMPvL2001” might have limited applicability in preventing further breaches in this scenario. Quantum meruit, as recognized in “PMPvP1987”, could allow Ulysses to claim compensation if the contract is deemed unenforceable, particularly for the benefits conferred to “F”.

Ulysses could argue for reliance loss, seeking to be compensated for the detriment suffered due to his reliance on Roger’s misrepresentations. The principles of reformation or rectification and account of profits, illustrated in “MPvME1973” and “WIvD1995” respectively, could also be explored.

Conclusion

The pursuit of damages, stemming from the foundational principle laid out in “RH1848”, can be elevated to a strategic level, considering the extent of financial loss incurred by Ulysses due to the defective motorcycle and Roger's misrepresentations.

Specific performance, while traditionally constrained by the uniqueness of the subject matter, could still be explored, given the significance of Ulysses' reliance on acquiring a reliable motorcycle for daily commuting and long-distance travel.

Rescission and restitution, following the precedent set in “CUFCvC1965”, emerge as powerful tools to revert Ulysses to his pre-contractual position, given the evident misrepresentations. The potential for an injunction, as per “ABCLGMPvL2001”, may be weighed based on the ongoing threat of MegaBank's repossession and the need to prevent further harm.

Quantum meruit, recognized in “PMPvP1987”, can be an instrumental remedy if the contract is deemed unenforceable, particularly for the benefits conferred to Fagan’s Motorcycles. The argument for reliance loss gains depth, as Ulysses can substantiate the detriment suffered due to his substantial reliance on Roger’s misrepresentations.

The principles of reformation or rectification and account of profits, illustrated in “MPvME1973” and “WIvD1995” respectively, may come into play depending on the unfolding facts and the development of Ulysses’ case.

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