Contract Law

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University Degree Law

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Introduction

The economic analysis identifies four functions of contract law that serve to ensure that parties to a contract are protected. It is also concerned with the overall effect of the economic rule that either promotes or discourages efficient outcomes, “rather than with results in a particular case”. It can been seen in the Begbie case that the court was mindful of achieving this outcome in their decision to strike down Mrs Begbie’s part of the contract, while Mr Brokken and Mr Cheers were still liable for their parts of the contract.

The feminist analysis of contract law is concerned with obtaining fair and equitable terms for women before the law. This can only be achieved with the courts moving away from using, what Margaret Thornton calls, the “benchmark man” and the “normative linkage between the masculine and rationality” in their decisions process.

The doctrine of unconscionability, as seen in the Garcia case, is where a one party to a contract has acted against the other party in way that has been unfair or misleading, or exerted extreme pressure or undue influence, or was not forthcoming with relevant information. The court will either set a part of the contract aside as in the Begbie case or they will strike down the whole contract as in the Garcia case, depending on the factors involved in the case, with each case decided on it own merits.

The Begbie Case

The Case

Pamela Ann Begbie v State Bank of New South Wales Limited; Leslie Matthew Cheers; John Brokken and Anivor Pty Ltd No. QG24 of 1991 FED No. 899 Equity – Guarantees (1994) ATPR 41-288 (Begbie Case)

Facts of the Case

Mrs Begbie owned properties at Toorbul, Eight Mile Plains, Clayfield and Boondall, with income from the Toorbul, Boondall and Eight Mile Plains properties.

Mr Cheers was a director of Snowlakes Pty Ltd which was in a very bad financial position and had a history of blowing out the company’s overdraft substantially. He also had a history of bad personal debt and he also was involved with a number of other companies.

Mr Brokken was Cheers accountant and had known him for a long period of time and was aware of his client’s bad financial management. He had only ever met Begbie once.

Mr Henshaw was the manager of the State Bank of New South Wales branch in Bundall and he was personally keeping an eye on the Cheers and Snowlakes accounts. He had never met Begbie.

By developing a ‘relationship’ with Mrs Begbie, Mr Cheers was able to gain access to her assets, within a very short time of meeting her, to shore up his failing company (Snowlakes Pty Ltd) and service his personal debts under the guise of developing her Eight Mile Plains property. He managed to get her to sign at least one mortgage along with other documents and he then forged her signature on another mortgage and on other documents relating to what she thought was for the development of her Eight Mile Plains property. 

Cheers along with Brokken and Begbie were directors of a shelf company Anivor Pty Ltd that Cheers used to obtain the mortgages over Begbie’s properties (Eight Mile Plains and Toorbul). Begbie was also made guarantor of the loans without her knowledge.

The way in which Cheer did his dealings with the bank alerted Mr Henshaw to the possibility that Begbie did not have independent legal advice. However, contrary to the bank policy he did not take the step to ensure that she was fully informed, instead he continued to deal with Cheers with this knowledge and the knowledge that Cheers had proved himself a financial risk on many previous occasions.

The Courts Decision

The court ruled that:

  • The mortgage over the Eight Mile Plains and the Toorbul properties were void;
  • Pamela Ann Begbie was discharged from the Guarantee;
  • John Brokken and Leslie Cheers were still responsible for the full payment of the loans;
  • Pamela Ann Begbie’s name was to be replaced with Anivor Pty Ltd on the Guarantee;
  • The State Bank of NSW to pay Begbie’s cost;
  • Brokken and Cheers had to pay the State Bank of NSW incidental costs.

Focus of the Case

In the Begbie case the Court looked at whether there was duress or undue influence by Cheers. The court also looked whether Mr Henshaw’s actions (thus the State Bank of NSW) were unconscionable and whether the bank was in breach of s 52A of the Trade Practices Act 1974 (Cth) (TPA)

The Court found that the actions of Mr Henshaw, therefore, the State Bank of New South Wales were unconscionable in the way the mortgage documents were handled and no information was supplied to Mrs Begbie to ensure that she was fully informed as to the purpose of the loans and where the monies were to be channelled. 

In relation to s 52A of the TPA the court found the bank was not in breach because the "reference in this section to goods or services is a reference to goods or services of a kind ordinarily acquired for personal, domestic or household use or consumption." 

The Court found that Mrs Begbie signed the documents of her own free will and Mr Cheers had not acted with either duress or undue influence towards her.

Economic Theory

The world has limited resources, so it would seem logical that the limited resource should be attracted to the parties who would value them the most. This could be accomplished in economic terms by freely exchanging the resources, with the role of contract law ensuring “maximise market efficiency” by achieving exchanges that are done in a free way while keeping the costs of the transactions to a lowest amount.

It is often viewed in economic analysis that when entering in to a contract situation individuals do not have much regard for the interests of other individual, nor do they take a lot of notice of the “contract doctrine itself”. Instead they are more interested in consistent results that remain within a set budget. Parties to contracts would hope for a “theoretically complete contract” that cover every “possible contingencies”, including cost of transactions and negotiation, while avoiding some terms and including others to enhance the bargaining power. 

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Economic analysis assume that Individuals who enter into contracts are seen to do so on a voluntary basis causing the transfer of goods or services to other parties that place a higher value on them. However, economic analysis does not assume that all parties are rational, but it hopes that given the ratio of rational and non-rational individuals everything will even out in the long run. 

The economic functions of contract law are four fold that promotes economic efficiency. The four functions are “containing opportunism in non-simultaneous exchanges”, “reducing transaction costs”, “filling gaps in incomplete contracts” and “distinguishing welfare enhancing and welfare reducing exchanges”.

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Contract Law
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