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The recent Victorian Court of Appeal decision in Mimi Ange v First East Auction Holdings Pty Ltd provides useful guidance on a range of key issues that often arise in standard form contracts that are made up of several documents, including: incorporation of terms by reference, frustration, penalties, unconscionable conduct and implied terms.

Background

Over the course of their marriage, Mr and Mrs Ange bought and sold a number of paintings and had used the auction agent Bonhams (the plaintiff at first instance and respondent in the appeal) a number of times.

In February 2009, following the breakdown of the marriage, Mrs Ange contacted Bonhams regarding the storage of some paintings. Bonhams agreed to store the paintings and provided her with a standard form Consignment Agreement, which attached its General Conditions of Business, this agreement was received but not signed by Mrs Ange (the February 2009 Consignment Agreement).

Between February and March, there were discussions between Mrs Ange and Bonhams about Mrs Ange consigning some of the stored paintings to Bonhams for sale by auction. As part of those discussions, Bonhams advised Mrs Ange that if she withdrew the paintings from the auction after committing to consign them there would be substantial withdrawal fees and that she should speak to her lawyer regarding any issues about Mr Ange objecting to the sale of the paintings.

On the last day for inclusion in the auction catalogue, Mrs Ange, after speaking to her lawyer, agreed to consign some of the paintings for sale in the auction. Bonhams made some amendments to their copy of the February 2009 Consignment Agreement to reflect the negotiations, which referred to the General Conditions and stated that they were attached and included an acknowledgement that Mrs Ange had read and accepted them. The agreement was signed by Mrs Ange but did not attach the General Conditions (the Agreement).

In the meantime Mr Ange, who disputed Mrs Ange's ownership of the paintings and had informed Bonhams of this, obtained an injunction from the Family Court that required Mrs Ange to withdraw the paintings from sale. Mrs Ange gave Bonhams written notice requesting the withdrawal of the paintings.

Issues

The key issues raised in the appeal were whether:

  • the General Conditions were incorporated into the Agreement and, in particular, whether the withdrawal fee clause was so exceptional, unusual and unexpected that it required special notice to be incorporated
  • the Family Court injunction frustrated the Agreement
  • the withdrawal fee was a penalty
  • Bonhams had engaged in unconscionable conduct, and
  • there was an implied warranty that Mrs Ange was entitled to consign the paintings for auction.

Incorporation of the General Conditions

The Court of Appeal held that the General Conditions formed part of the Agreement, despite not being attached, because:

  • both parties had signed the Agreement acknowledging that the General Conditions would apply
  • Mrs Ange was in possession of the General Conditions, since she had received the February 2009 Consignment Agreement
  • the evidence before the court established, on the balance of probabilities, that Mrs Ange was aware of the General Conditions at the time she signed the Agreement, and
  • the withdrawal fee term was not so exceptional, unusual and unexpected that it required special notice to be incorporated; further, the evidence established that Mrs Ange was aware that a substantial withdrawal fee would be payable if she did withdraw the paintings from auction.

Frustration

Mrs Ange argued that the Agreement was frustrated when the Family Court restrained her from selling the paintings and ordered her to withdraw them from sale. However, as the General Conditions contemplated a court order restraining a person from selling a painting and deemed it a withdrawal from sale by the seller, the trial judge held that the doctrine of frustration didn't apply.

The Court of Appeal agreed with the trial judge's reasoning and noted that "there is clear authority ... that if an agreement makes express provision for what is to occur should certain events arise, the happening of those events does not ordinarily frustrate the contract."

Penalty

The trial judge held that the withdrawal fee wasn't a penalty, as the doctrine of penalties only applies to contractual terms requiring payment in the event of a breach of the contract.

The Court of Appeal applied the NSW Court of Appeal decision in Interstar Wholesale Finance Pty Ltd v Integral Home Loans Pty Ltd, and held that the law is currently that "a term of a contract that imposes an obligation on a party to pay money on the happening of a specified event which is not a breach of contract does not constitute a penalty. Primarily, this is because it is not the role of the court to relieve a party from a bad bargain."

As a result, the Court of Appeal agreed with the trial judge and held that the withdrawal fee wasn't a penalty.

Unconscionable conduct

Mrs Ange alleged that Bonhams engaged in unconscionable conduct in breach of ss 51AB and 51 AC of the Trade Practices Act 1974 by:

  • failing to give unequivocal notice of the withdrawal fee term
  • obtaining her signature on the Agreement when Bonhams knew she was involved in a matrimonial dispute and was desperate for money, and
  • obtaining her signature on the Agreement when Bonhams knew Mr Ange was claiming an interest in the art collection.

The trial judge, in rejecting Mrs Ange's claim, stated that the test was whether the actions showed no regard for conscience, or were irreconcilable with what is right or reasonable. His Honour held that none of these matters amounted to unconscionable conduct in the circumstances given:

  • Bonhams told Mrs Ange there would be a fee if she consigned paintings and later withdrew them
  • Mrs Ange was experienced in the business of negotiating favourable consignment terms and selling fine art, and
  • as both Mr and Mrs Ange had legal advisors, Bonhams was entitled to accept Mrs Ange's representation that she owned the art.

The Court of Appeal agreed with the reasoning of the trial judge and held that there was no unconscionable conduct on the part of Bonhams.

Implied warranty

The trial judge held that if the General Conditions were not incorporated into the Agreement, he would have implied a warranty by Mrs Ange that she was entitled to consign the goods for auction.

The Court of Appeal agreed with the trial judge's decision to imply the term stating "it seems a necessary term of all contracts under which goods are consigned for auction must be a warranty by the person consigning the goods that he or she is entitled to sell them. Otherwise, the inability to transfer good title would render the whole transaction futile."

Implications

The decision provides some useful guidance on some of the commonly raised issues that arise where a person tries to rely on a standard form contract made up of several documents, namely:

  • terms can be incorporated by reference, even if they aren't attached to the contract, and that prior conduct between the parties is relevant to determining whether knowledge of those terms should be imputed\
  • the doctrine of frustration won't apply if the contract expressly contemplates what will occur on the happening of the event, even if it would otherwise be an event that would result in the frustration of the contract
  • the doctrine of penalties only presently applies to contractual terms requiring payment in the event of a breach of the contract, and
  • a warranty may be implied into a contract where the term must have been intended by the parties, by necessary implication and without which the whole transaction would be futile.

Further information

If you would like to discuss any of the issues raised in this bulletin, please contact:

  • Richard Morrison, Partner 
    p. +61 2 6263 6353 | e. Richard.Morrison@sparke.com.au
    Ashley Cahif, Special Counsel
    p. +61 2 6263 6361 | e. Ashley.Cahif@sparke.com.au
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