BASIC PRINCIPLES OF CONTRACT LAWEvi PlatsidakiSolicitorNorton Rose Fulbright Greece27 November 2014

OVERVIEWWhat’s the difference between a contract and an

agreement?What are the elements of a contract?Which are the terms of the contract?How can a contract be discharged? When are

remedies available to the injured party?Can you exclude liability for breach of contract?How can a contract become void or voidable?

2

Key terms

3

Discharge of contract

Frustration of contract

Damages

Void contracts

Right to terminate

Voidable contract

Condition

Warranty

Innominate term

Implied terms

Force Majeure

Promissory estoppel

Agreement v Contract

4

What’s the difference? Elements of a contract: OFFER:

unequivocal offer not just an invitation to treat ie invitation for others to indicate interest

ACCEPTANCE of terms of offer [acceptance must be on the SAME terms as those of the OFFER] must be communicated to the offeror; if orally / fax / email must be actually received by the offeror; if by post, English law provides that acceptance is deemed to have occurred on the

date of posting; acceptance must not be a counter offer ie must be on same terms as the offer.

(Note: different in the US where you can have an agreement once the main terms (not ALL terms) have been agreed.)

Agreement v Contract cont’

5

CONSIDERATION: The agreement must be a “bargain” ie the offeror must be getting something in

return. Consideration must be of value but need not be adequate eg $1. Courts have become more flexible in finding consideration. Stilk v Myrick (1808): some of the crew left the ship and the captain offered to give

the rest of the crew their salary to return the ship to London. The court found that the crew had assumed such responsibility anyway under the terms of their contract so there was no consideration for the extra money offered to them.

(Note: there were also public policy considerations “if such a promise could be enforced, sailors would in many cases suffer a ship to sink unless the captain would accede to any extravagant demand they might think proper to make”.)

William v Roffrey (1990): carpenter quoted too low for work; owner offered extra money to him; when work was completed the owner did not pay; Qu was whether the was consideration for the extra money since the scope of work did not increase; court decide there was consideration but were influenced by the fact that there was no sign of duress by the carpenter, initial quite was very low, defendant intended to be bound etc.

Agreement v Contract cont’

6

Exception to the rule of consideration: promissory estoppel. The court might enforce a contract where there is no consideration if the offeree made an offer on which the counterparty relied on and acted on. If it is considered unfair on such counterparty to not enforce the contract, the court will oblige the offeree to do as he promised.

The Vistafjord [1988] 2 LLR 343: One offers to not accept payment; counterparty makes arrangements and on longer has funds to pay. Even though such an agreement is not legally enforceable (lack of consideration), the courts will not allow the offeree to use the lack of consideration to his advantage because the counterparty had relied on it and would suffer a detriment.

INTENTION TO CREATE LEGAL RELATIONS e.g. if your grandma asks you to bring her the paper [offer] and gives you $2 for ice cream for yourself [consideration], and you accept [acceptance] do you have a contract?

FOR LEGAL PURPOSE FORMALITIES (if required) e.g. in writing / as a deed.

Terms of Contract

7

EXPRESS & IMPLIED TERMS Express terms: those expressly stated by the parties; they

may be:

ORAL; and/or WRITTEN.

Note: not all statements made will constitute terms; some will constitute representations made to induce the other into contract. Depends on parties’ intention. (Different consequences if statement proves to be incorrect/not complied with.) Have any terms been excluded? E.g. is there an entire agreement

clause in the contract? Are the terms effective? A clause which HAS been expressly

included may be ineffective. E.g. exclusion clauses (later)

Terms of Contract cont’

8

Implied terms: those implied into the contract by court by reason of: Usage/customary for particular trade Previous course of dealings i.e. terms consistently used between the

same parties in previous dealings. Completing a gap in the documentation in order to reflect parties’

intention. E.g. no clause re: termination of contract imply right to terminate on reasonable notice.(Note: no implication of good faith requirement in English law contracts.)

Statute e.g. SGA 1979 eg will imply that the seller has the right to sell the goods / that goods conform to description.Note: can parties agree to exclude terms implied by statute? Statute may not allow such exclusion or may be silent, in which case not necessarily clear. Mostly treated as mandatory.

How can a contract be discharged?

9

By performance parties fully perform their obligations. By breach must be a breach which allows a party to

terminate. (see below – the injured party won’t always be allowed to terminate because of breach; may only have a right to damages).

By frustration automatic discharge of contract withoutremedies for injured party.

Breach of contract

10

Breach = failure by a party to the contract to perform an obligation under the contract.What are the consequences of a breach under common law*? Damages; and [in certain circumstances] Right to terminate the contract.

Note that this is a right of the injured party; it’s not triggered automatically. Instead of terminating the contract such party may choose to affirm the contract i.e. allow it to continue.

* These rights are available under common law. There may be additional rights under the terms of the contract.

Breach of contract cont’

11

When is an injured party entitled to (i) damages and/or (ii) terminate the contract?

Must determine what TYPE of term has been breached by the other party. The term may be a:o Condition; oro Innominate term; oro Warranty,

and depending on the type of term the remedies will differ.

Breach of contract cont’

12

Conditions, Warranties and Innominate termsA. ConditionsA term which goes to the root of the contract. A fundamental term. A term which if breached will give the injured party the right to

terminate the contract AND claim damages. E.g. ship fully classed, no deviation, no dangerous goods.B. WarrantiesA term which does not affect the overall performance of the contract.Will not entitle the injured party to terminate the contract. Can

only claim damages.

Breach of contract cont’

13

C. Innominate termsA term which may be either a warranty or a condition depending on the circumstances.E.g. seaworthiness, carrying capacity, consumption/speed, type of cargo to be loaded.

Breach of contract cont’

14

Hong Kong Fir Shipping v Kawasaki Kisen Kaisha [1962] 2 QB 26 Court of Appeal

C/P for 2 years.

One of the terms of the contract was that the vessel would be seaworthy throughout the period of hire (“in every way fitted for ordinary cargo service / maintained in a thoroughly efficient state in hull and machinery during service.

Delivered to the charterer undermanned and engine room staff was incompetent.

Vessel was off hire for 5 weeks for repairs.

On arrival at Osaka (15 May 1957), engines found to be in bad state requiring further 15 weeks to repair.

By 15 September 1957 vessel was made seaworthy.

On 6 June and 11 September, the charterers sought to repudiate the charter and the owners commenced action for wrongful termination.

Held: The defendants were liable for wrongful repudiation i.e. did not have a right to terminate the C/P. The judge held that one should look to the effect of the breach and ask if the breach has substantially deprived the innocent party of the whole benefit of the contract. If it had, then it would be a breach of condition. The court held that 20 weeks off hire out of a 2 year contract period did not substantially deprive the defendants of whole benefit and therefore they were not entitled to repudiate the contract.

Breach of contract cont’

15

So how can one know how to classify an innominate term? Must look at the effect of the breach on the contract and the

loss incurred by the injured party: Does it deprive the other party of substantially the whole

benefit of the contract? condition Can the breach be remedied by way of damages?

warranty. A term may be classified by statute e.g. under SGA 1979, the

time of payment is deemed to be a warranty but implied terms relating to the seller’s title to the goods, compliance with description etc. are deemed to be conditions.

Breach of contract cont’

16

A term designated as a condition or warranty under the contract will be deemed to be as designated unless: it’s not in line with relevant statute or case law; there is express provision for the consequences of the breach

which are contradictory to such designation. E.g. deemed to be a warranty but also provide that breach will allow the other party to terminate; and

courts find that the intention of the parties, based on the facts was otherwise.

Damages

17

What amount of damages can one claim?AIM is to compensate for loss incurred and put the innocent party in the position he would be had the contract been performed. So the question is which losses resulted from the breach? Was the loss caused by the breach? There must not be a “break in the

chain of causation”. Corr v IBC Vehicles Ltd [2008] Duty to mitigate. Remoteness of damage – was the type of loss incurred foreseeable by

the parties at the date of the contract? (Note: information exchanged between parties will be taken into account).

Note: may be able to recover even if breach is not the only cause e.g. Unseaworthiness / perils of the sea (Smith, Hogg & Co Ltd v Black Sea and Baltic General Insurance Co Ltd [1940]

Exclusion clauses

18

A clause aiming at excluding one’s liability for breach of contract. To be effective they must:o Be properly incorporated in the contract. E.g. Thornton v Show

Lane Parking (1971): exclusion of liability set out on the ticket was ineffective as the contract had already been formed.

o Not misrepresented.o Unambiguous.o Not repugnant to the main purpose of the contract.One can exclude liability for fundamental breach Photo Productions v Securicor (1980) contract between plaintiff and defendant whereby the defendant would install fire precautions. The defendant employed an arsonist who burnt down the plaintiff's property. HofL held that liability for breach of contract had been successfully excluded (clear / unambiguous/equal footing).

Exclusion clauses cont’

19

Unfair Contract Terms Act 1977 (UCTA)Relates to consumer contracts. If an exclusion clause does not comply with UCTA rules it will be void (rest of the contract is not).Rules:o Must not cause imbalance in the parties’ rights and obligations

under the contract;o Will be void if not reasonably necessary to protect one’s

legitimate interests;o Would cause detriment to the party relying on it.

Frustration Of Contract

20

General rule is that the party who fails to perform its obligations under contract is liable in damages (Paradine v Kane (1647)). Frustration is an exception to the rule as it allows the contract

to be discharged i.e. parties are no longer bound to perform their obligations and no remedy is available to the innocent party (“loss lies where it fell”).

What constitutes a frustrating event? An event that: Occurs after the contract has been formed; and Is so fundamental that it strikes at the root of the contract; and Not contemplated by parties when entering into the contract; and Is not due to fault by either party; and Performance becomes impossible, illegal or radically different.

Frustration Of Contract

21

Examples of frustrating events: Subject matter of the contract is no longer available;

Taylor v Caldwell [1863]: plaintiff and defendant entered into a contract whereby the plaintiff would rent the defendant’s music hall for concerts. The music hall was burned down and the plaintiff claimed that the defendant was in breach of contract for failing to rent out the music hall. “When the existence of a particular thing is essential to a contract, and the thing is destroyed by no fault of the party selling it, the parties are freed from the obligation to deliver such thing.”

Personal incapacity of a person who has entered into a contract for personal services.

The contract will NOT be frustrated if: The parties have made provision for such event; Party is at fault; More expensive to perform the contract; Contract can be performed in a different way.

Frustration Of Contract

22

Force majeureWhat is force majeure and how does it relate to frustration of contract?A clause which provides that if certain events occur, the parties will no longer be liable to perform their obligations under contract. But note that “force majeure” is not recognised under English law so to have the effect of such a clause under an English contract, parties must describe it in full (not just refer to a force majeure clause being deemed incorporated).

Void & voidable contracts

23

When a contract is VOID, it has no legal effect. It is deemed void from the beginning. (e.g. if A sells to B and B to C and contract between A to B is void, C did not acquire title to goods because B had to title to transfer to C*).The parties have no rights or obligations, as if the contract had never been made.A contract may be void by reason of:o Statute o Illegality (i.e. one must act illegally to perform it)o Ultra vires (lack of capacity)o Mistake (but Great Peace Shipping Ltd v Tsavliris Salvage contract not

void due to common mistake re: location of ship; TS had to pay cancellation fee)

o Uncertainty impossible to be resolved

* http://uk.practicallaw.com/8-503-1691?q=voidable+contract#a186498

Void & voidable contracts cont’

24

When a contract is VOIDABLE, it has been formed (so not deemed void from the beginning as a contract that is void) but the innocent party has the RIGHT to have it set aside (ie not automatically set aside).A contract may be voidable by reason of the counterparty being induced into the contract by:o Duresso Fraudo Undue influenceo Undue influenceo Misrepresentationo Fraud

DisclaimerNorton Rose Fulbright LLP, Norton Rose Fulbright Australia, Norton Rose Fulbright Canada LLP, Norton Rose Fulbright South Africa (incorporated as Deneys Reitz Inc) and Fulbright & Jaworski LLP, each of which is a separate legal entity, are members (‘the Norton Rose Fulbright members’) of Norton Rose Fulbright Verein, a Swiss Verein. Norton Rose Fulbright Verein helps coordinate the activities of the Norton Rose Fulbright members but does not itself provide legal services to clients.References to ‘Norton Rose Fulbright’, ‘the law firm’, and ‘legal practice’ are to one or more of the Norton Rose Fulbright members or to one of their respective affiliates (together ‘Norton Rose Fulbright entity/entities’). No individual who is a member, partner, shareholder, director, employee or consultant of, in or to any Norton Rose Fulbright entity (whether or not such individual is described as a ‘partner’) accepts or assumes responsibility, or has any liability, to any person in respect of this communication. Any reference to a partner or director is to a member, employee or consultant with equivalent standing and qualifications of the relevant Norton Rose Fulbright entity.The purpose of this communication is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of any Norton Rose Fulbright entity on the points of law discussed. You must take specific legal advice on any particular matter which concerns you. If you require any advice or further information, please speak to your usual contact at Norton Rose Fulbright.

26