contract law c 2nd edition
TRANSCRIPT
Contract LawChris Turner
2nd Edition
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British Library Cataloguing in Publication DataA catalogue record for this title is available from the BritishLibrary
ISBN: 978 0 340 94161 4
First Edition Published 2003This Edition Published 2007
Copyright © 2007 Chris Turner
All rights reserved. No part of this publication may bereproduced or transmitted in any form or by any means,electronic or mechanical, including photocopy, recording, or anyinformation storage and retrieval system, without permission inwriting from the publisher or under licence from the CopyrightLicensing Agency Limited. Further details of such licences (forreprographic reproduction) may be obtained from the CopyrightLicensing Agency Limited, of Saffron House, 6-10 Kirby Street,London EC1N 8TS.
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List of figures vi
Preface vii
Acknowledgements vii
Table of statutes and other instruments viii
Table of cases xi
Chapter 1 The origins and character of contract law
1.1 The development of a law of contract 1
1.2 The character of modern contracts 2
1.3 The reasons why contracts are enforced 3
1.4 Contracts compared with other areas of law 3
Chapter 2 Principles of formation:offer and acceptance
2.1 The character of agreement 5
2.2 The nature of offers 5
2.2.1 Distinguishing offer from invitation to treat 5
2.2.2 Examples of invitation to treat 6
2.2.3 Situations which are not invitation to treat 8
2.3 The rules of offer 10
2.4 Termination of offer 11
2.5 The rules on acceptance 12
2.6 Points for discussion 16
Chapter 3 Principles of formation:consideration
3.1 The nature and purpose of consideration 21
3.2 Defining consideration 21
3.3 Executory and executed consideration 22
3.4 The rules of consideration 22
Chapter 4 Principles of formation:intention to create legal relations
4.1 The two presumptions 38
4.2 Social and domestic agreements 38
4.3 Commercial and business agreements 39
Chapter 5 Formalities and specialitycontracts
5.1 The requirement of form 43
5.2 Agreements which must be created in the form of a deed to be valid 44
5.3 Contracts that must be in writing in order to be valid 44
5.4 Agreements needing only evidence in writing to be valid 44
Chapter 6 Third-party rights6.1 The doctrine of privity of contract 47
6.1.1 The basic rule 47
6.1.2 Some consequences of the rule 47
6.2 The exceptions to the basic rule 48
6.2.1 Introduction 48
6.2.2 Statutory exceptions 48
6.2.3 Trust law 48
6.2.4 Restrictive covenants 49
6.2.5 The rule in Dunlop v Lambert 49
6.2.6 Privity of estate in leases 50
6.2.7 Procedural rules 51
6.2.8 The so-called ‘holiday cases’ 51
Contents
6.2.9 Protecting third parties in exclusion clauses 51
6.2.10 Collateral contracts 52
6.2.11 Agency, assignment and negotiable instruments 52
6.3 The Contracts (Rights of Third Parties) Act 1999 53
Chapter 7 Capacity and incapacity7.1 The nature of capacity 60
7.2 Minors’ contracts 60
7.2.1 Introduction 60
7.2.2 Valid or enforceable contracts 60
7.2.3 Voidable contracts 63
7.2.4 Void or unenforceable contracts 64
7.2.5 Minors’ contracts and the role of equity 65
7.3 Capacity and mentally disordered persons 67
7.4 Capacity and drunkenness 67
7.5 The capacity of corporations 67
Chapter 8 The contents of a contract:terms
8.1 Pre-contractual statements and representations 70
8.1.1 Introduction 70
8.1.2 The process of defining and distinguishing the express terms 70
8.2 The process of incorporating express terms 75
8.2.1 Factors relevant to incorporating terms 75
8.2.2 The ‘parol evidence’ rule 78
8.3 Implied terms 81
8.3.1 General 81
8.3.2 Terms implied by fact 81
8.3.3 Terms implied by law – by the courts 85
8.3.4 Terms implied by law – by statute 85
8.4 The relative significance of terms 88
8.4.1 Introduction 88
8.4.2 Conditions 89
8.4.3 Warranties 90
8.4.4 The construction of terms 90
8.4.5 Innominate terms 92
Chapter 9 The contents of a contract:exclusion clauses
9.1 Common-law control of exclusion clauses 99
9.1.1 Introduction 99
9.1.2 Rules on incorporating exclusion clauses into contracts 99
9.1.3 Other limitations imposed by the courts 103
9.1.4 Construction of the contract as a whole 105
9.2 Statutory and EC control of exclusion clauses 110
9.2.1 Introduction 110
9.2.2 The Unfair Contract Terms Act 1977 111
9.2.3 The Unfair Terms in Consumer ContractsRegulations 1999 114
Chapter 10 Vitiating factors: void andvoidable contracts
10.1 Introduction 119
10.2 Void contracts 119
10.3 Voidable contracts 120
10.4 The classes of vitiating factors 120
Chapter 11 Vitiating factors:misrepresentation
11.1 General 121
11.2 When a misrepresentation occurs 122
11.3 The different types of misrepresentation 124
11.3.1 The character of a misrepresentation 124
11.3.2 Fraudulent misrepresentation 124
11.3.3 Negligent misrepresentation 126
11.3.4 Innocent misrepresentation 128
11.4 Equity and misrepresentation 130
11.5 When non-disclosure amounts to misrepresentation 131
Contract Lawiv
v
Chapter 12 Vitiating factors: mistake12.1 Introduction 138
12.2 Common mistake 139
12.2.1 Res extincta 139
12.2.2 Res sua 140
12.2.3 Mistake as to the quality of the contract 140
12.3 Mutual mistake 143
12.4 Unilateral mistake 144
12.4.1 Introduction 144
12.4.2 Mistaken terms 144
12.4.3 Mistaken identity 145
12.4.4 Mistaken identity and face-to-face dealing 146
12.5 Mistake and equity 148
12.5.1 Introduction 148
12.5.2 Rescission 148
12.5.3 Refusal of specific performance 149
12.5.4 Rectification of a document 149
12.6 Non est factum 150
Chapter 13 Vitiating factors: duress and undue influence
13.1 Introduction 154
13.2 Duress 154
13.3 Economic duress 155
13.4 Undue influence 157
Chapter 14 Vitiating factors: illegality14.1 Introduction 165
14.2 Contracts void by statute 165
14.3 Contracts illegal by statute 166
14.4 Contracts void at common law 167
14.5 Contracts illegal at common law 173
14.6 The consequences of the contract being void 174
14.7 The consequences of the contract being illegal 175
Chapter 15 Discharging the contract15.1 Discharge by performance 179
15.1.1 Introduction 179
15.1.2 The strict rule on performance 179
15.1.3 Ways of avoiding the strict rule 180
15.1.4 Stipulations as to time of performance 182
15.2 Discharge by agreement 183
15.2.1 Introduction 183
15.2.2 Bilateral discharges 183
15.2.3 Unilateral discharges 184
15.3 Discharge by frustration 185
15.3.1 Introduction 185
15.3.2 The development of a doctrine of frustration 185
15.3.3 Frustrating events 186
15.3.4 Limitations on the doctrine offrustration 189
15.3.5 The common law effects of frustration 190
15.3.6 The Law Reform (Frustrated Contracts) Act 1943 191
15.4 Discharge by breach 197
15.4.1 Introduction 197
15.4.2 The different forms of breach 197
15.4.3 The effects of breach 198
Chapter 16 Remedies in contract law16.1 Limitation periods in contract law 203
16.1.1 The purpose of limitation periods 203
16.1.2 Basic limitation periods 203
16.2 The purpose of damages in contract 203
16.3 The problem of remoteness of damage in contract claims 204
16.3.1 Introduction 204
16.3.2 Causation in fact 204
16.3.3 Remoteness of damage 204
16.4 Quantification of damages in contract claims 206
16.4.1 Nominal damages 206
16.4.2 The bases of assessment 207
16.4.3 The duty to mitigate 209
16.5 Other common-law remedies in contract law 210
16.5.1 Liquidated damages 210
16.5.2 Quantum meruit 210
Contents
16.6 The effect of speculation in contract 211
16.7 Equitable remedies in contract law 213
16.7.1 Injunctions in contract law 213
16.7.2 Rescission in contract law 214
16.7.3 Specific performance in contract law 214
16.7.4 Rectification of documents in contract law 215
Chapter 17 Consumer protection17.1 General 216
17.2 Sale of goods and supply of goodsand services 216
17.3 The Consumer Protection Act 1987 217
17.4 The Trade Descriptions Act 1968 and applying false descriptions to goods or services 220
Chapter 18 The synoptic element18.1 The nature and purpose of synoptic
assessment 223
18.2 OCR synoptic element 223
18.3 AQA synoptic element 225
Appendix 1 Answers to dilemma boards 228
Index 237
Contract Lawvi
List of figuresFigure 2.1 Diagram showing the point at which a contract is made in a standard offer and
acceptance, and where there is firstly an invitation to treat—6Figure 3.1 Diagram illustrating the operation of the past consideration rule—24Figure 3.2 Diagram illustrating the exception in Lampleigh v Braithwaite in operation—24Figure 3.3 Diagram using the agreement in Tweddle v Atkinson to illustrate the rule that
consideration must move from the promisee—26Figure 5.1 Diagram illustrating the ways in which form is significant in contracts—46Figure 7.1 Diagram illustrating the different effects of capacity on minors’ contracts—66Figure 8.1 Table illustrating the relationship between different types of representation and the
legal consequences attaching to them—74Figure 12.1 Table illustrating the different types of mistake and their legal consequences—151Figure 15.1 Diagram illustrating when a contract will be considered frustrated—190Figure 15.2 Diagram illustrating the consequences of different types of breach of contract—201
PrefaceThis book is aimed primarily at students on A Level Law courses, of whatever examining board,but there is no reason why it should not be used by any first-time student of contract law.
The book is obviously a companion to the very successful textbooks on The English LegalSystem by Jacqueline Martin and on Criminal Law by Diana Roe and to my own Tort Law.
Contract law is mostly a common law subject although some areas have been subject to somestatutory intervention, particularly in areas of consumer protection. As a result, much of the bookis devoted to cases and case notes, and these are separated out in the text for easy reference.
Since the book is also intended to be a practical learning resource rather than a prose-heavytext, each section of the book contains ‘activities’of different types. These include ‘self-assessmentquestions’, some of which are mere comprehension exercises, while others are designed to bemore thought-provoking. A variety of other activities, such as quick quizzes, multiple choicetests, case tests etc., are also included to encourage maximum interaction.
From September 2006 OCR A Level Law has moved to a 4-module specification with firstteaching of the new A2 from September 2007. The new option papers at A2 include a new modelof assessment, the ‘dilemma board’objective questioning. In the exam this will take the form of afactual scenario followed by four propositions, with candidates having to use pure legalreasoning to support or reject these propositions. I have often used dilemma boards withstudents in a more diagrammatic form. Examples of dilemma boards for practice are producedhere for most chapters of the book and the appropriate answers are given in an appendix at theback of the book.
Each section of the book also contains a Key Fact chart summarising the most importantpoints contained in the section, and these can also act as a revision aid. Wherever they wouldmeaningfully add to the text and aid learning, I have also included diagrams or flow charts.
Many chapters also contain sections entitled ‘Points for discussion’or ‘Comment’. These occurwhere there are controversial points that are often the subject of essay titles in examinations.
Finally, a number of chapters also contain a brief explanation of how to attempt either anessay or a problem question on the area.
The final chapter provides insight into how to deal with the synoptic element of both OCRand AQA specifications.
Once again, I hope that you will gain as much enjoyment in reading about contract law andanswering the various questions in the book as I have had in writing it, and that you gain muchenjoyment and interest from your study of the law.
The law is stated as I believe it to be on 31st March 2007.
AcknowledgementsAQA examination questions are reproduced by permission of the Assessment and Qualifications Alliance.
Table of Statutes andOther InstrumentsStatutesBetting and Gaming Act 1960..............................175Bills of Exchange Act 1882......................................53Companies Act 1985 ...................................54, 67, 68
s 14..........................................................................54Companies Act 1989..........................................67, 68Consumer Credit Act 1974 .....................................44
Sch 4.....................................................................111Consumer Protection Act 1987 ...........203, 216–220
s 1(2).....................................................................217s 2(1).............................................................217, 218s 2(2).....................................................................217s 2(2)(b) ...............................................................218s 2(2)(c)................................................................217s 3(3) ............................................................217, 218s 3(1).....................................................................218s 4 ........................................................................219s 45(1) ..................................................................218
Contracts (Rights of Third Parties) Act 1999 .................................................53–59, 217, 230s 1(1).......................................................................53s 1(1)(b) ................................................................54s 1(2) ......................................................................53s 1(3) ......................................................................54
Disability Discrimination Act 1995........................86Employers’Liability Act 1880..................................62Employment Rights Act 1996 ........................86, 176Family Law Reform Act 1969 .................................60Gaming Act 1845—
s 18 .......................................................................166Gaming Act 1968 ...................................................166Infants Relief Act 1874 ......................................64, 65
s 1 ..........................................................................65Law of Property Act 1925 .......................................48
s 40 .................................................................44, 184
s 56 .........................................................................48s 141 ......................................................................50s 142 ......................................................................50
Law of Property (Miscellaneous Provisions) Act1989 .......................................................................45s 1(1) ......................................................................44s 2(1) ......................................................................44s 4 ..........................................................................45
Law Reform (Frustrated Contracts) Act 1943 ............................................191, 192, 194, 195s 1(2) ...................................................191, 195, 235s 1(3) ...................................................................191
Limitation Act 1980—s 2 ........................................................................203s 5 ........................................................................203
Married Women’s Property Act 1882 ....................48Mental Health Act 1983—
Pt VII.......................................................................67Minors’Contracts Act 1987...............................64, 65
s 2 ....................................................................65, 69s 3 .............................................................65, 68, 69s 3(1) ....................................................................227
Misrepresentation Act 1967 ..................78, 121, 124,127–129, 131, 135, 136
s 2(1) ...........................127–129, 133, 135, 136, 232s 3(2) ...................128, 129, 131, 133, 135, 136, 232
Offensive Weapons Act 1959....................................6Pharmacy and Poisons Act 1933—
s 18............................................................................6Protection of Birds Act 1954 .....................................7Race Relations Act 1976...........................................86Rent Restrictions (Notices of Increase)
Act 1923 ..............................................................141Restrictive Trade Practices Act 1976 .....................166Road Traffic Act 1988................................................55
s 148(7).. ..........................................................48, 56
Sale and Supply of Goods Act 1994 ......................87Sale of Goods Act 1893 ...............................77, 86, 99
s 55 .........................................................................99Sale of Goods Act 1979 ...........86, 88–90, 93, 96–98,
113, 117, 145, 182, 191, 197, 216, 231s 3 .............................................................61, 67, 69s 6 ........................................................................139s 12...........................................................86, 87, 111s 13 ..............................86, 87, 89, 97, 111, 112, 220s 14(2)........................................87, 89, 97, 111, 112s 14(2)(b)...............................................................87s 14(3)........................................87, 89, 97, 111, 112s 15.........................................................87, 111, 112s 18 .......................................................................216s 30(2A). ..............................................................180
Sex Discrimination Act 1975...................................86Statute of Frauds 1677 .............................................44Supply of Goods and Services Act 1982 ........86, 88,
89, 111, 113, 117, 216, 217s 2 ..........................................................................88s 3 ..................................................................88, 112s 4 ..................................................................88, 112s 5 ..................................................................88, 112s 13...........................................................88, 89, 111s 14...........................................................88, 89, 111s 15 .................................................................88, 111
Trade Descriptions Act 1968.................216, 220–222s 1 ........................................................................221s 1(1) ....................................................................220s 1(1)(a). ......................................................220, 222s 1(1)(b) ......................................................220–222s 2 ........................................................................220s 14 .......................................................................222s 14(1) ..................................................................221s 23 .......................................................................221s 24 .......................................................................221s 24(b)..................................................................222s 25 .......................................................................221
Unfair Contract Terms Act 1977............77, 107–112,114–118, 232
s 2(1)............................................111, 113, 114, 117s 2(2) ............................................................112, 117s 3 ...............................................................112, 117s 4 ...............................................................112, 113
s 5(1).....................................................................111s 6 ........................................................................111s 6(1) ............................................................111, 117s 6(2) ............................................................111, 117s 6(3)....................................................112, 113, 117s 7(1).....................................................................111s 6(2) ............................................................111, 117s 6(3)....................................................112, 113, 117s 8 ........................................................................112s 11 ...............................................................113, 117s 11(1) ..................................................................113s 11(2) ..................................................................113s 11(4) ..................................................................114s 11(5) ..................................................................113s 12 .......................................................................112s 11(1) ..................................................................111s 11(3) ..................................................................111s 14 .......................................................................112Sch 1.....................................................................114Sch 2.....................................................................113
Unsolicited Goods and Services Act 1971 ..........217
Statutory InstrumentsConsumer Protection (Distance Selling)Regulations 2000 (SI 2000/2334)......................14, 17
reg 7........................................................................14reg 8........................................................................14
Electronic Commerce (EC Directive) Regulations2002 (SI 2002/2013)..............................................14
General Product Safety Regulations 1994 (SI 1994/2328).....................................................217
Package Travel, Package Holidays and PackageTours Regulations 1992 (SI 1992/3288) ..........217
Seeds, Oils and Fats Order 1919..........................166Unfair Terms in Consumer Contracts Regulations
1994 (SI 1994/3159) ....................77, 110, 111, 117Unfair Terms in Consumer Contracts Regulations
1999 (SI 1999/2083) ............77, 110, 111, 114–117reg 4(1) .....................................................................115reg 6..........................................................................116reg 39(1) ...................................................................115Sch 1 ........................................................................115Sch 2 ........................................................................115Sch 3 ........................................................................115
ixTable of Statues and Other Instruments
European LegislationDirectivesDistance Selling Directive (97/7/EC).....................14Electronic Commerce Directive (2000/31/EC)
...................................................................14, 17Art 11..........................................................................14Product Liability Directive (85/374/EEC)............217Unfair Terms in Consumer Contracts Directive
(93/13/EEC)........................................110, 116, 117
Treaties and ConventionsEC Treaty—
Art 39 ...................................................................170Art 81 ...................................................................166Art 82 ...................................................................166
Contract Lawx
Table of CasesAdams v Lindsell [1818] 106 ER 250 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13, 17, 19Addis v The Gramophone Company [1909] AC 488 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .211Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd (Securicor case) [1983] 1 WLR 964 . .108–110, 197Alfred McAlpine Construction Ltd v Panatown Ltd [2000] 4 All ER 97; (1998) 88 BLR 67 . . . . . . . . . . . .50Allan (JW) (Merchandising) Ltd v Cloke [1960] 2 All ER 258 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .175Allcard v Skinner (1887) 36 Ch D 145 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .158, 159, 163, 203Amalgamated Investment & Property Co Ltd v John Walker & Sons Ltd [1977] 1 WLR 164 . . . .189, 192Anderson Ltd v Daniel [1924] 1 KB 138 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .167, 177Andrews Bros (Bournmouth) Ltd v Singer & Co [1934] 1 KB 17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .105Anglia Television Ltd v Reed [1972] 1 QB 60 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .208Antons Trawling Co Ltd v Smith [2003] 2 NZLR 23 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29Arcos Ltd v EA Ronaasen & Son [1933] AC 470 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .180Associated Japanese Bank (International) Ltd v Credit du Nord SA [1988] 3 All ER 902 . . . . . . . . . . . .140Associated Provincial Picture House v Wednesbury Corporation [1948] 1 KB 223 . . . . . . . . . . . . . . . . . .78Atlas Express Ltd v Kafco (Importers and Distributors) Ltd [1989] QB 833 . . . . . . . . . . . . . . . . . . . . . . .155Attwood v Lamont [1920] 3 KB 571 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .174— v Small [1838] 7 ER 684 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .123Avery v Bowden (1855) 5 E & B 714 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .199, 201BP Exploration Co (Libya) Ltd v Hunt (No 2) [1979] 1 WLR 783 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .191Baldry v Marshall [1925] 1 KB 260 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .87Balfour v Balfour [1919] 2 KB 571 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38, 40, 41Banco Exterior Internacional v Mann [1994] 1 All ER 936 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .160, 163Bank of Credit and Commerce International SA v Aboody [1990] 1 QB 923 . . . . . . . . . . . . . .157, 159, 163Bannerman v White (1861) 10 CBNS 844 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .75Barclays Bank plc v O’Brien [1993] 4 All ER 417 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .157, 159, 161–163Barrow Lane and Ballard Ltd v Phillip Phillips & Co Ltd [1929] 1 KB 574 . . . . . . . . . . . . . . . . . . . . . . . .139Barry v Heathcote Ball & Co (Commercial Auctions) Ltd [2001] 1 All ER 944; [2000] 1 WLR 1962 . . . . .9Bartlett v Sidney Marcus Ltd [1965] 1 WLR 1013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .87Barton v Armstrong [1975] 2 All ER 465 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .154, 163Beale v Taylor [1967] 3 All ER 253 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .97Bell v Lever Brothers Ltd [1932] AC 161 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .140, 151, 152Bence Graphics International Ltd v Fasson UK Ltd (1996) The Times, 24 October . . . . . . . . . . . . . . . . . .207Bentley (Dick) Productions Ltd v Harold Smith (Motors) Ltd [1965] 1 WLR 623 . . . . . . . . . . . . . . . .76, 81Beresford v Royal Insurance Co Ltd [1937] 2 KB 197 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .173, 177Beswick v Beswick [1968] AC 58 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48Bettini v Gye (1876) 1 QBD 183 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .90, 94, 96Biggs v Boyd Gibbins [1971] 1 WLR 913 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8Birch v Paramount Estates (Liverpool) Ltd (1956) 16 EG 396 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .75, 81, 97Bisset v Wilkinson [1927] AC 177 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .72–74, 122, 134Blackpool and Fylde Aero Club Ltd v Blackpool Borough Council [1990] 1 WLR 1195 . . . . . . . . . . . . . . .8
Bolton v Mahadeva [1972] 1 WLR 1009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .181, 183Bosman Ruling See Hooper’s Settlement Trusts, Re Bosman v Hooper—Boulton v Jones (1857) 2 H & N 564 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .146Bradbury v Morgan (1862) 1 H & C 249 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12Brennan v Bolt Burdon [2005] 1 QB 303 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .142Bridge v Campbell Discount Co [1962] AC 600 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .210Brikom Investments Ltd v Carr [1979] QB 467; [1979] 2 All ER 753 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31Brinkibon Ltd v Stahag Stahl [1983] AC 34 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14British Car Auctions v Wright [1972] 1 WLR 1519 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7British Reinforced Concrete Co v Schelff [1921] 2 Ch 63 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .170, 177British Steel Corporation v Cleveland Bridge and Engineering Co [1984] 1 All ER 504 . . . . . . . . . . . . . .16British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of
London Ltd [1912] AC 673 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .209Brogden v Metropolitan Railway Co (1877) 2 App Cas 666 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13, 15Bull v Pitney Bowes [1966] 1 WLR 273 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .170, 177Bunge Corporation v Tradax Export SA [1981] 1 WLR 711 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .93Bunn v Guy (1803) 4 East 190 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21Butler Machine Tool Co Ltd v Ex-Cell-O Corporation [1979] 1 WLR 401 . . . . . . . . . . . . . . . . . . . . . . . . . . .5Byrne v Van Tienhoven (1880) 5 CPD 344 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11, 17, 19CIBC Mortgages Ltd v Pitt [1993] 4 All ER 433 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .158, 163Canada Steamship Lines Ltd v R [1952] AC 192 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .106Candler v Crane Christmas & Co [1951] 2 KB 164 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .126Carlill v The Carbolic Smoke Ball Co Ltd [1893] 1 QB 256 . . . . . . . . . . . .8, 10, 11, 17, 72–74, 122, 134, 165Carnduff v Rock and Another (2001) The Times, 30 May . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .173Casey’s Patent, Re [1892] 1 Ch 104 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25, 224Cehave NV v Bremer Handelsgesselschaft MbH (The Hansa Nord) [1976] QB 44 . . . . . .93, 96, 198, 201Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130 . . . . . . . . . . . . . . . . . .30, 31, 33Chandler v Webster [1904] 1 KB 493 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .191, 194Chapelton v Barry Urban District Council [1940] 1 KB 532 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .77, 101Chaplin v Hicks [1911] 2 KB 786 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .208, 211— v Leslie Frewin (Publishers) Ltd [1966] Ch 71 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63Chappell & Co Ltd v Nestlé Co Ltd [1960] AC 87 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23, 32, 33, 224Chapple v Cooper (1844) 3 M & W 252 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61Charnock v Liverpool Corporation [1968] 1 WLR 1498 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .88Charter v Sullivan [1957] 2 QB 117 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .207Cheese v Thomas [1994] 1 FLR 118 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .161Chiemgauer Membrand und Zeltbau (formerly Koch Hightex GmbH) v New Millenium Experience Co
Ltd (formerly Millenium Central Ltd) (No 2) (2001) The Times, 16 January . . . . . . . . . . . . . . . . . . . . . .200Cine Bes Filmcilik ve Yapimcilik v United International Pictures [2003] EWCA Civ 1669 . . . . . . . . . . . .210Citibank NA v Brown Shipley & Co Ltd, Midland Bank v Brown Shipley & Co Ltd [1991] 2
All ER 690 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .147City and Westminster Properties (1934) Ltd v Mudd [1958] 2 All ER 733 . . . . . . . . . . . . . . . . . . . . . . . . . .80
Contract Lawxii
xiii
Clarion Ltd v National Provident Institution [2000] 2 All ER 265 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .149Clarke v Dickson [1858] 120 ER 463 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .133, 214Clements v London and North Western Railway Company [1894] 2 QB 482 . . . . . . . . . . . . . . . . . . . . . .62Collins v Godefroy [1831] 109 ER 1040 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26, 34Combe v Combe [1951] 2 KB 215 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31Condor v The Baron Knights [1966] 1 WLR 87 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .187Cook v Spanish Holidays (1960) The Times, 6 February . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .212Cooper v Phibbs (1867) LR 2 HL 149 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .140, 151Cope v Rowlands (1836) 2 M & W 149 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .166Corpe v Overton (1833) 10 Bing 252 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64, 68Cosgrove v Horsefell (1945) 62 TLR 140 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .104Couchman v Hill [1947] KB 554 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .75, 124Couturier v Hastie (1852) 5 HLC 673 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .139, 151, 152Craddock Bros Ltd v Hunt [1923] 2 Ch 136 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .149, 152, 215Crossley v Faithful & Gould Holdings Ltd [2004] EWCA Civ 293; [2004] IRLR 377 . . . . . . . . . . . . . . . . .85Cumming v Ince (1847) 11 QBD 112 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .154Cundy v Lindsay (1878) 3 App Cas 459 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .145, 147, 151, 152Currie v Misa (1875) 1 App Cas 554 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21Curtis v Chemical Cleaning and Dyeing Co Ltd [1951] 1 KB 805 . . . . . . . . . . . . . . . . . . . . . . . . . . . .103, 110Cutter v Powell (1795) 6 Term Rep 320 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .179, 180, 183DC Builders v Rees [1965] 3 All ER 837 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29, 155Dakin (H) & Co v Lee [1916] 1 KB 566 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .181Dann v Curzon (1910) 104 LT 66 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .173, 175, 177Darlington BC v Wiltshier Northern Ltd [1995] 1 WLR 68 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50, 55Davies & Co Ltd v William Old (1969) 67 LGR 395 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16Davis Contractors Ltd v Fareham UDC [1956] AC 696 . . . . . . . . . . . . . . . . . . . . . . . . . . . .186, 189, 192, 194Day Morris Associates v Voyce [2003] EWCA Civ 189; [2003] All ER (D) 368 . . . . . . . . . . . . . . . . . . . . . . .13De Barnady v Harding (1853) 8 Exch 822 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .211De Francesco v Barnum [1890] 45 Ch 430 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .62, 69, 215, 226Denny, Mott & Dickson Ltd v James B Fraser & Co Ltd [1944] 1 All ER 678 . . . . . . . . . . . . . . . . . . . . . .188Derry v Peek (1889) 14 App Cas 337 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .125, 126, 133, 135, 136Dickinson v Dodds (1876) 2 Ch D 463 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11, 17Dillon v Baltic Shipping Co Ltd (The Mikhail Lermontov) [1991] 2 Lloyd’s Rep 155, NSW . . . . . . . . .101Dimmock v Hallett (1866) LR 2 Ch App 21 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .132, 133Donoghue v Stevenson [1932] AC 562 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .216Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .125— v White City Stadium Ltd [1935] 1 KB 110 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .62Dunlop v Lambert [1839] 6 C & F 600 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49, 50, 55, 56Dunlop Pneumatic Tyre Co v New Garage and Motor Co [1914] AC 79 . . . . . . . . . . . . . . . . . . . . . . . . . .210— v Selfridge & Co Ltd [1915] AC 847 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21, 33, 34, 47, 48, 55–57Eastham v Newcastle United FC Ltd [1964] Ch 413 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .170Edgington v Fitzmaurice (1885) 29 ChD 459 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .122, 134
Table of Cases
Edwards v Carter [1893] AC 360 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63— v Skyways Ltd [1969] 1 WLR 349 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39, 41Egan v Static Control Components (Europe) Ltd [2004] EWCA Civ 392 . . . . . . . . . . . . . . . . . . . . . . . . . . .85English Hop Growers v Dering [1928] 2 KB 124 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .171Errington v Errington & Woods [1952] 1 KB 290 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11, 17Esso Petroleum Co Ltd v Commissioners of Customs and Excise [1976] 1 All ER 117 . . . . . . . . . . . .39, 41— v Harper’s Garage (Stourport) Ltd [1968] AC 269, HL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .172— v Marden [1976] QB 801 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .72, 74, 127Evans (J) & Son (Portsmouth) Ltd v Andrea Merzario Ltd [1976] 1 WLR 1078 . . . . . . . . . . . . . . . . .79, 103Experience Hendrix LLC v PPX Enterprises Inc [2003] EWCA Civ 323 . . . . . . . . . . . . . . . . . . . . . . . . . . .206Faccenda Chicken v Fowler [1986] 1 All ER 617 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .213Falcke v Gray (1859) 4 Drew 651 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .215Farley v Skinner [2001] 3 WLR 899 HL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .208Fawcett v Smethurst [1914] 84 KB 473 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61Fellowes v Fisher [1976] QB 122 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .213Felthouse v Bindley [1863] 142 ER 1037 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12, 17, 19Fercometal SARL v Mediterranean Shipping Co SA (The Simona) [1989] 2 All ER 742 . . . . . . . .199, 201Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd (The Fibrosa case) [1943]
AC 32 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .189–192, 194, 195Fisher v Bell [1961] 1 QB 394 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6Fitch v Dewes [1921] 2 AC 158 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .169, 177, 213Fletcher v Krell (1873) 42 LJQB 55 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .131Foakes v Beer (1884) 9 App Cas 605 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30Forster v Suggett (1918) 35 TLR 87 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .168Frost v Knight (1872) LR 7 Exch 111 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .199, 201Gallie v Lee [1970] 3 All ER 961 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .150George Mitchell Ltd v Finney Lock Seeds Ltd [1983] 2 AC 803 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .108, 114George Wimpey UK Ltd v VI Construction Ltd (2005) 103 Con LR 67 . . . . . . . . . . . . . . . . . . . . . . . . . . .150Gibson v Manchester City Council [1979] 1 WLR 294 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7Glassbrook Bros v Glamorgan County Council [1925] AC 270 . . . . . . . . . . . . . . . . . . . . . . . . . . . .26, 34, 224Godley v Perry [1960] 1 WLR 9, QBD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .88Goldsoll v Goldman [1915] 1 Ch 292 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .174, 177Gore v Gibson (1845) 13 M & W 623 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67Grant v Australian Knitting Mills Ltd [1936] AC 85 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .87, 97Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2002] EWCA Civ 1407,
CA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .141, 142, 149Green v Russell [1959] 2 QB 226 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49, 55Gregory & Parker v Williams (1817) 3 Mer 582 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48, 55, 56Guthing v Lynn (1831) 2 B & Ad 232 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10, 17HIH Casualty and General Insurance v Chase Manhattan Bank [2003] UKHL 6; [2003] 2 Lloyd’s
Rep 61 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .106Hadley v Baxendale (1854) 9 Exch 341 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .195, 200, 204, 205, 212, 227
Contract Lawxiv
xv
Hall v Woolston Hall Leisure Ltd [2000] 4 All ER 787 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .176Hands v Simpson, Fawcett & Co (1928) 44 TLR 295 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .132Hanover Insurance Brokers Ltd and Christchurch Insurance Brokers Ltd v Schapiro [1994] IRLR 82 .169Harlingdon & Leinster Enterprises Ltd v Christopher Hull Fine Art Ltd [1990] 3 WLR 13 . . . . . . . . . . .91Harmony Shipping Co SA v Davis [1979] 3 All ER 177 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .174, 177Harris v Nickerson (1873) LR 8 QB 286 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7Hartley v Ponsonby (1857) 7 E & B 872 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27, 32–34Hartog v Colin & Shields [1939] 3 All ER 566 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .144, 151, 152Harvela Investments Ltd v Royal Trust Co of Canada Ltd [1986] AC 207 . . . . . . . . . . . . . . . . . . . . . . . .8, 17Harvey v Facey [1893] AC 552 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7, 17Hayes v James and Charles Dodd [1990] 2 All ER 815 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .212Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 . . . . . . . . . . . .126–129, 133, 135–137, 232Hermann v Charlesworth [1905] 2 KB 123 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .174, 177Herne Bay Steamboat Co v Hutton [1903] 2 KB 683 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .188, 194, 195Heywood v Wellers [1976] QB 446 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .212Hillas & Co Ltd v Arcos Ltd (1932) 147 LT 503 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .83, 89Hilton v Barker Booth and Eastwood [2005] 1 All ER 651 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .132Hochster v De la Tour (1853) 2 E & B 678 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .195, 198, 201Hoenig v Isaacs [1952] 2 All ER 176 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .181, 183Hollier v Rambler Motors (AMC) Ltd [1972] QB 71 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .105, 110Holwell Securities v Hughes [1974] 1 WLR 155 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14Home Counties Dairies Ltd v Skilton [1970] 1 WLR 526 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .169, 177Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd (The Hong Kong Fir Case) [1962]
2 QB 26 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .92–94Hooper’s Settlement Trusts, Re Bosman v Hooper [1948] Ch 586; [1948] 1 All ER 261 . . . . . . . . . . . . .170Household Fire Insurance v Grant (1879) 4 Ex D 216 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13, 17Howard v Shirlstar Container Transport Ltd [1990] 3 All ER 366 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .175Howard Marine & Dredging Co Ltd v Ogden & Sons (Excavating) Ltd [1978] QB 574 . . . . . . . .128, 133Hughes v Liverpool and Victoria Legal Friendly Society [1916] 2 KB 482 . . . . . . . . . . . . . . . . . . . . . . . . .176Hutton v Warren [1836] 150 ER 517 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .82, 89Hyde v Wrench [1840] 49 ER 132 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14, 17, 19Imperial Loan Co v Stone [1892] 1 QB 599 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67Ingram v Little [1960] 3 All ER 332 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .146, 148Inland Revenue Commissioners v Fry (2001) NLJ, 7 December . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13, 17Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1988] 2 WLR 615 . . . . . . . . . . . . . . . . .102JEB Fasteners Ltd v Marks Bloom & Co Ltd [1983] 1 All ER 583 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .123Jackson v Horizon Holidays [1975] 1 WLR 1468 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51, 54–56, 212, 217— v Royal Bank of Scotland plc [2005] UKHL 3; [2005] 2 All ER 71 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .206— v Union Marine Insurance Co Ltd (1874) LR 10 CP 125 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .187Jarvis v Swan Tours Ltd [1973] 1 QB 233; [1973] 1 All ER 71 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .211Jones v Padavatton [1969] 1 WLR 328 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39— v Vernons’Pools Ltd [1938] 2 All ER 626 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40, 41
Table of Cases
Contract Lawxvi
Julian v Furby (1982) 132 NLJ 64 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40, 41Karsales (Harrow) Ltd v Wallis [1956] 1 WLR 936 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .106Kings Norton Metal Co Ltd v Edridge, Merrett & Co Ltd (The Kings Norton Metal Case) (1897)
14 TLR 98 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .145, 146Kiriri Cotton Co Ltd v Dewani [1960] AC 192 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .176Kleinwort Benson Ltd v Malaysian Mining Corporation [1989] 1 WLR 379 . . . . . . . . . . . . . . . . . . . . .40, 41Kores Manufacturing Co v Kolok Manufacturing Co [1959] Ch 108 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .170Koufos v C Czarnikow Ltd (The Heron II) [1969] 1 AC 350 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .205, 212Krell v Henry [1903] 2 KB 740 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .188, 191, 192, 194, 195L’Estrange v Graucob [1934] 2 KB 394 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .77, 81, 96, 99, 109, 110, 150Lagunas Nitrate Co v Lagunas Syndicate [1899] 2 Ch 392 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .130, 136Lampleigh v Braithwaite [1615] 80 ER 255 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24, 25, 28, 32, 33, 224Lancashire Loans Co v Black [1933] 1 KB 380 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .158, 163Lawson v Supasink Ltd (1984) 3 TRL 37 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .88Leaf v International Galleries [1950] 2 KB 86 . . . . . . . . . . . . . . . . . . . . . . . .130, 133, 136, 142, 152, 203, 214Leeds Rugby Ltd v Harris [2005] EWHC 2290 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .169Les Affreteurs Reunis SA v Walford (Walford’s Case) [1919] AC 801 . . . . . . . . . . . . . . . . . . . . . . . .49, 82, 89Leslie (R) Ltd v Sheill [1914] 3 KB 607 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65Lewis v Avery [1972] 1 QB 198 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .147, 151, 152Lidl UK GmbH v Hertford Foods Ltd [2001] EWCA Civ 938 (20 June, Court of Appeal) . . . . . . . . . . . . .78Liverpool City Council v Irwin [1976] 2 WLR 562 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .84, 85, 89, 96Lloyds Bank v Bundy [1979] QB 326 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .158Locker and Woolf Ltd v Western Australian Insurance Co Ltd [1936] 1 KB 408 . . . . . . . . . . . . . . . .132, 133London Joint Stock Bank v MacMillan [1918] AC 777 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .204Long v Lloyd [1958] 1 WLR 753 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .130, 133, 136, 214Lumley v Wagner [1852] 42 ER 687 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .214McArdle, Re [1951] Ch 669 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23, 33, 224McCutcheon v David MacBrayne Ltd [1964] 1 WLR 125 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .100, 110McGowan v Radio Buxton (2001) (unreported) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40, 41McManus v Fortescue [1907] 2 KB 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9McRae v Commonwealth Disposals Commission (1950) 84 CLR 377, High Court of Australia . . . . . .139Magee v Pennine Insurance Co Ltd [1969] 2 QB 507 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .149Mahmoud and Ispahani, Re [1921] 2 KB 716 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .166, 177Maredelanto Cia Naviera SA v Bergbau-Handel GmbH (The Mihalis Angelos) [1970] 3 All ER 125 . . .91Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] AC 524 . . . . . . . . . . . . . . . . . . . . . . .189, 192, 194Marles v Trant [1954] 1 QB 29 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .176, 177Massey v Midland Bank [1995] 1 All ER 929 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .159, 162, 163Matthews v Baxter (1873) LR 8 Exch 132 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67Merritt v Merritt [1970] 1 WLR 1211 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38, 40, 41Metropolitan Water Board v Dick Kerr & Co Ltd [1918] AC 119 . . . . . . . . . . . . . . . . . . . . . . . . . . . .188, 192Midland Bank v Shepherd [1988] 3 All ER 17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .159Mont (M) (UK) Ltd v Mills (1994) The Times, 5 May . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .170
xvii
Moorcock,The (1889) 14 PD 64 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .83, 89, 96Moore & Co and Landauer & Co’s Arbitration, Re [1921] 2 KB 519 . . . . . . . . . . . . . . . . . . . . . . . . . .86, 180Morgan v Manser [1948] 1 KB 184 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .187, 194Morris (Herbert) Ltd v Saxelby [1916] AC 688 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .168Museprime Properties Ltd v Adhill Properties Ltd [1990] EGLR 196 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .123Napier v The National Business Agency [1951] 2 All ER 264 . . . . . . . . . . . . . . . . . . . . . . . . . . . .173, 175, 177Nash v Inman [1908] 2 KB 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61, 69National Westminster Bank plc v Morgan [1985] AC 686 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .158New Zealand Shipping Co Ltd v AM Satterthwaite & Co Ltd (The Eurymedon) [1975] AC 154;
[1974] 2 WLR 865 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28, 34, 35, 52, 54–56, 104, 110, 224Niblett Ltd v Confectioners’Materials Co Ltd [1921] 3 KB 387 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .86Nisshin Shipping Co v Cleaves & Co Ltd [2003] EWHC 2602; [2004] 1 All ER (Comm) 481 . . . . . . . . .54Nordenfelt v Maxim Nordenfelt Co [1894] AC 535, HL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .171, 177North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd (The Atlantic Baron) [1979] QB 705;
[1978] 3 All ER 1170 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .156, 163Oakes v Turquand and Harding (1867) LR 2 HL 325 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .214O’Brien v Mirror Group Newspapers Ltd [2001] All ER (D), 1 August . . . . . . . . . . . . . . . . . . . . . . . . .77, 81Occidental Worldwide Investment Corporation v Skibs A/S Avanti (The Siboen and The Sibotre)
[1976] 1 Lloyd’s Rep 293 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .155, 163Olley v Marlborough Court Hotel [1949] 1 KB 532 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .77, 100, 110Oscar Chess Ltd v Williams [1957] 1 WLR 370 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .76, 81Overland Shoes Ltd v Shenkers Ltd [1998] 1 Lloyd’s Rep 498 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .108Page One Records v Britton [1968] 1 WLR 157 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .214Panayiotou v Sony Music International (UK) Ltd [1994] 1 All ER 755 . . . . . . . . . . . . . . . . . . . . . . . . . . . .171Pao On v Lau Yiu Long [1980] AC 614 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27, 32–35, 155, 224Paradine v Jane (1647) Aleyn 26 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .185, 186, 190, 192, 194, 235Paragon Finance v Nash [2001] EWCA Civ 1466 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .78Parker v Clarke [1960] 1 WLR 286 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39, 41— v South Eastern Railway Co (1877) 2 CPD 416 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .101Parkinson v The College of Ambulance [1925] 2 KB 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .173, 175, 177, 226Parsons (H) (Livestock) Ltd v Uttley Ingham [1978] QB 791 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .206, 213Partridge v Crittenden [1968] 1 WLR 1204 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7Pearce v Brooks (1866) LR 1 Ex 213 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .174, 177, 226Peco Arts Inc v Hazlitt Gallery Ltd [1983] 1 WLR 1315 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .142Peyman v Lanjani [1985] 2 WLR 154 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .123, 134Pharmaceutical Society of GB v Boots Cash Chemists Ltd [1953] 1 All ER 482 . . . . . . . . . . . . . . . . . . .6, 17Phillips v Brooks Ltd [1919] 2 KB 243 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .146Photo Productions Ltd v Securicor Transport Ltd (Securicor case) [1980] AC 827 . . . . . .107, 109, 110, 197Pilkington v Wood [1953] 2 All ER 810 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .209Pinnel’s Case (Pinnel’s rule) (1602) 5 Co Rep 117a; 77 ER 237 . . . . . . . . . . . . . . . . . . . . . .29, 30, 32, 33, 184Pioneer Shipping Ltd v BTP Tioxide Ltd (The Nema) [1981] 2 All ER 1030 . . . . . . . . . . . . . . . . . . . . . . .187Planche v Colburn (1831) 8 Bing 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .182, 183
Table of Cases
Posner v Scott-Lewis [1987] 3 WLR 53 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .215Poussard v Spiers and Pond (1876) 1 QBD 410 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .90, 94, 96Price v Easton [1833] 110 ER 518 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47, 48, 57Priest v Last [1903] 2 KB 148 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .97Proform Sports Management Ltd v Proactive Sports Management Ltd and another [2006]
All ER (D) 38 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63Pym v Campbell [1856] 119 ER 903 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .80Raffles v Wichelhaus [1864] 159 ER 375 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .143, 151, 152Ramsgate Victoria Hotel Co Ltd v Montefiore (1866) LR 1 Ex 109 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989 . . . . . . . . . . . . . . . . . . . . . . . . . . . .93, 94, 180Redgrave v Hurd (1881) 20 Ch D 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .129Reynolds v Atherton (1921) 125 LT 690 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12Robinson v Davidson (1871) LR 6 Ex 269 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .187, 192— v Harman [1848] 154 ER 363 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .204Roe v Minister of Health [1954] 2 QB 66 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .219Roscorla v Thomas (1842) 3 QBD 234 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .123, 135, 224Routledge v Grant (1828) 4 Bing 653 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11, 17, 19— v McKay [1954] 1 WLR 615 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .76, 77, 81Rowland v Divall [1923] 2 KB 500 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .86Royal Bank of Scotland plc v Etridge (No 2) and other appeals [2001] UKHL 44 . . . . . . . . . .160, 162, 163Royscot Trust Ltd v Rogerson [1991] 3 All ER 294 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .128, 135, 136Ruxley Electronics and Construction Ltd v Forsyth; Laddingford Enclosures Ltd v Forsyth [1995] 3 All
ER 268, HL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .212Ryan v Mutual Tontine Westminster Chambers Association [1893] 1 Ch 116 . . . . . . . . . . . . . . . . . . . . . .215Saunders (Executrix of the Estate of Rose Maud Gallie) v Anglian Building Society [1971] AC 1004;
[1970] 3 WLR 1078 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .150–152Schawel v Reade [1913] 2 IR 64 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .82Schroeder Music Publishing Co Ltd v Macaulay [1974] 1 WLR 1308 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .171Schuler (L) AG v Wickman Machine Tool Sales Ltd [1974] AC 235 . . . . . . . . . . . . . . . . . . . .91, 94, 197, 201Scotson v Pegg (1861) 6 H & N 295 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27, 34, 35, 224Scott v Avery (1856) 5 HL Cas 81 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .167Scriven Bros & Co v Hindley & Co [1913] 3 KB 564 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .143Scruttons Ltd v Midland Silicones Ltd [1962] AC 446 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52, 54, 104, 110Selectmove, Re [1995] 2 All ER 531 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31–33, 36Shadwell v Shadwell (1860) 9 CBNS 159 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27, 35, 224Shanklin Pier v Detel Products Ltd [1951] 2 KB 854 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32, 52, 55, 56Shell (UK) Ltd v Lostock Garage Ltd [1977] 1 All ER 481 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .84Shipton Anderson & Co and Harrison Bros & Co, Re [1915] 3 KB 676 . . . . . . . . . . . . . . . . . .188, 192, 194Shirlaw v Southern Foundries Ltd [1939] 2 KB 206 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .83, 89, 96Shogun Finance Ltd v Hudson [2003] UKHL 62 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .147Simpkins v Pays [1955] 1 WLR 975 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39, 41Skeate v Beale (1840) 11 A & E 983 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .155
Contract Lawxviii
xix
Smith v Eric S Bush [1990] 1 AC 831 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .113— v Hughes (1871) LR 6 QB 597 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .143, 151, 152— v Mawhood (1845) 14 M & W 452 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .166Smith New Court Securities v Scrimgeour Vickers [1996] 4 All ER 769 . . . . . . . . . . . . . . . . . . .125, 135, 136Snelling v John G Snelling Ltd [1973] 1 QB 87 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51, 55, 56Solle v Butcher [1950] 1 KB 671 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .141, 148–152Spice Girls Ltd v Aprilia World Service BV [2000] EMLR 478 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .121Spring v National Amalgamated Stevedores and Dockers Society [1956] 1 WLR 585 . . . . . . . . . . . . . . .84Spurling (J) Ltd v Bradshaw [1956] 1 WLR 561 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .100, 102St John Shipping Corporation v Joseph Rank Ltd [1956] 3 All ER 683 . . . . . . . . . . . . . . . . . . . . . . . . . . .167Staniforth v Lyall (1830) 7 Bing 169 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .206Stansbie v Troman [1948] 2 KB 48 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .204Startup v Macdonald (1843) 6 Man & G 593 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .182, 183Steinberg v Scala (Leeds) Ltd [1923] 2 Ch 452 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64, 68, 69Steven v Bromley [1919] 2 KB 722 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .211Stevenson v McLean (1880) 5 QBD 346 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15, 17, 19Stilk v Myrick [1809] 170 ER 1168 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26, 27, 32–35, 224Stocznia Gdanska SA v Latvian Shipping Co [1998] 1 WLR 574, HL . . . . . . . . . . . . . . . . . . . . . . . . . . . .209Suisse Atlantique Société d’Armement Maritime SA v NV Rotterdamsche Kolen Centrale (The Suisse
Atlantique Case) [1967] 1 AC 361 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .107Sumpter v Hedges [1898] 1 QB 673 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .181, 183Sybron Corporation v Rochem Ltd [1984] Ch 112 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .144TSB Bank plc v Camfield [1995] 1 All ER 951 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .163Taddy v Sterious [1904] 1 Ch 354 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49, 55Tamplin v James (1880) 15 Ch D 215 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .149Tate v Williamson (1866) LR 2 Ch App 55 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .132Taylor v Caldwell (1863) 32 LJ QB 164 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .186–188, 192, 192, 194— v Laird (1856) 25 LJ Ex 329 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10, 17, 18— v Webb [1937] 2 QB 283 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .180, 183Thomas v Thomas [1842] 2 QB 851 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21, 22, 33, 224Thompson v T Lohan (Plant Hire) Ltd & J W Hurdiss Ltd [1987] 1 WLR 649 . . . . . . . . . . . . . . . . . . . . .112Thompson (W L) Ltd v Robinson Gunmakers Ltd [1955] Ch 177 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .207Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .77, 102, 110Tinsley v Milligan [1993] 3 WLR 126 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .175Tulk v Moxhay [1848] 41 ER 1143 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49, 55, 56Tweddle v Atkinson [1861] 121 ER 762 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25, 26, 33, 47, 48, 54–57Universe Tankships Incorporated of Monrovia v International Transport Workers Federation (The
Universal Sentinel) [1983] 1 AC 366 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .156Upton RDC v Powell [1942] 1 All ER 220 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .210Vaswani v Italian Motor Cars Ltd [1996] 1 WLR 270, PC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .106Victoria Laundry Ltd v Newman Industries Ltd [1949] 2 KB 528 . . . . . . . . . . . . . . . . . . . . . . . .195, 205, 212Ward v Byham [1956] 1 WLR 496 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23, 34, 35
Table of Cases
Warlow v Harrison (1859) 1 E & E 309 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9Warren v Truprint Ltd [1986] BTLC 344 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .113Watford Electronics Ltd v Sanderson CFL [2001] 1 All ER (Comm) 696 . . . . . . . . . . . . . . . . . . . . . . . . . .114Webster v Cecil [1861] 54 ER 812 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .79, 149, 152, 215— v Higgin [1948] 2 All ER 127 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .103Western Web Offset Printers Ltd v Independent Media Ltd (1995) The Times, 10 October . . . . . . . . . .208White v Bluett (1853) LJ Ex 36 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22— v Garden (1851) 10 CB 919 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .131, 136White and Carter Ltd v McGregor [1962] AC 413 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .199, 201, 209Whittington v Seale-Hayne (1900) 44 SJ 229 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .131, 136Williams v Bayley (1866) LR 1 HL 200 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .154, 158— v Roffey Bros & Nicholls Contractors Ltd [1990] 1 All ER 512 . . . . . . . . .23, 28, 31–33, 35, 36, 184, 224With v O’Flanagan [1936] Ch 575 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .133Wood v Scarth (1858) 1 F & F 293 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .145Woodar Investment Development Ltd v Wimpey Construction (UK) Ltd [1980] 1 WLR 277; [1980] 1 All
ER 571 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51, 212Yates v Pulleyn (1975) 119 SJ 370 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13Zanzibar v British Aerospace (Lancaster House) Ltd (2000) The Times, 28 March . . . . . . . . . . . . . . . . . .129
Contract Lawxx
The Origins andCharacter ofContract Law
Chapter 1
1.1. The development of alaw of contractMuch of the modern law of contract lawdeveloped in the 19th century and derives fromthe laissez-faire principles of economics that werethe hallmark of the Industrial Revolution.
Nevertheless, the origins of contract law aremuch more ancient than that and are to be foundin the early common law of the Middle Ages.Society at that time was preoccupied with landownership and interests in land. As a result, thelaw of that time was also mainly concerned withproperty rights.
The distinction that the law drew in terms ofidentifying the enforceability of rights wasbetween formal agreements and informal ones. Aformal agreement was one made in writing andwhich was authenticated by the practice of‘sealing’. This is the origin of the deed which wasthe method accepted for transfer of land andinterests in land up to 1989, when therequirement to complete the document by theprocess of sealing was relaxed in favour of thealready common practice of witnessing thedocument.
Two principal types of formal agreement,required to be under seal to be enforceable,developed during the 12th century.
● A covenant – such an agreement was usuallyto do something, for example an agreement tobuild a house. The available remedy thatdeveloped in relation to such agreements wasspecific performance.
● A formal debt – this was again an agreementunder seal, but to pay a sum of money. Thisagreement was actionable as an ‘obligation’and the available remedy was the payment ofthe debt.
Informal agreements also gradually gained therecognition of the law. These became known as‘parol’ agreements following the simplemeaning of the word at the time: ‘by word ofhonour’. The clear problem with informalagreements was the availability of proof of theiractual existence in order to be able to enforcetheir provisions.
Two particular actions developed for informalagreements:
● An action for debt – this was usually an oralagreement for the sale of the goods, and theremedy sought was usually the price of thegoods.
● Detinue – this was a claim in respect of achattel due to the person bringing the action,for instance for delivery of a horseor other livestock.
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The more modern law of contract begins with thelaw of ‘assumpsit’ in the 14th century. This had itsorigins in the tort of trespass, and was an actionin respect of the breach of an informal promise.The assumpsit was the undertaking to carry outthe promise.
Moving even further forward in time, oneof the most essential requirements of moderncontract law, the doctrine of consideration, wasalso established. The consideration was thereason for the promise being given, and wasbased on the assumption that nobody doesanything for nothing.
1.2. The character ofmodern contractsIt is common for non-lawyers to assume that acontract is an official agreement of some kind thatis written down, and probably prepared by alawyer. This, of course, is not the case. We allmake many contracts every day, even though werarely put them in writing or contemplate theconsequences of making them.
For instance, this morning I had to go toBirmingham. I parked my car in the multi-storeycar park at Wolverhampton station, taking theticket from the machine at the entrance. Insidethe station I bought a newspaper. On the train Ibought a cup of coffee and a slice of cake.
There is nothing exceptional about any ofthese events. I gave no thought to contract law inrelation to any one of them, but I was making acontract in every case.
What, then, if, on opening the newspaper, Ifound that only the cover pages were printed on?How about if I bit into my cake to find a piece offinger inside it? Finally, how would I feel onreturning from Birmingham if I found my carstolen or crashed into? In all these instances Iwould want at least my money back, andprobably some other form of remedy. At that
point I would be very eager to know about thecontractual nature of the arrangements I hadmade.
What distinguishes a contract in the modernday, then, is not whether it is in writing or not (asmay have been absolutely critical in former times)but that it is an agreement made between twoparties, by which they are both bound, and whichif necessary can be enforced in the courts.
It can be in written form, but most often it willbe made orally, and can even be made byconduct, as is often the case in auctions. Suchcontracts are called simple contracts.
Some contracts, because of their nature, haveto be in writing or evidenced in writing. Thesecontracts we call speciality contracts, and themost common is a contract for the transfer ofland, but these are beyond the scope of this book.
A contract is essentially a commercialagreement, an agreement between two partieswhich is enforceable in law. It is based on thepromises that two parties make to each other.However, while the law rightly protects many ofthe promises that we make to one another, notall promises are contractual. For instance, abeneficiary under a will has in effect beenpromised that inheritance and has a legal right toreceive it. The will is not, however, covered bycontract law. The heir has promised nothing inreturn for the inheritance.
A contract can alternatively be called abargain. One party makes a promise in return forthe promise of the other and the promises aremutually enforceable because of the price thatone party has paid for the promise of the other.
Many of the rules of contract law came aboutin the 19th century. At that time people believedvery much in the idea that there was freedom ofcontract. This is a nice idea, that we are all free tomake whatever contracts we want, on whateverterms we want.
It does not, of course, bear much relationshipwith reality. Commonly, the two parties to a
The Origins and Character of Contract Law 3
contract have unequal bargaining strength. Aprospective employee at interview is rarely tellingthe prospective employer what conditions (s)he isprepared to work for, but is trying to impress inorder to get the job.
Consumers too, even though they may havethe choice where to buy from, will rarelynegotiate the terms of the transaction they aremaking. More often than not, in the present day,contracts with businesses will be done on thelatter’s ‘standard forms’.
As a result of this, Parliament in the 20thcentury has produced many laws inserting, orimplying, terms into contracts which the partiesthemselves have not chosen but by which theyboth are bound.
So the notion of freedom of contract is not asstraightforward as it seems, and a party to acontract has to be aware of the numerouscontractual obligations by which (s)he will bebound other than those which (s)he haspersonally negotiated.
1.3. The reasons whycontracts are enforcedAs we have seen, then, a contract is anenforceable agreement between two parties. Therules regarding enforceability of agreementsobviously grew out of the need for certainty inrelationships, whether between businesses orbetween private individuals. We can none of ussafely conduct ourselves without knowing thatwe are able to rely on arrangements that wehave made.
The enforceability of contracts is based onthree significant factors:
● An agreement made between two partiescreates legitimate expectations in both that theterms of the arrangement will be carried outand that they will receive whatever benefit thatis expected from the agreement.
● Parties will commonly risk expenditure or dowork in reliance on a promise that a particularagreement will be carried out.
● It is simply unfair that if one party is ready toperform, or indeed has performed, their part ofthe bargain, that the other party should escapeor avoid his/her obligations without somemeans of redress for the injured party.
1.4. Contracts comparedwith other areas of lawSometimes both the law of contract and the lawof torts are seen as a general law of ‘obligations’.Certainly, both branches of the law compensatevictims for the harm done to them. Both branchesof the law are also ultimately based on dutiesowed by one party to another.
The traditional distinction between the two isthe character of the duty owed. In the case oftorts, specific duties are imposed by law andapply to everyone. In contract law, the duties areimposed by the parties themselves and onlyoperate to the extent agreed upon before thecontract was formed. Similarly, in the case of tortthe duty is usually owed generally to all personslikely to be affected by the tort. In contract law, onthe other hand, the duty is only to the other partyto the contract.
Nevertheless, the distinction is not always soclear and there are many complications andoverlaps. In the law of contract, many duties arenow imposed on parties by statute and as a resultof European law irrespective of the actual wishesof the parties to the contract.
This has been particularly the case in the areaof consumer contracts. In the law of torts, in thosesituations where the law does allow recovery for apure economic loss the distinction between thetwo again is blurred somewhat.
There can be overlap too in areas such asproduct liability where there can be a claim for
Contract Law4
negligence and also for breach of impliedstatutory conditions under the contract. In suchcircumstances a choice is sometimes madewhether to sue a manufacturer in tort or asupplier under contract law.
Similar complications have arisen in the fieldof medicine. Normally we would expect actionslegal actions to be bought in medical negligencein tort. However, where a patient has takenadvantage of private medicine, the rules ofcontract law can be invoked if they may have amore satisfactory answer, if, for instance, thecontractual duty is higher than the duty in tort.
Difficulties can also arise because of thedoctrine of privity in contract law and theexceptions to it, although legislation has removedsome of the hardships here. Though the absenceof a contractual relationship again may notprevent an action being bought for a breach of aduty in tort if such a duty exists.
Activity
Self-assessment questions1. How were the courts originally certain that
there was an enforceable contract?
2. What was the difference between‘covenants’ and ‘debts’?
3. What was ‘detinue’?
4. What is ‘assumpsit’ and what does it have incommon with modern contract law?
5. What are the major features of moderncontracts?
6. Why are many of the original rules ofcontract law impractical in modern times?
7. What are the main reasons why contractsare enforced?
8. What features does contract law have incommon with tort?
9. What are the major differences?
Principles of Formation:Offer and Acceptance
Chapter 2
2.1. The character ofagreementWe know from our introduction to the lawof contract that the law concerns ‘bargains’ thatare made between parties. The major significanceof the word ‘bargain’ is that it involves anagreement that is binding on both parties. Incontract law, then, it is insufficient merely that anagreement exists between two parties but ratherthat it involves that specific type of agreementwhich is enforceable by both parties.
A contract is completed when both sideshonour an agreement by carrying out theirparticular side of the bargain. It is a breach ofcontract when a party fails to do so.
However, because of the special nature ofcontractual agreements, we can not identify abreach of contract where we may feel that wehave not got what we paid for or ‘bargained’ for,without first showing that the agreement wasindeed a contract.
So our first objective in a contract case may beto prove that there is actually a contract inexistence. We can tell if it is a contract because tobe so it must have been formed according tocertain standard rules.
It will only be a contract where there is:An agreement – which is based on mutuality;
consideration – which means that both sides arebound to give something to each other; andintention – to be legally bound by the terms of theagreement. These elements are considered in thenext three Chapters.
A contractual agreement is said to exist when avalid offer is followed by a valid acceptance. Thisseems straightforward enough, and where oneperson offers to sell something to another partywho accepts the price and agrees to buy thenthere is no difficulty.
In practice though negotiations can be muchmore complex than this and on the other handagreements can be identified which appear tohave no formal negotiating steps, purchasinggoods from a vending machine being a classicexample of that.
In Butler Machine Tool Co. v Ex-Cell-OCorporation (1979) Lord Denning MR suggestedthat judges should decide whether a contractexisted by examining the evidence in its totalityrather than trying to apply a strict test of offer andacceptance. Even if other judges sympathisedwith the logic of this they would not publiclyadmit it, so we still have to return to thetraditional test of offer and acceptance.
2.2. The nature of offers
2.2.1. Distinguishing offer frominvitation to treatA person making an offer is called an offeror. Theperson to whom the offer is made, and who thuscan accept it is called the offeree.
The offer is a statement of intent by the offerorto be legally bound by the terms of the offer if itis accepted, and the contract exists onceacceptance has taken place.
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If the offer is plainly stated e.g. ’Would you like tobuy my car for £8,000?’ there is no problem. Thequestion is easily identified as an offer, and youonly have to say ‘Yes I will buy your car for £8,000’for there to be an easily identifiable acceptance too.
It is not always the case, however, that thefirst stage in negotiations is an offer. Oftenthe first step is an entirely passive state and isnot therefore open to acceptance, e.g. a tin ofbeans sitting on a supermarket shelf. This is notan offer and is called an invitation to treat inother words an invitation to the other party tomake an offer, usually an offer to buy. Thecontract is then formed by the agreement to sellwhich is the acceptance in this case.
It can be illustrated in diagram form:
2.2.2. Examples of invitation to treat
a) Goods displayed on shelves in aself-service shop.These are not an offer that is then accepted whenthe customer picks the goods from the shelves.They are an invitation to treat an invitation to thebuyer to make an offer to buy. This is done by thecustomer taking them to the cash desk where thecontract is formed when the sale is agreed.
The rule preserves the freedom of contract of theshopkeeper and sensibly allows the shopkeeper toaccept or refuse a sale. This might be particularlyimportant where a child selects alcohol fromshelves in an off license and tries to buy it.
b) Goods on display in a shop window.Again there is no offer, only a display of thegoods that the customer might go into the shopand offer to buy.
Figure 2.1 Diagram showing the point at which a contract is
made in a standard offer and acceptance, and where there is
firstly an invitation to treat
Party A
makes an
OFFER
Party B
ACCEPTSthe offer
Party A makes an
INVITATIONTO TREAT(it is not an offer)
Party B makes an
OFFER TO BUY(this is not an
acceptance)
Contract cannot be
formed at this point
CONTRACTformed at
this point
CONTRACTformed at
this point
Party A agrees to
sell (this is the
ACCEPTANCE)
Pharmaceutical Society of GB vBoots Cash Chemists Ltd (1953)Boots altered one of their shops to self-service.Under s18 Pharmacy and Poisons Act 1933 aregistered pharmacist was required to be present atthe sale of certain drugs and poisons. It wasimportant to know where the contract was formed.CA held that the contract was formed when goodswere presented at the cash desk where a pharmacistwas present, not when taken from the shelf.
Fisher v Bell (1961)A prosecution under the Offensive Weapons Act1959 failed due to bad drafting of the Act.Theoffence was to offer for sale prohibited weapons.The shopkeeper displaying a flick knife in thewindow was not offering it for sale. It was a mereinvitation to treat.
Principles of Formation: Offer and Acceptance 7
c) Goods or services advertised in anewspaper or magazineHere, a contract will not be formed until theperson seeing the advertisement has made anoffer to buy, which has then been accepted.
d) An invitation to council tenants tobuy their property
e) A mere statement of priceThe mere fact that a party has indicated a pricewhich (s)he would find acceptable does not makeit an offer.
f) Lots at an auctionThe rule in fact derives from auctions. The lot isthe invitation to make a bid. Bidding is an offer tobuy, and the acceptance is the fall of theauctioneer’s hammer at which point the contractis formed. The contract is formed between thehighest bidder and the owner of the goods. Theauctioneer is merely acting on behalf of theowner of the goods.
The consequence of this is that there is anabsolute entitlement to withdraw any lot prior tothe fall of the auctioneer’s hammer. This is nomore than an example of the rule that an offercan be withdrawn any time prior to acceptance(see section 2.3: The rules of offer).
The result may be different in an auction that isadvertised as being ‘without reserve’. This meansthat there is no minimum sale price that must bereached by the bidders before a sale can beconcluded, so that the goods are sold to thehighest bidder (see later).
Partridge v Crittenden (1968)A prosecution for ‘offering for sale’ a wild birdunder the Protection of Birds Act 1954 failed.Theadvertisement (‘Bramblefinch cocks, bramblefinchhens, 25s each’) was not an offer but an invitationto treat.
Gibson v Manchester City Council(1979)Gibson returned his completed application formwhen receiving an invitation to buy his house fromthe council.When there was a change of policy bythe council, Gibson’s action for breach of contractfailed. His completed application was an offer tobuy, not an acceptance of any offer by the council.
Harvey v Facey (1893)Harvey wanted to buy Facey’s farm and sent atelegram saying ‘Will you sell me Bumper Hall Penn?Telegraph lowest price’. Facey’s telegram replied‘Lowest price acceptable £900’. Harvey tried toaccept this but could not. It was merely a statementof price, not an offer.
British Car Auctions v Wright (1972)A prosecution for offering to sell an unroadworthyvehicle failed. At the auction there was no offer tosell, only an invitation to bid.
Harris v Nickerson (1873)Here, Harris had attended the auction, hoping to buycertain furniture which was advertised as being in thesale in the catalogue of the auction.The auctioneerhad withdrawn these items from the sale and Harrissued, arguing a breach of contract.The court heldthat the advertising of the goods in the cataloguewas no more than an invitation to treat. Moreover,any contract could only be formed on the fall of theauctioneer’s hammer when a bid was accepted.
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2.2.3. Situations which are notinvitation to treatSometimes, in situations that we would normallyassociate with invitation to treat, thecircumstances involved or the nature of the wordsused mean that there has in fact been an offerrather than an invitation to treat. These include:
(i) Advertisements involving aunilateral offerIf the advertisement indicates a course of action inreturn for which the advertiser makes a promiseto pay, then (s)he is bound by this promise.
(ii) A statement of price where anoffer is also intendedA mere statement of price is not binding, but ifother factors indicate that an offer is included in thestatement then it will be binding if it is accepted.
(iii) Competitive tenderingNormally, an invitation to tender for the supply ofgoods or services is no more than an invitation totreat. For instance, a company wants its officepainted. It invites tenders and various decoratorswill respond with different prices for the work.The company is free to choose any of thedecorators, not necessarily the cheapest. If,however, the company has in its advertisementagreed that the work will go to the tender withthe lowest price, then it is bound to give the workto the bidder with the lowest price.
There may also be an obligation on the partyinviting tenders to consider all tenders regardlessof whether a tender is accepted.
Carlill v The Carbolic Smoke Ball Co.Ltd (1893)The company advertised a patent medicine, thesmoke ball, with the promise that if a purchaserused it correctly and still got flu, then the companywould pay them £100. Mrs Carlill did get flu afterusing the smoke ball in the correct fashion.Thecourt enforced her claim for the £100.The promisewas an offer that could be accepted by anyonewho used the smoke ball correctly and still got flu.
Harvela Investments Ltd v Royal TrustCo. of Canada Ltd (1986)The Trust Company had invited tenders from twointerested parties for the purchase of some land.Thesale would go to the party making the highest bid.The party making the lowest bid had tendered aprice of $2,100,000 or $101,000 in excess of anyother offer.When it was accepted and Harvela, theparty making the higher bid, found out, they suedsuccessfully.The wording of the invitation to tendermade it an offer that could only be accepted by thehighest bidder.
Biggs v Boyd Gibbins (1971)In response to the offer of a lower price theclaimant wrote ‘For a quick sale I will accept£26,000’.The defendant replied ‘I accept your offer’.The claimant then wrote ‘I thank you for acceptingmy price of £26,000. My wife and I are both pleasedthat you are purchasing the property’. His first letterwas an offer that the defendant had accepted.
Blackpool and Fylde Aero Club Ltd vBlackpool Borough Council (1990)For many years, the aero club had held theconcession to run pleasure flights from the council’sairport.When the concession was due for renewalthe council put it out to competitive tender, andinvited tenders from other parties. All tenders wereto be submitted in unmarked envelopes in aparticular box by 12 noon on a specific date.The
Principles of Formation: Offer and Acceptance 9
(iv) Auctions advertised as ‘withoutreserve’Traditionally, an auction might take two forms.The first includes a ‘reserve price’ (a minimumprice acceptable to the seller) and in this case nosale can take place, and thus no contract isformed, unless the bidders reach this reserveprice. See McManus v Fortescue (1907).
In the case of an auction held by reserve thenthere is only one possible outcome: the goods willbecome the property of the highest bona fidebidder. It has, however, been held obiter, that nocontract of sale can materialise between theowner of the goods and the highest bidder wherethe auctioneer refuses the sale or for any reasonfails to accept the bid of the highest bona fidebidder. In this instance it was said that a collateralcontract is created between the highest bona fidebidder and the auctioneer himself, so that theauctioneer may then be sued for breach ofcontract. See Warlow v Harrison (1859). This pointhas been examined more recently.
council stated that it would not be bound to acceptany bid.The club placed its bid in the box at 11.00a.m. but by accident the box was not emptied afterthis time and its bid was not therefore considered.The concession was given to another group, R.R.Helicopters.When the council later discovered itsmistake it at first decided to repeat the exercisebut was threatened with legal action by R.R.Helicopters.The club claimed breach of a contractto consider all tenders delivered by the due time.Its claim was upheld.The court felt that there wasan implied undertaking to operate by the rules thatit had set, even though the invitation to tender forthe concession was only an invitation to treat.
Barry v Heathcote Ball & Co.(Commercial Auctions) Ltd (2000)Here, in an auction advertised as ‘without reserve’,the auctioneer withdrew two lots, machinery worth£14,251, from the auction. In doing so he refusedbids of £200 for each machine made by the claimantand which were the highest bids.The auctioneerthen sold them on privately at £750 each.Theclaimant bidder sued, arguing that the highest bidrule should apply.The court, approving Warlow vHarrison, accepted the existence of a collateralcontract between the bidder and the auctioneer andawarded the claimant £27,600 damages.
Activity Quick QuizExplain whether the following situations involveoffers or mere invitations to treat:
1. A sign in a shop window reading:
SPECIAL OFFERBAKED BEANS
ONLY 6p PER TIN
2. My friend has an old sports car that Iparticularly like.When I ask him howmuch he would sell it for he replies: ‘Youcould not buy a car like that for less than£20,000 these days.’
3. An advertisement in a local newspaperwhich reads:
YOU MUST NOT MISS SUPERSTORES’SPECIAL OPENING BONANZA
MICROWAVE OVENS RRP £199 ONLY 99PTO OUR FIRST 10 CUSTOMERS
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2.3. The rules of offerOnce we know whether a party is making anoffer, and is then intending to contract, we mustbe satisfied that the offer conforms to the rules toshow whether it is a valid offer or not.
The offer must be communicated tothe offereeIt is impossible to accept something of which youhave no knowledge.
An offer can be made to one personbut it can also be made to the wholeworldAnyone can then accept the offer who has hadnotice of it.
The terms of the offer must be certainIf the words of the offer are too vague then theparties might not really know what they arecontracting for and should not then be bound.
Activity Quick QuizNow do the same in a simpler form andsuggest whether or not an offer exists in thefollowing examples.
1. I tell you that I have a thousand copies ofmy new contract law text, the price ofwhich is only £13.99.
2. My new contract law text is advertised inthe college handbook at only £13.99.
3. I write you a letter in which I say ‘Would youlike a copy of my new contract law text book?It is only £13.99’.
Taylor v Laird (1856)Taylor gave up the captaincy of a ship and thenworked his passage back to Britain as an ordinarycrew member. His claim for wages failed.The shipowner had received no communication ofTaylor’soffer to work in that capacity.
Carlill v The Carbolic Smoke Ball Co.(1893)The company’s claim that it had no contract withMrs Carlill failed. It had made its offer generally andshe had accepted by buying the smoke ball, using itand still getting flu.
Guthing v Lynn (1831)When a horse was purchased a promise to pay £5more ‘if the horse is lucky’ could not be an offer. Itwas too vague.
Activity Quick QuizIn the following examples, consider whetherthe terms of the offer are certain enough for acontract to be formed if they are accepted.
Sukky agrees to sell an important book oncontract law for :
1. a fair price
2. a price which will be fixed by Sukky’s friendDalvinder when he next sees him
3. a price that is half of the normal retail price
4. a price to be agreed between Sukky andmyself at a later date.
Principles of Formation: Offer and Acceptance 11
It is possible to withdraw an offer, atany time before the offer is accepted
If, however, the offeree paid money to the offerorto keep the offer open, then (s)he would bebound to do so.
The offeror must communicate thewithdrawal of the offer to the offeree
This shows how important it is to keep a track ofdates as well as other information duringcontractual negotiations.
Communication of withdrawal of theoffer can be by a reliable third partyIt need not be done personally but the third partymust be a reliable source of information.
A unilateral offer cannot be withdrawnwhile the offeree is performing In a unilateral contract the offeree actually acceptsby performing his/her side of the bargain (as inCarlill). It would clearly be unfair to prevent thisonce the other party had begun.
2.4. Termination of offer
An offer can be terminated in anumber of ways:
● It can be accepted, in which case there is acontract. (or indeed it could be refused or metwith a counter-offer, in which case there is nocontract).
● It can be properly withdrawn, as we have seenabove.
● The time for acceptance can lapse.● A reasonable time can have lapsed. (It would
be rare that an offer could stay openindefinitely.)
Routledge v Grant (1828)Grant had offered his house for sale on theunderstanding that the offer would remain open forsix weeks.When he took it off the market withinthe six weeks that was legitimate because therehad been no acceptance.
Byrne v Van Tienhoven (1880)On 1st October Van Tienhoven wrote to Byrne,offering to sell certain goods.
On 8th October he changed his mind and sent aletter withdrawing the offer.
On 11th October Byrne accepted the offer in atelegram.
On 15th October he confirmed this in writing.On 20th October Byrne received Van
Tienhoven’s letter withdrawing the offer. It wasinvalid because it had not been received until afterByrne’s acceptance.
Dickinson v Dodds (1876)Dodds had offered to sell houses to Dickinson.WhenBerry notified Dickinson that Dodds had withdrawnthe offer this was acceptable. Berry was shown to bea mutual acquaintance on whom both could rely.
Errington v Errington & Woods (1952)A father bought a house and mortgaged it in hisown name. He promised his son and daughter-in-law that it would become theirs when they hadpaid off the mortgage.When the father died andother members of the family wanted possession ofthe house, the couple’s action failed.The father’spromise could not be withdrawn so long as thecouple kept up the mortgage repayments, afterwhich the house would be theirs.
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● When one of the parties dies. Generally, thismay operate in different ways depending onwhich party dies.w If the offeree dies then this will cause the
offer to lapse and his/her representativeswill be unable to accept on his/her behalf.See Reynolds v Atherton (1921).
w If an offeror dies, however, (s)he may stillbe bound by an acceptance that is made inignorance of the offeror’s death. SeeBradbury v Morgan (1862).
w Although, if the offeror dies and the offereeknows of this then it is unlikely that (s)hecould still claim to accept the offer.
2.5. The rules on acceptance
a) The acceptance must becommunicated to the offerorJust the same as for the offer, communication isrequired. Otherwise the unscrupulous might holdpeople to offers of which they were unaware. Itgoes without saying, then, that the acceptancemust be a positive act, and that acceptancecannot be taken from silence.
ActivitySelf-assessment questions1. What is an offer?
2. What is the major difference between anoffer and an invitation to treat?
3. What would happen if a customer in asupermarket took tins of beans from ashelf but changed her mind and discardedthem before reaching the cash desk?
4. What would happen if I ordered goodsadvertised in a magazine and the sellerwrote back to say that supplies wereexhausted?
5. What makes a unilateral offer different toan invitation to treat?
6. Is it possible for an offer to be made tomore than one person?
7. Why is it important to notify an offereebefore withdrawing the offer?
8. Is it true to say that it is better for anofferee that negotiations prior to acontract are all carried out by letter, and ifso why is that so?
9. What factors would you take into accountin determining whether a reasonable timefor an offer to stay open had lapsed?
10. If you find my lost dog and return it to meand later see an advertisement in thenewspaper offering a reward for return ofthe dog, can you claim it?
Ramsgate Victoria Hotel Co. Ltd vMontefiore (1866)Montefiore had offered to buy shares in June butthe company only issued the shares in November.It was held that his offer to buy had lapsed.
Felthouse v Bindley (1863)An uncle and nephew had negotiated over the saleof the nephew’s horse.The uncle had said ‘If I hearno more from you I shall consider the horse mine at£30:15s’. On sale of the nephew’s stock, the
Principles of Formation: Offer and Acceptance 13
As a result, if the offeree is unaware of theexistence of the offer then he cannot be said tohave accepted it.
b) The acceptance can be in any formIt can be in writing, by words, or conduct. Ofcourse, if the offeror requires it to be in a specificform then it must be in that form or it will beinvalid.
Acceptance can be construed from the conduct ofthe parties – see Brogden v Metropolitan RailwayCo (1877) in (g) below. However, only this can beobjectively demonstrated to have been theintention of the offeree, as in Day MorrisAssociates v Voyce (2003).
c) The ‘postal rule’Where use of the ordinary postal system is thenormal, anticipated or agreed means of acceptingthen the contract is formed at the time the letterof acceptance is posted, not when it is received(the postal rule).
The rule applies even where the letter is neverreceived, rather than merely delayed.
It is possible to avoid the effects of the postal ruleby stating in the offer that there will be nocontract until the acceptance is actually received,in which case the contract is only complete oncommunication of the acceptance.
auctioneer failed to withdraw the horse from thesale, as instructed by the nephew.The uncle tried tosue the auctioneer in tort but failed. He could notprove that the horse was his.The nephew had notactually accepted his offer to buy.
Inland Revenue Commissioners v Fry(2001)Fry owed the IRC £113,000. She sent a chequefor £10,000 with a letter stating that this was ‘in fullsettlement’ of the debt and if it was cashed shewould take this as acceptance of her offer. IRCcashiers normally bank cheques before sendingletters on to a caseworker.The caseworkerimmediately phoned Fry and told her that the£10,000 could be treated only as part-payment. Fryinsisted that the Revenue were bound to acceptthe offer, having cashed the cheque.The court heldthat, although an offeree might accept a unilateraloffer which prescribed its manner of acceptance byacting accordingly, the offeree must have knowledgeof the offer.The IRC were ignorant of the offer sothere was no acceptance.
Yates v Pulleyn (1975)An option to purchase land was required to beexercised by notice in writing ‘sent by registered orrecorded delivery post’.When the option was sentby ordinary post only, it was invalid.
Adams v Lindsell (1818)The rule began with this case where wool wasoffered for sale, an acceptance by post wasrequested and sent, but not received until long afterthe wool had been sold.The rule developed thenfrom the possible injustices caused by delays in thepostal system in its early days.
Household Fire Insurance v Grant(1879)Grant made a written offer to purchase shares.Notification of acceptance was posted but neverreceived.When the company went into liquidation,Grant’s claim that he was not a shareholder andshould not be liable for the value of the sharesfailed. He had become a shareholder, even thoughunaware of it.
Contract Law14
d) More modern methods ofcommunicationIn the case of more modern methods ofcommunication, the picture is not so clear.The important factor seems to be howinstantaneous the method is.
Faxes and e-mail are even more modern forms ofcommunication and the same problems and thesame principles very often apply.
More recently, as a result of having toimplement EU Directive 97/7, the distance sellingdirective, the Consumer Protection (DistanceSelling) Regulations 2000 have been introduced.
● These apply to contracts for the sale of goodsand provisions of services made by a variety ofmodern methods, e.g. telephone, fax, Internetshopping, mail order, e-mail and televisionshopping.
● The Regulations do not apply to transfers ofland, building contracts, financial services,purchases from vending machines and auctions.
● Under Regulation 7, the seller/supplier isbound to provide the purchaser with certain
minimum information, including the right tocancel the contract within seven days,description, price, arrangements for paymentand delivery (and how long all of these remainopen for) and the identity of the supplier.Written confirmation must also be given,according to Regulation 8.
● Inevitably, if these rules are not complied withthen the contract is not formed.
The Electronic Commerce Directive 2000/31(implemented in the Electronic Commerce (ECDirective) Regulations 2002) has an impact alsoon offer and acceptance by electronic means.Article 11 says that
‘where [a purchaser] in accepting [a seller’s] offer isrequired to give his consent through technologicalmeans, such as clicking on an icon, the contract isconcluded when the recipient of the service hasreceived from the service provider, electronically, anacknowledgement of receipt of the recipient’sacceptance’.
So this would appear to clear up some of theproblems formerly encountered in determiningwhen such agreements are actually complete anda contract formed.
e) The acceptance must beunconditionalThis is the so-called‘mirror image rule’. Theacceptance must conform exactly with the terms ofthe offer or it is invalid and no contract will havebeen formed. It follows that any attempt to vary theterms of the offer is a counter-offer, terminating theoriginal offer, which cannot then be accepted.
Holwell Securities v Hughes (1974)An attempt to use the postal rule failed where theacceptance was required to be ‘by notice in writing’.The fact that actual notice was required meant thatthe postal rule did not apply.
Brinkibon Ltd v Stahag Stahl (1983)Previous case law had stated that an acceptance bytelex, like telephone, was immediate enoughcommunication to be effective straightaway.Thiscase, however, concerned a telex received out ofoffice hours. HL held that this could only beeffective once the office was reopened.
Hyde v Wrench (1840)Wrench offered to sell his farm to Hyde for£1,000. Hyde rejected this and offered to pay £950,which Wrench rejected.When Hyde then tried toaccept the original price and Wrench would not
Principles of Formation: Offer and Acceptance 15
f) Mere enquiries do not count asrejectionA mere enquiry about the contract is not acounter-offer, as it does not reject the terms of theoffer. This means that the offer is still open toacceptance by the offeree.
g) Technical counter-offers of noimportance to the parties will notcount as a rejectionA counter-offer rejecting a central term means theoffer is no longer open to acceptance. However,in the case of mere ancillary terms, if the partiesshow no concern and go on to contract then thecourt may ignore the counter-offer.
sell, Hyde’s action failed.The original offer was nolonger open for him to accept.
Stevenson v McLean (1880)In a response to an offer to sell iron, the price andquantity were accepted but the offeree wished toknow whether delivery could be staggered. Hearingnothing further, the claimant sent a letter ofacceptance. He sued on discovering that the ironhad been sold to a third party.The defendant’sclaim that there had been a counter-offer failed. Itwas not a rejection of the offer, merely an enquiryabout it, and the offer was still open to acceptance.
Brogden inserted the name of an arbitrator in asection left blank for that purpose, signed theagreement and returned it.The company secretaryfor the Railway Company signed and returned itwithout looking at it. Brogden continued to supplycoal and was paid for deliveries. In a later conflictBrogden tried to avoid his obligations and arguedthat there was no contract because of a counter-offer by the Railway Company.The House of Lordsaccepted that technically the insertion of thearbitrator’s name was a counter-offer but this hadno effect on the parties, so Brogden had acceptedthe counter-offer and could not claim the contractdid not exist.
Brogden v Metropolitan Railway Co(1877)The parties had a long-standing informalarrangement for the supply of coal.They thenformalised the arrangement and a draft contractwas sent to Brogden by the Railway Company.
Activity
Self-assessment questions1. Why is it necessary for acceptance to
‘mirror’ the offer?
2. What are the different consequences of acounter-offer and a mere enquiry?
3. How does the judge decide whethersomething is a counter-offer or a mereenquiry?
4. In what way can a counter-offer operate toinfluence the formation of a contract?
5. In what possible situations might a silentresponse nevertheless lead on to acontractual relationship?
6. Is there any justification for the postal rule inthe modern day?
7. What problems result from modern dayrapid or instantaneous forms ofcommunication and how have they beenresolved?
Contract Law16
2.6. Points for discussion
Problems associated with offer andacceptanceMany contracts in a modern commercial contextare not formed as the result of one partystraightforwardly accepting the simple offer of theother. This would be too restrictive and rigid.Businesses contract in a variety of ways and maybe subject to disagreements, rejections,compromises and even threats before anagreement is ever reached. Sometimes people toowill negotiate to try to get something differentthan what is first offered. We have already seenthe effect that a counter-offer can have on theparties. When does a mere enquiry end and acounter-offer begin? That is a question thatjudges will often be called on to answer.
A further complication is the common use of‘standard forms’by businesses. These are used sothat the business can be sure of always dealing onterms advantageous to it. This may not cause anyproblems in a consumer sale. When two businessesare contracting, however, it can prove a nightmare.This is the so-called‘battle of the forms’. Onebusiness makes an offer on its standard forms. Thecustomer accepts on its. The two forms may beentirely contradictory. The question is which termsare taken as being the contractual ones in the caseof a conflict between the two businesses.
The general rule in the modern day is to takethe last counter-offer as having been accepted,and give effect to its terms in the contract.
The problem is further compounded because oftenthe services or goods are provided before anysettled agreement is reached. In a later conflict thecourts may find a contract does exist, providedthere has been no major disagreement betweenthe parties. Sometimes, however, this is impossible.
clause that they would not pay for work until theythemselves had been paid.When the shop fitterslater sued for some work that had not been paidfor, their action failed.The builders’ standard formwas a counter-offer that the shop fitters hadaccepted by carrying on with the work.
Davies & Co. Ltd v William Old (1969)Shop fitters, following their successful tender,contracted with the architects in a buildingcontract to sub-contract to the builders.Thebuilders, under instruction from the architects,issued an order for work to the shop fitters.Theydid this on their own standard form that included a
British Steel Corporation v ClevelandBridge and Engineering Co. (1984)Cleveland Bridge were sub-contracted to build thesteel framework of a bank in Saudi Arabia.The workrequired four steel nodes that they asked BSC tomanufacture. BSC wanted a disclaimer of liability forany loss caused by late delivery.The parties werenever able to agree on this and so no writtenagreement was ever made. BSC, however, did makeand deliver three of the nodes, but the last wasdelayed because of a strike. Cleveland Bridge refusedto pay for the three nodes and claimed that BSC wasin breach of contract for late delivery of the fourth.Because there was a total disagreement over a majorterm, the judge in the case found it impossible torecognise that a contract existed. He did order thatBSC be paid for what they had supplied.
ActivitySelf-assessment questions1. Is there a satisfactory method of resolving a
‘battle of forms’?
2. Is there any logic to the outcome ofCleveland Bridge?
Principles of Formation: Offer and Acceptance 17
● A contract is made where there is anagreement between two parties
● An agreement is a valid offer followed bya valid acceptance
● Offer must be distinguished from:w an ‘invitation to treat’ – Pharmaceutical
Society of GB v Bootsw and from a mere statement of price –
Harvey v Facey● Competitive tendering is different – Harvela
Investments v Royal Trust Co. of Canada● An offer must be communicated –
Taylor v Laird● The offeree must be aware of the existence
of the offer – IRC v Fry● An offer can be made to the whole world –
Carlill v Carbolic Smoke Ball Co.● The terms of the offer must be certain –
Guthing v Lynn● An offer can be withdrawn any time up to
acceptance – Routledge v Grant● The withdrawal must be communicated to the
offeree – Byrne v van Tienhoven● This can be by a reliable third party –
Dickinson v Dodds
● Unilateral offers do not require acceptance,only performance – Errington v Errington andWoods
● An offer ends – w on acceptancew on proper withdrawalw on lapse of timew on death of one of the parties
● Acceptance must be communicated –Felthouse v Bindley
● If use of the post is the normal, anticipatedmethod of acceptance the contract is formedon posting (the postal rule) – Adams v Lindsell
● This applies even if the acceptance is neverreceived – Household Fire Insurance v Grant
● Acceptance must be unconditional – Hyde vWrench
● But mere enquiries are not rejections of theoffer – Stevenson v McLean
● Modern methods of communicating such asfax, e-mail and the Internet cause problems indetermining when a contract is formed
● Some of these problems have now beenresolved by the E-commerce Directive andthe Consumer Protection (Distance Selling)Regulations
Key
Fact
s
ActivityLegal Problem SolvingThere are four essential ingredients toanswering problem questions:
● Firstly you must be able to identify theimportant facts in the problem, the ones onwhich the answer may depend.
● Secondly you will need to know andunderstand the law which is likely to applyin the situation.
● Thirdly you will need to be able to applythe law to the facts.
● Fourthly you will need to be able to drawconclusions from that process.This isparticularly so where the problem asks youto advise. If you are advising then your clientis depending on you to say what to do in thecircumstances.
Consider the following situation
Contract Law18
ProblemOn May 11th Andy wrote to his friend Brianoffering to sell Brian his Cup Final ticket for£150. Brian posted a letter on May 12th whichsaid:
“Dear Andy,
About the Cup Final tickets. £150 seems a bit onthe steep side. I don’t mind paying a bit over theodds but I’d be happier paying £100. Or could Ipay you £100 now and the other £50 when I’mpaid again at the end of the month?
Yours Brian”
Later in the day Brian wrote again to Andy:
“Dear Andy,
I’ve thought again about that ticket. I really wantto go and it’s cutting it a bit fine to get one fromanywhere else. I’ll pay you the £150.
Yours Brian”
He posted the letter the same night.
Andy received Brian’s first letter on the morningof May 13th and sold the ticket to anotherfriend Chris at work that day.
When Andy returned home that evening Brian’ssecond letter had been delivered in the later post.
Brian missed the Cup Final and now seeksyour advice.
Answering the questionThe factsUnlike in real life, it is common when a tutoror an examiner makes up a problem for nearlyall of the facts to be relevant in some way.
Even so they may still need to be put intosome logical order to connect them to the lawyou need to use.
Here the key facts seem to be:
1. Andy made an offer to Brian on May 11thof a Cup Final ticket for £150.
2. On May 12th Brian replied that he wouldprefer to pay £100 to £150, andalternatively asked if he might pay £150 intwo installments.
3. Later on May 12th Brian sent astraightforward letter of acceptance.
4. Andy sold the ticket to Chris on 13th Mayafter receiving Brian’s first letter.
5. Andy received the second letter later thesame day.
6. All of these communications were carriedout by post.
The lawWe know because the problem is all aboutwhether Andy is obliged to sell the tickets toBrian or not that it concerns formation, andparticularly offer and acceptance; indeed theword offer is used in the situation.
From this and other facts we can deduce whatparticular rules are important to solving theproblem.
The appropriate law would appear to be:
● A contract can only be formed if there is anagreement, which is a valid offer followed bya valid acceptance.
● An offer must be communicated – Taylor vLaird.
Principles of Formation: Offer and Acceptance 19
● An offer can be withdrawn any time beforeacceptance – Routledge v Grant.
● But this must be communicated to theofferee – Byrne v Van Tienhoven.
● A contract is formed once the offer isaccepted.
● The acceptance must be communicated tothe offeree – Felthouse v Brindley.
● Where the post is the normal, anticipatedmethod of accepting then the contract isformed when the letter is posted not whenit is received – Adams v Lindsell.
● A counter offer is a rejection of the offerthat is longer open to acceptance – Hyde vWrench.
● But a mere enquiry has no such effect –Stevenson v McLean.
Applying law to factIt is tempting to look at Brian’s first letter andsee it as a counter-offer. Of course, if we dothat there is nothing left to answer about.Thisshould be a pointer in itself, but really in anyproblem where a particular act can be seen asone thing or the other we need to look atboth or all possibilities.
On the other hand, if we do not see it as acounter-offer it means Brian’s second lettercould be an acceptance (‘I’ll pay the £150’).We need to examine the first letter, then, todecide whether we think the first part is a
definite rejection of the offer, and if notwhether the second part is only an enquiry.
If we accept that it is, then our next realconcern is that Andy has sold the ticket. Canhe do this? Well, if there was a counter-offer hecan, with no thought to Brian. If not, then heneeds to tell Brian before he sells it.
The final part of the problem is whether thepostal rule applies or not. Andy has not soldthe ticket until after he receives Brian’s firstletter. If the letter has no contractualsignificance then Andy has in effect withdrawnthe offer without informing Brian. Brian, on theother hand, has accepted in his second letter. Ifthe postal rule applies (which appears possiblehere because all the communications are byletter) then the acceptance takes place whenthe letter is posted, not when Andy receives itafter he has sold the ticket.The contract isformed at the time the letter is posted andAndy would be in breach of contract by sellingthe ticket to Chris.
ConclusionsIt just remains now to make a judgement,based on our analysis above, as to whether toadvise Brian to sue Andy or not.
Just as in real life, there might not be a definiteor straightforward answer.The point is to reacha logical conclusion by using the law correctly.
Contract
Law20
Dilemma Board
Jody sees an advert in the post office window in which Gary is selling a pair of football boots for £50. Jodyrings Gary and asks Gary how new the boots are. Gary says that they are three years old but hardly usedand cost £100. Jody tells Gary that he would prefer to pay £40 for the boots. Gary says that he will think itover. Later that evening Jody sends a letter to Gary saying that he will buy the boots for £50 as advertised.Meanwhile Gary has sold the boots to Ken.
A.Gary is in breach of contractbecause he has not communicatedto Jody that his offer is withdrawn.
C.Jody cannot sue Gary for breach ofcontract because stating that hewould prefer to pay £40 for theboots was a counter-offer.
B.Jody can sue Gary for breach ofcontract because of the postal rule.
D.Jody cannot sue Gary for breach ofcontract because an offer must bemade to an individual.
In the dilemma board below consider the accuracy of each of the four statements A, B, Cand D, as they apply to the facts in the central scenario.You only need to give the basicprinciples. The answer is in the appendix at the end of the book.
Principles of Formation:Consideration
Chapter 3
3.1. The nature and purposeof considerationAs we have already seen, the law of contract dealswith bargains. The rules of contract seek todifferentiate between agreements where there issomething to be gained by both parties, as is thecase in a contract, and agreements which arepurely gratuitous, as are gifts.
Originally, contracts were only recognised ifcontained in a deed. This was logical in the case ofland transfers but otherwise inconvenient. Thegiving of ‘consideration’by both sides became thetraditional method of ensuring that other types ofagreement were contractual. It was the quid proquo, the proof that a bargain in fact existed, and ifno consideration could be found then theagreement could not be enforced. The exception isan agreement made by deed.
3.2. Defining considerationOriginally, it proved impossible to give a simple,single definition of consideration, and thepragmatic view was often taken that it is was nomore than the reason why the promise should bebinding in law. Often, in any case, it was taken asbeing no more than a rule of evidence.
Many 19th-century cases looked for definitionsbased on benefit gained and detriment suffered.So, for instance, it was variously defined as:
● ‘loss or inconvenience suffered by one partyat the request of the other’– Bunn v Guy (1803).
● ‘some detriment to the plaintiff or somebenefit to the defendant’– Thomas v Thomas(1842).
A simple, early way of defining considerationcame in Currie v Misa (1875) where it wasdescribed in terms of benefit and detriment:‘some right, interest, profit or benefit accruing toone party, or some forbearance, detriment, loss orresponsibility given, suffered or undertaken bythe other’. So, if I contract with you over mycontract law textbook for £15, I am gaining thebenefit of the £15 but have the detriment ofgiving up the book. For you, it is the other wayround.
A more sophisticated definition was laterprovided in Dunlop v Selfridge (1915), a caseinvolving issues of both absence of considerationand lack of privity of contract by the party seekingto enforce contractual provisions. Here HLapproved Sir Frederick Pollock’s definitioncontained in his Principles of Contract that ‘anact of forbearance or the promise thereof is theprice for which the promise of the other isbought, and the promise thus given for value isenforceable’.
In fact, although the judges are saying thatthey will not in contract law enforce a promisewhich has not been paid for in some way, inmodern cases they have been shown to bewilling to see almost any promise made in acommercial context as contractual. Thereforeconsideration can be surprisingly little, and itcan seem difficult to fit the theory to realsituations.
3.3. Executory and executedconsiderationContract law would have no meaning unlessit enforced promises as well as actual acts.Executory consideration is simply the exchangeof promises to carry out acts or pass property at alater stage. If one party breaks their promise andfails to do what they are supposed to do under it,then they are in breach of contract and may besued.
In unilateral contracts, however, the partymaking the unilateral offer is under no obligationuntil the other party performs (executes) theirside of the bargain. This is called executedconsideration, and a common example is areward. We have already seen this principle inoperation in Mrs Carlill’s case.
3.4. The rules ofconsideration
a) Consideration need not beadequate but it must be sufficientThis sounds like complete nonsense becauseadequacy and sufficiency appear to be the samething.
AdequacyIn fact, lawyers are using ‘adequacy’ in itseveryday form, i.e. whether the parties arepromising things of fairly equal value. Adequacywill be decided by the parties themselves.Freedom of contract would be badly affected if wecould not decide ourselves whether we aresatisfied with the bargain we have made. Incertain circumstances, in any case, it may actuallywork to our ultimate advantage to make a bargainthat on the face of it appears to be a bad one.
The courts, then, are not interested in whetherthere has been a good or a bad bargain made,only that a bargain exists, and they will seek toenforce the bargain that is actually agreed uponby the parties.
SufficiencyOn the other hand,‘sufficiency’ is used here as alegal term, and it means that what is promisedmust:
● be real● be tangible ● and have some actual value.
Contract Law22
Thomas v Thomas (1842)A man before his death expressed the wish that hiswife be allowed to remain in the house, althoughthis was not in his will.The executors carried outthis wish and charged the widow a nominal groundrent of £1 per year.When they later tried todispossess her, they failed.The moral obligation tocarry out the man’s wishes was not considerationbut the payment of ground rent, however small andapparently inadequate, was.
White v Bluett (1853)A son owed his father money on a promissorynote.When the father died and his executors weretrying to recover the money, the son tried to claimthat he was not bound to pay. He claimed anagreement with his father that the debt would beforgotten in return for the son’s promisenot to complain about the distribution of thefather’s assets in his will.The son failed.The promisewas too intangible to be consideration for thefather’s promise to forgo the debt.
Principles of Formation: Consideration 23
What is real, tangible and of value is not alwayseasily distinguishable.
In fact, even things of no apparent worth havebeen classed as amounting to valuableconsideration.
The accusation that if a court wishes to enforcea promise in a commercial context it willalways find something to act as considerationseems to be proved when set against thereasoning in certain cases (see later, for instance,Williams v Roffey Bros. & Nicholls Contractors Ltd(1990)).
b) Past consideration is noconsiderationThis is another strange-sounding rule. It simplymeans that any consideration given cannot comebefore the agreement but must follow it.
It is a sensible rule in that it can prevent theunscrupulous from forcing people into contractson the basis of providing goods or services whichthey have not ordered. Quite simply, in any case itis a promise that has not been agreed to by bothparties in their contract.
The basic ruleIt will usually occur where one party has done avoluntary act and is trying to enforce the otherparty’s later promise to pay.
The exception to the ruleThe rule will not always work justly, as the abovecase shows. In certain circumstances, the rule willnot apply. Where one of the parties has requesteda service, the law sensibly concludes that (s)he isprepared to pay for it. Even though that service is
Ward v Byham (1956)A father of an illegitimate child promised themother money towards its upkeep if she wouldkeep the child ‘well looked after and happy’.Themother would be doing nothing more than she wasalready bound by law to do in looking after thechild.The court was prepared to enforce theagreement, however, since there is no obligation inlaw to keep a child happy, and the promise to doso was seen as good consideration.
Chappell v Nestlé Co. (1960)Nestlé had offered a record, normally retailing at6/8d (not quite 34p), for 1/6d (7.5p) plus threechocolate bar wrappers, to promote theirchocolate. On receipt, the wrappers were thrownaway.They were still held to be good considerationwhen the holders of the copyright of the recordsued to prevent the promotion because they wouldreceive substantially fewer royalties from it.
Re McArdle (1951)A son and his wife lived in his mother’s house thaton her death would be inherited by her son andthree other children.The son’s wife paid forsubstantial repairs and improvements to theproperty.The mother then made her four childrensign an agreement to reimburse the daughter-in-lawout of her estate.When she died and the childrenrefused to keep this promise, the daughter-in-lawsued unsuccessfully. Her consideration for theirpromise was past. It came before they signed theagreement to repay her.
Contract Law24
Figure 3.2 Diagram illustrating the exception in Lampleigh v Braithwaite in operation
A requests a
service from Bwith no mention
of payment
B carries out
what (s)he is
asked to do
A grateful Anow promises
B a payment
for the service
The agreement
CONTRACTFORMED
This is not yet
an agreement,
but the request
shows a
willingness
to pay
This is not
yet
consideration
This promise
supports the
idea of
willingness
to form an
agreement
then carried out without any mention as topayment, or any apparent contractual agreement,a promise to pay coming after the service isperformed will be enforced by the courts. This isknown as ‘the rule in Lampleigh v Braithwaite‘,from the case of that name.
In diagram form, it works in the following way:
Lampleigh v Braithwaite (1615)Braithwaite was accused of killing a man and askedLampleigh to get him a king’s pardon.This Lampleighachieved, at considerable expense to himself, andBraithwaite, in gratitude, promised to pay him £100,which he in fact never did. Lampleigh’s claim thatthere was a contract succeeded. Because theservice was requested, even though no price wasmentioned at the time, it was clear that both parties Figure 3.1 Diagram illustrating the operation of the past
consideration rule
Performance
of a voluntary
act by
A in favour of B
Later promise
to pay
A made by B
NOCONTRACTFORMED
No agreement
made
at this point
No
consideration
given by Aat this point
would have contemplated a payment.The laterpromise to pay was clear evidence of this.
Principles of Formation: Consideration 25
There are more modern examples of theoperation of the exception in Lampleigh vBraithwaite operating in a commercial context.
c) The consideration must move fromthe promisee (the person to whomthe promise is made)Again, the rule sounds somewhat complex butin fact it simply means that a person cannotsue or indeed be sued under a contract unless(s)he has provided consideration. (This rule isinterchangeable with the rule requiring privity ofcontract.)
Activity Quick QuizConsider the following events and decidewhether an enforceable contract has beenformed or whether consideration is only past.
1. While I was away on holiday in Goa it wasvery hot at home too. My neighbour Alisonnoticed that some of my flowers were dyingand so she watered them every day, savingthem. I was very pleased when I returnedand I told her that I would give her £20for all her trouble. In fact, I have not givenAlison the money and she wonders if sheis actually entitled to it.
2. Last month I had to go to an exam boardmeeting in Birmingham. My car would notstart so I asked one of my students Neera,who has a car, if she would take me there.She quite happily agreed and gave me a liftthere and even waited for the meeting tofinish so that she could also give me a liftback.When we had returned I gave Neerathe appropriate amount of money for thepetrol that she had used, but I also promisedher that I would buy her a new copy of alaw text book costing £58.50p that she hadbeen saving hard for. However, last weekwhen Neera asked when she could have themoney for the book I told her that I nolonger intend to buy the book for her.
Re Casey’s Patent (1892)Joint owners of a patent wrote to the claimant,agreeing to give him a one-third share of thepatents in return for his services as manager oftheir patents.When the claimant wished to enforcethis agreement they then claimed that theagreement was actually in respect of his pastservices and unenforceable for past consideration.He had in fact supplied no consideration followingthe agreement. Bowen LJ held that there wasinevitably an implied promise that in managing thepatents the claimant would be paid for his work.The later agreement to pay was thereforeenforceable. It was an example of the exception inLampleigh v Braithwaite.
Tweddle v Atkinson (1861)Fathers of a young couple who intended to marryagreed in writing each to settle a sum of money onthe couple.The young woman’s father died beforegiving over the money and the young man thensued the executors to the estate when they refusedto hand over the money. Even though he wasnamed in the agreement, he failed because he hadgiven no consideration for the agreement himself.
Contract Law26
In diagram form, the situation can be expressedas follows:
d) Performing an existing duty cannotbe the consideration for a new promiseThe basic ruleMerely doing something that you are alreadybound to do can never be sufficient to amount toconsideration. This applies firstly where the dutyis a public one created by law.
It also applies where the duty has arisen under anexisting contract.
The exceptions to the ruleIt will be consideration where what is given ismore than could be expected from the duty. Theextra element is the consideration for the newpromise. Again, this will apply where a publicduty is exceeded.
The exception to the basic rule has also been seeneven in apparently social arrangements, where itis arguable whether it can in reality be consideredthat there is also an intention to create legalrelations.
Stilk v Myrick (1809)Two members of a ship’s crew deserted.Thecaptain promised the remaining crew that theycould share these two men’s wages if they gotthe ship safely home.The promise was held notto be binding on the ship’s owner. Sailors werebound by their contract to cope with the normalcontingencies of the voyage, which could includethese desertions, so there was no consideration forthe captain’s promise.
Glassbrook Bros v Glamorgan CountyCouncil (1925)During a strike a pit owner asked for extraprotection from the police and promised apayment in return.When the strike was over thepit owner refused to pay, claiming that the policewere in any case bound to protect his pit. Hisargument failed.The police had provided more menthan they would normally have done, so there wasconsideration for the promise.
Collins v Godefroy (1831)A police officer was under a court order to attendand give evidence at a trial. It was important to thedefendant that the officer attended so he promisedto pay him a sum of money to ensure that he didso.The promise to pay was not contractual andunenforceable.There was no consideration for it.
CONTRACT TOPASS MONEY TO
THE YOUNG COUPLEBETWEEN
Tweedle’s father:The considerationis the promise to paythe money to theyoung couple inreturn for the samepromise by the other
William Tweedle:Gave noconsideration underthe agreement sohad no claim againstthe estate
Miss Guy’s father:The considerationis the promise to paythe money to theyoung couple inreturn for the samepromise by the other
Figure 3.3 Diagram using the agreement in Tweddle vAtkinson to illustrate the rule that consideration must move
from the promisee
Principles of Formation: Consideration 27
Again, it also applies where the existing dutyis a contractual one and a party has givenmore than was identified as necessaryin the contract.
The exception has been upheld even in situationswhere the consideration is not straightforwardlyidentifiable.
It has also been accepted, albeit by the PrivyCouncil, that a promise to perform an existingobligation made to a third party can be validconsideration for a fresh agreement.
Shadwell v Shadwell (1860)At a time when an action for breach of promise tomarry was still available in law, a young manbecame engaged to marry. His uncle wrote to himcongratulating him, and promising to pay him £150per year until he reached an income of £600 peryear as a Chancery barrister.The young man did infact marry and claimed the money from his unclewhen it remained unpaid.The court held that eventhough the claimant was legally bound to marry,doing so was good consideration for the uncle’spromise and the promise was enforceable.
Hartley v Ponsonby (1857)Involved similar facts to Stilk v Myrick but here only19 members of a crew of 36 remained. A similarpromise to pay more money to the remaining crewwas enforceable because the reduction in numbersmade the voyage much more dangerous. In agreeingto continue in these circumstances they had providedgood consideration for the promise to pay themextra money.
the claimants that in consideration of the claimantsdelivering the coal to them the defendants wouldunload the coal at a fixed rate per day.Thedefendants failed to keep this arrangement and theclaimants sued.The defendant argued that therewas no consideration for the agreement with theclaimants.The court rejected their argument andheld that the performance of a duty owed to athird party could in fact provide consideration for apromise made by a third party.
Pao On v Lau Yiu Long (1980)Both parties owned companies.The major asset inPao’s company was a building that Lau wished topurchase. An agreement was made whereby Lau’scompany would buy Pao’s company in return for alarge number of shares in Lau’s company.To avoidthe damage that sudden trading in this number ofshares might cause, Lau inserted a clause in thecontract that Pao should retain 60% of the sharesfor at least one year. (We could call this Agreement1.) Pao wanted a guarantee that the shares wouldnot fall in value and a subsidiary agreement wasmade at the same time by which Lau would buyback 60% of the shares at $2.50 each. Pao laterrealised that this might benefit Lau more if theshares rose in value and therefore refused to carryout the contract unless the subsidiary arrangementwas scrapped and replaced with a straightforwardindemnity by Lau against a fall in the value of theshares. Lau could have sued at this point for breachof contract but, fearing a loss of public confidencein his company as a result, agreed to the newterms. (We could call this Agreement 2.) When thevalue of the shares did then fall, Lau refused tohonour the agreement and Pao then sought to
Scotson v Pegg (1861)Claimants contracted with one party to deliver coalto them or to their order.The contracting partythen sold the coal to the defendants and instructedthe claimants to deliver the coal to a third party,the defendants.The defendants then agreed with
The same reasoning can be used to findconsideration by third parties to a contract wherean agency relationship can be identified andwhere the agreement protects the commercialcredibility of the contract.
A very recent exception to the basic rule occurswhere the party making the promise to pay extrareceives an extra benefit from the other party’sagreement to complete what (s)he was alreadybound to do under an existing arrangement.
New Zealand Shipping Co. Ltd vA.M. Satterthwaite & Co. Ltd(The Eurymedon) (1975)This is a complex case demonstrating how far thecourts are prepared to strain the simple meaning of‘consideration’ in order to enforce an agreementthat they believe must be enforced. Carrierscontracted with the consignors of goods to shipdrilling equipment.The carriers hired stevedores tounload the equipment, and these stevedores bytheir negligence caused substantial damage to it. Aclause in the carriers’ contract with the consignorscontained a clause limiting their liability in the eventof breach.The clause also identified that theprotection offered by the limitation would extendto any servant or agent of the carriers.There were
Williams v Roffey Bros & NichollsContractors Ltd (1990)Roffey Bros builders sub-contracted the carpentryon a number of flats they were building to Williamsfor £20,000.Williams had under-quoted for thework and ran into financial difficulties. Because therewas a delay clause in Roffeys’ building, meaning theywould have to pay money to the client if the flatswere not built on time, they promised to payWilliams another £10,300 if he would complete thecarpentry on time.When Williams completed thework and Roffeys failed to pay extra, his claim tothe money succeeded. Even though Williams wasonly doing what he was already contractually boundto do, Roffeys were gaining the extra benefit of nothaving to pay the money for delay to the client.Williams was providing consideration fortheir promise to pay him more for the work merelyby completing his existing obligations on time.
Contract Law28
enforce the indemnity. Lao offered two defences:firstly that the second agreement, the agreement toindemnify Pao, was past consideration, and secondlythat Pao had given no consideration for the secondagreement since it only involved doing what he wasbound to do under the first agreement (pass thecompany in return for the shares). In response toLau’s first defence the Privy Council applied therule in Lampleigh v Braithwaite. Lau’s demand thatPao should not sell 60% of the shares for one yearwas a request for a service that carried with it animplied promise to pay.This implied promise waslater supported by the actual promise to indemnifyPao.The second of Lau’s defences also failed.Therewas consideration. Pao, by continuing with thecontract, was protecting the credibility and financialstanding of Lau’s company and the price payable inreturn for this was the indemnity.
two questions for the court. Firstly, the court had todecide whether there was a contractual relationshipbetween the stevedores and the consignors. If so,the court was then required to determine whetherthe stevedores had provided any consideration forthe promise by the consignors to be bound by thelimitation clause.This was clearly questionablebecause the stevedores were doing nothing morethan they were contractually bound to the carriersto do: unload the ship.The Privy Council acceptedthat there was a contractual relationship based onagency and that the promise made to the carriersby the stevedores could provide consideration inreturn for the promise made by the consignors tobe bound by the limitation clause.
Principles of Formation: Consideration 29
One point to remember is that there was noattempt on Williams’part to extract the extramoney by threats or coercion. The rules ofeconomic duress would in any case haveprevented him from succeeding.
What is clear from the case is that the courtsdo not want promises made in a business contextto be broken. To prevent this they will findconsideration even though we may find it hard tofind anything real or tangible about it.
The New Zealand Court of Appeal has taken adifferent and simpler approach. In Antons TrawlingCo Ltd v Smith (2003) the court held that wherethe parties merely vary the terms of an existingagreement they should be bound by the variation.
e) A promise to accept part-paymentof an existing debt in place of thewhole debt cannot be enforcedbecause there is no considerationfor such a promise
The basic ruleThis was first stated in Pinnel’s Case (1602) whichheld that payment of a smaller sum than the debtitself on the due date can never relieve theliability of the debtor to pay the whole debt, sothe creditor can always sue for the balance of thedebt which is unpaid.
The rule can operate fairly where the creditor isgiving in to pressure by the debtor to accept less.
It can also sometimes seem to operate unfairlywhere the debtor genuinely relies on the promiseof the creditor.
ActivityMultiple choice questionsIn the following situations, select the appropriatestatement from the choices which follow:
1. Mary, a student, asks Donald, her teacher, ifhe will give her good tuition for which shewill pay him £100.
a) There is a contract. Mary will have topay the £100 to Donald.
b) Mary will be able to sue Donald if histuition is not good.
c) Donald cannot demand the £100 fromMary. He is only doing his duty.
d) Donald can sue for the £100 if Marydoes not pay it.
2. Sid, the manager of a firm, promises Danny,a packer, £100 on top of his wages if he willstay late at work one evening to get out arush order.
a) There is no contract. Danny is only doinghis job.
b) Danny is entitled to the £100. He isdoing extra to his normal job.
c) Danny can only be paid the £100 if hedoes £100 worth of extra work.
d) Sid can sue Danny if he refuses to staylate.
D.C. Builders v Rees (1965)Builders were owed £482 for the balance of workthey had completed. After several months waitingfor payment, and at a point where they were indanger of going out of business, they reluctantlyaccepted an offer by Rees to pay £300 in fullsatisfaction of the debt.When the builders thensued for the balance, they were successful.Theywere not prevented by the agreement to acceptless, which in any case was extracted from themunder pressure.
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Exceptions to the ruleThere are two basic exceptions where theagreement to pay less than the full debt can beenforced.
1. Accord and satisfactionIn other words, there is an agreement to acceptsomething other than the money from theexisting debt. This might take a number of forms:
● An agreement to accept an earlier payment ofa smaller sum than the whole debt. (This wasin fact what actually happened in Pinnel’scase.) As an example, say I owe you £100 that Iam due to pay on 1st March.You then agree toaccept a payment of £80 made on 1st February.You will be unable to sue for the remaining£20. In effect, the earlier payment reflectsconsideration for the changed agreement.
●● An agreement to accept something other thanmoney instead of the debt. Say I owe you£1,000 and you accept instead my stereo hi-fi,worth about £800.You have the opportunity toplace whatever value you wish on the goods.If you accept them in place of the money, thefull debt is satisfied.
● An agreement to accept a part-paymenttogether with something else, not to the value ofthe balance of the debt. Say I owe you £100 andyou agree to accept £50 together with a law bookworth £21.99. In cash value you have receivedonly £71.99 but, again, the debt has been paid.
2.The doctrine of promissory estoppelThe doctrine acts as a defence to a claim by acreditor for the remainder of the debt where part-payment has been accepted.
The effect of the doctrine is to prevent (estop)the claimant from going back on the promisebecause it would be unfair and inequitable to do so.
Lord Denning in obiter statements developedthe doctrine from the older doctrine of waiver.
Unfortunately, Lord Denning’s final statement hereled some judges to the conclusion that the need
Foakes v Beer (1884)Dr Foakes owed Mrs Beer £2,090 after a courtjudged against him.The two reached an agreementfor Foakes to pay in instalments, with Mrs Beeragreeing that no further action would be taken if thedebt was paid off by the agreed date. Later,Mrs Beer demanded interest, which is always payableon a judgment debt, and sued when Foakes refusedto pay. She was successful as a result of Pinnel’s rule.
Central London Property Trust Ltd vHigh Trees House Ltd (1947)From 1937 the defendants leased from the claimantsa block of flats in Wimbledon which they sub-let totenants.When war started, it was impossible to findtenants and so the defendants were unable to paythe rent.The claimants agreed to accept half rent,which the defendants continued to pay. By 1945 theflats were all let and the claimants wanted the rentreturned to its former level and sued for the higherrent for the last two quarters.They succeeded butLord Denning stated, obiter, that had they tried tosue for the extra rent for the whole period of thewar, they would have failed. Estoppel would preventthem from going back on the promise on which thedefendants had relied so long as the circumstancespersisted. As Lord Denning stated:
‘A promise was made which was intended tocreate legal relations and which to the knowledgeof the person making the promise was going to beacted upon by the person to whom it was made,and which in fact was so acted upon. In suchcases the courts have said that the promise mustbe honoured . . . the logical consequence, no doubt,is that a promise to accept a smaller sum indischarge of a larger debt if acted upon, is bindingnotwithstanding the absence of consideration.’
Principles of Formation: Consideration 31
for consideration to be proved in contracts hadsomehow been removed. Lord Denning was thencalled on to develop a more reliable explanation ofthe application of estoppel in a later case.
The essential elements of the doctrine, then, asdescribed in the case require the following to beshown in order to be used successfully:
● There must be an existing contractualrelationship between the claimant and thedefendant.
● The claimant must have agreed to waive (giveup) some of his/her rights under that contract(the amount of the debt that has been unpaid).
● The claimant has waived these rightsknowing that the defendant would rely on
the promise in determining his/her futureconduct.
● The defendant has in fact acted in reliance onthe promise to forgo some of the debt.
The possible subsequent development of thedoctrine is uncertain, particularly now that LordDenning has died. In Brikom Investments Ltd v Carr(1979), for instance, Lord Justice Roskill stressedthat ‘it would be wrong to extend the doctrine ofpromissory estoppel, whatever its precise limits atthe present day, to the extent of abolishing in thisback-handed way the doctrine of consideration’.
Certainly application of the principles ofestoppel to the area of part-payment of debt asan enforceable replacement for the whole debt islikely to be rejected. See Re Selectmove (1995).
Attempts to apply the principle in Williams vRoffey to situations involving promises to acceptpart-payment of debts in full satisfaction of thewhole debt have been specifically rejected.
Combe v Combe (1951)A wife separated from her husband and sued himfor a promise that he had quite gratuitously madeto her that he would pay her £2 per week (i.e. itwas not under a legal maintenance order).The judgeat first instance noted the lack of consideration butheld that following High Trees this was irrelevant andfound in the wife’s favour. In the CA, Lord Denningapologised for any confusion he had caused in HighTrees and explained the doctrine further:
‘Where one party has by his words or conduct madeto the other party a promise or assurance which wasintended to affect the legal conditions between themand be acted on accordingly, then once the other partyhas taken him at his word and acted on it the onewho gave the promise cannot afterwards be allowedto revert to the previous legal relations as if no suchpromise had been made.’
Lord Birkett in the case made one further verysignificant comment in describing estoppel as ‘ashield and not a sword’; in other words, it couldoperate only as a defence to a claim, not a meansof bringing one.
Re Selectmove (1995)Here, a company which owed tax to the InlandRevenue offered to pay its debt by instalments.TheCollector ofTaxes stated that he would contact thecompany if the arrangement was unsatisfactory andthe company began to pay off its debt by instalments.The IRC then insisted that all arrears of tax be paidimmediately or it would begin winding-up proceduresagainst the company.The company tried to argue, onthe basis of Williams v Roffey, that its promise to carryout an existing obligation was good consideration forthe agreement to pay by instalments. CAdistinguished Williams v Roffey as that case involvedthe provision of goods and services rather thanpayment of an existing debt. The court, as a resultfelt itself bound rather by the basic precedent inFoakes v Beer and held that IRC was not bound byany agreement to accept payment by instalments.There appears still to be a glaring inconsistency herewith the reasoning in Williams v Roffey.
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ActivityMultiple Choice QuestionsIn the following situation, select theappropriate statement from the choices whichfollow:
1. Dave, a builder, owes his supplier £50,000for materials. Dave has been unable to sellthe house he has recently built at a profit,due to a slump in the property market, andhas only £45,000.The supplier agrees toaccept the £45,000 to prevent Dave fromgoing out of business. Six months later thesupplier has learned that Dave has justgained a building contract worth £5 million.
a) Dave will have to pay the remaining£5,000 to the supplier immediately.
b) Dave can use the supplier’s promise as adefence to a claim for the money.
c) The supplier can recover the materialsused by Dave.
d) Dave can sue the supplier.
ActivitySelf-assessment questions1. Why did the law first develop the doctrine
of consideration?
2. What, in simple terms, is consideration?
3. How do the 19th century definitions basedon detriment and benefit differ from theapplication of the doctrine in recent times?
4. Why is it unimportant whether theconsideration is adequate or not?
5. What is the basic difference betweensomething that is sufficient and somethingthat is adequate?
6. How easy is it to accept cases such asChappell v Nestlé in the light of theaccepted legal meaning of ‘sufficiency’?
7. Why is it impossible to form a contractwith consideration that is past?
8. Exactly how does the exception inLampleigh v Braithwaite operate?
9. What is the connection between the rulethat consideration must move from thepromisee and the rule requiring privity ofcontract?
10. How does the case of Shanklin Pier vDetel Products contradict or modify thebasic rule?
11. In what ways could the rule thatconsideration must move from thepromisee be said to be unfair?
12. What is the distinguishing feature, if any,between Stilk v Myrick and Hartley vPonsonby?
13. Why is it difficult to see the distinctionbetween the principles in Stilk v Myrick andWilliams v Roffey Bros & Nicholls?
14. Why exactly did Pau On succeed in thecase of Pao On v Lau Yiu Long?
15. Is there any relevance to promissoryestoppel in the modern day?
16. Do the exceptions to Pinnel’s rule alwayscover every possible problem?
17. What is the effect of the judgment in ReSelectmove
Principles of Formation: Consideration 33
ActivityLegal essay writing
Consider the following essay title:Critically discuss the extent to which thecourts will allow performance of an existingduty to be accepted as providing considerationfor an entirely fresh agreement.
Answering the questionThere are usually two key elements toanswering essays in law:
● firstly, you are required to reproduce certainfactual information on a particular area of
law and this is usually identified for you inthe question
● secondly, you are required to answer thespecific question set, which usually is in theform of some sort of critical element, i.e.you are likely to see the words ‘discuss’, or‘analyse’, or ‘comment on’, or ‘criticallyconsider’, or ‘evaluate’, or even ‘compare andcontrast’ if two areas are involved.
Students for the most part seem quite capableof doing the first, but also generally seem lessskilled at the second.The important points inany case are to ensure that you only deal withrelevant legal material in your answer and thatyou do answer the question set, rather than
● Consideration is ‘the price for which thepromise of the other is bought’ – Dunlop vSelfridge
● Executory consideration is where theconsideration is yet to change hands. Executedconsideration is consideration that has alreadypassed
● Consideration need not be adequate –Thomas v Thomas
● But it must be sufficient, that is it must be real,tangible and have value – Chappel v Nestlé
● Consideration must not be past – Re McArdle● Except where it is a service that has been
requested – Lampleigh v Braithwaite● A person seeking to sue on a contract must
have given consideration under it – Tweddle vAtkinson
● Carrying out an existing contractual obligationcannot be consideration for a new promise –Stilk v Myrick
● Unless something extra is added to thecontract – Hartley v Ponsonby
● Or a third party’s interests are involved – PaoOn v Lau Yiu Long
● Or if an extra benefit is to be gained –Willams v Roffey Bros & Nicholls
● Part-payment of a debt can never satisfy thedebt as a whole – Pinnel’s rule
● Although there are exceptions to the rule,including accord and satisfaction (where thedebt is paid in a different form), and estoppel(where a party waiving rights is preventedfrom going back on the promise because ofreliance by the other party) – Central LondonProperties Trust v High Trees House Ltd
● The principle in Williams v Roffey applies onlyto existing duties as consideration for freshagreements and cannot be applied toagreements to accept part-payment of a debtin satisfaction of the full debt – Re Selectmove
Key
Fact
s
Contract Law34
bargain enforceable in law) and anappropriate definition of consideration suchas that in Dunlop v Selfridge – ‘an act offorbearance or the promise thereof is theprice for which the promise of the other isbought, and the promise thus given for valueis enforceable’
● An explanation of the basic rule onperformance of existing duties asconsideration – that this is not allowablebecause it is in effect no consideration –Stilk v Myrick
● An explanation that this principle appliesnot merely in the case of contractual dutiesbut in the case of performance of statutoryor other legal duties also – Collins v Godefroyand Ward v Byham
● Explain the various exceptions to the basicrule that the courts have accepted overtime which are:
w Where something more is given over andabove that required under the contract –Hartley v Ponsonby
w Where extra is provided over and abovethat required by the statutory or otherlegal duty – Ward v Byham andGlassbrook Brothers v Glamorgan CC
w Where the promise is made to a thirdparty (Scotson v Pegg) or where third-party rights would inevitably be affected(Pao On v Lau Yiu Long)
w Where not to enforce the arrangementmight threaten the integrity of acommercial agreement – New ZealandShipping Co. v A. M. Satterthwaite & Co.(The Eurymedon)
one you have made up yourself, or indeed theone that was on last year’s paper.
For instance, in the case of the first, in thisessay you are likely to provide detail on thefollowing:
● definitions of consideration itself
● explanations of the rules relating toperformance of existing duties
● some specific references to the case law onperformance of existing duties, both thoseidentifying that it is not consideration andthose that represent exceptions to thesimple rule.
This is not then the opportunity to write allthat you know about consideration. In fact, it isessential that you are selective in theinformation that you give. Aspects of adequacyand sufficiency, past consideration, movementfrom the promisee, and the rules on part-payment of debts are irrelevant to thequestion set. So you should focus on only avery limited range of information from yourtotal knowledge on consideration.
In the case of the second, the essay asks you ineffect to analyse the extent to which there areexceptions to a basic rule of contract, the ruleon performance of existing obligations. So in thisessay again you have to be really selective withthe subject of your discussion as well as withthe base of knowledge from which it is drawn.
Relevant lawThe appropriate law appears to be:
● A brief explanation of the nature ofconsideration (consideration being the quidpro quo – the proof of the existence of a
Principles of Formation: Consideration 35
On the exceptions to the basic rule, relevantcomments might include:
● That it is perfectly logical and legitimatewhere something is added to the originalconsideration to enforce the later agreementwhich in effect is a new agreementsupported by its own consideration.
● That nevertheless very often the reasoningbehind the decision to enforce the freshagreement can be strained or at leastsomewhat doubtful, e.g.
w in Shadwell v Shadwell and in Ward vByham there is the obvious contradictionthat the agreements, being domestic, maybe seen as lacking an intention to createa legally enforceable relationship
w in Williams v Roffey the defendants hadthe opportunity to sue anyway – ineffect, although the extra benefit is taken,the avoidance of penalties, a party couldextend the reasoning to avoid bringing anaction themselves where the other partymay not complete and make an emptypromise merely to save themselves theexpense of suing on the breach.
● That very often what the court accepts asconsideration is difficult if not impossible toidentify in terms of being ‘real, and tangible’even if it might tenuously be described ashaving some ‘value’, e.g. Scotson v Pegg,Wardv Byham,Williams v Roffey.
● That many of the cases actually involve thirdparties so may be conflicting with the basicrules of privity, e.g. Scotson v Pegg, Pao On vLau Yiu Long,The Eurymedon.
● That certain of the cases are in any casePrivy Council decisions so are persuasiveonly, e.g. Pao On v Lau Yiu Long.
w Where a party gains an extra benefitfrom the performance of the existingduty
● Use any other relevant cases as examples,e.g. Shadwell v Shadwell.
Discussion and evaluationThe essay title asks for a ‘critical discussion’ ofthe circumstances in which the courts willallow exceptions to the basic rule on usingperformance of existing duties as considerationfor fresh agreements to stand.
On this basis it is not sufficient merely to relyon a purely narrative approach listing the basicrule and the exceptions as we have done forthe knowledge element. Something more mustbe done to appraise the rule itself and theexceptions to it.
On the basic rule itself, certain comments canbe made:
● The rule is obviously a necessary one sinceit protects against the situation where aparty gains more out of the originalagreement than he was entitled to withoutgiving anything extra himself.
● In advance of a doctrine of economicduress it could operate to prevent a partyfrom trying to extract more from theagreement after the event by threateningnot to perform.
● In the context of Stilk v Myrick it may still beseen as unfair – and clearly one of thepoints in Williams v Roffey was to preventthe breaking of a later promise made in acommercial context on which the otherparty had relied to his possible detriment.
Contract Law36
● That the courts have in any case chosen torestrict the development of theseexceptions to the extent, e.g. that they willnot allow the principle in Williams v Roffeyto be used in the case of part-payment ofdebts in full satisfaction of the whole debt –Re Selectmove.
● It may also be discussed whether or not thelaw on the area is a demonstration of thecourts’ willingness to protect free bargainingby parties and how much cases like Williams
v Roffey demonstrate a willingness tointervene to ensure that commercialagreements can be relied upon andrespected.
● Any sensible conclusion would do – but it isprobably appropriate to conclude by statingthat while the basic rule has some logic, theexceptions seem often to be contradictoryto the basic principles behind therequirement of consideration.
Principles of Formation:C
onsideration37
Dilemma Board
Sukhwinder, a law teacher, gives private tuition on contract law to Tara for two hours a week on Saturdaymornings for £50.Tara asks Sukhwinder if he will spend some of the time helping her in her research for acoursework project on tort. Sukhwinder spends two of the Saturday sessions helping Tara.When Tara thengets a high mark for her tort coursework she promises to pay Sukhwinder an extra £100 but she neverdoes so.
A.Sukhwinder will not be able toenforce payment of the extra £100because helping Tara with herresearch is too vague to amount toconsideration.
C.Sukhwinder will not be able toclaim the extra £100 because he isnot doing anything more than hewas already bound to do under hiscontract with Tara.
B.Sukhwinder will not be able toenforce payment of the extra £100because any consideration that hehas given is past consideration.
D.Tara will be estopped from goingback on her promise to paySukhwinder £100.
In the dilemma board below consider the accuracy of each of the four statements A, B, Cand D, as they apply to the facts in the central scenario.You only need to give the basicprinciples. The answer is in the appendix at the end of the book.
Principles of Formation:Intention to Create LegalRelations
Chapter 4
4.1. The two presumptionsWe all regularly make arrangements with eachother, and we may even be doing things in returnfor something, and this seems as though there isconsideration too.
However, we do not always intend that if wefail to keep to an agreement the other partyshould be able to sue us. Nor would it be sensiblefor the courts to be filled with actions on all of thebroken promises that are ever made. My childrenmay expect their pocket money regularly butwould you want them to be able to sue if I forgetto give it to them one week?
The law makes a sensible compromise byassuming that in certain situations we wouldusually not intend the agreement to be legallybinding, while in others we usually would. Thefirst covers social or domestic arrangementswhere it is presumed there is no intentionto be legally bound. The second concernscommercial or business agreements where anintention to be legally bound is presumed. Ineither case the facts can show that thepresumption should not apply. So intention isvery much decided on the facts in individualcases.
4.2. Social and domesticagreementsArrangements between family members areusually left to them to sort out themselves andare not legally binding.
Where husband and wife are estranged, anagreement between them may be taken asintended to be legally binding.
Balfour v Balfour (1919)A husband worked abroad without his wife whohad to stay in England because of illness, andpromised an income of £30 per month.When thewife later petitioned for divorce, her claim to thisincome failed. It had been made at an amicablepoint in their relationship, not in contemplation ofdivorce. It was a purely domestic arrangementbeyond the scope of the court.
Merritt v Merritt (1970)Here the husband had deserted his wife for anotherwoman. An agreement that he would pay her anincome if she paid the outstanding mortgage washeld by the court to be intended to create legallybinding obligations.
Principles of Formation: Intention to Create Legal Relations 39
Sometimes, of course, families makearrangements that appear to be businessarrangements because of their character. In suchcases the court will need to examine what the realpurpose of the arrangement was.
If money has passed hands then it will not matterthat the arrangement is made socially. It will beheld as intended to be legally binding.
If parties put their financial security at risk for anagreement, then it must have been intended thatthe agreement should be legally binding.
4.3. Commercial andbusiness agreementsAn arrangement made within a business contextis presumed to be intended to be legally bindingunless evidence can show a different intent.
The offer of free gifts where this is to promote thebusiness can still be held to be legally binding.
Jones v Padavatton (1969)A mother provided an allowance for her daughterunder an agreement for the daughter to give up herhighly paid job in New York, study for the Bar inEngland and then return to practice in Trinidadwhere the mother lived.When the daughter wasfinding it difficult to manage on the allowance themother then bought a house for her to live in, partof which the daughter could let to supplement herincome.They later quarrelled and the mother soughtrepossession of the house.The daughter’s argument,that the second agreement was contractual, failed.The court could find no intent.
Simpkins v Pays (1955)A lodger and two members of the householdentered competitions in the lodger’s name butpaying equal shares of the entry money and on theunderstanding that they would share any winnings.So, when the lodger won, he was bound to sharethe winnings.
Parker v Clarke (1960)A young couple were persuaded by an oldercouple to sell their house in order to move in withthem, with the promise also that they would inheritproperty on the death of the old couple.When thetwo couples eventually fell out and the youngcouple were asked to leave, their action fordamages succeeded. Giving up their security was anindication that the arrangement was intended to belegally binding.
Edwards v Skyways Ltd (1969)An attempt to avoid making an agreed ex gratiapayment in a redundancy failed. Although ex gratiaindicates no pre-existing liability to make thepayment, the agreement to pay it, once made, wasbinding.
Esso Petroleum Co. Ltd vCommissioners of Customs and Excise(1976)Esso gave free World Cup coins with every fourgallons of petrol purchased. Customs and Excisewanted to claim purchase tax from the transaction.Since Esso were clearly trying to gain morebusiness from the promotion there was held to beintention to be bound by the arrangement.
Contract Law40
Julian v Furby (1982)An experienced plasterer helped his daughter andson-in-law to alter and furnish their house.Whenthe couple split up he sued the son-in-law for theprice of the materials he had bought and also forhis labour.The court agreed that there should bepayment for the materials but not for the man’slabour which was felt to be no more than anyfather would do for his daughter.
The principle has also been developed tocover situations where prizes are offered incompetitions. The purpose of such events isgenerally to promote the body offering the prizeso there is intention to create a legal relationshipwhich is binding and can be relied on bymembers of the public who enter thecompetition.
However, it is possible for the agreement tocontain no intention to be legally binding wherethat is specifically stated in the agreement itself.
The same type of principle applies withso-called comfort letters. Although such lettersare worded so that they appear almost to amountto a guarantee, they do not and will not give riseto legal obligations.
Sometimes judges will find that parts of anagreement are intended to be legally binding, andother parts are not.
McGowan v Radio Buxton (2001)The claimant entered a radio competition forwhich the prize had been stated to be a RenaultClio car. She was told that she had won thecompetition but was given a four-inch scale model ofa Clio.The defendants argued that there was nolegally binding contract.The judge held that therehad been intention to create legal relations.Theclaimant entered the competition as a member ofthe public and that ‘looking at the transcript of thebroadcast, there was not even a hint that the carwould be a toy’.
Jones v Vernons’ Pools Ltd (1938)The pools company inserted a clause on allcoupons stating that ‘the transaction should not giverise to any legal relationship . . . but be binding inhonour only’.When a punter claimed that thecompany had lost his winning coupon and soughtpayment, his claim failed.The clause prevented anylegal claim.
Kleinwort Benson Ltd v MalaysianMining Corporation (1989)Kleinwort lent £10 million to Metals Ltd, a subsidiaryof MMC.The parent company would not guaranteethis loan but issued a comfort letter stating theirintention to ensure Metals had sufficient funds forrepayment.When Metals went out of businesswithout repaying Kleinwort the latter’s action basedon the comfort letter failed. If they had wanted aguarantee they should have insisted on one.
ActivitySelf-assessment questions1. How do courts decide if an agreement is
intended to be legally binding?
2. Why should an agreement within a familynot be legally binding?
3. Why are the cases of Balfour v Balfour andMerritt v Merritt decided differently?
4. Why should commercial agreementsgenerally lead to a legal relationship?
Principles of Formation: Intention to Create Legal Relations 41
5. How will businesses try to get round therules on intention?
6. What is an ‘honour pledge clause’?
7. What is the reasoning behind making freegifts, prizes in competitions etc. part of alegally enforceable agreement?
Activity Quick Quiz
Consider whether the courts would identify anintention to be legally bound in the followingsituations:
1. Alan agrees that he will buy his son a bookin return for mowing the lawns.
2. James agrees to take his secretary Dawnout for a meal for getting an urgent jobfinished quickly and at very short notice.
3. I ask my daughter to give up her part-timejob for a week to proofread a draft of atextbook, and I promise to pay her thesame as she would have earned.
4. Skinny Co. usually give their employees a£50 Christmas box but this year they havedecided against it.
5. I agree to take my wife to the cinema butfail to turn up because I have had to staylonger at work.
● There are two rebuttable presumptions– that in social and domesticarrangements there is no intention tobe legally bound, and that in commercialand business dealings there is
● An arrangement between husband andwife will not normally be legally binding– Balfour v Balfour
● Unless the couple is estranged – Merrittv Merritt
● An agreement will be binding where theparties have spent money on it –Simpkin v Pays
● And also where they have acted totheir detriment – Parker v Clarke
● An agreement made in a businesscontext is usually binding – Edwards vSkyways
● Even where free gifts are promised topromote sales – Esso v Commissioners ofCustoms and Excise
● The same can apply to prizes offered incompetitions – McGowan v Radio Buxton
● Some agreements are binding in honouronly – Jones v Vernons Pools
● Comfort letters create no legalobligations – Kleinwort Benson v MalaysiaMining Corporation
● Sometimes the judges take a pragmaticview of an agreement – Julian v Furby
Key
Fact
s
Contract
Law42
Dilemma Board
Crispin, an author, says that he will pay his daughter Sarah, aged nine, some money if she can find anyspelling mistakes in 10 pages of his latest manuscript to give Sarah something to do because she says thatshe is bored. Sarah finds two mistakes but Crispin does not pay her. Crispin employs his wife, Katie, as hissecretary and to keep his accounts. Crispin promises Katie that he will pay her a £100 bonus if his latestbook exceeds 10,000 sales.The book sells 12,000 copies but Crispin does not pay Katie the bonus.
A.Sarah has a business arrangementwith her father and will be able tosue Crispin for the money.
C.Katie will not be able to sue Crispinfor the £100 bonus because she ishis wife.
B.Sarah will not be able to sue herfather because she is his daughter.
D.Katie will not be able to sue Crispinfor the £100 because agreementsto pay bonuses are not legallyenforceable.
In the Dilemma Board below consider the accuracy of each of the four statements, A, B, Cand D, as they apply to the facts in the central scenario.You only need to give the basicprinciples. The answer is in the appendix at the end of the book
Formalities and SpecialityContracts
Chapter 5
5.1. The requirement offormForm is not an aspect of contract law that most ALevel syllabuses now concern themselves with.However, it can in some instances be animportant issue, and it is therefore worthknowing at least the basic rules. It is not,however, ever likely to be a major part of any ALevel contract exam.
It is generally fair to say that with the majorityof contracts the form in which they are made isnot an issue. We make contracts every day, andprobably all day long, without ever contemplatingtheir legal significance and certainly withoutworrying about the specific form in which wehave created them.
We can distinguish between ‘simple’ contractsand ‘speciality’ contracts.
In the case of simple contracts these can bemade orally or in writing, or possibly even beimplied by conduct. An example is where anauctioneer completes a contract at an auction bythe fall of his hammer (although this might alsobe accompanied by words such as ‘sold to thelady in the red dress’).
● with contracts made in this way then there isno requirement for there to be any particularform
● and evidence of compliance with the basicrules of formation will be sufficient to makesuch contracts enforceable in law.
However, with speciality contracts these need tohave been created in a specific form in order togain their validity:
● the ‘form’ in question will be to do with beingwritten or evidenced in writing
● and this formal requirement indicates that ahigher level of proof of the existence of thecontract is required
● and so speciality contracts are concerned withmore significant property such as land or othertransferable interests.
Speciality contracts come in one of three types:
● agreements which must be created in the formof a deed
● agreements which must be made in writing● agreements which need only to be evidenced
in writing, e.g. in a memorandum.
Contract Law44
5.2. Agreements whichmust be created in the formof a deed to be validTraditionally, any transaction that involved theconveyance of land or an interest in land had tobe in a deed in order to be valid.
A deed was a document which was drafted onparchment, signed by the parties to theagreement, an impression made in sealing wax onthe document, which was then delivered up byhand. In this way it was signed, sealed anddelivered.
Under s1(1) of the Law of Property(Miscellaneous Provisions) Act 1989 therequirement that the document be ‘sealed’hasbeen abolished. Now the document will be validif it is made clear on the face of it that it isintended to act as a deed, and is validly executed.A new requirement is for the document to beformally witnessed, but this is no more than wasalready standard practice anyway.
A deed is also the standard means used fortransferring of gifts that are thus unsupported byconsideration. The classic example here ischaritable gifts.
5.3. Contracts that must bein writing in order to bevalidA number of these exist. They are usuallyidentified in a statute that will also outline therequirements.
They include cheques and other negotiableinstruments and also credit agreements that mustbe in the prescribed form and conform to therequirements of the Consumer Credit Act 1974.
Finally, they include sale or disposition of otherinterests in land. Section 40 of the Law ofProperty Act 1925 and the doctrine of partperformance formerly governed these. Now,however, such contracts come under s2(1) Law ofProperty (Miscellaneous Provisions) Act 1989which provides that ‘a contract for the sale orother disposition of an interest in land can onlybe made in writing and only by incorporating allthe terms which the parties have expressly agreedin one document or, where contracts areexchanged, in each’.
The potential problem created by repeal of thedoctrine of part-performance is that it makes itless easy for equity to intervene where there is adispute over form.
5.4. Agreements needingonly evidence in writing tobe validThese are those contracts that are governed bythe Statute of Frauds 1677.
Following the repeal of s40 Law of PropertyAct the only contract requiring evidence inwriting is a contract of guarantee. This is apromise made by one party to a second party tomeet the debts of a third party in the event of thethird party defaulting on the debt.
The basic rule is under s4 that requires the
Formalities and Speciality Contracts 45
agreement to be evidenced in a written note ormemorandum. This memorandum must:
● be signed by the guarantor (or his/her agent)● clearly be a signed admission of the existence
of a contract and● contain all the material terms of the
agreement, including the identities of all theparties involved and the precise subject matterof the contract.
The guarantee is enforceable provided it isevidenced in writing in this way.
.
Activity
Self-assessment questions1. In what circumstances will form be an issue
in determining the contractual validity of anagreement?
2. What is the common thread that runsbetween agreements requiring specific form?
3. What is a deed? In what ways has therequired form of a deed changed in recentyears?
4. What is the common characteristic ofcontracts that must be created in writtenform?
5. What exactly is a guarantee?
● ‘Simple’ contracts can be made orally, inwriting or by conduct
● Speciality contracts will need to becreated by the appropriate form ormethod
● They mostly have to do with land orinterests in land
● Under the Law of Property(Miscellaneous Provisions) Act 1989transfers of land must be in the form ofa deed, having been signed andwitnessed
● Cheques and other negotiableinstruments will need to be in writing
● Guarantees need to be evidenced inwriting
Key
Fact
s
Contract Law46
Figure 5.1 Diagram illustrating the ways in which form is significant in contracts
These are of three types:
Agreements
which must
be in the form
of a deed:
Transfer of anestate in land
Agreements
which must
be evidenced
in writing:
Guarantees
Agreements which must be
in writing:
• Negotiable instruments• Contracts for approved
credit• Contracts for the sale
or disposition of certain interests in land
Can be made orally, in writing,
or by conduct – so no
specific form is required
Must comply with
specific formalities
to be valid
Simple
e.g. sale of goods and
supply of services
Speciality
e.g. transfers of land
and interests in land
Contractual
agreements
are of two
types
6.1. The doctrine of privityof contract
6.1.1.The basic ruleThis is possibly the most contentious of all therules of contract. Simply stated, it is that anyperson who is not a party to the contract canneither sue nor be sued under it.
This is very similar to the proposition inconsideration that a person who has not givenconsideration under the contract cannot sue orbe sued. We have already seen this in operationin Tweddle v Atkinson. Here, even though theclaimant was named in a written agreementhe was unable to claim an enforceable third-party right.
The rule is an old one.
The modern statement of the rule is found inLord Haldane’s judgment in:
6.1.2. Some consequences of the ruleThe rule has a number of consequences:
● A person receiving goods as a gift may beunable to sue personally where the goods aredefective.
● In such a case it may prove embarrassing to tryto enlist the help of the actual purchaser of thegoods.
● Even if the purchaser does sue (s)he may beable to recover only for their own loss, not
Third-Party Rights
Chapter 6
Price v Easton (1833)Here, Easton had agreed with a third party that ifthat third party did specified work for him hewould pay £19 to Price.While the work wascompleted by the third party, Easton failed to payPrice who then sued. Price’s claim wasunsuccessful. He had given no consideration forthe arrangement and was not therefore a party tothe contract.
Dunlop Pneumatic Tyre Co. Ltd vSelfridge & Co. Ltd (1915)In the contract Dew & Co., wholesalers, agreed tobuy tyres from Dunlop.They did so on the expressundertaking that they would not sell below certainfixed prices.They also undertook to obtain thesame price-fixing agreements from their clients.Dew sold tyres on to Selfridge on these terms butSelfridge broke the agreement and sold tyres atdiscount prices. Dunlop sought an injunction.Theyfailed for lack of privity. In the House of Lords LordHaldane said
‘only a person who is a party to a contract cansue on it. Our law knows nothing of a jusquaesitum tertio arising by way of contract. Sucha right may be conferred by way of property, as,for example, under a trust, but it cannot beconferred on a stranger to a contract as a right toenforce the contract in personam.’
Contract Law48
necessarily the loss suffered by the donee ofthe gift.
● The rule may well prevent enforcement ofservices that have already been paid for. Thiswas the case in Price v Easton.
● The rule may also mean that a benefactor’sexpress wishes are denied, as was the case inTweddle v Atkinson.
● More dramatically still, in commercial contracts,as Lord Dunedin said in Dunlop v Selfridge ‘theeffect . . . is to make it possible for a person tosnap his fingers at a bargain definitely made, abargain not unfair in itself, and which theperson seeking to enforce it has a legitimateinterest to enforce’.
6.2. The exceptions to thebasic rule
6.2.1. IntroductionNot surprisingly, the rule is unpopular and manyattempts have been made to avoid the harsheffects of the rule on enforcing third-party rightsin a contract. This is done using a variety ofmeans, none of which has affected the basic rule.This remains intact.
6.2.2. Statutory exceptionsParliament is not bound by the strict rules ofcontract in enacting new provisions, and so thereare a number of statutory inroads into the rule.
S148(7) of the Road Traffic Act 1988 obliges amotorist to take out third-party liability insurance.Another motorist who is involved in an accidentwith this motorist can then rely upon it. Theinsurance is enforceable despite the fact that theother motorist lacks any privity in the insurancecontract.
By the Married Women’s Property Act 1882 ahusband can take out insurance in his own name
but for the benefit of his wife and children. Theycan enforce the terms of the insurance althoughthey are not parties to the contract.
However, the courts will not allow an Act to beused for an incorrect purpose.
6.2.3.Trust lawDespite lacking privity, a party identifying third-party rights under a contract may be able toshow that a trust of the rights is created in his orher favour.
Beswick v Beswick (1968)Here a widow was trying to enforce an agreementbetween her husband and her nephew for thelatter to provide her with a weekly annuity on thedeath of the former.The agreement was acondition in the sale of her husband’s business tothe nephew.The widow clearly lacked privity to theagreement and had provided no consideration forit. Her attempt to use a provision in s56 of the Lawof Property Act that referred to ‘other property’failed.The reasoning was that the Act referred onlyto real property (land or interests in land) andcould not be applied to purely personal property.
Gregory & Parker v Williams (1817)Parker owed money to both Gregory and Williams.Since he could see no way of organising settlementhimself, he assigned all of his property to Williamson the understanding that Williams would then payoff the debt to Gregory.Williams failed to pay overthe money to Gregory who, not being a party tothe agreement, was unable to sue on it in contractlaw.The court was nevertheless prepared to acceptthat a trust of the money had been created inGregory’s favour, which was then enforceableagainst Williams.
Third-Party Rights 49
However, the court will not accept that a trust iscreated unless the claimant can show an expressintention that he should receive the benefit.
The courts will not in any case accept that a trustis created unless the interest claimed conforms tothe general character of a trust.
In this way the cases in which a claimant mightclaim that a trust is created are probably quitelimited.
6.2.4. Restrictive covenantsThis is another device created by equity by whicha party selling land retains certain rights over theuse of the land. The restriction thus created mustbe a negative one, for example preventing use ofthe land for business purposes.
The covenant is said to run with the land. So, ifproperly created, it will bind subsequentpurchasers of the land even though there is noprivity between them and the original seller. Thiswill apply even if the land retained by the originalseller has also been sold on.
The device though operates only in respect ofland. The courts have resisted attempts to extendthe principle to cover other property. So it will notbe available merely as a method of controllingpricing of goods.
6.2.5.The rule in Dunlop v LambertThis common law rule states that a remedy canbe granted notwithstanding the absence of privityof contract ‘where no other would be available toa person sustaining loss which under a rationallegal system ought to be compensated by theperson who caused it’.
Les Affreteurs Reunis S.A. v Walford(Walford’s case) (1919)Walford was a broker who negotiated anagreement between a charter party and the ownerof the vessel, but was obviously not a party to theagreement.The agreement contained a stipulationthat Walford should receive a 3% commission fromthe shipowners.They failed to pay.The court wasprepared to accept that a trust was created onlybecause he was named.
Green v Russell (1959)Here, an employer had insurance in his own namethat also covered certain employees including Green.There was, however, no such requirement in thecontract of employment.When both were killed in afire, the Court of Appeal concluded that there wasno trust in favour of Green since the employer couldhave surrendered the policy at any time.
Tulk v Moxhay (1848)Tulk owned land in London that he sold with anexpress undertaking that it would never be used tobuild property on.The land was then re-sold onnumerous occasions, each time subject to the sameundertaking. Moxhay bought it knowing of thelimitation but nevertheless intended to build on it.Tulk successfully sought an injunction.The courtaccepted that it would be against conscience forMoxhay to buy knowing of the restriction.
Taddy v Sterious (1904)Tobacco manufacturers sold tobacco to wholesalerswith an express clause in the contract requiring thatretailers should not sell below fixed prices.Whenthis agreement was breached the manufacturertried to argue that Tulk v Moxhay applied.The courtrejected this argument out of hand.
Contract Law50
The rule has recently been both approved andapplied.
But there is also a proviso that the rule will not beapplied where the parties to the original contract,the consignor and the carrier, had contemplatedthat there would be a separate contract betweencarrier and consignee to regulate liability betweenthem. This proviso has been considered recently.
6.2.6. Privity of estate in leasesWhere an owner of land creates a lease in favourof another person, the terms of the lease are ineffect contractual obligations. These terms aremore usually known as the ‘covenants’of the leaseand are enforceable by both parties because thereis privity between them.
The principle of ‘privity of estate’means thatthe landowner will be able to enforce thecovenants also against anybody to whom theholder of the lease assigns their lease. By ss141and 142 Law of Property Act 1925 a tenant willalso be able to enforce covenants of the leaseagainst a new owner of the freehold, as will thatnew landlord be able to enforce them against thetenant.
Darlington B.C. v Wiltshier NorthernLtd (1995)The council wanted a new recreation centre. Inorder to avoid certain financial restraints it wasunder, it hired Morgan Grenfell who in turn hired thebuilders of the new centre. A collateral agreementprovided for Morgan Grenfell to pay the builders,Wiltshier Northern Ltd, and for the council toreimburse Morgan Grenfell and for Morgan Grenfellto assign all rights they might have against Wiltshierto the council.When £2 million worth of defectswere discovered in the building the council obviouslywished to sue. Morgan Grenfell would be unable torecover in tort, having no proprietary interest in thebuilding.The council would normally be preventedfrom suing because of its lack of privity in thebuilding contract. However, Lord Diplock applied theprinciple in Dunlop v Lambert and allowed the action.The justification was that Morgan Grenfell was thefiduciary of the council and had assigned its rights inthe building contract over to the council.
Alfred McAlpine Construction Ltd vPanatown Ltd (2000)McAlpine were employed by Panatown to designand build a multi-storey car park.When thiscontract was formed McAlpine also entered into aduty of care deed with Unex Investment PropertiesLtd (UIPL) who were the actual owners of the site.
When Panatown sued McAlpine, claiming that thebuilding was so defective that it would need to berebuilt, McAlpine countered that Panatown hadnever been the owner of the site and it was UIPLthat had suffered the loss, not them – so thatPanatown could claim only nominal damages andUIPL nothing at all since they were not parties tothe contract.The Court of Appeal held that therule in Dunlop v Lambert was relevant (that acontracting party could recover damages eventhough it was a third party that suffered the actualloss).The issue then was whether the provisoapplied to prevent recovery by Panatown.TheCourt of Appeal accepted that the deed with UIPLindicated that contractual rights had been given tothe third party but that, on the facts, since allaccounts were bound to be settled betweenPanatown and McAlpine then Panatown must havethe right to sue.The House of Lords disagreed.Theexistence of the ‘duty of care deed’ with UIPLprevented Panatown from suing.The deed meantthat the third party was given a specific remedy bythe contract even though this remedy was morelimited than that which would have been availableunder Panatown’s breach of contract action.
Third-Party Rights 51
6.2.7. Procedural rulesIn very rare instances, rules of procedure havebeen used to get round the effects of the doctrineof privity. Such a course has succeeded onlybecause to do so has corresponded to the actualpromise made, and because all of the parties arepresent in the court.
6.2.8.The so-called ‘holiday cases’We will discuss the issue of recovery for mentaldistress and the ‘holiday cases’ at a later stageunder damages. However, significantdevelopment was made in these cases in respectof third-party rights.
The courts, though, have indicated that thismethod of getting round the doctrine ofprecedent is confined to ‘holiday contracts’. Seelater Woodar Investment Development Ltd vWimpey Construction (UK) Ltd (1980) where theHouse of Lords, while not expressly overrulingthe Jackson case, held that there was no generalprinciple allowing a party to a contract to sue onbehalf of third parties injured by a breach of thecontract. Lord Wilberforce’s view was that Jacksonfell into a specialist group of contracts involvingfamilies where it was intended that the benefit ofthe contract be shared between the members ofthe family.
6.2.9. Protecting third parties inexclusion clausesA party to a contract can include an exclusionclause or a limitation clause in a contract.Traditionally, however, a sub-contractor would beunable to claim the benefit of the exclusionclause, even if named under it.
Snelling v John G Snelling Ltd (1973)Three brothers were all directors of their owncompany, John G Snelling Ltd, which was financedby loans from the three brothers.When thecompany borrowed money from a financecompany the three brothers entered an agreementwith one another that, until such time as the financecompany loan was repaid, if any of them resignedtheir directorship in the company they would forfeitthe amount of their own loan to the company.Thecompany was not a party to this agreement. Onebrother later did leave the company and sued thecompany for his loan.The remaining two brothersapplied to join the company as defendants andcounter-claimed on the basis of the agreementreached between the three brothers.The courtupheld their argument. Even though the companywas not a party to the agreement, the brothers andthe company were in many ways the same. A stayof execution of the brother’s claim was theappropriate order.
Jackson v Horizon Holidays (1975)Mr Jackson had booked a ‘family holiday’ which fellfar short of the contract description. He sued theholiday company not only on his own behalf but forhis family also.The company, while accepting liability,disputed that it should pay damages in respect ofthe family.The House of Lords held that the loss ofenjoyment suffered by the family was in effect a lossto the contracting party himself. He had paid for a‘family holiday’ but not received it. Damages wereawarded on this basis.This would appear to bestraining the law a long way, albeit in order toachieve a just result.
Contract Law52
Despite this there have been situations in whichsuch a third party has been able to claim coverunder an exclusion clause despite lacking privity.
6.2.10. Collateral contractsThis is a mechanism that might succeed when aclaimant complains that a contract has beenformed through reliance on a collateral promisemade by a third party who is not a party to thecontract.
6.2.11. Agency, assignment andnegotiable instrumentsAll of the exceptions we have so far considered areenforceable either because of principles containedin individual cases or because they rely on areas oflaw other than contract, such as trust law.
There are, however, three major exceptions tothe doctrine which are outside of the A Levelsyllabuses. A detailed analysis is therefore notnecessary, but they are worth knowing. They arethe rules of agency, the process of assignment,and the rules regarding negotiable instruments.
● Where one party acts as an agent for another(known as the principal) the agent can makeand carry out contracts with a third party on theprincipal’s behalf. The significance of this is thatthe agent can make agreements by which theprincipal is bound despite the apparent lack ofprivity. Where all of the appropriate rules arecomplied with then the principal and the thirdparty are able to sue and be sued by each otherunder the contract made by the agent.
● Assignment is a specific system devised for thetransfer of property rights. This may beappropriate for instance with debts. If the
Shanklin Pier v Detel Products Ltd(1951)Owners of a pier were assured by Detel’srepresentatives that their paint was suitable to paintthe pier and would last a minimum of seven years.Relying on this assurance, the pier ownersinstructed their painting contractors to paint thepier with Detel’s paint.The paint was in factunsuitable and peeled.The court held that Detelwas liable on the promise despite an apparent lackof privity in the painting contract.
Scruttons Ltd v Midland Silicones Ltd(1962)A shipping company was carrying a drum ofchemicals for the claimants under a contractcontaining a clause limiting damages in the event ofbreach to $500. Stevedores sub-contracted to theshipping company did $1,800 worth of damage,sought to rely on the limitation clause and failedowing to lack of privity. However, Lord Reid did feelthat there could be ‘success in agency if the bill oflading makes it clear that the stevedore is intendedto be protected by the provisions’.
New Zealand Shipping Co. Ltd v A.M.Satterthwaite & Co. Ltd (TheEurymedon) (1974)In this Privy Council case, the stevedores were ableto succeed and rely on an exclusion clause in asimilar action.The reasoning given by LordWilberforce was that the stevedores wereidentified as agents in the contract.
Third-Party Rights 53
assignment of the debt conforms to the properrules of assignment then the party to whomthe debt is assigned can sue the debtor despitethe apparent lack of privity between them.
● Negotiable instruments were originally a deviceof merchant traders. The rules devised by themerchants were eventually given statutory forcein the Bills of Exchange Act 1882. Possibly themost common form of negotiable instrumentwith which we are familiar in modern times isthe cheque. By various processes it is thenpossible to transfer ownership of the propertyidentified in the instrument. In the case of acheque a sum of money.
6.3. The Contracts (Rightsof Third Parties) Act 1999We have already seen at the beginning of thissection some of the harsh effects that the doctrineof privity can have in preventing third partiesfrom enforcing rights which appear to have beengranted them in contracts.
The fact that judges have been prepared toallow so many exceptions to the basic rule is a fairindication of a general dissatisfaction with theoperation of the doctrine. In many cases, indeed,judges have themselves called for legislativereform, particularly because of the complexitiesthat are caused by there being so many differentexceptions.
This is not a new feeling and as early as 1937the Law Revision Committee was recommendingreforms. In simple terms they suggested that thirdparties should be able to enforce provisions in acontract which ‘by its express terms purport toconfer a benefit on a third party’.
More recently, the Law Commission in itsConsultation Paper No. 121 argued that thereshould be a ‘third-party rule’ in privity.Nevertheless, it rejected various proposedcourses of action:
● Extending the number of exceptions – rejectedbecause there were already too many.
● Leaving enforcement of third-party rights topromisees under the contract – rejected as tooonerous a burden and no guarantee it wouldhappen.
● Introducing a general rule preventing privityfrom denying any third-party rights – rejectedas too vague, and might ‘open the floodgates’to claims.
So the Law Commission favoured a more preciserule whereby third parties would only be able toenforce rights identified in the terms of thecontract as intending to confer a legallyenforceable benefit on the third party.
Even here, the Law Commission felt thatparties to the contract should be able to vary suchterms where the contract specifically allowed forsuch variation.
The Law Commission subsequently prepared adraft Bill in a further report, No. 242. Its majorprovision is contained in s1(1) by which:
‘a person who is not a party to a contract (in this Actreferred to as a third party) may in his own right enforcethe contract if: (a) the contract contains an express termto that effect; or (b) subject to subsection (2) thecontract purports to confer a benefit on the third party’.
The first ground under subsection (a) is self-explanatory. The second ground is subject tosubsection (2). It states that ground (b) will beunavailable to a third party where ‘on the properconstruction of the contract it appears that theparties did not intend the contract to beenforceable by a third party’. In consequence, itseems only those rights actually conferred by thecontract can be enforced.
One final recommendation of the LawCommission here was the abolition of the rulethat consideration must move from the promiseethat would otherwise defeat the reform.
The reforms were presented to Parliament in adraft Bill in January 1999. This has subsequently
Contract Law54
been enacted as the Contracts (Rights of ThirdParties) Act 1999. By s1(3) the Act will apply if athird party is identified in the contract either byname or even as a member of a class. The thirdparty does not have to exist at the time thecontract was formed, as long as (s)he isidentifiable as part of the class.
The Act contains some amendments from theLaw Commission’s draft Bill. Certain types ofcontract are excluded, notably those contractswhere other legislation already applies. Anotherinclusion is a rule preventing a third party fromsuing an employee who is in breach of hiscontract of employment. This is to protect workerswhere they take legitimate industrial action.Another exception is the ‘statutory contract’unders14 of the Companies Act 1985, which givesshareholders the right to sue officers of thecompany on issues arising from thememorandum and articles of association.
The Act has a number of importantconsequences:
● A wide range of third-party rights will beenforceable under the Act.
● A number of the exceptions to the basic privitydoctrine become unnecessary, e.g. the claimantin Tweddle v Atkinson would have an
enforceable right, as would the familymembers in Jackson v Horizon Holidays.
● Where a third party comes within the scope ofan exclusion clause it will be much easier toenforce in their favour.
● Many exceptions will still apply as the Act willhave no impact on them, e.g. collateralwarranties.
● The Act can still prove ineffective as itsprovisions can be expressly excluded in acontract.
ActivitySelf-assessment questions1. What are the major justifications for the
rule on privity of contract?
2. What is the connection between thedoctrine of privity and the requirement ofconsideration in a contract?
3. In what ways is the doctrine of privity unfair?
4. Why is it not possible to argue thatwhenever a third-party right is identified in acontract it automatically creates a trust?
5. Is it possible to use the mechanism of a res-trictive covenant to protect third-party rightsin cases that involve things other than land?
6. To what extent are the judgments inScruttons v Midland Silicones and TheEurymedon consistent with one another?
7. Other than where Parliament grantsenforceable third-party rights by statute,what are the most effective exceptions tothe basic rule on privity?
8. To what extent does the Contracts (Rightsof Third Parties) Act 1999 address theproblems of all third parties affected by thedoctrine of privity?
Nisshin Shipping Co v Cleaves & CoLtd (2004)A contract between ship owners and charterers ofthe vessel included a clause for payment ofcommission to the broker who had negotiated theagreement between the parties, but who was not aparty to the contract.The commission was not paidso the broker sued.The court held that he wasidentifiable from the contract so s1(3) applied andthe contract clearly conferred a benefit on him sothat s1(1)(b) was also satisfied and he was able torecover under the Act.
Third-Party Rights 55
● The basic doctrine of privity is that nobodycan sue or be sued under a contract who isnot a party to the contract – Dunlop vSelfridge
● Put another way, nobody can enforce acontract who has not provided considerationunder the contract – Tweddle v Atkinson
● Since the rule unfairly prevents third partiesidentified as gaining rights under a contractfrom enforcing those rights, a number ofexceptions to the strict rule have developed:
● Statutory exceptions, as with third-partyinsurance under the Road Traffic Acts
● Stating that a trust is created in favour of thethird party – Gregory & Parker v Williams – butonly so long as the interest conforms to thecharacter of a trust – Green v Russell
● Restrictive covenants – Tulk v Moxhay – butonly in relation to land not other interests –Taddy v Sterious
● The rule in Dunlop v Lambert – Darlington BC vWiltshier Northern Ltd
● Privity of estate in leases● Procedural rules – Snelling v John G Snelling Ltd● The ‘holiday cases’ – Jackson v Horizon Holidays● Protection given to third parties in exclusion
clauses – New Zealand Shipping Co. vSatterthwaite
● Collateral contracts – Shanklin Pier v DetelProducts Ltd
● Agency, assignment and negotiable instruments● Now Parliament has passed the Contracts
(Rights of Third Parties) Act 1999 to enablethird parties to enforce rights that they aregiven under a contract – so a third party canenforce provisions in a contract if:w the contract expressly states that he canw the contract purports to confer a benefit
on the third party
Key
Fact
s
ActivityLegal Essay Writing
Consider the following essay title:‘The rule of privity of contract is that only aparty to the contract can sue or be suedunder the contract.This is intrinsically unfair tothird parties who might expect to acquirerights under the contract. However, thiscriticism has been answered in full by theenactment of the Contracts (Rights of ThirdParties) Act 1999.’
Discuss the accuracy of this statement.
Answering the questionThere are usually two key elements toanswering essays in law:
● firstly, you are required to reproduce certainfactual information on a particular area oflaw and this is usually identified for you inthe question
● secondly, you are required to answer thespecific question set, which usually is in theform of some sort of critical element, i.e.you are likely to see the words ‘discuss’, or‘analyse’, or ‘comment on’, or ‘criticallyconsider’, or ‘evaluate’, or even ‘compare andcontrast’ if two areas are involved.
Contract Law56
Students for the most part seem quite capableof doing the first, but also generally seem lessskilled at the second.The important points inany case are to ensure that you deal only withrelevant legal material in your answer and thatyou do answer the question set, rather thanone you have made up yourself, or indeed theone that was on last year’s paper.
For instance, in the case of the first, in this essayyou are likely to provide detail on the following:
● definitions of the basic doctrine of privity ofcontract itself
● explanations of the various exceptions tothe doctrine that have developed throughthe common law to mitigate the harshnessof the doctrine as it affects third-party rights
● specific references to the actual provisionsof the 1999 Act and the ways, if any, inwhich it alters or mitigates the harshness ofthe doctrine of privity of contract.
This is then in many ways an opportunity, inknowledge terms, to write most of what youknow about third-party rights and the doctrineof privity of contract.
In the case of the second, however, it must beremembered that the essay calls for a criticaldiscussion, however, with a specific questionrelating to the 1999 Act.You should be careful,therefore, to ensure that, rather than merelygiving narrative notes on privity and on theprovisions of the Act, that you answer thequestion set.
Relevant law● Explain the basic doctrine of privity as in
Dunlop v Selfridge – a person who is not a
party to a contract can neither sue nor besued under the contract.
● Explain also the link with consideration – aperson who has not provided considerationcan neither sue nor be sued – Tweddle vAtkinson.
● Identify the various exceptions to thedoctrine of privity:
w statutory exceptions such as third-partyinsurance demanded unders148(7) Road Traffic Act 1988
w agreement creates a trust in favour of thethird party – Gregory & Parker v Williams
w restrictive covenants allowing a third partyto enforce rights over land – Tulk v Moxhay
w the rule in Dunlop v Lambertw privity of estate in the case of leasesw certain procedural rules where all parties
are actually represented – Snelling v JohnG Snelling
w the so-called ‘holiday cases’ – Jackson vHorizon holidays
w protection of third parties throughexclusion clauses – New Zealand ShippingCo. v A.M. Satterthwaite (The Eurymedon)
w collateral contracts – where the promiseis made by a third party and can be reliedupon – Shanklin Pier v Detel Products
w agency, assignment, and negotiableinstruments.
● Explain also the basic principles of the 1999Act – enforceable third party rights in twosituations:
w where the contract provides forenforceability by the third party or
w where the contract purports to conferbenefits on a third party.
Third-Party Rights 57
● Identify also that there is no need for thethird party to be named in the contract aslong as (s)he fits a class of person describedin the agreement.
● Explain also that the third party has thesame rights of enforcement as a contractingparty would have.
Discussion and evaluationThe essay title asks in effect for a criticaldiscussion of two things: firstly that thedoctrine of privity is unfair to third parties;secondly that this unfairness has been fullymitigated by the provisions of the Contracts(Rights of Third Parties) Act 1999.To get intothe highest mark levels in an exam, both wouldhave to be addressed.
On this basis the discussion should include:
Points on the unfairness of privity:
● A person receiving defective goods as a giftmay be unable to sue personally – leadingto embarrassment if the person is thenbound to contact the person who madethe gift.
● The purchaser in that case would only beable to claim based on the defect, not forany consequential loss.
● The rule may prevent the enforcement of acontract that has already been paid for –Price v Easton.
● A benefactor’s express wishes may bethwarted by the rule – Tweddle v Atkinson.
● As Lord Dunedin said in Dunlop v Selfridge, itallows a party to behave unconscionablyand shamelessly avoid the consequences ofan agreement he has made freely.
● The courts simply would not have acceptedso many, and such a variety of, exceptions toa rule that was not unfair in some way.
● Discuss how often before the Act judgesthemselves classed the rule as unfair andcalled for legislative reform.
● Consider that the Law Revision Committeecalled for reform in a paper in 1937.
● Identify the fact that the Act itself followedLaw Commission comments in(Consultation Paper No. 121) and an actualLaw Commission Report(No. 242).
Points on the extent to which the Actmitigates this unfairness:
● does allow rights to a third party who isnamed or who expressly or impliedly isintended to benefit from a contract
● but the Act will not apply to all contractse.g. – contracts where other legislationapplies, contracts of employment, thestatutory contract in company law
● and the second ground cannot be usedif it is clear from the contract that thecontract was not intended to beenforceable by a third party
● and most professionally drafted agreementsare likely to exclude the Act
● and difficulties may occur for parties whoare unaware of the provisions of the Act
● and there is likely to be variable impact onexceptions to the privity rule such as thecreation of trusts
● and in any case the existing exceptions tothe privity rule are not expressly repealed
Contract Law58
by the Act so may still operate wherenecessary.
Conclusion● Any sensible conclusion would do.
● On unfairness of privity, it is probablyappropriate to conclude by stating thatwhile the basic rule has some logic, theremust be some intrinsic unfairness or there
simply would not have developed such awide range of exceptions – and so manycalls for reform.
● On the extent to which the Act has metthe criticisms – obviously concludingcriticisms could concern the extent towhich it will a) have any impact because ofthe exceptions to its operation; b) actuallyreplaces the existing exceptions.
Third-Party Rights59
Dilemma Board
Ravinder contracts with City Sights for him and his wife, Sanjeet, to fly from Glasgow to London, with acooked meal in-flight, and in London to see the Royal Ballet perform Swan Lake.The cost is £250 each andthe tickets for both the flights and the ballet are individually named.There is no meal at all on the flight. CitySights have overbooked for the ballet and Ravinder and Sanjeet are taken instead to a second-rate varietyshow.
A.Sanjeet has no claim against CitySights for breach of contractbecause there are no circumstancesin which a third party to a contractcan sue on the contract.
C.Sanjeet will not have any claimagainst City Sights under theContract (Rights of Third Parties)Act 1999.
B.Sanjeet may sue City Sights forbreach of contract successfullybecause a trust has been set up inher favour.
D.Ravinder can recover damages formental distress for both himself andSanjeet as a result of the breach ofcontract by City Sights.
In the dilemma board below consider the accuracy of each of the four statements, A, B, Cand D, as they apply to the facts in the central scenario.You only need to give the basicprinciples. The answer is in the appendix at the end of the book
Capacity and Incapacity
Chapter 7
7.1. The nature of capacityIt would probably make more sense to refer inthis section to incapacity rather than capacitysince it involves limitations to the generalassumption that all parties to a contract have thepower to enter into it.
The law ultimately is concerned withpromoting freedom of contract. In this way thelogic of rules on capacity is aimed at protectingcertain types of person who may enter a contracteither for their own protection or for theprotection of the party who contracts with them. Itwill do so to avoid an unfair advantage beingtaken by a party in a superior position.The lawdoes not necessarily prevent such people fromentering contracts, but the consequences both forthe party who lacks full capacity and the partywith whom they deal may be different.
The law sensibly distinguishes betweennatural persons and artificial persons, the latterbeing corporations of whatever type.
In the case of natural persons there are threeclasses that may be affected by capacity: peoplewho are drunk, mental patients and minors. Thelast group is probably the most important.
7.2. Minors’ contracts
7.2.1. IntroductionThe Family Law Reform Act 1969 made somesignificant changes to the law on minority. Firstly,prior to the Act this group of people was referredto as ‘infants’ rather than ‘minors’. Secondly, thegroup comprised all those under the age of 21whereas now it comprises those under 18.
One effect of the Act may have beentemporarily to reduce the significance of the rulesrelating to minors since they now applied to amuch smaller group of young people. However,since 1969 time has moved on again.Youngpeople are more mobile and many more areprobably now living away from their parents. Sominors’ contracts may be important once more.
Minors’contracts are divided into threecategories representing the consequences for theparties to the contract in each case. They are:
● Contracts which are valid and thereforeenforceable against the minor.
● Contracts, which the minor may enter but canalso back out of if required and which aretherefore voidable.
● Contracts that are unenforceable against theminor and which in practical terms thereforemay be difficult for him or her to make.
The nature of these categories means that theycan and should serve as much as a guide for theadults who contract with minors as for theprotection of the minors themselves.
7.2.2.Valid or enforceable contractsThose contracts that a party may feel securein making with a minor themselves divide intotwo further categories.
a) Contracts for necessariesThe common law traditionally accepted thatminors should pay for those goods and servicesactually supplied to them that are necessariesaccording to their station in life.
Capacity and Incapacity 61
The purpose and effect of such a rule is clear. It isto allow minors to enter into contracts beneficialto them, but at the same time to preventunscrupulous businesses from taking advantageof their youth and inexperience.
‘Necessary’does not have to mean the same as‘necessity’. As Baron Alderson said in Chapple vCooper, ‘the proper cultivation of the mind is asexpedient as the support of the body’. So it can bemore than just food and clothing. As a result,what is a necessary may differ according to theparticular minor.
The courts have established a two-part test fordetermining what is a necessary and thereforewhat will be enforceable in the individual case:
● The goods or services must be necessaryaccording to the ‘station in life’of the particularminor.
● The goods or services must also suit the actualrequirements of the minor at the time of thecontract.
Clearly then what is a necessary varies according tothe minor’s background. Thus, what is a ‘necessary’for the son of the managing director of a largepublic company may not be a‘necessary’ for theson of the car park attendant in the same company.
But, of course, the supplier will have todemonstrate not only that the goods supplied are‘necessaries’ in relation to the particular minor,but that the minor also has need of them at thetime of the contract.
Under s3 Sale of Goods Act 1979 ‘Wherenecessaries are sold and delivered to a minor, orto a person who by reason of mental incapacity ordrunkenness is incompetent to contract, he mustpay a reasonable price therefor’.
This then leads on to two further pointsconcerning ‘necessaries’:
● The minor is only liable to pay for goods thatare actually supplied. This may mean thatexecutory contracts are unenforceable.
● The minor is even then only obliged to pay‘areasonable price’. Therefore even though thesupplier is able to enforce the contract (s)he maybe unable to recover the actual contract price.
One final point concerns contracts containingharsh or onerous terms. Even though a minor hasbeen supplied with ‘necessaries’ according to theestablished tests the contract may still beunenforceable if the terms of the contract areprejudicial to the minor’s interests.
Fawcett v Smethurst (1914)The minor hired a car in order to transport luggage.This on the face of it was a ‘necessary’. Nevertheless,under a term in the contract the minor was to be
Chapple v Cooper (1844)A minor whose husband had recently diedcontracted with undertakers for his funeral. Shelater refused to pay the cost of the funeral, claimingher incapacity to contract.The court held her liableto pay the bill.The funeral was for her privatebenefit and was a necessary as she had an obviousobligation to bury her dead husband.
Nash v Inman (1908)A Cambridge undergraduate, the son of anarchitect, was supplied with clothes to the value of£122, including 11 ‘fancy waistcoats’ priced at 2guineas each (£2.10p) by a Savile Row tailor.Whilethe supply of such clothing could be appropriate tothe station in life of the undergraduate, the contractwas not enforceable because facts showed that the
minor was already adequately supplied with clothes.Therefore those supplied by the tailor could not beclassed as necessaries.
Contract Law62
b) Beneficial contracts of serviceThe common law again sensibly concludes thatthe minor may need to support himself or herselffinancially, and therefore must have the capacityto enter into contracts of employment. Schoolleaving age is 16 and this is two years below theage of majority.
Such a contract would be prima facie valid andtherefore enforceable. However, from an earlytime it was accepted that the contract would bebinding on the minor only if, on balance, theterms of the contract were substantially to thebenefit of the minor.
The court will have to look at the wholecontract. The fact that some of the terms actto the minor’s detriment will not automaticallyinvalidate the contract of service providing thatit still operates mostly for the minor’s benefit.
By comparison, where the contract is made up ofterms, which are predominantly detrimental tothe minor, then the court will have no choice butto invalidate the contract as a whole.
As can be seen from the last case, the principlehas not been limited in its application to contractsof service only but has been extended in itsapplication to cover contracts of apprenticeship,education and training, since it is to the generaladvantage of a minor that (s)he should secure themeans of acquiring a livelihood. During thiscentury the courts have taken an even moreprogressive view of those circumstances whichcan be classed as a beneficial contract of service.
De Francesco v Barnum (1890)Here, a 14-year-old girl entered into a seven-yearapprenticeship with De Francesco to be taught stagedancing. By the apprenticeship deed the girl agreedthat she would be at De Francesco’s total disposalduring the seven years, and that she would acceptno professional engagements except with his expressapproval. He was under no obligation to maintainher or to employ her. In the event that he didemploy her, the scales of pay were set extremelylow. She was also obliged not to marry except withhis permission. Finally De Francesco was able toterminate their arrangement without noticewhenever he wished.When the girl was set toaccept other work, De Francesco’s action to preventit failed.The provisions of the apprenticeship deedwere held to be unfair and unenforceable againsther.They were not substantially for her benefit.
Doyle v White City Stadium Ltd(1935)Here the principle was extended to cover acontract between a minor who was a professionalboxer and the British Boxing Board of Control. By
held absolutely liable for any damage to the carregardless of how it was caused, on which basis thecourt felt the contract to be too onerous andtherefore unenforceable against the minor.
Clements v London and North WesternRailway Company (1894)The minor had taken up employment as a porterwith the railway company. He agreed to join thecompany’s insurance scheme, as a result of whichhe would relinquish any rights he might have underthe Employers’ Liability Act 1880. In the event of anaccident the statutory scheme would be of greaterbenefit to the minor since it covered a wider rangeof accidents for which compensation could beclaimed, although the levels of compensation werelower.When the minor tried to claim that he wasnot bound by the employer’s scheme, he failed.Viewing the whole contract on balance, it wasgenerally to his benefit.
Capacity and Incapacity 63
It follows that, since contracts for necessaries andbeneficial contracts of service are enforceableagainst the minor, if the goods or service are notnecessaries or if the contract of service is notbeneficial then these contracts are voidable by theminor. This has recently been confirmed.
7.2.3.Voidable contractsThis category of contracts made by minors refersto those contracts which though the minor mightenter with perfect validity (s)he may neverthelessavoid by repudiating his or her obligations underthe contract while still a minor or within areasonable time after reaching the age of 18.
The common feature of such contracts is thatthey involve subject matter of some permanency.So they are otherwise known as contracts ofcontinuous or recurring obligations. They involvelong-term interests and the law sensibly considersthat, while a minor should be able to enter suchcontracts, (s)he should also be in a position torepudiate all obligations and avoid further liabilityif so desired, providing the repudiation occurssufficiently early.
There are four principal classes of contractsfalling within this category. They are:
● contracts to lease property● contracts to purchase shares in a company● contracts to enter a partnership● contracts of marriage settlement.
It is clearly the case that such contracts arevoidable by the minor because of their potentiallyonerous nature. Nevertheless, if the minor choosesnot to repudiate the contract then (s)he willobviously be bound by all of the obligations fallingunder the contract, e.g. a minor will be bound bythe usual covenants in a lease, and will be boundalso by outstanding amounts owed on shares.
Whether the minor has repudiated in sufficienttime to avoid the contract is a question of fact ineach case.
Proform Sports Management Ltd vProactive Sports Management Ltd andanother (2006)Wayne Rooney, a famous England footballer, hadsigned a management and agency agreement withthe claimant when he was 15 lasting for two years.He did so without any legal advice. Rooney wasalready contracted to Everton at this point. Shortlybefore the agreement was due to end Rooney wasapproached by another agent and wrote to theclaimant giving notice of his intention not to renewthe agreement when it expired.The claimantargued that the other agent had induced a breachof its contract with Rooney.The court held that thecontract with the claimant was not a contract ofapprenticeship, education and service substantiallyto Rooney’s benefit and therefore he was entitledto avoid it.
Edwards v Carter (1893)Here, a minor sought to repudiate an agreementunder a marriage settlement by which he agreed totransfer the money he would inherit from his father’swill to the trustees under the settlement. He tried torepudiate more than a year after his father’s death
Chaplin v Leslie Frewin (Publishers) Ltd(1966)In this case the principle was extended to acontract to write an autobiography.This was held tobe similar to a contract for services and wasbeneficial to the minor, and so was binding on him.
the agreement the minor would lose his ‘purse’(payment for the fight) if he were disqualified.Theagreement was held to be binding on the minorsince it was not only to encourage clean fightingbut also proficiency in boxing, and was therefore forthe benefit of the minor.
Contract Law64
Where the minor repudiates the contract beforeany obligations under it have arisen, then thereare no problems, the contract is simply at an end.The minor cannot be sued on any obligation thatwould have arisen after this point.
However, where obligations have alreadyarisen before this point then the position is notso clear cut. Academic opinion seems to favourthe view that the minor is bound by debtsarising from the contract prior to the date ofrepudiation.
Where the minor has transferred money underthe contract then it would appear that this is notrecoverable unless there is a complete failure ofconsideration.
In contrast the minor may succeed in recoveringmoney paid over if (s)he can prove that (s)he hasnot received what was promised under thecontract.
7.2.4.Void or unenforceablecontractsAt one time much of the law governing minors’contracts was contained in the Infants Relief Act1874. After much call for change in what was avery complex piece of legislation, its provisionswere eventually repealed in the Minors’ContractsAct 1987. This Act took the unusual step ofrestoring the common law as it was before theprior Act, with some modification. As a result, thelaw is not without its complexities.
The basic position is that, with the exceptionof those classes of contracts we have alreadydiscussed, a contract made by a minor will notbind him/her and is therefore unenforceableagainst him/her. To the sensible partycontemplating entering into a contract with aminor, what this means is that the range ofcontracts open to a minor is necessarily morelimited than that available to an adult. There aretherefore situations where it is prudent not tocontract with a minor.
What it does not mean is that in the case ofcontracts other than those already considered thatthey are devoid of legal consequences. Forexample:
Steinberg v Scala (Leeds) Ltd (1923)A minor was allotted company shares for which shehad made the payment due for the allotment andfor the first call. Since she was unable to meet thepayments for the further calls, she sought torepudiate the contract and also to recoverthe money which she had already paid over tothe company.The court was happy to accept therepudiation.This meant that her name could beremoved from the register of shareholders and shewould bear no further liability for the company.However, the court was not prepared to grantreturn of her money.There was no failure ofconsideration. Even though she had received nodividends or attended any meetings of shareholders,she had received everything she was bound tounder the contract. She had been registered as ashareholder.
Corpe v Overton (1833)Here, the minor reached an agreement to enter apartnership in three months’ time, and to pay £1,000on signing the partnership deed.The minor paid adeposit of £100.When he repudiated the agreementon reaching majority he was able to recover thedeposit since he had received no benefits under theagreement.There was a failure of consideration.
and four and a half years after reaching the age ofmajority. His argument that he was incapable ofrepudiating until he knew the full extent of hisinterest under his father’s estate failed. Hisrepudiation was too late in time to be reasonable.
Capacity and Incapacity 65
● Even though the minor is not bound by thecontract the other party still will be if such acontract is entered.
● If the minor has paid over money under thecontract (s)he may be able to recover thatmoney if there is a total failure ofconsideration.
● If the minor ratifies such a contract onreaching the age of 18 then the ratification willbind the minor. It is not necessary for thecontract to be ratified expressly; continuingwith the contract may be sufficient forratification to be implied.
Section 1 of the Infants Relief Act 1874 listed theclasses of contract that would be void andunenforceable against the minor. These were:
● contracts for the repayment of money lent orto be lent
● contracts for goods supplied or to be suppliedother than necessaries
● accounts stated, i.e. IOUs.
The law has now been somewhat modified by theMinors’Contracts Act 1987. Clearly, in moderncircumstances many minors might wish to takeadvantage of the credit and loan facilities nowfreely available. Such contracts would have beenformerly unenforceable against the minor.Furthermore, by the Infants Relief Act 1874 even aguarantee for a loan given by an adult close to theminor would have been unenforceable since aguarantor is said to‘stand in the shoes of theprincipal debtor’. So it is understandable that therewould be a reluctance to offer loans or contract tosupply things other than necessaries to minors. Inconsequence, their capacity to contract wasrestricted.
Now under s2 of the Minors’Contracts Act aguarantee can be enforced and minors thereforehave perhaps gained greater access to creditfacilities.
7.2.5. Minors’ contracts and the roleof equityWe have seen that the aims of the law governingminors’ contracts is not so much to restrict orlimit the ability of a minor to enter contracts butrather to protect the minor from those who mightexploit him and take advantage of his youth andinexperience.
Logic dictates that the other party to thecontract might in certain circumstances requireprotection from an unscrupulous minor who triesto take full advantage of his contractual incapacity.
Traditionally, while the common law would failsuch a party where the contract wasunenforceable against the minor, equity couldintervene with the remedy of restitution toprevent the minor’s ‘unjust enrichment’.
So the doctrine of restitution would still havelimited application in preventing the minor’sunjust enrichment.
Now the role of equity has been superseded bys3 of the Minors’Contracts Act 1987. Now, underthis provision:
‘(1) Where –
(a) a person (‘the claimant’) has after thecommencement of this Act entered into a contractwith another (‘the defendant’), and
R. Leslie Ltd v Sheill (1914)Here, a minor fraudulently misrepresented his agein order to get a loan from the claimant. Atcommon law the claimant could not recover theamount of the loan since this would have the effectof enforcing an unenforceable contract. However,had the contract involved goods then the minorwould have been obliged in equity to return them.Restitution would not apply in the same way to themoney lent unless the very coins or notes lentwere still identifiable in the hands of the minor.
Contract Law66
(b) the contract is unenforceable against the defendant(or he repudiates it) because he was a minor whenthe contract was made,
the court may, if it is just and equitable to do so, requirethe defendant to transfer to the claimant any propertyacquired by the defendant under the contract, or anyproperty representing it’.
This provision means that it will no longer bevital to prove fraud against the minor to be ableto recover from him provided there is an unjustenrichment and it is equitable for property to berecovered.
Figure 7.1 Diagram illustrating the different effects of
capacity on minors’ contracts
Is the contract
with the minor:
• For necessaries?
• A contract of service
education or training
substantially for the
benefit of the minor?
YES
YES
YES
NO
NO
Is the contract
with the minor:
• For goods or services
other than necessaries?
• For a loan?
• For an account stated?
Is the contract
with the minor:
• A lease of premises?
• For purchase of
shares in a company?
• To join a partnership?
• A marriage settlement?
The contract
cannot be
enforced
against the
minor – though
property
may be
recovered
The contract
can be
continued
by the minor
or avoided
before
reaching 18
or a
reasonable
time
thereafter
The contract
is valid and
enforceable
against the
minor
ActivityMultiple choice questions1. From the following choices, select the
statement which most accurately describesa contract which is enforceable against aminor:
a) Brian agrees to lend Sam, aged 17, £5,000with which Sam is to buy a car.
b) James, an unemployed 17-year-old, hasagreed to buy an ocean-going yacht, price£20,000.
c) Terry, aged 17, is hoping to become achef. He has agreed to sign up for acatering course at his local college thatwill cost him £300 a term.
d) Sally, who is 17, has signed an agreementto lease a flat from George.
2. From the following choices, select thestatement which most accurately describesa contract which is void and unenforceableagainst a minor:
a) Tim, who is aged 17, has ordered a suitfrom Best Man Tailors. His new job in asales department requires that he wear asuit and a tie.
b) Helen has agreed to become a partner ina business run by her friends, Sarah andMelanie.
c) Vanessa is 17 and she got married toTom when she was only 16.Tom recentlydied in a car crash and Vanessa hascontracted with Boxem, a local funeraldirectors, for Tom’s funeral arrangements.
d) Simon, aged 16, recently took out amortgage for a flat. He did so by statinghis age as 19 on the application forms.
Capacity and Incapacity 67
7.3. Capacity and mentallydisordered personsMental patients and mental disorder have becomethe subject of widespread definition in moderntimes, and the administration of the property ofmental patients subject to numerous rules.However, the contractual capacity of such people isstill predominantly the subject of common lawrules, as with minors.
In considering the capacity of such a party tocontract, the first question for the court todetermine is whether at the time of contractingthat party was suffering from a mental disability tothe extent that (s)he was incapable ofunderstanding the nature of their act.
If this is the case then the contract will bevoidable by the party with the mental disorder,rather than void, provided also that the otherparty to the agreement was aware of thedisability: Imperial Loan Co. v Stone (1892).
A contract made in a period of lucidity, however,is binding upon the mentally incapacitated personeven if they lapse back into mental illness.
Where necessaries are supplied to the personsuffering a mental illness s3 of the Sale of GoodsAct applies once again and (s)he will be obligedto pay a reasonable price for the goods and it willnot matter whether the other party is aware ofthe disability or not.
Under Part VII of the Mental Health Act 1983the property of a mental patient now falls underthe control and jurisdiction of the courts todetermine what contracts will bind the individualconcerned.
7.4. Capacity anddrunkennessWhen a party who is also drunk enters into acontract then, provided that he does not knowthe quality of his actions at the time that the
contract is formed, and provided also that hisdrunkenness is evident to the other party to thecontract, then the contract is voidable by thedrunken person on his return to a sober state:Gore v Gibson (1845).
However, the party making it may later ratifysuch a contract: Matthews v Baxter (1873).
It follows that a contract made with a partywho is so drunk as not to know the quality oftheir act will almost always be voidable since itseems very unlikely that this would then beunknown by the other party.
The same provision concerning necessariesunder s3 Sale of Goods Act 1979 that applies toboth minors’ contracts and to mental patientsapplies also to those who are incapacitatedthrough drunkenness.
7.5. The capacity ofcorporationsA corporation is a body which is accepted in lawas having its own separate legal personality. Inthis way a corporation can form contracts and sueor be sued in its own name.
A corporation inevitably is made up of avariety of people, whether employees or officers.But, while it is these individuals who run thebusiness of the corporation and make contractson behalf of the corporation, they can neither suenor be sued. An obvious example of a corporationwould be a company registered under theCompanies Acts. This should be contrasted withsomething like a local darts club. The club mightrepresent the interests of the members and act ontheir behalf, but it would be an unincorporatedassociation. Any legal liability would be on themembers themselves. They would be heldaccountable on any contracts, and the club couldnot as such sue or be sued.
Incorporation inevitably creates only anartificial legal personality. A company is not a
Contract Law68
person and therefore will have more limitedcapacity than would an actual person. So thecapacity of a corporation will depend on the wayin which it has been formed.
A corporation can be formed in one of threeways:
● By Royal Charter – These charters werecommonly given to the original tradingcompanies such as the East India Company.The capacity was determined by the terms ofthe charter, though it was usually wide.
● By statute – Many of the old nationalisedindustries and bodies such as the BBC gainedtheir status by Act of Parliament. Their capacitywas obviously identified in the statute itself orin regulations made under the statute.
● By registration as a company under theCompanies Acts – This would be the mostcommon form of incorporation. Each companyon formation has to register certain documentsfor public inspection. One of these is thememorandum of association that includes oneimportant part called the objects clause. This isin effect the constitution of the company andthe company may then do anything legal infurtherance of these objects or anythingreasonably incidental to them provided it hasgranted itself the appropriate power. Goingbeyond the objects is known as acting ultravires and such actions will be illegal.
When a corporation goes beyond its capacity toact in making transactions then it is said to actultra vires (beyond its powers). This couldtraditionally be unfair on a party contracting witha company that was deemed by company lawrules to know of the company’s capacity tocontract. Now to comply with EU law theCompanies Acts have introduced provisions toprotect such a party from the company pleadingits own ultra vires to avoid the consequences ofthe contract.
ActivitySelf-assessment questions1. Why does the law apply different rules to
contracts made by minors?
2. What exactly is a ‘necessary’, and how doesthat differ from a ‘necessity’?
3. What is the common feature betweennecessaries and contracts of service or ofapprenticeship, education or training?
4. Why does the law allow a minor to ‘avoid’the effects of a contract of continuing orrecurrent obligations?
5. Why were there different results inSteinberg v Scala (Leeds) Ltd and in Corpe vOverton?
6. Where a contract has been declaredunenforceable against a minor are there anyconsequences of the contract having beenmade at all?
7. In what circumstances will equity act againsta minor? How different is the provisionunder s3 of the Minors’ Contracts Act1987?
8. Why are there special rules on capacitywhen dealing with people who are drunk orwho are mental patients?
9. How does the capacity of a company differfrom the capacity of an individual?
Capacity and Incapacity 69
● Nobody can enter a contract who does nothave the capacity to do so
● Contracts made with minors are of threetypes: (i) those enforceable against the minor;(ii) those voidable by the minor;(iii) those unenforceable against the minor
● Contracts enforceable against the minorinclude those for necessaries, which aremeasured against the minor’s station in life andcurrent needs – Nash v Inman
● By s3 Sale of Goods Act 1979 the minor isonly obliged to pay a ‘reasonable price’ forgoods actually delivered
● Enforceable contracts also include contracts ofemployment, training and apprenticeship, butonly if they are substantially to the minor’sbenefit –De Francesco v Barnum
● Voidable contracts are long-term arrangementsand include leases, purchase of shares,agreements to enter partnerships etc
● Any money paid over is only recoverable ifthere is a total failure of consideration –Steinberg v Scala (Leeds)
● Unenforceable contracts include loans andgoods other than necessaries
● S2 Minors’ Contracts Act 1987 allows thatguarantees of such contracts can be enforced
● S3 allows the other party to recover goodshanded over to the minor in an unenforceablecontract if it is just and equitable
● Rules on incapacity also apply in the case ofdrunkards and mental patients and contractsmade during periods of such incapacity will beunenforceable
● Corporations are also limited in the type ofcontracts that they can make – their limitationwill depend on the type of corporation
Key
Fact
s
The Contents of aContract: Terms
Chapter 8
8.1. Pre-contractualstatements andrepresentations
8.1.1. IntroductionWe have so far looked at the methods of creatinga contract between two parties and some otherfactors that may have a bearing on the making ofa contract or the ability of the parties to enter intosuch an arrangement.
The terms of a contract are otherwise known asthe contents of the contract and they representwhat the parties have agreed to do or to giveunder the contract, in other words, theirobligations to each other. Both sides will haveobligations as we have already seen both from theconsensus ad idem in offer and acceptance andfrom the doctrine of consideration.
Under a contract, both sides will have to carryout their side of the agreement for the contractto be completed. It is commonly a failure tohonour a contractual obligation, and therefore abreach of a term of the contract, that leads to adispute.
The terms of a contract can be what the partieshave expressly agreed upon, but they can also bewhat the law has said should be included in thecontract and therefore is implied into thecontract.
8.1.2.The process of defining anddistinguishing the express termsTerms that have been expressly agreed upon bythe parties will inevitably arise from thenegotiations that have taken place prior to thecontract being formed and the statements thateach party makes to the other at that time. Suchpre-contractual statements are generally knownas ‘representations’.
A pre-contractual statement may be madeorally or in writing or indeed may be implied byconduct, as when a contract is formed on the fallof an auctioneer’s hammer. The impact that a pre-contractual statement will have on the contractwill depend very much on the character of thestatement and the context in which it is made.
In this way certain statements made by theparties will have no significance at all in law,while some will actually form the obligations ofthe contract as terms, and will therefore beenforceable or their breach will lead to remedies.The significance of certain other pre-contractualstatements may depend on whether they havebeen falsely stated or not in which case they maybe actionable.
Thus, in negotiations for the sale of my carI might make the following comments:
● it is a 1978 MGB GT● it is British Racing Green with gold stripes (in
fact, the stripe on one side is missing)
The Contents of a Contract: Terms 71
● the price is only £7,000● it has had only two owners, including myself● the previous owner only used it to go
shopping (in fact, it was a commercial traveller)● it has done only 65,000 miles (in fact, the true
mileage is 165,000)● it is mechanically perfect● it has leather upholstery● it has been serviced ‘quite often’● the petrol consumption is ‘reasonable’● it is an ace little car.
Even a non-lawyer would see the point that theweight attached to these statements varies, as willalso then the contractual significance. The factthat a car is mechanically perfect may be ofcritical importance to the buyer, but what exactlyis an ‘ace little car’?
Basically, any statement made at the time ofthe contract or in the period leading up to thecontract is a representation. The effect of thestatement is to represent that the informationcontained in the statement is true. One furtheraspect of the statement at this point is to representthe stated intention of the party making it.
The law rightly has to distinguish betweendifferent statements according to the relativesignificance they will have in law. Where acontract is reduced to writing then the terms areeasily identified in the contract itself. Otherwisethe following distinctions can be drawn:
● A statement made by a contracting partywhich may be intended to induce the otherparty to enter the contract, but was notintended to form part of the contract isa representation. It may have legalconsequences if certain criteria are met. Itis not a term since it is not incorporated intothe contract.
● A statement made by a contracting party bywhich (s)he intends to be bound will beincorporated and form part of the contract andis therefore a term. It will have legalconsequences, though these may differaccording to what type of term it is.
In all cases the court will determine what theintention of the parties was by use of anobjective test – what would a reasonableperson consider to be the significance of thestatement?
There are also some statements made at the time the contract was formed or in thenegotiations leading up to it that will attach noliability and have no legal significance. They willbe treated as such because the courts can find noreliance placed upon them, or indeed because nosensible person would believe that they wouldinduce a party to enter a contract.
They are of three different types:
Activity Quick QuizTry to work out which of the abovestatements made about the car may besignificant enough to be classed as a term andwhich you think are not sufficiently importantto be terms.
There are 11:
● make of car
● colour
● price
● number of owners
● previous use
● mechanical state
● upholstery
● mileage
● service record
● petrol consumption
● ‘ace little car’.
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Trade puffsPuffs are the boasts or unsubstantiated claimsmade by, amongst others, advertisers ofproducts or services to highlight the productthey are selling.‘Carlsberg – probably the bestlager in the world’ is an obvious example ofsuch a boast. It is an exaggerated claim madeto boost the saleability of the product. The lawwill allow the producers some licence to makesuch statements since it is felt that nobodywould be taken in by them: simplex commendationon obligat.
Where a different legal view is taken is whenthe statement, rather than being identifiable as amere boast, has included a specific promise orwhat amounts to an assertion of fact.
OpinionsSome statements made by a party to a contractattach little legal significance because they lackany weight. An example of this is a mereopinion. An opinion does not carry any liabilityfor the party making it because it is not basedon fact.
Obviously, if the statement of opinion is knownto be untrue by the party expressing it, then it canbe actionable as a misrepresentation.
Similarly, a party will be able to sue on thebasis of a false opinion which has been statedby a party with specialist expertise in that field,and therefore who is in a better bargainingposition than the party to whom it is addressed.
Carlill v The Carbolic Smoke Ball Co.Ltd (1893)Here the Smoke Ball Company argued that theclaim in the advertisement that the product woulddo as it suggested was a mere advertising gimmick,designed to sell more of the product. Its argumentfailed because of the promise it made to give £100to anybody contracting one of the prescribedillnesses after using the Smoke Ball correctly.Thefact that it had stated in its advertisement that asum of money was deposited in a bank to coversuch claims was even greater proof of its intentionto be bound by its promise.
Bisset v Wilkinson (1927)Here, a vendor was selling two blocks of land inNew Zealand.The purchaser was intending to usethe land for sheep farming, though it had notpreviously been used for that purpose, althoughsheep had formerly been kept on a small part ofthe land.The vendor told the purchaser that in hisjudgement the land could carry 2,000 sheep. In fact,it could support nowhere near that number.Thepurchaser argued that the statement was anactionable misrepresentation.The Privy Council heldthat, owing to the inexperience on which it wasbased, it was nothing more than an honest opinion,and not actionable therefore.
Esso Petroleum Co. Ltd v Marden(1976)Esso acquired a site on which to build a petrolstation. On the basis of professional estimates itrepresented to Marden, a prospective purchaser,that the filling station would have a throughput of200,000 gallons per year. In fact, the local authorityrefused planning permission for the proposedlayout so that pumps would be at the back of thesite, and access only from side roads at the rearrather than from the main road at the front of thesite. Marden queried the throughput figure but Essoassured him it would be possible. Despite Marden’sbest efforts, sales only ever reached 78,000 gallons,he lost money and was unable to pay back a loanfrom Esso. Esso sued for repossession and Marden
The Contents of a Contract: Terms 73
Mere representationsWhere a party to a contract has made arepresentation as to fact, which is intended toinduce the other party to enter the contract, butwhich is not intended to form part of the contract,and it is in fact true, there can be no furthercontractual significance. The representation hasachieved what it was supposed to do but it isaccurate so it has also been complied with.
The different significance attached to varioustypes of pre-contractual statements can beexpressed in the table on the following page:
counter-claimed. One of Esso’s arguments was thatthe statement as to the likely throughput of petrolwas a mere opinion.This argument failed becauseof its extensive expertise in the area.
ActivitySelf-assessment questions1. In what ways does a term differ from a
mere representation?
2. Why is it that some statements madebefore the contract attach no liability at all?
Activity Quick QuizWhich of the following situations do you thinkis likely to contain a term?
1. Jasvinder is a greengrocer. He puts a posterin his window, saying ‘The tastiest applesaround’.
2. Andrew is selling his caravan. He describes itas a ‘family caravan’. It has one double bedand two couches on which it would bepossible for other people to sleep.
3. Annie has been given a present of acomputer that she cannot use, so she isselling it to Raj. Raj asks if it has a largememory and Annie says that she thinksit has.
4. Sid is selling his motorbike to Colin. He tellsColin that the bike is ‘mechanically perfect’.In fact, the bike breaks down as Colin isleaving Sid’s house.
● The express terms of a contract representwhat the parties have agreed upon – theseare often identified in the pre-contractualstatements
● Pre-contractual statements are known as‘representations’
● The law distinguishes between:w statements which are sufficiently significant to
be incorporated into the contract as termsw statements which, while not incorporated
into the contract, nevertheless wereintended to induce the other party to
enter the contract – these are mererepresentations, but if they are falsestatements they will be misrepresentations
w statements intended to have no contractualsignificance at all – these can include tradepuffs and mere opinions
● A trade puff has no effect on the contractbecause it is a mere boast which is not takenseriously – unless some other promise isattached: Carlill v The Carbolic Smoke Ball Co
● An opinion carries no weight unless it is madeby an expert: Bisset v Wilkinson
Key
Fact
s
Contract Law74
Type of statement
Terms
Mere representations
Misrepresentations
Mere opinions
Expert opinions
Trade puffs
Puffs with a specific promiseattached
Contractual significance
These will attach liability (and also a range of remedies whenthey are breached)
These attach NO liability
These attach liability(and also a range of remediesdepending on how deliberately thefalsehood was made)Esso v Marden (1976)
These attach NO liability inthemselves Bisset v Wilkinson (1927)
These attach liability(possibly as terms if they areimportant enough to have beenincorporated in the contract. If notthey may still amount to innocentmisrepresentations)Esso v Marden (1976)
These attach NO liabilitye.g. ‘Carlsberg probably the bestlager in the world’
These attach liabilityCarlill v Carbolic Smoke Ball Co.(1892)
Reasoning
Because they are actuallyincorporated into the contract,and so they become theobligations under the contract
Because, while they may inducea party to enter into thecontract, they are notincorporated into the contractand are not intended to createbinding obligations
Because even though they arenot part of the contract, beingfalse they may have wronglyinduced the other party to enterthe contract thus vitiating his orher free will
Because the other party’sopinion is no more valid thanour own, and we cannot be saidto rely on it
Because we do rely, and shouldbe entitled to rely, on theopinion of experts
Because the law credits us withmore intelligence than to takeadvertiser’s boasts too seriously
Because the promise is quitespecific and so we can rely on itrather than the puff, since itcreates a separate contractualrelationship
Figure 8.1 Table illustrating the relationship between different types of representation and the legal consequences attaching tothem
The Contents of a Contract: Terms 75
8.2. The process ofincorporating express terms8.2.1. Factors relevant toincorporating termsClearly, the dividing lines between some of theabove categories of statements are not alwaysobvious. Where a contract is in writing, thengenerally the terms are as stated in the writtencontract. Where negotiations leading up to thecontract are oral, the courts have developedguidelines to determine whether a particularstatement is a term of the contract or not.
In order to be a term of the contract thestatement must be incorporated and form part ofthe contract. Whether or not a statement isincorporated as a term can depend on a numberof different factors:
a) The importance attached to therepresentationThe more importance is attached to the statementby either party then the more likely it is that it is aterm. The logic of this is clear. Where a partyrelied on a statement such that without beingincorporated into the contract as a term, then it isunlikely that the party would have entered thecontract without the inclusion of the provisionidentified in the statement as a term.
In this way the effect of the statement being soimportant may make it a warranty of the contractrather than a misrepresentation that it mightotherwise have been.
Where a party has requested specific detailsabout the agreement then this can also be takento indicate that importance is attached to themand that they are incorporated into the contractas terms.
Birch v Paramount Estates(Liverpool) Ltd (1956)Here, a couple bought a new house from developerson the basis of a promise that the house would be‘as good as the show house’. In fact, the house wasnot as good as the show house and the Court ofAppeal concluded that the statement was so centralto the agreement that it had been incorporated intothe contract as a term.
Couchman v Hill (1947)In a written agreement for the sale of a heifer(a young female cow, usually one that has not yethad a calf) the conditions of sale included a clausethat lots were sold ‘with all faults, imperfections anderrors of description’. The sale catalogue actuallydescribed the heifer as ‘unserved’ (meaning not yethaving been used for breeding). Prior to the makingof the contract, the buyer asked both the auctioneerand the seller to confirm that the heifer wasunserved, and they both assured him that it was. Asa result, he bought the heifer. However, not longafterwards he discovered that the heifer was havinga calf, and it in fact died as a result of having a calf attoo young an age.The Court of Appeal concludedthat, despite the written terms in the contract, therepresentation was so crucial to the buyer in makingthe contract that it was incorporated as a term.
Bannerman v White (1861)During negotiations for the purchase of hops thedefendant purchaser stated that ‘if they have beentreated with sulphur I am not interested in evenknowing the price of them’. Assurances were giventhat they had not, which was also repeated whenthe same question was asked of samples that wereproduced. In fact, some of the crop had beentreated with sulphur.The defendant repudiated thecontract.The claimant argued that the discussions
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b) Special knowledge or skill affectingthe equality of bargaining strengthThus where the statement is made without anyparticular expertise or specialist knowledge to backit up it is less likely to be construed as a term.
However, a statement may well amount to a termwhere the person making it possesses specialistknowledge or expertise and the person to whomit is made is relying on that expertise in decidingto contract.
c) The time between making thestatement and formation of thecontractSometimes the court may assess that the timelapse between the statement made in thenegotiations and the creation of the contract itselfis too great to support a claim that the statementis incorporated in the contract as a term.
d) Reducing the agreement, includingthe statement, to writingWhere a contract is made in a written documentand a statement made orally between the partiesis not included in the written document then thecourt will generally infer that it was not intendedto form part of the contract but is a mererepresentation.
were preliminary to the contract, but the courtaccepted that the stipulations regarding sulphuramounted to a condition of the contract which wastherefore breached.
Oscar Chess Ltd v Williams (1957)The defendants sold a car to motor dealers for£290, describing it as a 1948 Morris 10.Theyhonestly believed that was the correct age of the carsince that was the age given in the registrationdocuments.When the car was later discovered to bea 1939 model, the motor dealers sued for breach ofwarranty.Their action failed.The defendants had noexpertise or specialist skill, were reliant on theregistration documents and their statement was nomore than an innocent misrepresentation.
Dick Bentley Productions Ltd v HaroldSmith (Motors) Ltd (1965)The claimant asked the defendants, who were cardealers, to find him a ‘well vetted’ Bentley car, inother words, one in good condition.The defendantsfound a car they falsely stated had only done20,000 miles since being fitted with a new engineand gearbox. In fact, it had done 100,000 miles.Theclaimant later found the car to be unsuitable, as well
as discovering that the statement about the mileagewas untrue, and sued for a breach of warranty.TheCourt of Appeal upheld the claim since theclaimant relied on the specialist expertise of the cardealers in stating the mileage.
Routledge v McKay (1954)A motor cycle had actually first been registered in1939 but on a new registration book being issued itwas wrongly stated as 1941. In 1949 the currentowner, who was unaware of this inaccuracy, wasselling the motor cycle and in response to anenquiry as to the age by a prospective buyer gavethe age in the registration documents.Theprospective buyer then bought the motor cycle aweek later in a written contract that made nomention of the age.When he discovered the trueage and tried to sue for a breach of a term hefailed.The lapse of time was held to be too wide tocreate a binding relationship based on thestatement.
The Contents of a Contract: Terms 77
Furthermore, where a written agreement is signedthis will generally make the contents of theagreement binding irrespective of whether theyhave been read by the party signing. (A clearwarning that we should never sign anythingwithout reading it first.)
(Of course, judgments like the above would nowbe subject to the Unfair Contract Terms Act andUnfair Terms in Consumer ContractsRegulations.)
e) The extent to which the term iseffectively drawn to the notice of theparty subject to itIn general, a term will not be accepted asincorporated into the contract unless it is broughtsufficiently to the attention of the party subject toit prior to or at the time the contract is made. Thisis one of the basic ways in which judges havedeveloped protections for consumers in the case ofexclusion clauses. Rules on incorporation of termsare interchangeable with the rules onincorporation of exclusion clauses, and cases suchas Olley v Marlborough Court Hotel (1949),Chapelton v Barry UDC (1940) and Thornton v ShoeLane Parking Ltd (1971) could all also be used toillustrate the basic point. So the party subject to analleged term must have real knowledge of it beforeentering the contract or it may not be incorporated.
Routledge v McKay (1954)Here, since the written agreement made nomention of the age of the motor cycle, the courtheld that it had not been considered importantenough to be a term.
L’Estrange v Graucob (1934)The claimant bought a vending machine from thedefendants on a written contract which in smallprint contained the clause ‘any express or impliedcondition, statement or warranty, statutory orotherwise not stated herein is hereby excluded’.The machine turned out to be unsatisfactory andthe claimant claimed for breach of an implied termas to fitness for purpose under the Sale of GoodsAct 1893. (Exclusions of liability for the impliedterms were possible under the 1893 Act.) She alsoargued that she had not read the clause and hadno knowledge of what it contained. Judgment wasinitially given to the claimant but on appeal shefailed. As Scruttton LJ put it, ‘When a documentcontaining contractual terms is signed, then, in theabsence of fraud, or, I will add, misrepresentation,the party signing it is bound, and it is whollyimmaterial whether he has read the documentor not’.
O’Brien v MGN Ltd (2001)The claimant bought a copy of the Daily Mirrorcontaining a scratch card. On the card was printed‘For full rules and how to claim, see Daily Mirror’.The claimant bought another Daily Mirror containinga scratch card on a later day.The card and papercontained the words ‘normal Mirror rules apply’.This second card showed a £50,000 prize, butbecause of a mistake 1,472 other people were alsotold that they had won.The competition rulesprovided for a draw to take place in the event thatthere were more winners than prize moneyavailable.The paper organised a draw with oneprize of £50,000 and another £50,000 to bedivided between all the others (£34 each).Thecontract included the phrase ‘normal Mirror rulesapply’ and it was held that this was sufficient toincorporate the terms.The newspaper had donejust enough to bring the terms to the attention ofthe claimant since the rules were referred to onthe back of each card and were available at theoffices of the paper and in back issues of the paper.
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f) The significance of standard formsIt is commonplace in a modern commercialcontext for parties to contract on their ownstandard terms and conditions.Very often, thiscan lead to problems when the terms aremutually conflicting. Where the contract has beenformed orally, such terms can be relied on only ifthey have in fact been incorporated into thecontract at the time of its formation.
g) Whether the term is reasonablethen the discretion should not beused for an improper purpose.This comes from a concept in administrative lawfrom the case of Associated Provincial PictureHouses Ltd v Wednesbury Corporation (1948).
It is important to remember that since the passingof the Misrepresentation Act 1967 many of theabove claimants would not necessarily have to tryto prove that the statement made to themamounted to a term of the contract. The Actallows a claimant an action even in respect of aninnocent misrepresentation such as that relatingto age of a vehicle found in the registrationdocuments of a vehicle. Prior to this Act therewere very limited circumstances in which a claimfor misrepresentation could be made. So it wasvital for a claimant to prove that a statement wasa term otherwise (s)he may have had no remedyat all.
8.2.2.The ‘parol evidence’ ruleTraditionally, where a party to a writtenagreement was trying to show that the writtendocument did not fully reflect the actualagreement (s)he would come up against the ‘parolevidence’ rule. By this rule, oral or other evidencethat the party was trying to introduce would notbe admissible if it was to be used to add to, varyor contradict the terms contained in the writtencontract.
Lidl UK GmbH v Hertford Foods Ltd(2001)Here, in a contract for supply of corned beef theseller was able to deliver only part of the order andwas unable to get further supplies due tocircumstances beyond his control.The buyer thenhad to obtain supplies elsewhere at extra costwhich the buyer then sued for. Both parties thentried to rely on their own standard terms andconditions.The seller’s terms included a ‘forcemajeure’ clause which would make them not liable.They had done business with each other before sohad seen each other’s terms, but the terms wereinconsistent and not been incorporated into earliercontracts. As the contract was made on thetelephone and neither party had mentioned theirstandard terms, even though they had later sentthem to the other, the Court of Appeal decidedthat neither set of terms was incorporated.Theseller was in breach of contract and liable
Paragon Finance v Nash (2001)Mortgage lenders loaned money on variable interestrates with discretion to raise or lower the rates.Theclaimants fell into arrears and challenged theagreements on the ground that the interest rateswere far higher than those of other lenders.TheCourt of Appeal held that a term should be impliedinto such contracts that the rates should not be setarbitrarily or dishonestly or for any improperpurpose or in a way that no other mortgage lender,acting in a reasonable way, would do. However, theloan agreement was held not to be excessive.
The Contents of a Contract: Terms 79
The rule can easily be justified. Firstly, if thecontract had been reduced to writing then it wasonly logical to suppose that things omitted fromthe written document actually formed no part ofthe agreement. Secondly, the danger is thatadding terms in after the written agreement leadsto uncertainty.
However, many contracts are partly writtenand partly oral, and over time a number ofexceptions to the strict rule have emergedrendering the rule unworkable:
a) Custom or trade usageTerms can invariably be implied into a contract bytrade custom (see later on implied terms).
b) RectificationWhere it can be shown that a written contractinaccurately represents the actual agreementreached by the two parties then equity will allowrectification of the written document. Parolevidence can be introduced to show what the realagreement was. The inaccuracies are removed andreplaced if necessary with the substance of thereal agreement.
c) Invalidation by misrepresentation,mistake etc.Where a claimant is seeking to avoid theconsequences of a contract having discovered thatthe contract has been made as the result of amistake or a misrepresentation or other
invalidating factor (s)he is clearly entitled tointroduce evidence to that effect (see Chapter 11on vitiating factors).
d) Where the written agreement onlyrepresents part of a larger agreementClearly in some circumstances, as we have alreadyseen, the court is prepared to accept that oralrepresentations because of their significance areintended to be as much a part of the agreementas those included in the written document.
e) Where the contract depends onfulfilment of a specified eventObviously, where the parties have a writtenagreement but have also agreed that the contractwill only come into effect on fulfilment of someother condition, then evidence can be introduced
Webster v Cecil (1861)Webster was trying to enforce his purchase of landwhere the written document identified the price as£1,250. Cecil was able to show that he had alreadyrefused an offer of £2,000, so that the accurate pricewas £2,250.The price was amended accordingly.
J. Evans & Son (Portsmouth) Ltd vAndrea Merzario Ltd (1976)The claimant regularly used the defendants ascarriers to ship machinery from Italy and they didso on the defendants’ standard forms. Originally themachines, which were liable to rust if left on deck,were always carried below decks.When thedefendants started using containers, which wouldgenerally be kept on deck, the claimants expressedconcern about rusting and were given an oralassurance that their machinery would still be storedbelow decks. One machine being carried for theclaimants was put in a container and by errorstored on deck.The container was not properlyfastened and subsequently fell overboard.TheCourt of Appeal allowed the claimant to introduceevidence of the oral assurance, the standard formsdid not represent the actual agreement, and thedefendants were liable.
Contract Law80
to that effect. There is no attempt to vary theterms of the contract. The evidence of the oralagreement is introduced only to show thatoperation of the contract has been suspended tillfulfilment of the condition.
f) Collateral contractsWe have already seen how the collateral contractis an exception to the basic rules on privity ofcontract, allowing a party to sue the maker of apromise on which they have relied even thoughthat party is not a party to the actual contract.
A collateral agreement can also be relevant asan exception to the parol evidence rule in certaincircumstances. For instance, where a promise ismade which is dependent on the making ofanother contract, the promise is collateral, themaking of the other contract is the consideration.Though the promise may rank as only arepresentation in the major contract, it can beraised as evidence of the second or collateralcontract.
Pym v Campbell (1856)Here, there was a written agreement to buy a shareof the patent of an invention.The claimant sued for abreach of this agreement. In fact, there was an oralagreement between the parties that the contractwould not come into effect until the patent had beenexamined and verified by a third party.The defendantwas allowed to introduce parol evidence of this.
City and Westminster Properties(1934) Ltd v Mudd (1958)The defendant rented a shop for six years, togetherwith a small room in which he slept, which wasknown by the claimant landlords.When the lease wasup for renewal the landlords inserted a clauserestricting use of the premises to the ‘showrooms,workrooms and offices only’, the effect of whichwould be to prevent the defendant from sleeping onthe premises. He then gained an oral assurance thathe could still sleep in the room, on which basis hesigned the new lease.The landlords then bought anaction for forfeiture of the lease for the defendant’sbreach of the new clause. It was held that he hadbroken the terms of the lease, but the landlords wereunable to enforce its terms against him because ofthe collateral contract.
ActivitySelf-assessment questions1. In what ways can expertise or specialist
knowledge be important in determiningwhat the terms of a contract are?
2. What are the benefits of putting a contract in writing?
3. What is the effect of signing anagreement that you have not read?
The Contents of a Contract: Terms 81
8.3. Implied terms8.3.1. GeneralGenerally, the parties to a contract will bedeemed to have included all of the variousobligations by which they intend to be bound asexpress terms of the contract.
There are, however, occasions when terms willbe implied into a contract, even though they donot appear in a written agreement or in the oralnegotiations that have taken place leading up tothe contract.
Terms will be implied into a contract for one oftwo reasons:
● because a court in a later dispute is trying togive effect to a presumed intention of theparties, even though these intentions have notbeen expressed (these are terms implied by fact)
● because the law demands that certainobligations are to be included in a contractirrespective of whether the parties have agreed
on them or would naturally include them(these are terms implied by law – usually thiswill be as the result of some statutory provisionaimed at redressing an imbalance inbargaining strength or seeking to protect aparticular group – but it can be by operation ofthe common law).
8.3.2.Terms implied by factWhere terms are implied by fact this is usually asa result of decisions in individual court cases. Thecourts have implied terms by fact in a variety ofdifferent circumstances:
a) Terms implied by custom or habitThere is an old maxim that ‘custom hardens intoright. For instance customary rights gained bylong use, otherwise known as prescription, arecommon features in relation to the use of land.Bridle paths and public rights of way are anexample of this.
● To form part of the contract, express termsmust be incorporated into the contract
● If the contract is written then this presents noproblem since the terms are in written form
● Where the contract is oral, a number offactors can be taken into account indetermining whether or not representationshave been less incorporated:w The importance attached to them by the
parties – Birch v Paramount Estatesw The relative bargaining strength of the
parties – Oscar Chess v Williamsw The extent to which one party relied on
the expertise of the other – Dick BentleyProductions v Harold Smith Motors
w Whether the term was sufficiently drawnto the other party’s attention before thecontract was formed – O’Brien v MirrorGroup Newspapers
w Whether the representation was put inwriting – Routledge v McKay
● A party is generally bound by anything that(s)he has signed, whether or not (s)he hasread it – L’Estrange v Graucob
● Originally, the ‘parol evidence’ rule wouldprevent a party from introducing evidence oforal agreements not actually in the writtenagreement – but there are now manyexceptions to this rule
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b) Terms implied by trade orprofessional customThe parties to a contract might be bound by animplied trade custom when it is accepted as theirdeemed intention even though there are noexpress terms on the matter.
In marine insurance, for instance, it has longbeen a custom that there is an impliedundertaking on the part of the broker that he willpay the premium to the insurer even where theparty insured defaults on the payment.
The custom, however, should operate to giveeffect to the contract by supporting the generalpurpose, not to contradict the express terms, andtherefore defeat the general purpose.
c) Terms implied to give sense andmeaning to the agreementSometimes a contract would be renderedmeaningless or inoperable without the inclusion ofa particular term, which will be implied to giveeffect and sense to the agreement.
d) Terms implied to give businessefficacy to a commercial contractExactly the same point applies in respect ofbusiness contracts. Parties would not enter acontract freely that had no benefit for them orindeed that might harm them or cause themsome loss. So the courts will imply terms into acontract that lacks them in express form in orderto sustain the agreement as a businesslikearrangement.
Hutton v Warren (1836)Local custom meant that on termination of anagricultural lease the tenant was entitled to anallowance for seed and labour on the land.Thecourt held that the lease made by the two partiesmust be viewed in the light of this custom. AsBaron Parke in the Court of Exchequer said: ‘It haslong been settled that in commercial transactionsextrinsic evidence of custom and usage isadmissible to annex incidents to written contracts,in matters with respect to which they are silent.’
Les Affreteurs Reunis SA v Walford(Walford’s case) (1919)In this case that we have already seen in privity ofcontract Walford was suing for a commission of 3%that he felt he was owed for negotiatinga charter party between Lubricating and Fuel OilsCo. Ltd and the owners of the SS ‘Flore’. Oneargument of the defendants was thatthere was a custom that commission was payableonly when the ship had actually been hired. In thisinstance the French government had requisitioned
the ship before the charter party had actuallyoccurred. If the custom was accepted then it wouldconflict with the clause in the contract requiringpayment as soon as the hire agreement was signed,so it was held not to have been implied into thecontract.
Schawel v Reade (1913)The claimant wanted to buy a stallion for studpurposes. At the defendant’s stables he wasexamining a horse advertised for sale when thedefendant remarked ‘You need not look for anything:the horse is perfectly sound. If there was anythingthe matter with the horse I would tell you’. On thisrecommendation the claimant halted his inspectionand later bought the horse. In fact it turned out thatthe horse was unfit for stud purposes. Lord Moultonheld that, even though the defendant’s assurancesdid not amount to an express warranty as to thehorse’s fitness for stud, nevertheless they were animplied warranty to that effect.
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This basic principle has been supported insubsequent cases.
e) Terms implied because of the priorconduct of the contracting partiesQuite simply, where the parties to a contract havea prior history of dealing on particular terms, ifthose terms are not included in a later contractthey may be implied into it if the parties aredealing in otherwise essentially similar terms.
The process of implying terms by factThe classic test for identifying whether or not aterm will be implied into a contract by fact is thatlaid down in the judgement of MacKinnon LJ inShirlaw v Southern Foundries Ltd (1939).
‘Prima facie that which in any contract is left to beimplied and need not be expressed is something soobvious that it goes without saying; so that if, while theparties were making their bargain, an officious bystanderwere to suggest some express provision for it in theiragreement, they would testily suppress him with acommon “Oh of course!.” ’
This is commonly known as the ‘officiousbystander’ test. It is still in use, and on the face ofit is an adequate way of showing that what thecourt is doing is giving effect to the presumedintention of the parties. However, it imposes avery strict standard and possibly an unrealisticone. While one party will usually be all too willingto accept that the implied term at issue was what(s)he actually intended to be part of the contract,the other party almost inevitably will be arguingthe exact reverse, or there would be no dispute.
In consequence, there will be circumstances inwhich the ‘officious bystander’ rule cannot apply.
One example is where one party to thecontract is totally unaware of the term that it isbeing suggested should be implied into theagreement. In this case it could never havebeen his intention that it be included, so thetest fails.
The Moorcock (1889)The defendants owned a wharf with a jetty on theThames.They made an agreement with theclaimant for him to dock his ship and unloadcargoes at the wharf. Both parties were aware atthe time of contracting that this could involve thevessel being at the jetty at low tide.The shipbecame grounded at the jetty and broke up on aridge of rock.The defendants argued that they hadgiven no undertaking as to the safety of the ship.The court held that there was an impliedundertaking that the ship would not be damaged.Bowen LJ explained that ‘In business what thetransactions such as this, what the law desires toeffect by the implication is to give such businessefficacy . . . as must have been intended at all eventsby both parties who are businessmen’.
Hillas v Arcos (1932)In a 1931 contract between the two parties for thesupply of standard-sized lengths of timber therewas included an option clause allowing theclaimants to buy a further 100,000 during 1932.Theagreement was otherwise quite vague as to thetype of timber, the terms of shipment and otherfeatures. Despite this the contract was completedand the timber supplied. In 1932 the claimants thenwanted the further 100,000 lengths of timber butthe defendants refused to deliver them.Their
argument was that since the 1931 agreement wasvague in many major aspects and was therefore nomore than a basis for further negotiations.TheHouse of Lords held that, while the option clauselacked specific detail, nevertheless it was in thesame terms as the contract of sale that had beencompleted. It was therefore implicit in the originalcontract that the option be carried out in the sameterms if the claimant wished to exercise it.
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If it is uncertain that both parties would haveagreed to the term even if it had been included inthe agreement then it is difficult to demonstratethat it was their presumed intention and include itby implication, in which case the test fails yet again.
Lord Denning took a more relaxed view to theprocess of implying terms by fact into a contract.He suggested that the process of implication neednot be anything more than to include terms thatare reasonable as between the parties in thecircumstances of the case. The House of Lordsrejected his approach.
Spring v National AmalgamatedStevedores and Dockers Society(1956)There was an agreement between various tradeunions, including the defendant union known as the‘Bridlington Agreement’, from the meeting of the TUCat which it was reached.The agreement concernedtransfer between unions.The claimant joined thedefendant union in breach of this rule on transfer buttotally unaware of the existence of the agreement.This breach was reported to the TUC DisputesCommittee. It then demanded of the defendants thatthey expel him.When they tried to do so theclaimant sued for breach of contract.The defendantunion asked that a term should be implied into theiragreement with Spring that they it should follow theBridlington Agreement. MacKinnon’s ‘officiousbystander’ test was referred to and rejected. If toldabout the Bridlington Agreement by an officiousbystander, Spring would have no idea what it was.
Shell (UK) Ltd v Lostock GarageLtd (1977)By an agreement between the two parties Shellwas to supply petrol and oil to Lostock who inreturn agreed to buy these products only fromShell. In a later ‘price war’ Shell supplied petrol toother garages at lower prices, forcing Lostock to sellat a loss. Lostock wanted inclusion of an impliedterm in the contract to the effect that Shell wouldnot ‘abnormally discriminate’ against them.TheCourt of Appeal refused since Shell would neverhave agreed to it.
Liverpool City Council v Irwin (1976)Here, the council let flats in a 15-floor tower block.There was no proper tenancy agreement thoughthere was a list of tenants’ obligations signed bytenants.There were no express undertakings in theagreement on the part of the landlord.The councilfailed to maintain the common areas such as thestairs, lifts, corridors and rubbish chutes.Thesebecame badly vandalised over time, with no lightingand the lifts and rubbish chutes not working.Theclaimants were tenants in the tower block whowithheld the rent in protest.The council sued forrepossession.The claimants counterclaimed andargued a breach of an implied term that the councilshould maintain the common areas. In the Court ofAppeal Lord Denning felt that such a term couldbe implied because it was reasonable in thecircumstances.The House of Lords though rejectedthis approach. Lord Wilberforce said that to do thisis to ‘extend a long, and undesirable, way beyondsound authority’. Lord Cross stated that ‘it is notenough for the court to say that the suggestedterm is a reasonable one the presence of whichwould make the contract a better or fairer one’ andidentifies that the ‘officious bystander’ test is theappropriate method for a term to be implied into acontract. In the event the House of Lords were notprepared to accept that the council had an absoluteobligation to maintain the common areas, thoughthey did accept that there was an implied term totake reasonable care to maintain the commonareas, which they did not feel had been breachedhere by the council.
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More recently it has been suggested that thecourts should take into account reasonableness,fairness and the balancing of competing policyconsiderations when implying terms intocontracts.
Implied terms are what a reasonable personwould have understood to be the intention ofboth parties, so the court must look at thecontext.
8.3.3.Terms implied by law – by thecourtsTerms implied into the contract are justified onthe basis that they represent the presumed butunexpressed intentions of the parties. Had theparties thought of the particular term, they wouldhave naturally included it.
Where a term is being implied into a contractby process of law it is being inserted into thecontract irrespective of the wishes of the parties.The justification here is that the law, whether thecourts or Parliament itself, wishes to regulate suchagreements.
The courts might imply a term by law becauseit is felt that it is the type of term that shouldnaturally be incorporated in a contract of thattype. Once the term has been implied the casewill then stand as a precedent for future casesinvolving the same type of agreement.
8.3.4.Terms implied by law – bystatuteIn the 19th century the law of contract was mostcommonly governed by the maxim caveat emptor(let the buyer beware). The law was very muchconcerned with the process of contracting andlittle attention was paid to the fact that in manycircumstances one party to the contract was in a
Crossley v Faithful & Gould HoldingsLtd (2004)The court was asked to imply a term into anemployment contract that the employer had anobligation to take care of the economic wellbeing ofhis employee.The court held that such an impliedterm would be too broad, place unreasonableburdens on employers and there were no policyreasons for implying such a general obligation.
Egan v Static Control Components(Europe) Ltd (2004)SCC supplied Egan’s company with components.Before 1999 Egan had signed three guaranteesmaking him personally liable for the company’sdebts up to £75,000. In 1999 with the debt risingEgan was asked to repay in six weekly instalmentsand to sign a new agreement guaranteeing thecompany’s debts up to £150,000 in the same formas the previous guarantees.When the companywent into liquidation Egan tried to argue that the1999 guarantee only applied to goods suppliedafter it was signed.The Court of Appeal held that areasonable person would assume that theguarantee applied to both existing and future debts.
Liverpool City Council v Irwin (1976)Here, the House of Lords could not imply a termas a matter of fact that the landlord wasresponsible for the common areas because it failedthe ‘officious bystander’ test. However, it did acceptthat there should be a general obligation on alandlord in tenancy agreements to take reasonablecare to maintain the common areas.
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significantly inferior bargaining position to theother party. Early statutes such as the Sale ofGoods Act 1893 did attempt to redress thisimbalance. In the latter half of the 20th centurythere has been much more awareness of theneeds of consumers, employees and others incontractual relationships. The old maxim has beenfound wanting and unacceptable and Parliament,through Acts, has often given greater protectionto the party with the weaker bargaining strengthin certain types of contracts by the process ofinserting or implying terms into the contractsirrespective of the express intentions of theparties.
Such a process is common in Acts governingconsumer contracts such as the Sale of Goods Act1979 (as amended) and the Supply of Goods andServices Act 1982. It is also prominent inemployment contracts with not only theEmployment Rights Act 1996 but various Actsoutlawing discrimination such as the SexDiscrimination Act 1975, Race Relations Act 1976and Disability Discrimination Act 1995, and manyother Acts giving a wide variety of protection toemployees by the process of implying terms intothe contract of employment.
The importance of such terms is that theyprovide a statutory protection that can beconstantly relied upon because they willusually apply regardless of what is said in thecontract.
The Sale of Goods Act 1979The Act contains a number of these terms whichprovide a very clear example of the process andits benefits.
S12 – the implied condition as to titleIn sale of goods contracts a term is automaticallyimplied that the person selling the goods canpass on good title to the goods, in other wordsthat (s)he has the right to sell the goods.
The implied term obviously can protect a buyer inthose circumstances where the seller does notown the goods and the original owner wantstheir return.
S13 – the implied condition as to descriptionBy this goods sold in a sale of goods contractmust correspond to any description applied tothem, and this might even include the packaging.
Niblett Ltd v Confectioners’ MaterialsCo. Ltd (1921)A seller sold 3,000 tins of condensed milk that wereon consignment from America.The tins weremarked ‘Nissly’ which Nestlé argued was too closeto their brand name and therefore an infringementof their trademark.The goods were impounded as aresult.The buyers then removed the labels as theywere required to do and sold the goods on forwhatever price they could get.They successfully suedthe sellers under s12.The sellers had been unablelegitimately to sell the goods in their original state.
Rowland v Divall (1923)The claimant bought a car that turned out to bestolen.When the proper owner took the car backthe claimant was able to recover the full price ofthe car from the seller.
Re Moore & Co. and Landauer & Co’sArbitration (1921)A contract for a consignment of tinned fruit wasdescribed as being in cartons of 30 tins.When, ondelivery, half of the cartons were of 24 tins therewas a breach of s13 even though the actualquantity of tins ordered was correct.
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S14(2) – the implied condition that the goods are of satisfactory qualityUnlike s12 and s13, this implied term, as withs14(3), applies only when the goods are sold inthe course of a business.
Traditionally the requirement was that goodsshould be of ‘merchantable’quality.‘Merchantability’was a legal term with a fairlynarrow meaning and as a consequence manyparties might be left without a remedy.
The Sale and Supply of Goods Act 1994 amendedthe section, replacing merchantable withsatisfactory, a concept that should be easilyunderstood by consumers generally. It alsoinserted a new s14(2)(b) explaining what issatisfactory. The definition would include:
a) fitness for all purposes for which goods of thekind in question are commonly supplied
b) appearance and finish
c) freedom from minor defects
d) safety and durability.
There is little case law on the new provisions butthey should make it much easier for consumers tobring claims in respect of defective goods.
S14(3) – the implied condition that the goodsare fit for their purposeThis provision will apply where the buyer ‘eitherexpressly or impliedly makes known to the seller
any particular purpose for which goods are beingbought regardless of whether or not that is apurpose for which goods of that kind arecommonly supplied’.
So the provision mainly applies where the buyeris relying on the skill and judgement of the sellerin buying the goods and has expressed a particularpurpose for which the goods are required.
It may also apply, however, in respect of purposesthat are implicit in the contract rather thanactually stated.
S15 – the implied condition that goods sold bysample should correspond with the sampleThis provision is particularly appropriate when aseller is being sued by a customer for defectivegoods and is able to argue that the defect was notapparent in the sample on which was based thedecision to buy the bulk for resale. The seller usess15 to claim against the original supplier.
Bartlett v Sidney Marcus Ltd (1965)In this case a car was bought with a defectiveclutch.The sellers offered either to repair the clutchor to reduce the price by £25.The buyer acceptedthe price reduction but very soon had to replacethe clutch, costing an extra £45. Lord Denningnevertheless rejected the buyer’s claim that thedefect was more costly meant that it was notmerchantable.
Baldry v Marshall (1925)Here, the buyer claimed that a Bugatti car was notfit for the purpose. He had asked the seller tosupply him with a fast, flexible and easily managedcar that would be comfortable and suitable forordinary touring purposes.The Bugatti that he wassold was not such a car.
Grant v Australian Knitting Mills Ltd(1936)Here, the buyer contracted a painful skin diseasefrom chemicals in underpants that he had bought.The court accepted that the buyer would haveimpliedly made known the purpose for which hewas buying the underpants even if he had notactually stated it to the seller.
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The Supply of Goods and ServicesAct 1982Similar implied terms are contained in the Supplyof Goods and Services Act 1982. Since the Actcovers situations where goods as well as servicesare provided certain of the terms mirror those inthe Sale of Goods Act. These include an impliedcondition as to title (s2); description (s3); animplied condition of satisfactory quality andfitness for the purpose (s4); and an impliedcondition in respect of sale by sample (s5).
There are also three further significant impliedterms of particular relevance to the supply ofservices:
S13 – In a contract for the supply of a servicewhere the supplier is acting in the course of abusiness there is an implied term that thesupplier will carry out the service withreasonable care and skill
S14 – where the time for the service to becarried out is not fixed . . . the supplier willcarry out the service within a reasonable time
S15 – where the consideration for the service isnot determined . . . the party contracting to withthe supplier will pay a reasonable charge
8.4. The relative significanceof terms8.4.1. IntroductionWe have already considered how inrepresentation made prior to the formation of thecontract some are more important than others. As
Godley v Perry (1960)A boy was injured in the eye by a catapult boughtfrom a retailer when the elastic snapped.The retailerhad tested the sample but was able to show thatthe bulk did not match the quality of the sample.
Lawson v Supasink Ltd (1984)Here, the defendant was contracted to design,supply and install a fitted kitchen for £1,200. Planswere drawn up but the defendant failed to followthem properly.The claimants were able to recovertheir money. Since the work was shoddy there wasno entitlement to payment less the price ofrepairing defects on the part of the defendant.
Charnock v Liverpool Corporation(1968)The defendant took eight weeks to repair a carwhen a competent repair should have taken onlyfive weeks and so the defendant was in breach ofthe implied term.
ActivitySelf-assessment questions1. How are terms implied into a contract?
2. What is the difference between an expressterm and an implied term?
3. What is the difference between a termimplied by fact and a term implied by law?
4. In what ways is the ‘officious bystander’ testineffective?
5. For what reasons has Parliament chosen toimply terms into contracts through Acts ofParliament?
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a result some are incorporated in the contract andothers are not.
In the same way not all terms are equallyimportant to the contract. Some are of criticalimportance and without them the contract couldnot be completed. On the other hand some termsare of lesser importance. They may, for instance,be purely descriptive and even if they arebreached this will not mean that the contractcannot be carried out.
If terms are of different significance then theeffects of a breach of those terms will also vary insignificance and there are of necessity differentremedies available to the parties in the event of abreach. The courts have traditionally dealt with theissue by classifying terms into different categories.Broadly speaking, then, the courts alwaysdistinguished between terms and determinedtheir classification in two ways. Firstly, the termcan be categorised according to its importance tothe completion of the contract. Secondly, it can becategorised according to the remedies available toa party who is a victim of a breach of the term – afailure to honour the obligation.
8.4.2. ConditionsUntil fairly recently, judges recognised only twoclasses of term. The most important of these wasthe condition, which can be considered in twoways.
Firstly, a condition is a term of a contractwhich is so important to the contract that a failureto perform the condition would render thecontract meaningless and destroy its purpose. Asa result, a condition is said to ‘go to the root of acontract’.
Secondly, as a result of the significance of theterm to the contract, the court allows the claimantwho has suffered a breach of the term the fullestrange of remedies. When a condition is unfulfilledthe claimant will not only be able to sue fordamages but will be able to repudiate hisobligations, or indeed do both. Repudiation as aremedy is the right to consider the contract endedas a result of the other party’s breach of contract.This may be particularly appropriate as it maymean that the claimant can contract with analternative party and treat himself as relieved of
● Terms can be implied into a contract in one ofthree ways:w by fact – because of the presumed
intention of the parties w by law – because the courts feel that such
terms should always be present (LiverpoolCity Council v Irwin)
w by law – because statutory provisionsinsert terms into contracts
● Terms are implied by fact because of:w custom or common usage – Hutton v
Warrenw professional custom – Walford’s casew business efficacy – The Moorcockw past conduct of the parties – Hillas v Arcos
● Terms are implied by fact according to the‘officious bystander’ test – if an officious
bystander had asked the parties about a termthat was missing from the contract they wouldhave replied that it was obviously included(Shirlaw v Southern Foundries Ltd )
● Terms are implied by statute for, e.g. consumerprotection – Sale of Goods Act 1979, Supplyof Goods and Services Act 1982
● Sale of Goods Act terms include, e.g. goodsshould correspond with description – s13; andbe of satisfactory quality – s14(2); and fit fortheir purpose – s14(3)
● Supply of Goods and Services Act impliedterms include – service to be carried out withreasonable care and skill – s13; service to becarried out within a reasonable time – s14;where price not stated, party receiving serviceto pay a reasonable charge
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his obligations under the contract, without fear ofthe defendant alleging a breach by the claimantinstead.
8.4.3.WarrantiesWarranties are regarded as minor terms of thecontract or those where in general the contractmight continue despite their breach. Almost bydefault, then, a warranty is any other term in acontract – one that does not go to the root ofthe contract.
It is a residual category of terms dealing withobligations that are ancillary or secondary to themajor purpose of the contract.
As a result, the remedy for a breach ofwarranty is merely an action for damages.There is no right to repudiate for breach of awarranty.
Thus it can be seen that the way in which theterms are classified is critical in determining theoutcome of the contract and the remediesavailable in the case of a breach of the terms.
8.4.4.The construction of termsThe remedies available to a party who hassuffered a contractual breach depend on theclassification given to the term that is notcomplied with. Parties to a contract do not alwaysthink to outline prior to the contract the nature ofthe terms they are incorporating in the contract orthe precise remedies they are contemplating willbe available in the event of a breach. Where theparties are silent on the classification of terms orthe classifications are vague it will be for judges toconstrue what the terms are and their contractualsignificance.
Judges use a number of guiding principles:
● Where terms are implied into the contract bylaw then judges will apply the classificationgiven to the terms in the statute, i.e. theimplied terms in the Sale of Goods Act thatwe have already looked at are stated asconditions.
● Where the terms are implied by fact the judgeswill construe them according to the presumedintention of the parties.
● Where the terms have been expressed bythe parties who have identified how theterms are to be classified or what remediesattach to them then the judges will usuallytry to give effect to the express wishes of theparties.
Poussard v Spiers and Pond (1876)Here, an actress was contracted to appear in thelead role in an operetta for a season.The actresswas unable to attend for the early performances, bywhich time the producers had given her role up tothe understudy.The actress sued for breach ofcontract but lost. She had in fact breached thecontract by turning up after the first night. As thelead, her presence was crucial to the productionand so was a condition entitling the producers torepudiate and terminate her contract for her non-attendance at the early performances.
Bettini v Gye (1876)In a case with similar circumstances to the last, asinger was contracted to appear at a variety oftheatres for a season of concerts. His contractincluded a term that he should attend rehearsals forsix days prior to the beginning of the actualperformances. In the event, he turned up only three
days before but had been replaced.When the singersued the producers’ claim that the obligation toattend rehearsals was a condition failed.The courtheld that it was only ancillary to the main purposeand entitled the producers only to sue for damages,not to end the contract and replace the singer.
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● Where the terms are express but the partieshave not identified what type of term they areor what is the appropriate remedy in a breachthen the judges will construe those termsaccording to what they believe is the trueintention of the parties.
Inevitably, it is very advantageous if a term isa condition since a greater range of remedies isavailable. This has the potential for unscrupulousparties to a contract to classify all of the terms ofthe contract as conditions. In view of thecomplexities of modern contracting, andparticularly the use of the standard form contract,there may well be occasions when the judges feelthat it is impossible to follow the expressclassification of the terms. In this way a termstated as being a condition may be construed infact as a warranty.
Judges may of course be aided in their constructionof terms by guidance given in statutory definitionsand referring to the market in which the particularcontract operates may also assist them.
So while in general a contract drafted by a lawyershould usually conform to the classification ofterms given nevertheless the courts may seek topreserve certainty in commercial contractswhatever the apparent intent of the parties.
Schuler (L) AG v Wickman MachineTool Sales Ltd (1974)In an agency contract Wickman was appointed soledistributor of Schuler’s presses. It was stated as acondition of the contract that Wickman’srepresentatives would make weekly visits to six largeUK motor manufacturers to solicit orders forpresses. A further term stated that the contractcould be terminated for a breach of any conditionthat was not remedied within 60 days.The contractwas to last more than four years amounting to morethan 1,400 visits.When some way into the contractWickman’s representatives failed to make a visitSchuler sought to terminate the contract. In theHouse of Lords Lord Reid felt that it was inevitablethat during the length of the contract there would beoccasions when maintaining weekly visits would beimpossible. He also felt that the effect of acceptingthe term as a condition would be to entitle Schulerto terminate the contract even if there was only onefailure to visit out of the 1,400.This would beunreasonable so the term could not be a condition.
Maredelanto Cia Naviera SA vBergbau-Handel GmbH (The MihalisAngelos) (1970)A charter party repudiated their contract with shipowners when the contract contained an ‘expectedreadiness to load’ clause and it was clear that thevessel would not be ready to load on time.Therewas a clear breach of a term but the court had todecide of which type.The House of Lords, usingguidance from statutory terms as well as from thecommercial character of the contract, decidedthat the term was a condition justifying repudiation.The judges held that in commercial contractspredictability and certainty of relations must be theultimate test.
Harlingdon & Leinster Enterprises Ltdv Christopher Hull Fine Art Ltd (1990)Here, defendant dealers sold a painting as a Munter(a German expressionist painter).The sellersdeclared at the time of the contract that they hadno expertise on such paintings whereas the buyersdid have.When it was discovered that the paintingwas a forgery the buyers tried to claim a breach ofdescription by the sellers.They Court of Appealheld that the sale was not one by descriptionentitling the buyers to repudiate.There was noreliance by the buyers who had relied on their ownsuperior judgement.
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8.4.5 Innominate termsThe problem of determining which category aterm fits usually happens when the parties havebeen silent on the subject or where the contract isoral. The effect of the classification is to identifywhat the term was at the time of the formation ofthe contract, and therefore all later consequencesdepend on that classification.
A more recent approach of the courts has beento describe terms as ‘innominate’, or withoutspecific classification, and in determining theoutcome of a breach of the term to considerthe consequence of the breach rather than how itis classified in deciding on the available remedy.
The purpose of distinguishing betweendifferent classes of term is to ultimately determinewhat remedies are available to the victim of thebreach of the term. The modern concept of theinnominate term has developed out of a desirethat the right to repudiate a contract should onlybe available in the event of a breach when it isfair to both sides.
The rather simplistic process of classifying allterms as either conditions or warranties was notwithout its problems and the innominate termwas first considered as an alternative method ofdeciding the appropriate remedy in the event of abreach of a term in:
The process seems simple enough. The availableremedy is only discovered after the consequencesof the breach have first been identified. Theinnominate term in this way could be particularlyuseful in contracts such as charters where theresults of the breach can vary all the way fromrendering the contract impossible to relativelytrivial effects.
Nevertheless there is an uncertainty to theinnominate term. Nobody can be really sure whatthe outcome of a particular situation will be untilthe term has been breached and the judge in thecase has construed the term and declared whatremedy is appropriate. The doctrine has, however,been accepted.
Hong Kong Fir Shipping Co. Ltd vKawasaki Kisen Kaisha Ltd (the HongKong Fir case) (1962)The defendants chartered a ship from the claimantsunder a two-year charter party. A term in thecontract required that the ship should be ‘in everyway fitted for ordinary cargo service’. In fact, theship broke down as a result of the incompetence ofthe engine room staff, and in any case was in agenerally poor state of repair and not seaworthy, afact admitted by the claimants. As a result, 18weeks’ use of the ship was lost by the defendants
and they claimed to treat the contract asrepudiated and at an end.The claimants sued,claiming that the term was only a warranty, entitlingthe defendants only to sue for damages.The Courtof Appeal agreed.There were, however, someinteresting points made in the judgments. LordDiplock felt that not all contracts could be simplydivided into terms that are conditions and termsthat are warranties, and that many contracts are ofa more complex character. He considered that
‘all that can be predicted is that some breacheswill, and others will not, give rise to an eventwhich will deprive the party not in default ofsubstantially the whole benefit which it wasintended that he should obtain from contract; andthe legal consequences . . . unless expresslyprovided for expressly in the contract, depend onthe nature of the event to which the breach givesrise and do not follow automatically from a priorclassification . . . as a “condition” or a “warranty” ’.
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The use of the innominate term is particularlyappropriate where there is unequal bargainingstrength between the parties or where breaches ofthe contract are technical rather than material andthe traditional methods of classification wouldlead to an injustice.
However, the court may still classify a term as acondition, regardless of what the possibleconsequences of a breach might be, where it feelsthat the circumstances demand it.
Cehave N.V. v BremerHandelsgesellschaft mbH (The HansaNord) (1976)A cargo of citrus pulp pellets to be used as cattlefeed was rejected by the buyers because part hadsuffered overheating and did not conform to theterm ‘Shipment to be made in good condition’. Asthe sellers would not refund the price already paidthe buyers applied to the Rotterdam court whichordered its sale. Another party then bought thecargo and sold it on to the original buyers at amuch lower price than they had paid the originalsellers.The cargo was then used for its originalpurpose, cattle feed.The buyers argued that thegoods were not merchantable within the meaningof the Sale of Goods Act, the term was a conditionand therefore justified their repudiation.This was atfirst successful.The Court of Appeal, however, usingthe Hong Kong Fir approach, accepted that, sincethe goods had been used for their original purpose,there was not a breach of the contract seriousenough to justify repudiation. Only an action fordamages was appropriate in the circumstances.
Reardon Smith Line Ltd v Hansen-Tangen (1976)In a contract for the charter of a tanker the ship wasdescribed as ‘Osaka 354’, a reference to the shipyardat which the tanker would be built. In fact because
the shipyard had too many orders the work wassub-contracted to another yard and the tankerbecame known as ‘Oshima 004’.When the need fortankers lessened the buyers tried to get out of thecontract by claiming a breach of a condition that thetanker should correspond with its description.Thecourt held that since the breach was entirelytechnical and had no bearing on the outcome of thecontract it could not justify repudiation.
Bunge Corporation v Tradax Export SA(1981)In a contract for the sale of Soya bean meal thebuyers were required to give at least 15 days’notice of readiness to load the vessel. In the eventthey gave only 13 days’ notice.This would notnecessarily prevent the sellers from completingtheir obligations. As a result, the first instance courtheld that since the consequences of the breachwere minor it would not justify repudiation.TheHouse of Lords, however, held that, since thesellers’ obligation to ship was certainly a conditionthe obligation to give notice to load in proper timeshould also be a condition without regard to theconsequences of the breach. Lord Wilberforce feltthat stipulations as to time in mercantile contractsshould usually be viewed as conditions.
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● There are different types of term – whichcategory a term falls into is determined byhow important it is to the contract
● In this way terms also vary according to theremedy available if they are breached
● A condition is a term which ‘goes to the rootof the contract’ – breach of a condition wouldrender the contract meaningless, so that theparty who is the victim of the breach canrepudiate his/her obligations under thecontract as well as or instead of suing fordamages – Poussard v Spiers
● A warranty is any other term – only damagesare available for a breach of a warranty –Bettini v Gye
● Where the parties are silent on what type theterm is judges must construe it from thesurrounding circumstances – while judges try togive effect to the express intentions of theparties, remedies for breach of a term will onlybe awarded if the condition operates like acondition – Schuler v Wickman Machine Tool Sales
● Judges sometimes also view terms asinnominate, i.e. the appropriate remedy isjudged from the seriousness of the breach –Hong Kong Fir Shipping case
● This can prevent the wrong remedy beinggiven for breaches which are purely technicalin character – Reardon Smith Line v Hansen-Tangen
Key
Fact
s
ActivitySelf-assessment questions1. What are the major differences between a
‘condition’ and a ‘warranty’?
2. In what circumstances will the court ignorethe classification given to a term by theparties themselves?
3. In what ways does a term classed asinnominate different from terms classifiednormally as conditions or warranties?
4. What are the advantages and disadvantagesof defining terms as innominate?
ActivityLegal Problem SolvingThere are four essential ingredients toanswering problem questions:
● Firstly, you must be able to identify theimportant facts in the problem, the ones onwhich the answer may depend.
● Secondly, you will need to know andunderstand the law which is likely to applyin the situation.
● Thirdly, you will need to be able to applythe law to the facts.
● Fourthly, you will need to be able to drawconclusions from that process.This isparticularly so where the problem asks youto ‘advise’. If you are advising then yourclient is depending on you to say what todo in the circumstances.
Consider the following situation:
ProblemBrian is a tenant of a flat in a block of twentyflats all owned by his local council, BadboroughCouncil. In the block of flats the stairs are in a
The Contents of a Contract: Terms 95
very run down and dilapidated state.Thehandrails are broken and are dangerous andthe lighting in the corridors and staircases isfrequently out of order so that these commonareas are often in darkness.The tenants haverepeatedly asked the council to repair handrailsand to properly maintain the lighting.Thecouncil has, however, refused on the basis thatit claims there is nothing in the tenancyagreement that makes it responsible for thecommon areas inside the block of flats. Sometenants, including Brian, have decided towithhold their rents until the council carriesout their demands.The council is now seekingto evict Brian for his non-payment of rent.
Another tenant, George, wanting to improvethe outside appearance of his flat, bought aladder from Dodgy DIY to paint his windows.The manager of Dodgy assured him that theladder would be suitable for the work inquestion. In fact, it was too short to reachGeorge’s windows properly and in stretchingGeorge fell off the ladder and broke his leg.
Advise both Brian and George.
Answering the questionIt is sensible when there are two distinctcontractual relationships, as with this problem,to separate them in your answer and deal withthem individually.
Brian v Badborough CouncilThe factsUnlike in real life, it is common, when a tutoror an examiner makes up a problem, for nearlyall of the facts to be relevant in some way.Even so, they may still need to be put into
some logical order to connect them to the lawyou need to use.
Here the key facts seem to be:
1. Brian is a tenant in a block of flats owned byBadborough Council.
2. There is apparently nothing in the tenancyagreement making the council responsiblefor the common areas in the flats.
3. Handrails are broken and dangerous, lightingdoes not work and is dangerous, corridorsare full of litter.
4. Despite requests by tenants the council willnot repair or maintain the common areas.
5. Some tenants, including Brian, withhold theirrent.
6. The council is seeking to evict Brian.
The lawIt is very important, when answering problemquestions, that you use only the law that isrelevant to the precise facts, if for no otherreason that you are not getting any marks forusing law that is irrelevant, and so you arewasting valuable writing time.We know becausethis problem is all about whether the council isobliged to maintain the common areas andwhether it can evict Brian for not paying hisrent that it is all about terms.
From this and other facts we can deduce whatparticular rules are important to solving theproblem.
The appropriate law would appear to be:
● Terms are the obligations of the parties to acontract which if they are not compliedwith will lead to a breach of the contract.
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● Terms can be either expressed by theparties themselves or implied.
● If express they depend on incorporation –and in a written contract this will bethrough inclusion in the document itself –L’Estrange v Graucob.
● Terms can be implied:
w by fact – based on the presumedintention of the parties – The Moorcock
w by law – by the insertion of statutoryterms, e.g. those in the Sale of Goods Act1979
w by law – where judges determine that theterm should commonly apply as a matterof law.
● If implied by fact they will depend on the‘officious bystander’ test – Shirlaw v SouthernFoundries – and would probably be impliedto make sense of the agreement.
● If implied by the common law it will usuallybe because there is an area lacking statutorycontrol which the judges feel should beregulated apart from in the current caseand the term is ‘reasonably necessary’ toachieve this – Liverpool City Council v Irwin.
● Terms can be either :
w conditions – going to the root of thecontract and if they are breachedallowing for repudiation of the contractand/or an award of damages – Poussard vSpiers; or
w warranties – mere general terms which ifbreached allow only for a claim fordamages – Bettini v Gye.
● Sometimes alternatively terms are classed asinnominate – where the remedy dependson the effect of the breach rather than any
prior classification of the term – The HansaNord.
Applying law to fact:1. There is nothing express in the tenancy
agreement so any rights on behalf of thetenants will have to be implied either by factor by law. (Ignoring any actual rights to befound in landlord and tenant law which isnot in the scope of the syllabus.)
2. There is a possible comparison with caseslike The Moorcock but the facts are also verysimilar to those in Liverpool City Council vIrwin.
3. Whichever is used, it is likely to regulate theagreement and make the councilresponsible for the common areas.
4. Brian will have repudiated the contractlawfully only if the implied term is a condition.
ConclusionsIt just remains now to make a judgment basedon the analysis above whether Brian has lawfullyrepudiated the tenancy agreement or not.
Just as in real life, there might not be a definiteor straightforward answer.The point is to reacha logical conclusion by using the law correctly. Itis likely, though, that the term is only a warrantyand Brian’s repudiation would be unlawful.
George v Dodgy DIY
The factsAll the same points apply.
Here the key facts seem to be:
1. George bought a ladder from Dodgy topaint his outside windows.
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2. The shop manager assured George that theladder was suitable for the use that it wasneeded for.
3. The ladder was actually too short.
4. George fell when stretching and broke hisleg as a result.
5. George wishes to recover damages.
The lawAll the same points apply.
The appropriate law would appear to be:
● Terms are the obligations of the parties to acontract which if they are not complied withwill lead to a breach of the contract.
● Terms can be either expressed by theparties themselves or implied.
● If express they depend on incorporation –and in an oral contract this may depend onthe importance attached to them by a party– Birch v Paramount Estates.
● Terms can be implied by the insertion ofstatutory terms, e.g. those in the Sale ofGoods Act 1979 – here, three possible SGAterms might apply:
w S13 – goods must corresponds to anydescription applied to them – Beale vTaylor
w S14(2) – goods must be of satisfactoryquality (i.e. they must not be defective) –Grant v Australian Knitting Mills
w S14(3) – goods must be fit for thepurpose (the buyer can rely on theskill and judgment of the seller wherethe buyer has stated the purpose forwhich the goods will be used) – Preist vLast.
● All of these SGA terms are conditions – soif breached allow for repudiation and/ordamages.
Applying law to fact1. S13 is unlikely unless the ladder is seen
as being self-descriptive in thecircumstances.
2. S14(2) is more arguable – while laddersare of different heights this one was notsuitable for its intended use – but we canassume that the ladder was generally fit fornormal use.
3. S14(3) is more likely – the shop managerknows of George’s purpose for the ladderand has assured him of its suitability – soGeorge can probably rely on this.
ConclusionsAgain, it remains to make a judgement basedon the analysis above whether. It is possible toargue that George will be able to suesuccessfully under s14(3) SGA – repudiationcan be an issue because the ladder is of nouse – so George can have his money back aswell as damages for his injuries.
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Law98
Dilemma Board
Steve buys a car from Wow Cars car dealers without inspecting it, because after enquiring he was assuredby the sales manager that the car was ‘mechanically perfect’.Wow Cars deliver the car to Steve’s house on atrailer and when he tries the car it will not start.This is because the engine block has seized when the carwas driven through water and the engine has not been replaced, so the car will never start in its currentstate.
A.The statement that the car ismechanically perfect is not a termbecause it has not beenincorporated into the contract.
C.Steve will only be able to sue fordamages because the statementthat the car is mechanically perfectis a warranty.
B.There is a term implied by fact thatthe car is mechanically perfect.
D.Steve will not be able to use theSale of Goods Act 1979 to make aclaim against Wow Cars.
In the dilemma board below consider the accuracy of each of the four statements A, B, Cand D as they apply to the facts in the central scenario.You only need to give the basicprinciples. The answer is in the appendix at the end of the book
The Contents of aContract: ExclusionClauses
Chapter 9
9.1. Common-law control ofexclusion clauses9.1.1. IntroductionA clause in a contract that seeks to either limit orexclude liability for breaches of the contract isitself a term of the contract. It is therefore subjectto all of the normal rules regarding terms,particularly those concerning incorporation of theterm.
Such terms can be particularly harsh on theparty subject to them and they often highlight theinequality of bargaining that can exist betweendifferent parties notably providers of goods andservices and consumers. Historically, the principleof caveat emptor gave a great deal of leeway to aseller and little protection to a consumer. Evenwhere statute intervened to create protections forthe consumer, as in the Sale of Goods Act 1893,the sellers’ superior position was generallypreserved. Thus s55 of the 1893 Act allowedsellers to exclude liability for breaches of theimplied conditions in the Act.
As a result, judges gradually developed rules toprevent sellers having an unfettered discretion toavoid liability for their contractual breaches. Morerecently, a general trend towards consumerprotection has seen the introduction of more
effective statutory controls and the UK has alsohad to implement controls created in Europeanlaw. Judicial controls, though, are still effective inlimiting the use of exclusion clauses.
9.1.2. Rules on incorporatingexclusion clauses into contracts Judges have shown a willingness to redress theimbalance that exclusion clauses can give rise to.They have done so initially by insisting on strictrules of incorporation of such clauses. The rulesare generally interchangeable with rules regardingincorporation of other terms.
Signed agreementsAs with terms in general, the initial proposition isthat where a party has signed a writtenagreement then (s)he is prima facie bound by thatagreement.
L’Estrange v Graucob (1934)Here, as we know, the purchaser of the vendingmachine was bound by the exclusion clause inthe contract regardless of the fact that she hadnot read it.
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Express knowledge of the clauseThe first principle adopted by the courts is that anexclusion clause will only be incorporated into acontract where the party subject to the clause hasactual knowledge of the clause at the time thecontract was made.
On the other hand, where the parties have dealton the same terms in the past it may be possibleto imply knowledge of the clause from the pastdealings. In which case it may be incorporated inthe contract.
However, the courts will not allow a party to relyon past dealings to imply knowledge of anexclusion clause in order to incorporate it into thecontract unless the previous dealings represent aconsistent course of action.
Sufficiency of notice of the exclusionclauseIn general, the courts will not accept that anexclusion clause has been incorporated into acontract unless the party who is subject to the
Olley v Marlborough Court Hotel(1949)Mr and Mrs Olley booked into the hotel, at whichpoint a contract was formed.When they later wentout, they left the key at reception as required. Intheir absence a third party took the key, enteredtheir room and stole Mrs Olley’s fur coat.The hotelclaimed that they were not liable because of anexclusion clause in the contract that ‘theproprietors will not hold themselves liable forarticles lost or stolen unless handed to themanageress for safe custody’.The Court of Appealrejected the Olleys’ claim.The clause was notincorporated in the contract since it was on anotice on a wall inside the Olleys’ room.
Spurling (J) Ltd v Bradshaw (1956)The defendant had contracted to store goods inthe claimant’s warehouse over many years. On thisoccasion he had stored a consignment of orangejuice that went missing.The defendant refused topay and the claimant sued and the defendantcounterclaimed the claimant’s negligence.Theclaimant pointed to an exclusion for any ‘loss ordamage occasioned by the negligence, wrongful actor default’ of them or their servants contained in a
receipt sent to the defendants.They in turn arguedthat this was only sent out after the contract wasformed.The court accepted the validity of theexclusion since the parties had dealt on the sameterms in the past.
McCutcheon v David MacBrayne Ltd(1964)The claimant had used the defendants’ ferries toship his car from Islay to the Scottish mainland onmany occasions. Sometimes he was asked to sign arisk note including an exclusion clause and on otheroccasions he was not. On the occasion in questionthe claimant’s relative, McSporran, took the car tothe ferry. He received a receipt on which wasprinted the exclusion clause, but he did not read it,and he was not asked to sign a risk note.The ferrysank through the defendants’ negligence and the carwas a write-off.The claimant claimed compensationand the defendants tried to rely on the exclusionclause in the risk note and on the receipt.Theyfailed because there was not a consistent course ofaction that allowed them to assume that theclaimant knew of the exclusion clause so it was notincorporated in the contract. As Lord Devlin put it:‘previous dealings are only relevant if they proveknowledge of the terms actual and not constructiveand assent to them’.
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clause has been made sufficiently aware of theexistence of the clause in the contract.
The obligation then is firmly on the partyinserting the clause into the contract to bring it tothe attention of the other party before it can berelied on and the party who wishes to rely on theexclusion clause is relieved of liability for theircontractual breach.
Clearly, one of the issues in Parker would havebeen whether or not the claimant could havebeen expected to contemplate that the cloakroomticket in fact formed the basis of a writtencontract. An exclusion clause will not beincorporated into the contract when, on anobjective analysis, it is not contained in adocument that would ordinarily be perceived asbeing a contractual document or havingcontractual significance.
The exclusion clause might not be incorporatedeither where reference to it is contained inanother document given to the claimant prior tothe formation of the contract but whereinsufficient is done to bring the claimant’sattention to the existence of the clause.
One further question concerns the extent towhich parties inserting exclusion clauses incontracts must go in order to claim that they are
Parker v South Eastern Railway Co.(1877)The claimant left his luggage in the cloakroom of thestation and was given a ticket on paying a fee. Onthe back of the ticket was a clause stating that therailway company would not be liable for any luggagethat exceeded £10 in value. Mr Parker’s luggage wasworth more than that amount and when it wasstolen he claimed compensation from the railwaycompany. Its attempt to rely on the exclusion clausefailed since it could not show that it had instructedthe claimant to read the clause or to otherwisebring his attention to the exclusion clause.
Chapelton v Barry Urban DistrictCouncil (1940)Here, the claimant hired deckchairs on the beach atBarry, and received two tickets from the council’sbeach attendant on paying the cost of hiring the
chairs. On the back of these small tickets were thewords ‘The council will not be liable for anyaccident or damage arising from the hire of thechair’ though the claimant did not read it, believingit only to be a receipt. The canvas on one chair wasdefective and it collapsed injuring the claimant. Heclaimed compensation and the council tried to relyon their exclusion clause.Their defence failed sincethe existence of the clause was not effectivelybought to the attention of the claimant. It wasunreasonable to assume that he wouldautomatically understand that the ticket was acontractual document, and the council was liable forthe claimant’s injuries.
Dillon v Baltic Shipping Co. Ltd (TheMikhail Lermontov) (1991)A woman booked to go on a cruise with herdaughter. In the booking form there was a clausethat the contract of carriage was ‘subject toconditions and regulations printed on the tickets’. Infact, the contract of carriage would only then beissued some time later, at the same time as thetickets.The cruise ship sank and the claimant wasinjured as a result. In her claim for compensation thedefendant shipping company sought to rely on theexclusion clause in the contract of carriage. It failed.The court held that there was insufficient noticegiven in the booking form to draw the claimant’sattention to the existence of the exclusion clause.
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brought sufficiently to the attention of the otherparty and therefore incorporated in the contract.This is graphically illustrated in a judgment ofLord Denning. The case is also relevant to therequirement that the party subject to the clausemust be aware of the clause at the time ofcontracting. Finally, the case also puts intoperspective some of the problems of modernforms of contracting such as dealing with vendingmachines, ticket machines or other situationswhere there is no contact with the party seekingto insert the clause or his/her agents at the timeof contracting.
One final point worth mentioning on this issue isthat the courts have not always felt constrained toapply this strict approach only to exclusionclauses. In certain instances the courts haveadopted the same position in contracts containingclauses which are particularly burdensome to theother side regardless of the clause not being anexclusion clause.
the clause in the contract a very high degree ofnotice is required for it to be effective. As he hadpreviously stated in Spurling v Bradshaw, whenlooking at what needs to be done to draw a clauseto the attention of the party subject to it: ‘Someclauses which I have seen would need to beprinted in red ink with a red hand pointing to itbefore the notice could be held to be sufficient’.
Thornton v Shoe Lane Parking Ltd(1971)The claimant was injured in a car park owned bythe defendants. At the entrance to the car parkthere was a notice that, as well as giving thecharges, stated that parking was at the owner’s risk.On entering, a motorist was required to stop at abarrier and take a ticket from a machine, at whichpoint a barrier would lift allowing entry to the carpark. On the ticket was printed the words ‘Thisticket is issued subject to the conditions of issue asdisplayed on the premises’. Notices inside the carpark then listed the conditions of the contract,including an exclusion clause covering both damageand personal injury.When the claimant claimed thedefendants argued that the exclusion clause appliedbut their argument was rejected. Lord Denningidentified that the customer in such situations hasno chance of negotiating. He ‘pays his money andgets a ticket. He cannot refuse it. He cannot get hismoney back. He may protest to the machine, evenswear at it. But it will remain unmoved. He iscommitted beyond recall . . .The contract wasconcluded at that time’. In consequence, LordDenning says the customer is bound by the termsof the contract ‘as long as they are sufficientlybought to his notice beforehand, but nototherwise’. In other words, for the party including
Interfoto Picture Library Ltd v StilettoVisual Programmes Ltd (1988)Here, the defendants hired photographictransparencies for a visual aid in a presentation,from a party with whom they had had no previousdealings. In the claimants’ delivery note, which thedefendants did not read, was a clause referring to aholding fee and VAT for each day when thetransparencies were not returned past a setdeadline, 19th March.When the defendantsreturned the transparencies on 2nd April they werepresented with a bill for £3,783.50 in respect of theholding charge for late return.The claimants suedwhen the defendants refused to pay. Dillon LJ in theCourt of Appeal held that ‘if one condition in a setof printed conditions is particularly onerous orunusual, the party seeking to enforce it must showthat that condition was fairly bought to theattention of the other party’.
The Contents of a Contract: Exclusion Clauses 103
9.1.3. Other limitations imposed bythe courts
Inconsistent oral representationsA party is generally bound by a contract which(s)he has signed. In some circumstances,however, the party subject to the clause may haveenquired about the existence of the clause orqueried the consequences of a clause that theyhave already read. Where oral misrepresentationshave then caused that party to enter the contractwith confidence the exclusion clause may beineffective because it is the misrepresentation thathas induced the other party to enter the contract.
So, as we have already seen, an oral undertakingmade before the contract is formed can overridean inconsistent express written term.
The same point will apply where a collateralpromise or undertaking is made on which theclaimant can rely. The effect of the collateralpromise may be to prevent the party inserting anexclusion clause into a contract from relying on itin a subsequent dispute.
The effect of exclusion clauses onthird parties to the contractThe doctrine of privity means that the terms of acontract are only binding on the parties to thecontract themselves. We have already seen that ingeneral a party trying to enforce third-party rightsunder a contract will fail for lack of privity. In thesame way, despite the existence of an exclusionclause in a contract, it may not offer protection toparties other than the parties to the contract.
Curtis v Chemical Cleaning and DyeingCo. Ltd (1951)The claimant took a wedding dress to be cleanedand was asked to sign a document that exemptedthe defendants from liability for any damage‘howsoever arising’. She sensibly questioned thenature of the document that she was being asked tosign. She was then informed that it only referred tothe fact that the defendants would not acceptliability for beads or sequins attached to the dress.When the dress was returned it had a chemical stainfor which Mrs Curtis tried to claim.The defendantsfailed in their attempt to rely on the exclusion clausebecause of the oral assurances made to the claimant.
J Evans & Son (Portsmouth) Ltd vAndrea Merzario Ltd (1976)In this case the carriage of the goods was changedto the use of containers.The promise made by thedefendants’ representative to continue to carry the
claimants’ machinery below deck was binding andwould override any later inconsistent term in thecontract.
Webster v Higgin (1948)The defendant had negotiated to purchase a carfrom the claimants’ garage under a hire-purchaseagreement. In a hire-purchase contract while thegoods are bought under one contract, the hire-purchase agreement itself is a separate contract.Here, the garage owners promised that the car theclaimant planned to buy was in good condition.Thehire-purchase agreement contained a clause that ‘nowarranty, condition, description or representation asto the state or quality of the vehicle is given orimplied’. In fact, the car was, as the court describedit, ‘nothing but a mass of second hand anddilapidated ironmongery’.When the buyer refusedto pay the claimant sued for return of the car andthe balance of instalments due.The action failed.There had been a breach of the collateral promisethat the car was in good condition.
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The fact that the doctrine of privity prevents athird party to a contract from relying onexclusions contained in it may mean that aclaimant still has a party to sue despite theexistence of the clause, where the third party isresponsible for the damage, and is financiallyworth bringing an action against.
There have of course been occasions where aparty has successfully claimed the protection ofan exclusion clause even though not a party to
the contract in which the clause was contained.The approach, which is not without its critics, isto argue an agency relationship, and thus to claimthat a contractual relationship is created also withthe third party.
Scruttons Ltd v Midland Silicones Ltd(1962)Carriers had a contract to ship a drum of chemicalsfor a company, the claimants in the case.The bill oflading contained a clause limiting the liability of thecarriers in the event of a breach to $500.Thedefendants were stevedores who were contractedby the carriers to unload goods.Their contract withthe carriers contained terms that they should havethe benefit of the limitation clause in the bill oflading.When the stevedores through theirnegligence did $583 worth of damage to the drumof chemicals they were sued and tried to rely onthe limitation clause in the contract between theclaimants and the carriers.Their defence failedbecause they were not parties to the bill of ladingso could not claim any rights under it.
Cosgrove v Horsefell (1945)A passenger on a bus was injured through thenegligence of the driver.The contract with the buscompany contained a valid exclusion clause whichthus protected them from liability.This did not,however, protect the bus driver from an action innegligence.
New Zealand Shipping Co. Ltd vA. M. Satterthwaite & Co. Ltd(The Eurymedon) (1975)Here there was a contract between a consignorand a carrier to ship drilling equipment to NewZealand.The bill of lading contained an exclusionclause stating that ‘it is hereby expressly agreed thatno servant or Agent of the carrier (including everyindependent contractor from time to timeemployed by the carrier) shall in any circumstanceswhatsoever be under any liability whatsoever to theshipper, consignee or owner of the goods or to anyholder of the bill of lading for any loss or damageor delay of whatsoever kind arising or resultingdirectly or indirectly from any neglect or default onhis part’ and also stating that ‘every right,exemption, limitation, condition and liberty hereincontained . . . shall extend to protect every suchservant or agent of the carrier’. In the event,stevedores hired by the carriers negligentlydamaged the drilling equipment and were sued bythe consignors.Their attempt to claim protectionunder the carriers’ exclusion clause succeeded.ThePrivy Council felt that the issue centred on whetherthe stevedores had given consideration under thecontract.The stevedores had accepted a unilateraloffer by the consignors that in return for theirpromise to carry out duties the consignors wouldin turn exempt them from any liability.Thestevedores had accepted this offer by unloading theship and could therefore rely on the exclusionclause.
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9.1.4. Construction of the contractas a wholeEven though an exclusion clause satisfies theabove tests and therefore appears to have beensuccessfully incorporated into a contract this doesnot mean that it will necessarily operatesuccessfully in all cases. The clause might still failon a construction of the contract as a whole for anumber of reasons.
The contra preferentem ruleThe contra preferentem rule is a device that isbasically hostile to ambiguities in a contract. Thebasic proposition is this. If a party wishes tosecure an exemption from liability for contractualbreaches by means of incorporation of anexclusion clause in the contract then the clausemust be specific as to the circumstances in whichthe exemption is claimed otherwise the clausewill fail.
The effect of the contra preferentem rule as appliedto exclusion clauses then is that, where there isany ambiguity in the contract, ambiguity will workagainst the party seeking to rely on the exclusionclause. Having inserted the clause in the contractthat party cannot rely upon it unless it is clear.
Activity Quick QuizConsider whether exclusion clauses notified inthe following ways will be successfullyincorporated into contracts, and say why:
a) A notice placed on the counter in a shop.
b) A notice contained in a signed contract.
c) A notice contained in a delivery notewhere the parties have regularly dealt onthe same terms.
d) A notice posted on a hotel bedroom.
e) A notice contained in a receipt.
f) A notice on the back of a cloakroom ticket.
g) A notice posted on the machine at theentrance to a car park.
Andrews Bros (Bournemouth) Ltd vSinger & Co. (1934)A contract for the purchase of ‘new Singer cars’contained a clause excluding ‘all conditions, warrantiesand liabilities implied by statute, common law orotherwise’. One car delivered under the contract wasstrictly speaking a used car because a prospectivepurchaser had used it.The Court of Appeal held thatthe supply of ‘new Singer cars’ was an express termof the contract. Since the exclusion clause applied to‘implied terms’ the contra preferentem rule wouldprevent it being used in relation to express terms.
Hollier v Rambler Motors (AMC) Ltd(1972)Hollier left his car with the garage, as he had doneon previous occasions.The normal conditions of thecontract were contained in a form that Hollier hadsigned on previous occasions but not on the one inquestion.This form contained a term that ‘Thecompany is not responsible for damage caused byfire to customers’ cars on the premises’.The car wasdamaged in a fire caused by the defendants’negligence.The Court of Appeal firstly held that theform was not incorporated into the contract merelyby the previous course of dealings in this case. It alsoconcluded that for the garage to rely on the clause itmust have stated in it without ambiguity that it wouldnot be liable in the event of its own negligence.Otherwise, the customer might rightly concludewhen making the contract that the company wouldbe liable except where the fire damage was causedby other than the defendants’ negligence.
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Traditionally, after Canada Steamship Lines Ltd v R(1952), courts only accepted a clause excludingliability for negligence if this was expressly statedin the agreement. Recently a less rigid approachhas been introduced with the real test being whatthe intention of the parties was at the time ofcontracting.
It is important also to remember that the contrapreferentem rule is not limited in its application toexclusion clauses. It can be used in construingother clauses in the contract where the term itselfis ambiguous.
Fundamental breachTraditionally, the courts were reluctant to allow aparty to escape liability for a serious breach by the
device of the exclusion clause. One way in whichthey could control this was by strict constructionof the clause and of the contract as a whole, as wehave just seen.
Another method that the courts devised and atone time employed to combat the effectiveness ofexclusion clauses was the doctrine of fundamentalbreach. By this doctrine a party who hadcommitted a serious breach by breaching a centralterm of the contract, a ‘fundamental breach’,would find their clause rendered ineffective by thecourt. The fundamental breach would be treatedas a breach of the whole contract, and thereforethe other party would be able to treat the contractas repudiated. The party inserting the exclusionclause would be unable to rely on it since, by thedoctrine, (s)he would be treated as being inbreach of every term.
HIH Casualty and General Insurance vChase Manhattan Bank (2003)The bank loaned money for the making of filmsagainst the security of the future receipts from thefilms.To minimise its risk the bank contracted withthe insurance company to underwrite the risk.Theagreement was negotiated by an intermediary partywho was better informed than either of the parties.When a loss occurred the bank successfully reliedon an exclusion clause covering its agents.
Vaswani v Italian Motor Cars Ltd(1996)In this case the principle was applied to a pricevariation clause in a contract for the supply ofFerrari cars.The price variation would apply only inlimited circumstances.When, on a properconstruction of the contract, the suppliers hadincreased the cost to the purchaser for a reasonnot falling within those limited circumstances, thesupplier was unable to enforce the price variation.
Karsales (Harrow) Ltd v Wallis (1956)In this case the purchaser arranged to buy a second-hand car on a hire-purchase agreement. In thisagreement was a clause stating that ‘No condition orwarranty that the vehicle is roadworthy, or as to itsage, condition or fitness for any purpose is given bythe owner or implied herein’. Though the purchaserhad previously examined the car and found itsatisfactory, when it was delivered the cylinder headhad been removed, valves in the engine had burntout, two pistons were damaged, the tyres weredamaged and the radio was missing.The purchaser,not surprisingly, rejected the car.When he was suedthe claimants tried to rely on the exclusion clause inthe hire-purchase agreement.The Court of Appealrejected the argument.There had been afundamental breach of the contract.There was sucha substantial difference between the contract asformed and the contract as performed that thebreach went to the root of the contract and theclaimant could not rely on the exclusion clause.
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This approach of the court did not gain universalpopularity with judges who found it to bedestructive to the general philosophy of freedomof contract. There was also uncertainty as to whatactually amounted to a fundamental breach. Inconsumer contracts judges might be moredisposed to accepting the doctrine than they werein commercial contracts where bargainingstrength was more equal. As a result, the courtsgradually moved to a position of deciding that thedoctrine was unsustainable in the form expressedabove and was merely a method of constructionrather than a rule of law negating what theparties had freely decided between themselves.
The enactment of the Unfair Contract Terms Act1977 did mean that consumers now hadprotection against exclusion clauses. The courtshave subsequently been prepared to take a morerelaxed view towards exclusion and limitationclauses in commercial contracts where the partiescontract on the basis of a more equal bargainingstrength. In this way a clause may be upheldwhere the parties have freely and genuinelyagreed it at the time the contract was formed.
Suisse Atlantique Société d’ArmementMaritime SA v NV RotterdamscheKolen Centrale (the Suisse Atlantiquecase) (1967)The owners of a ship sought to sue the party thathad chartered the vessel and were to pay them onthe basis of the number of journeys made.Theowners claimed, and it was accepted by the court,that breaches of the term concerning loading andunloading meant that the party chartering thevessel had made only eight voyages instead of the14 that they might have been expected tocomplete.The charter party argued that theirliability was limited to a fixed amount of $1,000 perday by virtue of a limitation clause in the contractrather than the actual loss.The ship ownerscountered this arguing that there was afundamental breach as a result of which thelimitation clause could not apply.The case wasdecided on the basis that the clause was not alimitation clause but a genuine liquidated damagesclause, and in any case it was felt that there was nofundamental breach. Nevertheless, the House ofLords expressed the view that the doctrine offundamental breach was a restriction on freedomof contract. Lord Wilberforce was a little more
guarded since he recognised that where a breach isso serious that it is almost the same as noperformance then it is hard to limit liability and stillhave a contract left.
Photo Productions Ltd v SecuricorTransport Ltd (1980)Securicor was under contract on its own standardterms to provide a night patrol service at PhotoProductions factory. A clause in Securicor’s standardterms stated that ‘Under no circumstances shall theCompany be responsible for any injurious act ordefault by any employee of the company unlesssuch act or default could have been foreseen andavoided by the exercise of due diligence on thepart of the Company as his employer’.The dutysecurity officer on the night in question started afire that got out of control and as a result burntdown a large part of the factory. It was notdisputed that he was suitable for the work, nor wasit considered that Securicor was negligent inemploying him.While the trial judge held withSecuricor, the Court of Appeal applied the doctrineof fundamental breach and found in PhotoProductions’ favour.The House of Lords, however,disagreed.They affirmed that parties dealing in freenegotiations were entitled to include in theircontracts any exclusions or limitations ormodifications to their obligations that they chose.Since the clause was clear and unambiguous there
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The approach has since been followed. It seemsthat in common law it is now immaterial howserious the breach is. If the clause seeking toexclude or limit liability occurs in a contract madeout of equal bargaining strength then the partyinserting the clause can rely on it provided it isclearly and unambiguously stated in the contract.
These two cases, often referred to as the‘Securicor cases’, seem to suggest that thedoctrine of fundamental breach can no longerapply. They also suggest that, subject now tostatutory controls, where there is equality ofbargaining strength and free negotiation theparties can include terms however onerousprovided that the other side accepts them. Theseterms will then bind the party agreeing to themeven if remedies are lost as a result.
On that level, it is probably the case that thestatutory provisions in the Unfair Contract TermsAct may be more effective in controlling exclusionclauses than the common law is.
was nothing to prevent its use and it thereforeprotected Securicor from their employee’s actions.It was also fairly critical of the continued use of thedoctrine of fundamental breach.
Ailsa Craig Fishing Co. Ltd v MalvernFishing Co. Ltd (1983)Securicor were under contract to the AberdeenFishing Vessels Owners Association Ltd, who actedon behalf of various fishing boat owners, to providea security service in the harbour where boatsmoored. Following negligence by the security guard,one vessel fouled another vessel; both sank andbecame trapped under the quay.The contract wason Securicor’s standard terms and in the ensuingaction they sought to rely on a clause in thecontract limiting liability ‘for any loss or damage ofwhatever nature arising out of or connected withthe provision of or failure in provision of, theservices covered by this contract . . . to a sum . . .not exceeding £1,000 in respect of one claim . . .and . . . not exceeding a maximum £10,000 for theconsequences of any incident involving fire, theft orany other cause of liability’.The sums are clearlyvery small when compared to the likely cost of thedamage done to two ships.The court, however,rejected the argument that since Securicor hadclearly failed to carry out the terms of theircontract at all they should be unable to rely on thelimitation clause.The House of Lords stated thatlimitation clauses are not to be regarded with thesame hostility as exclusion clauses because theyrelate to the risks to which the defending party is
exposed, the remuneration he may receive and theopportunity of the other party to insure againstloss. As a result, it held that the clause wassufficiently clear and unambiguous to protectSecuricor in the case. (The contract was itselfmade before the enactment of the Unfair ContractTerms Act otherwise there may well have been adifferent result.)
George Mitchell Ltd v Finney LockSeeds Ltd (1983)Seed merchants agreed to supply farmers with 30lbof Dutch winter cabbage seed for £192. Alimitation clause in the contract limited liability inthe event of breach to the cost of the seed only orto replacement seed.The farmers planned to sow63 acres with the seed and calculated that theirreturn would be £61,000.The seed was the wrongsort and was not merchantable and there was nocrop.The farmers sued for £63,000 incompensation for their lost production. Using theterminology of the Unfair Contract Terms Act theHouse of Lords held that the clause wasunreasonable and could not be relied on.
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But in any case there are situations where thecourts are reluctant to intervene because theparties are of equal bargaining strength and theclause is a common one. An obvious example isin standard form contracts where the offendingclause is based on long-standing trade custom.
Overland Shoes Ltd v Schenkers Ltd(1998)Overland Shoes were importing shoes from China,and Schenkers, who were worldwide freightcarriers, were contracted to transport the shoes.The contract was based on the standard forms ofthe British International Freight Association andincluded a ‘no set-off ’ clause.When Schenkerssought their freight charges Overland Shoes triedto set off against these sums that Schenkers owedfor VAT. Shenkers refused, pointing to the ‘no set-off ’ clause. Overland argued that this was in effectan exclusion clause and was unreasonable underthe test in the Unfair Contract Terms Act.The courtheld that the clause actually satisfied the test ofreasonableness since it was based on long-standingestablished custom.
Activity Quick Quiz
Self-assessment questions1. For what reasons did judges develop rules
to control the use of contractual termslimiting or excluding liability?
2. In what ways does a limitation clause differfrom an exclusion clause?
3. In what ways can the rule in L’Estrange vGraucob be described as unfair?
4. What complications are created when aperson uses a vending machine or a ticketmachine, and how do the courts deal withthese problems?
5. Why are the courts reluctant to accept thattickets or receipts can contain contractualterms that then bind the parties?
6. Why were the courts prepared to acceptexclusions or limitations in the case of suchextreme breaches as those in the ‘Securicorcases’?
7. To what extent did the common lawcontrol of exclusion clauses make statutoryintervention inevitable?
8. How does the contra preferentem rule helpto control the use of exclusion clauses?
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9.2. Statutory and ECcontrol of exclusion clauses9.2.1. IntroductionProvisions created by statute or in regulations areclearly the most effective in controlling theoperation of both exclusion and limitation clausesin contracts. This is not to say that the commonlaw has no relevance. Quite simply, as we haveseen, if an exclusion clause has not beensuccessfully incorporated into a contractaccording to the normal rules then it will beinoperable anyway.
There are two principal provisions provided byParliament: the Unfair Contract Terms Act 1977and the Unfair Terms in Consumer ContractRegulations 1994, and now the 1999 Regulations,which were passed in order to comply with ECDirective 93/13.
The Unfair Contract Terms Act is an effectivebrake on the operation of exclusion clauses andas such a serious inroad into the principle offreedom of contract when compared, for instance,with the ‘Securicor cases’. The Act applies toexclusions for tort damage as well as contractualbreaches.
The 1994 Regulations, and now the 1999Regulations, are based on the Directive which isobviously aimed at harmonising rules on consumer protection throughout theEuropean Union in order to make the singlemarket more effective. The Regulations arein some senses narrower than the Act. This isbecause existing UK law already provided manyof the features of the Directive. Nevertheless, insome ways the Regulations are broader than theAct because the directive was intended to applyin a much broader range of circumstances thanthe Act, and often impose stricter duties.
● An exclusion clause is a term of a contractthat aims to avoid liability for breaches of thecontract, a limitation clause is one which hasthe effect of reducing damages if there is abreach of contract
● Again a party is bound by terms where (s)hehas signed an agreement – L’Estrange vGraucob
● Judges gradually developed controls on theuse of exclusion clauses because of theirpotential unfairness to consumers
● An exclusion clause will not be recognisedunless it is incorporated into the contract:w The party subject to it must be aware of it
at the time of contracting – Olley vMarlborough Court Hotel
w Though it is possible for past dealings to betaken into account if relevant – McCutcheonv MacBrayne
w The party wishing to rely on the clausemust bring it to the other party’s attentioneffectively – Thornton v Shoe Lane Parking
● Misrepresentations about the clause maymean that the party inserting it in the contractcannot rely on it – Curtis v Chemical CleaningCo
● In general, third parties to the contract cannotrely on the clause – Scruttons v MidlandSilicones – but see Satterthwaite v New ZealandShipping
● If the clause is ambiguous it cannot be reliedupon – Hollier v Rambler Motors
● In recent times the courts have beenprepared to take a different view where theparties contract on equal terms – PhotoProductions v Securicor Transport
● Providing the clause is clear and unambiguous– Ailsa Craig Fishing v Malvern Fishing
Key
Fact
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The consequence is that when construing agiven exclusion clause it may be appropriate tohave regard to the Act, the Regulations and thecommon law.
9.2.2.The Unfair Contract Terms Act1977When passed, the Act was certainly one of themost significant areas of consumer protection.However, it should be remembered that the Actdoes not cover every exclusion or indeed everyunfair term.
What the Act does try to achieve is to protectthe consumer by removing some of theinequalities in bargaining strength. It does this bymaking certain exclusion clauses automaticallyinvalid, by drawing a distinction betweenconsumer dealings and inter-business dealings,and by introducing a test of reasonableness toapply in inter-business dealings and in certainother circumstances. As a result of this some ofthe problems caused by unequal bargainingstrength are mitigated.
Exclusions and limitations renderedvoid by the ActCertain types of exclusion clauses are invalidatedby the Act and will therefore be unenforceableeven where they have been successfullyincorporated in the contract.
● By s2(1) UCTA a person cannot excludeliability for death or personal injury caused byhis or her negligence.
● By s5(1) in any consumer contract clausesseeking to exclude liability by reference to theterms of a guarantee will fail in respect ofdefects which have been caused by negligencein the manufacture or distribution of the goods.
● By s6(1) there can be no valid exclusion ofbreaches of the implied condition as to title ins12 of the Sale of Goods Act 1979.
● This same provision applies in respect ofSchedule 4 to the Consumer Credit Act 1974which concerns the same type of condition.
● S6(2) invalidates any exclusion clause insertedin a consumer contract to cover breaches of theimplied conditions of description (s13),satisfactory quality (s14(2)), fitness for thepurpose (s14(3)), and sale by sample (s15)) inthe Sale of Goods Act 1979.
● Again, the provision will invalidate breaches ofthe same conditions in Schedule 4 to theConsumer Credit Act 1974.
● By s7(2) there can be no valid exclusion in anyconsumer contract for breaches of the impliedterms of reasonable care and skill (s13),reasonable time (s14), and reasonable cost (s15)in the Supply of Goods and Services Act 1982.
● Under s7(1) similar principles to those in s6apply in respect of goods which are transferredunder the Supply of Goods and Services Act1982.
Definitions of consumer contract andinter-business dealingThe Act inevitably is designed to operateprincipally for the protection of consumers. As aresult the term ‘consumer’has to be defined in theAct. The definition is found in s12(1) whichidentifies that a party acts in a contract as aconsumer when:
(a) he neither makes the contract in the course of abusiness nor holds himself out as doing so; and
(b) the other party does make the contract in the courseof a business; and
(c) . . . the goods passing under or in pursuance of thecontract are of a type ordinarily supplied for privateuse or consumption.
If the party inserting the exclusion clause in thecontract wants to argue that the party subject tothe clause is not a consumer then, by s12(3), (s)hemust prove it.
Whether or not a contract involves a consumerdealing is clearly a matter of construction for the
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courts. There are many situations where a partymight buy goods that are ordinarily for businessuse, or a businessman buys goods but not forbusiness use, so that difficulties can arise. Besideswhich, a consumer can fall outside the definitionin s12 and thus lose the protection it entails if(s)he holds himself/herself out as acting in thecourse of a business in order to acquire a tradediscount.
‘Business’, on the other hand, is defined in s14 asincluding ‘a profession and the activities of anygovernment department or local or publicauthority’.
Exclusions depending for their validityon a test of reasonablenessThe Act identifies a number of contractualsituations in which an exclusion clause will bevalid provided that it satisfies a test ofreasonableness. If it fails to satisfy these criteriathen it will be invalid.
● By s2(2) a clause seeking to exclude liability forloss, other than death or personal injury, caused
by the negligence of the party inserting theclause can only stand if it satisfies the test ofreasonableness in the Act.
● By s3 in those contracts where the party dealsas a consumer, or deals on the other party’sstandard business forms the party inserting anexclusion clause cannot rely on a clauseexcluding liability for his/her own breach, or fora substantially different performance, or for noperformance at all except where to do so wouldsatisfy the test of reasonableness in the Act.
● By s6(3) a party can only exclude liability forbreaches of the implied conditions in ss13,14(2), 14(3) and 15 of the Sale of Goods Act ininter-business dealings where the test ofreasonableness is satisfied.
● This same principle operates in the case ofprivate sellers (those not selling in the courseof a business) in respect of exclusions forbreaches of ss13 and 15 of the Sale of GoodsAct.
● By s7(3) exactly the same requirement ofreasonableness operates in respect ofexclusions for breaches of the impliedconditions in ss3, 4 and 5 of the Supply ofGoods and Services Act.
● Under s8 a clause seeking to exclude liabilityfor misrepresentations will be subject to thesame requirement of reasonableness.
● By s4, in consumer contracts clauses requiringa party to indemnify the other against loss willonly be valid where the clause satisfies thereasonableness test. Such a clause mightrequire the consumer to indemnify the partyinserting the indemnity clause for injury loss ordamage caused to third parties.
Activity Quick QuizConsider which of the following may beconsumer dealings:
1. A solicitor buys 200 square yards of carpetto carpet her offices.
2. A carpet salesman sells at cost price to hisbrother enough carpet to carpet the wholehouse.
3. A private individual who owns seven largechest freezers buys enough lambs and pigscut into joints to fill the freezers.
4. A young man buys an ambulance second-hand to use as a normal vehicle.
Thompson v T. Lohan (Plant Hire) Ltd& J.W. Hurdiss Ltd (1987)A plant hire company hired out a JCB and driver.The contract required that the driver supplied
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The test of reasonablenessGuidelines on what can be classed as reasonableare contained in both s11 of and Schedule 2 tothe Act. These are not absolutely definitive so thatthe test is one really for judicial interpretation,although there is not a great amount of a case lawon the area.
S11(5) identifies that it is for the party whoinserts the clause in the contract and thus seeksto rely it to show that it is reasonable in all thecircumstances.
There are in effect three tests of reasonableness.
a) Under s11(1), which concerns exclusion clausesin general, the test is whether the insertion ofthe term in the contract is reasonable in the
light of what was known to the parties at thetime when they contracted.
b) S11(2) concerns those exclusion clausesreferred to in ss6(3) and 7(3), those involvingbreaches of the implied conditions in the Saleof Goods Act and Supply of Goods andServices Act in inter-business dealings. In thecase of these the court should consider thecriteria that are set out in Schedule 2:
● Whether the bargaining strength of the twoparties was comparable – for instance if thebuyer could easily be supplied fromanother source then it would be.
● Whether or not the buyer received anyinducement or advantage from the supplierthat might make insertion of the exclusionclause reasonable, particularly if such anadvantage could not be gained from anyother source of supply.
● Whether the goods were manufactured,processed or adapted to the buyer’sspecifications.
● Whether exclusions or limitations ofliability were customary practice.
should be competent, but the party hiring themwould be liable for all claims arising from the use ofthe equipment or the work of the driver. On top ofthis the contract required them to indemnify theplant hire company for any claims against them.When the claimant was killed as a result of thedriver’s negligence the defendants claimed that theclause was a void exclusion clause under s2(1) ofthe Act.The court held that it was in fact anindemnity clause covered by s4 and thus subject toa test of reasonableness in determining its validity.
Warren v Trueprint Ltd (1986)A contract contained a limitation clause where thedefendants were responsible only for a replacementfilm and would only undertake further liability if asupplementary charge were paid.They wereobliged to but were unable to show that this clausewas reasonable when they lost a couple’s SilverWedding snaps.
Smith v Eric S Bush (1990)Here, surveyors negligently carried out a buildingsociety valuation, and a defect was missed whichlater resulted in loss to the purchaser.Thepurchaser was obliged to pay for the valuationreport.This and the mortgage applicationcontained clauses excluding liability for theaccuracy of the valuation report.The attempt torely on the exclusion clause failed since the courtwere unwilling to accept that its inclusion wasreasonable.
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c) S11(4) specifically concerns limitation clauses.Here the party inserting the clause must showthat a capability to meet liability if it arose.Insurance will also be considered.
Contracts falling outside the scope ofthe ActA number of contracts of specific types will not becovered by the provisions of the Act. These are tobe found in Schedule 1:
● contracts of insurance● contracts for the creation, transfer or
termination of interests in land● contracts that involve patents, copyright and
other intellectual property● contracts for the creation or dissolution of
companies● contracts for marine salvage, charter parties, or
carriage of goods by sea or air (except in thecase of incidents falling within the scope ofs2(1).
9.2.3.The Unfair Terms in ConsumerContracts Regulations 1999
The scope of the RegulationsThe Regulations are straightaway significantlydifferent in operation to the Act because theycover contractual terms in general not justexclusion clauses. Nevertheless, they will as theirname suggests operate only in relation toconsumer contracts.
Consumer dealing is defined in different termsthan in the Act.
● A seller or supplier is defined as ‘any personwho sells or supplies goods or services andwho in making a contract is acting forpurposes related to his business’. So this iswider than in the Act.
● A consumer is defined as ‘any natural personwho is acting for purposes which are outsidehis trade, business or profession’. So this isnarrower.
Watford Electronics Ltd v SandersonCFL (2001)The defendants provided and integrated softwareinto Watford’s existing computer system. WhenWatford terminated the agreement because thesystem did not work satisfactorily, the cost stoodat £105,000. Watford claimed damages for breachof contract for £5.5 million, or formisrepresentation and negligence of about £1.1million. In the defendant’s standard terms therewas a clause excluding liability for any claims forindirect or consequential losses whether arisingfrom negligence or otherwise, and limiting anyliability to the price of the goods as supplied.UCTA was held to apply so the question waswhether or not the clause satisfied the test ofreasonableness.The Court of Appeal held that itdid since the parties were of equal bargainingpower and the limitation clause was subject tonegotiation when the contract was made.
George Mitchell Ltd v Finney LockSeeds Ltd (1983)Here, the House of Lords considered that theclause limiting damages to the price of the seedswas unreasonable since the suppliers had oftensettled out of court in the past and could haveinsured against such loss without altering theirprofits substantially.
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According to Regulation 39(1), the Regulationswill apply only where the parties have notindividually negotiated the term in question. Sothe Regulations operate particularly in relation tostandard form contracts. In order to avoid theoperation of the Regulations, therefore, the selleror supplier will need to show that the contracthas been negotiated and is not standard form.
As with the Act the Regulations will notoperate in the case of certain types of contract.These are identified in Schedule 1 and includecontracts relating to employment, succession,family law rights and partnerships andcompanies. The Regulations will not cover eitherinsurance contracts where the risk and theinsured are clearly defined. Other than this, thescope of the Regulations seems to be muchbroader than the Act, though their exact scope isuncertain.
Terms falling within the scope of theregulationsThe Regulations operate in respect of ‘unfairterms’. According to Regulation 4(1), an unfairterm is ‘any term which contrary to good faithcauses a significant imbalance in the parties’rights and obligations under the contract to thedetriment of the consumer’. As a result, theRegulations introduce a general concept ofunfairness into the making of contracts, which isthen subject to controls.
‘Good faith’ is considered in Schedule 2. Thisidentifies a number of factors that must be lookedat in order to establish good faith:
● the relative bargaining strength of the partiesto the contract
● whether the seller or supplier gave theconsumer any inducement in order that (s)hewould agree to the term of the contract inquestion
● whether the goods sold or services suppliedunder the contract were to the special order ofthe consumer
● the extent to which the seller or supplier hasdealt fairly and equitably with the consumer.
As well as these general guidelines, theRegulations in Schedule 3 list a great number ofterms that may generally be regarded as unfair,though the list is not intended to be exhaustive.
a) Terms which limit or exclude liability for thedeath or personal injury of the consumer arisingfrom an act or omission of the seller or supplier.
b) Terms which inappropriately limit or excludeliability for a partial performance, a non-performance, or an inadequate performance.
c) Terms that include provisions binding theconsumer but which are only at the discretionof the seller or supplier.
d) Terms allowing the seller or supplier to retainsums already paid over by the consumer whocancels the contract where there is noreciprocal term in relation to a cancellation bythe seller or supplier.
e) Terms requiring a consumer who is in breachof the contract to pay excessive sums incompensation to the seller or supplier.
f) Terms allowing the seller or supplier todissolve the contract where the same facility isnot made available to the consumer by thecontract.
g) Terms that enable a seller or supplier todissolve a contract that has only indeterminateduration without giving reasonable notice ofthe dissolution, except where there are seriousgrounds for doing so.
h) Terms which automatically allow a seller orsupplier to extend a contract of fixed durationwhere the consumer does not indicateotherwise, when the deadline set for theconsumer to indicate the contrary desire not toextend the contract is set unreasonably early.
i) Terms which irrevocably bind the consumer toterms which (s)he had no real opportunity tobecome acquainted with prior to the formationof the contract.
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j) Terms that allow the seller or supplier tounilaterally alter terms without any validreason specified in the contract.
k) Terms allowing the seller or supplier tounilaterally alter without any valid reason thecharacter of the goods or services supplied.
l) Terms enabling the price of goods to bedetermined at the time of delivery or whichallow a seller or supplier to alter prices withoutthe consumer having the opportunity to cancelthe contract.
m)Terms giving the seller or supplier the right tointerpret terms of the contract or otherwise todetermine whether the goods or servicessupplied correspond to the requirements of thecontract.
n) Terms which limit obligations or commitmentsmade by the agents of the sellers or suppliers.
o) Terms requiring the consumer to comply withall obligations under the contract but notimposing a similar obligation on the sellers orsuppliers.
p) Terms which grant the sellers or suppliers theright to transfer obligations under the contractwhich might then have the effect of reducingthe consumer’s rights under any guarantees.
q) Terms which would have the effect ofhindering the right of the consumer to takelegal action or which would restrict theavailability of evidence.
A further requirement under Regulation 6 is thatthe terms of a contract should be expressed inplain and intelligible language. If any term is thenfound to be unfair under the Regulations, it willnot bind the consumer.
The Regulations still have certain limitations.They do not apply to any term that has beenindividually negotiated. This quite sensiblypreserves the principle of freedom of contract, butit also has the effect in some cases of presumingan equality of bargaining strength that does notin fact exist. In introducing the Regulations, the
Government construed the provisions indicatedin the Directive quite narrowly. As a result of this,while the Trading Standards department has thepower to challenge the standard form contracts ofcompanies and large corporations, the samefacility has not been extended to the consumergroups who may have wished to police contracts.In consequence, the Directive may not be givenfull effect.
The Law Commission has proposed reformsfor the area of statutory control of terms in LawCommission Report No 292 on unfair contractterms. The suggestion is to combine the 1977 Actand the 1999 Regulations and to simplify thelanguage involved.
ActivitySelf-assessment questions1. To what extent will the Unfair Contract Terms
Act prevent the exclusion or limitation of liabilityfor negligence?
2. In what ways are a consumer dealing and aninter-business dealing different?
3. For what reasons does the Unfair ContractTerms Act make certain exclusions automaticallyinvalid if inserted in a contract?
4. Under the Unfair Contract Terms Act, whatexactly does ‘reasonable’ mean?
5. Is there any difference between who isprotected by the Unfair Contract Terms Act andthe Unfair Terms in Consumer ContractsRegulations?
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● Common-law controls of exclusion clauseshave also been supplemented by statutorycontrols through the Unfair Contract TermsAct 1977 and through the Unfair Terms inConsumer Contracts Regulations 1994, andnow 1999 (the latter to comply with EuropeanDirective 93/13)
● The Act draws a distinction betweenconsumer dealings and inter-business dealings
● Clauses in certain types of contract are madevoid by the Act, e.g. exclusion of liability fordeath or injury caused by negligence – s2(1);exclusions of liability for breaches of theimplied terms in the Sale of Goods Act andSupply of Goods and Services Act – ss 6(1),6(2) and 7(2)
● Clauses in certain other circumstances dependfor their validity on a test of reasonableness,
e.g. damage caused by negligence – s2(2);standard term contracts – s3; breaches of Saleof Goods Act and Supply of Goods andServices Act implied terms – ss 6(3) and 7(3)
● Under s11, what is reasonable depends on theknowledge of the parties at the time ofcontracting and a number of factors can betaken into account e.g. whether the goodswere freely available elsewhere, whether thegoods were made to the buyer’s specificationetc.
● The Regulations are much wider and refer tounfair terms generally, not just exclusionclauses, but apply in consumer contracts only
● In general they are aimed at remedyinginequality in bargaining strength and removeunequal conditions
Key
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Dilemma Board
Anton pays the attendant and parks in the Packemin Car Park. Anton uses the car park every day. As Antonis walking out of the car park an insecurely mounted sign at the entrance falls on him, injuring him.The signreads ‘The proprietors accept no liability for injury to patrons, however caused’.When he returns fromhospital Anton finds that his car has been broken into and his radio stolen.The attendant points Anton tothe back of his ticket where it is printed ‘The proprietors accept no responsibility for property left in cars’.
A.Packemin cannot rely on theexclusion in the sign in respect ofAnton’s injury because it has notbeen incorporated into thecontract.
C.Packemin will be able to rely on theexclusion clause on the back of theticket in any common law action byAnton.
B.Anton will not be able to suePackemin for his injury because ofthe exclusion clause on the sign atthe entrance.
D.The Unfair Contract Terms Act1977 has no relevance in Anton’sclaim against Packemin for the theftfrom his car.
In the dilemma board below consider the accuracy of each of the four statements A, B, Cand D, as they apply to the facts in the central scenario.You only need to give the basicprinciples. The answer is in the appendix at the end of the book.
Vitiating Factors:Void and VoidableContracts
Chapter 10
10.1. Introduction We have looked so far at the requirements madeon parties when entering into contracts and alsoat the obligations that parties may make forthemselves when they have in fact contracted. Ifthe parties have not complied with all of thenecessary requirements that we looked at inChapter 1 then there will not be a contract inexistence anyway.
Nevertheless, the mere fact that all of the rulesof formation have been complied with does notmake a contract perfect. For instance, where aparty has contracted on the basis of falseinformation this is a denial of freedom ofcontract. That party may clearly have beenunprepared to enter the contract if only (s)he hadknown the true facts.
Thus, even though the various requirements offormation might have been fully met, a party maystill have legal rights and remedies because ofother defects that are later discovered that are todo with other ‘imperfections’at the time thecontract was formed. Indeed contracts affected insuch a way are often referred to as ‘imperfectcontracts’.
The defects in question are generally known asvitiating factors. A vitiating factor is one that mayoperate to invalidate an otherwise validly formed
contract, that is one that conforms to all the rulesof formation already identified.
To vitiate basically means to impair the qualityof, to corrupt or to debase. In contractual termsthis means that factors present at the time of theformation of the contract, possibly unknown toone or either party, mean that the contract lacksthe essential characteristic of voluntariness, isbased on misinformation or is of a type frownedon by the law.
As a result, the role of the law is to provide aremedy to the party who may not have wished toenter the contract given full knowledge of thevitiating factor at the time of formation.
There can be two effects if a contract isvitiated: it may be void or it may be voidable.Whether the contract is void or voidable in agiven case depends on the type of vitiating factorthat is complained of.
10.2. Void contractsIn the case of certain vitiating factors, the effect ofdemonstrating the presence of the vitiating factorto the court’s satisfaction is to render the contractvoid. It is as though it has never been.
Stating that a contract is void is in many waysthe same as stating that the contract does notexist.
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This is because identifying a contract as void isidentifying it as having no validity and thereforeno enforceability in law.
10.3. Voidable contractsWhere a contract is voidable there are differentpossibilities. The vitiating factor is identified andacknowledged but this does not necessarily meanthat the contract is at an end.
A party who has entered a contract that isvoidable for a vitiating factor can continue withthe contract if that is to his/her benefit.
On the other hand that party can avoid theirresponsibilities under the contract and in effectset the contract aside.
10.4. The classes of vitiatingfactorsThere are essentially four classes of vitiatingfactors which themselves are subject to sub-divisions:
● Misrepresentation – where a contract has beenformed but as the result of false informationabout its substance the innocent contractingparty who is the victim of themisrepresentation can avoid the contract
● Mistake – where the contract has been formedon the basis of mistakes about contractingterms made by either party or both parties – ifthe mistake is operative then the contract isvoid
● Duress and undue influence – duress being acommon law area where the contract hasresulted from actual or threatened violence andthe contract is voidable – this is nowsupplemented by economic duress which isimproper coercion in a commercial context –and undue influence which is an equitabledoctrine concerning contracts that have been
made following improper coercion and theinnocent party can avoid the contract
● Illegality – of which there are many types wherethe type of contract will not be accepted at all,sometimes by the courts and sometimes bystatute, as being legitimate and enforceable –usually for reasons of public policy.
ActivitySelf-assessment questions1. What does ‘vitiating factor’ mean?
2. What are the basic consequences of acontract being declared void?
3. What are the basic consequences of acontract being declared voidable?
4. Will a contract made on the basis of amisrepresentation generally be void orvoidable?
5. Will a contract made on the basis of duressgenerally be void or voidable?
6. Will a contract that is declared illegal bevoid or voidable?
Vitiating Factors:Misrepresentation
Chapter 11
11.1. General We have already considered, in Chapter 3, thatstatements made before or at the time ofcontracting are known as representations. Theserepresentations can, if they are incorporated intothe contract, be terms of the contract and as suchmay be actionable if they are breached.
Representations that are not incorporated intothe contract will have no contractual significanceif they are truly stated. They will have acted toinduce the other party into the contract but that iswhere they end. Alternatively, they may be ‘puffs’having no contractual significance.
A falsely made representation, however, is amisrepresentation and it can have contractualsignificance even though it does not form part ofthe contract. In order to be actionable, therefore,the statement must not only be false but have actedto induce the other party to enter the contract.
Misrepresentation may refer to the falsestatement itself or it may be the action of makingthe false statement. The statement may be false ormerely incorrect, for it is now possible to claim foran innocent misrepresentation.
A misrepresentation can also arise from theconduct of a party.
The consequences of a contract having beenformed on the basis of a misrepresentationare for the contract to be voidable at the requestof the party who is the victim of themisrepresentation. It is not void because thisdenies that party the right to continue withthe contract if that is in their interest.
Traditionally, misrepresentation was notactionable at common law. Some relief wasavailable in equity, subject to certainqualifications, and later a remedy was availablewhere fraud could be proved. In general, though,a party had little possibility of claiming against amisrepresentation until the passing of theMisrepresentation Act 1967. For this reason, itwas often critical in the past for a party to provethat a statement made to them before thecontract was a term.
It may still be advantageous to a party toidentify that a representation has beenincorporated as a term, though this is obviouslymore difficult where the contract is written, sothat misrepresentation should still be viewed in
Spice Girls Ltd v Aprilia World ServiceBV (2000)A famous girl group was offered a contract with ascooter manufacturer to promote its products.
Before the contract was signed the group filmed acommercial.They all knew that one member of thegroup was about to leave. In a later disputebetween the manufacturers and the group thecourt held that by attending the group representedthat none of them intended to leave the group andnone of them was aware that one memberintended to.Their conduct in attending was amisrepresentation.
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the general context of pre-contractual statementsand representations.
A final point about misrepresentation is that italso shares some features with common mistake.As a consequence, it is not impossible to see bothpleaded in a case.
11.2. When amisrepresentation occurs
DefinitionA misrepresentation occurs, as we have alreadysaid, when a representation made at or before thetime of the contract is also falsely stated. Amisrepresentation can therefore be defined as astatement of material fact, made by one party to acontract to the other party to the contract, duringthe negotiations leading up to the formation ofthe contract, which was intended to operate anddid operate as an inducement to the other partyto enter the contract, but which was not intendedto be a binding obligation under the contract, andwhich was untrue or incorrectly stated.
This is a very precise definition and if notconformed to it will not give rise to amisrepresentation. The components of thisdefinition then should be considered individually.
a) The statement complained of isrequired to be one of material fact● It cannot therefore have been a mere opinion,
unless of course the opinion was not actuallyheld at the time of the making of thestatement.
● Neither can it be a statement expressing futureintention which would be speculation ratherthan fact. Though it could be if the statementwas falsely representing a state of mind whichdid not exist.
● It could not either be a mere ‘puff’whichattaches no weight and is not intended to berelied upon at all.
b) The statement that is claimed to bea misrepresentation must have beenmade by one party to the contract tothe other partyAs a result, it will not be a misrepresentationwhere the false statement that it is arguedinduced the other party to contract was made bya third party, unless that third party is the agentof the other party.
Bisset v Wilkinson (1927)A representation as to the number of sheep landcould hold was not based on any expertknowledge so could neither be relied upon nor beactionable as a misrepresentation.
Edgington v Fitzmaurice (1885)The directors of a company borrowed moneyrepresenting that they would use the loan for theimprovement of the company’s buildings. In factthey had intended from the start to use the loan to pay off serious, existing debts.They hadmisrepresented what their actual intentions were.
Carlill v The Carbolic Smoke Ball Co.Ltd (1893)The company’s argument, that its promise to pay£100 to whoever contracted flu was only a puff,failed.The maxim simplex commendatio non obligatcould not apply where it had supported thepromise by lodging £1,000 in a bank to coverpossible claims.
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c) The statement complained of musthave been made before or at the timeof the contractIf the statement therefore was made after theagreement was reached then it cannot beactionable as a misrepresentation because ithad no effect on the formation of the contract.
d) The statement has to be aninducement to enter the contract● Therefore it must be materially important to
the making of the contract.
● Though it will not matter that therepresentation would not generally be aninducement as long as it induced the claimant.
● It cannot be an inducement where the otherparty is unaware of the misrepresentation.
● It will not be a misrepresentation where theparty to whom it is made already knows thestatement to be false.
● It will not be a misrepresentation where theparty to whom it was made never actually reliedupon the statement in entering the contract.
Peyman v Lanjani (1985)The defendant took the lease of premises underan agreement requiring the landlord’s permission.The defendant did not attend the meeting atwhich the agreement was struck but sent an agentwho he thought would create a better impressionwith the landlord. He later decided to sell thelease on to the claimant and again this wouldrequire the landlord’s permission. Once more hesent his agent.The claimant discovered thedeception after he had paid over £10,000 underthe agreement with the defendant. He thensuccessfully applied to rescind the contract.Using the agent was a misrepresentation of thelegitimacy of the lease which had never beenagreed between the defendant and the landlord.
Roscorla v Thomas (1842)After a deal had been struck for the sale andpurchase of a horse the seller represented that itwas ‘sound and free from vice’. In fact, the horsewas unruly but the purchaser could not claim sincethe promise was made after the agreement.
JEB Fasteners Ltd v Marks Bloom &Co. Ltd (1983)The claimant engaged in a take-over of anothercompany in order to obtain the services of twodirectors of the other company. In investigating thecompany it relied on accounts which had beennegligently prepared.There could be no claim ofmisrepresentation since the purpose of taking overthe company was to secure the services of thedirectors and the accounts were no inducement.They were not material to the real purpose.
Museprime Properties Ltd v AdhillProperties Ltd (1990)Three properties were sold by auction.Therewas a misrepresentation as to the existence of anoutstanding rent review which could result inincreased rents and therefore increased revenue.Thedefendants unsuccessfully challenged the claimants’claim for rescission arguing that the statement couldrealistically induce nobody to enter the contract.
Attwood v Small (1838)A mine was purchased and certain informationgiven as to its remaining capacity.This was in factfalse.The claimant could not argue a
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e) The statement was not intended toform part of the contractIf it were intended to be contractually bindingthen it would be a warranty rather than amisrepresentation.
f) The representation was falsely madeClearly if the representation was true it wouldhave no further contractual significance once thecontract was formed.
11.3. The different types ofmisrepresentation
11.3.1.The character of amisrepresentationA misrepresentation can obviously arise in anumber of different ways. It could be a merelyinaccurate statement, made, for instance, in allinnocence, the inaccuracy being unknown tothe maker of the statement. This could happenwhere the maker of the statement is relyingon information supplied in manufacturersspecifications for example, or oral statementsmade about goods by a previous owner. Amisrepresentation can also be a quite deliberatelie, intended to deceive and stated in fullknowledge that it is untrue. In between thesepoints a misrepresentation can be carelesslymade by assuming knowledge and failing tocheck on the actual details.
As a result, misrepresentations can be classifiedaccording to type. Since the passing of theMisrepresentation Act 1967 the significance is lessmarked than it was, but it can still be important indetermining what remedy is available to a partywho is the victim of the misrepresentation.Traditionally, the character of the misrepresentationwas vital since only a fraudulently mademisrepresentation was actionable, and in the tort ofdeceit rather than in the law of contract.
Originally, everything that was not a fraud wasclassed as an innocent misrepresentation and theonly remedy was in equity for rescission of thecontract. Now it is possible to identify fraudulent,negligent and innocent misrepresentations, andthere are remedies available in common law andunder statute.
11.3.2. Fraudulent misrepresentationAt common law, traditionally, the only actionavailable for a misrepresentation was where fraud
misrepresentation, however, since in buying themine he had actually relied on his own mineralsurvey which was also inaccurate.
Couchman v Hill (1947)Here, the statement that the heifer was ‘unserved’could not be a misrepresentation because of thesignificance attached to it. It was a termincorporated into the contract.
ActivitySelf-assessment questions1. What is a misrepresentation?
2. How can a misrepresentation bedistinguished from an opinion?
3. Why does it matter whether themisrepresentation actually induces theother party to enter into the contract ornot?
4. Why is it important to think ofmisrepresentation in the context of all pre-contractual statements?
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could also be proved. This action itself is fairlyrecent coming only at the end of the last century.This demonstrates clearly how vital it was to manylitigants in the past to show that a statement onwhich they had relied had been incorporated intothe contract as a term, otherwise they might beleft without any remedy at all.
So those are the three possibilities if an action indeceit is to be successful. ‘Knowingly’ isstraightforward: the representor knew theinaccuracy of his/her statement. In other words,there is a deliberate falsehood. If the representoracted without belief in the statement then this isalso a statement falsely made. A recklessly madestatement must be something more than merecarelessness. In all cases the essence of liability isthe dishonesty of the defendant in making astatement which (s)he did not honestly know tobe true. The motive for making the statement islargely irrelevant. If the claimant has suffered lossas a result then there is a claim.
The simplest defence available, then, is to showan honest belief in the truth of the statement. Itwould not have to be a reasonable belief providedit was honestly held, and as a result fraud isextremely difficult to prove.
Remedies for fraudulentmisrepresentationAs we have said, a party suffering loss as the resultof a fraudulent misrepresentation can sue fordamages in the tort of deceit. The method ofassessing any damages awarded then will beaccording to the tort measure, i.e. to put theclaimant in the position (s)he would have been inif the tort had not occurred, rather than thecontract measure which is to put the claimant inthe position (s) he would have been in if thecontract had been properly performed.
This may result in more being recovered byway of any claim for consequential loss. As LordDenning put it in Doyle v Olby (Ironmongers) Ltd(1969): ’the defendant is bound to makereparation for all the damage flowing from thefraudulent inducement’.
This point has been confirmed so that thedefendant is responsible for all losses includingany consequential loss providing a causal link canbe shown between the fraudulent inducementand the claimant’s loss.
Derry v Peek (1889)A tram company was licensed to operate horsedrawn trams by Act of Parliament. Under the Act itwould also be able to use mechanical power bygaining the certification of the Board of Trade. Itmade an application and also issued a prospectus toraise further share capital. In this, honestly believingthat permission would be granted, it falselyrepresented that it was able to use mechanicalpower. In the event, its application was denied andthe company fell into liquidation. Peek, who hadinvested on the strength of the representation in theprospectus and lost money, sued. His action failedsince there was insufficient proof of fraud. LordHerschell in the House of Lords defined the actionas requiring actual proof that the false representationwas made ‘knowingly or without belief in its truth orrecklessly careless whether it be true or false’.
Smith New Court Securities vScrimgeour Vickers (1996)The claimants had been induced to buy shares inFerranti at 82.25p per share, as a result of afraudulent misrepresentation that they were a goodmarketing risk.The shares were actually trading at78p per share at the time of the transaction.Unknown to either party, the shares were worthconsiderably less since Ferranti itself had been thevictim of a major fraud.When the claimants, onlater discovering the fraud, chose not to rescind butto sell the shares on at prices ranging from 49p to
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The clear consequence of the judgment is thatheavier claims can be pursued if fraud is alleged,and there is therefore an encouragement to do soif proof is available.
The claimant who is a victim suffering loss asthe result of a fraudulent misrepresentation thenhas two choices on discovering the fraud. (S)hemay affirm the contract and go on to sue fordamages as indicated above. But the claimantmight also disaffirm the contract and refusefurther performance.
If this is the claimant’s choice then there aretwo further possible courses of action. Firstly, ifthere is nothing at this point to be gained bybringing action against the other party, theclaimant can discontinue performance of his orher obligations and do nothing. Then if (s)he issued by the maker of the fraud (s)he can then usethe misrepresentation as a defence to that claim.Alternatively, the claimant might seek rescissionof the contract in equity on discovering the fraud.
11.3.3. Negligent misrepresentationTraditionally, any misrepresentation that was notidentifiable as a fraud would be classed as aninnocent misrepresentation for which the onlypossible action was for rescission of the contractin equity.
The reason there was no available action for anegligently made misrepresentation was thatnegligence falls short of the criteria identified byLord Herschell in Derry v Peek.
There have, however, been developments inboth common law and statute meaning thatan action is now possible for a negligentmisrepresentation. The former is again only
possible in tort rather than contract and is amuch more limited action than that availableunder the Act.
Common lawAn action for a negligent misstatement causing apecuniary, that is a financial, loss to be suffered bythe other party is now possible.
Subsequent case law has both accepted andrefined the Hedley Byrne principle. Therequirements of the tort are threefold. The partymaking the negligent statement must be inpossession of the particular type of knowledge forwhich the advice is required. There must besufficient proximity between the two parties that
30p per share.The House of Lords held that thelosses incurred were a direct result of the fraudthat induced the claimants to contract. As a result,any losses awarded should be based on the figurepaid of 82.25p rather than the 78p.
Hedley Byrne & Co. Ltd v Heller &Partners Ltd (1964)The claimants were asked to provide advertisingwork worth £100,000 for another company,Easipower, on credit. Sensibly, they sought a referenceas to creditworthiness from Easipower’s bankers, thedefendants.They wrote back confirming thatEasipower was a ‘respectably constituted companygood for its ordinary business engagements’.Thebankers also claimed to reply without anyresponsibility for the reference they had given.WhenEasipower went into liquidation with the claimantsstill unpaid they brought an action in the tort ofnegligence against the bankers.Their action failedbecause the bank had validly disclaimed any liabilityfor their reference. Nevertheless, the House ofLords, in obiter, considered that such an action wouldbe possible in certain ‘special relationships’ where theperson making the negligent statement owed a dutyof care to the other party to ensure that thestatement was accurately made. In reaching thisconclusion, the House of Lords approved LordDenning’s dissenting judgment in Candler v CraneChristmas & Co. (1951), where he felt that negligentlyprepared company accounts should be actionable.
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it is reasonable to rely on the statement. The partyto whom the statement is made does rely on thestatement and the party making the statement isaware of that reliance.
It is also possible for the principle to apply torepresentations as to a future rather than apresent state of affairs.
StatuteThe above case started before theMisrepresentation Act was in force, otherwise asimpler action may have been available.
The Misrepresentation Act was passed in 1967.Its benefit is that an action in terms of it is muchbroader than any of the actions previouslyavailable. It is particularly appropriate where the
claimant is unable to prove fraud. It followed therecommendation of the Law Reform Committeethat damages should be available for lossesarising from a negligent misrepresentation.However, the Act in that sense was based on thelaw as it existed before Hedley Byrne and so takesno account of that principle but rather operates asan alternative to fraud.
Section 2(1) identifies the main means oftaking action. By this section:
‘Where a person has entered into a contract after amisrepresentation has been made to him by anotherparty thereto and as a result thereof he has sufferedloss, then if the person making the misrepresentationwould be liable to damages in respect thereof had themisrepresentation been made fraudulently, that personshall be so liable notwithstanding that themisrepresentation was not made fraudulently unless heproves that he had reasonable grounds to believe anddid believe up to the time the contract was made thatthe facts represented were true.’
All that this basically means is that a party who isthe victim of a misrepresentation has an actionavailable without having to prove either fraud orthe existence of a special relationship in order tofulfil Hedley Byrne criteria.
There are then some important differenceswith the past law.
● Firstly, the burden of proof is partly reversed.Where formerly the claimant would have beenrequired to prove fraud, under the Act it will befor the defendant to show that (s)he in factheld a reasonable belief in the truth of thestatement once it is shown to be amisrepresentation.
● If the misrepresentation is negligently madethen the claimant has the choice of whether tosue under the Act or under the Hedley Byrneprinciple.
● If the Act is chosen then there is no need toshow the relationship required for HedleyByrne-type liability.
Esso Petroleum Co. Ltd v Marden(1976)Esso developed a filling station on a new site nearto a busy road and let it to Marden. Duringnegotiations for the lease its representativeindicated that the throughput would amount to200,000 gallons per year. Marden queried this figurebut contracted on the basis of the reassurance ofthe more experienced representative. In fact, thelocal authority then required pumps and theentrance to be at the rear of the site, accessibleonly from side streets. As a result, throughput wasnever more than 86,502 gallons per year, and thepetrol station was uneconomical. Marden lost all hiscapital in the venture and gave up the tenancy. Essosued for back rent and Marden counter-claimedwith two arguments, both of which were successful.Firstly, he claimed that the estimate of throughputwas a warranty on which he was entitled to rely.Secondly, he claimed that the relationship with Essowas a special one, creating a duty of care. Esso’sfailure to warn him properly of the changedcircumstances and the very different throughputresulting was negligence under Hedley Byrne.
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Remedies for negligentmisrepresentationDamages are available as a remedy both underthe Act and at common law. If the Hedley Byrneprinciple is applied then damages are calculatedaccording to the standard tort measure. Thismeans that damages will only be awarded for aloss that is a foreseeable consequence of thenegligent misrepresentation being made.
Under the Act, damages are again calculatedaccording to a tort measure since the Act is statedas being appropriate where fraud cannot beproved. It is more arguable whether damages willbe according to the normal tort measure orwhether the test applied in the tort of deceit isappropriate. The latter is more beneficial and hasbeen accepted in Royscot Trust Ltd v Rogerson(1991).
One consequence of damages under the Actbeing calculated according to tort measures ofcourse is that they can be reduced if contributorynegligence can be shown.
The only remedy traditionally available ifthe misrepresentation was negligently made
would be for rescission in equity and this is stillpossible.
11.3.4. Innocent misrepresentationAs has already been stated, any misrepresentationnot made fraudulently was formerly classed as aninnocent misrepresentation regardless of how itwas made. There would be no action possibleunder the common law only an action forrescission of the contract in equity.
The emergence of the Hedley Byrne principleand of s2(1) of the Misrepresentation Act meansthat possibly the only misrepresentations that canbe claimed to be made innocently are where aparty makes a statement with an honest belief inits truth. The obvious example of this is where theparty merely repeats inaccurate information, thetruth of which (s)he is unaware.
In this case an action under s2(1) of the Actwould not be possible since this can besuccessfully defended by showing the existence ofa reasonable belief in the truth of the statement.Nevertheless, the traditional action for rescissionin equity is still a possibility. There is also apossibility of claiming under s2(2) of the Act.
Remedies for innocentmisrepresentationAs we have seen, since damages were notformerly available under common law they willnot be available either under s2(1).
However, the court has a discretion unders2(2) to award damages as an alternative torescission where it is convinced that to do so isthe appropriate remedy. The court mustconsider that ‘it would be equitable to do so,having regard to the nature of themisrepresentation and the loss that would becaused by it if the contract were upheld, as wellas the loss that rescission would cause to theother party’.
Howard Marine Dredging Co. Ltd vA. Ogden & Sons (Excavating) Ltd(1978)Contractors estimating a price for depositingexcavated earth at sea sought advice from thecompany from whom they intended to hire bargesas to their capacity.The Marine manager negligentlybased his answer of 1,600 tonnes on dead weightfigures from Lloyds, register rather than checkingthe actual shipping register which would haveshown a figure of 1,055 tonnes. Delays resulted inthe work and the contractors refused to pay thehire for the barges.When sued for payment theysuccessfully counter-claimed using s2(1) of theMisrepresentation Act.
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It is important to consider three significant pointsregarding s2(2):
● There is no actual right to damages as theremay be in a common law action. The award ofdamages is at the discretion of the court as anequitable remedy would be.
● Since damages are to be awarded as analternative to rescission, then only one remedycan be granted, not both.
● The measure of damages to be awarded isuncertain but since it is in lieu of rescission,then it is unlikely that consequential loss couldbe claimed.
Prior to the passing of the Act then the onlyavailable remedy was rescission. This remedy maybe appropriate because, in the words of SirGeorge Jessell, ‘no man ought to seek to takeadvantage of his own false statements’.
Zanzibar v British Aerospace(Lancaster House) Ltd (2000)Here the Zanzibar Government purchased acorporate jet aeroplane from British Aerospace in1992.The Zanzibar Government subsequentlyalleged that it had been induced to enter thecontract on the basis of a false representation byBritish Aerospace as to both the type of jet and itsgeneral airworthiness. Zanzibar claimed rescission ofthe contract and damages as an alternative.Thecourt denied it on the ground that the delay inbringing the action meant that the right torescission had been lost and so no damages couldbe paid in lieu of rescission either.
Redgrave v Hurd (1881)In the case rescission was ordered in a contractbetween two solicitors for the sale and purchase ofthe one’s practice. He had misstated the incomefrom the practice and when the other backed out
tried to claim specific performance of the contract.The other solicitor successfully counter-claimed forrescission.
Activity
Self-assessment questions1. Why was it traditionally so important to
prove that a falsely made representationwas actually incorporated into the contract?
2. How would a party traditionally prove afraudulent misrepresentation?
3. How easy or difficult is it to prove fraud?
4. What did negligently and innocently maderepresentations have in common?
5. Which is the more advantageous action:that under Hedley Byrne principles for tortor that under s2(1) of theMisrepresentation Act?
6. What are the major advantages of theMisrepresentation Act over other actions?
7. Are the remedies better for any particularclass of misrepresentation?
Activity Quick QuizSuggest what type ofmisrepresentation is involved in thefollowing examples:1. James is selling his car to Frank. Frank asks
what the capacity of the engine is. James,after looking at the registration documents,tells him that it is 1,299 c.c. Unknown toJames, the documents are incorrect.
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11.4. Equity andmisrepresentationThe availability of damages for amisrepresentation varies, as we have seen,according to the nature of the misrepresentationand the nature of the action bought by theinjured party. Rescission, on the other hand, maybe available whatever the character of themisrepresentation.
Rescission is of course an equitable remedyand its award is subject to the discretion of thecourt. It must be remembered that an actionablemisrepresentation makes a contract voidablerather than void, so the contract remains validuntil such time as it is ‘set aside’by the court forthe injured party.
The right to rescind is not absolute and it maybe lost in a number of circumstances.
● Restitutio in integrum is vital to rescission. Inessence this means that the party claiming isasking to be returned to the pre-contractposition, known as the status quo ante. This infact must be possible to achieve. If it is not,then rescission of the contract will not begranted.
● An affirmation of the contract after itsformation by the party seeking rescission willdefeat the claim.
● Delay is said to ‘defeat equity’. So a failure toclaim rescission promptly may mean it isunavailable as a remedy.
2. Sally, a saleswoman, tells Rajesh that a three-piece suite is flame resistant, in order to gainthe sale, without checking themanufacturers’ specifications that wouldhave revealed that it was not.
3. Howard, who has no qualifications at all, tellsprospective employers at an interview thathe has a degree in marketing.
Lagunas Nitrate Co. v LagunasSyndicate (1899)A nitrate field was bought by the claimants on an innocent misrepresentation of thedefendant as to the strength of the market fornitrates.They made profits for a period but wereaffected adversely by a general depression inprices, at which point they sought rescission.Theyfailed because they had extracted the nitrates forsome time and the field could not be restored toits pre-contract order.
Long v Lloyd (1958)A lorry was bought on the basis of arepresentation as to its ‘exceptional condition’.Several faults were discovered on the first journeythat the purchaser then allowed the seller to repair.When the lorry again broke down through its faultycondition the buyer’s claim to rescission wasunsuccessful. He had accepted the goods in a lessthan satisfactory condition and was unable toreturn them.
Leaf v International Galleries (1950)A contract for the sale of a painting of SalisburyCathedral described it as a Constable.When thedescription later proved false, the purchaser’s claimto rescission failed because a five-year period hadthen elapsed.
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● If a third party has subsequently gained rightsin the goods then it would be unfair tointerfere with those rights by grantingrescission.
● Under s2(2) of the Misrepresentation Act thejudge has a discretion which remedy to apply.Rescission will not therefore be available if thejudge has decided that damages are a moreappropriate remedy.
It is possible to be granted rescission and anindemnity for other expenses incurred as a resultof the misrepresentation.
In granting rescission the court must always takeinto account the seriousness of the breach and thelikely consequences of rescission for both parties.
11.5. When non-disclosureamounts tomisrepresentationThere is no basic obligation at common lawto volunteer information that has not beenasked for.
White v Garden (1851)A rogue bought 50 tons of iron from the claimantusing a bill of exchange in a false name, and resoldit on to a third party who acted in good faith.When the claimant discovered that the Bill ofExchange was useless he seized the iron from theinnocent third party.This was illicit since the thirdparty had gained good title to the iron.
Whittington v Seale-Hayne (1900)Poultry breeders took a lease of premises on thebasis of an oral representation that the premiseswere in a sanitary condition.This was untrue.Thewater was contaminated and the buyer became illand some poultry died. At the time the claimantswere not entitled to consequential loss becausethey could not prove fraud. However, as well astheir claim to rescission of the contract, they wereawarded an indemnity representing what they hadspent in terms of rent and rates and other costs.
ActivitySelf-assessment questions1. Why was equity traditionally so important
to a party who had entered a contract as aresult of a misrepresentation?
2. How fair are the ‘bars’ to rescission?
3. What types of misrepresentation would beclassed as innocent following theMisrepresentation Act 1967?
4. What are the advantages and disadvantagesof s2(2) of the Act?
Fletcher v Krell (1873)A woman who had applied for a position as agoverness had not revealed that she had formerlybeen married. Despite the fact that single womenwere generally preferred, her failure to reveal hermarriage was not a misrepresentation.
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In fact, silence of itself cannot generally be classedas misrepresentation.
However, there are a number of situations wherethe act of withholding or not offeringinformation will amount to misrepresentation.
● Contracts which are uberrimae fides or wherethe ‘utmost good faith’ is required. Thisprinciple is commonly applicable to contractsof insurance on the basis that with fullinformation the insurer may not have beenprepared to accept the risk.
It also applies to the solicitor and clientrelationship.
● Fiduciary relationships where again good faithis required. These may include the relationshipbetween trustees and beneficiaries. A failure toreveal certain information material to thecontract may result in its being set aside underthe doctrine of constructive fraud.
● Where a part truth amounts to a falsehood.
● Where a statement made originally in truthbecomes false during the negotiations. Thiswill then be a misrepresentation.
Hands v Simpson, Fawcett & Co.(1928)A commercial traveller acquired employmentwithout advising his new employers that he wasdisqualified from driving, even though this was anessential part of the work. Even so, he was notobliged to volunteer the information withoutbeing asked.
Locker and Woolf Ltd v WesternAustralian Insurance Co. Ltd (1936)The insured party had not revealed to the insurerwhen entering the contract that another companyhad refused him insurance.This was clearly materialto the contract.
Hilton v Barker Booth and Eastwood(2005)Solicitors acted for a property developer, theclaimant, and for a prospective purchaser of hisland.The solicitors knew that the purchaser had
been in prison for fraud but did not tell theclaimant.The solicitors also advanced certaindeposits to the purchaser who then failed tocomplete.The House of Lords held that where asolicitor places himself in such a conflict of duties,then he can be liable.
Tate v Williamson (1866)A young man dreadfully in debt was persuaded byan adviser to sell his land to raise money to settlethe debts.This adviser then bought the land, havingnot revealed full details as to its value and thusobtaining at half value.The contract was set aside.
Dimmock v Hallett (1866)A person selling land revealed that the land was letto tenants but not that the tenants wereterminating the lease and thus that the incomefrom the land was reducing.This amounted to amisrepresentation.
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With v O’Flanagan (1936)A doctor selling his practice stated the true incomeat the beginning of negotiations but by the time ofthe sale this had dwindled to a negligible figure.Since he failed to reveal this, it was amisrepresentation.
ActivitySelf-assessment questions1. What exactly is non-disclosure?
2. In what circumstances will non-disclosureamount to an actionable misrepresentation?
● A misrepresentation is a false statement offact made by one party to the contract to theother, at or before the time of contracting, notintended to be part of the contract butintended to induce the other party to enterthe contract
● It will have the effect of making the contractvoidable
● A misrepresentation can be made:w fraudulentlyw negligentlyw innocently
● If fraudulent there is an action in the tort ofdeceit Derry v Peek – in which case it musthave been made:w knowingly or deliberatelyw or without any belief in its truthw or recklessly as to whether it is true or
not – an honest belief is a defence● If negligent then there is a possible action:
w in tort under Hedley Byrne – provided it ismade in a special relationship, where theparty making it has expert knowledge reliedupon by the other party; or
w under s2(1) Misrepresentation Act 1967 –Howard Marine Insurance v Ogden
● If innocent then traditionally the only remedywas for rescission in equity, now there is alsoan action for damages under s2(2)Misrepresentation Act
● Rescission is only available if w restitutio in integrum applies – Clarke v
Dicksonw the contract is not affirmed – Long v Lloydw there is no undue delay – Leaf v
International Galleriesw and no third party has gained rights
● Non-disclosure of information will alsoamount to misrepresentation w in contracts uberrimae fides (of utmost
good faith) such as insurance – Locker andWoolf v Western Australian Insurance
w where a part truth amounts to a falsehood– Dimmock v Hallett and
w where a true statement later becomes false– With v O’Flanagan
Key
Fact
s
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ActivityLegal Essay Writing
Consider the following essay title:Discuss the extent to which the developmentof a range of remedies for misrepresentationhas ensured adequate protection for partieswho have relied on inaccurate informationwhen entering into a contract.
Answering the questionThere are usually two key elements toanswering essays in law:
● firstly, you are required to reproduce certainfactual information on a particular area oflaw and this is usually identified for you inthe question
● secondly, you are required to answer thespecific question set, which usually is in theform of some sort of critical element, i.e.you are likely to see the words ‘discuss’, or‘analyse’, or ‘comment on’, or ‘criticallyconsider’, or ‘evaluate’, or even ‘compare andcontrast’ if two areas are involved.
Students, for the most part, seem quite capableof doing the first, but also often seem to beless confident at the second.The importantpoints in any case are to ensure that you dealwith only relevant legal material in your answerand that you do answer the question set,rather than one you have made up yourself, orindeed the one that was on last year’s paper.
For instance, in the case of the first, in thisessay you are likely to provide detail on thefollowing:
● a definition of misrepresentation
● an explanation of the different classes ofmisrepresentation
● an explanation of the different remediesavailable for misrepresentation.
The essay title, although it focuses onremedies, is also in many ways quite wide. Soit does give you the opportunity to write alot of what you know misrepresentation.Although it may seem fairly obvious, thepoint to remember that it is vital forinformation on remedies to be given in theanswer. A mere narrative on types ofmisrepresentation would not get intoreasonable mark levels.
In the case of the second, however, it must beremembered that the essay calls for a criticaldiscussion, in this case an evaluation of theeffectiveness of the law on misrepresentationand its available remedies.You must, thereforeensure that, rather than merely giving narrativenotes on misrepresentation you answer thequestion set and make some evaluativecomments.
Relevant lawIdentify that, as is the case with terms,misrepresentations begin as representationsmade before or at the time of the contract.
● Define misrepresentation:
w a false statement of material fact (notopinion – Bisset v Wilkinson; nor futureintention – Edgington v Fitzmaurice; nortrade puffs – Carlill v Carbolic SmokeBall Co.)
w made by a party to the contract (notby a third party – Peyman v Lanjani)
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w before formation, not after – Roscorla vThomas
w intended to induce the other party toenter the contract
w but not intended to form part of thecontract (which otherwise, ifincorporated, would amount to a term).
● Identify the various classes ofmisrepresentation:
w fraudulent – based on tort of deceit –Derry v Peek
w negligent – before 1964 negligentmisrepresentation was treated asinnocent misrepresentation and therewas no remedy except in equity – nowthere are two types: negligentmisstatement based on tort negligenceand the existence of a special relationship– Hedley Byrne v Heller & Partners; andnow also under s2(1) MisrepresentationAct 1967
w innocent – traditionally there was onlyremediable under equity – but nowunder Misrepresentation Act 1967 s2(2).
Explain that there are a number of differentremedies and the type of remedy depends onthe type of misrepresentation action used:
● Fraudulent:
w Sue for damages, under tort measure,including all consequential loss – SmithNew Court Securities v Scrimgeour.
w If suing for damage, can also affirmcontract and continue; or refuse anyfurther performance.
w Seek rescission in equity.
● Negligent:
w Damages based on foreseeable lossnegligent misstatement.
w Damages on tort measure under theMisrepresentation Act 1967 – RoyscotTrust Ltd v Rogerson.
w Traditionally, rescission was alwaysavailable in equity.
● Innocent:
w Traditionally, no action or remedyavailable in the common law.
w So only rescission was available in equity.w Now under s2(2) Misrepresentation Act
1967 judge has discretion to awarddamages as an alternative.
Discussion and evaluationThe essay title asks in effect for a criticaldiscussion on the remedies available formisrepresentation.The essay is evaluative in thesense that the title refers to the developmentof the law. So it is important to put thedevelopment of misrepresentation in thecontext also of the prior law.There aredifferent types of misrepresentation alsoleading to different types of remedy, so it isalso important to get into the highest marklevels to make some critical observations on allof the remedies.
On this basis the discussion should include:On the development of misrepresentation:● Before 1899 there was no remedy available
at all where a contract had been enteredinto on the basis of false information –unless equity could be used.
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● Even then, liability was limited to a deceitaction and was very hard to prove underDerry v Peek principles.
● So it was vital for the most part to provethat a representation was incorporated as aterm or there could be no redress.
● No further development occurred until1964, which again was limited by requiringproof of a special relationship.
● The Misrepresentation Act 1967 has actuallywidened out the law dramatically so that allgenuine misrepresentations should beactionable.
Criticisms of the actions and the remedies:● Fraud under Derry v Peek is very hard to
prove but if the action succeeds damagesare measured very generously
w so includes all consequential loss where acausative link is proved – following SmithNew Court Securities v Scrimgeour Vickers
w there is some discretion in continuingwith or ending the contract which can beadvantageous
w also there is always an action forrescission in equity still possible.
● Hedley Byrne liability is also very narrow anddifficult to prove the special relationship
w but again, damages are set on the tortmeasure – based on foreseeable loss –but can be reduced for contributorynegligence, of course.
● Negligence actions under s2(1)Misrepresentation Act 1967 mean thatan action is possible for allmisrepresentations.
w An obvious advantage is the reversal ofthe burden of proof.
w Once again, damages are on the tortmeasure Royscot v Rogerson.
● Innocent misrepresentation probably existsnow only where inaccurate information isinnocently repeated, e.g. from specificationswith mistakes in etc.
w Rescission was always available as aremedy.
w Now judges have discretion by s2(2)Misrepresentation Act 1967 to awarddamages in lieu – but can have only oneor the other and the claimant may notlike the judge’s choice.
● Equity always provided rescission as aremedy but it had its own limitations – the‘bars to rescission’:
w not available after too long a delay – Leafv International Galleries
w not available unless restitutio in integrumpossible – Lagunas Nitrate v LagunasSyndicate
w affirmation of the contract – Long v Lloydw third party acquiring rights – White v
Gardenw but on the plus side could be linked to
an indemnity – Whittington v Seale-Hayne.
Conclusion● Any sensible conclusion would do,
w but it is logical to say that theMisrepresentation Act is a massiveimprovement on the prior law
w and there are enough classes of action tocover most situations – but they all havetheir own strengths and weaknesses.
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isrepresentation137
Dilemma Board
Harminder, a saleswoman, tells Deepak, a prospective customer, that a mobile phone that Deepak wishes tobuy can be used on all networks anywhere in the world. She does so after first checking the manufacturer’sspecifications, which are not correct on this particular model as it cannot be used on any networks in India.
A.Harminder is liable for a fraudulentmisrepresentation.
C.Deepak will have an action only forinnocent misrepresentation and sowill not be able to recover damagesfrom Harminder.
B.Deepak will claim for a negligentmisrepresentation under the HedleyByrne principle.
D.Deepak will only be able to rescindthe contract if he has never usedthe phone.
In the dilemma board below consider the accuracy of each of the four statements A, B, Cand D, as they apply to the facts in the central scenario.You only need to give the basicprinciples. The answer is in the appendix at the end of the book.
Vitiating Factors: Mistake
Chapter 12
12.1. IntroductionMistake is sometimes considered to be a difficultarea of law. There are certainly a number ofreasons for this. It is quite closely related to thearea of agreement since agreement is said todepend on a consensus ad idem, a voluntaryarrangement mutually agreed by both parties. If aparty enters a contract on the basis of a mistakethen this is said to negate the consensus ad idem,since any consensus could not be genuinely heldin that case.
Mistake, certainly common mistake, is alsoclosely related to misrepresentation, since a partymight claim that they are mistaken owing to themisrepresentation of the other party, howeverinnocent. In consequence, a claimant sometimespleads both claims.
Where goods have passed to third partiesfollowing a contract that is made as a result of amistake this can also have quite profound effectssince one apparently innocent party is going tolack rights to the subject matter of the contract. Ifa purchaser under a contract has not been givenfull title and then sells on to a third party then themaxim nemo dat quod non habet might apply. Thismeans that nobody can transfer title who doesnot already have good title himself. The result ofthis could be goods being reclaimed from a thirdparty who has acquired the goods in innocence ofthe defective title. This will become apparentwhen considering a unilateral mistake as to theidentity of the other party to the contract.
For these reasons judges have shownunwillingness in the past to accept a mistake asoperative and therefore justifying a declarationthat the contract is void. The result of the courts’
attitude and the common law constraintsimposed on mistake has been for the courts touse equitable solutions, but only in thosesituations where the common law rules cannotapply.
This is then the first distinction to make inmistake, whether it is the common law or equitythat provides the remedy. For the common law tohave any effect the mistake must have been an‘operative’one. It must have been a mistakefundamental to the making of the contract suchthat the contract was only formed because of themistake.
If the mistake is recognised as being ‘operative’then the contract will be void ab initio. Not onlywill the parties be returned to their pre-contractposition, but also any further rights coming out ofthe contract will have no effect, because thecontract is as though it had never existed.
If the court cannot accept that the mistake isoperative, in other words the mistake was not thereason that the contract was formed, thencommon law rules can not apply but a solution inequity is possible, subject to the discretion of thecourt and the normal maxims. Recent case law,however, casts some doubt on this.
If equity can be applied then the effect is forthe contract to be voidable. The contract couldcontinue but a party to the contract who has beenthe victim of the mistake can avoid his/herobligations and the contract may be set aside.
There are basically three classes of mistake,although these themselves sub-divide to covermore specific circumstances.
● A ‘common mistake’ is one where both partieshave made the same mistake. The mistake can
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concern either the existence of the subjectmatter of the contract, or its quality, withdifferent consequences depending on whichit is.
● A ‘mutual mistake’again involves both partiesbeing mistaken, but at cross-purposes over thenature of the agreement rather than makingthe same mistake.
● A ‘unilateral mistake’ is one where only one ofthe parties is mistaken. By implication theother party will usually know of the otherparty’s mistake and be set to take advantageof it.
12.2. Common mistake
12.2.1. Res extinctaThis involves a mistake about the existence of thesubject matter of the contract at the time that thecontract was formed. If at that time the subjectmatter of the contract did not exist then themistake is an operative one, because clearly neitherparty to the contract would contract for somethingthat did not exist, and the contract will be void.
The above case involved specific goods. If,however, the contract is of a more speculativenature then the consequence of the goods notexisting at the time of the contract may bedifferent, since the buyer has bought only achance.
If the goods have ‘commercially perished’at thetime the contract is formed unknown to eitherparty then this still could be an operative mistakeleading to the contract being void. Commerciallyperished would mean that the goods no longerhad the value attached to them in the contract.
Couturier v Hastie (1852)The contract was for sale and purchase of a cargoof grain in transit and which both parties believedexisted at the time of the contract. In fact, thecaptain of the ship had sold the cargo, as wascustomary practice, when it had begun to overheat.When this was discovered the court (while notactually mentioning mistake) declared the contractvoid rejecting the seller’s argument that the buyerhad accepted the risk and should pay the price.Thisbasic proposition is now contained in s6 Sale ofGoods Act 1979 – ‘Where there is a contract forspecific goods, and the goods without theknowledge of the seller have perished at the timewhen the contract is made, the contract is void.’
McRae v Commonwealth DisposalsCommission (1950)Here the contract was for the salvage rights to awreck.The buyer went to considerable expense tolocate the wreck at the approximate position givenby the Commission, but could not find it.Whenthey sued for breach of contract the Commissiontried to rely on the principle in the last case butfailed.There was no operative mistake.Theclaimants had bought the salvage rights on theclear representation by the Commission that thewreck did exist, who were therefore liable forbreach of contract.
Barrow Lane and Ballard Ltd v PhillipPhillips & Co. Ltd (1929)Here the seller bought 700 bags of groundnuts ina particular warehouse and, without ever inspectingthe goods, sold them on.When the buyer cameto inspect the goods 109 bags had been stolen.The seller could not sue the owner of thewarehouse who had become insolvent so he suedthe buyer for the price but failed.The goods hadceased to exist in commercial terms and thecontract was void.
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The classical operation of the principle of resextincta will still apply in modern commercialtransactions.
12.2.2. Res suaThis principle applies to a mistake as toownership of the goods. If a party enters acontract as a buyer when, in fact, unknown toeither party, he owns the title to the goods thenthe contract is void.
12.2.3. Mistake as to the quality ofthe contractThis is inevitably a more complex area than eitherres extincta or res sua. Generally, however, wherethe mistake that is common to both parties is thatthe subject matter of the contract is of a qualitydifferent to that anticipated then the mistake hasthree consequences. The mistake will not beconsidered an operative one, it will have no effectin common law on the contract, and both partiesare still bound by their original obligations.
Associated Japanese Bank(International) Ltd v Credit du Nord SA(1988)A sale and leaseback arrangement over fourpackaging machines was concluded between thebank and a man called Bennett. Credit du Nordguaranteed Bennett’s obligations under the contract.The machines did not in fact exist and the bank wasprevented from suing Bennett when he wasdeclared bankrupt. It then sued on the guarantee.Steyn J held that the guarantee was subject to acondition precedent that the four machines existedat the time of the contract. Applying the test fromBell v Lever Brothers, for the mistake as to theexistence of the machines to be an operative one,the subject matter of the contract must be radicallydifferent to that expected by both parties.Theguarantee was an accessory contract.The non-existence of the machines was of paramountimportance to the guarantor in granting theguarantee.The res extincta doctrine applied and thecontract of guarantee was void.
Cooper v Phibbs (1867)Cooper took a three-year lease for a salmon fisheryfrom Phibbs. At the time of the contract bothparties believed that Phibbs owned the fisherywhen in fact it was subsequently discovered thatCooper was life tenant of the property. He was
unable to dispose of the property but was effectiveowner at the time of contracting. Cooper thentried to have the lease set aside.The House ofLords agreed to this but also granted Phibbs a lienin respect of the considerable expense he had goneto in improving the property.
Although the case was decided on equitablerather than common law principles, law Lord Atkinin Bell v Lever Brothers refers to it as an example ofres sua.
The case can be seen as res sua. Equity wasapplied and the contract declared voidable ratherthan void because firstly Cooper had only anequitable interest in the property, and secondlyPhibbs had spent money on it.
Bell v Lever Brothers Ltd (1932)Lever Brothers employed Bell as Chairman of asubsidiary company, Niger Co Ltd, with the brief ofrejuvenating the subsidiary.When he was successfulin his task and the subsidiary was merged withanother company Lever Brothers offered asettlement of £30,000 for the termination of hisexisting service contract. It was later discovered thatBell was in breach of a clause of the serviceagreement, having entered into private dealings onhis own account. Lever Brothers then sued forreturn of the settlement, claiming fraudulentmisrepresentation, in which they failed, and breach
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The common law principle then is appliedabsolutely. Nevertheless, the fact that the mistakeis not operative means that an action in equitymay still result.
Although it is possible now that common mistakeis such that the contract is neither void nor can itbe set aside in equity.
of contract.The Court of Appeal then held that thesettlement was invalid for common mistake, themistake being that Lever were bound to pay thesettlement when they could in fact have merelyfired Bell. In the House of Lords Lord Warringtonfelt that the ‘mistake’ could have no effect on thecontract unless it was ‘of such a fundamentalcharacter as to constitute an underlying assumptionwithout which the parties would not have made thecontract they in fact made’.The mistake was notone affecting the consideration or that went to theroot of the matter, so the contract of settlementcould not be void. Lord Atkin stated that
‘Mistake as to quality of the thing contractedraises more difficult questions. In such a case,a mistake will not affect assent unless it is themistake of both parties and is as to the existenceof some quality which makes the thing withoutthe quality essentially different from the thing asit was believed to be . . .’ .
The settlement had not been given as a resultof the breach or otherwise of the clause, but inrecognition of the work already done by Bell. It wasnot an operative mistake.The mistake was notfundamental in any way to the making of thesettlement agreement. Lever Brothers were merelyupset because had they known of the breachbefore the settlement they could have fired Belland avoided the expense.
Solle v Butcher (1950)In an agreement for the lease of a flat both partiesmistakenly believed that the rent was not subjectto controls under the Rent Restrictions Act.Therent was set at £250 per annum, though if subject
to the Act it should have been £140. However,had the landlord realised that it was subject tothose controls he might have applied to increasethe rent because of considerable repairs andimprovements he had made to what wasotherwise war-damaged property. On discoveringthat the rent was subject to controls under theAct the tenant then sued for a declaration that therent should be £140 and to recover the differencealready paid. On appeal the landlord claimed thatthe mistake was void for mistake.The Court ofAppeal held that at common law the mistake hadno effect on the contract. It was merely a mistakeas to quality.This did not prevent the court fromsetting the agreement aside in equity.
Great Peace Shipping Ltd v TsavlirisSalvage (International) Ltd (2002)The defendants, who were salvors, had an interest ina ship, the Cape Providence, and, worried that it mightsink, they approached London brokers whocontacted a third party (OR) who identified thenearest vessel as the Great Peace, which belonged tothe claimants.The defendants then agreed a charterparty contract to hire the Great Peace for five days.However, OR was wrong, and Great Peace wasseveral hundred miles away. So the charter contractwas based on a common mistake.The defendantsthen tried to cancel the contract but the claimantsrefused and claimed for five days’ hire.They arguedthat the mistake made the contract void at commonlaw or voidable in equity.Toulson J held that sincethe mistake was not as to the existence of thesubject matter (and so was not operable) thecontract was not void at common law. He alsoconsidered that it could not be set aside in equitysince it was impossible to determine the nature of
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Great Peace has subsequently been followed,which appears to make successful claims forcommon mistake hard to achieve.
In some situations parties will easily mistake thequality of the contract. This is particularly so in thecase of art works or antiques or anything wherevaluations are a matter of opinion rather than fact,and the attitude taken by the court to the effect ofthe mistake can vary enormously.
Nevertheless, the opposite view has been taken inrelation to the effect of a mistake as to qualitywhere works of art are concerned.
the ‘fundamental ‘ mistake that would enable thecontract to be rescinded; and he would not exerciseany discretion to set the contract aside because thefixing of charterparties is done by professionals andis an area where certainty is important and to setaside the contract would amount to making thecorrectness of the information given by OR acondition of the contract.The Court of Appealagreed with the trial judge.
Brennan v Bolt Burdon (2005)A form submitted by the claimant in a personal injuryaction was invalid because of an existing precedent.The defendant then agreed not to claim costs if theclaimant agreed not to continue the action.Theprecedent was then reversed and the claimantcontinued with his claim.The defendant argued thatthe compromise agreement was binding.The claimantargued that the compromise agreement was void fora common mistake of law.The Court of Appeal heldthat the compromise agreement was not vitiated bymistake since the mistake did not make theagreement impossible to perform.
Leaf v International Galleries (1950)The contract was for the sale and purchase of an oilpainting of Salisbury Cathedral that was innocentlyrepresented as being a Constable.The buyer
discovered that it was not a Constable when he triedto sell it five years later. His claim for rescission failedand he appealed.The Court of Appeal rejected hisclaim, holding that an action for damages would havebeen the appropriate action, and also that he haddelayed too long for rescission. Lord Denning madesome interesting references to mistake: ‘There was nomistake about the subject matter of the sale. It was aspecific picture of “Salisbury Cathedral”.The partieswere agreed in the same terms on the subjectmatter, and that is sufficient to make a contract . . .’. SoLord Denning suggested that the identity of thepainter was irrelevant. It was a mistake only as to thequality of the contract.
Peco Arts Inc v Hazlitt Gallery Ltd(1983)The claimant bought a drawing from a reputablegallery that both parties mistakenly believed was anoriginal.The contract included an express term thatthe work was an original inscribed by the artist.Eleven years later, the claimant discovered that thework was a reproduction, and tried to claim returnof the purchase price and interest.The court,distinguishing Leaf, allowed his claim.The time lapsewas no problem since it was accepted that, evenwithout due diligence, the truth could not havebeen discovered at an earlier stage.
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12.3. Mutual mistakeA mutual mistake occurs where the parties to thecontract are at cross-purposes over the meaningof the contract. One of the problems here is thatit is doubtful whether any meaningful andsustainable agreement has ever been reached.
What the courts will do is to try to make senseof the agreement that does exist in order that itcan continue. To do this they will implement anobjective test and will try to identify a commonintent if one exists.
If, however, the promises made by the twoparties so contradict one another as to render anyperformance of the agreement impossible thenthe court will deem that an operative mistakeexists and the contract will be declared void.
So ambiguity surrounding the subject matter ofthe contract may well make a mistake operativeand result in the contract being declared void.
However, where one party is merely mistaken asto the quality of the contract then the mistake isnot mutual. The contract can be continued,although it is not to the liking of that party andthe contract will not be declared void.
Activity Quick Quiz
Consider what sort of commonmistake is indicated in the followingscenarios:1. Tracy has bought a set of antique cutlery
that both she and the shopkeeper believedto be solid silver. In fact, the cutlery is onlysilver plate.
2. Geoff today contracted to buy my old1966 Ferrari sports car. Unknown to eitherof us, the car was destroyed in a fire lastweek when the garage where it was keptburnt down.
3. I have contracted to take the lease of aboating lake from Tom, who both of usbelieve has inherited the property. In fact,after we form the contract we discover thatI have been given a life interest in theproperty.
Raffles v Wichelhaus (1864)The contract was for the sale of cotton on board aship named Peerless that was sailing out of Bombay.In the event, there were two ships both namedPeerless both sailing from Bombay on the same day.The seller was selling the cargo other than the onethat the buyer was intending to buy.There was noway of finding a common intention.The contractcould not be completed and was declared void.
Scriven Bros & Co. v Hindley & Co.(1913)There are different qualities of hemp. One is called‘tow’ and is generally of inferior quality. Auctioneerswere selling hemp that was actually ‘tow’ thoughthis was not made absolutely clear in the catalogue.The purchaser bid extravagantly, under the mistakethat he was actually bidding for the superiorproduct. He rejected the goods on discovering themistake.The auctioneer’s action to enforce thecontract failed owing to the mutual mistake.Therecould be no reconciling the situation to mutualsatisfaction.
Smith v Hughes (1871)Smith was offered a consignment of oats that heexamined a sample of and bought. On delivery he
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12.4. Unilateral mistake
12.4.1. Introduction The cases in unilateral mistake show twoparticular lines: the mistake will either be as tothe terms of the contract or will be as to theidentity of the other party to the contract. Ineither case the significant point is that only one ofthe parties to the contract is actually mistaken,hence unilateral mistake.
The basic principle is simple. Where one partycontracts on the basis of a mistake known to theother party then the contract is void because thereis no consensus in this instance. The mistake mustobviously be a fundamental one. A mistake as toquality will not suffice.
12.4.2. Mistaken termsIf one party to the contract makes a materialmistake in expressing his/her intention and theother party knows, or is deemed to know, of themistake then the mistake may be operative, withthe result that the contract may be void.
The test of whether or not such a mistake isoperative and therefore voids the contract appearsto have three parts:
● One party to the contract is genuinelymistaken over a material detail that had thetruth been known would have meant (s)hewould not have contracted on the terms stated.(This was clearly the position of the sellers inthe above case.)
● The other party to the contract oughtreasonably to have known of the mistake.(Again the court accepted in the above casethat the buyers were taking advantage of asituation that they would have been aware ofbecause of usual custom in the trade.)
● The party making the mistake was not at faultin any other way.
However, the mistake cannot be operative if theother party is unaware of it.
discovered that the oats were ‘new oats’ ratherthan oats from the previous year’s crop. He refuseddelivery and when the seller sued for the priceclaimed that the contract should be void formistake. He believed he had been offered ‘good oldoats’ rather than ‘good oats’ as the seller claimed.The court felt that it could not declare a contractvoid merely because one party later discovered itwas less advantageous than he believed it to be.
Hartog v Colin & Shields (1939)The contract was for 30,000 Argentine hare skins.The price was stated at 10d and 1 farthing per lb.The regular practice was to sell per piece. Sincethere were about three pieces per lb. this wouldreduce the cost of each piece to a third.The buyers
tried to enforce the contract on the basis of themistaken term.The sellers countered that the offerwas wrongly stated, as would be commonknowledge in the trade.The court declared thecontract void for the mistake.
Sybron Corporation v Rochem Ltd(1984)Having opted for early retirement, a manager wasawarded a discretionary pension. It wassubsequently discovered that the manager, togetherwith other employees, had engaged in a fraud onthe company.The company sought to have thepension agreement set aside, and succeeded.TheCourt of Appeal held that it was the manager’sbreach of duty that had induced the company tobelieve that it was obliged to grant him the pension.It had done so under a mistake of fact.
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12.4.3. Mistaken identityAgain, the area is at first sight complex and itraises different issues to those already considered.However, the occasions when the principle arisesare not straightforward. The common scenariowill be when a rogue has made off with propertybelonging to another party after making falserepresentations as to his/her identity. This then isthe mistake made by the other party. The goodswill then usually have been transferred to aninnocent third party from whom the originalowner is trying to recover them.
The cases are distressing because the courtswill have to decide which of two seeminglyinnocent parties to disappoint. If the contract isone covered by the Sale of Goods Act 1979 thenthe rogue, as a seller, has no title to pass indisposing of the goods. If the original owneridentifies the title as only voidable sufficientlyearly, then he may have rights as against asubsequent purchaser. If the third party buyingthe goods from the rogue does so in good faithand without notice of the defective title then(s)he may have a good title as against the partyfrom whom the rogue acquired the goods.
The case law shows some confusion andcontradictions. There are some basic requirementsthat the original owner must satisfy in order toclaim that (s)he retains ownership.
● In order to claim a mistake on the basis of amistaken identity, the party seeking toclaim rights in the goods must first of allshow that (s)he intended to contract with aperson other than the one with whom they didcontract. So there must have been anotherperson.
● In order to claim that the mistake is operativeand therefore makes the contract void themistake must be shown to have been materialto the formation of the contract.
Wood v Scarth (1858)A landlord agreed to lease premises to a tenant,mistakenly believing that his clerk had made plain tothe tenant before the agreement that a premium of£500 was expected as well as rent.The court heldthat the mistake could not be operative since thetenant contracted on terms not including thepremium in good faith and without knowledge of thelandlord’s mistake.The contract for rent only wastherefore not affected.
Kings Norton Metal Co. Ltd v Edridge,Merrett & Co. Ltd (the Kings NortonMetal case) (1897)Wallis contracted under the name Hallam & Co. forthe purchase of expensive items of brass rivet wire.The goods were supplied but never paid for.TheMetal Co. sued the party who eventually purchasedthem from Wallis to recover the goods.The courtwas not prepared to void the contract for mistake.The Metal Co. was not so much mistaking theidentity of Wallis, since Hallam & Co. did not exist,as mistaking the creditworthiness of Wallis withwhom it had in fact contracted.
Cundy v Lindsay (1878)Blenkarn hired a room at 37 Wood Street where ahighly respectable firm, Blenkiron & Co., conductedits business at number 123. He then ordered alarge number of handkerchiefs from Lindsay’s, witha signature designed to be confused with that ofthe reputable firm.The goods were supplied andBlenkiron was billed. Blenkarn had sold some goodson to Cundy before the fraud was discovered.Lindsay then tried to recover the goods. On appealthe House of Lords held that the contract was voidfor mistake.The mistake was operable because
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● If the one party is to be able to claim that themistake is to be considered material then theother party to the contract must have knownof it.
12.4.4. Mistaken identity and face-to-face dealingWhere a party negotiates a contract in personthen the party is deemed to be contracting withthe other party who is physically present at thenegotiations, whatever the identity that the otherparty assumes. In this way the mistake is not as tothe identity but as to the creditworthiness of theother party. This is not material to the forming ofthe contract so the mistake is not operative andthe contract cannot be void.
One case actually cast doubt on this principle andcaused some confusion.
The case is seen as being either decided on theparticular facts or indeed wrongly decided, and
Lindsay’s were able to show that the identity ofthe party trading from 37 Wood Street wasmaterial to the formation of the contract. Unlikethe Kings Norton Metal case, there was a party herewith whom the claimants wished to contract.Thethird party acquired the goods from Blenkarnwithout any title.
Boulton v Jones (1857)The defendant ordered certain goods fromBrocklehurst in order to take advantage of a set-off(a legal means of keeping the goods in return for adebt already owed to the defendant). Unknown tothe defendant Brocklehurst had assigned hisbusiness to the claimant.When the goods weredelivered and the defendant refused to pay, he thentried to have the contract set aside for mistake asto the identity of the party with whom he hadcontracted.The court would not void the contract.The other party knew nothing of the mistake andhad merely responded to an order to supply goods.The mistake was not operative.
Phillips v Brooks Ltd (1919)North, a rogue, selected jewellery in a shop includinga necklace worth £2,550 and a ring worth £450. Hewrote a cheque for £3,000, misrepresenting himselfas Sir George Bullough, whose address the jewellerfound in the directory. North persuaded the jewellerto let him leave with the ring, leaving the rest of thejewels till his cheque cleared.The cheque bouncedand when the jeweller later discovered the ring in apawn shop where North had sold it he tried to suefor its recovery. His argument, that the contract withNorth was based on mistaking North’s identity forthat of Sir George Bullough, failed. He could haveonly intended to contract with the party he metface-to-face.The pawn shop gained good titlebecause it bought in good faith, without notice ofany defect in title.
Ingram v Little (1960)Sisters jointly owned a car that they advertised forsale.The rogue who came to buy it offered to payby cheque.The ladies initially refused the chequebut were persuaded when the rogue passedhimself off as an important local figure, and foundthe name offered in the telephone directory.Thecheque bounced and when the ladies discoveredthe car in the hands of an innocent third party towhom the rogue had sold it they sued to recoverthe car.The Court of Appeal, strangely, acceptedthat the mistake as to identity was material to thecontract, as it was shown that the ladies initiallyrejected the cheque, and so relied on the identityof the important local figure.
Vitiating Factors: Mistake 147
subsequent cases have reiterated the originalprinciple.
It follows that, for a party to claim that the identityof the other party is material to the making of thecontract, he must have taken adequate steps toensure the true identity of the other party.
The principle of face-to-face dealing may applywhere the contract is made by the claimant’sagent but if the contract is made through a mereintermediary then general principles of mistakenidentity will apply.
Lewis v Avery (1972)A rogue buying a car represented himself asa famous actor of the time, Richard Greene, andshowed a false studio pass after his cheque was atfirst rejected.When the cheque was dishonouredand the seller later discovered the whereabouts ofthe car, he sued the new owner for recovery. Hisaction failed.The claimant had been induced intobelieving that the party he contracted with wassomebody different but had still contracted withthat party.The mistake was not operative and thecontract could not be void.
Citibank NA v Brown Shipley & Co. Ltd;Midland Bank v Brown Shipley & Co.Ltd (1991)A rogue passed himself off as a company officerand persuaded a bank to issue a bankers’ draft topay for large amounts of foreign currency he wasbuying from another bank.The currency was passedonce the legitimacy of the bankers’ draft wasestablished.When the fraud was discovered theissuing bank tried to recover from the other bankbut failed.They had done insufficient to establish thebona fides of the rogue for his identity to bematerial and their mistake to be operative.
Shogun Finance Ltd v Hudson (2003)A rogue, giving a false name and address,completed hire-purchase forms to buy a car andshowed a stolen driving licence in the name of D.Patel to confirm his identity.The car dealer faxed acopy of the licence and draft HP agreement, signedby the rogue in Mr Patel’s name, to the claimantfinance company.They then checked the creditrating of the real Patel and accepted the deal.Therogue paid 10% party in cash and partly by chequeand drove the car away and then sold it to thedefendant.When the finance company realised themistake they brought proceedings against thedefendant.The rule nemo dat quod non habet wasapplied, i.e. a seller cannot pass on a title if he doesnot have one.The Court of Appeal considered the‘face-to-face’ cases but decided that they did notapply.The offer of finance was made to Mr Patel,not the rogue; there was no contract between therogue and the finance company.The situation wasmore like Cundy v Lindsay since the financecompany never saw the rogue, dealt only withdocumentation, and the salesman in the showroomwas not their agent, but only an intermediary.Therogue gained no title that he could pass on, and theinnocent purchaser had to bear the loss.The Houseof Lords agreed.
ActivitySelf-assessment questions1. In what ways is mistake close to
a) agreement and b) misrepresentation?
2. Why is it easy to confuse common mistakewith misrepresentation?
3. Why might a party prefer to sue for amistake rather than for misrepresentation?
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12.5. Mistake and equity
12.5.1. IntroductionIf a mistake has been shown to be operative thenthe common law rather than equity may apply. Ifit is not an operative mistake and therefore notvoid, then an equitable solution may be sought inone of three ways:
● rescission of the contract, with the contractbeing set aside and new terms substituted
● a refusal to grant the other party’s claim forspecific performance of the contract
● rectification of a document containing amistake which is material.
12.5.2. RescissionIf the party claiming rescission can show that it isagainst conscience to allow the other party to takeadvantage of the mistake then the court may allowrescission, though usually at the same timesubstituting more equitable terms as an alternative.
4. In what circumstances will a contract bevoid in common law as a result of a mistake?
5. In what sense is it possible to say that acommon mistake as to quality has no effecton the contract?
6. What is the difference between a commonmistake and a mutual mistake?
7. What are the possible effects of a mutualmistake on the contract?
8. What is meant by the requirement inunilateral mistake that the mistake must bea material one?
9. Why is identity such a key factor inunilateral mistake?
10. In what ways does the case of Ingram vLittle seem to be wrongly decided?
Activity Quick Quiz
Suggest what type of mistake isinvolved in the following scenarios:a) I contracted with Farmer Giles to buy his
horse called Silver. He has two horses calledSilver. He believes that he has sold me hisbrown stallion with the white flash on thenose. I believed that I was buying his greymare.
b) A man calling himself Tony Blair knocked onmy door one evening and bought my car bycheque. I accepted the cheque because Ibelieved he was the Prime Minister but Ihave now discovered that this was not thecase, as his cheque has been returned.
c) In the pub tonight I agreed to sell mycollection of Elvis records to a man called
Stan. However, when I went home and askedmy wife where they were she said that shehad thrown them away years ago becausethey were never played.
Solle v Butcher (1950)At common law the mistake as to the applicationof rent review rules had no effect. Nevertheless,the court set aside the original terms that wereunworkable in the circumstances and was preparedto allow the tenant the choice of terminating thelease or continuing it with the rent set at £250.Thiswould be appropriate since the improvementsjustified the increase.
Vitiating Factors: Mistake 149
Rescission will often be the appropriate remedy inthe contracts made as the result of an innocentmisrepresentation.
It has recently been restated, however, that equityintervenes with the remedy of rescission only toallow a party to escape from an unconscionablebargain but it will not intervene to allow a partyto avoid having made a bad bargain. See ClarionLtd v National Provident Institution (2000). Besidesthis, the case of Great Peace Shipping casts doubtson the use of equity in mistake.
12.5.3. Refusal of specific performanceAs an equitable remedy, specific performancedepends on the discretion of the court. So it canalso be refused where one party entered theagreement on the basis of a mistake and:
● it would be unfair or harsh to expect him toperform the contract or
● the mistake was actually caused by the otherparty’s misrepresentation or
● the other party knew of the mistake and triedto take advantage of it.
The court will not, however, refuse an ordermerely because it means one party has made aworse bargain than he thought he had.
12.5.4. Rectification of a documentThe court can rewrite a written document thatdoes not conform to the actual agreement betweenthe two parties, as happened in Webster v Cecil.
The two sides in dispute will usually have adifferent view of what the agreement is so theside seeking rectification must show that acomplete and certain agreement was reached,and that the agreement remained unchanged upto the time of contracting.
Magee v Pennine Insurance Co. Ltd(1969)An insurance agent had filled out the proposal formfor the proposer.The details as to the people drivingthe car was inaccurately stated as including Magee,who was stated as having a provisional licence, andhis eldest son, a police driver, since only his youngestson was to drive the car. Magee himself did not havea licence and, when the car was in an accident, theinsurance company agreed to pay £385 being thetrue value of the car.When the company laterdiscovered the inaccuracies in the proposal theyrefused to pay and Magee sued to enforce theagreement. On appeal, Lord Denning affirmed hisown principle in Solle v Butcher, held that theagreement to pay was made as a result of a commonmistake and was voidable in equity.
Webster v Cecil (1861)Webster offered to buy land from Cecil and Cecilwho stated that the land had cost him more thanthat rejected his offer of £2,000.Webster then triedto enforce a written agreement for sale of the landfor £1,250. His claim to specific performance failedsince the written agreement clearly ran contrary toany oral one.
Tamplin v James (1880)James bought an inn at auction. He believed that hehad also bought adjoining land but had not. He hadmade no check of the plans and he could not resistan order of specific performance of the contract.
Craddock Bros Ltd v Hunt (1923)Craddock agreed to sell his house to Hunt notintending an adjoining yard to be included in thesale. By mistake the yard was included in theconveyance so Craddock immediately soughtrectification of the document and succeeded.
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However, if the claimant cannot show that thewritten agreement was different to the commonintention of the parties then rectification will bedenied.
12.6. Non est factumThis is literally translated as ‘this is not my deed’.It is a doctrine that operates only in respect ofwritten agreements. Usually the principle in
L’Estrange v Graucob applies and a party is boundby written agreements that (s)he has signed.
However, in some circumstances a party is ableto claim that they only signed as a result of agenuine mistake as to the nature of the documentsigned. The doctrine is subject to strictrequirements. It will only be appropriate becausethe party signing is subject to some weakness thathas been exploited by the other party, for instanceblindness or senility. Also the other party musthave represented that the document is somethingdifferent than that which has been signed.
If this is so and the party signing has taken theprecautions available to check on the authenticityof the document before signing then the contractis void. However, before the court will declare thecontract void it must be satisfied that thedocument is of a kind materially different to whatit was represented to be, and that the party hasnot been negligent in signing it.
George Wimpey UK Ltd v VIConstruction Ltd (2005)Wimpey bought land from VIC intending to buildflats on it. Both parties accepted that Wimpey wouldpay a basic price plus the difference between theactual sales price and a projected price. Draftcontracts identified things that would increase thevalue of the flats but these were omitted from thecontract by mistake.Wimpey was denied rectificationbecause the decision to enter the contract was takenby its board but the person negotiating the deal hadno authority to bind Wimpey, so it could not showthat it did not approve of the written contract.
ActivitySelf-assessment questions1. When will a party claiming mistake be able
to look for a solution in equity?
2. Why could the mistake in Solle v Butchernot lead to the contract being void underthe common law – and why was equity ableto be used?
3. When will the courts refuse to grant anorder of specific performance?
4. What happens to the contract whenrectification is applied as a remedy?
Saunders v Anglian Building Society(1970)This case, which began as Gallie v Lee, involved anelderly widow who decided to transfer herproperty to her nephew on the stipulation that shecould live there for the rest of her life. She did thisso that he could borrow money on the property inorder to start a business.The document was drawnup by Lee, a dishonest friend of the nephew, andwas in fact a conveyance to him rather than a deedof gift to the nephew. Lee then borrowed againstthe property and defaulted on the loan.The widowin answer to the claim for repossession initiallysucceeded with a plea of non est factum. On a laterappeal the House of Lords rejected her plea.Therewas insufficient difference between the documentsthat she did sign and had intended to sign. Bothgave up her rights to the property and she had notdone enough to check its nature.
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The class of mistake The character of the mistake The legal consequences of the mistake
Common mistake: The same mistake is made byboth parties:
w Res extincta w The mistake concerns the w The mistake is ‘operative’ and the(Couturier v Hastie) existence of the subject matter contract is void
at the time the contract is made
w Res sua w The mistake is about who owns w The mistake is ‘operative’ and the (Cooper v Phibbs) the subject matter at the time of contract is void
contracting
w Mistake as to quality w Mistake is merely as to the quality w The mistake is not ‘operative’ –(Bell v Lever Bros) in equity of the bargain made contract continues but may be
set aside (Solle v Butcher)
Mutual mistake: Both parties make a mistake but not w If performance is impossible then the same one – they are the contract is voidat cross-purposes (Raffles v Wichelhaus)
w If the court can find a commonintent then the contract maycontinue (Smith v Hughes)
Unilateral mistake: Only one party is mistaken – the other party knows and takes advantage of the first party’s mistake:
w Mistake as to terms w (i) One party mistaken over a w If all three, mistake is ‘operative’ and(Hartog v Colin & Shields) material detail; contract void – if not then may be
(ii) other party knew of mistake; voidable in equity(iii) mistaken party not at fault
w Mistaken identity not w (i) Mistaken party intended to w If all three, mistake is ‘operative’ and face-to-face contract with someone else; contract void – if not then may be(Cundy v Lindsay) (ii) mistake material to contract; voidable in equity
(iii) mistake known to other party
w Mistaken identity w Party contracts in person with w Not an ‘operative’ mistake – face-to-face someone who claims to be mistaken party deemed to be contrac-(Lewis v Avery) someone else ting with person in front of him
Non est factum w Mistake concerns nature of If both are present then there is an the document being signed ‘operative mistake’ – the contract is
w The document is void – but if not then there is no effect (i) materially different to what it on contract (Saunders v Anglianwas represented to be; Building Society)(ii) there is no negligence bythe person signing it
Figure 12.1 Table illustrating the different types of mistake and their legal consequences
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● A mistake can occur in one of three principalways:w both parties are making the same mistake
– known as common mistakew the parties are at cross-purposes and so
are both mistaken but making differentmistakes – known as mutual mistake
w only one of the parties is mistaken and theother party knowingly takes advantage ofthis – known as unilateral mistake
● If a mistake is operative (i.e. the contract wasonly made because of the mistake) then thecontract is void at common law
● Only if the mistake is not operative it may bepossible to rescind the contract or set it asidein equity
● A common mistake can void a contract wherethe mistake is as to the existence of thesubject matter of the contract – res extincta –Couturier v Hastiew but it will not void the contract where the
mistake is only as to the quality of thecontract made – Bell v Lever Brothers
w authenticity of art works is a difficult area –Leaf v International Galleries
● A mutual mistake will void the contract whenthe parties are so at odds that it is impossibleto make any sense of the agreement – Rafflesv Wichelhausw but if the mistake is only about the quality
of the contract then the contract willcontinue – Smith v Hughes
● With unilateral mistake the mistake canbe about the terms of the contract or
about the identity of the other party to thecontractw If the mistake is about the terms of the
agreement then it is operative and thecontract void if the one party through nofault of his own is mistaken over a materialdetail and the other party knows or oughtto know of the mistake – Hartog v Colin &Shields
w If the mistake is the identity of the otherparty then that mistake must have beenmaterial to the formation of the contract –Cundy v Lindsay
w If the parties contract face to face thenthey are said to be contracting with theparty in front of them regardless of whatidentity they assume – Lewis v Avery
● Where the mistake is not operative equity canbe used in one of three ways:w to rescind the contract or set it aside on
terms – Solle v Butcherw to refuse a request for specific
performance of the contract – Webster vCecil
w to rectify a document which contains themistake – Craddock Brothers v Hunt
● It is possible to claim non est factum (this isnot my deed) in relation to a documentsigned provided that:w a party has some disability which is being
taken advantage of andw (s)he thinks (s)he is signing an entirely
different type of document – Saunders vAnglian Building Society
Key
Fact
s
Vitiating Factors:M
istake153
Dilemma Board
Rashpal advertised his cricket bat signed by the 2005 Ashes-winning England Cricket Team for sale in thelocal newspaper. A man falsely calling himself Monty Panesar called at Rashpal’s house and agreed to buy thebat for £5,000. Rashpal accepted a cheque from the man because once he heard the man’s name Rashpalbelieved that he was selling the bat to the England spin bowler.The cheque later bounced. Rashpal is nowtrying to recover the bat from Shane who innocently bought it from the man calling himself Monty Panesar.
A.The contract between Rashpal andthe man calling himself MontyPanesar will be declared void forcommon mistake.
C.The contract between Rashpal andthe man calling himself MontyPanesar will be declared void forunilateral mistake.
B.The contract between Rashpal andthe man calling himself MontyPanesar will be declared void formutual mistake.
D.The contract between Rashpal andthe man calling himself MontyPanesar may be set aside on thebasis of a claim of non est factum.
In the dilemma board below consider the accuracy of each of the four statements A, B, Cand D, as they apply to the facts in the central scenario.You only need to give the basicprinciples. The answer is in the appendix at the end of the book.
Vitiating Factors: Duressand Undue Influence
Chapter 13
13.1. IntroductionThe courts have always been keen to preservefreedom of contract. A necessary element of thisfreedom is that the agreement should be reachedvoluntarily. This means that no force or coercionshould be used in order to secure the agreement.If a party does enter a contract because ofcoercion by the other party then the law acceptsthat the contract should be set aside and theparty coerced should be relieved of their ownobligations.
Such principles have been developed so thatthere is an action under common law for duress,and an action in equity for undue influence. Inthe first a remedy will be automatic on proof ofthe duress and the contract can be set aside. Inthe second the remedy is at the discretion of thecourt. In either case the contract will be voidablerather than void.
13.2. DuressDuress is a common law area which wastraditionally associated with intimidation that wasreal or at least sufficiently real and threatening tovitiate the consent of the other party, and meanthat (s)he acted not by free will.
The law developed so that the threat vitiatingthe contract was associated with violence oreven death.
Threats to carry out a lawful action, however,cannot amount to duress.
Cumming v Ince (1847)An inmate in a private mental asylum was coercedinto signing away title to all of her property or she
was threatened that the committal order wouldnever be lifted.The contract was set aside. It wasnot made of her free will.
Barton v Armstrong (1975)A former chairman of a company threatened thecurrent managing director with death unless themanaging director paid over a large sum of moneyfor the former chairman’s shares. It was shown inthe case that the managing director was actuallyquite happy to buy the shares and would havedone so even without any threat being made.Nevertheless threats had been made and weretherefore sufficient to amount to duress, vitiatingthe agreement they had reached as a result.
Williams v Bayley (1866)A young man had forged his father’s signature onpromissory notes (IOUs) which he then gave tothe bank, causing it to lose money.The bank thenapproached the young man’s father and demandedthat he should mortgage his farm to it to cover the
Vitiating Factors: Duress and Undue Influence 155
Traditionally, for duress to apply to allow thecontract to be set aside the threat should be athreat of violence against the other party notagainst their property.
13.3. Economic duressThis last point had been the subject of somecriticism. A doctrine has subsequently developedin the commercial field whereby a contract maybe set aside not because of threats of violence butbecause extreme coercion has rendered thecontract otherwise commercially unviable. It wasfirst discussed in cases without actually beingapplied.
The point was then taken further and a moreformal doctrine was developed.
Lord Scarman then also accepted the basicdoctrine in Pao On v Lau Yiu Long (1980) ‘there isnothing contrary to principle in recognisingeconomic duress as a factor which may render acontract voidable provided always that the basisof such recognition is that it must always amountto a coercion of will which vitiates consent’. LordScarman also outlined the test for coercion‘whether the person alleged to have been coerceddid or did not protest . . . did or did not have analternative course open to him . . . wasindependently advised . . . took steps to avoid it’.
The doctrine and the tests deriving from ithave been subsequently and satisfactorily applied.
son’s debt or it would prosecute the son.Thethreat was for lawful action and so could notamount to duress. However, the court wasdisturbed by the manner of the threats andaccepted that they did amount to undue influence.
Skeate v Beale (1840)A promise given in return for recovery of goodsthat had been unlawfully detained was not duress.
D.C. Builders v Rees (1965)In this case, as we have already seen, the Reesesforced the small firm of builders to accept a chequeof £300 in full satisfaction of the actual bill of £462or take nothing.They had no choice in thecircumstances but to accept. Lord Denningconsidered the issue of inequality of bargainingstrength and felt that coercion in suchcircumstances justified avoidance of the agreement.
Occidental Worldwide InvestmentCorporation v Skibs A/S Avanti (TheSiboen and the Sibotre) (1976)During a world recession in the shipping industry,charterers demanded a renegotiation of theircontract with the ship owners.They claimed that theywould otherwise go out of business and that with noassets they were not worth suing.The ship ownershad no choice but to agree. Because of the recessionthey would have little chance of other charters oftheir vessels. Kerr J suggested that the question to askwas ‘was there such a degree of coercion that theother party was deprived of his free consent andagreement’. He also identified a two-part test toestablish if economic duress had occurred: (i) did theparty alleging the coercion protest immediately, and, ifso, (ii) did that party accept the agreement or try toargue openly about it?
Atlas Express Ltd v Kafco (Importersand Distributors) Ltd (1989)Atlas, a national carrier, contracted with Kafco todeliver Kafco’s basketwork to Woolworth stores. Itwas estimated that each load would be between
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The doctrine has been extended to applywherever there is an intentional submission toimproper pressure. Although what the differenceis between legitimate pressure and improperpressure is not always certain.
The doctrine is still developing and is subject touncertainty. Even though the economic duress canbe shown this is no guarantee of a remedy.
400 and 600 cartons and a price of £1.10p percarton was agreed. In fact the loads were onlyabout 200 cartons each and Atlas refused to carryany more without a minimum £440 per load. Kafcohad no immediate alternative and were forced toagree to protect their contract with Woolworth.However, they later failed to pay the agreed rateand Atlas sued.Tucker J held for Kafco and said
‘I find that the defendant’s apparent consent tothe agreement was induced by pressure whichwas illegitimate . . . In my judgment can properlybe described as economic duress, which is aconcept recognised by English law, and which inthe circumstances of the present case vitiates thedefendant’s apparent consent’.
Universe Tankships Incorporated ofMonrovia v International TransportWorkers Federation (The UniversalSentinel) (1983)One of a number of cases involving action by theITWF in respect of a campaign to improveconditions on ships ‘flying flags of convenience’.Here, the ship was blacked by the union and forcedto pay towards the ITWF welfare fund to securethe ship’s release.This was economic duress, thepressure being illegitimate.Though the court wereundecided on the difference between what waslegitimate pressure and what was not.
North Ocean Shipping Co. Ltd vHyundai Construction Co. Ltd (TheAtlantic Baron) (1978)A shipyard agreed to build a tanker for a shippingcompany, payment to be in five instalments. As partof the contract the shipyard opened a letter of creditfor repayment of payments already made if theyshould fail to build the ship. After payment of the firstinstalment the shipyard demanded an increase in theprice.The shipping company reluctantly agreed, asthey needed the ship to complete other contracts.The letter of credit was increased as a result. Monthsafter completion of the ship the shipping companysued for return of the excess.While the courtaccepted that there was economic duress, it was feltthat the increase in the letter of credit was sufficientconsideration for the fresh promise, and also thedelay meant that the contract was affirmed.
ActivitySelf-assessment questions1. What is the main limitation on a claim to
duress?
2. What is the effect of:
a) a successful claim of duress and b) the alternative when duress is not
available as an action?3. Why has the doctrine of economic duress
developed?
4. In what circumstances will a claim ofeconomic duress fail and in whatcircumstances will it succeed?
5. Will there always be a remedy availablewhere the court accepts that economicduress has in fact occurred?
Vitiating Factors: Duress and Undue Influence 157
13.4. Undue influenceTraditionally developed under equity and so anyremedy is at the court’s discretion. Undueinfluence developed to cover those areas whereimproper pressure prevents a party fromexercising their free will in entering a contract.Since equity is inevitably more flexible thancommon law the doctrine could be appliedwhenever a party has exploited the other party togain an unfair advantage.
Clearly, there is nothing wrong with trying toinduce another to enter a contract, so it is thedegree of influence and the context in which itoccurs that the court is concerned with indetermining what is and is not acceptable.
Traditionally, a distinction was made betweenthose situations where undue influence waspresumed from the relationship of the two partiesand where undue influence had to be proved. Thecourts have recently redefined these classes.
The classifications were subsequently approved inthe leading case.
6. What was the traditional differencebetween a claim of duress and a claim ofundue influence?
Bank of Credit and CommerceInternational SA v Aboody (1990)Here, a wife was able to avoid liability to the bankin respect of a surety transaction which she wasinduced to enter by her husband. She succeededbecause the bank was said to have eitherconstructive or actual notice of her husband’sactions in either exercising undue influence over heror misrepresenting the amount of money he owedthe bank.The court drew distinctions between thetwo classes of undue influence:Class 1 – actual undue influence – representing theoriginal situation where there was no special
relationship between the parties and so the partyalleging the undue influence is required to prove it.
Class 2 – presumed undue influence – representingthe traditional class where there was a specialrelationship and so undue influence is automaticallypresumed unless the contrary is proved.
Barclays Bank plc v O’Brien (1993)The bank granted an overdraft of £135,000 forO’Brien’s failing business on the security of thejointly owned marital home.The bank’srepresentative failed to follow instructions to ensurethat both O’Brien and his wife receive independentadvice before signing. In the event, the companywent further into trouble and the bank then soughtto enforce the surety to recover the debt. MrsO’Brien succeeded in showing that she had beeninduced to sign as a result of her husband’s undueinfluence and had an inaccurate picture of what shehad signed.The House of Lords considered that:
● there was a presumption of undue influenceagainst the husband
● such a presumption could also apply withcohabitees
● a surety of this type could not be enforcedwhere it had been gained by the presumedundue influence of the principal debtor
● unless the creditor took reasonable steps toensure that the surety was entered into with freewill and full knowledge then the creditor wouldbe fixed with constructive notice of the undueinfluence
● constructive notice could be avoided by warningof the risks involved and advising of the need totake independent legal advice at a meeting notattended by the principal debtor.
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Class 1: Actual undue influenceThis type of undue influence applies where there isno special relationship between the parties. In thisway it is impossible to show that an abuse ofconfidence or trust has occurred and as a result theparty alleging the undue influence must show it.
Undue influence will be accepted in thesecircumstances where it is possible to show thatthe coercion amounted to a dominance to theextent that the party subject to it was unable toexercise free will or act independently of theinfluence in contracting.
It was originally defined in Allcard v Skinner(1887) as ‘some unfair and improper conduct,some coercion from outside, some overreaching,some form of cheating’.
Lord Denning felt it should apply where thereis any inequality in bargaining strength.
However, Lord Scarman subsequently rejected thisin National Westminster Bank plc v Morgan (1985).
Lord Browne-Wilkinson in CIBC Mortgages Ltd vPitt (1993) has more recently explained that ‘actualundue influence is a species of fraud . . . a manguilty of fraud is no more entitled to argue that thetransaction was beneficial to the person defraudedthan a man who has procured a transaction bymisrepresentation’, rejecting the previously heldview that the party claiming actual undue influencewas required to show some manifest disadvantage.
Traditionally, such relationships as husbandand wife and banker and client were felt to fallwithin actual undue influence, but the class as awhole seems to be becoming more rare.
Class 2: Presumed undue influenceThis class applies whenever the party claiming itcan show a relationship of trust and confidencewith the party against whom the undue influenceis alleged. The claimant only need prove therelationship, and then undue influence ispresumed and it is for the other party to disprovethat it has in fact occurred. This can only be doneby showing that the party alleging the undueinfluence entered the contract with fullknowledge of its character and effect. In order toachieve this the party against whom undueinfluence is alleged will need to show that theother party had the benefit of independent,impartial advice before entering the contract.
Traditionally, presumed undue influenceapplied in relationships such as parent/child.
Williams v Bayley (1866)A young man forged endorsements on promissorynotes, causing loss to a bank. His father was thenapproached by the bank to stand the son’s debts.This was acceptable behaviour but the threat thatthe bank would have the son arrested anddeported amounted to undue influence.
Lloyds Bank v Bundy (1979)An elderly farmer, his son, and a company ownedby his son were customers of the same bank.Thefarmer was persuaded by his son and the bankmanager to use his farm as security for a loan tothe son’s company.When the company defaultedon the loan and the bank sought possession of thefarm, the farmer successfully pleaded undueinfluence.There was a clear conflict of interestbecause the bank represented all parties.
Lancashire Loans Co. v Black (1933)A domineering woman induced her daughter tostand guarantor for a loan with a bank.When shedefaulted on the loan and the bank sought to enforcethe guarantee the daughter successfully claimedundue influence. She was dominated by her mother,did not properly know the nature of what she wassigning and had been given no independent advice.
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Also a relationship based on spiritual leadershipgave rise to the presumption.
Other relationships such as trustee/beneficiary,doctor/patient, and other fiduciary relationshipshave been held to create a presumption of undueinfluence.
Such relationships are now identified as Class2A, and arise automatically, merely because of thetype of the relationship. It is also now possible toestablish a relationship where the one party provesthat (s)he has placed trust and confidence in theother where the presumption will apply eventhough not falling within one of the traditionalcategories. This is now known as Class 2B.
The most common case is that of husband andwife, which traditionally fell under the category ofactual undue influence, requiring proof of theundue influence by the party alleging it, usually awife. The court in Bank of Credit and CommerceInternational SA v Aboody (1990) rejected theproposition in Midland Bank v Shepherd (1988)that the wife/husband relationship gave rise onlyto actual undue influence, and therefore proof ofthe undue influence by the husband.
It has been argued both that the party subjectto undue influence in these cases is protectedbecause the other party is seen as the agent of thecreditor, or alternatively that the wife in suchsituations has a special protection in equity. Themost common means of protecting the weakerparty, however, is by application of the ‘doctrine of
notice’. That is the creditor, usually a bank orbuilding society, will be unable to enforce thedefaulted loan against the wife where it has actualor constructive notice of her equitable interest inthe property which stands as surety for the loan.
Since Barclays Bank plc v O’Brien wives are ableto show a relationship of trust and confidence intheir husbands and thus qualify for presumedundue influence under Class 2B. The informalityof the relationship, it is accepted, means thatthere is a greater risk of the wife being takenadvantage of in order to secure a loan based onthe surety of the matrimonial property. This isthen sufficient to put the creditor on noticeproviding that the contract is not on the face of itto the wife’s advantage, and there is a risk thatthe husband has unfairly induced the wife’sacceptance. Lord Browne-Wilkinson, in the case,also suggested that the principle should applyalso to cohabitees where the relationship isactually known to the creditor.
So the creditor will be unable to enforce thesurety against the loan unless he has ‘takenreasonable steps to satisfy himself that the suretyentered into the obligation freely and inknowledge of the true facts’. Reasonable stepsmight include: personally interviewing the personstanding surety for the loan in the absence of theprincipal debtor; explaining the full extent of theliability; explaining all of the risks involved;encouraging the person to seek independent legaladvice before standing surety on the loan.
The creditor of course has no duty to enquirewhat goes on when the solicitor gives thisindependent advice.
Allcard v Skinner (1887)A woman belonging to a religious sect waspersuaded to join a closed order and to give all ofher property up to the order.When she later leftthe order she then tried to recover railway stockthat she had owned.While it was accepted that shehad been subjected to undue influence her actionfailed because she waited until five years after leavingthe order before claiming, and ‘delay defeats equity’.
Massey v Midland Bank (1995)Mrs Massey was persuaded to give the bank acharge on the property she shared with Potts, thefather of her children, as security for his businessoverdraft.The bank suggested that Mrs Masseywould need independent legal advice.This was
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On this basis the creditor is entitled to assumethat the solicitor will act honestly andcompetently. As Steyn LJ put it in Banco ExteriorInternacional v Mann (1994) ‘I do not understandLord Browne-Wilkinson to be laying down theonly steps to be taken which will avoid a bankbeing faced with constructive notice . . . rather heis pointing out best practice’.
However, in the recent case of Royal Bank ofScotland plc v Etridge (No 2) (2001) the House ofLords has considered the issue of whether asolicitor appointed by the bank to give the wifeindependent advice is agent of the bank. Itreviewed all the leading authorities on undueinfluence, setting significant guidelines in theprocess. It has set out some major rules. The casewould also seem to suggest that the distinctionsbetween Class 1, Class 2A and Class 2B are nowin many ways irrelevant.
arranged with Potts’ solicitor, and Potts himselfattended. Potts defaulted and the bank sought toenforce the charge.The bank had notice of therelationship, and of the risk that the charge was notto Mrs Massey’s advantage. However, the solicitorconfirmed to the bank that she had receivedindependent advice, and it was not bound to makeany further enquiries.
Royal Bank of Scotland plc v Etridge(No 2) and other appeals (2001)Here, the wife claimed undue influence by herhusband and argued that the solicitor had notexplained the charge to her on her own. Sheclaimed that the bank was therefore fixed withconstructive notice of the undue influence.TheHouse of Lords reviewed all of the law on undueinfluence in the banking cases where a wife hasstood surety for her husband’s debts.The Lordsappear to have decided that there are not twotypes of undue influence. Presumed undue influence
is merely an evidential ‘lift’ in helping prove undueinfluence.They also expressed dislike with the words‘manifestly disadvantageous’ and preferred insteadthe 19th-century language ‘transactions which arenot to be accounted for on terms of charity, love oraffection’.They considered that it was out of touchwith life to presume that every gift from a child to aparent was undue influence.They also thought thatmost cases where a spouse guarantees a husband’sbusiness debts would be explicable and arereasonably accountable.This view might lead tofewer cases being successful.The Lords issuedgeneral guidelines as follows:
1. A bank should be put on enquiry whenever awife offers to stand surety for her husband’sdebts or vice versa, or even in the case ofunmarried couples where the bank was aware ofthe relationship.
2. A bank should take reasonable steps to satisfyitself that a wife had been fully informed of thepractical implications of the proposed transaction.This need not mean a personal meeting if asuitable alternative was available and the bankcould rely on confirmation from a solicitor actingfor the wife that he had advised herappropriately. But if the bank knew that thesolicitor had not properly advised the wife orought to have realised that the wife had notreceived appropriate advice then it was risk ofbeing fixed with notice.
3. A solicitor advising the wife can act for both herand her husband (and/or the bank) unless herealised that there was a real risk of conflict ofinterests, in which case he should cease acting forher or be liable.
4. The advice given by a solicitor should includeexplanation of the following:
● the nature of the documents and theirpractical consequences for the wife
● the seriousness of the risks involved – i.e. theextent of her financial means and whether she
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The effects of pleading undueinfluenceWhere a claimant succeeds in a plea that undueinfluence has taken place then the contract isvoidable by the party alleging the undueinfluence. The contract will be set aside subject tothe principle of restitutio in integrum.
However, in certain circumstances a party maybe denied an effective remedy despite a successfulplea if the actual value of the property has changed.
has other assets out of which repaymentcould be made
● that she has a choice of whether to proceedor not
● the solicitor should be sure that the wife doeswish to proceed, and the discussion should takeplace at a face-to-face meeting with the wife inthe absence of the husband.
5. The bank has a duty to obtain confirmation fromthe solicitor.
a) For future cases:● the bank should take steps to check directly
with the wife the name of the solicitor shewishes to act for her
● this communication and response must bedirect with the wife
● the bank should send the solicitor thenecessary financial information
● in exceptional cases, where the bankbelieves or suspects the wife is being misledby her husband, the bank should inform thesolicitors of the information giving rise tothat suspicion
● in every case the bank should obtain writtenconfirmation from the solicitor.
b) For past transactions:● it would be sufficient if the bank obtained
from a solicitor acting for the wifeconfirmation to the effect that he hadbrought home to the wife the risks she wasrunning by standing surety.
6. In obiter the court also identified that the O’Brienprinciple is not confined to husband/wiferelationships but also to others who are in asexual relationships or whenever there is a risk ofundue influence (e.g. parent and child). If the bankknows of the relationship, that is enough to putthe bank on enquiry.
Cheese v Thomas (1994)Cheese, who was aged 84, contributed £43,000 tothe purchase of a property costing £83,000. Hisnephew provided the remaining £40,000 by way ofa mortgage.The property went in the nephew’ssole name, but was to be solely occupied by theuncle until his death.The nephew then defaulted onthe mortgage.The uncle then sought return of his£43,000 fearful of his security.The court accepted aclaim of undue influence and ordered the housesold. However, the slump in property prices meantthat the house could only fetch £55,000 and theuncle was then entitled to only a 43/83 share.
Activity Quick QuizSelf-assessment questions1. Why did the doctrine of undue influence
develop in equity?
2. What was the traditional differencebetween claims made under duress andthose made under undue influence?
3. What differences were there traditionallybetween actual undue influence andpresumed undue influence?
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4. Why was undue influence traditionallypresumed in the case of certainrelationships?
5. Were the classes of relationships coveredby this principle sensible?
6. What is the difference between the newclasses 2A and 2B in undue influence?
7. What is the role of the ‘doctrine of notice’in undue influence?
8. When will a bank have constructive noticeof the undue influence, and how can itavoid this?
9. What is the basic rule in Barclays Bank vO’Brien?
10. What impact do cases such as Massey haveon the basic rule?
11. When are banks in a special relationshipwith their clients?
12. How has the case of Royal Bank ofScotland plc v Etridge (No 2) in HLdeveloped or help clear up the rules onundue influence?
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● To preserve freedom of contract the courtshave traditionally invalidated a contract whichhas been formed as the result of any coercion
● Duress is a common law action where acontract has been procured by violence orthreats of violence – Barton v Armstrong
● Economic duress is a modern area where in acommercial contract a party is coerced into achange of arrangements under the threat of acommercially damaging course of action – TheSiboen and the Sibotre
● The party raising it must have (i) protestedimmediately, and (ii) shown a reluctance toenter the arrangement otherwise any remedymay be lost – The Atlantic Baron
● Undue influence is traditionally an equitablearea where one party has been induced bycoercion to enter a contract – it is a questionof degree what level of persuasion isacceptable and what amounts to undueinfluence
● There are now identified two types of undueinfluence – Class 1 or actual undue influence,and Class 2 or presumed undue influence –BCCI v Aboody
● Actual is where there is no special relationshipand the party alleging the undue influencemust prove it – CIBC Mortgages v Pitt
● Presumed undue influence occurs in certainrelationships such as parents and children –Lancashire Loans v Black – and spiritualadviser/follower – Allcard v Skinner
● The party against whom the undue influenceis alleged must disprove it
● Class 2B now extends this type of undueinfluence to those situations where a wife isinduced to place the family home as securityfor a loan made to the husband – BarclaysBank v O’Brien
● In such situations the creditor is put on noticeof the possibility of the undue influence andmust take reasonable care to ensure that thewife only agrees to the arrangement afterhaving full knowledge of the risks involved,having been given independent legal advice
● Many cases such as Massey, Mann, Camfield,and Etridge concern whether or not thecreditor has done sufficient to discharge theirduty towards the wife to escape actual orconstructive notice
● Now the major rules are contained in HLjudgment in Etridgew Bank put on enquiry when she stands as
surety for husband’s debtsw Bank should take steps to see that she is
fully informedw Solicitor can act for both parties unless he
realises that it involves a conflict of interestsw Solicitor should inform wife of nature of
documents, seriousness of risk, that she haschoice to back out
w Bank should get confirmation of advicefrom solicitor
w O’Brien principles extend beyond husbandsand wives into other similar relationships
Key
Fact
s
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Dilemma Board
Beta Baskets has a contract to supply a national retail chain with its products, which accounts for 90% ofBeta Baskets’ sales. It has a contract with Getithere hauliers to deliver its products to shops in the retailchain. At the time of the heaviest demand for Beta Baskets’ products Getithere refuses to deliver for BetaBaskets unless Beta Baskets pays twice the normal rate.There is no alternative haulier available and fearingthat it will be put out of business Beta Baskets agrees but makes no protest to Getithere.When Getithereasks for payment for the work Beta Baskets refuses to pay the new price.
A.Beta Baskets can claim that theagreement with Getithere is vitiatedby Getithere’s duress.
C.Economic duress has no relevanceto Beta Basket’s situation.
B.Beta Baskets can claim that theagreement with Getithere is vitiatedby Getithere’s undue influence.
D.Beta Baskets will be able tosuccessfully claim economic duressin any action by Getithere.
In the dilemma board below consider the accuracy of each of the four statements A, B, Cand D, as they apply to the facts in the central scenario.You only need to give the basicprinciples. The answer is in the appendix at the end of the book.
Vitiating Factors:Illegality
Chapter 14
14.1. IntroductionMost vitiating factors represent some sort ofdefect in the formation, for instance that theagreement does not truly represent the consensusof the two parties because the agreement is basedon a mistake or a misrepresentation. Illegality onthe other hand is more about the character of theagreement itself. It is of a type that for somereason the law frowns on.
The basic principle involved is straightforwardenough: the law will not enforce a contract that istainted with illegality. However, the area is not asimple one for a number of reasons. Firstly, thetypes of contract that have been declared illegalare not only numerous but also diverse. Secondly,while judges frequently refer to contracts beingillegal or void or unenforceable, they do notalways fully distinguish between these terms.Thirdly, there is the added complication that overtime both the common law and statute law haveboth been used to render different types ofcontract illegal. Fourthly, the area is one that isheavily influenced by public policy.
Despite these difficulties it is possible toidentify some loose groupings in which tocategorise such contracts.
● Certain contracts are said to be void andtherefore unenforceable – in other words, thereis nothing to prevent their creation and so longas the parties comply with the terms of theiragreement they create no problems, but if oneparty breaches a term of the agreement theother will have no redress in law;
● Certain other contracts are said to be illegaland therefore unenforceable – with these itis possible that they should not have beenmade at all, in any case other connectedtransactions may be tainted with theirillegality.
Since contracts can be illegal by statutoryprovision or by common law it is possible toclassify illegality into four groups:
● contracts void by statute● contracts declared illegal by statute (with the
further division between contracts that areillegal in their formation and those declaredillegal because of the manner of theirperformance)
● contracts that are void at common law – anarea that is heavily influenced by public policy
● contracts that are illegal at common law –again for public policy reasons.
14.2. Contracts void bystatuteThese are of two types:
Contracts of wagerWager was defined in Carlill v The Carbolic SmokeBall Co. as where ‘two persons mutually agree thatone shall win from the other money or otherstake upon the determination of some event,neither party having an interest in the contractapart from the stake’.
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By virtue of s18 Gaming Act 1845 suchcontracts are null and void. So it is possible tomake a contract of wager but not to enforce it.Money passed as a result of the wager is notrecoverable and contracts that are associated withthe wager may also be affected.
There are of course a number of contractsinvolving betting that are now regulated byvarious Acts and are consequently enforceable.These include the lottery and the pools, on coursetote betting, and casino gambling under theGaming Act 1968.
Restrictive trade practicesPublic policy originally prevented enforceabilityof agreements aimed at restricting freecompetition. Now such agreements fall underthe Restrictive Trade Practices Act 1976, and areregulated by the Director General of Fair Trading.They are also subject to the control of EUcompetition law in Articles 81 and 82 of theEC Treaty.
14.3. Contracts illegal bystatuteHere the contract could be illegal in one of twoways:
● it could be illegal to make such contracts at all –generally this would be for reasons of publicpolicy, Parliament does not wish such contractsto be made
● it could be legal to engage in such a contractbut the manner in which the contract isperformed is illegal.
Contracts illegal when formedWhere the contract is illegal as formed then thecontract is void ab initio and unenforceable as aresult.
The justification for this is that the contract wouldbe ‘a transgression of the positive laws of ourcountry’– Lord Mansfield.
Sometimes, however, the contract will not beillegal because the provision in the Act is for adifferent purpose than to prevent the contractfrom being made.
Contracts illegally performedA contract may be created legitimately butbecome illegal and therefore unenforceable
Re Mahmoud and Ispahani (1921)The Seed, Oils and Fats Order of 1919 prohibitedunlicensed trading in linseed oil. One party had alicence and contracted to supply the defendantwho did not but who falsely stated that he did.When the defendant backed out of the agreementthe claimant sued for the failure to accept delivery.He was unsuccessful because the contract was voidand unenforceable for the lack of the licence.
Smith v Mawhood (1845)A tobacconist failed to get the appropriate licenceto sell tobacco products.The purpose of thelicensing was to impose a penalty for the revenueso the contract was not unenforceable.
Cope v Rowlands (1836)An Act made it illegal for stockbrokers to dealwithout a licence. Cope set up business in Londonwithout obtaining a licence. As a result, when hesued Rowlands for payment for work done, hefailed. His lack of a licence made the contract illegaland unenforceable.The purpose of the provisionwas to protect the public from the harm that couldbe caused by unregulated brokers.
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because the manner in which it is performed isillegal.
But the fact that performance is not by theproscribed manner does not mean that it will beautomatically unenforceable on all occasions.
The point that the case clearly makes is that theillegality must relate to the contract’s centralpurpose if the contract is to be declared invalidand unenforceable.
14.4. Contracts void atcommon lawThe central issue here is again whether the typeof contract offends public policy. Again, as voidcontracts there is nothing to prevent partiesagreeing to their formation but the parties will beunable to enforce the terms of the contract whenthere is any dispute.
Contracts unenforceable under this headingfall into three distinct categories:
Contracts seeking to oust thejurisdiction of the courtsGenerally, the courts will reject any attempt toremove their jurisdiction through clauses incontracts to that effect.
An exception to this is arbitration clauses, knownas Scott v Avery clauses. Many bodies will contain aclause referring any dispute, at least initially, to aqualified arbitrator expert in the specific field.
Also, Parliament directs a number ofcontractual disputes to bodies other than thecourts. An obvious example of this is employmentdisputes and employment tribunals.
Contracts prejudicial to the familyThe courts traditionally have seen themselves asthe defenders of moral values and marriage is seenas a sacred institution requiring the protection ofthe courts. Traditionally, then, any arrangementwhich might have the effect of harming marriagewould be deemed void by the courts.
Obvious examples of this would be takinga fee not to marry or indeed procuring a marriagefor a fee, or otherwise threatening a marriage.
Originally the courts would also view contractswhich relinquished parental responsibility as void,as where a parent sold the child. Now this principlemay be complicated by the practice of surrogacy.
Contracts in restraint of tradeThese are clearly the most important category ofcontracts void at common law and they areprobably also the most contentious.
A restraint of trade clause is a clause of a contractby which one party agrees to limit or restrict hisability to carry on his trade, business or profession.
Judges have always viewed such arrangementsas prima facie void for two principal reasons:
● firstly, the courts are reluctant to endorse anarrangement whereby one party effectively gives
Anderson Ltd v Daniel (1924)A statute provided that, in sales of fertilisers, aninvoice listing chemicals contained in the productmust be given to the buyer. Fertiliser was suppliedwithout the proper invoice.When the buyer failedto pay for the goods, the seller’s action for the pricefailed.The contract could be made lawfully but theabsence of the invoice rendered it illegal and theseller could not enforce it.
St John Shipping Corporation v JosephRank Ltd (1956)The court refused to hold that a contract for thecarriage of goods at sea was illegal and thereforeunenforceable merely because the captain loadedhis ship beyond the legal loading line.To do sowould have allowed the other party to avoidpayment with no justification.
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up his right to his livelihood as a requirement ofthe stronger party to the contract
● secondly, the judges are similarly reluctant tosee the public deprived of that party’s skill orexpertise.
Nevertheless, the courts have always tried toprotect the idea of freedom of contract and onlyintervene in a contractual relationship reluctantly.As a result, while restraint clauses are prima facievoid, the courts will allow them to stand wherethey are demonstrated as reasonable.
Reasonable in this context is measured in twoways:
● firstly, the restraint must be reasonable asbetween the two parties to the contract.‘Reasonable’here means that the restraint is nowider than is needed to protect the legitimateinterests of the party inserting the restraintclause into the contract. Merely preventinglegitimate competition through use of therestraint is unacceptable and the clause will fail
● secondly, the restraint must be reasonable inthe public interest. A restraint would not beconsidered reasonable that deprived the publicof a benefit that might otherwise be enjoyed orthat unduly restricted choice.
Restraint clauses generally operate in one of threedistinct contexts:
● employee restraints● vendor restraints● agreements of mutual recognition between
businesses.
Employee restraintsThese are clauses contained in the contract ofemployment that restrict the activities of theemployee on leaving the employment. Theemployer seeking to rely on such a clause willsucceed only where he is actually protecting alegitimate interest of his business. No clause willsucceed which merely tries to prevent legitimate
competition and which has its logical outcometherefore that the employer is effectivelyprevented from working. The employer thenwill be able legitimately to use such a clause toprotect only things such as his trade secrets andhis client connections, and sometimes to reducethe damage that could be done by a high-levelemployee.
The courts must decide what is reasonable inthe circumstances. They will measure what isreasonable against a number of factors:
a) Whether or not the work is specialised– in which case the restraint is more likely to beseen as reasonable.
b) The position held by the employee in theemployer’s businessThe higher up and the more important theemployee, the more likely it is that inclusion ofthe restraint is to be reasonable.
Forster v Suggett (1918)A clause in a glass blower’s contract prevented himfrom working for any competitor of his employerson leaving.The court held that the skill was sospecialist at the time that it amounted to a tradesecret and the glass manufacturers were entitled tothe protection of the clause.
Herbert Morris Ltd v Saxelby (1916)The restraint clause prevented the ex-employeefrom involvement with the sale or manufacture ofpulley blocks, overhead runways, or overheadtravelling cranes for a period of seven years afterleaving the employment.This covered the wholerange of the employer’s business and was too wideto succeed despite the key position held by theemployee.
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The employee need not be a senior member ofstaff if they are significant to the business.
c) Soliciting clientsIn general, since an employer is able to protect hisclient contact, a clause that prevents the employeefrom soliciting those clients will be upheldprovided that it is not too wide.
d) The geographical area covered by therestraint This must not be wider than necessary to protectthe legitimate interest.
e) The duration of the restraint This must not be longer than necessary to protectthe legitimate interest.
f) The restraint must be no wider than isnecessary to protect the legitimate interests ofthe employerThe restraint must be against activities only,which would protect the employer’s legitimateinterests. Any attempt to widen the clause to
Leeds Rugby Ltd v Harris (2005)Harris, a star rugby league player for Leeds Rhinos,was under contract until 2003. In 2001 he asked fora move to Cardiff Rugby Union Club in order toplay for Wales in the World Cup. A clause in thetransfer contract required Harris to return to Leedsif he exercised an option to return to rugby leagueafter three years. Harris did exercise the option andaccepted an offer to play for Bradford Bulls. Leedssued successfully.The court held that the restraintclause was reasonable because Harris requestedthe original release from Leeds and the club wasentitled to protect its interests if its star playerreturned to rugby league.
Hanover Insurance Brokers Ltd andChristchurch Insurance Brokers Ltd vSchapiro (1994)Here, a number of brokerages including HanoverInsurance Brokers (HIB) were sold on toChristchurch. After the sale three directors of HIBleft and set up on their own and were accused ofsoliciting clients. A restraint clause in their contractprevented them from soliciting the clients ofHanover Associates (of which HIB was a subsidiary)and all its other subsidiaries.The three ex-directorsargued that the clause was too wide and should bedeclared void since they had only worked for HIB.The court accepted this, but held also that since thepurpose of the restraint was to prevent soliciting ofinsurance clients, and only HIB engaged in this
activity, then the clause could be upheld against thethree directors in respect of the clients of HIB.
Fitch v Dewes (1921)A restraint in a conveyancing clerk’s contractprevented him from working in the same capacityfor any firm within a seven-mile radius of TamworthTown Hall for life.The restraint was reasonablebecause of the rural nature of the community andthe clerk’s contact with the solicitor’s client base.
Home Counties Dairies Ltd v Skilton(1970)A milk roundsman had an employment contractcontaining two restraints. Clause 12 prevented himfrom entering any employment connected with thedairy business.The second, Clause 15, provided thathe should not work as a roundsman or serve anyexisting customer for a period of one year afterleaving the employment. Clause 12 was too wide tobe reasonable. Clause 15 was successful since itonly protected legitimate interests and for only ashort period of time.
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activities not relevant to the employee’s actualwork will be void.
g) Achieving restraint through other meansIt will also generally be classed as unreasonableto attempt to achieve the restraint through othermeans than a direct restraint clause.
A similar line would be taken when employersagree among themselves on an arrangement thathas the effect of a restraint of trade.
A similar point applies where the restraint isachieved through rules of associations.
Vendor restraintsThese will occur where sellers of business agreeunder the contract of sale not to unfairly competewith the purchaser of the business. Again, suchagreements are prima facie void. Declaring suchrestraints void has been justified as preventing anindividual from negotiating away his livelihood,and also for preventing the public from losing avaluable benefit where the one party is preventedfrom trading by the other.
They are, however, more likely to be accepted asreasonable by the courts because the bargainingstrength of the parties is more likely to be equal.
Again, to be reasonable and enforceable, theymust protect only legitimate interests and notmerely aim to prevent legitimate competition.
Mont (JA) (UK) Ltd v Mills (1994)This restraint clause was against a 43-year-oldmanaging director in the paper tissue industryand was contained in a severance agreement.The clause prevented him from joining anycompany within the paper industry for a periodof 12 months after ending his employment.Thecourt decided that it was much too wide. Iteffectively prevented him from working in thepaper industry which was all that he knew.Theclause only needed to prevent him from revealingconfidential information.
Bull v Pitney Bowes (1966)There was no restraint clause in the contract butthere was a clause whereby employees forfeited theirpension rights in the event that they took up workwith a competitor of the employer.This was held tobe void for public policy.
Kores Manufacturing Co. v KolokManufacturing Co. (1959)Two electronics companies reached an agreementnot to employ the other’s staff for five years in theevent of their leaving.This had the same effect as arestraint clause and was held to be void.
Eastham v Newcastle United FC Ltd(1964)Here, George Eastham, a well-known footballer,challenged the rules of the Football Association onthe legitimacy of the then transfer system.Theserules meant that a club could retain a player’sregistration even after his contract ended and soeffectively prevent him from playing again. Also,players could be placed on the transfer list againsttheir will.The court determined that these rules didamount to an unlawful restraint of trade. (Ofcourse, subsequently the whole area of transfershas become subject to control under Article 39 ECTreaty through the Bosman ruling.)
British Reinforced Concrete Co. vSchelff (1921)A business that specialised in the production of steelreinforcement for roads was sold. In the contract arestraint clause prevented the vendors of the
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Again, the same tests apply as for employeerestraints and no clause will be enforced that istoo wide in its application, though what is toowide is a question of fact dictated by thecircumstances of each case.
Mutual undertakingsOften, agreements between merchants ormanufacturers or in other trades of different typeswill amount in effect to restraints. Similar rulesapply and they will not in any case be declaredreasonable and valid unless a clear benefit isgained by both sides.
One example is agreements based on the rulesof associations.
Another area where the same principles canobviously apply is in the agreements betweenartists and performers etc and their various agents,particularly where there is an obvious imbalance inthe bargaining strength of the parties.
While the same rules generally apply, this can becontrasted with situations where, while a contractmay have been originally entered into where oneparty may have taken advantage of theimmaturity and unequal bargaining strength ofthe other, subsequent compromises have been tothe advantage of the other party.
business from engaging in any similar business. Oneof the vendors then entered another business asmanager of the reinforced concrete section.Theclause was held to be too wide to protectlegitimate interests and could not be applied.
Nordenfelt v Maxim NordenfeltCo. (1894)Nordenfelt had established a worldwide businessmanufacturing and selling guns and ammunition.When he sold the business, it was subject to aclause in the contract preventing from engaging inthe armaments business anywhere in the world fora period of 25 years.This seems an unusually wideclause. However, the court was prepared to enforceit since the world was the appropriate market.
English Hop Growers v Dering (1928)Here, Dering was held to be bound by hisagreement to deliver all of his hop crop to theassociation for onward sale.This arrangement wasactually the way in which hop growers eliminatedcompetition. It also ensured that any loss as well asany profit was shared equally amongst the
members of the association in any given year. So itwas a genuine protection of the members and ofobvious mutual benefit.
Schroeder Music Publishing Co. Ltd vMacaulay (1974)An unknown composer entered into an agreementwith music publishers. Under this agreement thepublishers would receive world copyright on anycomposition he produced, there would be nogeneral payment for compositions and royaltieswere payable only on those compositions that werecommercially exploited, and the publisher gave noguarantee that any work would be published.Theoriginal five-year agreement could automatically beextended by the publishers but they could alsoterminate the agreement at any time with only onemonth’s notice.The court held that this regulationof trade was plainly unreasonable and unlawful,particularly in the light of the inexperience andunequal bargaining strength of the young composer.
Panayiotou v Sony Music International(UK) Ltd (1994)This case involved George Michael and his attemptsto improve the degree of control he had over his
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A further area where the courts have applied theprinciples of restraint of trade and discussed indetail the tests for determining reasonableness isin the case of so-called ‘solus agreements’.
recording contract and gain greater freedom fromthe restrictions it imposed on him. Originally, he andAndrew Ridgeley had a recording contract as thegroup ‘Wham’, and they had tried to get theirrecording contract declared void for restraint oftrade.This in fact was changed in 1984 under anagreed compromise and the group moved to CBS.Michael then established himself as a solo artist andin 1988 his contract was changed to reflect his new‘superstar’ status. CBS was also taken over by Sonyat this time.When Michael later wanted to changehis image and became dissatisfied with Sony hesought to have this agreement declared void forrestraint of trade. As the 1988 contract was basedon and was an improvement on the 1984agreement which the court accepted as a genuinecompromise, it refused his claim as being contraryto public policy.
Esso Petroleum Co. Ltd v Harper’sGarage (Stourport) Ltd (1968)Under the solus agreement here, Esso lent Harper’sGarage money and it could sell only Esso petrolfrom its two garages. In the case of the first garage,known as the Corner Garage, there was a loan, theagreement was to last for 21 years, and by thesame agreement Harper’s were bound to pay backthe loan over that 21-year period and not anyshorter period. In effect, then, they were tied intothe agreement to sell only Esso petrol for those 21years. Under the agreement for the second garage,known as the Mustow Green garage, the durationof the agreement was for only four years and fivemonths and there was no loan attached to thegarage. HL discussed in length and restated thevarious rules for determining the validity of restraint
of trade clauses. Applying these rules, it declaredthe Corner Garage agreement void on the basis ofexcessive duration of the restraint. Using the samebasis of duration, HL declared the Mustow Garageagreement valid as both fair and reasonable.
ActivityProblemTry the following problem:Lisa agreed to sell her hairdressing business inWickton to Alison for £50,000, including thelease, all fixtures and fittings, and the goodwill.Lisa had planned to marry and begin a family,and thus give up hairdressing for a numberof years.
In a clause in the written contract that hadbeen insisted upon by Alison, Lisa agreed thatshe would not ‘for a period of ten yearsfollowing transfer of the business open a salonor other hairdressing establishment within atwenty five mile radius’ of the salon in Wickton.By a further clause in the contract Lisa wasprohibited from ‘approaching, soliciting forbusiness, or contacting with a view to enteringany business arrangement, for a period of fiveyears, any client of the business’.
Three years later, Lisa has found that she isunable to have a family, and so she plans toreturn to hairdressing. She has taken the leaseon a hairdresser’s in Sockington which is onlyfive miles from Wickton.
Alison is concerned that she may nowlose business and seeks your advice on anyremedies which may be available to her.
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14.5. Contracts illegal atcommon lawThis is potentially a very wide group ofcontracts and it includes any type of agreementthat is prejudicial to the general notion offreedom of contract. The basis for judgesdeclaring such arrangements illegal is that toallow them to stand would be harmful to thepublic good. So, like most aspects of illegality atcommon law, the reason for the illegality ispublic policy.
The categories of such agreements arenumerous and varied. The common characteristicseems to be some form of immorality in eachcase. They include:
a) A contract to commit a wrongThis might be a tort, a fraud, and even a crime.
b) A contract to benefit from thecrime of another
c) A contract to defraud the Revenue
There is also an interesting recent development ofthis point.
d) Contracts aimed at corruption inpublic life
Dann v Curzon (1910)Here, the claimant had been hired to start a riot ina theatre.When he sued for the unpaid fee of £20he was unsuccessful.The judges, as a matter ofpolicy, could not enforce an agreement to carry outa crime.
Beresford v Royal Insurance Co. Ltd(1937)Relatives were prevented from benefiting from thelife insurance of a suicide.
Napier v The National Business Agency(1951)Under his contract of employment the claimantreceived expenses of £6 per week where his actualcosts were no more than £1.This was a deliberateagreement between the parties with the purposeof avoiding income tax.When the claimant wasdismissed he was unable to sue for back pay sincethe contract was unenforceable.
Carnduff v Rock and another (2001)Here, the Court of Appeal held that there could beno enforceable agreement between a policeinformer and the police for payment for information.It would be against the public interest to allow aninformer to sue for payment. Laws LJ identified thatto resolve the issue fairly would involve examiningthe operational methods of the police in detail.Thiswould transfer the ‘difficult and delicate business oftracking and catching serious professional criminalsfrom the confidential context of police operations tothe glare of a court of justice’.
Parkinson v The College of Ambulance(1925)The claimant, who was wealthy, was asked todonate funds to a company, in return for which theother party promised he would be able to gain hima knighthood.When the claimant made thedonation but was not given any honour he sued for
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e) Contracts to interfere with justice
f) Contracts to promote sexualimmorality
14.6. The consequences ofthe contract being voidWhere the contract is declared void the significantdifference in effect is between contracts void undercommon law and contracts void because of statute.
Common lawWhere the contract is declared void by thecourts, as may be the case with a contract inrestraint of trade, there are a number of possibleconsequences:
a) Firstly, depending on the wording of thecontract, the whole contract itself is notnecessarily void, though the offending clausemay be.
b) Money that has been paid over under thecontract may be recoverable as a result ofthe contract being declared void, as inHermann v Charlesworth (1905) where theprocurement of a marriage for a fee wasdeclared void.
c) It is possible to sever the clause that is voidfrom the rest of the contract to avoid voidingthe whole contract.
d) But the court will not sever parts of a contractwhere to do so would alter the whole characterof the agreement.
e) Also, the court will not employ severance ifto do so would defeat public policy whichrendered the contract void in the first place.
return of his money. He failed because this waspurely a corrupt practice.
Harmony Shipping Co. SA v Davis(1979)An agreement by a witness not to give evidencein return for a cash payment was void andunenforceable.
Pearce v Brooks (1866)A prostitute hit on the idea of conducting hertrade from hired carriages.When she did not paythe fee owed, the owner’s action for the pricefailed.The contract was for immoral purposes andwas unenforceable.
Goldsoll v Goldman (1915)A restraint in the sale of a jewellery businessspecialising in the sale of imitation jewellery insidethe UK, prevented the vendor from engaging in thesale of real or imitation jewellery throughout mostof Europe and America.The court severed theword ‘real’ from the contract, and also the clausesrelating to those areas outside of the UK, and therest of the clause stood.
Attwood v Lamont (1920)A tailor’s cutter was restrained, on leaving hisemployment, from taking up work as ‘tailor,dressmaker, general draper, milliner, hatter,haberdasher, gentleman’s, ladies’ or children’soutfitter at any place within a ten mile radius’.The court saw this not so much as a list but acomprehensive description of the employer’s wholebusiness and as such severance was not possibleand the contract was void and unenforceable.
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StatuteThe effects if the contract is void because of astatutory provision may obviously vary and willdepend on the wording of the Act itself.
However, where the statute itself is silent onthe effects of the contract being declared voidthen the common law effects above will apply.
14.7. The consequences ofthe contract being illegalHere, the principal difference is not between thecommon law and statute but between contractsthat are illegal as formed and those that arelegally formed and only become illegal by themanner of their performance.
Illegal as formedWhere statute or the common law has declaredthat a class of contract will be illegal if made thensuch a contract can never be legally formed orperformed and will be illegal from the moment offormation. There are then a number ofconsequences for such agreements:
a) Since the contract is illegal it is alsounenforceable by either party.
b) As a result, property or money transferred inadvance of the agreement cannot generally berecovered, as was the case with the claimant inParkinson v The College of Ambulance (1925)where the court would not permit recovery ofthe donation.
c) This may be the position even where the partiesare unaware of the illegality of the agreement.
d) However, there are certain exceptions to thisbasic rule where property transferred may berecoverable:
(i) where not to allow recovery is ‘an affront topublic conscience’
(ii) where the illegality is not vital to the cause
Napier v The National Business Agency(1951)Here, because of the tax avoidance mechanism, thecontract was void and the claimant was unable torecover any of the money owing.
Dann v Curzon (1910)Since the agreement to start the riot was illegalthen there was no legal way of enforcing payment.
J.W. Allan (Merchandising) Ltd v Cloke(1960)Fees to hire a roulette wheel for an illegal gameunder the Betting and Gaming Act 1960 were notrecoverable although the parties were unaware thatthe game was illegal.
Tinsley v Milligan (1993)The claimant and defendant bought a house,putting it in the claimant’s name so that thedefendant could carry on claiming benefits, thusmaking the agreement illegal.The defendant later
Howard v Shirlstar Container TransportLtd (1990)The contract was to recover an aircraft impoundedin Nigeria, so in effect it meant stealing it for theowner.When it was completed and the aircraftowner refused to pay claiming that the arrangementwas void for illegality the court held that theclaimant could recover in the circumstances.
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(iii) where the party seeking recovery is not inpari delicto, i.e. is not as culpable as theother party
(iv) where the agreement has been induced bya fraud
(v) where the one party repents before thecontract is performed.
Illegal as performedIf both parties are equally culpable for the illegalperformance then the rules are basically the sameas for contracts illegal in their formation.
However, if one party is unaware of theillegality then (s)he may have remedies availableincluding recovery of any money handed over inadvance of the contract.
If a party relies on the illegality to bring the claimthen damages are not available. The party wouldquite naturally be tainted with the illegality of theagreement. If the illegality is only ancillary to thesubject of the claim then damages may berecovered.
claimed a share of the property under a resultingtrust arising out of the contribution to thepurchase.The claimant argued illegality but theHouse of Lords accepted that the right arising outof the trust was enforceable.
Kiriri Cotton Co. Ltd v Dewani (1960)A landlord demanded a premium from a tenanteven though this was illegal under legislation.Thetenant could recover the cost because he had nochoice but to go along with the illegalarrangement.
Hughes v Liverpool and Victoria LegalFriendly Society (1916)The claimant was induced by the fraud of aninsurance agent to take out on parties who werenot insurable by her.When the fraud wasdiscovered she was entitled to return of thepremiums paid.
Marles v Trant (1954)A seed supplier sold seed to Trant as ‘spring wheat’seed which in fact it was not.Trant then sold it onto Marles, but without an invoice required bystatute.When Marles discovered that the seed was‘winter wheat’ seed he was able to sue despite theillegality of the contract.
Hall v Woolston Hall Leisure Ltd (2000)The claimant was sacked when she became pregnantand claimed that this was sex discrimination andillegal under the Employment Rights Act 1996.Theemployer argued that the contract of employmentwas itself illegal and unenforceable because thewoman knew that the employer was paying andrecording her wages in a way to defraud the InlandRevenue.The claimant was aware of this but it wasdone for the benefit of the employer and she hadno control over it.The Court of Appeal held that theillegality had nothing to do with the claim so it couldaward compensation for unfair dismissal.
ActivitySelf-assessment questions1. In what ways does illegality differ from
other vitiating factors?
2. How are restrictive trade practicesregulated in modern times?
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7. How is reasonableness measured in restraint of trade?
8. What are the common characteristics ofcontracts declared illegal by the common law?
9. In what circumstances can a party recovermoney or property handed over under anillegal contract?
10. What are the purposes of severing acontract?
3. What is the difference between a contractillegally formed and a contract illegallyperformed?
4. How important do you think control ofcontracts prejudicial to marriage is in thepresent day?
5. Why are contracts in restraint of tradeprima facie void?
6. When will a restraint clause be upheld?
● Illegality is a difficult area because judges refer tocontracts being illegal, void and unenforceable,and also because a contract can be invalidatedby statute or by the common law
● Contracts void by statute include contracts ofwager, and restrictive trade practices
● A contract can be illegal by statute in itsformation – Re Mahmoud and Ispahani – inwhich case it is unenforceable
● Or a legally formed contract can be illegal inits performance – Anderson Ltd v Daniel
● Contracts void at common law include:w contracts to oust the jurisdiction of the
courtw contracts harmful to family lifew contracts in restraint of trade
● Contracts in restraint of trade are prima facievoid but may enforced if they are accepted asreasonable as between the parties, and in thepublic interest
● Reasonableness depends on:w geographical extent – Fitch v Dewesw duration of the restraint – Home Counties
Dairies v Skilton● A party is able to protect only legitimate
interests – British Concrete v Schelff● A vendor restraint is more likely to be held
reasonable than an employee restraint –Nordenfelt v Maxim Nordenfelt
● A party cannot either try to use other meansto effect a restraint – Bull v Pitney Bowes
● Contracts illegal at common law are all forreasons of public policy and include:w a contract to commit a wrong – Dann v
Curzonw a contract to commit a crime – Beresford v
Royal Insurance Co.w a contract to defraud the Revenue –
Napier v The National Business Agencyw contracts aimed at corruption – Parkinson v
The College of Ambulancew contracts to interfere with justice –
Harmony Shipping Co. v Davisw contracts promoting immorality – Pearce v
Brooks● If a contract is void by statute, the effect
depends on what the statute says● If a contract is void at common law then
money paid over may be recovered –Hermann v Charlesworth – and sometimes theoffending clause can be severed to save therest of the agreement – Goldsoll v Goldman
● A contract illegal as formed is unenforceableand money paid over is generallyunrecoverable, though there are exceptions
● A contract legally formed but illegally performedwill have remedies available to a party who isunaware of the illegality – Marles v Trant
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D.Belle Barnet cannot enforce either clauseagainst Simone if only one clause isunreasonable.
Dilemma Board
Simone is employed to colour hair by Belle Barnet salon. In her contract Simone is prevented from(a) entering the hairdressing trade in any form within a five-mile radius of Belle Barnet salon for a period ofone year after ending her employment; and (b) from soliciting any existing customer of Belle Barnet for aperiod of one year after leaving her employment. Simone leaves Belle Barnet and takes up employment as acutter and stylist for a business across the road. She regularly serves Belle Barnet customers.
C.Belle Barnet can enforce clause (b) againstSimone as it is only protecting a legitimatebusiness interest.
B.Belle Barnet can enforce clause (a) againstSimone as it is reasonable.
A.Clauses (a) and (b) of Simone’s contract areautomatically void for restraint of trade andcould never be enforced against her.
In the dilemma board below consider the accuracy of each of the four statements A,B, C and D, as they apply to the facts in the central scenario.You only need to givethe basic principles. The answer is in the appendix at the end of the book.
Discharging the Contract
Chapter 15
15.1. Discharge byperformance
15.1.1. IntroductionDischarge of the contract refers to the ending ofthe obligations under the contract, so that wherewe have thought of formation being the beginningof the contract discharge is concerned with its end.
In its simplest form discharge will be the pointat which all of the primary obligations created bythe contract have been met. However, the situationis not always that simple or straightforward andthere are times when we refer to the contractbeing discharged even though the obligationsunder the contract remain uncompleted.
The obvious example of this latter point iswhere the contract has been breached. Secondaryobligations in this case may be substituted for theprimary obligations, and a party not carrying outhis/her obligations under the contract may berequired to pay damages.
Where all of the obligations under thecontract have been carried out this is referred toas performance of the contract. The contract isdischarged, but even then the area can becomplicated by one party completing some butnot all of the obligations.
15.1.2.The strict rule on performanceThe rule in Cutter v PowellThe starting point for performance of the contract,sometimes known as the ‘perfect tender’ rule, is
that there should be complete performance of allof the obligations under the contract. If this is thecase then the contract is in effect complete anddischarged.
On the other hand, it also means that where aparty fails to meet all of his/her obligations thecontract is not discharged and this may requirethe other party to be remedied.
The bare and potentially unjust simplicity ofthe rule can be seen in the case from which itemerges.
An entire contract is one where all of theobligations are seen as a single transaction thatcannot be broken down in any way. The caseillustrates the effect of failing to perform such acontract. It also shows how it can create aninjustice since Cutter could hardly be said to havedefaulted by dying, an event that was beyondhis control.
Cutter v Powell (1795)Cutter was the second mate on a ship, TheGovernor Parry, sailing from Jamaica to Liverpool.Theboat set sail on 2nd August and reached Liverpoolon 9th October. Cutter died during the voyage on20th September.When his wages were not paid hiswife sued on a ‘quantum meruit’ basis (meaning forthe amount owed). Her action failed because herhusband had signed on for the complete voyage. Bydying he had failed to complete his contract andsince it was an entire contract there was noobligation on the ship owners to pay.
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Application of the ruleApplication of the strict rule can be commonly seenin sale of goods contracts where the descriptionapplied to the contract may mean that all ratherthan part is essential to completion of the contract.
The strict rule has been applied even in the caseof ancillary obligations such as packaging.
Despite that it is of course always possible that ajudge in a case may apply the maxim de minimisnon curat lex (the law will not grant a remedy forsomething that is too trivial).
This principle that a buyer should not be allowedto reject goods delivered when there is a slightshortfall or excess has now been incorporated inthe Sale of Goods Act as s30(2A).
15.1.3.Ways of avoiding thestrict ruleThe potential injustice of the rule, as seen inCutter v Powell, has led to judges acceptingexceptions when the rule does not operate.
a) Divisible contractsIn these the contract can be seen as being madeup of various parts. If each part can be dischargedseparately then it might also be enforcedseparately, and the strict rule need not apply.The rule here can be particularly appropriate forinstance where there is delivery by separateinstalments, except where the seller has stipulatedfor a single payment.
Arcos Ltd v E.A. Ronaasen & Son(1933)A buyer of wooden staves (described in thecontract as half an inch thick) was allowed to rejectthe consignment sent to him.Those delivered werea sixteenth of an inch narrower and so did notcorrespond to the contract description.The rule isshown for its strictness here since the staves couldstill be used for the purpose for which the buyerwanted them. Lord Atkin commented that ‘a tondoes not mean about a ton, or a yard about a yard.If a seller wants a margin he must, and in myexperience does, stipulate for it’.
Re Moore & Co. and Landauer & Co.(1921)Tinned fruit was sold described as being in cases of30 tins.When delivered, some of the cartonscontained 24 tins, although the overall total numberof tins ordered was correct.The buyer intended toresell the goods so the difference would have noimpact on him. Nevertheless, the Court of Appeal,applying the strict rule, held that packaging couldbe included in a description and that the buyer wascorrect in rejecting the goods and repudiating thecontract.
Reardon Smith Line Ltd v Hansen-Tangen (1976)We have already seen in this case, using innominateterms, how the judges were not prepared to accepta repudiation of obligations where the term was amere technicality describing the shipyard and jobnumber.
Taylor v Webb (1937)Premises were leased to a tenant for rent. A termin the lease required the landlord to keep thepremises in good repair. In the event the landlordfailed to maintain the premises and the tenant thenrefused to pay the rent. In the landlord’s action thecourt held that the contract had divisibleobligations, to lease the premises, and to repair andmaintain.The contract was thus not entire and thetenant could not legitimately refuse payment.
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b) Acceptance of part-performanceWhere one of the parties has performed thecontract but not completely if the other side hasshown willingness to accept the part performedthen the strict rule will usually not apply.
Part-performance may occur where there is ashortfall on delivery of goods or where a service isnot fully carried out. This exception to the rulewill only apply though when the party who is thevictim of the part performance has a genuinechoice whether or not to accept.
c) Substantial performanceIf a party has done substantially what wasrequired under the contract then the doctrine ofsubstantial performance can apply. That party canthen recover the amount appropriate to what hasbeen done under the contract, providing that thecontract is not an entire contract.
● The price is thus often payable in suchcircumstances and the sum deductedrepresents the cost of repairing the defectiveworkmanship.
● However, what is deemed to be substantialperformance is a question of fact to be decidedin each case. It will largely depend on whatremains undone and its value in comparison tothe contract as a whole.
Sumpter v Hedges (1898)A builder was hired to build two houses andstables. Some of the work was done when thebuilder ran out of money and was unable tocomplete it.The landowner then had the workcompleted using materials left on the land.Thebuilder was awarded the value of the materialsthat had been used. His argument, that part-performance had been accepted, was rejected.Thelandowner had no choice but to complete thework.The alternative was to leave the partlycompleted buildings as an eyesore on his land.
Dakin & Co. v Lee (1916)Here, a builder was bound by contract to completemajor repair work to a building. He did complete allof the work but some of it was carried out socarelessly that the owner of the building refused topay on the grounds that performance was in effect
Hoenig v Isaacs (1952)A decorator was hired to decorate and furnish aflat for £750. He finished the work.The ownermoved into the flat and paid £400 by instalments.Then, because of defects to a bookcase and awardrobe that would cost about £55 to put right,he refused to pay the remaining £350.The Courtof Appeal held that the contract was substantiallyperformed and the balance was payable less theamount representing the defects.
Bolton v Mahadeva (1972)An electrical contractor was hired to install centralheating.When completed it gave off fumes and didnot work properly.When payment was refused as aresult, the contractor sued for the price.The Courtof Appeal rejected his claim on the ground thatthere was not substantial performance. Part of thereasoning lay in the fact that there were £174worth of defects in a system costing £560.
incomplete.The builder was able to sue for theprice of the work less an amount representing thevalue of the defective work.
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d) Prevention of performanceIf the other party prevents a party from carryingout his obligations because of some act oromission then the strict rule cannot apply. Inthese circumstances the party trying to performmay have an action for damages.
e) Tender of performanceA similar situation with slightly differentconsequences occurs where a party has offered tocomplete his obligations but the other side hasunreasonably refused performance. In such asituation the party ‘tendering’performance cansue and recover under the contract. He may alsoconsider his own obligations discharged eventhough there has been no performance.
In the case of money owed which is tendered andrefused though the debtor is freed from makingfurther offers to pay the debt will still exist.
15.1.4. Stipulations as to time ofperformanceTraditionally, a failure to perform on time wouldgive only an action for damages but not torepudiate the contract.
While under the common law it was acceptedthat time could be ‘of the essence’, this principlewas not generally accepted in equity, and this isnow the general assumption.
There are three principal occasions when timewill be considered to be ‘of the essence’and arepudiation of the contract is therefore availableas a remedy:
● where the parties have made an express stipu-lation in the contract that time is of the essence
● where the surrounding circumstances showthat time of performance is critical, as wouldbe the case with delivery of perishable goods
● where one party has already failed to performhis obligations under the contract. In this casethe other party is able to confirm that unlessperformance is then complete within a statedperiod repudiation will occur.
Planche v Colburn (1831)A publisher hired an author to write one ofa series of books on a theme.When the publisherdecided to abandon the whole series, the authorwas prevented from completing the work throughno fault of his own. He was entitled to recover afee for his wasted work.
Startup v Macdonald (1843)The contract was for 10 tons of linseed oil to bedelivered by the end of March.The seller deliveredat 8.30 p.m. on 31st March which was a Saturday,and the buyer refused to accept delivery.The sellerwas able to recover damages. (The answer mightbe different now under the Sale of Goods Act sincedelivery should be at a ‘reasonable hour’.)
ActivitySelf-assessement questions
1. In what circumstances is a contractconsidered to be ‘entire’?
2. How can the strict rule cause injustice?
3. What is a ‘divisible contract’?
4. In what way can the de minimis rule beapplied to performance?
5. What is the effect of a contract being onlypartly performed?
6. How is it possible to measure ‘substantialperformance’?
7. What effect does failing to perform on timehave on a contract?
15.2. Discharge byagreement
15.2.1. IntroductionIf a contract is formed following an agreementthen it seems almost pure logic to suggest thatthe contract can also be ended by agreementwithout necessarily having been performed.Inevitably, what is required is mutuality.
There are in fact two ways in which thecontract could be discharged by agreement:
● a bilateral discharge – here, the assumption isthat both parties are to gain a fresh butdifferent benefit from the new agreement
● a unilateral discharge – the benefit is probablyonly to be gained by one party, who istherefore trying to convince the other party tolet him/her off the obligations arising underthe original agreement. Lack of considerationis an inevitable problem if one party is merelypromising to release the other from existingobligations.
So possibly two problems are immediatelyapparent where a contract is discharged byagreement:
● absence of consideration for the freshagreement
● the possible lack of proper form for the newagreement in the case of speciality contracts.
15.2.2. Bilateral discharges
Wholly executory arrangementsIf neither side has yet performed any obligationsunder the contract it is possible that there is noproblem at all. Each side can release the otherform performance and there is consideration forthe new promise in each case – not having toperform the obligations under the originalagreement.
A further possibility occurs where the partieswish to continue the contractual arrangement butto substitute new terms for the old ones. In thiscase it is possible for the parties to ‘waive’ theirrights under the old agreement and to substitutethe new agreement.
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● The strict rule on performance is that in an‘entire contract’ all obligations must beperformed – so there can be nopayment for part-performance –Cutter v Powell
● There are exceptions to this strict rule:w if obligations are ‘divisible’ then payment
should be made for the part performed –Taylor v Webb
w where a party has accepted partperformance then this should be paid for –Sumpter v Hedges
w where there has been substantialperformance then the full price will be paid
less the sum appropriate to what has notbeen done – Hoenig v Isaacs
w unless too much remains to be done underthe contract – Bolton v Mahadeva
● A party can sue for damages where hisperformance has been prevented by the otherparty – Planche v Colburn
● And also where he has offered to performbut this has been refused – Startup vMacdonald
● Time of performance is ‘of the essence’ when(i) it says so in the contract; (ii) thecircumstances make it so; (iii) one party hasalready failed to perform
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Arrangements which are partlyexecutory and partly executedIn this situation one of the parties wishes to giveless than full performance and it is possible forthe other to waive rights. However, the obviousproblem with this is the absence of consideration.
Where form is an issueTraditionally, this would have been dealt withsubject to the rule in s40 Law of Property Act1925 and the doctrine of part-performance. Now,an agreement to vary the terms in a contractrequiring specific form may be invalid unless it isevidenced in writing. If a new agreement is to besubstituted for an existing agreement then againthis change will be unenforceable unlessevidenced in writing.
15.2.3. Unilateral dischargesWhere the contract is left unperformed by oneparty despite the willingness to contract of theother party there are a number of possibleconsequences.
Firstly, the party not in default might releasethe other from performing, but this would requirea deed for validity otherwise it would fail for lackof consideration. However, as we have alreadyseen in consideration, the principle in Williams vRoffey Bros & Nicholls Contractors may besufficient to discharge the other party’sobligations in circumstances where there is anextra benefit gained.
It is also possible to discharge the party indefault from full performance where there is‘accord and satisfaction’. This could be asindicated in the rule in Pinnel, either by adding anew element which would count asconsideration, or by making a smaller payment atan earlier time than the full payment is due.
Finally, by the equitable doctrine of promissoryestoppel, where the party waiting for performancehas agreed to waive rights under the contract,knowing that the other party is relying on thispromise to forego performance, then the partymaking the promise may be prevented fromgoing back on the promise.
ActivitySelf-assessement questions1. Why should parties to a contract be able to
discharge their obligations by agreementwithout actually performing?
2. What is the difference between a bilateraldischarge and a unilateral discharge?
3. In what way is form a problem in dischargeby agreement?
4. When is it easiest to discharge a contractby agreement?
5. What is the easiest way of discharging acontract in a unilateral discharge?
6. What exactly is ’accord and satisfaction’?
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15.3. Discharge byfrustration
15.3.1. IntroductionIn the strictest sense, effective discharge ofa contract, as we have seen, requires performanceof the obligations under the contract. Inevitably,there will be times when the requirement forstrict performance will lead to injustice.
This can be particularly the case where there isa factor preventing a party or parties fromperforming which is beyond the control of eitherparty to the contract. It is because of this potentialinjustice that the doctrine of frustration developedin the 19th century.
The original common law rule was that a partywas bound to perform his/her obligations underthe contract regardless of the effect of interveningevents making it more difficult or even impossibleto perform.
This was the strict rule and it would override anycircumstances.
15.3.2.The development of adoctrine of frustrationThe clear injustice of the strict rule above ledinevitably on to exceptions. In the 19th century adoctrine was developed whereby a party boundby a contractual promises, in circumstances where(s)he was prevented from keeping the promisebecause of an unforeseeable, intervening event,would be relieved of the strict obligation. As aresult, that party would not be liable for a breachof contract.
This is said to be the origin of the doctrineof frustration. The judges achieved the desiredresult by the fiction of implying a term into thecontract.
● Since a contract can be formed by agreementthen it can also be discharged withoutperformance by agreement of both parties
● There are two types of discharge byagreement – a bilateral arrangement and aunilateral agreement – the first is where bothparties wish to back out of the arrangement,the second is where in effect only one does
● Bilateral discharge is simple where thecontract is executory – the waiving of rights is
given by the one party in return for thewaiving of rights by the other
● Where form is an issue the discharge willneed evidence in writing
● Where only one party wants to back out ofthe contract then that party will need to givesome consideration, as in accord andsatisfaction, unless estoppel applies
Key
Fact
s
Paradine v Jane (1647)Paradine sued Jane for rent due under a lease.Jane’s defence was that he had been forced off theland by an invading army.The court held that hehad a contractual duty to pay the rent due under
the lease, which was not discharged by anyintervening event. If he had wished to reduce hisliability to take account of intervening eventspreventing his performance then he should havemade express provision for that in the lease.
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The doctrine then developed to cover thosesituations where the frustrating event meant thatperformance as envisaged in the contract wasimpossible.
The immediate consequence of application ofthe doctrine then is that both parties are relievedof the burden of further performance, and ofliability for not performing. This will inevitablynot remove all apparent injustice since the oneparty to the contract is still being denied theperformance of the other party through no faultof his, and may have incurred costs inanticipation of the contract being performed.
As a result operation of the doctrine is subjectto a number of limitations, and parties mayprovide in their contracts for what happens ifthere are intervening frustrating events, the so-called force majeure clauses.
15.3.3. Frustrating eventsThe doctrine has developed largely out of the caselaw, and will operate in three main types ofcircumstance:
● where the intervening event makesperformance impossible
● where performance of the contract becomesillegal
● where the contract becomes commerciallysterilised.
ImpossibilityThe contract may be frustrated because of thedestruction of the subject matter.
Taylor v Caldwell (1863)Caldwell had agreed to rent the Surrey Garden andMusic Hall to Taylor for four days for a series ofconcerts and fêtes. Before the concerts were dueto start, the music hall burnt to the ground andperformance of the contract was impossible.Thecontract contained no stipulations as to whatshould happen in the event of fire. Since Taylor hadspent money on advertising the concerts and othergeneral preparations, he sued Caldwell for damagesunder the principle in Paradine v Jane.The courtheld, however, that the commercial purpose of thecontract had ceased to exist, performance wasimpossible, and so both sides were excused furtherperformance. As Blackburn J. stated:
‘in contracts in which performance depends onthe continued existence of a given person orthing, a condition is implied that the impossibilityof performance arising from the perishing of theperson or thing shall excuse the performance . . .that excuse is by law implied, because from thenature of the contract it is apparent that theparties contracted on the basis of the continuedexistence of the particular person or chattel’.
Davis Contractors Ltd v Fareham UDC(1956)A building firm contracted to build houses for a localcouncil for £92,450 over a period of eight months. Infact, due to a shortage of skilled labour, the worktook some 22 months to complete and the builderswanted an extra £17,651.The council paid thecontract price.The builders claimed that the contract
was frustrated in order to claim the extra on aquantum meruit basis. The House of Lords held thatthe contract was not in fact frustrated, but LordRadcliffe did explain those factors that would justifythe doctrine when used: ‘without default of eitherparty, a contractual obligation has become incapableof being performed because the circumstances inwhich performance is called for would render it athing radically different from that which wasundertaken by the contract’.
Discharging the Contract 187
It may alternatively be the case that the subjectmatter becomes unavailable when the contract isto be performed.
Where a contract is for services the frustratingevent may be the unavailability of the party whois to render the service due to illness.
This principle of impossibility because ofunavailability may apply even where there is onlya risk that the party will be unavailable.
In fact, any good reason that will mean that aparty is unavailable to perform his obligationsmay lead to a frustration of the contract.
An excessive but unavoidable delay in performingwill often be classed as impossibility and meanthat the contract is frustrated.
Outbreak of war is also a common frustratingevent.
Taylor v Caldwell (1863)Here, the destruction of the music hall was thecause of the impossibility and hence the frustration.
Jackson v Union Marine Insurance Co.Ltd (1874)A ship was chartered to sail from Liverpool toNewport and from there with a cargo of iron railsto San Francisco.The ship ran aground and couldnot be loaded for some time.The court acceptedthat there was an implied term that the ship shouldbe available for loading in a reasonable time andthe long delay amounted to a frustration of thecontract.
Robinson v Davidson (1871)A husband, acting as agent for his wife, a celebratedpianist, contracted for her to perform. A few hoursbefore her performance was due she became illand the husband contacted the claimant to informthat she would be unable to attend.When theclaimant sued the court held that the contract wasconditional on the woman being well enough toperform and because of her illness she wasexcused.The contract was frustrated.
Condor v The Baron Knights (1966)A contract entered into by a pop music groupallowed that the group should be available toperform for seven evenings a week if necessary. Onemember of the group became ill and was advised torest and work fewer hours.Though he actuallyignored this advice, the court still held that thecontract was frustrated since it was necessary tohave a stand-in musician in case he fell ill.
Morgan v Manser (1948)A music hall artiste was contracted to his managerfor a 10-year period commencing in 1938. Between1940 and 1946 he was in fact conscripted into theforces during the war years. His absence renderedthe purpose of the contract undermined and bothparties were excused performance.
Pioneer Shipping Ltd v BTP Tioxide Ltd(The Nema) (1981)A time charter of nine months was agreed whichanticipated a possible seven voyages. In fact due tostrikes at the port where the vessel was loaded thiswas reduced to two and the contract was held tobe frustrated.
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Subsequent illegalityA contract may be frustrated as the result of achange in the law that makes the contract illegalto perform in the manner anticipated in thecontract.
Outbreak of war is an obvious time when lawsmay change rapidly and cause a contract to befrustrated.
Commercial sterilityEven where the contract is not impossible toperform but the commercial purpose of thecontract has disappeared as a result of theintervening event then the contract might still beheld to be frustrated. This is sometimes alsoknown as frustration of the common venture, andit is commonly claimed when an event that isfundamental to the contract does not occur.
All commercial purpose must be destroyed,however. If any is left then the contract is notfrustrated and obligations under it continue.
Metropolitan Water Board v Dick Kerr& Co. Ltd (1918)In July 1914 a contract was formed for theconstruction of a reservoir and a water works.Thecontract allowed that the work should becompleted within a six-year period. In 1916 agovernment order stopped the work and alsorequisitioned much of the plant. It was held that thecontract was frustrated at the time of thegovernment order.
Denny, Mott & Dickson Ltd v James B.Fraser & Co. Ltd (1944)Lord Macmillan said that a contract to importcertain goods to an English port would befrustrated if the law was changed so that importinggoods of that kind became illegal.
Re Shipton Anderson & Co. andHarrison Bros & Co. (1915)A cargo of grain was sold but before it could bedelivered war broke out.The governmentrequisitioned the cargo and the contract wasfrustrated.
Krell v Henry (1903)A contract was reached for the hire of a roomoverlooking the procession route for thecoronation of King Edward VII.There was no specificmention of the purpose of the hire in the contract.However, when the coronation did not take placebecause of the King’s illness and the defendantrefused to pay for the room, the court, applying theprinciple from Taylor v Caldwell, accepted that thecontract was frustrated.Watching the coronationprocession was the ‘foundation of the contract’; thedefendant was relieved further performance.
Herne Bay Steamboat Co. v Hutton(1903)This was another case arising from the delayedcoronation.The defendant hired a boat from whichto see the review of the fleet by the King. His claimthat the contract was frustrated failed. One purposehad disappeared, but it was still possible to use theboat and to see the fleet.
Discharging the Contract 189
15.3.4. Limitations on the doctrine offrustrationBecause one party to the contract is still leftharmed there are a number of situations wherethe courts have stated that the doctrine cannotapply.
Self-induced frustrationFrustration demands that the event is beyond thecontrol of either party so the doctrine isunavailable when the event is within the controlof one party.
Contract more onerous to performThere will be no release from obligations merelybecause the contract has become less beneficial asa result of the intervening event.
Foreseeable riskIf the event claimed as frustrating the contractwas in the contemplation of the parties at thetime of contracting then the plea will be rejected.
Provisions made in the contract forthe frustrating eventIf the parties have contemplated the possibilityof a frustrating event and catered for that inthe contract then there can be no release fromobligations.
So that if a force majeure clause does notspecifically cover the event in question frustrationmay still be claimed.
Absolute undertaking to performWhere the contract contains an undertaking thatperformance should occur in any circumstances
Maritime National Fish Ltd v OceanTrawlers Ltd (1935)A fishing company owned two trawlers but wishedto run three and so hired one. It required a licencefor each vessel but was granted licences only fortwo. It used its own and, in failing to pay for the hireof the other, claimed frustration.The court rejectedits claim. It had chosen not to use the hired vesselrather than was prevented from doing so.
Davis Contractors Ltd v Fareham UDC(1956)Here, merely because the builders were unable tomake the same profit was not accepted as justifyingdeclaring the contract frustrated.
Amalgamated Investment & PropertyCo. Ltd v John Walker & Sons Ltd(1977)The defendants contracted to sell a building to theInvestment Company who wanted it forredevelopment. Unknown to either party, theDepartment of the Environment then listed thebuilding, meaning that it could not be used fordevelopment, resulting in a drop of £1.5 millionfrom the contract price of £1.71 million.The courtrejected a claim of frustration, holding that listingwas a risk associated with all old buildings of whichthe developers should have been aware.
Fibrosa Spolka Akcyjna v FairbairnLawson Combe Barbour Ltd (theFibrosa case) (1943)A contract for the sale of machinery to a Polishcompany could not be completed because of theGerman invasion.The contract contained a ‘warclause’.The contract was still frustrated in the eventbecause the clause only anticipated delays indelivery, not the effects of invasion.
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then a frustrating event will not affect theobligations. This was the case with the lease inParadine v Jane.
15.3.5.The common-law effects offrustrationThe contract terminates at the point of thefrustration. This means that the parties arereleased from their obligation to perform fromthat point on. Nevertheless, they would still bebound by obligations arising before thefrustrating event occurred.
Activity Quick Quiz
Which of the following involvefrustrating events and which do not?1. A famous comedian dies just before he is
due to appear on stage.
2. A plumber is contracted to fit centralheating in a house. He under-estimates thedays needed to complete the work and as aresult he will lose profit on the price agreed.
3. A car I had contracted to buy is destroyedwhen an explosion sets fire to it.
4. As a lecturer, I have contracted personallyto take 15 students on a trip to court. AnAct is passed requiring teaching andlecturing staff to take no more than 10students per one member of staff oneducational visits.
5. In a contract to supply a Far Eastern statewith machinery one clause stipulates whathappens in the event of war. In fact, war isdeclared after the making of the contract.
Figure 15.1 Diagram illustrating when a contract will be
considered frustrated
CONTRACT
CONTINUES
Is there an event which
prevents the contract from
being completed or performed?
Is the event beyond the control
of either party to the contract?
Does this event:
• make performance impossible
• make performance illegal
• destroy the commercial
purpose of the contract?
The contract is frustated – all
obligations cease at this point
Is the event:
• self-induced by the party
claiming frustration
• merely more onerous to
perform
• one the parties should have
contemplated
• one the parties made provision
for in the contract
• irrelevant because the contract
provides for full performance?
YES
YES
YES
NO
NO
NO
NO
YES
Discharging the Contract 191
This is clearly an unsatisfactory situation becauseit means that the effect on the parties dependsentirely on what point in the contract they havereached.
The House of Lords overruled this principle inthe Fibrosa case and modified the harshness ofthe rule. It held that a party could recoverpayments made prior to a frustrating eventprovided that there was a total failure ofconsideration. This is an improvement, but ofcourse it still means that one party will lose outand will receive no payment for work done inadvance of a contract.
15.3.6.The Law Reform (FrustratedContracts) Act 1943Frustration is a common law doctrine originallydeveloped to avoid some of the harshness ofexisting rules. Nevertheless, as has been shown, itcan produce injustice itself. As a result the Act waspassed specifically to deal with the consequencesof frustrating events.
The Act covers three main areas:
● recovery of money paid in advance of acontract
● recovery for work already completed under thecontract
● financial reward where a valuable benefit hasbeen conferred.
In this way s1(2) confirms the principle in theFibrosa case that money already paid over is
recoverable despite the apparent lack ofconsideration. Money due under the contract alsoceases to be payable.
Under s1(2) the court also has the discretion toprovide some form of reward for a party who hascarried out work under the contract, thusmitigating the harshness of the rule in Fibrosa. Thesum awarded is discretionary and is what the courtbelieves to be fair, not what has actually beenincurred in the way of expenses.
Finally, under s1(3), a party is able to recoverfor a partial performance which has conferred avaluable benefit on the other party. Againapplication of this principle is at the court’sdiscretion.
The Act’s effectiveness is limited because it doesnot apply in some circumstances.
These include:
● contracts for the carriage of goods by sea,except time charter parties
● insurance contracts (which in any case are allabout risk)
● perishing of goods under the Sale of GoodsAct 1979.
Chandler v Webster (1904)This was another case arising from the delayedcoronation of Edward VII. Again, a room was hired.However, unlike in Krell v Henry, where the roomwas to be paid for on the day of the procession,in this case it was paid for in advance. Despitethe frustration, there could be no recovery ofthe money.
BP Exploration Co. (Libya) Ltd v Hunt(No. 2) (1979)Hunt had a concession to explore for oil in Libya.BP financed him in return for a half share of theconcession. Its expenses would be three-eighths ofthe oil found till it had recovered 120% of its outlay.Oil was discovered but Libya confiscated it.WhileBP had already spent $87 million it was awarded$35 million by the court.
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4. In what ways is the doctrine still unfair on atleast one party?
5. Is there really a frustrating event where thefrustration is self-induced?
6. How does the Fibrosa case modify theprinciple?
7. How does the Law Reform (FrustratedContracts) Act modify the principle?
● A frustrating event is one that preventsperformance of the contract but is beyondthe control of either party
● The original rule on frustrating events was thata party was still bound by all obligations underthe contract – Paradine v Jane
● A doctrine was developed in the 19th centuryso that in such cases obligations finished at thepoint of the frustrating event – Taylor vCaldwell
● Frustrating events include:w impossibility – which could be through the
destruction of the subject matter (Taylor vCaldwell) or the unavailability of the otherparty (Robinson v Davidson) or outbreak ofwar (Metropolitan Water Board v Dick Kerr& Co.)
w subsequent illegality – Re Shipton Anderson& Co.
w commercial sterilisation – the commercialpurpose in the contract is lost – Krell vHenry
● The courts will not recognise frustrationwhere it is self-induced – Maritime NationalFish Ltd v Ocean Trawlers Ltdw or the contract is merely more
burdensome to perform – DavisContractors Ltd v Fareham UDC
w or where the risk is foreseeable –Amalgamated Investment & Property Co. Ltdv John Walker & Sons Ltd
w or has been provided for the Fibrosa case● The common-law principle was changed so
that payments made before the frustratingevent could be recovered – Fibrosa
● And now the Law Reform (FrustratedContracts) Act makes more complexprovision
Key
Fact
s
ActivitySelf-assessment questions1. What exactly is a ‘frustrating event’?
2. How did Taylor v Caldwell help to modify theharshness in the law?
3. What are the differences between‘impossibility’ and ‘commercial sterility’?
Discharging the Contract 193
ActivityAnswering Problem QuestionsRemember that there are four essentialingredients to answering problem questions:
● Firstly, you must be able to identify whichare the key facts in the problem, the oneson which any resolution of the problem willdepend.
● Secondly, you will need to identify which isthe appropriate law which applies to theparticular situation in the problem.
● The third task is to apply the law to the facts.
● Finally, you will need to reach conclusions ofsome sort. If the question asks you to‘advise’, then that is what you need to do.On the other hand, if the problem says‘Discuss the legal consequences of . . .’ thenyou know that you can be less positive inyour conclusions.
Consider the following problem:Darren and Jim are both keen ornithologists(bird watchers). Neither of them has ever seenthe Lesser Spotted Scrote.The Taffwillum WildBird Reserve in West Wales is home to avariety of rare breeds of wild birds includingthe Lesser Spotted Scrote. Darren and Jimarrange to rent a cottage for a fortnight fromGeraint in Llanfairfiddlybits, a village which isonly two miles away from the bird reserve.Therent for the cottage is set at £200 per weekand Geraint has asked for £50 in advance as adeposit, the balance to be paid on their arrivalat the cottage. Darren, who has informedGeraint that they will make little use of thecottage as it is their intention to spend the
whole fortnight birdwatching, pays the deposit,and has also told Geraint how much they arelooking forward to seeing the Scrote.Twoweeks before Darren and Jim are due to go toWales, a forest fire spreads to the bird reserve,destroying most of the habitat and killing manybirds including all of the Scrotes which areflightless birds and are therefore unable toescape the fire. Darren then informs Geraintthat he and Jim will no longer be needing thecottage and asks for return of his £50 deposit.Geraint refuses and demands a further £75which he says represents costs he has incurredin cleaning and painting the cottage inpreparation for Darren’s and Jim’s arrival.
Advise Darren and Jim.
The factsIt is important to have a clear idea of theprincipal facts, particular as here where thefacts appear to be quite complex and anoriginal contract is subject to changedcircumstances.The question is then whether ornot it is discharged, and if so what area ofdischarge is appropriate and with whatconsequences.
The main facts seem to be:
1. Darren and Jim intend to have a holidaybirdwatching, specifically to see the LesserSpotted Scrote, a rare bird.
2. In consequence, Darren and Jim have renteda nearby cottage from Geraint.
3. They have explained that the sole purposeof hiring the cottage is the proximity to thebird reserve and that they intend to spendall of their time bird-watching.
Contract Law194
4. Darren pays a £50 deposit as required byGeraint – the balance is to be paid onarrival at the cottage.
5. A fire then destroys the bird reserve andkills all of the Scrotes.
6. Darren and Jim try to cancel the cottagerental and ask for return of their £50 deposit.
7. Geraint refuses and demands an extra £75for decorating and cleaning the cottage.
The appropriate lawIt is very important when answering problemquestions that you use only the law that isrelevant to the precise facts, if for no otherreason that you are not getting any marks forusing law that is irrelevant, and so you arewasting valuable writing time. By looking at thevarious facts we can say that the following lawmay be relevant in our problem here:
1. There are actually a few possible areas oflaw of relevance even though frustration isthe central theme – breach is also possiblyrelevant, and to a lesser extent remotenessof damage could also be considered.
2. On frustration the first point that could beidentified is the original rule in Paradine vJane, demanding payment regardless of anyfrustrating event.
3. The doctrine of frustration was introducedin Taylor v Caldwell – that where thecontract becomes impossible to performthrough no fault of either party allobligations cease at the point of frustration.
4. There are three types of frustrating events:
w impossibility – whether through thedestruction of the subject matter (Taylor v
Caldwell) or factors such as theunavailability of a party to the contract ina service contract (Morgan v Manser)
w subsequent illegality – Re ShiptonAnderson
w commercial sterilisation of the contract– Krell v Henry.
5. There is no further obligation toperform – so only where payment wasto be made before the date forperformance will a payment beenforceable – compare Krell v Henry withChandler v Webster.
6. If there remains a viable purpose to thecontract then the contract continuesdespite the frustrating event – Herne BaySteamboat Co. v Hutton.
7. The doctrine will not apply, e.g. where:
w there is self-induced frustration –Maritime National Fish Ltd. v OceanTrawlers Ltd
w contract merely more onerous toperform – Davis Contractors Ltd vFareham UDC.
8. Common-law effects of frustration are:
w obligations cease at the point offrustration – Taylor v Caldwell
w money is only payable if due before thecontract date – Krell v Henry andChandler v Webster
w but a party may recover money paidover where there is a failure ofconsideration – the Fibrosa case.
9. Effects of frustration following the LawReform (Frustrated Contracts) Act 1943:
w money already paid over is recoverablew money due ceases to be payable
Discharging the Contract 195
w money is recoverable for work alreadydone under the contract
w a party can recover for any partialperformance which confers a valuablebenefit on the other party.
10. Repudiatory breach occurs where oneparty indicates to another party to thecontract that he will not carry out hisobligations under the contract – Hochster vDe la Tour.
11. Damages can only be recovered for lossesthat are a natural consequence of thebreach or which are in the contemplationof both parties at the time when thecontract was made – Hadley v Baxendale –and the latter must be foreseeable loss –Victoria Laundry v Newman Industries.
Applying the law to the facts1. The issue is whether or not the contract
between Darren, Jim and Geraint isfrustrated.
2. The purpose of the visit to Wales hasceased to be viable because of thedestruction of the bird sanctuary and thedeath of all of the Scrotes.
3. The logical type of frustration would beimpossibility.
4. But it is questionable whether the contractfor renting the cottage is still viable – thisdepends on whether or not the sole purposeof hiring the cottage was to birdwatch (Krell vHenry) or whether any purpose remains(Herne Bay Steamboat Co. v Hutton).
5. Darren and Jim did point out to Geraintthat their only reason for hiring the cottagewas to visit the bird reserve and to see the
Scrote – and also stated that they wouldhardly use the cottage.
6. If the contract between them is frustratedthen Darren and Jim may be able to recovertheir deposit as there is a complete absenceof frustration – Fibrosa and s1(2) LawReform (Frustrated Contracts) Act 1943.
7. If not, then Darren and Jim may be inrepudiatory breach – and Geraint would beable to recover for his loss of profit.
8. In respect of the £75 it is unlikely thatGeraint could recover this as it is not anatural loss – nor was it specifically orimpliedly in the contemplation of bothparties at the time the contract was formed.
ConclusionsThe law and its application have been clearlyshown above. It remains to reach a conclusionand advise based on the analysis above. Just asin real life, there might not be a definite orstraightforward answer.The point is to reach alogical conclusion by using the law correctly.
● Because of the pains that Darren and Jimwent to explain the sole purpose of the visitit is possible that the doctrine of frustrationmay apply in a similar way to Krell v Henry.
● If this is the case then there is every chance,following the 1943 Act, that they couldrecover their £50 deposit.
● In any case in the circumstances it is unlikelythat Geraint could claim the £75 fordecorating, although if the contract is notconsidered to be frustrated he may claim allof his lost profit from Darren’s and Jim’sbreach of contract in that case.
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Law196
Dilemma Board
Freddie is contracted to play for a Rest of the World cricket team against Pakistan in a five-day test matchorganised by the Pakistan Cricket Association to celebrate the anniversary of the first international matchinvolving Pakistan. Freddie is due to be paid a fee of £50,000 on completion of the match. On the daybefore the match is due to commence an earthquake destroys much of the town, including the stadium,and the match has to be called off.
A.The earthquake will have no effecton the contract.The strict rule isthat all parties are absolutely boundby contractual undertakings.
C.The contract between Freddie andthe Pakistan Cricket Association willnot be frustrated because theearthquake was a foreseeable event.
B.The contract between Freddie andthe Pakistan Cricket Association isfrustrated because of subsequentillegality.
D.The contract between Freddie andthe Pakistan Cricket Association isfrustrated but Freddie is able toclaim his £50,000.
In the dilemma board below consider the accuracy of each of the four statements A, B, Cand D, as they apply to the facts in the central scenario.You only need to give the basicprinciples. The answer is in the appendix at the end of the book.
Discharging the Contract 197
15.4. Discharge by breach
15.4.1. IntroductionWhenever a party fails to perform an obligationarising under a contract then that party can besaid to be in breach of contract.
A breach of the contract can actually thoughoccur in one of two ways:
● by failing to perform obligations – this situationitself can occur in one of two ways: either thecontract is not performed at all, or the contractis not performed to the standard required underthe contract, e.g. providing goods that are not ofsatisfactory quality
● by repudiating the contract withoutjustification.
Breach is described as a method of dischargealthough this seems slightly illogical since bydefinition a breach means that obligations underthe contract have not been discharged.
Lord Diplock explained this position in PhotoProductions Ltd v Securicor Transport Ltd. Hesuggested that the terms of a contract, whetherexpress or implied, are primary obligations. If aparty fails to perform what (s)he has promised todo then this is a breach of a primary obligationwhich in consequence is then replaced by asecondary obligation, for instance to pay damages.So breach is not so much a discharge of thecontract but a replacing of one set of obligationswith a different set.
Lord Diplock also saw there being two basicexceptions to his proposition:
● The doctrine of fundamental breach –whereby if a breach of a term deprives theother party of substantially the benefit theywere to receive under the contract then thewhole contract is said to be breached. (It isunlikely of course that this doctrine hasactually survived the Securicor cases.)
● Breach of a condition – where the term is socentral to the contract that its breach renders
the contract meaningless and thus entitles theother party to repudiate their obligations underthe contract.
The significant difference between the twotraditionally would have been that, whileexclusion clauses would be rendered ineffectiveby the first, it would still be possible tosuccessfully rely on an exclusion clause despite abreach of a condition. This is precisely what theSecuricor cases demonstrate.
15.4.2.The different forms of breachThere are three identifiable forms of breach:
Breach of an ordinary termHere, in effect the character of a term isunimportant. Regardless of whether it is acondition or a warranty, if a term is breached therewill always be available an action for damages.
Breach of a conditionA condition can either be expressed by the partiesor indeed it can be implied by law, as in the caseof the implied conditions in the Sale of GoodsAct. However, if it is identified as being acondition it must of course conform to the natureof a condition to attract the range of remediesassociated with a condition.
A breach of a condition could also in effectinclude a breach of an innominate term where
Schuler (L) AG v Wickman MachineTools Sales Ltd (1974)Here, the claimants could not rely on the termregarding the required frequency of visits by thedefendants to the motor manufacturers to repudiatetheir obligations.They had accepted numeroussimilar breaches in the past.The term obviously didnot go to the root of the contract.
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the effect of the breach was so serious as to justifyrepudiation by the other party. If the doctrine hassurvived then it might also include a fundamentalbreach.
Anticipatory breachAn anticipatory breach can occur whenever oneparty to a contract gives notice, whether expresslyor implied by conduct, that (s)he will notcomplete his/her obligations under the contract.
Again, this does not necessarily mean that allobligations will remain unperformed. It may ofcourse be that the obligations will be performedbut not in the manner described in the contract.An obvious example of the latter would be lateperformance, as in delivery of goods after thecontract date.
The doctrine can probably be more correctlydescribed as a breach by an anticipatoryrepudiation, as this is in effect what is usuallytaking place.
15.4.3.The effects of breachThe consequences for the party who is the victimof a breach of contract and the remedies availablewill vary according to the categories of breachthat we have already considered.
Breach of an ordinary termAn action for damages is always available forbreach of any kind of term. If the term is only awarranty or, in the case of innominate terms thebreach is not a serious one justifying repudiation,then only an action for damages is available. Anyattempt to repudiate in such circumstances willitself amount to a breach of contract.
Breach of a conditionWhere, on the other hand, a condition isbreached or the breach is sufficiently serious theparty who is the victim of the breach has morechoice. (S)he may continue with the contract andsue for damages, or repudiate his/her ownobligations under the contract, or indeed bothrepudiate and sue for damages.
Before repudiating of course a party should becertain that the term is in fact a conditionentitling repudiation or the breach by the otherparty is so serious as to justify repudiation.Otherwise his/her own repudiation might be abreach.
Anticipatory breachHere again, the party who is victim of the breachhas choices available once having discovered thatthe contract will be breached.
Hochster v De la Tour (1853)The claimant was hired to begin work as a couriertwo months after the contract date. One monthlater, the defendants wrote to him cancelling thecontract. In answer to his claim they argued that hecould not sue unless he could show that on thedue date he was ready to perform.The courtdisagreed.There was no requirement that thevictim of a breach of contract should wait until theactual breach to sue.
Cehave NV v BremerHandelsgesellschaft mbH (The HansaNord) (1976)Here, the buyer’s refusal to accept the animal feedwas an unlawful repudiation. Using innominateterms it could be shown that, since they went on tobuy the goods and use them for the same purpose,the effects of the breach could not have beensufficiently serious to justify repudiation.
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(S)he might immediately consider the contractat an end and sue for damages.
As an alternative, it is possible to continue withthe contract, wait for the due date of performanceand, if the contract is not performed, sue at thatpoint.
It is always a danger for a party to take this lattercourse of action. The contract remains live and asa result it is always possible for the party not onlyto lose their remedy but also to become liable fora breach themselves.
It is also possible that the fact of the innocentparty having the right to affirm the contractcan itself cause apparent injustice to theother party.
Where the innocent party decides to accept therepudiatory breach of the other party then (s)he isentitled to recover for the loss of any benefits thatwould have resulted from performance of thecontract. The party in breach cannot then try toreduce damages because of a subsequent act ofthe innocent party that might have the effect ofreducing the overall loss.
Frost v Knight (1872)At one time, a broken promise to marry wasactionable. Here the defendant had promised tomarry his fiancée when his father died. Before hisfather did die, he broke off the engagement.Theclaimant sued successfully for the breach of promiseeven though the date of the actual beach had notyet arrived since the father was still alive.
Avery v Bowden (1855)Bowden was contracted to load cargo onto a shipfor Avery.When it was clear that Bowden would beunable to meet his obligations Avery could havesued. He waited, however, in the hope that thecontract would be completed, and intending to sue ifit was not completed.This actually turned out to be amistaken strategy since the Crimean War then brokeout, frustrating the contract, and Avery thus lost out.
Fercometal SARL v MediterraneanShipping Co. SA (The Simona) (1989)A charter party contained an ‘expected readinessto load’ clause, entitling the charterers to repudiateif the ship was not loaded by 9th June.The ship
owners asked for an extension on 2nd June and thecharterers then chartered another ship.The shipowners, instead of repudiating here for the breachby the charterers, gave notice of readiness to loadinstead. In fact, this was not the case and thecharterers continued to use the other vessel.Theship owners’ action eventually failed in the House ofLords. Since they had elected to affirm the contractthey were bound by their own original terms, ofwhich they were in breach for not being ready toload on 9th June.
White and Carter Ltd v McGregor(1962)Under a contract, one party was to supply litterbins for a local council.The bins were to be paid forfrom advertising revenue from businesses thatwould have advertisements placed on the bins for athree-year period. One such business backed out ofthe arrangement before the bins had beenprepared.The supplier of the bins neverthelessprepared the advertising and continued to use it forthe whole period of the contract and then suedsuccessfully for the full price.
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Chiemgauer Membrand Und Zeltbau(formerly Koch Hightex GmbH) v NewMillenium Experience Co. Ltd (formerlyMillenium Central Ltd) (No. 2) (2001)The claimant was given the contract to build theroof of the Millennium Dome. Under the contractthe defendants could terminate provided they paida sum of compensation identified in the contract as‘direct loss and damage’.The claimants then becameinsolvent. In their claim against the defendants theyargued that ‘direct loss’ should include their loss ofprofits and the court, applying the first limb ofHadley v Baxendale, agreed.The defendants arguedthat the claimants would have been unable tocomplete the contract even without theirtermination and that their subsequent insolvencymeant that they should not be fixed with theclaimant’s loss of profits.The Court of Appealdisagreed, and considered that the facts could becompared with those cases where an innocentparty accepts the other party’s repudiatory breachand is still entitled to all benefits arising naturallyunder the contract.
Activity Quick Quiz
Self-assessment questions1. In what way does a breach of contract
discharge the obligations under it?
2. What are Lord Diplock’s ‘primaryobligations’ and ‘secondary obligations’?
3. How limited are the remedies available to aparty who has suffered a breach ofwarranty?
4. Why is there a difference between theremedies available for a breach of acondition and those available for a breach ofa warranty?
5. What effect does breach of an innominateterm have?
6. Exactly what is an anticipatory breach?
7. What possible problems are there in waitingtill the actual breach when there is ananticipatory breach?
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Figure 15.2 Diagram illustrating the consequences of different types of breach of contract
NO
NO
NO YES
YES
YES
Has the time for performanceof the contract been reachedor passed?
Has one party expressly or impliedlyindicated that he intends to carry outobligations under the contract?
Has the term of the contract been breached?
Does one of the following apply?• The term is a condition properly so called• The term is construed as being
a condition by the judge• The term is innominate and the
breach is sufficiently seriousto destroy the purpose of the contract
The victim of the breach may sue and/or repudiate his own obligations
The victim of the breach may only sue for damages
Does one of the following apply?• The term is a warranty only• The term is innominate and the
effects of the breach are minor
There is an anticipatory breach:• The party may
sue immediately• Or wait for the date
of performance to pass
Thecontractcontinues
YES
YES
NO
● A breach occurs when one party fails toperform at all, or does less than is requiredunder the contract, or does not performsatisfactorily
● It will also be a breach where one partywrongly repudiates
● Breach of a warranty allows only an action fordamages
● Breach of a condition allows for action fordamages and/or repudiation, but only if theterm is really a condition going to the root ofthe contract – Schuler v Wickman Machine ToolSales Ltd
● The same choice applies where the effect ofbreach of an innominate term is sufficientlyserious – The Hansa Nord
● An anticipatory breach occurs where a partymakes known before performance is due thatthe contract will not be performed – Hochsterv De la Tour
● The victim of an anticipatory breach has theright to treat the contract at an end and sueimmediately – Frost v Knight
● Or to wait until performance is due and thensue for the breach – Avery v Bowden
● The latter course can be unfair to the party inbreach – White & Carter Ltd v McGregor
● Waiting for the actual breach can also meanlosing the remedy – Fercometal vMediterranean Shipping Co
Key
Fact
s
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Dilemma Board
Fine Firs, a leading wholesaler of Christmas trees, supplies Christmas trees to hundreds of UK firms sellingChristmas trees to the public. Fine Firs has a contract with Arctic Spruce for delivery of two millionChristmas trees on 1st December 2008. On 28th November Arctic Spruce tells Fine Firs that it can onlysupply 200 Christmas trees by 1st December and the remainder on 30th January 2009. On the same dayFine Firs manages to contract for supply of Christmas trees with Lapp Larches, an alternative supplier, andtells Arctic Spruce not to deliver the 200 Christmas trees.
A.Arctic Spruce has not breached thecontract on 28th November so FineFirs could not act until after 1stDecember.
C.Arctic Spruce can claim damagesfrom Fine Firs because Fine Firs hasprevented it from performing.
B.Arctic Spruce will be able to claimpayment for the 200 trees itdelivers because it has partlyperformed the contract.
D.Fine Firs can only claim damagesfrom Arctic Spruce. It is not entitledto repudiate the contract.
In the dilemma board below consider the accuracy of each of the four statements A, B, Cand D, as they apply to the facts in the central scenario.You only need to give the basicprinciples. The answer is in the appendix at the end of the book.
Remedies in ContractLaw
Chapter 16
16.1. Limitation periods incontract law
16.1.1.The purpose of limitationperiodsAll actions in contract law, as in tort, are subjectto limitation periods out of which an actioncannot be brought. There are a variety of reasonswhy a claimant should be limited in the time that(s)he can wait before bringing an action for thedamage suffered. Even in equity we can see themaxim ‘delay defeats equity’operating so that aclaimant who delays too long in bringing a claimwill be prevented from succeeding. See, e.g.Allcard v Skinner on undue influence or Leaf vInternational Galleries on misrepresentation andcommon mistake as to quality.
Firstly, if there is a valid case to be fought thenthe claimant is to be encouraged to bring theaction as soon as possible. If the evidence for theclaim can be gathered, there is no purpose indelaying.
Secondly, there is the difficulty of actuallypreserving evidence intact if a claim is delayed fortoo long. Certainly the scene will be disturbedover time, forensic evidence may deteriorate, butalso the memory of witnesses can only fade.
Finally, it is only fair on a defendant to bringthe claim as early as possible if it is indeedactionable. Although many claims are settled outof insurance, a defendant may be damaged by theuncertainty of his/her budget when
contemplating the possible costs of a successfulaction against him/her. This may in turn preventthe potential defendant from planning effectivelyfor the future.
16.1.2. Basic limitation periodsThe majority of contract and tort actions aresubject to the same basic limitation period of sixyears from the date on which the action accrues.In the case of tort this is contained in s2Limitation Act 1980: ‘An action founded on tortshall not be brought after the expiration of sixyears from the date on which the action accrued.’In the case of contract the period is identified ins5: ‘An action founded on simple contract shallnot be brought after the expiration of six yearsfrom the date on which the action accrued.’
There are also a number of different periodsapplying in more particular instances, for instancein the case of speciality contracts, in respect ofdefective products under the ConsumerProtection Act 1987.
16.2. The purpose ofdamages in contract Damages is a sum of money paid by thedefendant to the claimant once liability isestablished in compensation for the harmsuffered by the claimant.
In the case of damages awarded for a breach ofcontract the purpose of the award is to
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compensate the claimant for the losses sufferedas a result of the breach. As Baron Parke put it inRobinson v Harman (1848) ‘the purpose is to putthe victim of the breach, so far as is possible andso far as the law allows, into the same position hewould have been in if the contract had not beenbroken but had been performed in the mannerand at the time intended by the parties’. In thisway damages in contract law are aimed to put thevictim in the position (s)he would have enjoyed ifthe contract had been properly completed andperformed by the defendant.
This contrasts with damages in tort where thepurpose of damages is, as far as is possible to doso, to put the claimant in the position (s)he wouldhave been in had the tort never occurred. So tortdamages by contrast to contract damages representa very artificial remedy. Inevitably there is a largemeasure of speculation involved in awardingdamages in tort since it involves predicting whatwould have happened if the tort had not occurred,whereas in contract damages will represent anactual financial loss, and are rarely speculative.
16.3. The problem ofremoteness of damage incontract claims
16.3.1. IntroductionThere are in effect two tests used in assessing anaward for an unliquidated sum of damages incontract. The first test concerns the loss in respectof which the claimant can recover. The secondconcerns the quantity of damages available.
The first of these two questions actuallyconcerns causation. There must be a causal linkbetween the defendant’s breach of the contract andthe damage suffered by the claimant. Moreover,there is a general principle that damages will neverbe awarded in respect of a loss that it is too remotea consequence of the defendant’s breach.
16.3.2. Causation in factCausation is a question of fact in each case. Thecourt will decide whether or not the breach is thepredominant reason for the loss suffered by theclaimant.
If the loss arises partly from the breach and partlyas the result of intervening events the party inbreach may still be liable provided that the chainof causation is not broken.
16.3.3. Remoteness of damageThe test of remoteness was originally derived byAlderson B. in the case of Hadley v Baxendale:‘Where the parties have made a contract which one ofthem has broken the damages which the other partyought to receive in respect of such breach of contractshould be such as may fairly and reasonably beconsidered arising either naturally, i.e. according to theusual course of things, for such breach of contract itself,or such as may be reasonably supposed to have been in
London Joint Stock Bank v MacMillan(1918)A customer of a bank owes a contractual obligationnot to draw cheques so that they are easilyalterable. Here, a customer who did so was liablewhen a third party fraudulently altered the cheque,causing a loss to the bank.
Stansbie v Troman (1948)A decorator was entrusted with keys to thepremises in which he was contracted to work.When he left the premises unlocked a thief enteredand stole property.The decorator was liable for theloss which was the result of his failure to complywith his contractual duty to secure the premisesproperly on leaving.
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the contemplation of both parties at the time theymade the contract as the probable result of the breach.’
So in essence the test is in two parts: one ismeasured objectively according to what loss is anatural consequence of the breach, the second issubjectively based on specific knowledge ofpotential losses in the minds of both parties atthe time the contract is formed.
The test remains to this day, although it hasbeen modified on occasions.
Nevertheless the test can cause confusion and bemade unnecessarily complex.
Hadley v Baxendale (1854)In the case a mill owner contracted with a carrierto deliver a crankshaft for his mill.The mill wasactually not operating at the time because theexisting crankshaft was broken.The carrier did notknow this at the time the contract was formed.Thecarrier was then late with delivery.The mill ownersued unsuccessfully because the carrier wasunaware of the importance of prompt delivery.
Victoria Laundry Ltd v NewmanIndustries Ltd (1949)Here, the defendants had been contracted to delivera boiler to the laundry company and failed to deliveruntil five months after the contract date.The laundrysued for loss of its usual profits of £16 per week fromthe date of the breach. It succeeded since this was anatural consequence loss. It also sued in respect oflost profits of £262 per week from a governmentcontract that it had been unable to take up withoutthe boiler. It failed in this action since the governmentcontract was unknown to the defendants at the timethe contract was formed.Asquith LJ made a numberof vital points on the issue of remoteness:
● to give the claimant a complete indemnity for anyloss suffered by the claimant no matter howremote is too harsh a test to apply
● as a result, recoverable loss should be measuredagainst a test of reasonable foreseeability
● foreseeability of loss is itself dependent onknowledge at the time of formation
● knowledge can be of two types: commonknowledge and actual knowledge enjoyed by thedefendant – the two types identified in Hadley vBaxendale
● but knowledge can also be implied on the basisof what a reasonable man may have (ratherthan must have) contemplated in thecircumstances.
Koufos v C. Czarnikow Ltd (The HeronII) (1969)A vessel was chartered to carry sugar to Basrah, aknown sugar market. Owing to the carrier’s breach,the vessel arrived nine days late during which timethe price of sugar had fallen considerably.Theclaimant had intended to resell the sugar on itsarrival in port, a fact unknown to the defendantcarrier.The claimant sued for his reduction in profitsfollowing the fall in price of sugar.This was held to betoo remote in the Court of Appeal.The House ofLords, however, held that the claimant could recoverunder the first head of Hadley v Baxendale, andsuggested that in certain circumstances thereasonable man ought to contemplate that aparticular loss was a natural consequence of abreach (although this actually seems more likeimplied knowledge). It was also suggested thatforeseeability differed between contract and tort,although different judges gave different definitions:Lord Reid described it as ‘not unlikely . . . considerablyless than an even chance but nevertheless not very
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However, Lord Scarman has subsequently heldthat the test of remoteness depends not oncontemplation of the level of injury but merely onproof that the loss could have been anticipated.
However, it is what was in the contemplation ofthe parties at the time that the contract was madewhich determines the outcome.
16.4. Quantification ofdamages in contract claimsOnce the tests of causation and remoteness haveestablished that there is indeed liability for theloss claimed the court then has to determine howmuch the claimant can recover.
16.4.1. Nominal damagesIf no loss is actually suffered but the breach hasbeen established then it is possible for the courtto award ‘nominal damages’. Proof of damage hasnever been an essential of contract law as it is inmany areas of tort.
The likely motive of the claimant in suing is toensure that there is a declaration by the court thatthe contract is at an end.
In some cases substantial damages have beenawarded where traditionally nominal damagesmight have been considered more appropriate.
unusual and easily foreseeable’; Lord Morris as ‘notunlikely to occur . . . liable to result’; Lord Hodson as‘liable to result’; and Lords Pearce and Upjohn as ‘areal danger . . . a serious possibility’.
H. Parsons (Livestock) Ltd v UttleyIngham (1978)The contract was for the sale and installation of ananimal feed hopper.The ventilation hatch wassealed during transit and the installers then forgotto open it. As a result, the feed became mouldy, thepigs contracted an intestinal disease and 254 died.The judge at first instance considered the loss wastoo remote and not within the contemplation ofthe defendants but this was reversed by the Courtof Appeal.
Jackson v Royal Bank of Scotland plc(2005)Jackson imported dog chews from Thailand andsold them to a firm, Easy Bag, packaged to itsinstructions. Both parties banked with the RoyalBank of Scotland.The bank, in breach ofconfidentiality, mistakenly revealed to Easy Bag thatJackson was making 19% mark-up and Easy Bagstopped dealing with him.The House of Lords heldthat the termination of the relationship was a clearconsequence of the bank’s breach of contract. Itshould have contemplated that this would be theresult of breaching Jackson’s confidentiality.
Staniforth v Lyall (1830)Lyall was under a duty to load his cargo onto theclaimant’s boat by a certain date. He failed and theboat owner sued for breach. He had actually hiredhis boat out to another party immediately followingthe breach and for a greater profit than he wouldhave made. He succeeded in having the contractdeclared terminated and, having suffered no loss, wasawarded a nominal sum.
Experience Hendrix LLC v PPXEnterprises Inc (2003)Jimi Hendrix was a famous rock guitarist of the1960s. After Hendrix died an agreement wasreached by which his publisher was entitled tocertain recordings from master tapes in return forpaying royalties to Hendrix’s estate.The publisher
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16.4.2.The bases of assessmentThere are normally said to be three bases forassessing awards of damages in contract claims.
1. Loss of a bargainThe idea here is to place the claimant in the samefinancial position as if the contract had beenproperly performed. This may represent a numberof positions:
a) The difference in value between the goods orservices of the quality indicated in the contractand those actually delivered where they are ofinferior value. This sum can be assessedaccording to the diminution in value or the costof bringing them up to the contract quality.
b) The difference between the contract price andthe price obtained in an ‘available market’where there is either a failure to deliver the
goods or services and an alternative supply hasto be found, or where there is a failure toaccept delivery and an alternative market hasto be found.
If the claimant’s ability to make a profitremains then there is no entitlement todamages.
However, if there is no available market thenthe claimant can recover the full loss.
c) Loss of profitA claimant may recover for the profit oncontracts that (s)he would have been able tocomplete but for the breach of contract.
d) Loss of a chanceIn rare circumstances the courts have allowed aclaimant to recover a loss that is entirelyspeculative in the circumstances, althoughgenerally in contract law a speculative loss isnot recoverable.
breached the agreement and granted licenses torecordings that were not in the agreement.TheCourt of Appeal held that the defendant should paya reasonable sum to Hendrix’s estate.The publisherhad gained a benefit from the breach even thoughHendrix’s estate had suffered no actual loss.
Bence Graphics International Ltd vFasson UK Ltd (1996)The defendant supplied vinyl film on which theclaimant printed decals to put on bulk containers. Inthe claimant’s contract with the container companythere was an implied term that the decals wouldsurvive in a readable form for five years. In fact, theylasted only two.The claimant sued for the wholepurchase price or an indemnity against itscustomer’s claim.This was rejected at first instance,but the Court of Appeal held that the claimantscould recover the actual loss.
Charter v Sullivan (1957)Here, the defendant contracted to buy a car thenrefused to take delivery. Because demand for theparticular model at the time easily outstrippedsupply there was no interference in the seller’sability to sell the car. In consequence, he recoveredonly nominal damages.
W.L.Thompson Ltd v RobinsonGunmakers Ltd (1955)Similar facts to the last case, but here there was anexcess in supply of the type of car ordered. As aresult, when the buyer breached the seller couldrecover full damages.
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2. Reliance lossA claimant is entitled also to recover for expenses(s)he has been required to spend in advance of acontract that has been breached.
Such a claim will normally be made where theany loss of profit is too speculative to be able tocalculate effectively.
Generally, it is not possible to claim for both lossof profit and reliance loss since it is said to becompensating twice for the same loss. However itis possible where the claim for lost profit concernsonly net rather than gross profit which wouldinclude the reliance loss.
But it may also on occasions be possible to recoverdamages for the loss of a valuable amenity.
3. RestitutionThis is simply a repayment to the claimant of anymoney or other benefits passed to the defendantin advance of the contract that has been breached.
Chaplin v Hicks (1911)An actress had a contractual right to attend anaudition. At this audition 12 actresses would bechosen out of the 50 invited to attend.When shewas wrongly prevented from attending, the courtawarded her £100 in compensation even thoughshe only had a 50:12 chance of gaining work fromthe audition.The court stated that the mere factthat damages were difficult to calculate should notprevent her recovering.
Anglia Television Ltd v Reed (1972)Anglia paid out a large sum of money in preparingto make a film, including paying scriptwriters, hiringproduction and technical staff and other necessaryexpenses.The actor contracted to make the filmthen backed out in breach of his contract and thecompany was forced to abandon the project, sincethere was no appropriate substitute.Their relianceloss was much easier to account for in thecircumstances than any loss of profit.
Western Web Offset Printers Ltd vIndependent Media Ltd (1995)The defendant wrongly repudiated a contractunder which the claimant was to print 48 issues ofa weekly newspaper.The claimant sued for£176,903, having deducted the costs of printingsuch as ink and paper from the contract price.Thedefendant argued that labour costs and otheroverheads amounting to £38,245 should also bededucted from the claim.The Court of Appeal heldthat since the claimant had no alternative work forthe workforce the whole claim could be recovered.
Farley v Skinner (2001)The claimant hired a surveyor before buying ahouse and asked the surveyor to report specificallyon whether the property was affected by aircraftnoise.The report stated that it would not besubstantially affected by aircraft noise but this waswrong and negligent as the house was near abeacon for stacking aircraft at busy times.Theclaimant paid £490,000 for the house and spent£125,000 on it before moving in.When he movedin and discovered the noise he decided not tomove but sued the surveyor for damages for loss ofamenity.The House of Lords held that for loss ofamenity to succeed, it was not essential for thecontract to be one the object of which was toprovide pleasure, relaxation etc.The claimant didnot forfeit his right to non-pecuniary damages bynot moving and was awarded £10,000.
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Restitution is a massive area of law in its ownright and full explanations are only to be found inbooks dealing specifically with the subject.
Inevitably restitution in contract law has to dowith consideration and the presence or absence ofconsideration may determine the appropriatenessof the remedy.
16.4.3.The duty to mitigateThere is a clear principle of English law that theparty injured by a breach of contract must takereasonable steps to minimise the effects of thebreach, known as the duty to mitigate. Theprinciple is as appropriate to tort as it is tocontract law, and a failure to mitigate may betaken into account in awarding damages.
However, a claimant is not bound to go toextraordinary lengths to mitigate the loss, only todo what is reasonable in the circumstances.
Similarly, in the case of an anticipatory breach,the claimant is not bound to sue immediately(s)he knows of the possibility of the breach.
Stocznia Gdanska SA v LatvianShipping Co. (1998)Here a shipyard entered into a contract underwhich it was bound to both design and build a shipfor the buyers.The shipyard later rescinded thecontract before any ownership in the goods hadpassed to the buyers.The buyers claimed for returnof an installment of the contract price on the basisthat there was a failure of consideration.Theshipyard successfully resisted this claim.The Houseof Lords held that the true test of whether therewas a failure of consideration was not based onwhether the buyer had received nothing under thecontract but on whether the seller had donenothing under the contract.
contract. As a result, the buyers had to replace themwith turbines bought from another supplier. In theevent these turbines were so efficient that theysoon paid for the difference in price. As a result, thiscould not be claimed for but losses sustained beforethe originals were replaced were recoverable. LordHaldane LC said that a claimant has ‘the duty oftaking all reasonable steps to mitigate the lossconsequent on the breach [which] debars him fromclaiming in respect of any part of the damage whichis due to his neglect to take such steps.’
Pilkington v Wood (1953)As the result of a solicitor’s negligence the claimantbought a house with defective title, and was thusunable to take up residence for some time, andincurred the extra costs of hotel bills and travellingto and from his old house.The solicitor’s argument,that the claimant could instead have brought hisaction against the vendor and thus mitigated theloss in his action against the solicitor, was rejected.
British Westinghouse Electric andManufacturing Co. Ltd v UndergroundElectric Railways Co. of London Ltd(1912)In a contract for the supply of turbines the goodsdelivered did not match the specifications in the
White and Carter v McGregor (1962)A firm had contracted to buy advertising space onlitter bins to be fitted by the claimants to lampposts.When it backed out in breach of itsagreement the claimants continued to produce thebins.The argument, that the claimants might havemitigated the loss by not continuing to fit the bins,failed.
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16.5. Other common-lawremedies in contract law
16.5.1. Liquidated damagesA sum of liquidated damages may be availablewhere the parties have fixed the amount in thecontract that will be available in the event of abreach. However, the courts will accept this sumand deny the victim of the breach a claim for anunliquidated sum only where the sum identifiedin the contract represents an accurate and properassessment of loss. If it is not then this is seen asa ‘penalty’ and will be unenforceable.
Any clause providing for a greater sum thanthe actual loss is prima facie void.
The courts have developed rules for determiningthe difference between genuine liquidateddamages and a penalty.
A liquidated damages clause must accuratelyreflect the position of both parties.
16.5.2. Quantum meruitThis is merely recovery of an unqualified sum inrespect of services already rendered, and we haveseen its operation in relation to part-performance.
There are three common circumstances inwhich such an award is made:
a) where there is a contract for services that issilent on the issue of remuneration
b) where the circumstances of the case show thata fresh agreement can be implied in place ofthe original one
Bridge v Campbell Discount Co.(1962)A depreciation clause in a hire purchase agreementfor a car bore no relation to actual depreciation invalue.The clause was declared void as a penalty.
● a single sum operating in respect of a variety ofdifferent breaches is likely to be a penalty
● the wording used by the parties is notnecessarily conclusive
● it is no bar to recovering a liquidated sum thatactual assessment of the loss was impossiblebefore the contract.
Cine Bes Filmcilik ve Yapimcilik v UnitedInternational Pictures (2003)A clause in a licensing agreement for films providedfor payment by the licensee to the licensor in theevent of termination of the agreement. It took noaccount of payment to the licensee for any benefitsgained by the licensor so was a penalty.
Upton RDC v Powell (1942)Where a retained fireman provided services with nofixed agreement as to wages the court awarded areasonable sum in the circumstances.
Dunlop Pneumatic Tyre Co v NewGarage and Motor Co. (1914)Under its contract with Dunlop the garage wasbound to pay £5 in respect of breaches such asselling under the recommended price. In this case theHouse of Lords accepted that the sum represented agenuine assessment so was not a penalty. LordDunedin’s test included a number of points:
● an extravagant sum will always be a penalty
● payment of a large sum for a failure to settle asmall debt is probably a penalty
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c) where a party has elected to consider thecontract discharged by the other’s breach orwhere a party has been prevented formperforming by the other party, in either case theymight claim for work they have already done.
16.6. The effect ofspeculation in contract As has already been said, the purpose ofawarding damages in contract and tort varies.Where in contract the compensation is financiallyto recreate the situation that would have been butfor the breach of contract, in tort, damages are toput the claimant in the position (s)he would havebeen in had the tort not occurred. On this basis,in tort damages are frequently of a speculativenature, in other words an attempt to assess whatthe claimant’s position would have been if (s)hehad not been wronged by the defendant. This isknown as general damages, and a major featureof tort claims, for instance in personal injury, is incalculating future losses.
In contract law, on the other hand, we havealready seen that the courts have been careful toavoid granting damages of a speculative nature
since damages in contract are awarded in respectof a specific loss. Of course, there have been rareexceptions such as that in Chaplin v Hicks (1911)where damages were awarded for the loss of achance in an audition.
The courts have always been careful to separatecontract and tort. This is seen in the reluctance ofjudges to allow a remedy for a pure economic lossin negligence, which they see as being moreappropriate to principles of contract law. Theyhave been equally careful in traditionally avoidingallowing recovery in contract law for a claim seenas being more appropriate to principles in tort.
However, an exceptional group of cases hasdeveloped a principle in contract law in recenttimes allowing damages of a highly speculativenature in relation to mental distress. The casesare generally known as the ‘holiday cases’.
The principle was first accepted in relation to aspoiled holiday.
Steven v Bromley (1919)Steven had agreed to carry steel at a specified rate.The steel when delivered to Steven contained extragoods and thus Steven was able to claim extra forcarrying them.
De Barnady v Harding (1853)A principal wrongly revoked his agent’s authority toact on his behalf.The agent was then entitled toclaim for the work he had already done and forexpenses incurred.
Addis v The Gramophone Company(1909)The claimant was wrongly dismissed from his postas manager and replaced even before he left.TheHouse of Lords refused his claim for damages forinjury to his reputation and the mental distresscaused by the humiliating manner of his dismissal,the proper place for this according to Lord Atkinbeing the tort of defamation. He recovered only forthe loss of salary and commission owed.
Jarvis v Swan Tours Ltd (1973)The claimant contracted for a Tyrolean holiday,advertised as a ‘house party’. In fact, he was on hisown for the second week, and the holiday wasinferior to most aspects advertised in the brochure.The judge at first instance awarded him £31.72 forthe difference between the quality of the holiday as
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The principle has been extended, effectively as anexception to the doctrine of privity where theclaimant has recovered not only for his ownmental distress but that of his family also inJackson v Horizon Holidays (1975).
The reason for allowing the claims is that inholiday contracts ‘the provision of comfort,pleasure and “peace of mind”was a central featureof the contract’.
The principle also appears to have beenextended to include certain problems caused bysolicitors.
More recently damages for ‘loss of amenity’havebeen allowed where the sole purpose of thecontract was for ‘the provision of a pleasurableamenity’.
Nevertheless, the courts are still reluctant to allowthe principle to develop too far or to extend intopurely commercial territory. In Hayes v James andCharles Dodd (1990) Staughten LJ stated thatrecovery for mental distress should not include‘any case where the object of the contract was notpleasure or comfort or the relief of discomfort, butsimply carrying on a commercial contract with aview to profit’. Similarly, the court in WoodarInvestment Development Ltd v Wimpey ConstructionUK Ltd (1980) suggested that the principle shouldbe restricted to the holiday cases.
described and the actual holiday. However, theCourt of Appeal upheld his claim fordisappointment and mental distress and awardedhim damages of £125.
The courts had actually previously created anexception to the rule in Addis.
Cook v Spanish Holidays (1960)Travel agents failed in their contractual duty when ahoneymoon couple were left without a room ontheir wedding night and they were awardeddamages for loss of enjoyment.
Heywood v Wellers (1976)The claimant was awarded damages for mentaldistress where her solicitors, in breach of theircontractual obligations, failed to obtain an injunctionto prevent her former boyfriend from molesting her.
Ruxley Electronics and ConstructionLtd v Forsyth; Laddingford EnclosuresLtd v Forsyth (1995)A swimming pool was built six inches shallowerthan stated in the contract. Since this might preventthe purchaser from safely enjoying the pleasure ofdiving into the pool, damages were awarded.
Activity
Self-assessment questions1. What is a court trying to achieve when it
makes an award of damages in contract law?
2. When will it be possible to recoverdamages even though the injured party hassuffered no loss?
3. How does a court decide whether thedefendant’s breach of contract caused theactual damage suffered?
4. What are the basic differences betweenthe judgments in Hadley v Baxendale andVictoria Laundry v Newman Industries?
5. In what ways is the judgment in The Heronnot a sensible one?
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16.7. Equitable remedies incontract lawEquitable remedies are available in both contractand tort, although equity is much more closelyassociated with contract law. The whole purpose ofequitable remedies is that they should operatewhere an award of damages is an inadequateremedy and justice is not served.
On that basis there are a number of differentremedies available to the court, particularly incontract law, which more adequately reflect theneed of the claimant. Equitable remedies are atthe discretion of the court, unlike an award ofdamages, which is an automatic consequence ofliability being established. Because the remediesare discretionary they are awarded subject tocompliance with the various ‘maxims of equity’such as ‘he who comes to equity must come withclean hands’.
16.7.1. Injunctions in contract lawAgain, in contract law injunctions are rarelymandatory and are usually then negative
restrictions on the defendant. Again, injunctionsmay be either final or interlocutory.
There are three common instances where aninjunction is claimed in respect of contracts:
a) To enforce a contract in restraint of trade.Such contractual clauses are prima facie void,
and so an injunction will only be granted if therestraint is reasonable as between the partiesand in the public interest, and only if theyprotect a legitimate interest.
b) To enforce a provision protecting legitimatetrade secrets or specialist information.
c) To encourage compliance with a contract ofpersonal service.
6. Why was the case rejected in Parsons vUttley Ingham?
7. How does the ‘available market’ rule affectan award of damages?
8. When is reliance loss awarded rather thanloss of a bargain?
9. Is it possible to recover both?
10. What effect does an anticipatory breachhave on an award of damages?
11. What restrictions exist in the case ofrecovering damages for mental distress?
12. In what ways is a penalty different toliquidated damages?
Fitch v Dewes (1921)Here, a lifelong restraint on a solicitor’s clerk fromtaking up the same employment in a seven-mileradius of Tamworth Town Hall was held to bereasonable.
Fellowes v Fisher (1976)Here, a five-year restraint on a conveyancing clerkfrom taking similar employment in Walthamstowwas held to be unreasonable by Lord Denningsince the clerk was relatively unknown in a denselypopulated area.
Faccenda Chicken v Fowler (1986)The injunction was sought to prevent competitionby a former employee who had devised a salessystem of fresh chickens from refrigerated vans.The action was unsuccessful because thetermination was reasonable and there was noexpress provision in the contract.
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Since this appears similar to a mandatoryinjunction it will only be awarded where thereis an express negative restriction in thecontract and will not be awarded where itamounts in effect to a mandatory award.
Similarly, it will be unavailable where the clause isunreasonably wide and would prevent the otherparty from earning a living.
16.7.2. Rescission in contract lawThis is particularly common in bothmisrepresentation and mistake and is an order ofthe court returning the parties to their originalpre-contract position. As a result it is onlyavailable where to do that is actually possible.
Restitutio in integrum must apply for a successfulclaim for rescission of a contract. That is it must bepossible to return to the actual pre-contractposition without the subject matter of the contracthaving been substantially altered in any way.
Other important requirements for rescissioninclude that the party seeking rescission must nothave already affirmed the contract.
Also that (s)he has not delayed too long inseeking the remedy, as was the case in Leaf vInternational Galleries (1950) where theremedy was lost because the claimant waitedfive years.
Finally, that no third parties have subsequentlygained rights over the subject matter, as occurredin Oakes v Turquand (1867).
16.7.3. Specific performance incontract lawThis is an order of the court for the party indefault to carry out his/her obligations under thecontract. It is rarely granted because of thedifficulty of overseeing it.
Page One Records v Britton (1968)‘The Troggs’, a sixties pop group, were tied bycontract, indefinitely, to their manager underextremely unfavourable conditions.When theybecame disillusioned and found a new manager theold manager tried to enforce the contract but failed.
Lumley v Wagner (1852)An opera singer had a contract with an expressstipulation that during its three months’ currencyshe would not take up work with any othertheatre.When she did so she was successfullyrestrained. Bearing in mind the duration of thecontract, it in no way interfered with her generalability to earn a living.
Clarke v Dickson (1858)Clarke was persuaded to buy shares in apartnership as a result of misrepresentations madeto him. Later the partnership became a limitedcompany.When it failed Clarke then discovered themisrepresentation. He was unable to rescindbecause the nature of the shares had changed frompartnership shares to company shares.The judgegave the example of a butcher who buys live cattle,slaughters them and then wishes to rescind. Itwould be impossible.
Long v Lloyd (1958)A lorry was bought which proved defective.Thepurchaser lost the right to rescind after allowing theseller twice to make repairs to the lorry. He hadthus affirmed the contract.
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This contrasts with Posner v Scott-Lewis (1987)which again involves an obligation to provide ahall porter. The court could award the remedyhere where the landlord had merely failed toemploy one.
Such an order is only usually granted then inthe case of transfers of land or where the subjectmatter of the contract is unique in some way sothat it could not be replaced in an ‘availablemarket’ and an award of damages is thusinadequate. An example would be a valuable workof art, as in Falcke v Gray (1859). So it will never beable for instance in a contract of service – DeFrancesco v Barnum (1890), where it was denied inthe case of a breach of a contract of apprenticeship.
Since the remedy is discretionary underequity it will not be awarded where theclaimant’s actions in seeking the order areunconscionable, as would be the case with allequitable remedies.
16.7.4. Rectification of documents incontract lawThis is an order of the court to rectify a mistake ina written contract. Again the remedy isdiscretionary and will only be granted where theactual agreement is different and it isunconscionable to allow the existing writtendocument to stand.
Ryan v Mutual Tontine WestminsterChambers Association (1893)Under a tenancy agreement the landlord wasobliged to provide a hall porter to take care of thecommon areas.The person employed failed to dothe work properly. An order for specificperformance was refused because the court couldnot supervise the work.
Webster v Cecil (1861)The claimant was trying to enforce a writtendocument for the sale and purchase of land that heknew contained an inaccurate statement of price.Since there was evidence to show what the actualprice should be his action failed and the documentof sale was rectified to accurately reflect the priceactually agreed.
Craddock Bros Ltd v Hunt (1923)Craddock agreed to sell his house to Hunt, notintending an adjoining yard to be included in thesale. By mistake, the yard was included in theconveyance so Craddock immediately soughtrectification of the document and succeeded.
ActivitySelf-assessment questions1. What are the common features of property
that can be the subject of an order forspecific performance?
2. In what circumstances will an order forspecific performance be denied?
3. Why are the courts reluctant to awardmandatory injunctions?
4. When, if ever, is an injunction possible in acontract of employment?
5. In rescission, why is the rule relating torestitutio in integrum necessary?
6. What other bars to rescission are there?
7. What has gone wrong when rectification ofa document is ordered?
Consumer Protection
Chapter 17
17.1. General‘Consumer protection’ is a general term andcovers not only areas of contract law but of tortalso. Product liability under the principle inDonoghue v Stevenson is as important to theconsumer as are the Sale of Goods Act 1979 andthe Supply of Goods and Services Act 1982.
Of course, while the consumer can useboth contract and tort in his action the remediesare likely to be different and this has to beborne in mind when choosing which action tobring.
Contract actions under the two Acts are betterfor the person who has purchased goods orservices because they are in effect strict liabilityand the full range of loss can be recovered.However, they do depend on being a party to thecontract and for other parties a tort action may bethe only way.
Besides providing civil law remedies,consumer protection is achieved through thecriminal law, through Acts that provide criminalsanctions, mainly through fines. TradingStandards officers generally police these andkeep a watch on unscrupulous traders andtradesmen. Two specific Acts which deal withproduct safety and misleading descriptionsapplied to goods respectively are the ConsumerProtection Act 1987 and the Trade DescriptionsAct 1968.
It is interesting to note, finally, the importantimpact that EU law has had on the whole area ofconsumer protection, as we have already seen inother chapters.
17.2. Sale of goods andsupply of goods and servicesThe most significant aspect of both the Sale ofGoods Act 1979 and the Supply of Goods andServices Act 1982 is the implied terms that theyinsert into any contract covered by each Actrespectively. These terms are already covered indetail in Chapter 8 as well as in Chapter 9 onexclusion clauses.
Another important feature of the Sale ofGoods Act 1979 is the rules relating to thepassing of property.
Goods can be specific or unascertained. If theyare unascertained, meaning, e.g. that they haveyet to come into existence or the exact portion ofa larger consignment is yet to be identified, thenproperty (ownership) in the goods does not passto the buyer. Any loss is still the responsibility ofthe seller.
In the case of specific goods, property (and therisk of loss) generally passes when the partiesdecide that it should.
Under s18 there are also some specific rules asto when property passes:
● rule 1 – where goods are in a deliverable state,property passes when the contract is made
● rule 2 – where the seller is bound to dosomething to the goods to put them in adeliverable state then property passes when ithas been done
● rule 3 – is similar to rule 2 but applies wherethe seller must weigh, measure or test in orderto ascertain the price – property will not passuntil this is done
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● rule 4 – concerns goods sold on sale or return(approval) – property only passes onacceptance by the buyer.
One important point to make about the Supply ofGoods and Services Act 1982 is that its provisionsapply also to contracts for the hire of goods.
There is also some very specific additionallegislation which applies to contracts for goods orservices.
The Package Travel, Package Holidays andPackage Tours Regulations 1992 create liability onthe part of sellers or organisers of packageholidays. They must ensure that the holidaymakeris not subjected to any misleading informationand are responsible for the proper performance ofthe contract even though they are not the actualsuppliers. As such, they supplement rights underthe Contracts (Rights of Third Parties) Act 1999and the common-law protection in Jackson vHorizon Holidays in respect of third-party rights.
The Unsolicited Goods and Services Act 1971was introduced to protect consumers againstaggressive selling techniques. Where goods aresent to a person who has not requested them, ifthey then send written notice that they areunwanted, if they are not collected within 30 daysthey can be claimed free.
17.3. The ConsumerProtection Act 1987The Consumer Protection Act was the UK ‘sresponse to the EC Directive on Product LiabilityDirective 85/374 that required the harmonisationof law of member states on the issue of productliability.
The Act is both criminal and civil in content,and in its regulatory sense has since beensupplemented by the General Product SafetyRegulations 1994 (which again is a response toEC law). It is at least arguable that the criminalsanctions under the Act provide ultimately a more
effective control of defective products thancommon law product liability.
The civil liability in the Act is contained ins2(1): ‘where any damage is caused wholly orpartly by a defect in a product, every person towhom subsection (2) applies shall be liable forthe damage’.
Those who can be sued Potential defendants under the Act are listed ins2(2):
● Producers – these are defined in s1(2) andinclude:w the manufacturer – who can be the
manufacturer of the final product, but alsomanufacturers and assemblers of componentparts, and also producers of raw materials
w a person who ‘wins’or ‘abstracts’products –e.g. someone who extracts minerals fromthe ground
w a person carrying out an industrial or otherprocess which adds to the essentialcharacteristic of the product – e.g. freezingvegetables.
● Importers, suppliers and ‘own-branders’ arealso defined in s2(2), and can be liable to theconsumer in certain circumstances:w importers – under s2(2)(c) will include
anybody who in the course of a businessimports a product from outside of the EU
w suppliers – these are obviously retailers orequivalent persons – ordinarily they will beliable only in contract law – but under s2(3),where it is impossible to identify either a‘producer’or an importer, the supplier canbe liable if the consumer has asked thesupplier to identify the producer, within areasonable time of the damage suffered,because it is impractical for the consumer toidentify the producer, and the supplier hasfailed to identify or refuses to identify theproducer (this means businesses must keeprecords of their suppliers)
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● own-branders – under s2(2)(b) would be, e.g.,supermarket chains who, while not producers,effectively hold themselves out as producers bydeclaring a product to be their own brand –they must indicate that someone else isproducing the goods for them in order to avoidliability under the Act.
So, three important points can be made:
● any person in the chain of manufacture anddistribution is potentially liable
● liability is both ‘joint and several’ – meaningthat the consumer can sue the person with themost money or best insurance cover
● and liability is ‘strict’ – meaning that fault neednot be proved.
Products covered by the Act‘Product’ is defined in s2(1) as ‘any goods orelectricity and (subject to subsection (3)) includesa product which is comprised in another product,whether by virtue of being a component part, rawmaterial or otherwise’.
‘Goods’are defined in s45(1) as ‘substances,growing crops, and things comprised in land byvirtue of being attached to it and any ship, aircraftor vehicle’.
A number of things are specifically exemptedfrom the scope of the Act:
● buildings – because they are immovable –though building materials are included
● nuclear power● agricultural produce which has not undergone
an industrial process – the problem here is indefining what is an industrial process, e.g.would butchery be in the light of the BSE andCJD problems?
Defects covered by the Act‘Defect’ is defined in s3(1) as ‘if the safety of theproduct is not such as persons generally areentitled to expect, taking into account all thecircumstances’.
The courts can take into account a number ofcircumstances in defining safety:
● the manner in which and purposes forwhich the product has been marketed, its get-up, the use of any mark in relation to theproduct and any instructions for, or warningswith respect to, doing or refraining from doinganything in relation to the product
● what might reasonably be expected to be donewith or in relation to the product
● the time when the product was supplied by itsproducer to another.
Market can be important, e.g. toys and children.But the use of warnings can be, too. In that case,the way that a consumer uses products canrelieve liability, e.g. fireworks not to be usedindoors.
Defects in production or design, which renderthe product unsafe, will result in liability underthe Act. However, the consumer may cause thedamage by improper use, e.g. drying wet pets inmicrowaves.
Another important factor is time, becauseknowledge is always increasing – so the questionis: once knowledge has changed, should aproducer recall all products sold however longago in the past?
Damage to which the Act appliesThe Act covers death, personal injury, and loss ordamage to property caused by unsafe products.
Some limitations are placed on this:
● no damages will be given in respect of smallproperty damage under £275 – a consumerhere would need to use basic contract lawinstead
● no damages will be awarded in respect ofbusiness property – so the property must havebeen intended for private use, occupation orconsumption
● no damages are recoverable for loss or damageto the defective product itself.
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LimitationThe claimant must begin proceedings withinthree years of becoming aware of the defect, thedamage or the identity of the defendant, or if thedamage is latent the date of knowledge of theplaintiff provided that is within the 10-yearperiod.
The court has discretion to override the three-year period in the case of personal injury.
In all cases there is an absolute cut-off pointfor claims of 10 years from the date that theproduct was supplied.
DefencesAll defences are contained in s4 of the Act.
They include:
● that the product complies with statutory or EUobligations – and so the defect was aninevitable consequence of complying with thatrequirement, e.g. a chemical required to be in aproduct by law which then turns out to bedangerous
● the defect did not exist at the time it wassupplied by the defendant – this might include,e.g., animal rights campaigners ‘doctoring’babyfood, but also the case where the defect arisesin the subsequent product but not in thecomponent
● the product was not supplied in the course of abusiness
● where the defendant can show that it was nothim/her who actually supplied the product
● where the state of technical or scientificknowledge at the relevant time was notsuch that the defendant could be expectedto have discovered the defect – Roe v Ministerof Health (1954) (precedes the Act but makesthe same point) – this is highly controversialand out of step with many other EUcountries, which follow the Directive’swording of when the product was put intocirculation.
Some criticisms of the ActThe Act was a step forward in a few ways:
● it has put producers on their guard, andknowledge of the need for appropriatechecking and quality control
● as a result, there is a greater likelihood ofproduct recall
● it also allows the consumer more chance of anaction because (s)he has a greater range ofpotential defendants to choose from.
However, the Act has shortcomings also:
● it does not apply to all products, nor to alldefects, nor to all damage
● the limitation period is very strict● the Act in any case does not apply to products
supplied before 1988● there are probably too many defences, making
it difficult for a claimant to succeed● causation is still a requirement and the standard
of care is very similar to negligence, making ittoo similar to negligence and not enough likethe strict liability it is supposed to be.
ActivitySelf-assessment questions1. Why was contract law inadequate on its
own to deal with consumer problems?
2. What was the purpose in passing theConsumer Protection Act?
3. Which consumers does it protect?
4. How does a civil action under the Act differfrom one in tort?
5. What injustices could arise from the fact thatagricultural products not undergoing anindustrial process are not covered in the Act?
6. How does the defence of state of technicalor scientific knowledge cause problems forthe consumer?
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17.4. The Trade DescriptionsAct 1968 and applying falsedescriptions to goods orservices
IntroductionThe Act was created to deal with false statementsmade in a business context. The mere fact that theseller is a trader is insufficient on its own. Thetransaction in question must be one that is aregular occurrence in that particular business.
The Act produces criminal liability for makingfalse ands misleading statements and any actionwould usually be by Trading Standards in theMagistrates’Court.
It therefore complements civil law actions incontract law for misrepresentation or for breachof the implied term relating to description unders13 Sale of Goods Act. The Act applies both togoods and services.
False description of goodsBy s1(1):
‘Any person who, in the course of a trade or business:a) applies a false trade description to any goods; orb) supplies or offers to supply any goods to which a
false trade description is applied;shall, subject to the provisions of this Act, be guilty of anoffence.’
S1(1)(a) would apply where the seller haspersonally made the false description.
S1(1)(b) would apply where the seller is offeringgoods to which a false description has beenapplied by another person e.g. a label in a garment.
By s2 a trade description is any direct orindirect indication relating to:
a) quantity, size, gauge
b) method of manufacture, production,processing, recondition
Activity
Problem solvingConsider the following:Derek buys a pocket electronic calculator, anelectric paint stripper, and a speaking teddybear from Cheapbits electrical goods discountwarehouse.The calculator is manufactured bySupelec plc, an English company.The paintstripper is from Taiwan but has nomanufacturer’s address. Supelec’s managerbought it for cash in a consignment of 100from a travelling salesman.The teddy bear hasno identified producer and is in sealedpackaging marked ‘Supelec Talking Ted’.
Derek gives the calculator to his nephewTrevor as a birthday present.Trevor uses it inan exam.The calculator fails to perform certainmathematical functions properly, as a result ofwhich Trevor fails his exam.
Derek’s wife,Wendy, uses the paint stripper todry her hair and it burns her scalp very badly.
Derek’s little daughter, Natalie, is given the bear.The talking mechanism fails after only a fewdays. Derek intends to return it to Cheapbitsbut is busy at work. Natalie takes the bear tobed with her every night. She develops a badasthma condition and dies in an attack.A yearlater, scientists discover a connection betweenartificial fur and asthma.
Decide whether any party has a right to suefor compensation under the ConsumerProtection Act 1987.
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c) composition
d) fitness for purpose, strength, performance,behaviour, accuracy
e) any other physical characteristics
f) testing by any person and the results of suchtests
g) approval by anyone or conformity with a typeof approval
h) place or date of manufacture, production,processing or reconditioning
i) the person who manufactured, produced,processed, or reconditioned
j) any other history, including previousownership.
A number of further points can be made:
● the false trade description may be appliedverbally, in writing, pictorially or even byconduct
● to be an offence under the Act the false tradedescription must be false or misleading to amaterial degree
● an offence under s1 may be committed by anyperson, not just the seller
● a person may be guilty under s1(1)(b) even if hedoes not know that the description is false,provided that he knows that the description hasbeen applied to the goods by another person
● under s23 a person who is not in the course ofa trade or business may still be convicted if itwas because of his default or omission that thefalse description was applied to the goods.
False statements concerning provisionof services, accommodation orfacilitiesBy s14(1):
‘It shall be an offence for any person in the course ofany trade or business:
a) to make statements which he knows to be false; orb) recklessly to make statements which he knows to be
false; as to any of the following matters:(i) the provision of any services, accommodation or
facilities;(ii) the nature of any services, accommodation or
facilities;(iii) the time at which, the manner in which or
persons by whom any services, accommodationor facilities are provided;
(iv) the examination, approval or evaluation by anyperson of any services accommodation or facilities;
(v) the location or amenities of any accommodation.’
For a conviction the prosecution must show thatthe defendant actually knew the statement wasfalse at the time he made it or was recklesswhether it was true or not.
The statement must actually be false at thetime it is made – it is not sufficient that itbecomes false at a later stage.
DefencesBy s24 a defence is available if the defendant canshow both:
a) that the commission of the offence was due to amistake or to reliance on information supplied to himor to the act or default of another person, anaccident or some other cause beyond his control; and
b) that he took all reasonable precautions and exercisedall due diligence to avoid the commission of such anoffence by himself or any other person under hiscontrol.
Under s25 a defence is also available for, e.g.newspapers that merely innocently publish amisleading advertisement.
Where a dealer is unsure as to the accuracy ofdescriptions applied by other people he mayapply a notice of disclaimer for the accuracy ofthe trade description provided that the disclaimeris ‘as bold, precise and compelling as the tradedescription itself’. This will then provide aneffective defence
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ActivitySelf-assessment questions1. What is a false description?
2. To what range of descriptions does the Actapply?
3. How is the Act administered?
4. To whom can the Act be applied?
5. Does the Act cover services as well asgoods?
6. In what circumstances is a trader entitled toa defence under the Act?
ActivityMultiple Choice Question
Consider which of the followinganswers applies to the scenariobelow:Electrical Retailers make and supply an AstralTelescope described in all materials as beingcapable of ‘455× magnification’. In fact, evidenceshows that actual useful magnification amountsto at most 120×, although scientifically thetelescope is capable of 455 magnification but ofblurred images only.
1. The retailers can be charged under s14Trade Descriptions Act 1968.
2. The retailers can be charged successfullyunder s1(1)(b) Trade Descriptions Act 1968.
3. The retailers can be charged successfullyunder s1(1)(a) Trade Descriptions Act 1968.
4. The retailers can be charged under s1(1)(a)Trade Descriptions Act 1968 but have adefence under s24(b).
The Synoptic Element
Chapter 18
18.1. The nature andpurpose of synopticassessmentThe synoptic element was an inclusion to all ALevels insisted upon by the Dearing Report whichpreceded Curriculum 2000.
The general principle behind it is thatcandidates should be assessed in a form thatdemonstrates both a good overall understandingof the different components of their course, i.e.the legal system, as well as the substantive areastudied, and also of the ways in which theindividual components connect or affect eachother. So it is a general overview of the course.
Candidates choosing contract law as an optionon A2 would be expected to show anunderstanding of the way that the contract lawoperates within the legal system. The individualexamination boards chose different styles ofpapers for the synoptic element, mirroring thedifferent emphases in their individualspecifications.
AQA chose a model of synoptic assessment,mirroring interest previously shown in abstractconceptual aspects of law such as justice, principlesof fault, morality etc., illustrated by use of contractlaw examples (or other substantive law areaschosen as a course of study in Units 4 and 5).
OCR chose a narrower focus, basing itssynoptic assessment on a previously selectedtheme for both legal system and substantive lawelements. The theme for legal system is commonfor all substantive law options. A specific themefor each option is then illustrative of the centrallegal system theme. Building on the style of the
existing Sources of Law paper, candidates alsohave the support of pre-released resourcematerials in the exam.
WJEC chose a modular structure based onstyle of assessment rather than on content. Forthe synoptic element, a model of assessmentbased on a single compulsory synoptic questiondrawn from the AS content and an Optioncontent was chosen.
18.2. OCR synoptic elementOCR Law examiners who prepared the draftspecification for Curriculum 2000 chose to basethe synoptic element, termed the ‘Special Study’,on a theme, and on use of pre-released sourcematerials, building on use of source materials inSources of Law.
Each theme lasts for two years or four papers.The overarching theme linking all of the
options is ‘the role of judges, precedent, theapplication of statutory materials and thedevelopment of law’. Candidates, as well asanswering on a specific theme within theirchosen option, should also answer in the contextof the overarching theme. From January 2008 toJanuary 2009 inclusive the theme for the Law ofContract option is consideration, but onlyadequacy and sufficiency of consideration, pastconsideration, and performance of existence ofexisting duties as consideration.
Centres are provided with booklets of sourcematerials with which candidates can familiarisethemselves during the course of their A2 year.Teachers also will be able to use the materials andthe past papers to prepare candidates for the styleof exam.
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Candidates cannot take their original copy intothe exam, but have the benefit of a clean copy ofthese materials in the exam room at the time ofsitting the paper.
These materials are available from OCR andare usually on its website also. They includeextracts from judgments of leading cases, extractsfrom articles in legal journals, and extracts frombetter-quality text books. The questions aredesigned to draw on material found in thesesources.
Each paper has three questions, andthese are of distinct types:
Question 1 This is always a question about a case that appearsin the source materials, e.g. in the sample materialsavailable from OCR the case for question 1 isChappell v Nestlé Co and candidates are asked todiscuss how far the case represents a developmentof the law on consideration.
With the new theme of specific aspects ofconsideration the materials include reference tocases such as Thomas v Thomas, Chappell v Nestlé,Lampleigh v Braithwaite,Williams v Roffey, Stilk vMyrick, Pao On v LauYiu Long, Glassbrook Bros vGlamorgan CC, and with less detail Roscorla vThomas, Re McArdle, Shadwell v Shadwell, Scotson vPegg, and New Zealand Shipping v Satterthwaite (TheEurymedon). Inevitably, on any paper Question 2 willbe taken from one of these cases.
Questions will ask candidates to discuss the casein the light of the overarching theme. So they maydemand an understanding of how the casechanged or developed the law, whether the casehas restricted the law, whether the case remediesor produces injustice etc.
Question 2This is always the major discussion questionabout the substantive law theme.
In the sample materials produced by OCR,question 2 focuses on a quote from the sourcematerials from Major and Taylor on performanceof existing duties.The task for the candidate is toconsider whether the development of rules onperformance of existing duties in return for afresh promise does in fact mean that a partymust do more than he was already bound to do.
It is easy to see areas of discussion that couldbe asked for in relation to the new theme.There is obvious disparity between Williams vRoffey and Stilk v Myrick. Definitions of adequacyand sufficiency are strained, and pastconsideration and its exceptions is an odd rule.
Question 3Always involves pure application of the area oflaw in the theme. Question 3 comes in theform of three small scenarios, so they are morefocused than normal problem questions on theoption papers.There are significantly more AO2marks than AO1 marks so candidates need toshow good understanding of the law and goodapplication skills. In the sample materialsavailable from OCR two of the scenariosinvolve past consideration. In the first theservice is requested and in the second it is not,so candidates have to apply not only the basicprinciple but also the exceptions in Lampleigh vBraithwaite and/or Re Casey’s Patent.The thirdscenario concerns adequacy and sufficiency andalso vagueness of consideration so candidateshave to determine whether anything that isoffered can be considered real, tangible and ofsufficient value to count as consideration.
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These three types of questions havespecific demands in what is requiredin the exam:
Candidates taking the paper should alsoremember two significant skills:
● Weighting – the weighting of AO1 marks toAO2 marks is 30:60 so candidates will not beable to gain marks for very narrative answers.They must evaluate or apply the law to getgood marks.
● Time management – candidates haveapproximately 15 minutes to spend onquestion 1 and 371⁄2 minutes each for question2 and question 3.
18.3. AQA synoptic elementFor the synoptic unit, candidates sitting AQA Unit6: Concepts of Law are expected to use materialin illustration of their answers from anywhere inthe other five units.
In order to demonstrate a synthesis of theirunderstanding of legal processes and institutionsas well as the substantive areas of law studied,candidates are asked to answer questions on anumber of conceptual areas.
Question 1● Always requires a response to a case actually to
be found in the materials.
● So merely reciting the facts of the case isinsufficient – it requires some critical awarenessof the significance of the case to the theme.
● Remember to identify the significant features ofthe case in the context of the development oflaw. In the context of consideration this may beanalysis of what courts are prepared to accept assufficient consideration, analysis of the pastconsideration rules and the exceptions to it, andanalysis of the reasoning behind rules onperformance of existing duties as considerationfor fresh promises.
Question 2● Always requires a discussion about the
substantive area – but candidates should notforget the overall theme of precedent and thedevelopment of law.
● Again, the source material will be relevant andshould be used.
● The question will ask for a criticism of someaspect of consideration.
● Or may refer to a quote from a source fromeither an article or a judgment and then requirecomment on the quote.
Question 3● This always calls for pure application of law to
be found in the source materials.
● Again, it is the understanding of the principlesthrough application that is important rather thanregurgitating facts.
● Candidates have already scored high marks onthis question by employing the skills learned onthe sources of law paper.
These concepts of law are:● the law and morals
● the law and justice
● the balancing of conflicting interests
● the principle of fault
● judicial creativity.
Contract Law226
Even a very brief examination of these broadheadings can hint at fairly obvious areas ofinterest in a study of contract law:
● contract law involves moral judgments even ifless so than in crime
● contract inevitably seeks justice for the victimby the provision of compensation
● contract law is all about balancing competinginterests of the two parties to the contract andeven third parties
● fault is a means of identifying liability for abreach of contract
● judges say that they only declare the law, notmake it. However, the part played by ‘policy’ inthe development of much contract law seemsto suggest that judges can be quite creative.
In answering questions on theseconcepts, candidates will need todemonstrate understanding of theconcepts themselves:
In the case of law and morality:
● Questions here will involve exploring thedistinction between the two, e.g. that moralsdepend on voluntary codes while legal rulesare enforceable in the courts; that moralitycan have a social context and develops overtime, where legal rules can be introducedinstantly without reference to popular views,that things included in a moral code do notalways appear in legal rules, and that somethings that are accepted in law may stilloffend some people’s sense of morality,e.g. abortion.
● It will inevitably involve exploring theHart/Devlin debate, i.e. between the views thatmorality is a private concept and that the lawshould not intervene in a person’s privatemorality, and the view that judges have aninherent right to protect the public from morallapses.
● Some context will be introduced to illustratewhether law and morals do coincide. In thecase of contracts declared illegal by commonlaw they include contracts for immoralpurposes (Pearce v Brooks) or corruption inpublic office (Parkinson v College of Ambulance).
In the case of law and justice:
● Questions will involve some discussion ofindividual theories of justice and explanationsof the theories of natural lawyers, positivists,the utilitarian theories of Bentham and JohnStuart Mill, as well as Marxist theorists, couldall be explored.
● Problems that surface here obviously includethe fact that what is just for society as a wholemay be unjust to the individual and vice versa.
● The fact that unjust laws are possible can alsobe considered, e.g. the privity rule, the numberof judicial exceptions and the eventual move tolegislate.
● Ways of achieving justice should also beconsidered, e.g. the development of controlson exclusion clauses for the protection ofconsumers.
In the case of balancing conflicting interests:
● Again, questions here will focus on the extentto which individual rights can be protected asagainst the interests of the state or indeedcompeting interests.
● Contract law, in essence, should be seeking toremedy the party whose contractual rightshave been infringed.
● However, the use of commercial arbitration isan indication of the law and the partiesreaching compromises.
● A good example of balancing competinginterests is the rules on minors’ contractswhere the minor is protected againstunscrupulous businessmen who would takeadvantage of them (De Francesco v Barnum) but
The Synoptic Element 227
the person dealing with a minor is alsoprotected against their unjust enrichment(s3(1) Minors’Contracts Act 1987).
In the case of the principle of liability based onfault:
● Questions here would demand anunderstanding of fault, i.e. that liability shoulddepend on culpability and responsibility.
● Fault appears in contract law mainly throughthe principle of remoteness of damage indeciding whether to award damages – Hadley vBaxendale.
● But fault is also an issue in contracts resultingfrom fraudulent misrepresentation – eventhough this is in effect an action in the tort ofdeceit.
In the case of judicial creativity:
● Questions will inevitably involve anexplanation of the restrictions on judicialcreativity, i.e. Parliament is the supreme law-maker, judges adhere to a declaratory theory oflaw, a rigid doctrine of precedent.
● Means of avoiding this would also beconsidered, e.g. any flexibility within thedoctrine of precedent including the Practice
Statement 1966, the impact that judges canhave on legislation through statutoryinterpretation, and processes like judicialreview.
● In illustration reference could be made to thefact that contract law is still in the main acommon law area – major areas such asconsideration and mistake having no statutoryintervention.
Example question 1:
Discuss the meaning of ‘justice’. Considerthe extent to which justice is achieved inthe application of legal rules. Relate youranswer to examples drawn from civil law,criminal law or both.
Example question 2:
Discuss the relationship between law andmorals. Consider how far the law seeks touphold and promote moral values.
[Both June 2002]
Answers to DilemmaBoards
Appendix
Answers to Dilemma Boardon Offer and AcceptanceIn the case of A:
● Where an offer is made then it can only bewithdrawn by communicating this fact to theofferee.
● If advertising the boots for £50 is an offer thenGary has not communicated withdrawal of theoffer before Jodie accepted.
● However, advertising goods generally acts as aninvitation to treat and not an offer unless thereis something to indicate a specific offeree.
● This is not the case here so the statement isinaccurate.
In the case of B:
● Where use of the post is the normalanticipated means of acceptance, the contractis formed when the acceptance is posted, notwhen it is received.
● Here only one communication during thenegotiations was by letter so the postal rulecould not apply.
● In any case, since Gary’s statement of price isan invitation to treat and not an offer, Jodie’sletter is an offer and not an acceptance.
● Therefore the statement is inaccurate.
In the case of C:
● A counter-offer does count as a rejection of theoffer meaning that acceptance is no longerpossible.
● However, Jodie saying that he prefers to pay £40may not be seen as an outright rejection.
● In any case, since Gary’s statement of price isan invitation to treat and not an offer, Jodiesaying that he prefers to pay £40 cannot beseen as a counter-offer.
● Therefore the statement is inaccurate.
In the case of D:
● Gary’s statement of price is an invitation totreat and not an offer.
● In any case an offer can be made to the wholeworld and does not have to be made to anindividual.
● Therefore the statement is inaccurate.
Answers to Dilemma Boardon ConsiderationIn the case of A:
● Consideration is a promise of one thing inreturn for the promise of another thing whichmust be real, tangible and of some value.
● Something that is too vague, eg promising tostop complaining, will not be seen as goodconsideration.
● Sukhwinder has helped Tara with herresearches on two Saturdays and she hasreceived a high mark.
● Therefore it is unlikely that Sukhwinder’s helpwill be seen as too vague to amount toconsideration and the statement is notabsolutely accurate.
Answers to Dilemma Boards 229
In the case of B:
● Consideration must result from the agreementbetween the two parties and not precede theagreement.
● Tara’s promise to pay Sukhwinder comes afterhe has helped her so it looks like pastconsideration.
● There is an exception when somebody requestsa service, as here, and later promises to pay forit – in this case the promise to pay can beenforced.
● A later promise of payment can also beenforced when there is an implied promise topay because of professional expertise, which islikely to apply here.
● Therefore the statement is inaccurate.
In the case of C:
● The basic rule is that performance of anobligation under an existing contract cannot beconsideration for a fresh agreement.
● Sukhwinder is already bound to teach Tara fortwo hours each Saturday and that is what he isdoing.
● An exception to this principle is where theparty is giving something extra than they arealready doing – if teaching tort rather thancontract is seen as something extra then thepayment of the £100 may be enforceable.
● Alternatively, the promise to pay can beenforced when the other party gains an extrabenefit – here Tara has gained a high mark inher tort coursework.
● Therefore the statement may be inaccurate.
In the case of D:
● Estoppel applies where in an existingcontractual arrangement one party agrees towaive some of their rights under the contractknowing that the other party is relying on thatpromise to waive rights and does in fact do so.
● Tara has not agreed to waive any rights underthe contract with Sukhwinder.
● Estoppel is ‘a shield not a sword’, so could notbe used as the basis for an action bySukhwinder.
● Therefore the statement is inaccurate.
Answers to Dilemma Boardon Intention to Create LegalRelationsIn the case of A:
● Sarah is Crispin’s nine year-old daughter andtherefore the arrangement is likely to beconsidered domestic.
● The presumption in domestic agreements isthat there is no intention to create legalrelations.
● The agreement is vague – it is to prevent Sarahfrom being bored and there is no specific sumof money identified.
● Therefore the statement is inaccurate – it is nota business arrangement and Sarah will not beable to sue.
In the case of B:
● Sarah is Crispin’s nine year-old daughter andtherefore the arrangement is likely to beconsidered domestic.
● The presumption in domestic agreements is thatthere is no intention to create legal relations.
● However, the presumption can be rebutted, egwhere a family member has spent money inadvance of the agreement.
● Therefore the statement is not absolutelyaccurate.
In the case of C:
● Katie is Crispin’s wife but she is also hisemployee so the arrangement is a business oneand not a domestic one.
● The presumption in business agreements isthat there is an intention to create legalrelations.
Contract Law230
● The presumption can be rebutted where there isclear evidence that there was no intention tocreate legal relations e.g. honour pledge clauses.
● There is no evidence here so the statement isinaccurate.
In the case of D:
● The arrangement is a business one and not adomestic one.
● The presumption in business agreements isthat there is an intention to create legalrelations unless this is rebutted by evidenceshowing the contrary.
● Bonus and ex gratia payments linked to anemployment contract have been held to beenforceable.
● Therefore the statement is inaccurate.
Answers to Dilemma Boardon Third Party RightsIn the case of A:
● The privity rule states that only persons whoare parties to a contract can sue or be suedunder the contract.
● However, the courts have devised a number ofexceptions to the basic rule.
● Parliament has also created third party rightsunder the Contracts (Rights of Third Parties)Act 1999.
● So, whether or not Sanjeet could sue CitySights, the statement is not absolutelyaccurate.
In the case of B:
● The privity rule states that only persons whoare parties to a contract can sue or be suedunder the contract.
● One exception to the rule accepted by thecourts is where a trust is created by theagreement in favour of the third party.
● This only applies where the agreementconforms to all the characteristics of a trust.
● Ravinder might cancel the trip without returnof his money so the statement is unlikely to beaccurate.
In the case of C:
● The Act allows a third party to sue eitherwhere the contract provides that they can orwhere the contract purports to confer a benefiton them.
● The Act also applies where a party is named inthe contract either specifically or as a memberof a class.
● Sanjeet’s name is on both the air ticket and theballet ticket so she is named in the contractand is to receive a benefit under it.
● Therefore the statement is inaccurate.
In the case of D:
● The privity rule states that only persons whoare parties to a contract can sue or be suedunder the contract.
● The ‘holiday cases’ are an exception to the rulewhere the contracting party can sue for mentaldistress for both himself and his family.
● The principle only applies in contracts that arespecifically for the provision of relaxation andpeace of mind.
● The situation here may be analogous but thestatement is only accurate if Ravinder canprove that the contract was for relaxation andpeace of mind as in the holiday cases.
Answers to Dilemma Boardon TermsIn the case of A:
● A pre-contractual representation only becomesa term of the contract if it is incorporated intothe contract.
Answers to Dilemma Boards 231
● This can be because a party attached particularimportance to the representation and becausethe party making the representation has expertknowledge.
● It was clearly important to Steve that the carwas mechanically perfect and the salesmanager also has expert knowledge of thestate of the car.
● Therefore the statement is inaccurate – therepresentation is incorporated into thecontract.
In the case of B:● Terms can be implied into a contract where
they are the unspoken but presumed intentionof both parties to the contract.
● This will happen according to the ‘officiousbystander test’ – an objective test of whetherboth parties meant to be bound by such aterm.
● Here there is an express representation prior tothe contract being formed.
● The statement is therefore unlikely to beaccurate.
In the case of C:
● The law distinguishes between conditions andwarranties.
● Conditions are terms that go to the root of thecontract and allow for repudiation and/ordamages.
● Warranties are secondary terms allowing onlydamages.
● Here there would be little point in buying a carthat cannot be used.
● So the statement is likely to be inaccurate.
In the case of D:
● The Sale of Goods Act 1979 implies a term intocontracts that goods supplied in a consumercontract correspond to the description appliedto them.
● Here the car is not mechanically perfect as itwas described.
● The Act also implies a term that goods are ofsatisfactory quality.
● It is unlikely that a car that could not be usedfor its normal purpose would be seen as beingof satisfactory quality.
● Therefore the statement is inaccurate – the Actcan apply.
Answers to Dilemma Boardon Exclusion ClausesIn the case of A:
● At common law an exclusion clause cannot berelied on unless it has been incorporated intothe contract.
● This depends on it being brought to theattention of the party subject to it prior to themaking of the contract.
● Where there is a consistent course of pastdealings on the same terms it is implied thatthe party subject to the clause has priorknowledge of it.
● The sign here is at the entrance and Antonparks there every day so it seems as thoughPackemin can rely on it.
● However, under the contra preferentum rulePackemin would be unable to rely on theclause to exclude its negligence unless this wasspecifically stated so the statement may beinaccurate.
In the case of B:
● The exclusion clause in the sign at theentrance may have been successfullyincorporated into the contract.
● However, under statute a party cannot excludeliability for death or personal injury caused byhis own negligence.
● Therefore the statement is inaccurate – thesign will have no bearing on Anton’s claim.
Contract Law232
In the case of C:
● Anton has previously dealt with Packeminon the same terms so that it may be impliedthat he has implied knowledge of theexclusion.
● However, a party will not be bound by anexclusion which is not drawn to his attentionand which, on an objective analysis, would notbe considered to be a contractual document.
● The ‘ticket cases’ are an example of thisprinciple so the statement may be inaccurate.
In the case of D:
● The Unfair Contract Terms Act includesregulation of exclusion clauses in the provisionof services.
● This includes that the provider acts withreasonable care and skill.
● Even though Anton may not win his caseUCTA may be applicable, therefore thestatement is inaccurate.
Answers to Dilemma Boardon MisrepresentationIn the case of A:
● A misrepresentation is a statement of materialfact made by one party to a contract to theother party to the contract, at or before thetime when the contract was made, which wasnot intended to form part of the contract butwas intended to induce the other party tocontract and which is in fact false.
● The statement about the phone conforms tothis definition.
● A fraudulent misrepresentation is one that ismade knowingly, or without belief in its truth,or recklessly careless whether it is true or false.
● Harminder has checked the manufacturer’sspecification and so has an honest belief in theaccuracy of the statement.
● The statement is inaccurate, an action infraudulent misrepresentation is not possible.
In the case of B:
● The statement about the phone conforms tothe definition of misrepresentation.
● An action under Hedley Byrne depends on:
i) there being a special relationship betweenthe parties;
ii) that the person making the statement hasspecific skill or expertise relating to thesubject of the advice;
iii) the other party acted in reasonable relianceon the statement;
iv) the person making the statement knows ofthis reliance; and
v) the person accepts responsibility for thestatement.
● It is unlikely in the circumstances that thesecond and fifth of these criteria could beproved here and the first is arguable.
● Besides this, an action for negligentmisrepresentation is more simply made unders2(1) Misrepresentation Act 1967.
● So Deepak is unlikely to claim under HedleyByrne.
In the case of C:
● The statement about the phone conforms tothe definition of misrepresentation.
● Because Harminder has checked with themanufacturer’s specifications, anymisrepresentation is likely to be innocent.
● Any action for misrepresentation will thereforebe under s2(2) Misrepresentation Act 1967.
● But under s2(2) judges have a discretion toaward damages as an alternative to rescissionso the statement is not accurate.
In the case of D:
● Rescission is a possible remedy in equity for amisrepresentation.
Answers to Dilemma Boards 233
● Rescission depends on restitutio in integrum.● But rescission will only be barred if it is
impossible to put the parties back to their pre-contractual position.
● So it will depend on how much Deepak usingthe phone alters the nature of the phone.
Answers to Dilemma Boardon MistakeIn the case of A:
● A common mistake is where both parties aremistaken and both are making the samemistake.
● A common mistake can be about the existenceof the subject matter when the contract wasformed (res extincta) or about the ownership ofthe property when the contract was formed(res sua) or in rare circumstances where thequality of the contract as performed would becompletely different to that anticipated by bothparties in the contract.
● Here only one party is actually mistaken.● So common law cannot be applied to void the
contract.
In the case of B:
● A mutual mistake is where both parties aremistaken but are making different mistakesand are therefore at cross purposes.
● In order for the contract to be declared voidthe court must be unable to make anymeaningful sense of the agreement.
● Here only one party is actually mistaken.● So mutual mistake does not apply and the
contract cannot be declared void on that basis.
In the case of C:
● A unilateral mistake is one where only oneparty is mistaken, the other party knows of themistake and is taking advantage of it.
● The mistake can be as to the identity of theother party.
● The mistake must be operative for the contractto be declared void so the identity of the otherparty must be material to the making of thecontract.
● In face to face dealings the mistaken party isusually said to be contracting with the personin front of him and the mistake is only as tothe creditworthiness of that party.
● This mirrors the situation here.● So, while there is a unilateral mistake, it is
unlikely that the contract will be declaredvoid.
In the case of D:
● Non est factum is a specific plea involving adocument that has been signed by mistake.
● For the pleas to succeed the document musthave been radically different to what it wasrepresented as being by the other party andthe party signing should not have beennegligent in any way.
● The facts here do not suggest that such amistake has occurred.
● So non est factum cannot be used to set asidethe contract.
Answers to Dilemma Boardon Duress and UndueInfluenceIn the case of A:
● Duress vitiates a contract because the partysubjected to the duress is not entering thecontract through free will.
● Duress is traditionally associated with threatsof violence or even death.
● Here the threat is only a withdrawal ofservices.
● Therefore the statement is inaccurate.
Contract Law234
In the case of B:
● Undue influence operates in equity whereimproper pressure has been used to coerce aparty into entering a contract.
● Undue influence is usually not used incommercial situations where one business iscoerced by another.
● Therefore it is unlikely that Beta Baskets wouldrely on undue influence.
● The statement may be inaccurate.
In the case of C:
● Economic duress is a principle developedwhere unfair pressure occurs in a business orcommercial context.
● It applies where there is a such a degree ofcoercion that the party did not exercise freewill in the arrangement and is often to do withunilateral variations of contractual terms.
● Beta Baskets has been subjected to unfairpressure by Getithere.
● Therefore the statement is inaccurate –economic duress may be relevant.
In the case of D:
● Economic duress can vitiate a contract wheretwo factors apply – the party coerced unfairlyprotested immediately, and did so openlyrather than merely accepting the change.
● Here Beta Baskets has made no protest at all.● Therefore it is unlikely that it would be able to
rely on economic duress to avoid the extrapayment.
● The statement is inaccurate.
Answers to Dilemma Boardon IllegalityIn the case of A:
● Clause a) and clause b) of Simone’s contractare restraints of trade and therefore are primafacie void.
● However, restraint clauses can be enforced bythe courts if they are reasonable as betweenthe parties and in the public interest.
● If the clauses here were reasonable then theycould be enforced.
● Therefore the statement is inaccurate.
In the case of B:
● Clause a) of Simone’s contract is a restraint oftrade and therefore prima facie void.
● The question is whether it is reasonablebetween the parties and in the public interest.
● The clause is probably reasonable in terms ofboth geographical extent and duration.
● However, it effectively restrains Simone fromany involvement in the hairdressing industryand she only colours hair, so it is probably toowide to protect a legitimate interest and thestatement is probably inaccurate.
In the case of C:
● Clause b) of Simone’s contract is a restraint oftrade and therefore prima facie void.
● The clause is probably reasonable in terms ofboth geographical extent and duration.
● It protects a legitimate interest – client contact.● But Simone is styling and cutting whereas for
Belle Barnet she coloured hair.● So the clause may be unenforceable in the
circumstances and the statement may beinaccurate.
In the case of D:
● Both clauses are restraints of trade and soprima facie void.
● Neither could be enforced unless they arereasonable as between the parties and in thepublic interest.
● However, where two clauses restrain trade andone is reasonable and the other unreasonable itis possible to sever the contract and declare theunreasonable one void but enforce the other.
● Therefore the statement is inaccurate.
Answers to Dilemma Boards 235
Answers to Dilemma Boardon Discharge of a Contractby FrustrationIn the case of A:
● The strict rule was originally that parties arebound absolutely by contractual undertakingsmade (Paradine v Jane).
● However, where an event occurs beyond thecontrol of either party making it impossible toperform contractual undertakings, then thecontract is frustrated and both parties arerelieved further performance from the point ofthe frustrating event.
● The strict rule only applies where theparties have given an absolute undertaking toperform and this is unlikely in thecircumstances.
● Therefore the statement is inaccurate.
In the case of B:
● Where an event occurs beyond the control ofeither party making it impossible to performcontractual undertakings, then the contract isfrustrated and both parties are relieved furtherperformance from the point of the frustratingevent.
● Here the frustrating event would be thedestruction of the stadium, making itimpossible to play the match.
● There is no indication that it has becomeillegal to play the match and therefore this isthe wrong type of frustrating event and thestatement is inaccurate.
In the case of C:
● Where an event occurs beyond the control ofeither party making it impossible to performcontractual undertakings, then the contract isfrustrated and both parties are relieved furtherperformance from the point of the frustratingevent.
● But the frustrating event must be entirelybeyond the control of either party and not beself-induced.
● Where the contract merely becomes moreonerous or costly to perform then thecontractual obligations continue.
● Here the contract is impossible to perform,therefore there is no bar to a claim offrustration and the statement is inaccurate.
In the case of D:
● Where an event occurs beyond the control ofeither party making it impossible to performcontractual undertakings, then the contract isfrustrated and both parties are relieved furtherperformance from the point of the frustratingevent.
● This also means that all obligations cease atthe point of the frustrating event and Freddieis not due to receive any payment untilcompletion of the match.
● Under s1(2) Law Reform (Frustrated Contracts)Act 1943 Freddie will not be able to enforcepayment as there is a total absence ofconsideration.
Answers to Dilemma Boardon Discharge of a Contractby Performance and byBreachIn the case of A:
● One way in which a contract can be dischargedis by anticipatory breach.
● An anticipatory breach occurs where one partymakes known to the other party before thedate that performance is due that it will nothonour its obligations, or where this can beimplied from conduct.
● A party subject to an anticipatory breach hasthe choice whether to act immediately or waitfor the actual date of the breach.
Contract Law236
● Therefore the statement is inaccurate – FineFirs can act as soon as it hears from ArcticSpruce.
In the case of B:
● Payment for part performance can only beenforced when the other party has acceptedpart performance in circumstances thatrepresent a free choice.
● Here Fine Firs’business would have beenunder threat if it accepted such limitedperformance.
● Furthermore payment cannot be recoveredunless there is substantial performance.
● Therefore the statement is inaccurate.
In the case of C:
● The contract for 2 million Christmas trees is anentire contract.
● Arctic Spruce has not offered to perform thecontract in its entirety.
● Therefore Fine Firs has not prevented ArcticSpruce from performing by rejecting the muchsmaller number of trees.
● The statement is inaccurate.
In the case of D:
● Stipulations as to time are normally warrantiesnot allowing repudiation.
● One exception is where time is of the essencein which case the term may be a conditionentitling repudiation.
● Here the trees would be useless to Fine Firsafter Christmas.
● Therefore the statement is inaccurate – FineFirs would be able to repudiate.
ab initio 138, 166
absolute undertakings 189–90
acceptance 5, 12–15
see also offer
communication 12–14
unconditional 14
accord and satisfaction 30, 184
actual undue influence 158
advertisements 7, 8
agency relationships 28, 52, 104
agreements 1, 5, 172
see also contracts
bilateral 183–4
commercial and business 3,
38–40, 82–3
consideration, new agreements
27–8
consumer credit 44
discharge by 183–4
signed 77, 99
social and domestic 38–9
unilateral 22, 184
written 44, 76–7, 150
ambiguity, in contracts 105–6,
108
amenity, loss of 208, 212
anticipatory breach 198–9, 209
anticipatory repudiation 198
AQA assessment criteria 225–7
arbitration clauses 167
artificial persons 60, 67–8
assignment 52–3
assumpsit, law of 2
auctions 7, 9, 70
bargains 2–3, 5, 22
see also contracts
loss of 207–8
unequal 93, 113, 155, 158, 170–1
beneficial contracts of service,
minors’62–3
bilateral agreements 183–4
bilateral discharge 183–4
breach of contract 201, 202
anticipatory 198–9, 209
conditions 89–90, 197–8
fundamental 106–9, 197
of innominate term 92–3, 197–8
mitigation 209
of promise 199
remedies 89–90, 197–200, 203–215
third party rights 51
warranties 90
business contracts 38–40, 82–3
capacity 60–8, 69
corporations 67–8
drunkenness 67
mentally disordered persons 67
minors 60–6, 66
care, reasonable 88
causation 125, 204, 219
caveat emptor 85–6, 99
certainty 3, 10, 91–2
chance, loss of 207–8, 211
cheques 44, 53
classification, contract terms 90–3
coercion see duress; undue
influence
collateral contracts 9, 52, 80
parol evidence rule 78–80
collateral promise 103
comfort letters 40
commercial and business
agreements 38–40, 82–3
commercial sterility, frustration 188
common law
illegal contracts 165, 173–4
implied terms 85–8
void by 165, 167–72
common mistake 138–42, 151
ownership 140
quality of contract 140–2
res extincta 139–40
res sua 140
common venture, frustration of 188
communication
acceptance 12–14
electronic 14
offer 10–11
postal rule 13
companies see corporations
compensation see damages
competitions 40
conditions
see also terms
IndexPage numbers in italics refer to diagrams, key fact summaries and model answers.
Contract Law238
breach 89–90, 111–112, 197–8
implied 86–7, 89–90, 91, 93
conduct
custom or trade usage 79, 81–2,
109, 113
prior 70, 83–5, 100
conflict, of standard forms 16, 78
consensus ad idem 70, 138
consent, duress 155–6
consequential loss 125, 129
consideration 2, 5, 21–32
adequacy 22–3
agency relationships and third
parties 27–8
executory and executed 22, 184
failure of, frustration 190–1
movement of 25–6, 26, 54
new agreements 27–8
part payment 184
past 23–4, 24
restitution 208–9
consumer contracts 3, 111–112
see also sale of goods
unfair terms 114–116
consumer credit 44
minors 65
consumer protection 110–116
defective products and product
liability 87, 216–218
negligence 219
misrepresentation 216–217,
220–1
third parties 217
time limits 218–219
trade descriptions 220–1
continuous obligations, minors 63
contra preferentem rule 105–6
contract law
freedom of contract 110, 116,
119, 173–4
history 1–2
and law of torts 3–4, 211–212,
216
contracts
see also agreements; breach;
consideration; discharge;
formation; frustration;
performance; terms; void;
voidable
ambiguity in 105–6, 108
capacity 60–66, 67
certainty 3, 10, 91–2
collateral 9, 52, 80
commercial and business 3,
38–40, 82–3
consumer 3, 111–112
divisible 180
illegal 120, 165–76, 177, 178
insurance 48, 114, 115, 132
mentally disturbed persons 67
minors’60–6, 66
onerous 189
privity 4, 21, 25, 47–54
personal services 213–214
signed 77, 99
simple 2–3, 43
speciality 2, 43–5
standard form 16, 78, 109, 112,
115
statutory 54
unilateral 22, 184
wagers 165–6
written 44–5, 76–7, 150
corporations 67–8
ultra vires actions 68
counter offers 15, 16
course assessment criteria
see also curriculum
AQA 225–7
OCR 223–5
covenants 1
restrictive 49
credit agreements see consumer
credit
curriculum and course assessment
criteria 223–7
custom or trade usage 79, 81–2,
109, 113
Cutter v Powell rule 179–82
damages
causation 204
duty to mitigate 209
economic loss 211
equitable remedies 213–215
liquidated 210
losses, defined 207–8, 211–212
mental distress 211–212
misrepresentation 128, 129
nominal 206–7
part performance 210–211
recovery of expenses 208
remoteness 204–6
restitution 208–9
tort law 3–4, 211–212, 216
death of offeree or offeror 12
debts 29
guarantees 44–5
third parties 45
waiver 30–1
deceit 124, 125–6, 128
deeds 1, 21, 44
defective products 87, 216–218
delay 130, 187, 203
de minimis non curat lex 180
Derry v Peek rule 125–6
detinue 1
dilemma boards see model answers
discharge of contracts
accord and satisfaction 30, 184
Index 239
by agreement 183–4
bilateral 183–4
by breach 197–200, 201, 202
frustration 185–90, 191, 192
performance and part-
performance 179–82, 191
Pinnel rule 184
promissory estoppel 184
unilateral 183, 184
waiver 183, 184
discretionary remedies see equitable
remedies
display of goods 6
divisible contracts 180
domestic agreements 38–9
drunkenness, capacity 67
Dunlop v Lambert rule 49–50
duress 120, 154–6, 163, 164
see also undue influence
consent 155–6
economic 155–6
duty to mitigate 209
economic loss 211
electronic communication 14
enjoyment, loss of 51
enquiries, offers 15, 16
e-mail 14
employees, restraint of trade
168–70
equitable remedies
and damages 213–215
injunctions 213–214
recission 128–9, 130–1, 148–9,
213–214
rectification 79, 149–50, 215
specific performance 1, 149,
214–215
equity, minors’ contracts 65–6
evidence, written 44–5
exclusion clauses 99–117, 117
agency relationships 104
arbitration 167
contra preferentum rule 105–6
custom or trade usage 109
fundamental breach 106–9, 113
indemnities 112–113
reasonableness 112–114
statutory controls 107–8, 110–116
third parties, 51–2 103–4
unfair contract terms 111–116
exclusion of liability see exclusion
clauses
executed and executory
consideration 22, 184
executory arrangements 183–4
existence of goods, mistake 139–40
expenses, recovery 208
expert opinions 72–3, 74
express terms 70–8, 91
face to face dealing, mistaken
identity 146–7
fact
implied by 81–5, 90
misrepresentation of 122
false opinions 72
false statements 70, 119, 124, 216,
220–1
faxes 14
fit for purpose 87
foreseeability
risk 189
remoteness test 204–6
formation 5–20, 21–37, 38–42
see also acceptance;
consideration; intention; offer
illegal contracts 166
fraud 132, 173
undue influence 158
fraudulent misrepresentation
124–6
freedom of contract 110, 116, 119,
173–4
frustration 185–91, 191
absolute undertakings 189–90
commercial sterility 188
consideration, failure of 190–1
delay 187
foreseeable risk 189
impossibility 186–8
onerous contracts 189
part-performance 191
self-induced 189
statutory protection 190–1
by subsequent illegality 188
by war 187, 188
fundamental breach 106–9, 197
gifts 21, 39, 44
good faith, test for 115
goods
see also sale of goods
advertised and displayed 6, 7, 8
quality and suitability 87
guarantees 44–5, 65
habit see custom
Hedley Bryne rule 126–7, 128
history 1–2
holiday cases 51, 211–212
identity, mistaken 145–7, 151
illegal actions see ultra vires
illegal contracts 120, 175–6, 177, 178
at common law 165, 173–4
as formed 166
as performed 166–7
by statute 165, 166–7
subsequent frustration 188
Contract Law240
imperfect contracts 119
implied conditions 86–7, 89–91,
93
see also implied terms
breach 111–112
reasonableness 111
implied terms 81–8
see also implied conditions
by common law 85–8
custom or trade usage 79, 81–2,
109
by fact 81–5, 90
officious bystander test 83–4, 85
prior conduct 70, 83–5
reasonableness 85
by statute 85–8
trade descriptions 220
impossibility, frustration by 186–8
improper pressure see duress;
undue influence
improper purpose 78
in pari delicto 176
incapacity see capacity
indemnities 112–113
inducement, misrepresentation
122–4
injunctions 213–214
innocent misrepresentation 121,
124, 128–9
innominate terms 92–3, 197–8
insurance contracts 48, 114, 115,
132
intention 5, 8, 71–4
ambiguity 105–6, 108
to create legal relations 26,
38–40
misrepresentation 123–4
third parties 49
written agreements 76–7
invitation to treat 5–10, 6
Lampleigh v Braithwaite rule 24–5,
24
late performance 198
law of torts 3–4, 211–212, 216
law reform, privity of contract 53–4
leases 50
legal personality, corporations 67–8
legal relations, intention to create
26, 38–40
legitimate expectations 3
limitations see exclusion clause;
time limits
liquidated damages 210
loss
of amenity 208, 212
of bargain 207–8
of chance 207–8, 211
consequential 125, 129
economic 211
of enjoyment 51
of profit 207–8
reliance 208
medical negligence 4
mental distress 211–212
mentally disordered persons,
capacity 67
mere representations 73, 74, 76–7
minors’ contracts 60–6, 66, 67
beneficial contracts of service
62–3
capacity 60–6
continuous obligations 63
and equity 65–6
for necessaries 60–2, 65
ratification 65
repudiation 63–4
restitution 65–6
void 60, 64–5
voidable 60, 63–4
misleading statements see false
statements
misrepresentation 121–33, 78–9
see also mistake
consumer protection 216–217,
220–1
delay 130
false statements 70, 119, 124,
216, 220–1
fraudulent 121, 124–6
inducement 122–4
innocent 121, 124, 128–9
intention 123–4
material fact 122
negligent 126–8
non-disclosure 131–3
pre-contract representations
123–4, 70–4, 74
puffs 72, 74, 121
recission 128–9, 130–1
remedies 121, 125–6, 128–9
third parties 122–3
trade descriptions 220
mistake 120, 138–53, 151, 152,
153
see also misrepresentation
common 138–42
equity 141–2, 148–50
existence of goods 139–40
mistaken identity 145–7, 151
mutual 139, 143–4
non est factum 150–1
ownership 140, 145
quality of contract 140–2
recission 148–9, 214
rectification 215
remedies 138, 139, 141–3
third party rights 138
unilateral 139, 144–8
mistaken identity 145–7, 151
Index 241
face to face dealing 146–7
intermediaries 147
mitigation 209
model answers
breach and performance 202,
235–6
consideration 37, 228–9
contract terms 98, 230–1
duress and undue influence 164,
233–4
exclusion clauses 118, 231–2
frustration 196, 235
illegality 178, 234
intention 42, 229–30
misrepresentation 137, 232–3
mistake 233, 153
offer and acceptance 20, 228
third parties 59, 230
movement, of consideration 25–6,
26, 54
mutual mistake 139, 143–4, 151
mutual undertakings 171–2
mutuality, existence of 5, 16, 78
natural persons 60
necessaries, minors’ contracts 60–2,
65, 67
negligence 4, 106
consumer protection 219
economic loss 211
misrepresentation 126–8
negligent misrepresentation 126–8
damages 128, 129
Hedley Bryne rule 126–7, 128
negligent misstatement see
negligent misrepresentation
negotiable instruments 44, 53
nemo dat quod non habet 138
new agreements, consideration for
27–8
nominal damages 206–7
non disclosure, misrepresentation
131–3
non est factum 150–1
notice 77, 160
sufficient 100–2
objectivity, test for 71
obligations
continuous or recurring, minors
63
contractual 3, 4
OCR assessment criteria 223–5
offer 5–12
see also acceptance
communication 10, 11
counter offers 15, 16
death of offeree or offeror 12
enquiries 15, 16
invitation to treat 5–10, 6
rejection 15, 16
termination 11–12
time limits 11
unilateral 8, 11
withdrawal 11
officious bystander test 83–4, 85
onerous contracts 189
origins 1–2
opinions
expert 72–3, 74
false 72
ownership
mistaken 140, 145
parol agreements 1
parol evidence rule 78–80
partly executory arrangements
183
part-payment
accord and satisfaction 30
consideration 184
promissory estoppel 30–1
part-performance 44, 181, 183, 191
quantum meruit 210–211
past conduct see prior conduct
past consideration 23–4, 24
perfect tender rule 179–80
performance
see also frustration
absolute undertakings 189
Cutter v Powell rule 179–80
damages 210–211
divisible contracts 180
illegal contracts 166–7
late 198
part- 44, 181, 183, 191, 210–211
perfect tender rule 179–80
prevention of 182
specific 149, 214–5
strict rule 180–2
substantial 181
time limits 182
personal service contracts 213–214
Pinnel rule 184
postal rule 13
pre-contact representations 70–4
intention 71–4
misrepresentation 70–4, 74,
123–4
puffs 72, 74, 121
prejudicial to family 167
presumed undue influence 158–61
prevention, of performance 182
price, statements of 7, 8
prior conduct 70, 83–5, 100
privity of contract 4, 21, 25, 47–54
Dunlop v Lambert rule 49–50
exclusion clauses 103–4
leases 50
law reform 53–4
Contract Law242
procedural rules 51
restrictive covenants 49
statutory exceptions 48–53
third parties 48–54
trust law 48–9
prizes 40
procedural rules, privity of contract
51
product liability 216–218
profit, loss of 207–8
promise
breach of 199
collateral 103
promissory estoppel 30–1, 184
puffs 72, 74, 121
quality and suitability
of goods 87
of contract, mistake 140–2
quantum meruit 210–211
reasonableness 71, 78, 101
care and skill 88
exclusion clauses 112–114
forseeability 204–6
implied terms 85
mitigation 209
restraint of trade 172
test for 85, 111
recission 126, 213
misrepresentation 128–9, 130–1
mistake 148–9, 214
restitutio in integrum 130, 161, 214
rectification 79, 149–50, 215
recurring obligations, minors’
contracts 63
rejection, of offer 15, 16
reliance loss 208
remedies 203–215
see also damages;
condition, breach 89–90
consumer protection 216–218
equitable 213–215
injunctions 213–214
misrepresentation 125–6, 128–9
recission 128–9, 130–1, 148–9,
213–214
rectification 215
repudiation 63–4, 89–90, 198
restitution 208–9
specific performance 214–215
third parties 49–50
time of the essence 182
void contracts 174–5
warranties, breach 90
remoteness test 204–6
representations 74, 75
false 70, 119, 120–1, 216, 220–1
misrepresentation 121, 124
mere 73
opinions 72–3
pre-contractual 70–4
puffs 72, 74, 121
repudiation 89–90, 198
res extincta 139–40, 151
res sua 140, 151
restitutio in integrum 130, 161, 214
restitution 65–6, 208–9
restraint of trade 213
employee restraint 168–70
mutual undertakings 171–2
vendor restraint 170–2
restrictive covenants 49
restrictive trade practices 166, 170–1
risk, foreseeable 189
see also remoteness
sale of goods 86–8
quality and suitability 86–7
statutory protection 216–217
title, transfer of 216–217
satisfaction 30, 184
Scott v Avery clauses 167
sealed documents 44
self-induced frustration 189
signed agreements 77, 99
simple contracts 2–3, 43
simplex commendation non obligat
72
skill, reasonable 88
social and domestic agreements
38–9
solus agreements 172
speciality contracts 2, 43–5
specific performance 1, 149,
214–215
standard form contracts 3, 109
conflict, of terms 16, 78
unfair terms 112, 115
statement of price 7, 8
status quo ante 130
statute law
implied by 95–8
void by 165–6
statutory contracts 54
statutory protection and control
exclusion clauses 107–8, 110–116
frustration 190
illegal contracts 165, 166–7
sale of goods 216–217
third parties 48–54
unfair contract terms 111–116
strict rule, performance 180–2
subsequent illegality, frustration
188
substantial performance 181
sufficiency of notice 100–2
suitability see quality
supply of goods and services see
sale of goods
synoptic element see curriculum
Index 243
Taylor v Caldwell, frustration 186–8
tenders 8, 179–80
termination, of offer 11–12
terms 70–98
see also illegal contracts;
discharge; exclusion clauses;
misrepresentation; mistake
certainty in 91–2
classification 90–3
conditions 86–8, 89–90, 93,
111–112
conflict, of standard forms 16,
78
express 70–8, 91
frustration 189
imperfect 119
implied 81–8
onerous 90–3, 189
parol evidence rule 78–80
unfair 77, 111–116
warranties 75, 90, 91, 124
tests
forseeability and remoteness
204–6
good faith 115
officious bystander 83–4, 85
reasonableness and unfairness
85, 111–115
third parties 47
agency relationships 52
assignment 52–3
consideration 27–8
consumer protection 217
debts, payment of 45
exclusion clauses 51–2, 103–4
intention 49
misrepresentation 122–3
mistake 138
privity, of contract 48, 53–4
remedies 49–50
restrictive covenants 49
trusts 48–9
time limits 203
consumer protection 218–219
offers 11
performance 182
time of the essence 182
title, transfer of 216–217
torts, law of 110
and contract law 3–4, 211–212,
216
deceit 124, 125–6, 128
trade descriptions 220–2
false statements 220–1
trade puffs 72, 74, 121
trade usage 79, 81–2, 109, 113
trading standards 116
transfer, of title 216–217
trusts
and privity 48–9
third parties 48–9
uberrimae fides contracts 132
ultra vires actions 68
unavailability, frustration 187
unconditional acceptance 14
undertakings
absolute 189–90
mutual 171–2
undue influence 120, 163, 164
see also duress
actual 158
fraud 158
presumed 158–61
unenforceable contracts see void
contracts
unequal bargains 93, 113, 155, 158,
170–1
unfair advantage 60, 157–61
unfair competition agreements 166,
170–1
unfair contract terms 77, 111–116
unilateral agreements 22, 184
unilateral discharge 183, 184
unilateral mistake 139, 144–8, 151
identity 145–7
ownership 140, 145
unilateral offers 8, 11
unjust enrichment 65–6
unsolicited goods 217
utmost good faith 115, 132
value, loss of 207
vendor restraint 170–2
vitiating factors see duress; illegal
contracts; mistake;
misrepresentation; undue
influence
void contracts 64–5, 119–20
at common law 165, 167–72
mistake 138, 139, 141–3
remedies 174–5
by statute 165–6
voidable contracts 120, 130, 138,
161
mentally disordered persons 67
minors 60, 63–4
wagers 165–6
waiver 30–1, 183, 184
war, frustration by 187, 188
warranties 75, 90, 91, 124
wholly executory arrangements 183
withdrawal of offer 7, 11
written
agreements 44–5, 76–7, 150
evidence 44–5